Storm Brewing

oh, see the storm is threatening…

Accumulation Strategies, Client Insight, Featured, Mark's Corner, News, Retirement Strategies, Taxation, Wealth Transfers

oh, see the storm is threatening
my very life today
if i don’t get some shelter
yeah, i’m gonna fade away

These lyrics from the famous English rock band say so much. In our business of helping clients with their personal finances, we keep a close eye on our government’s tax policies. We are indeed facing a storm of new taxes that are threatening how our financial lives will play out. Without expressing any judgment on whether increasing taxes are good or bad for the country, I can say without hesitation, taxation is growing to be the most impactful variable in most people’s financial plans.

We all believe the saying about not having all our eggs in one basket. In financial speak, we use the word ‘diversification’.  Diversification typically means buying lots of different stocks, bonds, and other assets so we don’t have too much money invested in any one place. Well, I believe that diversification also has a place when discussing taxation. With so many different tax treatments available for our savings (401K, Roth 401K, Traditional IRA, Roth IRA, After Tax IRA, Annuities, Cash Value Life Insurance, Long Term Capital Gains, Short Term Capital Gains, Ordinary Dividends, Qualified Dividends, …) it only makes sense not to have too much of our money subjected to any one tax treatment.

Now is a great time to reflect on last year’s tax returns and refresh your thinking about how much of your retirement nest egg you want in each type of tax treatment. If we haven’t already shown you a pie chart of your forecasted retirement tax treatments, give us a call and let’s set up an appointment to do so.

Author: Mark Guthrie of Westface Financial and Insurance Services

Photo Credit: State Library and Archives of Florida

Important Disclosures:

This is written as a general information article meant to help the reader understand basic concepts in personal finance.

Nothing in this article should be considered a guarantee of any investment performance.

An investor should consider his or her current and anticipated investment horizon and income tax brackets when making any investment decision. This article does not reflect factors for any individual reader.

Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional or legal professional for additional guidance regarding tax and legal related matters.

 

Shoes

“I did NOT have Three Thousand Pairs of Shoes…”

Accumulation Strategies, Featured, Mark's Corner, News, Retirement Strategies, Taxation, Wealth Transfers

“I did NOT have Three Thousand Pairs of Shoes…, I had One Thousand and Sixty”

This quote from Imelda Marcos strikes many as one of the pinnacles of opulence in our time. It strikes me as an example of how a person’s “perspective” shapes their world. When it comes to shoes, one person sees 1,060 pairs as a reasonable number until they can find time to shop for more, while another jumps for joy when they get to trade in their old white runners for a shiny new pair.

In personal finance, individual perspectives vary just as much. What we have found in working with many families is that when we provide a little extra ‘financial’ information, many change their perspective.

For example, a couple feels great about their 60/40 (equity/bond) portfolio in their brokerage account. The equity markets have been up in the last few years and their account statement shows increasing balances. What’s not to like?

Well, when we zoom out a bit and look at the account statement and the tax return together, we might see that the equity portfolio has generated short term capital gains, and the bond portfolio has generated taxable interest. If we take the year-end account statement and write in big red ink the taxes paid, and then subtract those taxes to see the net returns, it may very well change one’s perspective.

One of the biggest wealth transfers (i.e. financial inefficiencies) we see is families trying to grow their after tax savings with actively traded equity portfolios and taxable interest paying bond portfolios. If solely look at the account statements, we might feel good about an annual 7% equity return and a 4% bond return. However, the feeling changes when we look at the annual marginal tax rates and see those returns eroded by 30% to 50%. Without the proper perspective, families often think they are doing the best they can with their hard earned savings, when in fact, if they only had a little extra information, they might be able to do better.

We help families change their perspective day in and day out by sharing our knowledge of where the wealth transfers lie in their unique financial situation. In doing so, we help many find the money to live the retirement they dreamed of, and yes, also to buy that new pair of shoes.

