Crossing the Rubicon

The triumphant Julius Caesar stood on the northern banks of the Gaul River with his army. He agonized over his next move. Caesar had expanded the borders of the Republic into modern France, Spain and Britain in a decade long campaign. Should he stay in Gaul and forfeit his power to enemies in Rome, or take Rome by force with his sword and army? He had little choice, but if he crossed, there would be no turning back.

Roman law required generals returning from military conquests to disband their armies.  Senators said it was “for the safety of Rome” and avoiding an internal military coup – and it protected their positions, power and wealth. However, this time opposition against Caesar had escalated. His unprecedented victories earned him unrivalled power and influence Caesar was ordered to relinquish his command and there were rumors to take him out by any means necessary.

Caesar had no intention of obeying the Senate. Inspired by a vision from the gods, he took charge of his men and said, “The die is cast.” He crossed the small stream and started a great war. And his successes continued until he was assassinated five years later. He established a new constitution, brought order to the Roman Empire, reformed the calendar with the Julian calendar, and was snuggle buddies with Cleopatra.

“Crossing the Rubicon” for Caesar meant leading the greatest empire of the times. It also brought him death. The phrase is used today when you face a difficult decision. You commit to a specific course and it becomes a point of no return. Examples include having a family, expanding into a new business area, retirement, divorce, or a tattoo. Not all are irrevocable and some have more significant consequences. And some can be reshaped or enhanced with adjustment and planning.


10 Ideas for Your Tax Refund (or Reasons Why We Save)

  • Build cash reserves – Amount equal to three or six months’ living expenses if working, one or two years if retired. Check online FDIC insured money markets for competitive yields (vs local banks).
  • Pay off debt.
  • Add to 401k or your after-tax savings – Retirement plans generally provide tax benefits. Reasons to invest outside of retirement accounts include liquidity, real estate, or you don’t want all your future retirement checks to be fully taxable.
  • Fill gaps in insurance and reduce risks – $1M umbrella liability policy might cost $300-$400 or buy a home generator.
  • Fund vocational or college expenses – Also 529 plans have been expanded for elementary and secondary private schools (but not all states have agreed to piggyback on the new Federal rules so check).
  • Build your HSA account – If you’re eligible, Health Savings Account are excellent with triple tax breaks (deductible contributions, tax-deferred growth, and withdrawals tax-free for qualified expenses).
  • Honey do’s – Maybe not enough for a car wash in the shower, but maybe programable thermostat, closet organizer, or yard project.
  • Kickstart the kid’s savings – Consider funding $5,500 to his or her Roth IRA, or their W-2 earnings, whichever is less.
  • Update your estate plan – We’re not getting out of this world alive. And aging can be a double-edged sword. Consult your attorney regarding your will, power of attorney, medical directive and maybe a trust.
  • Give to others – Most people give because it’s the right thing to do. A tax deduction may be a bonus. Some might “lump” contributions to every couple of years to clear the higher standard deduction.


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Tax Reform and Impacts to Business Owners

March Madness can be unpredictable, just like life. And Americans like to root for the underdog. Many Cinderella teams have captured our hearts since the first NCAA tournament in 1939. North Carolina State was a 6 seed that won it all in 1983. Butler almost beat Duke at the buzzer 61-59 in 2011 – 8 seed versus number 1. And this year a history making 16 seed took out a 1 when UMBC dominated Virginia, two 13 seeds defeated 4 seeds (Buffalo over Arizona and Marshall over Wichita). And because the Tourney is still on, I won’t talk about the others for fear of jinxing them.

We build March Madness brackets. We build plans for retirement and financial success. Both provide thrills. Both have uncertainty. However, one has much bigger stakes, and hopefully, demands greater focus and energy. May what remains of your bracket be successful. More importantly, may your future be secure and prosperous.

The Tax Cuts and Jobs Act represents one of the most significant tax changes over the past three decades. It impacts all taxpayers. This article focuses the possible implications to business owners, and briefly summarizes related details.

