Blog Archives - PFwise.com

3C's for Building an Effective Tribe - for Entrepreneurs

5/30/2014

Entrepreneurs, if you want to build an effective tribe, here are the 3C's you need to heed to -

Connection
What do you stand for? Are relationships being built, or is this merely an ATM?

Commitment
There's no cliff. This is a mission, a journey, a cultural convenant for the long haul. Will you be here tomorrow and next year and ten years after that?

Conversation
It might feel like a broadcast tool, but it's not. The tribe thrives when it talks to itself, not when it merely listens to you shout.

A New Way for Small Investors to Invest in Commercial Real Estate

5/29/2014

If you are an individual investor with some spare money and want to invest in the commercial real estate market, now there is an innovative way for you to do so.

Fundrise.com

It's a real estate crowdsourcing website that enables individual investors to participate in commercial real estate investment, it cuts lots of unnecessary middlemen therefore provides a more efficient way for every potential investor.

Retirement Tools and Their Benefits - Part I

5/29/2014

Q. I want to start saving for my retirement, what are the tools I should consider?

A. At a high level, there are two types of retirement planning choices: Investment tools and Savings tools.

An investment tool means your money could grow significantly, but you also have the risk of losing principal. A savings tool means your principal is safe, but don't expect spectacular returns on your money.

For most people, the following list covers most of the common retirement tool choices:

Investment Tools

Stocks
Bonds
Mutual Funds
Exchange-Traded Funds
Precious Metals
Real Estate investment
Variable Annuities

Safe Retirement Tools

Cash
CD
Money Market
Savings Account
Fixed Annuities
Permanent Life Insurances

In our next several blog posts, we will compare the risks and benefits of the various investment and saving tools.

Risk and Tax Considerations in One's Portfolio

5/28/2014

Q. What's a good way to evaluate my retirement portfolio?

A. There are many Investment and Saving products a person could choose to build a portfolio, you can also analyze your portfolio from many different angles.

Below we will introduce an approach to check your portfolio from risk and tax perspectives.

Your portfolio could have 3 categories of risk levels: no/low risk, moderate risk, and high risk. The table below summarizes the common characteristics of each category:

No/Low Risk
Guaranteed returns
No principal loss
High liquidity
Low return potential

Moderate Risk
Limited principal protection
Moderate volatility
Limited liquidity
Moderate return potential

High Risk
Higher volatility
Higher return potential
Higher chances of losing money

From taxation perspective, your portfolio could also have 3 categories of levels: taxable, tax deferred, and tax advantaged. The table below summarizes the common characteristics of each category:

Taxable
After-tax contributions
Tax due on annual returns
Capital gain (CG) tax on withdrawal of CG
CG withdrawals impact social security taxation

Tax Deferred
Allow both before-tax and after-tax contributions
Tax due on entire withdrawal
Entire withdrawal affects social security taxation
Undesirable if future taxes are higher

Tax Advantaged
After-tax contributions
Tax-free withdrawal options
May require qualification
May not impact social security taxation

What kind of portfolio are you building?
You can use the following matrix to first determine the desired percentage mix, then check against your actual investment and saving product allocations and see if you are far away from your desired allocations.

Taxable

Tax Deferred

Tax Advantaged

No/Low Risk

Moderate Risk

???

High Risk

Family Monthly Budget and Actual Worksheet

5/28/2014

If you want to manage your family's finance well, the first thing you need to do is to measure your money - how much you bring in each month and how much you spend and save each month.

You can download the following free Family Monthly Budget and Actual Worksheet and start tracking your family's money flows today!

How Long Will Insurance Benefits Last?

5/27/2014

Q. Is there an easy way I can estimate how many years my insurance benefits will last for my beneficiaries?

A. Yes, you can use the following tool to estimate the numbers of years your insurance's Death Benefits as well as your savings at the time of death will deplete for your loved ones.

The key factors are:

Your insurance death benefit payment
The amount of savings available at time of death of the insured person
Average annual return of the death benefit payment and savings
Average annual inflation rate

Lifetime Savings and Expenditures Calculator

5/27/2014

Q. How to easily estimate my lifetime savings and expenditures?

A. The following tool could help you quickly estimate the amount of lifetime savings (by your desired retirement age) and expenditures.