Author: Mark Guthrie of Westface Financial and Insurance Services

Photo Credit: Sydney Stratford

Important Disclosures:

This is written as a general information article meant to help the reader understand basic concepts in personal finance.

Nothing in this article should be considered a guarantee of any investment performance.

An investor should consider his or her current and anticipated investment horizon and income tax brackets when making any investment decision. This article does not reflect factors for any individual reader.

Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional or legal professional for additional guidance regarding tax and legal related matters.

 

Jelly Donuts

Procrastination and a Jelly Doughnut

Accumulation Strategies, Debt Management, Featured, Insurance, Investments, Mark's Corner, Mortgages, Retirement Strategies, Taxation, Wealth Transfers

You know you shouldn’t, but you do. You procrastinate. It might be a function of too much to do, a bad behavioral habit, or simply a lack of education on what procrastination really costs.

Let’s say you pick up a bad dose of poison oak on Saturday and you are flying to the East Coast on Tuesday morning. Are you going to put off the doctor’s visit to get Prednisone for your soon to be bubbling skin?

Not likely. Why? Because you know the cost of procrastination will be a lot of nasty discomfort.

When it comes to your money, you know you’re doing some things that aren’t very efficient, and you know that talking to a financial professional might reveal these inefficiencies. But you put it off.

Why? Because you probably think the cost of procrastination isn’t a big deal. If you thought it was, just like the poison oak, you would jump on finding a solution right away.

Let me shed some light on the cost of financial procrastination. If you pay income tax when an alternative strategy could have avoided it, it creates a cost. If you spend money that you don’t have and put it on a credit card, it creates a cost.

In these two examples, the cost is the tax and the credit card interest. But there is also a cost beyond the obvious and it is called opportunity cost. Opportunity cost is measured by the interest you could have earned on the money had you avoided losing it in the first place.

For example: A 50 year pays an extra tax or interest of a $1,000 month for a year.

In 15 years, it cost $12,000 ($1,000 x 12) plus $12,947 in opportunity costs ($12,000 x 15 years of interest at a 5% rate of return). And, at a life expectancy of 85, it cost $12,000 plus $54,192 in opportunity costs. This is an opportunity cost of almost five times the original loss!

Now, let’s say we lost $1,000 a month each and every month for 15 years. This adds up to $180,000 ($1,000 x 12 x 15), plus $91,890 in opportunity cost ($12,000 x 15 x 15 years of interest at a 5% rate of return). At age 85, the cost is $180,000 plus $541,405 in opportunity costs. This is a total cost of $271,890 in 15 years, and $721,405 at age 85.

So, if it takes a few hours to find $1,000 a month, you might not prioritize the effort because it doesn’t feel like a big deal. But, if you believed that with a few hours effort, you would be rewarded an extra quarter million dollars at retirement, and three quarters of a million dollars at life expectancy, would you procrastinate?

Not likely. Why? Because now you know the cost of financial procrastination is significant.

Why is saving money like eating a jelly doughnut?

If you save a little money or eat a jelly doughnut it’s really no big deal. But if you save a little money or eat a jelly doughnut each and every day, very soon, you become the big deal!

 

Author: Mark Guthrie of Westface Financial and Insurance Services

 

Important Disclosures:

This is written as a general information article meant to help the reader understand basic concepts in personal finance.

The 5% rate of return used in this article reflects a hypothetical investment return.

Nothing in this article should be considered a guarantee of any investment performance.

An investor should consider his or her current and anticipated investment horizon and income tax brackets when making any investment decision. This article does not reflect factors for any individual reader.

Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional or legal professional for additional guidance regarding tax and legal related matters.

3863871-2-cotton-candy

Cotton Candy and Chocolate Milk – Yum Yum

Accumulation Strategies, Client Insight, Featured, Insurance, Investments, Retirement Strategies, Taxation, Wealth Transfers

Spring time is amusement park time. As a kid, how fun was it to run into the park, grab some cotton candy and chocolate milk before your parents got your day organized? Then it was off to the rides. A drive around the Autopia, a ride through the Small World, and then to the Matterhorn! We all remember having a great time sprinting as fast as we could from ride to ride.