  • How does this impact me? – Tax simplification, while a worthy goal, continues to be an oxymoron. And rather than talk about generalities of “most” or “some” people, cut to the chase and meet with your CPA and other advisors and fine-tune a plan specific to you.
  • Flexible and adaptable – Be prepared for change. The 1,000-page legislation will need reform of its own to fix or clarify. And expect revision as the political pendulum shifts direction.
  • Global tax shakeup – You don’t always want to be at the top of the list. US moves from being the highest corporate tax jurisdictions of the 35 developed countries, to number thirteen. Tax reduction has global and domestic economic implications – stimulative for the short-term, however, some worry long-term if budget deficits persist. Will lower corporate taxes attract more interest by foreign investors and might this be an opportunity for private companies to sell?

Lower personal tax brackets and simplified deductions – Many individuals may be paying less taxes and filing may be easier. However, taxpayers in high income tax states may pay more due to limited deductions. Rates have come down until 2025. And three out of four taxpayers may be taking the standard deduction rather than itemizing. The standard deduction is increased to $12,000 for single and $24,000 for married filing jointly.

Corporate taxes – The most notable change has been the reduction of the highest corporate tax rate from 35% down to 21%. And corporate alternative minimum taxation was repealed. Including state corporate taxes, the average US company pays 25.75% versus 38.9% before tax reform. The intent was to increase business cash flow (less taxes) to encourage increased plant and equipment investment and hire more employees.

Qualified business income deduction – Some companies might be tempted to corporate entities given the lower corporate tax. The qualified business income deduction was meant to help address this. Pass thru entities (Sub S, LLCs, partnerships, sole props, etc.) may be eligible for a deduction of 20% of their qualified business income. Eligible businesses include manufacturing and real estate companies, but not professional services. Talk to your CPA to determine if you’re business is eligible. Professional services including doctors, lawyers, accountants, financial advisors, performing arts, athletes, etc. are ineligible. However, architects and engineers may be eligible for the deduction.

Repatriation – There’s an incentive for companies to bring back business profits to the US that may fuel spending and investment.  The one-time repatriation tax is 15.5% for liquid and 8% for illiquid assets.

Higher expensing – Businesses may be eligible to expense up to 100% of certain business assets acquired through 2022. This means increased free cash flow for operations or to fund acquisition.

Miscellaneous deductions – Deduction for business related entertainment (e.g. sporting events) has been spiked, but businesses are eligible to deduct 50% of qualified meals. Deduction for business interest expenses is limited to 30% of adjusted taxable income.

This is a summary of the tax reform. It’s difficult to generalize on how taxpayers should cope with the new rules. Consult with your CPA or enrolled agent for more details and specific advice relevant to your situation. They’re going to be busy with preparation of 2017 returns, but not too busy to schedule an appointment to review 2018 and beyond for you to pay the minimum tax legally required.

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Tariffs, Inflation and Tax Time

Life isn’t easy, simple or smooth. March is Women’s History Month which recognizes great contributions women have made to our country. Elizabeth Blackwell was the first women to graduate from medical school in 1849 and is recognized as our first woman doctor. Blackwell faced many prejudicial challenges in education and medicine. She was rejected by most schools, one accepted her on the condition she dress as a man, and was finally accepted by Geneva Medical College in NY. She and her sister Emily (graduated from med school in 1853) opened a women’s clinic. Elizabeth marched on, trained women physicians and nurses in the Civil War, and founded hospitals and women’s medical colleges in the US and England. She was a pioneer in preventative medicine and helped open the doors for other women. At the time of her death at age 85 in 1907, there were over 7,000 women physicians in the US.

Let’s shift gears and talk about three challenges facing investors today, and actions you can take to better put things in your favor:

Volatility vs Risk – Volatility has returned with the US stock markets in correction territory last month and Bitcoin cryptocurrency fell almost 60% from its peak. Numerous culprits have been suggested. The cause doesn’t really matter. Volatility makes people uneasy.

  • Volatility is natural. However, it doesn’t necessarily mean risk. Take two investments, one with an average return of 6% but about two-thirds of the time it ranges from being minus 6% to positive 18%. The other averages a 1% return per year and consistently earns 1% with zero volatility. Is it less risky than the other earning 6% on average with volatility?
  • Consider risk as things that jeopardize your expected outcomes (e.g. comfortable retirement). Volatility can be managed – prudent diversification. Consider risks – not having a written game plan, business cycles, divorce, aging, etc. What actions should you take to manage them?
  • Your response to volatility can be risky. Investors can be their own worst enemy. Some try to time the market diving in at the high and bailing at the bottom – buy high and sell low. DALBAR, a research company, calculates the average equity investor lags the index by three to four percent over a 20-year period (12/31/2016) and similar lags for fixed income investors. Instead, schedule reviews with your financial advisor when times are good (and adjust if prudent), so hopefully in bad times, the conferences will be “You’re going to be ok.”

