Category Archives: Financial Planning

Traditional IRAs, Roth IRAs and 401 (k)s, Oh My!

Embarking on your financial planning journey can seem overwhelming – at first. A common question that is asked is about the process of converting a traditional IRA to a Roth IRA, and any potential tax liabilities involved. There are additional considerations if 401 (k)s are one of your portfolio’s moving parts. A multi-year strategy may optimize tax benefits. I was quoted in a recent article addressing this subject in MarketWatch.

Financial Literacy for Young Adults

Regarding taxes, here are three things you should know:

I told you that the Federal withholding tables are broken. You probably shrugged and figured it was some sort of political commentary or something: surely the government couldn’t do something so basic so very wrong? But the Federal withholding tables only really work  if you’re a one-job household. One job just doesn’t know what the other job will make. So the solution here is to aim to make sure your withholding is around 10% for the Federal taxes once your income is over about $12,000/year. You can change the W-4 anytime you want. I generally recommend putting 0 for the exemptions and then adding extra to be withheld each week once you’ve looked at a paystub and can see how the withholding will work. (The state withholding tables work, just say 0 exemptions and you’ll be fine.)

Tax returns are a reconciliation tool to put down what you REALLY earned and what you REALLY paid in taxes already, then compare it to what is calculated you’d owe now that the whole picture is in place. The tricky part isn’t usually figuring the tax, it’s figuring the taxable income after we throw in the things that you are allowed to deduct against it.

We also use the tax return to administer a bunch of anti-poverty programs like the Earned Income Tax Credit, and to disperse tax credits for things like tuition paid and solar panels installed, things like that. It’s just a handy moment to total up what the government owes you as they’re generally based on your income.

Types of accounts. We talked about how you can “title” an account in a bunch of ways, which will cause them to be taxed differently.

The basic default type of account is to title it as an individual or joint checking at a bank, or an online savings account (individual or joint). But there are several other types of accounts. This is beautifully illustrated (if I do say so myself ) in the AGDEWT chart below. But the short version is that besides bank accounts, there are also:

  • Individual or joint brokerage accounts,
  • Roth IRAs (IRAs stand for Individual Retirement Arrangement: they can’t be joint.)Your own Traditional IRA (that I referred to as a bucket to collect all the drips from previous employer plans, and
  • Workplace tax-deferred and Roth accounts,
  • Health Savings Accounts are for people who ever had a high deductible health insurance plan.

How to do a budget/bill pay:

I mentioned that Quicken is a great checkbook register program that you can use to track all your past spending, but it’s not very helpful for figuring out where your next dollar should go. For that, the killer app is YNAB.com, a program that lets you tell your money where it needs to go to fill up envelopes for essential spending (groceries, rent) but also rainy day spending (new tires, winter clothes). It’s good in conjunction with short-term savings accounts like at Ally.com, but also really helpful for building up a rainy day cushion in your operating bank account. Two of my adult children use it, while the third uses his self-made excel sheets. The gist of it is to make sure money is where it needs to be when it needs to be there. 

Otherwise, you’ll see money accumulating and think, “oh, I’ve got money for a weekend in Vermont!” when you ACTUALLY  have money saved towards the expected vet bills an old cat will have.

We also talked about how emergency money is DIFFERENT than rainy day money. Emergencies are for things you don’t expect. If nothing unexpected happens, it’s for old age. On the other hand, it rains every other day. Rainy day money is a way to spread out likely annual expenses that WILL land, we just don’t know when exactly.

We talked a bit about how it’s nice to have parents that help you with large capital expenses that provide you with a start in life, but how it’s somewhat infantilizing for them to help you with everyday operating costs. The need to buy groceries and pay your car insurance bill is what forces you to do the annoying work of getting a job.

I talked about the best way to fix a budget: earn more. A great book that made a big impact on me years ago was Overcoming Underearning by Barbara Stanny. Another trick is to ask a man what he’d accept as a salary and then ask for that! (Women tend to accept 15% less than men, uggh.)

A great idea is to do a moonlighting job to save for a short-term goal (like replenishing your emergency money). We learn in ALL our scut jobs. Don’t look down on any.