Now that we’re all grown up, spring is tax time. What happened? Instead of parents telling us what we should eat and which rides we could go on, we now listen to accountants tell us our tax bill and give us advice advocating contributions to deferred retirement plan.  Some even offer the advice with the words “you will save on taxes”. Well, before you believe such words to be true, I think it’s important that you understand that deferred plans do two things:

  1. Defer tax payments on contributions and potential income/growth within the plan
  2. Defer the determination of the income brackets and tax rates applied to withdrawals

Most of us like the idea of deferring tax payments, but what many are discovering is that the government’s decision to increase tax rates is now negatively impacting their after tax spendable retirement income.

I’ve been talking about “tax rate” risk for 6 years since the launch of Westface Financial, and I’m sad to see the day when higher tax rates are upon us. With Prop 30 in California raising state income tax rates retroactive to 1/1/2012, and federal income tax increases taking effect 1/1/2013, this conversation is no longer theoretical.

While I’m deeply concerned about higher tax rates impacting withdrawals from deferred plans, I do believe some clients can still benefit from participating in these plans if it’s part of a well-coordinated overall financial strategy.

The core motivation to use a deferred plan is the belief that there will be a lower tax rate applied to withdrawals compared to the tax rate that would have been applied to contributions.

Many factors will impact the real life result. The obvious are the applicable tax rates at the time of contribution and withdrawal. But we also need to consider the dollar amount of the expected withdrawals.

Our income tax system is built on a set of income brackets and increasing tax rates per bracket.  The more you make, the more of your income falls into higher brackets and is subject to higher tax rates.

So, if a family saves most of their money in a deferred plan, and saves enough to fund an inflation adjusted retirement income similar to their working years, they are very exposed to future tax rate changes.

On the other hand, if a family splits their savings between a deferred plan and a tax free plan, they are much less exposed to changes in future tax rates. Such a family will be able to adjust their deferred plan withdrawals year by year to manage how much of their income is subject to higher or lower future tax rates.

In general, the younger you are the more “tax rate” risk you take with a deferred plan as the future tax brackets and rates are a long ways off. Also, the younger you are, the more “liquidity” risk you take as money inside a deferred plan is penalized in most cases if it’s withdrawn before the age of 59 ½. Another factor for younger families to consider is that most make lower incomes starting out, and then make significantly more as they advance in their careers.  If they contribute to a deferred plan early, it’s likely the deferral brackets and tax rates are low compared to retirement. This is the exact opposite of what makes the deferred plan tax beneficial.

On the other hand, the closer you are to retirement, the less “tax rate” risk you take as future tax brackets and rates are closer in time, and you have more clarity about your level of retirement income.

Whatever your particular situation, the decision to contribute or not to a deferred plan should encompass analysis far beyond the April tax bill. While it might feel good short term to reduce that tax bill, you could end up creating a lot of long term financial pain in your retirement lifestyle if you’re not careful.

At Westface financial, we base all our advice on a long term financial plan that looks well beyond any one tax bill. And just like your parents warned you about eating and drinking too much before the rides, be careful with any advice you get that doesn’t contemplate what’s next.

As you might have learned the hard way, while cotton candy and chocolate milk taste great, if your next stop is the Matterhorn, it probably won’t taste so great the second time.

 

Author: Mark Guthrie of Westface Financial and Insurance Services

 

Important Disclosures:

This is written as a general information article meant to help the reader understand basic concepts in personal finance.

Nothing in this article should be considered a guarantee of any investment performance.

An investor should consider his or her current and anticipated investment horizon and income tax brackets when making any investment decision. This article does not reflect factors for any individual reader.

Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional or legal professional for additional guidance regarding tax and legal related matters.

Feeling Financially Anxious? Take one Forecast and Call Me in the Morning.