Rising Inflation and Interest Rates – Some impacts are good, others bad. Example, Social Security retirees received a 2% pay raise (COLA) this year, the highest since 2012. The average retiree saw a monthly increase of $27, and those at the maximum benefit got $101. While payouts increased, so do costs. Full retirement age for younger workers rose. Taxable income cap for FICA taxes increased $1,600 to $128,700.

  • Investing: Higher interest rates can benefit savers. Talk to your advisor about using high yield, online, FDIC insured savings accounts paying 1.5% or higher, look at CDs but keep them short (go longer when rates rise), and the risks of owning long-term bonds in rising rate markets.
  • Borrowing: Flip side is that borrowing is more expensive. Consider moving adjustable rate debt to fixed rate (e.g. home and student loans). HARP home refinance program has been extended to the end of 2018 – contact and see if that benefits you. And request credit card issuers to review and reduce your interest rates.

Tax Time – Income taxes were illegal until Congress ratified the 16h Amendment. There were 7 brackets from 1% to 7%. Most Americans were at 1% which was for income to about $490k in today’s dollars adjusted for inflation. Times have changed.

  • You still have time for 2017 tax savings by contributing to certain retirement – IRAs and SEPs – if eligible and it makes sense for you.
  • For 2018 and beyond, higher contribution limits apply for defined contribution plans (including 401k), defined benefit plans and Health Savings Accounts. IRA, Roth and Simples generally remain unchanged.
  • Tax Cuts and Jobs Act contains major tax changes affecting both individuals and businesses. Ask your CPA how it will impact you, collaborate with advisors, and adjust tax planning strategies.
  • Finally, CPAs are under the gun with filing deadlines and clients who prefer paying less taxes. Organize, be timely, and bring them a latte to brighten their day. And most people hate surprises. Ask for their advice before you do the big transaction – sell a major asset, acquire a business, remarry, etc. – rather than “One more thing, did I tell you about…?”
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Alternative Thoughts on Education Funding

The world changed with the discovery of a hidden stairway in Egypt’s Valley of the Kings in 1922. Tomb raiders plundered the pharaohs’ tombs for centuries. And extensive excavations by archaeologists in the late 1800’s uncovered what they thought were any remaining secrets. However, British archaeologist Howard Carter and his team unsealed the door to King Tutankhamun’s tomb. The Boy King, his treasures, and new discoveries about Egyptian life were found largely undisturbed. This wealth remained hidden and overlooked for over 3,000 years. Tut’s father had been unpopular and Egyptians wiped history clean of Akhenaten’s legacy, and the boy king’s reign fell to obscurity. Tomb raiders overlooked Tut – in their books, he never existed.

Solutions to life’s mysteries often require persistence, new thinking, and a little luck.

The incoming class of 2018 anxiously awaits their letters of acceptance. College education is important for educating, preparing and re-tooling our workforce. It provides professional, personal and social benefits as skills are developed and networks are created linking people, talents and opportunities. And it enhances lifetime earnings potential. I’ll share alternative thoughts about college planning – “college” might be community college, vocational school, four-year college or graduate and professional degrees.

Should education funding take priority to retirement funding?

  1. It’s important to start early – time value of money – but savings can be “lumpy.” Young adults may be focused on paying off student loans and building reserves, shift to home acquisition and family, and finally, focus on retirement funding. If that’s the progression, then recognize the potential conflicting tendencies of “being safer because I’m not 30 anymore” (looking backwards) versus “need to stay growth-oriented to fund a three or four-decade timeframe” (looking ahead).
  2. Ironic situations can arise when life intersects with financial advice. One family sets limits on what they will fund such as X dollars or four years of in-state tuition. Should they feel guilty about saying “no” to their kid’s #1 school choice, or that the kid takes out student loans? Or consider retirees who preserve their retirement assets (don’t spend it) and pass it on to heirs who may become wealthier than they.