I talked about “massive action”, and visualizing your best life.

I asked you to stop and do some dreaming about what your perfect life will be like when you’re 28. Where are you? City or country? Are you working with people or alone? Are you working inside or out-side? Are you doing detailed work or is showing up and doing your best each day enough to succeed? (Accountants can’t say “meh, close enough”, but teachers sort of can!) Do you want to be sitting at a desk or moving around during the day? Do you want the safety of a career in a governmental agency, or would you like the risk/reward of being self-employed? Just sit and imagine your best possible life. Don’t worry about trying to figure out how to get there, just really VISUALIZE what success would look like to you. This exercise is super useful because you’ll now be primed to notice an opportunity as it arises that might lead you in that direction.

Massive action is where you commit to taking action until you get your desired result. If you apply for 3 jobs you might not get one. But if you keep applying, using what you’ve learned, after 300 you certainly will!

We talked about going to grad school in a non-funded program straight out of college. That’s usually a terrible idea. A far better idea is to go work for a while in the general industry you’re thinking of joining after grad school and see what you like. Even better is to try to get a job at a place that pays tuition for its employees. I’m paying for my paraplanner to become a Certified Financial Planner. Colleges give tuition waivers to their employees. Various agencies will pay for you to get a graduate degree in the field they’ve hired you into. Look for those jobs.

I have more to say about retirement plans, but that’s a story for another day.

By Wendy Marsden, CPA CFP®
Greenfield, MA

Possibilities in a Pie Plate – or Crèche

Who Gets Grandma’s Yellow Pie Plate? A Guide to Passing on Personal Possessions has terrific worksheets that help families navigate the challenges involved in determining who gets the “stuff”—not the cars, houses, bank, and retirement accounts but the personal possessions that are imbued with sentimental value. Their fate can tear families apart. Available from University of Minnesota Extension, this workbook is a great resource to help you to plan, or to help surviving family members distribute “stuff”.

See this crèche? My siblings and I discovered it in a box of Christmas treasures after my mom died. Unopened for years, I thought it had been lost. My overwhelming emotion at seeing the little Hallmark card box with these plastic figures was met by fascination among my siblings—no one knew that I would rearrange all the characters every Christmas when I was young.

The journey from unpacking that crèche in my mom’s apartment to coming out at my home every Christmas is a long and treacherous one that I wouldn’t wish on anyone. I think that’s probably why I encourage my clients so enthusiastically to think about how to manage expectations—when it comes to the stuff they leave behind.

There are lots of good reasons to avoid dealing with this. For one thing, it’s likely the pie plate for your famous pecan pie is so familiar that you can’t even imagine the civil war it might trigger after your death. It’s only a pie plate to you, right? But that pie plate—or crèche—might symbolize what your family has lost in your passing and provoke an acute experience of grief.

Then there’s the question of fairness. I told my three children many times that fair and the same were two different things. But perceptions of what is fair differ. What makes these valuable treasures special is their uniqueness. It’s not possible to settle a perception of unfairness by giving everyone the same thing or breaking it up into pieces.

Have you ever stopped and considered what these items embody? Things like wedding photographs or your dad’s hammer carry personal meaning. What makes these items “non-titled,” is that they are without specific instructions about where to go, unlike the beneficiary designations on your life insurance and retirement accounts. It will be left to your family and legal representatives to decide where your “stuff” goes.

Planning ahead can be challenging. The possibility I want to inspire is that planning for the transfer of these items gives you the opportunity now to preserve their beauty and meaning to you —and possibly avoid the tears in the woof and warp of family tapestries when this advance planning isn’t done.

Here are some ideas:

Start by making a quick list of the property and possessions that you treasure. I suggest three columns: Type, Description, Location. Type examples: Jewelry, Clothing ; Hobby supplies, Creations; Books, Cookbooks; Sentimental (photographs, letters, journals, baby items)

What are your reasons for completing this task? Which reasons are most important:


• maintain harmony within my family
• give myself peace of mind
• learn what items are important to family members
• tell others what personal items have value to me
• decide what I think is fair, or discover what my family thinks fair is
• record personal and family history embodied in items
• explore my goals and what I want to accomplish

What challenges do you see in this process? What alternatives or options do you see for meeting these challenges?