Accumulation Strategies, Client Insight, Investments, Mark's Corner, Retirement Strategies, Wealth Transfers

This month I wrote about the anxiety many people feel towards their financial future. I shared that most families don’t have much of a plan and worry about things out of ignorance. With a plan in place, a family knows where they stand and what’s reasonable to make things better. While they might not like the look of the numbers, at least the anxiety of the unknown is off the table.

What’s amazing to me is how much the press focuses on investment rate of returns. To have a channel on TV that shows stock quotes all day, has segments like “Fast Money” and hosts who ask their guest “where are you putting your money today?” is so delinked from most families situations it’s ridiculous. Whether Apple goes up by 20 or down by 50 in any given day doesn’t matter one iota to most families compared to how they choose to pay for their house, where they save for retirement, or how they pay for the kids college.

For clients of Westface Financial, we have created your high level financial forecast via our computer financial forecasting software. We demonstrated your current position, and then shared what would happen if you increased your savings, your rates of return, your retirement age, and then what it would look like if you simply lived on less during retirement.

Most of you went on to have us build your detailed financial forecast using our detailed program which considers many more variables. This model builds your forecast year by year, asset by asset, to forecast the future and show the impacts of various strategies and tax treatments over time.

As many of you know, I’m a national instructor to other financial advisors on how to operate the complex forecasting software and how to discuss with clients the results. As such, I not only see our client’s financial forecasts, but also hundreds of other forecasts as well.

It’s clear to me that most families could benefit tremendously from seeing their finances in detail. So many things become obvious. Things like 15 versus 30 year mortgages, brokerage account returns being taxed year in and year out at high marginal tax rates, how assets interact with insurance coverage’s,  retirement distribution account prioritization, and so much more.

If you feel that your forecast could use some updating, just give us a call and we can re-run the numbers and make sure you’re being efficient with your money as you prepare for the day when you will be living off your retirement nest egg.

 

Written by Mark Guthrie

Principal – Westface Financial and Insurance Services

Mark Guthrie is a Registered Representative offering Securities through The O.N. Equity Sales Company, Member FINRA/SIPC , One Financial Way, Cincinnati, Ohio 45242 (513) 794-6794

Investment advisory services offered by Mark Guthrie through O.N. Investment Management Company.

Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional for additional guidance regarding tax-related matters.

greyscale-drafting

Ask a Question and be a Fool for a Minute. Don’t Ask and be One for Life.

Accumulation Strategies, Featured, Investments, Mark's Corner, Retirement Strategies

Can you answer the four toughest questions in your personal finances?

To live the retirement I want:

  1. How much do I need to save each year until retirement?
  2. How much rate of return do I need to earn on my savings?
  3. At what age can I stop working and retire?
  4. If my savings fall short, how much of a hit will I take to my retirement budget?

If you don’t know the answers to these questions, you’re not alone. In my experience, 9 out of 10 affluent, intelligent, motivated people can’t answer these questions. Whether you are a “do-it-yourselfer,” or work with a professional adviser, if these questions go unanswered, you are less likely to enjoy your retirement and more likely to feel anxiety along the way.

As a professional financial advisor, I answer these questions for clients using my 30 years of financial experience, and two sophisticated forecasting computer programs. The first program has about 10 key inputs and generates a “ballpark” forecast. The second program has over 100 inputs and generates a detailed forecast that shows yearly;

  • Assets, liabilities, balances, and net worth
  • Pre and after tax savings
  • After tax rate of returns by investment
  • Insurance protections
  • After tax retirement income
  • Estate values at life expectancy

To see how a simple forecast can shed some light on your goals and reduce anxiety, for the sake of this article, let’s create a hypothetical family in their early 50’s with 15 years to retirement. Their savings are in qualified plans, brokerage accounts, and home equity. Let’s assume $100,000 annual income and keep the rest of the numbers relative so we can scale the math according to any situation. We often see about 5x annual salary in savings (outside of home equity) at age 50 with an annual savings rate of approximately 7%. With a 5% annual rate of return, and inflation of 3%, this hypothetical family would accumulate about 12x annual salary at retirement. That’s approximately $1.2 million in savings plus home equity and social security – not bad right?

