Archive for Cash Flow Management

Roth IRA/401(k)?

Income tax rates, established under the 16th amendment in 1913, move like a pendulum in a clock. The movement is extreme at each end from ultra high top rates (94% in 1945) to low top rates (24% in 1929). Over all the years the average top rate has been 58% (this does not include state, city or local taxes). At the end of 2016 the top rate is 39.6% plus the 3.8% Obamacare surcharge for a grand total of 43.4% at the federal level. The new Trump administration is proposing 3 rates of 12% – 25% and a top rate of 33%. Think long term in your life. If these lower rates do take place then over time a “regression to the mean” states that rates have to rise in the future (during your retirement years).

One of our goals, at Founders Group, is for each client to have 80% – 100% of their retirement income to be TAX FREE for life. It takes time and planning. It cannot be done at the last minute.

My question to you ……… wouldn’t it make sense to sock money away in tax free investments when rates are low, today, and then harvest the money when tax rates are higher in your retirement years??? There are a few fantastic vehicles to accumulate money for tax free retirement income. For the “do-it-yourself” crowd there are Roth IRAs or Roth 401(k) plans. The problem with both is there are so many strings attached (how much you can contribute, when you can take monies out, etc). Here is some information on Roth’s:

You can take money out of your Roth IRA anytime you want. However, you need to be careful how much you withdraw or you may get stuck with a penalty. In order to make “qualified distributions” in retirement, you must be at least 59 ½ years old, and at least five years must have passed since you first began contributing.

You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 1/2, unless it’s for a qualifying reason. Money that was converted into a Roth IRA cannot be taken out penalty-free until at least five years after conversion.

Not sure whether the money will be counted as contributions or earnings? Well, the IRS view withdrawals from a Roth IRA in the following order: your contributions, money converted from traditional IRAs and finally, investment earnings. For example, let’s say your IRA has $100,000 in it, $50,000 of which are contributions and $50,000 of which are investment earnings. If you withdraw $60,000, the IRS will consider $50,000 of that to be contributions and $10,000 to be earnings. So any penalty would apply only to the $10,000.

There are more sophisticated vehicles that magnify a Roth program and make Roth’s look like child’s play. These programs have been around since 1913 and require education and guidance by a professional adviser.

Improve Your Financial Future

Here are a few simple strategies to build your wealth:

• SPEND LESS THAN YOU EARN. You can’t make your money grow if you spend it all.
• LIST YOUR FINANCIAL PRIORITIES. Put your retirement at the top of the list.
• ESTABLISH AN EMERGENCY FUND. Low-risk, accessible cash will lessen the temptation to dip into retirement savings in an emergency.
• MAKE SAVINGS A HABIT. Even a little can add up, thanks to the power of compounding.
• PAY YOURSELF FIRST. Stock away at least 20% of your pay. Have the money automatically deposited so you’ll never miss it.
• CUT EXPENSES. It’s one of the fastest and best ways to make money. Clip coupons, buy second-hand on eBay, eat out less often. Funnel this “found money” into your investments.
• CREATE INCOME. Take a second job, rent out a room or downsize and invest the profits.
• INVEST REGULARLY. Use time and timing to get into the marketplace. If you don’t know how to invest, find out how! Go through training, read books, ask an expert and then apply your knowledge. Remember: Don’t work for money. Let money work for you.
• CREATE LONG-TERM WEALTH. Money in a savings account is safe, but inflation will erode its value. Stocks provide long-term growth.
• DIVERSIFY. The best way to balance your risk is with a portfolio that spreads your money out over a variety of financial instruments.
• REVIEW. Revisit your spending plan, savings and goals monthly to be sure you are on track.
• AVOID BAD DEBT. Don’t borrow for things such as vacations, clothing or furniture. Borrowing to remodel a home, on the other hand, may be good debt that can provide long-term financial benefits.
• BEWARE OF HIGH-INTEREST LOANS. Look at the total cost of repaying the principal and interest, not just the low monthly payment.
• GET OUF OF BAD DEBT. Otherwise, finance fees eat up principal that could be earning interest.
• HANDLE CREDIT CARDS WISELY. Keep only one or two cards. Transfer high-interest balances to zero-interest cards.
• PLAN TO RETIRE LATER. If you’re doing what you love, work is fun! You can work longer, work part-time or become a consultant.
• DELAY TAKING SOCIAL SECURITY. Benefits will be higher when you start.

Social Security – The Good and The Bad

THE GOOD

You can find out what you may receive in Social Security benefits by using their benefit calculator. It is very easy to use and takes less than a minute. This may help you determine if you want to take early or delayed retirement. Keep in mind this estimator is using “blue sky-rose colored glasses” in the calculations. It assumes that there is no problem with the funding of Social Security (sure!!) and you will get all of your promised benefits.

THE BAD

Most people are aware that Social Security has unfunded liabilities near $50 trillion, but they do not think it will affect them. For many years, when you received your annual Social Security statement, the report stated that revenue will not meet outlays starting in 2019. Every year it has come closer to present day. Last year’s statement said by 2016 outgo will exceed income. This year’s statement does not even mention when outgo will exceed income. It does state that you may get only 77 cents for every dollar promised in 2037; down from 2041 a few years ago. Good news – it looks like a one-penny increase from last year’s report.