What experience would you like to create for yourself and those around you?

How will important relationships be impacted? What can protect relationships?

Who else do I/we need to involve in this process?

Now consider the items on the list. Are there items you assume someone wants? Or you expect they want? List those: Who, What, Why, When, How I/we feel

Create a “Property Decisions” list and keep it with your Letter of Instruction. Location, item, description, when, to whom.


By Miriam Whiteley, CFP®, RLP®, CeFT®
Eugene, OR

Recognize Your Freedom to Choose

“When we are no longer able to change a situation, we are challenged to change ourselves.” – Viktor Frankl

We may not always be able to control the circumstances of a given situation we find ourselves in. But we always have the freedom to choose how we respond. The choice we make – and how we make it – often determines how well we survive the situation, and if we go on to thrive.

If challenges in your family life, your career, or your finances are making you feel powerless, try approaching the challenge from a new angle. This simple three-step process can put you back in touch with your freedom to choose how and why you live your life.

1. Consider your reaction.

Take a step back from the problem. Take a breath. Take a walk. Pour yourself a cup of coffee.

By creating some space, you’ll be able to ask yourself, “Why am I reacting the way that I’m reacting? Is there a better perspective I could be taking? Am I letting past experiences influence my reaction for better? For worse?”

When we feel overwhelmed by a challenge, we often fall back on established patterns in our thinking. Often these default reactions are negative. If we’re arguing with our spouse, we might replay past arguments in the back of our heads. Financial difficulty might trigger memories of our parents struggling with money as we were growing up.

Identifying the negative experiences and perspectives that create our immediate reactions to challenges can help us find ways to create more positive and empowering reactions.

2. Consider your purpose.

Instead of allowing the situation to dictate how you’re responding, push back. Refocus how you choose to respond around the goal that you are trying to accomplish.

For example, if your business partner backs out of the new company you’ve been planning to start, that loss of manpower and capital could make you feel defeated and powerless. But the reality is that you are choosing to dwell on negatives that you can’t control.

So, what can you control?

If you’re really committed to starting your new company, you can choose instead to focus on alternative funding sources. You can reach out to other friends, family, and colleagues about potential partnerships. You can choose to work on Plan B.

Another example is the investor who feels powerless as market volatility chips away at his nest egg for a quarter. No, you can’t control the natural disaster or political spat that’s giving the market fits right now. But you can choose to focus on your long-term purpose: a secure retirement for you and your family. That positive thinking and big-picture perspective could prevent a costly knee-jerk reaction.

3. Consider your values

One of the best ways to drive negative thinking from our reactions is to focus on the things that matter the most to us. Reconnecting our decision making to our values can lead to solutions that make life more fulfilling.

Work might be the most common source of challenges in our lives. And while no one loves absolutely everything about their job all the time, it’s worth considering how your job affects your sense of freedom. Do those 40 hours per week give you the financial resources to spend your free time doing what you want with the people you love? Are your skills and talents utilized in ways that make you feel like you’re making positive contributions? Does your employer have a mission bigger than profit that’s important to you?

If your answers are no, no, and no, you can choose to keep dragging yourself out of bed every Monday, resigned to the uninspiring week ahead. Or you can follow your values towards a more empowering choice. Consider a career change. Learn a new skill that will bolster your resume or line you up for a better job at your current employer.

If switching careers is really out of the question right now, choose to appreciate the parts of your job that you do well because of your unique skillset. And when you’re not working, make time for the hobbies, interests, and experiences that do fully engage your core values. Who knows? One day these pursuits might lead to exciting new opportunities for you and your family. If you’ve been committed to your values all along, you’ll be ready to make the right choice.

By Edward Fulbright, CPA/PFA, CPA
Durham, NC

Tax Inflation Reduction Act 2022: Tax Credits & Student Loan Forgiveness

The Inflation Reduction Act and other items passed by Congress may affect decisions you make in 2023 and beyond. Some of these were immediately in place as of August 16th, 2022. While student loan forgiveness has dominated headlines, there are other important changes to be aware of as well as you make financial decisions.