Well, with 3% inflation, it will take $145,000 future dollars to live a retirement lifestyle like they did when they worked. Spending an inflated $145,000 a year, less social security, the investment pool would be depleted in their mid 70’s. Not the idea outcome, but a clear picture of the situation.

So, once a family knows the numbers, what can they do if their plan doesn’t look the way they want? The obvious things are to save more, try and find higher rates of returns, and or find more efficient uses of their money which can be added to savings.

What do we mean by more efficient uses of money? Well, the biggest inefficiencies we see are consumer debt, taxes on savings and investment returns, mortgage selection, and insurances deductibles and coverage’s. It’s not uncommon for us to find 5% to 10% of a family’s annual income in inefficiencies and bring them back into their savings.

So, if you don’t know where you stand, it’s almost impossible to see your inefficiencies and creates a lot of unnecessary anxiety. If you do know where you stand, but don’t like the numbers, there are many things you can do to improve your financial future by becoming more efficient with your money.

We help clients every day by building financial forecasts, pointing out inefficient strategies, and then creating new efficient plans that help meet retirement goals.

If you’re interested in a high level financial forecast and our ideas about how to become more efficient, just give us a call. We can create a “ballpark” forecast in 30 minutes (online or in person). If you would like a detailed financial forecast with all the inefficiencies highlighted and recommendations on how to eliminate or reduce them, we’ll need your financial documents and about three hours of meeting time.

It’s just that easy to get yourself a plan and reduce financial anxiety. No therapy, no watching a Dr. TV guy, and no taking little pink pills.

Written by Mark Guthrie

Principal – Westface Financial and Insurance Services

Mark Guthrie is a Registered Representative offering Securities through The O.N. Equity Sales Company, Member FINRA/SIPC , One Financial Way, Cincinnati, Ohio 45242 (513) 794-6794

Investment advisory services offered by Mark Guthrie through O.N. Investment Management Company.

 Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional for additional guidance regarding tax-related matters.

Disclaimer: All of the assumptions made in this article are not to be considered guarantees of any investment performance. This is written as a general informational article meant to help the reader understand basic concepts in personal finance.

“I tried paying my income taxes with a smile; however, they wanted cash.”

Accumulation Strategies, Mark's Corner, Retirement Strategies, Taxation

Warning, I’m about to share my observations about how your hard earned savings and the US tax code interact.

At the very mention of the word “tax” I need to state up, front that I am not a licensed tax professional and you shouldn’t take any of the following to be tax advice. Please, get your tax advice from a licensed tax professional.

My goal is to simply share a few observations I have picked up during my 30 year career in the world of finance and help you see how things interact with a simple analysis. 

Fact:  The United States tax code is complicated. In 1913, the “temporary” federal income tax code started with about 400 pages. In 99 years, it’s grown to over 72,500 pages. That averages 2 new pages a day, every day, for the last 99 years.

Why I Love Permanent Life Insurance as Part of My Portfolio

Client Insight, Featured, Insurance, Investments, Mark's Corner, Taxation, Wealth Transfers

In this month’s “Mark’s Corner”, I posted an article about the interaction of taxes and retirement savings. I pointed out the benefits of saving in either a tax deferred or tax free environment. I also pointed out that the government places all kinds of limits on the amount one can contribute.

It seems like strange public policy to incent citizens to save by providing tax favored accounts, and then turn around and limit the amount of contributions to IRA’s and 401k type plans. I understand that our public policy doesn’t want the super wealthy to avoid too many taxes, but I would argue the current limits hurt many working Americans who are not likely saving enough for their retirement.

Take control of your retirement

Challenge Your Current Financial Plan – Now!