Your lifetime savings amount depends on the following important factors:

Your current age: the earlier you start saving, the better
Your current savings: the higher the better
Your desired retirement age: this is when you stop saving and start using your savings
Your annual income: the higher the better
Your investment return: this is the average annual investment return
% of your annual income spent on tax, debt, and living expenses: the higher these percentages, the less you will have left for savings

How to Add Value?

5/26/2014

For entrepreneurs, it's actually quite easy to add value - do extremely hard work for your clients.

If the work is easy, it's not for you.

How Much Is Your Lifetime Economic Value

5/26/2014

Q. How do I determine the life time monetary value I bring to my family?

A. A person's life time monetary value is the cumulative earnings plus fringe benefits he or she brings to the family during the person's working lifetime, it typically serves as the upper limit for insurance companies to determine the maximum coverage amount a person could have.

You can use the following tool to estimate your life time economic value.

Income Growth: This is the expected annual increase in earnings in the future
Fringe Benefits: This is the non-monetary benefits (e.g. employer-sponsored health insurance) that the person brings to the family.
After-Tax Rate of Return: This is also called the Discount Rate, it's used to calculate the present value of future earnings.

Why Leveraged Index ETFs Are Bad for Long Term Investors - Part III

5/25/2014

We have discussed the first reason why levered index ETFs fail to deliver in the long term. Now the second reason:

The Long Term Return Skew
What does "long term return skew" mean? It means over time, the distribution of the returns of the leveraged index ETFs are not normally distributed, instead, it will be skewed by a few positive outliers.

Let's use an example to illustrate: if an index has an equal chance of 10% or -10% returns per period, after 2 periods, there will be three compound outcomes: 21%, -1% (twice), and -19%. The average of these four returns is 0%.

However, only 1 return of the 4 returns exceed this average: 21%. Therefore, below average returns are increasingly likely for a leveraged ETF in a long term market.

Monte Carlo simulations supported this conclusion too.

In the end, a leveraged index ETF will deliver less than its expected return to a long term buy and hold investor in an up-swing market, but the risk (measured by standard distribution) is amplified (same as the multiples of the leverage).

Do you want to take on more risk but receive less return?

Why Leveraged Index ETFs Are Bad for Long Term Investors - Part II

5/25/2014

We used the 3x S&P 500 index as an example to show that leveraged ETFs will underperform in the long term. Now we will discuss the first reason for such under-performance.

The Daily Compounding Trap
The 3x S&P 500 index ETF is designed to return three times of the S&P 500 return, on a daily basis, by using the derivatives. Consequently, if the S&P 500 returns 1%, the SPXL should return about 3%.

However, such daily compounding won't necessarily lead to the same effect long term.

For example, if the S&P 500 moves down 10% a day, the SPXL should move down 30% at the same day. On the second day, if S&P 500 goes up 10%, over these two days, the S&P 500 return will be down 1%. You would expect SPXL to be down 3%, right?

Wrong.

SPXL will be actually down 9%, making it effectively a 9X leveraged ETF for this period!

Generally, the more volatile a benchmark index is, the more value the levered ETF will lose over time. If the benchmark index moved flat at the end of the investment period but had drastic up or downs along the way, a long term buy and hold investor of the leveraged ETF will lose big!

There is one more reason why levered ETF is not for long term investors.

Why Leveraged Index ETFs Are Bad for Long Term Investors - Part I

5/25/2014

Q. I am a long term investor. Since index will go up in the long term, should I use leveraged index ETFs to capture more of the upsides?

A. No. Leveraged ETFs don't deliver as a long term investor might expect. Let's use the S&P 500 Bull 3x ETF SPXL as an example to illustrate:

As of May 23, 2014

S&P 500
SPXL (3x)
Expected Return
Actual Return

Source: Yahoo Finance

1-year

20.31%

60.93%
64.12%

3-year

13.69%

41.07%
30.26%

5-year

19.00%

57.00%
51.42%

Why such long term underperformance? Because of two key reasons:

We will analyze each of the key reasons in the next two blog posts.

Benefits of the New Student Loan Payment Plan

5/24/2014

Q. My child is graduating from college this year and faces the student loan payment challenge. Is there anything I should pay attention to?