ALTERNATIVE (ELECTRIC) VEHICLE TAX CREDIT
The existing credit of up to $7,500 for new electric vehicle purchases was extended to 2032 and a new credit was added of up to $4,000 for used electric vehicles more than two years old. The caveat is for vehicles purchased after August 16, 2022, final assembly has to be in North America so this significantly limits which vehicles qualify now (https://afdc.energy. gov/laws/inflationreduction-act) and no longer includes foreign companies like Kia, Hyundai, or Toyota. On a positive side, the previous exclusion on tax credits by manufacturer once they sell 200,000 vehicles has been removed, making GM and Tesla eligible purchases once again. The credit is limited to the vehicle’s value as follows:

  • New Trucks, SUVs & Vans – $80,000
  • New Sedans – $55,000
  • Previously Owned Vehicles – $30,000

New income limits to qualify have also been added:

  • Couples – $300,000
  • Individuals – $150,000

The rules for this credit continue to change based on the release of additional information by different government entities. As a result, the safest way to determine if your vehicle will qualify for the credit is to enter the VIN at  https://vpic.nhtsa.dot.gov/decoder/ before you make a purchase.

ENERGY EFFICIENT HOME IMPROVEMENT CREDIT
Starting in 2023, homeowners may take a tax credit of 30% for the cost of installation and equipment of solar panels, wind power systems, and geo-thermal heat pumps. The prior lifetime limit for credits for eligible appliances was replaced by a $1,200 annual limit. This allows for greater use of the credit over time. In addition, credits will be available for efficient exterior doors, windows, water heaters, and biomass stoves ranging from $250 to $2,000 per year. You can find more details on these credit limits at https://www.kiplinger.com/taxes/605069/inflationreduction-act-tax-credits-ener-gy-efficient-home-improvements.

STUDENT LOAN FORGIVENESS
Another significant change involves a new plan for student loan forgiveness. Qualifications for forgiveness include:

  • Couples – $300,000
  • Individuals – $150,000

The rules for this credit continue to change based on the release of additional information by different government entities. As a result, the safest way to determine if your vehicle will qualify for the credit is to enter the VIN at

  • Loans must be federal student loans taken out prior to July 1, 2022
  • Household income below $125,000 for an individual or $250,000 for a couple for the 2020 or 2021 tax year.

Pell Grant recipients can have up to $20,000 forgiven, others may have $10,000 forgiven. An important element to the program is that forgiveness amounts are capped per borrower, not per household. This means that if you and your spouse both have federal student loans, then you both could qualify. The process could move quickly if you already have had your income verified through income-based repayments and would then show up as a credit in your student loan account. If your income is not verified, an application will be available in the coming weeks to qualify.

Currently, the student loan debt relief is blocked by court orders. In the meantime, they extended the pause on student loan repayments until the earlier of 60 days after implementation of the debt relief program is allowed or litigation is resolved or 60 days after June 30, 2023. You can find more information and updates at https://studentaid.gov/debt-relief-an-nouncement/.


By Steve Martin, CFP®, CPA, JD, LLM
Nashville, TN

Tax Loss Harvesting: A Good Idea That is Overrated?

Turning lemons into lemonade should be considered during the market volatility that we find ourselves in today. In periods of market downturns or even market upturns, one strategy that is often suggested is tax loss harvesting. It can be a beneficial strategy, but its application is often misunderstood or wrongly implemented.

Knowing when to utilize capital loss harvesting is beneficial. First, we must start with understanding how capital gains and capital losses are treated under the tax laws. You likely understand that long-term capital gains are taxed at different tax rates than ordinary income (such as wages and interest income). Like ordinary income, capital gains are taxed based on tiers. If one’s income falls under a certain threshold, capital gains are taxed at 0%! That’s huge, and there are planning opportunities here that we can hold for another day. The next two tiers are taxed at 15% and 20%. (Also note that net investment income tax can also be applied at a 3.8% rate for those exceeding certain income levels and state income taxes may apply.)