How active is the student involved in the planning process? It’s helpful to have both parents and students involved in conversations about the implications of college decisions. Issues include what’s the college choice priority – academic fit versus affordability? Who is primarily responsible for funding – parent versus student? And how school/career ready is the student – GPA, career or major, and drive?

What costs are being considered?

  1. Financially, you have tuition and fees (averages range $10k for in-state, $26k out-of-state, and $35k annually for private). There’s also room and board, books/computers/supplies, and personal/transportation.
  2. How long is school? Two-year program, four or more? What about potential over-enrolled public colleges where it may take more than four years to get the necessary courses versus private schools who say, ”We’ll get your kid out on time?”
  3. Opportunity costs? Consider a student entering the workforce with a technical or vocational degree at potentially less cost, debt and time than a four-year college graduate taking a position different than his major. Or alumni networks or specialty programs at various institutions.
  4. Weight of debt? Recent statistics show about $1.5 trillion of student debt (exceeds credit cards by $620 billion). Average 2016 graduate had $37k of debt. Graduate and professional students were higher – MBA $42k, law $140k and medical $162k. Debt service means less money to buy cars, make house payments, etc. and it gets more expensive as interest rates rise. A 2% rise in interest rates extends the payoff period ($37k of debt at 6%) by 2.6 years or increases the monthly payment 27%.

Planning involves working multiple dimensions simultaneously, not unlike the search for treasure. Good luck.

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Roth IRA Conversions Might be a Smart Move for 2018

The world’s best winter Olympic athletes meet in PyeongChang. Alpine skiers Vonn, Shiffrin, Ligety, Nyman and their teammates have a job which is basically to get from the starting gate to the finish line with a few obstacles to navigate in between. They face conditions they cannot control – weather, visibility, and snow to name a few. However, they can focus on the things they can control including the line or track they’ll take. And we’ll root them on their way to hopefully gold and joy.

Managing personal finances, and life, have similarities. We’re trying to get to where we want to be, with life’s surprises helping or hindering our progress. Either way, we adapt and adjust course and tactics. One area of change currently is tax reform (Note:  there are plenty of other commentators talking about shifts in investments). Tax rates have been reduced. What if Congress hikes future tax rates? Thus, Roth IRA conversions might be a smart conversation with your CPA and financial advisor.

There are two types of IRAs – traditional versus Roth IRAs.  Generally, the decision to contribute currently ($5,500, or $6,500 if you’re 50 or older) to either a Roth or traditional IRA is largely based on current versus future expected tax brackets. If future brackets are higher, then consider a Roth, and if lower, then consider the other.  In traditional IRAs, you may get a tax deduction up front for the contribution, the monies grow tax deferred, and future retirement withdrawals are taxable as ordinary income (Note: non-deductible contributions may be non-taxable). Roth IRAs are treated the opposite. You contribute money on an after-tax basis, monies grow tax deferred, and generally, if withdrawn during retirement, those retirement checks are non-taxable.

To summarize, Roth IRAs are generally better for people who are in low or relatively lower tax brackets while they’re saving versus when they later retire. (Please note, taxes are complex, I’m oversimplifying this for discussion purposes, and you should seek expert tax advice from your CPA relevant to your specific situation).

But wait, there’s one more thing – are you earning too much money that would prohibit you from making a Roth IRA contribution? For 2018, the phase out for Roth IRA contributions is MAGI between $189,000 and $199,000 for married, and $120,000 to $135,000 for single.

However, regardless of your income level, you may be eligible to convert a traditional IRA account to a Roth IRA. Consider the expected differential between current and future tax brackets as previously discussed. The conversion will trigger taxation of the IRA amount. If you convert a $100,000 IRA, then you’ll have an additional $100,000 of taxable income. In essence, you’re making a long-term bet for higher income tax rates and buying out Uncle Sam early.

There are two things about Tax Reform relevant to Roth IRA conversions. First is the elimination of the “do over” option after 2017 – you formerly could change your mind and “undo” a Roth IRA conversion as late as October 15th of the following year.  Second, the tax brackets are lower under Tax Reform. If you are high income and are considering Roth IRA conversion, the amount may have been taxed at rates ranging from 28% to 39.6% – under Tax Reform, it might “only” be taxed at 24% to 38.5%. And consider future tax policy. If nothing is done, the old tax brackets return in 2026. And if, the US deficit widens due to insufficient revenue (taxes) or higher expenses (more services, higher interest expense on government debt, etc.), what’s the bet for higher tax rates?