Accumulation Strategies, College Planning, Featured, Investments, Retirement Strategies, Taxation, Wealth Transfers

When it comes to your money, isolated decisions and procrastination are rarely your friends.

Whether you think you do or not, you absolutely do have a current financial plan.

Hopefully it’s well thought out and considers such things as efficient purchasing techniques, savings rates, tax treatments, investment risks, access, insurance protections, contingencies, as well as gift and estate planning. Or, your plan might be built on Wall Street’s and your government’s default choices made in isolation and driven by advertising and perpetuated financial myths.

Wherever you are with your plan, you can only benefit from a strong challenge. Worst case, you spend time confirming everything is going well and you sleep great knowing it’s on track. Best case, you find several things that will improve your financial position and makes some changes. Fight the inherent procrastination – your finances are too important to you and your loved ones.

The Challenge Checklist:

  • Do you pay efficiently for your top 5 expenditures?
    • Home(s), Taxes, Cars, Schools, Benefits,…
    • How much are you saving and what’s your investment and taxation strategy?
      • Annual Savings Plan between now and Retirement
      • Present and Future Tax Treatments
      • Access – Withdrawals and or Collateralized Borrowing Capacity
      • Investment strategies
      • How thorough is your Insurance Protection Strategy?
        • What do you insure and why
        • What don’t you insure and why not
        • Do you have an Estate Plan?
          • What happens if….

If this seems like a daunting list that will take a year to cover, you likely don’t have a well thought out plan in place. If it does take a year to get in place, so what. If you don’t start now, like you didn’t start last year or the year before, you’ll never feel good about your plan.

My very self-serving advice; get professional help now. These topics are too complex and dynamic to handle all by yourself. You’ll need a good team made up of an accountant, an estate lawyer, and one or more advisors who are experts in investments, insurance, and overall financial management.

Remember, a person who wants a glass of milk should not sit in a pasture and wait for a cow to back up to them! Take action now – call us.

 

Written by Mark Guthrie

Principal – Westface Financial and Insurance Services

Securities offered by Mark Guthrie through The O.N. Equity Sales Company, Member FINRA/SIPC One Financial Way, Cincinnati, Ohio 45242 (513) 794-6794
Investment advisory services offered by Mark Guthrie through O.N. Investment Management Company.
Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional for additional guidance regarding tax-related matters.

 

Photo Credit: s_falkow

Westface Client Process Diagram bks v9 5-8-2012

How We Work

Accumulation Strategies, Featured, Insurance, Investments, Wealth Transfers

In our initial meeting, we will start by listening. You’ll see this often in our approach – in order to help you, we need to understand your specific situation – there are no good cookie cutters when it comes to building an effective financial future.

We need to know what you like and don’t like about your current plan, what you think a good financial planner is all about, how you make decisions, and in what form (charts, spreadsheets, text) you’d like to see our recommendations.

Next, we will have a fun, interactive discussion where we will show our approach to financial planning. We’ll cover an assessment of your readiness for retirement, show the common areas of wealth transfers, discuss the important concept of opportunity costs, and share both the rules and the winning strategies in working with the financial institutions.

What we won’t do in our first meeting is discuss any particular investment, financial product, or specific recommendation. There is plenty of time for that after we make sure we find all your hidden wealth transfers.

The next step is for you to do a little homework and fill us in on your key financial details. Then, at our second meeting, we’ll share our findings of the areas where you can save more by avoiding wealth transfers. We’ll cover each area in detail and show you the lost dollars as well as the hidden impact of the opportunity costs.

Then, we’ll discuss investment options. We’ll cover your current investment strategies and talk about alternatives that you may not have considered. We’ll demonstrate the pros and cons of different investment approaches via an interactive model that covers all of the family’s assets and liabilities.

We’ll also discuss your insurance protection strategy. There is little sense in saving, investing wisely, and then risking your assets with too little insurance or the wrong kind.

We’ll bring it all together in a complete, comprehensive financial and investment plan.