A. There are some good news based on the proposed "Pay As Your Earn" plan from the Obama Administration.

The maximum student loan payment each month is limited to 10% of disposable income
Any remaining balance will be forgiven after 20 years
If a student works for the government or a non-profit organization, any remaining balance will be forgiven after 10 years

How to Evaluate Whole Life Insurance's Return

5/24/2014

Q. I am considering buy Whole Life insurance, how do I evaluate its return?

A. Because of the fixed premium feature of any Whole Life product, its return's calculation is quite easy.

However, before we introduce the tool below, it's worth pointing out a benefit of Whole Life that is little understood by most people - the policy owner's ability to use the cash value as a collateral to borrow against it for other investment uses.

For example, if you have $100,000 cash value in a whole life product, now have an real estate flipping opportunity that requires $100,000 cash. You can use the $100K CV as a collateral and borrow up to $100K from the insurance company. Your $100K cash value still earns the return inside the Whole life, and you also have the extra $100K cash for your investment. You do have to pay loan interest rate to the insurer, but if your other investment's return is superior, you will be able to pursue that investment while still letting your Whole life policy's cash value keep growing.

Now, back to evaluating a Whole life product's average annual return -

You just need to enter the starting age of the policy, the annual premium amount and the # of years the premium paid (or to be paid), then select any year in the future and the corresponding Whole Life's cash surrender value and death benefit value in the illustration, you will be able to see the average annual returns.

Freelancer Sites for Experienced Business Professionals

5/24/2014

Q. I am an experienced business consultant (not IT consultant), where can I find freelance opportunities?

A. While there are a few well known IT (with some business coverage as well) free lance sites, we haven't seen many freelance sites for business professionals, except recently we found two young companies popping up with venture fundings, they are:

Skillbridge.co (NY-based and U.S. focus)
MBAco.com (London-based with global coverage)

Both are online talent marketplaces for experienced business professionals in fields such as strategy, finance, marketing, etc.

How to Cut Your Wireless Bill to Almost Zero?

5/23/2014

Q. The most of the time I used my wireless devices (phone and tablet) are in house on Wi-Fi. Is there any way to cut my wireless bill?

A. If most of your wireless usages are on Wi-Fi (who isn't?), you have the potential to cut your wireless bill to $0, thanks to some of the innovative Wi-Fi-centric wireless service providers (they are all MVNOs - mobile virtual network operators, meaning they lease the wireless network from a mobile network operator).

The downsides?

The handset selections are limited
Not available everywhere yet - sign up and wait patiently ...

But the wait could save significant amount of money, especially if you travel overseas ...

Do You Have the Guts to Say "Follow Me"?

5/23/2014

You can easily find many shiny words in a person's resume.

But it's rare to hear an employee say "Follow me".

When you have the guts to say "Follow me", you will find no shortage of followers.

What is the Best Way to Save for College - Traditional IRA

5/23/2014

This is part of the Best Ways to Save for College series. We all know Traditional IRA is a type of retirement account, but this blog post will focus on how it's related to saving for college.

What is Traditional IRA?
Traditional IRA is a retirement savings plan that allows income earners to defer taxation on earned income, dividends, interest, and capital gains until retirement. It should be noted that IRAs are not specifically education savings accounts.

Who Are the Owners/Beneficiaries?
The person who establishes the Traditional IRA account is the owner, and the owner controls the Traditional IRA for all purposes at all time.

For IRAs, there is no designated beneficiary related to education withdrawals. An IRA beneficiary simply inherits the account upon the owner’s death.

How Traditional IRA Could Be Used for College Fund?
When the Traditional IRA account owner is 59½, withdrawals may be used for any purpose. For owners under 59½, a 10% penalty on earnings withdrawals applies, but is eliminated when the withdrawal is used to pay for qualified education expenses for the account owner, their spouse, or their child or grandchild.

Qualified education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Room and Board costs, with certain restrictions, are qualified education expenses for students enrolled at least half-time.

What Happens if Fund Not Used for Education?
Since the traditional IRA is not specifically designed for college savings, there are no specific penalties related to the use of the funds for non-education costs. In general, if the account owner uses the funds before they turn 59½, they will be subject to a 10% early withdrawal penalty on earnings, unless they meet one of criteria for exemptions to the penalty.

What Are the Contribution Limits?
Annual: An individual may make a contribution of the smaller of $5,500 (2014) or their total earned income. Individuals 50 years old and older may make an additional “catch-up contribution” of $1,000 as long as the total contribution does not exceed their total earned income. The contribution limit is indexed to inflation and should increase over time.