The bad news — these calculations do not take into account the STUPID program that has let you have a 2% reduction in Social Security taxes being taken from your paycheck for the past year. Thus, you are personally spending and enjoying 2% more in take-home pay now so you can lose 25% in benefits later on. Ah yes, government thinking at its best. Rob from Peter (you) now to take away from Peter (you) later on. Expect to see a massive increase in this tax soon to make up for the 2% you have had recently.

I hope you are saving every dollar of your new found wealth in that 2% Social Security tax cut.

By the way, did you watch the riots in Greece recently when they proposed a 5-10% cut in pension plans? The masses started fires at the Parthenon. Imagine when everyone wakes up here and sees a 25% cut in their Social Security payments for as far as the eye can see. (Let’s see…will they burn buildings in Washington, New York, or in your city?) I would dump stocks in any property and casualty insurance companies and buy stocks in water companies…to put out the fires!

Throughout history socialism has never worked. Well, it does work fine until they run out of ways to find people to tax.

No discipline leads to all regrets!

TROUBLE WITH REVERSE MORTGAGES

Oftentimes, when a person does not prepare adequately for retirement funding, they consider using a reverse mortgage just to exist.

Assume a retiree’s home is paid off. They can go to a bank and obtain a reverse mortgage loan against the property. Depending on the person’s age, their health, and the property value, the lender will provide funding to the retiree. The amount may be, say, 50% of the appraised value of the property. There are no payments due to the bank. The principal and interest accrue. Once the person dies, the bank will take the property and sell it. The outstanding mortgage may be 80-90% of the home’s value at the person’s death, so, the bank can still make some money once it sells the home. On the other hand, the surviving spouse or heirs could pay off the loan and take ownership.

A recent article in the September 2011 issue of Investment Advisor magazine showed AARP suing Fannie Mae and Wells Fargo over reverse mortgages.

HUD had established original rules that “…a borrower or heir would never pay more than the home was worth at the time of repayment.” In 2008 HUD changed the rules…. The heir must pay the full mortgage amount even if it exceeded the value of the home. AARP sued and HUD returned to the original rules.

A new suit has come up, by AARP, toward Fannie Mae and Wells Fargo. These institutions are failing to give notice to surviving spouses and heirs of their rights to buy the property for the lower value. These institutions are foreclosing and seeking to evict an heir who is attempting to pay off the current fair market price on an underwater home.

Thus, a stranger could purchase a reverse mortgage home for the fair market value where an heir could not.

A simple solution to not getting caught in this trap is to start early funding for your retirement. Sit down with a Certified Financial Planner no later than your early thirties to get a plan in place to actively fund your plan. Day after day I have a large number of people, around the age of 58, who earn $100,000 per year or more, and have less than $50,000 saved for retirement, call into the office, looking for a quick solution. With only $50,000 that will fund the first six months of their retirement. Sad….

As always, discipline or regret.

Cash Flow Management – Part 2 of 2

THE IMPORTANCE OF GOALS

A cash flow plan will function best if it reflects your goals, whether long-term or short-term. The purchase of a pleasure boat in three years or the decision to remodel your basement next winter should influence your cash flow plans.

The goals that you have already set will help you shape your personal version of this system. Refer to them often.

As you achieve some short-term goals, or begin to see significant progress towards long term-goals, your enthusiasm for this process will increase – and that will make the system even more effective for you.

ESTABLISHING YOUR SYSTEM

What should your system contain? There are four factors that will help you establish control over money:

• INCOME/EXPENSE
Identify and isolate income and disbursements (referred to as expense). You will consider whether income is gross, or net (the amount you actually have available).

• CATEGORY
Define the kinds of income you receive and the kinds of expenses you incur. Categorize them according to the fixed or flexible nature of the item.

• TIME
Your system should be based on a monthly structure. You should quantify your income and expense within a 12-month format.

• AMOUNT
Income and expenses are expressed in dollars.

Once you have qualified all financial transactions, you will be well on the way to controlling your cash flow, rather than letting it control you.

PERIODIC FIXED EXPENSES

Many people have lost control over cash flow because they have no system to handle periodic known expenses of a substantial nature. Good examples of this type of expense might be a large real estate tax bill of $1,500 due every March, a life insurance premium of $840 due in November, or an IRA deposit of $2,000 which must be made by April 15th.

What people frequently do is remember the bill a month before it is due and start scrimping, but it is too late! So, what happens then? In the ensuing months, they start running behind on bills or they simply do not make the planned payment at all. Interest charges are then added, and their attitude starts to decline.

The solution is to schedule these larger payments and start saving for them on a monthly basis. For example, for a small additional amount, an automatic bank deduction can be made regularly to cover the $840 life insurance premium.

The $1,500 tax bill is due again in 10 months. Why not set $150 aside into a special savings or credit union account? Then when it comes due, you will have the money. Afterwards, you can reduce the monthly savings amount to $125 since you will have 12 months to accumulate the next payment.

If the IRA $2,000 deposit is due again in eight months, put aside $250 each month until then. After it has been paid, the amount to set aside is only $166. Furthermore, you will be earning interest on these escrow funds, rather than paying interest as a result of poor money management.

Initial savings ($150 + $250) $400 monthly; thereafter only ($125 + $166) $291.

SAVE REGULARLY AND SYSTEMATICALLY

It is important to assign a portion of each paycheck for your savings and investment program. Consider it an obligation just as important as any other monthly obligation.

In addition to saving a portion of monthly income, we strongly urge that any money saved by tax planning each year be invested the following year. This will give you an additional source of investment funds as well as a means of reducing income tax liability on a regular basis.