This is one more planning “what if” to consider – a window of potentially lower income tax rates.  But save  yourself, and your CPA,  the bother if you’re one of the fortunate savers  who will be passing wealth on to your heirs. If that’s the case, why are you paying taxes for your kids’ inheritance?

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The Silk Road and Planning for Federal Employees

Beasts carried and merchants traded silk, porcelain, gold, spice and gunpowder along a 4,000 mile corridor between China and Greece for almost 2,000 years. It was called the Silk Road, and started about 200 BC when wealthy Romans sought soft and shimmering silk, and Chinese nobles wanted a special breed of horses that symbolized the sports car of their day.  The overland routes were valuable not only for the exchange of goods and luxuries between East and West, but also for the trade of philosophy, culture, religion and technology that helped shape the world.

The Silk Road had two unique features. First, it is not a single road, but rather a series of strategically located and connected trading posts, marketplaces and routes. It was a web similar to woven silk threads. Second, the flow could be interrupted due to weather, natural disasters, politics and marauding raiders to name a few. And it’s a good metaphor for one’s journey through life – there are multiple paths to the top of the mountain, and there’s likely to be numerous detours along the way.

Households across America pay close attention to their finances for New Year’s Resolutions and gearing up for income tax preparation. Others focus on planning summer vacation. Here are some issues Federal employees face as they consider employee benefit decisions. If you are not a Federal employee, consider reading on because we’re covering retirement and health planning issues.

Retirement benefits – Components may include Basic Annuity (FERS and CSRS), Thrift Savings Plan (TSP), and Social Security. (Note:  FERS and TSP are similar to PERS and 401k plans). The annuity benefit is based on your length of service and “high-3” average salary, reduced for survivor benefits, and subject to cost of living adjustments.

Retirement benefits from TSP are based on the account value – similar to 401k plans. Think of “fives” regarding TSP. First, consider contributing at least five percent to get matching contributions which are often five percent. (You may need to contribute more based on your situation). You get a huge return (100 percent here) on your contributions and ten percent of your pay goes to savings. Second, it’s simple investment menu – five index funds and five lifecycle funds. It’s a cheap way to invest – low management fees with index funds.  And you can contribute on a pre-tax or Roth option – the later may be better for those in a low tax bracket.

There are a couple of quirks to TSP such as (1) limited diversification – invest elsewhere if you want gold, real estate, small caps, etc.; (2) consider the other side to the “cheapest is best” rant – a bad (or poorly timed) investment, albeit cheap, is still a bad investment; and (3) limited withdrawal/distribution options – TSP encourages participants to transfer money in, but getting out is another issue.

Health benefits – The Feds have mass and offer a broad benefit and insurance program. I’ll cover three areas. Take a look at HSA (health savings) and FSA (flexible spending) to help cover out-of-pocket eligible healthcare costs on a tax-advantaged basis. Read the fine print of each. Second, review your life insurance needs and the group life program. Three reasons for insurance include income replacement, debt payoff, and estate taxes. The first two decrease over time, and few people have estate tax issues. And third, consider long-term care at  We’re not going to get out of this world alive and consider potential LTC costs of four to eight thousand bucks a month for up to four years. Note:  The second spouse can sell the house, but who is the first spouse needing LTC?

Some experts say the three biggest threats to a successful retirement include inflation, taxes and down markets. Only three? Consider the path being more like the Silk Road. The journey can be great, and the road bumpy, so let’s plan for it. Good luck.

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A Healthier 2018 – Six Questions

Old Chinese proverb goes “I hear and I forget; I see and I remember; I do and I understand.” Knowledge was passed by the ancients to their children often by stories and demonstration. Formal schools later emerged in China about 3,000 years ago. However, they were established for the nobles, the masses could only dream, and education was key to achieving coveted positions in civil service. Power, status and wealth accompanied those positions.