If you have a capital loss, there is an ordering rule for applying those capital losses. In simple terms (and without getting into short-term versus long-term capital gains and losses), capital losses are first applied against capital gains. Thus, if you realize a $40,000 gain on the sale of some stock and a $10,000 capital loss from the sale of another stock in one year, then your net capital gain is $30,000. If it is indeed a net long-term capital gain, then it is generally taxed at the capital gains rates. Effectively, your “deduction” for this capital loss was applied at the lower capital gains rates. If realized capital losses exceed capital gains in one year, then you can offset a portion of such losses against your ordinary income. Unfortunately, this offset against ordinary income is limited to $3,000 per year. Any unused losses (i.e., those that exceed the $3,000 limit) can be carried forward until such losses are used up. The same ordering rules apply to these carried forward amounts. Unlike many tax thresholds, the $3,000 capital loss limit is not inflation-adjusted.

Taking losses against capital gains can be advantageous in a few respects:

  1. The losses may allow you to avoid recognizing the gain at a higher tax rate.
  2. Taking losses may allow you to take advantage of other tax breaks (deductions or credits) or minimize financially-related penalties by reducing certain key thresholds.
  3. Minimizing income taxes earlier may have a time value of money benefit.


Offsetting losses against ordinary income can be even more beneficial considering the generally higher ordinary income tax rates compared to capital gains rates. Of course, one key is understanding your relative capital gains rates and ordinary income rates over the relevant period.

There are a few caveats before implementing this strategy:

  1. Understand that taking losses also reduces your tax basis in the portfolio, and this can result in larger capital gains down the road. This can, in turn, lead to higher taxes in the future.
  2. When deciding whether to buy and sell assets, the investment characteristics should be the primary factor.
  3. Consider the transactional costs and the time required to implement this strategy.
  4. Be aware of the wash sale rule.


Thus, capital loss harvesting should be considered, especially during market downturns. It can produce economic benefits in the right situation, but there are certainly other tax strategies that are often more beneficial. If done incorrectly, implementing this strategy can backfire on you. In addition to capital loss harvesting, there are a host of other strategies to consider when trying to minimize capital gains taxes, and these strategies should be coordinated with your overall cash flow and financial plan. If you would like help with this or other tax strategies, you should search for a financial planner that has expertise in the tax arena as that has the potential to enhance your overall situation.


By Steve Martin, CFP®, CPA, JD, LLM
Nashville, TN

Does Crypto Belong in Your Portfolio?

Don’t be fooled by the constant stream of articles about cryptocurrency. It’s true that cryptocurrencies have become more popular, and more numerous, including Bitcoin, Dogecoin, Ethereum, and more than 9,000 others.

They’re still not mainstream— “everyone” isn’t investing in cryptocurrencies. But are they a new asset class? Should you include cryptocurrencies in your portfolio?

No. And no.

OK, that answer sounds pretty categorical. Let’s be more precise: the enormous majority of individuals and households should not hold cryptocurrency as an investment. It’s every bit as suitable as currency speculation with all the intrinsic value of a non-fungible token (that is, not suitable at all with zero intrinsic value).

Are cryptocurrencies the newest asset class, another tool for greater diversification?

No. They’re a new kind of cash—much less stable than the US dollar—but not a new asset class. It’s very like having currency from a country you’ve never heard of. Or perhaps something like when exchange-traded funds entered the world of investments (but, unlike ETFs, just a lot less useful [well, pointless] for the enormous majority of us).

In the type of large portfolio (not yours) where it makes sense to stockpile some euros, pounds, rupees, or yuan, it might make sense to have some cryptocurrency. The rest of us should stick to investments in the kind of assets that have been around for centuries, like stocks, bonds, real estate, and cash—legal tender issued by the authority of a sovereign government. Here’s why.

What cryptocurrency really is

Money of any kind only works because groups of people agree to believe in it. (See Jacob Goldstein’s book Money: The True Story of a Made-Up Thing.) All money, including the kind issued by governments, isn’t valuable in itself. It’s an agreed-upon or accepted representation of value.

In this respect, cryptocurrency is similar to government-issued currency—it has value because numerous people agree it has value. What is different is that everyone who owns cryptocurrency receives a distributed ledger containing all the data tracking every transaction ever made by anyone in that specific cryptocurrency, and how much they have (or had) at any time. You just can’t identify who each individual is in the real world because everyone’s identity is hidden behind a unique string of characters, kind of like an account number.

