Author Archive
Can You Retire?
Posted on: February 27, 2012
Financially Secure Retirement
According to Shlomo Benartzi, a University of Chicago economic professor, 50% of Americans don’t save for retirement. Of the other 50% who do save, only 11% save enough, according to their own estimates, which are probably optimistic.
This is not surprising to this financial advisor. For nearly all of my clients, I have created a savings and investment plan for them. The plan is designed so that they can live the lifestyle they desire in retirement. They are all committed to the plan. But while the commitment is there, the will power is not. When it comes time to implement the plan, they can always find important spending that justifies putting off saving to another day.
My clients are all very educated and highly intelligent. Why do even they have a hard time saving enough for a secure retirement? It all boils down to two words: instant gratification.
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Tax Aspect of Self Employment
Posted on: February 19, 2012
[Guest post by Jeremy Bendler] As a sole proprietor, you would report net income or loss from your business on your personal income tax return. However, there are several important rules that you should be aware of:
(1) For income tax purposes, you will report your income and expenses on Schedule C of your Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses will be deductible against gross income (i.e., “above the line,” and not as itemized deductions subject to the 2%-of-adjusted-gross-income floor). If you have any losses, the losses will generally be deductible against your other income, subject to special rules relating to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”
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Morgan Stanley Smith Barney
Recently, a number of people came to me for advice with one thing in common: they all had a financial advisor from Morgan Stanley Smith Barney. These advisors all promised them that they could beat the market because Morgan Stanley, as a major institution in Wall Street, has extraordinary investment research resources.
I am just amazed how the financial industry (not just Morgan Stanley) uses the same trick to seduce people. Unfortunately, people fall for it over and over without fail.
If Morgan Stanley’s research is so good that it can beat the market, why can’t the company use some of that research to help its own stock price. I did a comparison of Morgan Stanley’s stock (MS) and the S&P 500 and found the following: Read the rest of this entry »
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- In: Life
- Leave a Comment
This morning, I got an unexpected call from a client of mine. He asked me how the little one was.
My younger son was born with nasal cleft and lipoma corpus callosum, a benign form of brain tumor. This Friday, he will go into surgery to fix his cleft.
My client was calling to ask for his name, so that he can ask his rabbi to pray for him.
I am not Jewish but his gesture has sent positive shivers down my spine. This is why my job is so rewarding and why I am passionate about what I do.
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“Only a fool invest without rules” – Jason Zweig
Young People
A client of mine asked me to teach his young son how to save and invest. The following are some rules I wrote down for him.
1. How much to save?
This is just a rule of thumb. If you start investing in your 20s, you need to put aside 10% of your income; if you start in your 30s, 15%; 40s, 20%, 50s, 25%.
The client’s son is a 26-year-old college grad, who is making about $48,000. Based on the rule of thumb, he needs to save $4,800 a year. That averages to $400 a month.
To make saving simple and painless, open a brokerage account, then set up an automatic bank payment of $400 a month to the account.
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Tax Form
Up until 2011, the burden for determining the cost basis of securities transactions for income tax purposes was shouldered by taxpayers.
In other words, the IRS was informed about how much investors sold securities for, but the tax agency relied on investors to provide the purchase prices.
Tax officials long suspected that many taxpayers overstated their cost basis in order to pay less tax. In response, the Treasury Department pushed for legislation that would require cost basis reporting by investment firms.
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Last year, while the S&P 500 was largely flat, small cap value and emerging markets were down significantly. No wonder some clients of mine got a bit edgy.
What a change one month has made! As of Feb. 5, these two asset classes have roared back with a vengeance. See the table below.
| 2012 Year to Feb 5th | 2011 | |
| DFA US Small Cap Value | 12.74% | -9.74% |
| DFA Emerging Mkts Value | 19.44% | -26.50% |
| DFA Intl Small Cap Value | 12.74% | -19.41% |
The lesson here: when we see big losses like -19%, -26%, we can view them as a financial Armageddon or as a buying opportunity. The latter position is mentally much harder to take, but it almost always pays off.
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[Guest Post by Christopher Guest] There are ways a person could use the two year window provided in the Tax Compromise of 2010 to leverage a person’s gifting opportunities, reducing a person’s taxable estate. One strategy that can be used and would not consume any, or only minimally consume, your lifetime gift tax exemption is the Grantor Retained Annuity Trust, or “GRAT.” A GRAT is a form of irrevocable trust that allows the grantor to take a calculated risk to lower the grantor’s taxable estate.