Studies were multi-disciplined and students who mastered the Six Arts were recognized for having achieved a state of perfection. The arts included Confucianism, music, archery, charioteering, calligraphy and mathematics.

The education system evolved. Mao’s Cultural Revolution in the 60’s was the most radical and controversial. He pressed elimination of the “Four Olds” – ideas, customs, culture and habits. Society stagnated for a decade.  Teachers and intellectuals were persecuted, books destroyed and schools shut down. Academic and scientific institutions would later recover, however, the impacts persist.

“Six Questions to Help Determine Your Financial Health” by Annamaria Lusardi was a popular wealth management article in the WSJ for 2017. It summarized the National Financial Capability Study on financial literacy. Average American scored 3.2 out of 6 questions. Below is the latest test and some relevant life issues.

Why is financial literacy vital to your success? If you had a magic wand and your retirement was guaranteed, you’ll face other financial decisions and possible reboots in your life. Family, job and business changes, and not getting out of this world alive are just a few. Life is complex and requires a variety of skills and resources. Here we go – see how you do.

  1. Suppose you have $100 in savings earning 2% a year. After five years, how much would you have? More than $102, exactly $102, less than $102, or don’t know. This illustrates time value of money, comparing investment options, and verify how much you should have in your account.
  2. Imagine the interest rate on your savings is 1% annually while inflation is 2%. After one year, would the money in your account buy you more than it does today, the same, less or don’t know? Inflation is a hidden menace. How “safe” is a safe return?
  3. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or there is no relationship. Interesting rebalancing dilemma facing investors today – do you reposition stock gains in long-term bonds? How much money do you lend at low current rates?
  4. 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest cost over life of the loan will be less. True, false, or don’t know? Debt reduction is high priority. Refinancing thoughts: (a) shorten the loan by paying more on your mortgage and save refinance costs, plus you can revert to the lower payment in tough times, and (b) check the new tax law for deductibility of mortgage interest. Are you overpaying for a car? “It only costs $100 a month” to bump up $5,000 to a $25,000 loan (5-year); and better credit score saves about $2,500 ($20,000 loan at 4% vs 8%).
  5. Buying a single company stock usually provides a safer return than a stock mutual fund. True, false, or don’t know? People may prefer stocks vs boring mutual funds or ETFs. Some are very successful (diligent and disciplined) stock investors. Remember, animals herd on the savanna – safety in numbers.
  6. Suppose you owe $1,000 at 20% interest annually. If you pay nothing, how many years will it take for the debt to double? Less than 2 years, 2 to 4, 5 to 9, or 10 or more. Make payments on time. “Rule of 72” relates the number of years for principal to double at a specified return. Divide the return (or number of years) into 72. $100 bill is worth half in 24 years at 3% inflation. Portfolio doubles in 10 years if earning 7.2% a year.

How’d you do? Answers are A, C, B, A, B, B. And another proverb says, “Walking ten thousand miles beats reading ten thousand books.” Experience and seeing the world are also great teachers. Good luck.

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Financial Planning – A Historical Summary and Insights for the Future

Cultures have different traditions in greeting the New Year. However, there are some similarities. Make noise – firecrackers routed the forces of darkness in China, Thais fired guns to frighten off demons, and Swiss pounded drums. Eat lucky foods – Spanish ate twelve lucky grapes at midnight, rice means prosperity in India, and eating ring-shaped food signals “coming full circle” and good fortune. Give a gift – Romans passed coins, Persians exchanged eggs as signs of fertility, and you kiss the person you hope to be kissing for a long time.

The New Year is also a time to reflect on the past and plan for the future.  So I share with you a history of the financial planning profession and some future trends. It has and continues to evolve and adapt as life and the environment change.

The industry is relatively young emerging in the 1960’s. However, the concepts of personal financial planning had its roots a hundred years prior with the Morrill Act of 1862 and the rise of land grant universities. The US government promoted agricultural and industrial studies and States were each offered 30,000 acres of land to either sell or used to develop colleges. Some of the first were Michigan State and Iowa State. Home economics departments emerged, first directed at the farm household and later expanded.