Where does cryptocurrency get its value?

Cryptocurrency, like legal tender, derives its value from how much you can exchange it for in goods or services. When we talk about how many dollars you can get for a bitcoin, it eventually boils down to how much bitcoin you’d need (compared with how many dollars) for a loaf of bread, a car, or a vacation.

The enormous swings in the value of cryptocurrencies stem from the fact that it’s less certain how much cryptocurrencies can buy. Like the value of Beanie Babies rocketing upward and then crashing, the value changes based on what the community as a whole thinks it can get if it tries to sell (for example) one Bitcoin or Dogecoin.

There’s an important similarity to another recent development, the emergence of non-fungible tokens (NFTs). An NFT is a computer file that’s identified as being unique, even though it can be copied identically many times. It gets its value, if any, from the tag that identifies it as unique. How much value? As much as the next buyer is willing to pay for it (the same influence that has caused used car prices to skyrocket during the pandemic). If no one else believes it’s worth paying for, its value is zero.

Why isn’t cryptocurrency as good as a stack of dollar bills? Because many fewer people believe in its value. So, if you wouldn’t speculate on the value of yen or euros, you certainly shouldn’t speculate on the value of cryptocurrency.

Is cryptocurrency a fad?

We don’t believe cryptocurrency is going away any time soon. In fact, it’s likely to continue to be accepted by more and more people. And the technology that makes cryptocurrencies work—a distributed ledger of all transactions that can only be added to, and not otherwise edited, using blockchain technology—is already being used by businesses in ways that have nothing to do with cryptocurrency.

One of the major selling points of cryptocurrency is that it allows users to keep transactions private. (“Crypto” derives from Latin and Greek roots for hiding and concealment.) While there are obvious unlawful applications—ransomware criminals, for example, may only release computer files back to you if you pay in cryptocurrency—it’s harder to see any essential application for people who (per our consistent recommendations) avoid committing felonies.

Cryptocurrencies and the technologies behind them aren’t worthless. But cryptocurrencies are inherently speculative—they’re not suitable for investing. “Investing” in cryptocurrency is applying the wrong tool for the job for almost all of us. I wouldn’t use your doorstop as an investment any more than I’d use a mutual fund to keep your door open.

Investing without cryptocurrency

Anything with the promise of making a lot of money in the short run has at least commensurate risk. To make money with cryptocurrency, you’d need to be very good at timing the market (people are notoriously bad at that) or very lucky. Will a small number of people make enormous fortunes in cryptocurrency? Of course. Many, many others will lose substantial sums of money.

Investments should be boring. They’re not about getting rich quickly, but building wealth slowly—very tortoise-like. And of course, most of us don’t need to beat the market to succeed at investing.

Don’t be seduced by articles claiming that cryptocurrency is a new asset class—it’s not. It’s a relatively new asset and, very much like speculating in sovereign currencies, it’s marked by risks that outweigh the benefits. Like many other assets, cryptocurrency has no role in strengthening the financial security of individuals and households. Anything cryptocurrency can be relied upon to do in an investment portfolio, there’s an alternative that’s far less speculative that can do the job better.

If you’re curious or you want to be a part of the trend, take the money from your entertainment budget, and consider it already spent at the time you buy cryptocurrency. And just like a bet at a casino, don’t consider it part of your portfolio.

By Ken Robinson, JD, CFP®
Rocky River, OH

Can You Take a Punch?

Mike Tyson, the former world heavyweight boxing champion, is not well known for making profound observations, but I believe he made at least one. Once, prior to a fight, a sports reporter asked him how he planned to handle his opponent who had said that he had a special plan to defeat “Iron Mike.” His response was that, “Everyone has a plan until he is hit in the mouth!” Mike may not have realized it at the time, but his observation has meaning far beyond the boxing ring.

There is more than one way to be a successful investor in the equity markets, but the one thing that most successful investors have in common is that they have a plan. Warren Buffett, who has enjoyed a modicum of success, buys businesses that he believes are undervalued and then holds them for the long term. I am told that there are successful day traders (though I do not know any) and I suspect that they have plans that they follow to time their trades. Others who invest in individual stocks have buy and sell rules based on price earnings ratios, dividend growth rate, the markets 200 day moving average, or other criteria that they follow. Still others have realized success using stock and/or bond mutual funds.