The grantor transfers specific assets or property into the GRAT. The language in the GRAT stipulates that every year the grantor will receive a fixed payment, i.e. an annuity payment, back from the trust over a fixed number of years. A typically time period for a GRAT is 2 to 5 years. At the end of the term, the remainder beneficiaries get whatever is left. For gift tax purposes, the value of the gift is calculated on day one, when the trust is created and funded, but the gift value is discounted, as discussed below.
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Last month, I was approached by a plastic surgeon whose money was with Morgan Stanley Smith Barney. He was looking for someone who could beat the market: not just promise to beat the market, like his financial advisor, but actually deliver.
I told him that I can’t beat the market, I can only help him capture the market. I could see a wisp of disappointment flash across his face.
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10. Portfolio rebalancing returns
9. A roller coaster ride to a merry Christmas
8. Recession and stock market performance
7. Variable annuity fees you don’t know you are paying
6. Why asset class diversification is superior?
5. Bill Gates: 11 Things You Don’t Learn in School
4. What can happen when you have a life insurance salesman as financial advisor
2. Bonus depreciation: Congress wants businesses to invest in 2011
1. Profit from Harry Dent’s prediction? think again!
Also see Top 10 last month.
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Healthy Lifestyle
Longer life spans, rising medical costs, declining retiree medical coverage, and Medicare and Medicaid insolvency all add up to making health care costs a serious challenge for folks preparing for retirement.
According to Fidelity research, a couple retiring today at age 65 will need current savings of $200k to supplement Medicare and pay for out-of-pocket health care costs in retirement. In another five years time, the number could balloon to $275k. And that’s before we talk about long-term care.
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What Can Happen When You Have a Life Insurance Salesman as Financial Advisor
Posted on: January 19, 2012
Financial Salesman
In an online forum, a doctor’s wife shared with me her story that should serve as a cautionary tale for all doctors.
Her husband had a solo medical practice. They had a “financial advisor” who advised them to put their saving into a $5mm cash value life insurance policy. They believed the product not only provided protection in the event of the doctor’s death but also was a great savings vehicle.
Last July, her husband was struck by an uninsured drunk driver. He suffered brain damage. Though he recovered from the coma, he was unable to practice medicine any more.
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Government Retirees Beware: Your Financial Advisor May Not Be Your Friend
Posted on: January 14, 2012
I have a client (Let’s call him John) who retired 12 years ago from the government. He had a pension, and he had the option of taking out a lump sum of about $800k or drawing a monthly check of more than $4,400 per month until death.
Lost Retirement Money?
John took his options to his financial advisor from Smith Barney (now absorbed into Morgan Stanley Smith Barney.) Guess what the advisor recommended? He recommended that John take out the lump sum and let him manage it instead.
By the time John came to me for a second opinion financial review four years ago, his retirement account had only $265k left. John decided to become my client, and I have been able to restore some of his money, but not all.
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If you are new parents, you are busy nursing, changing diapers, and dealing with the emotional roller coaster of having a new life in your household. If you put your finances in backburner, I don’t blame you.
As a new parent and a financial advisor, I can offer you a few absolutely necessary to-do items to safeguard the financial well-being of your family and your new baby.
1. Have a will.
Now that you have a baby, you don’t just live for yourself any more. You have the responsibility of seeing your baby grow up. What happens if both you and your spouse die in an accident? If you don’t have a will, the court will determine the baby’s guardianship. Do you want to leave that decision to the court without your input? If you don’t, get a will.
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A 2011 Investment Recap
Posted on: January 8, 2012
My investment approach can be summed up by three principles:
- Globally diversified
- Small cap value tilt
- Short duration tilt
This approach endured extraordinary challenges in 2011.
1. Globally diversified
Even though the US equity market largely ended up where it started, the global equity markets did a lot worse: the MSCI EAFA Index (world developed markets) dropped 15% and the MSCI Emerging Market Index dropped 20%. To the extent that your portfolio is globally diversified, it will suffer along with the rest of the world. Despite that, global diversification is still a sound principle. We should not regret just because the US market did better. In fact, the market that did the best last year was Venezuela; it went up 110%! Should we regret not concentrating on the Venezuela market? (The answer is no.)
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Saving for College
My son is 6 weeks old. Today, he received his social security card. The first thing I did for him after receiving the card was to open two Maryland 529 plan accounts for him: one with myself as the account holder, and the other with my wife.
In Maryland, the 529 plan deduction limit per parent per child is $2,500. So I put $2,500 into each of the accounts, for a total of $5,000. I invested the money for a target date 2030 fund since that’s the time my child will be of college age. I further set up an automatic contribution going forward: $2,500 will be deposited into each account every year.
Why I am doing this?
The Investment Scientist 