Financial planning as we know it today was born in December 1969 when thirteen financial services industry leaders gathered to discuss the creation of a new profession. The first CFP graduates were in 1973. Over the years, three main organizations would emerge – a membership association (FPA) and an education and enforcement arm (CFP Board), and one who was focused on fee-only advice (NAPFA). These organizations promote the planning industry, maintain and enforce high standards of practice, and support initiatives holding planners to a fiduciary standard. There are approximately 170,000 CFPs worldwide, and numerous CFP Board Registered colleges.

The industry has had a bumpy ride over time. The 70’s were marked by a double dip recession, a 15-year bear market (ending in ’82), OPEC lead oil shocks, double digit inflation, resignations of President and VP, end of Vietnam War, IRA accounts, and ERISA signed into law. It was largely product-driven (tax shelters, annuities and real estate partnerships) because of runaway inflation, high interest and tax rates, and few were interested in the stock market. The 80’s were marked by Reagan and Volker breaking the back of inflation (18 – 20% money market rates and 14-16% mortgages), tax reform, 401k’s which changed the way we’d save and invest for retirement, a rising stock market, Alan Greenspan, and Black Monday.  The 90’s started with Gulf War I, recession, drop in real estate prices, tech bubble, then record stock market highs. And during this time, financial planning turned more to a needs or goals based approach.

But what is on the horizon as we look ahead? Here are a couple financial planning trends:

Better aging – What if more people lived longer with active lifestyles? How might that change investment, saving and spending, health and wellness, and career and lifestyle decisions?

Evolving women demographics – Studies forecast an increased control of wealth by women. US population is shifting to women. Women live longer and graduation rates outpace the men. And gray divorce is a growing trend. How can we attract more women into the financial planning industry, and the industry itself better serve the needs of women?

Advancements in technology – The pace of change continues to accelerate. Similar to the trend of driverless cars, will investors be successful with automated investment solutions (robo advisors) or better served by humans in the cockpit? Which planning technology do you adopt and master? Are you fast (innovating and adapting) or slow (keep your values and filter out the noise)?

In closing, may the words from Poor Richard’s Almanac ring true with you – “Be at war with your vices, at peace with your neighbors, and let every New Year find you a better man.”

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3 Mistakes with 529 Plans to Avoid

Across America, some 20 million college students return to campus. Some prepare for their future, others intend to change it. And an interesting trend is emerging – tuition costs are growing at a slower rate.  According to the College Board, tuition grew an average of about 6% annually from 1990 through last year. That’s double the rate of inflation. However, this year the Labor Department estimates tuition costs have risen just under 2%. Factors include supply (more colleges), demand (less students going back to school with a healthy job market), and demographic shifts (declining birth rates). And more private schools are discounting their sticker prices – NACUBO reports that freshman are receiving higher price breaks on tuition via scholarships and grants.

Nevertheless, funding education costs has significant impact. The average cost for a four year private college is about $27,500. You’re either writing big checks – $66,000 annually 18 years from now if you have a newborn and 5 percent inflation – or graduate with student loans that compete with other financial goals – building cash reserves, buying a home and saving for retirement. Or the smarter ones start saving money early – saving $790 monthly for that newborn assuming a 5 percent return.

You have options on how to save and invest that $790. Each has its trade-offs. One popular way is via 529 plans. This article will address some of the mistakes to avoid with 529 plans. First, however, a refresher.

What are 529 plans? They help save for college and other post-secondary training on a tax-advantaged basis. There are two main types including “prepaid tuition plans” and “savings plans” and my focus will be on savings plans.  The key advantage is that withdrawals of earnings (you invested X and account has grown in value) might be tax free if funds are used for “qualified education expenses” or QEE’s.

Mistake # 1 – Using “Pre-paid plans” only

Prepaid plans are losing popularity. First, tuition might be only a third of the total college expense. What are you doing to fund other costs including room and board, transportation, and others? Second, they have their limitations. What if you buy prepaid for University A, but your kid prefers U of B? What if B tuition exceeds A? Will you support his or her enrollment in B and how make up the cost difference?

Mistake #2 – Withdraw too much

You cannot use 529 plans like an ATM. Withdrawals must be for QEE’s. Ineligible withdrawals are subject to tax consequences – earnings may be taxable and 10% penalty. QEEs are generally for the school’s published “estimated costs” – tuition and fees, room and board, books, supplies and equipment. Issues arise when students live off campus (and costs exceed on campus rent and meal plans), forget to adjust for scholarships and tax credits, and fail to report school refunds. Students are advised to keep record of their expenses and segregate purchases – lunchmeat and PBR on separate bills!