The investment policy that I suggest for my clients is to allocate one’s investment money between equities (stocks or stock funds) and bonds and cash in a fashion that meets their individual needs. They should think of their equity portion as their growth engine; money they will not need for three to five years. The bonds and cash portion of the portfolio serves to smooth out the inevitable swings in the equity markets, hopefully provide a bit of growth, and be a source of ready cash. As the various asset classes move up or down in value, these positions would be periodically rebalanced by moving money from one position to the other to keep the initial allocation plan in place.

Of course how much you may allocate to each portion depends on your particular circumstances. You should consider your age, your future goals and financial needs, and your tolerance for risk. But once your allocation decision is made, I suggest you stick with it through the market’s ups and downs.

Following such a plan accomplishes at least three important things: 1) It forces one to buy low and sell high as the rebalancing process will dictate that gains are taken from positions that have grown to be too large and invested in the positions that are smaller than the original allocation called for; 2) It takes emotion out of the decision; and 3) It keeps us from trying to “time” the market by jumping in and out, which no one has been reliably able to do over the long term.

Perhaps the most important thing an investment policy can do for us is to help control our emotions. Many studies (Google it) have shown that emotions often lead us to make exactly the wrong investing decision. Rational investing decisions are best made with CNBC turned off, all of the “talking heads” tuned out, and our long-range plans in mind. This is easy to say but hard to do. It is difficult to avoid the herd mentality as everyone is rushing for the doors screaming about the sky falling and the end being near! It seems no one likes equities when they are discounted and put “on sale,” but that is when they will be purchased by those who are rationally rebalancing their portfolios and following their plan.

One of the roles I try to fill for my clients is that of an emotional anchor; I try to keep them from getting too high when the markets are going up, or too low when markets turn down. Every asset class has its day, and all of them will eventually go both up, and down, in value. That is why I suggest a balanced portfolio where our money is spread over a variety of asset classes. That is also why I suggest we establish a plan, or a policy, that helps us decide when it is time to make changes to that portfolio.

So this is where Mike Tyson’s observation may apply to us. We need to ask ourselves if our plan is good enough to withstand a stiff punch to the mouth by the stock market; or put another way, are we committed to stick with our plan after such a lick? A well-conceived plan, or investment policy statement, will help you do just that. You will very likely be rewarded if you do as history has shown that the disciplined investor is more likely to succeed over the long term. But through it all remember: money is not the most important thing, perhaps not even in the top ten; but still, money matters.

By Michael Ryan, CFP
Hendersonville, TN

The Pros and Cons of Target Date Funds

Most 401k plans offer target date funds as an easy way for participants to start investing. A target date fund is a mutual fund that is composed of several other mutual funds and ETFs. These funds include domestic and international stock funds and fixed income funds. The target date represents the date when the investor plans to retire. The allocation changes over time as you get older. The allocation is more aggressive when you are younger and becomes more conservative as you age.

Target date funds are good for novice investors or individuals who do not want to spend a lot of time researching and selecting investment options. Simplicity is one of the biggest advantages of target date funds. You can select a fund based on when you plan to retire, and your money will be allocated in a manner deemed appropriate for your retirement plans. You don’t need to analyze, select, and monitor individual funds. It will automatically rebalance your portfolio as the market fluctuates and it will adjust your allocation to become more conservative as you get older.

This type of fund keeps you diversified across different investment categories and encourages participation from those who are reluctant to contribute to their retirement plan. It also helps investors avoid market timing and extreme investment behavior.

Conceptually, target date funds work well for many investors. Participants like the hands-off approach where you can set it up and forget about it. However, this also presents one of the biggest downfalls. People select a fund and forget about it without understanding the asset allocation and how it will change over time. When you begin investing, the allocation may be appropriate but as you approach retirement, target date funds can become too conservative.

It is common for target date funds to use an allocation of 50% in stock and 50% in fixed income upon retirement and gradually transition to over 75% in fixed income. This is a very conservative allocation for many retirees who anticipate spending 20 to 30 years in retirement. Monitor and under-stand the asset allocation of your fund to be sure it meets your investment goals.

Target date funds are not customized to your situation, everyone is treated the same based on age. The allocation of the fund does not take into consideration other financial considerations in your life and your tolerance for risk. 

Some additional disadvantages to target date funds include potentially higher investment expenses. With a target fund you pay the investment fee for the fund itself as well as fees for the underlying mutual funds held within the fund. Target date funds are generally concentrated in one fund family, providing less diversification and there may be tax inefficiencies if used in a non-retirement account. Do not use target date funds for Roth accounts which should generally be invested more heavily in equities

By Jane Young, CFP, EA
Colorado Springs, CO

Where There’s a Will, There’s a Way – to Control what Happens!

You worked hard for many years, saved well, and find yourself in a position to provide a legacy to loved ones after your death. The starting point for me is always the reminder that you have no obligation to provide an inheritance to anyone, even family (with a possible spousal exception), and therefore you can decide on an individual basis who gets what and whether there are any strings attached.

The simplest approach to leave a legacy to loved ones is to use your Will or Revocable Living Trust to name the individuals to whom you are providing an inheritance amount, either a percentage or specific dollar amount, with outright distribution to the beneficiary at your death and “no strings attached.” But simple is not always the best approach in more complex situations.

Sadly, it is not an uncommon situation to have concerns about providing an inheritance to family members who may have a poor track record of handling money, are in a troubled marriage, or have substance abuse or gambling issues. As planners we are often asked by our clients what they should do in these cases.

Let’s look at the case of Marge, a widow with no children of her own who wants to provide for her five nieces and nephews as well as some charities when she dies. Marge has a total estate of $1 million. Marge is thinking about a bequest of $100,000 each to her five nieces and nephews from the sale of her $500,000 home, with the remaining assets going to several charities. Marge is comfortable with three of her nieces and nephews getting their funds outright, but one niece is in a troubled marriage and one nephew has a history of substance abuse. Marge asks your advice on what she should do.

In coordination with Marge’s estate planning attorney, we looked at her options. The simplest option of outright distributions is not feasible for the one niece and nephew with issues. Marge could consider creating a trust in her Will or a Revocable Living Trust. Either trust can appoint a trustee to manage the inherited funds for the niece and nephew with whatever terms and conditions Marge would like. The trust option does satisfy Marge’s goal to provide for her family but not permit them to squander their inheritance. However, due to the cost of administering each trust, a trust may not be economically feasible for the $100,000 amount that Marge is considering for this legacy goal. Assuming it is feasible, who should she choose as her trustee? Marge is thinking that one of her nephews, a CPA, would be a good choice for that role, but a relative is not always the best idea. The trustee is put in a difficult position of being seen as standing between the beneficiary and his or her money. A professional trustee such as a bank, trust company, or financial/legal professional would be a good choice but may not be cost effective for this size legacy.

Another option for legacies too small to create a cost-effective trust is to include a provision in her Will or Trust to have her Executor/Personal Representative (likely her CPA nephew) use $200,000 from the proceeds of her home sale to purchase two $100,000 restricted single premium immediate annuities (SPIAs) for the benefit of her niece and nephew with issues. The restricted SPIA differs from other annuities in that the beneficiary has no ability to sell the annuity for cash or demand any payments beyond what the annuity provides. And, unlike a trust, there is no family member or other professional in charge of the funds in trust – just the annuity company making monthly, quarterly, or annual payments to the beneficiary. For the $100,000 legacy, it may not be feasible to have an annuity go on for longer than 10 years, but Marge is okay with that since neither her niece nor nephew can change anything, and they get the guaranteed payments under the terms of the annuity contract. What they do with the money once they get it is something Marge can’t control! But that is the same for trust distributions as well. Control can only go so far.

Your situation may not be similar to Marge’s, but it is important to understand that you have multiple options with providing a legacy – or not – and that your planning team can help you achieve your goals in often creative ways. The only plan that won’t work is the plan that is never put in place!

George F. Reilly, J.D., CFP®
Occoquan, VA