Mistake #3 – Overfunding

What if there’s left over money because they came in under budget (funded for four years and they were done in two)? The owner of the 529 plan generally doesn’t lose the money, however he or she may lose the tax benefits. You may change the beneficiary (you name a grandchild after your kid graduates), or you use the funds for your qualifying secondary education expenses. And if you’ve run out of beneficiaries, you can always make an ineligible withdrawal and pay the taxes and penalty.

You have options with education funding, and each may be subject to special rules. Know where the lines are, stay inside of them, and consult your advisors and especially your CPA. Tax issues can be complicated, and I like you hate to get a letter from the IRS. Good luck!

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Retiring Sooner

The Transcontinental Railroad brought thousands of settlers westward. In 1879, people began eyeing a dusty region known as the “Unassigned Lands.” The early group of supporters and promoters were known as “Boomers.” Farmers and ranchers sought new virgin territory to apply their advanced ranching and agriculture techniques and transform the arid and treeless landscape. Some began to survey, plant crops and even built homes on the yet-to-be-opened land. And a decade later, President Harrison finally declared that the region would be opened.

Cannons boomed precisely at noon on April 22, 1889, and the race was on. 50,000 land hungry settlers were eager to stake their claim for 160 acres of free land. However, there were some cheaters who illegally staked claims early. They were known as “Sooners.“ Together, the Boomers and Sooners became known as the Eighty-Niners. And regardless if the settlor was toeing the start line at high noon, or well beyond it hiding in the brush ready to claim his or her slice of heaven as the riders approached, those who would persevere in the new frontier likely possessed two characteristics – well prepared and full of grit.

What is your expected retirement date? Age 65 or 67 or whatever your full retirement age per Social Security? Later? Alternatively, when would you like to make work optional and retire earlier? Maybe you’re evaluating an early buyout, you’re tired, or expecting an inheritance. What are some of the implications of early retirement?

Fixed income sources may be lower. Common sources include Social Security, pensions, and annuity-like income. They’re considered fixed because payouts are generally consistent. However, payouts will be lower due to longer periods of payment and/or less benefit earnings.

Social Security benefits are generally determined by your Average Indexed Monthly Earnings (AIME) over 35 years. Generally, the longer you work, the higher your AIME and your accrued benefit. However, once you retire, you cease accruing additional benefits. The reduction in SS benefit at 62 is roughly 25 to 29% versus full retirement age, and the spouse’s benefit is 30 to 34% lower. Visit for more information.

Let’s take Nevada PERS as a pension example. This benefit also is driven by your covered service – the longer you work (2.5% or 2.67% per year) and the greater the compensation (high 3-year compensation), then the greater the retirement benefit. Your retirement benefit may be reduced 10% if you retire 4 years early (4 times 2.5%). However, additional reductions may occur based on your age (with 5 years of service you can retire at 65, 10 years at age 60 and 30 years at any age), and the spousal benefit you chose. Other pension plans have similar provisions (STRS, FERS, etc.).

Annuity payouts – Say there’s $100,000 in an annuity with two scenarios (a) 10-year payout, or (b) 30-year payout. Which scenario will have the higher payout? The first one. The longer the money must “stretch,” the lower the payout.

It’s scary to switch from a saver to a spender. You’ve been hard-wired to save for decades, and it can be difficult to withdraw more than the account earnings. But consider a shift in your thinking. Instead of being like tens of millions of Americans who compulsively check their account balances, think of your savings as your personal pension (and prudently invest like one).

  • Retirement paycheck for lifetime
  • A periodic raise to keep pace with rising living costs
  • Have a cushion for the “just in case”
  • And the final check you write bounces (or reduce your paychecks to leave the desired amount at the end)

Any retirement takes preparation and grit. Early retirement might take a little more work – increase savings, adjust lifestyle, and plug cash flow gaps. And if you’re afraid to quit early, that’s ok too. A friend told why he continued to work … “I’m afraid if I get off the horse, it’ll be difficult to get back on.” He was talking about the speed of change, technological advancements, and the need for continual learning. Good luck.

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