Spouses of wage earners may make contributions to IRAs based on their spouse’s income. Note: these limits apply to the sum of contributions to Roth and Traditional IRAs. See IRS Publication 590. Contributions for year 2014 may be made until April 15, 2015.

Lifetime: Contributions must stop in the year in which the contributor becomes 70½.

What Are the Investment Choices?
A contributor chooses the investment vehicle depending on plan’s sponsor.

Can Traditional IRA Be Transferred?
No.

What Are the Tax Treatments?
Contributions
Contributions are deductible on federal tax returns under two specific and very limited circumstances:
1. The income earner is not eligible to participate in an employer sponsored retirement plan and is either unmarried or has a non-working spouse
or
2. The contributor’s household income (defined as modified Adjusted Gross Income) is below certain IRS defined limits. (This is a very complicated issue, Please see IRS Publication 590 before concluding you may deduct your traditional IRA contribution.)

If the contributor does not meet one of these criteria, the contribution is non-deductible.

NOTE: The rules for deduction an IRA for a non-working spouse with a working spouse covered by an employer sponsored retirement plan are too complicated for this discussion, please refer to IRS Publication 590.

Growth
Tax-deferred.

Withdrawals
For account owners older than 59½, withdrawals for any purpose are subject to income tax (except for withdrawals of contributions that were not deducted when the contribution was made). For those younger than 59½, the earnings are subject to income tax and a 10% early withdrawal penalty. The penalty does not apply if the funds are used to pay qualifying education expenses for the taxpayer, the taxpayer’s spouse, or the taxpayer’s child or grandchild. The “Ordering Rules for Distributions” that are described in the Roth IRA section of this document do not apply to Traditional IRA withdrawals.

What Are the Other Important Notes?
The taxable amount of a withdrawal from a Traditional IRA is taxed at the owner’s income tax rate, which is typically higher than the capital gains rate. As a consequence, Traditional IRAs may not provide more after tax value than even direct investments (use this free tool to check it out).

For those whose goal it is to maximize their after-tax savings for education purposes, there may be better options. However, since many people already have traditional IRAs, either from contributions or rollovers from employer retirement plans, it is useful to remember the penalty exemption for qualified education expenses.

Conversion to Roth IRA
Starting in 2010, anyone who owns a Traditional IRA (or a SEP IRA, SIMPLE IRA, 401k, 403b, or 457 plan and is not employed by the company at which the plan is held) may convert that plan into a Roth IRA. The account owner will be taxed on the pre-taxed and deductible contributions and any earnings in the converted amount. Non-deductible contributions are not subject to taxation during the conversion.

Example 1: Jill is a single taxpayer whose income is $150,000: she is not able to contribute directly to a Roth IRA. However, she has $50,000 in a Traditional IRA that she created when she left her former employer and rolled her 401k into the IRA. All of the contributions in the 401k were made with pre-tax dollars. Jill can convert all or part of this Traditional IRA into a Roth IRA. She’ll have to pay income tax on the entire amount converted.

People who do not have a Traditional IRA can create Roth IRA to avoid future tax liability. They can deposit funds (subject to the annual contribution limits) into a Traditional IRA and immediately convert the Traditional IRA into a Roth IRA. Assuming this is done on the day of the deposit, and there has been no time for earning to accrue, this should be a tax free process. This can be repeated annually to grow the account.

Taxpayers who have traditional IRAs funded from rollovers from employer sponsored retirement plans, or from past deductible contributions, or with a lot of earnings, should review the conversion rules in IRS Publication 590. These accounts cannot be segregated from the newer contributions and will cause the taxpayer doing a conversion from a traditional to a Roth IRA to pay more taxes than expected.

Example 2: Jack is single taxpayer whose income is $150,000: he is not able to contribute directly to a Roth IRA. However, he has $55,000 in a Traditional IRA that he created when he left his former employer and rolled his 401k into the IRA. All of the contributions in the 401k were made with pre-tax dollars.

Jack contributes $5,500 to a Traditional IRA at a different company from the one that holds his current IRA, with after tax dollars (a non-deductible contribution) and immediately converts this new $5,500 into a Roth IRA. He thinks he has no tax liability, but he is incorrect. Even though he segregated the new, non-deductible contribution from the older account, the IRS considers all Traditional IRAs one account. Jack is required to determine the ratio of pre-taxed assets to total assets in all of his Traditional IRAs (in this example, 10/11ths of his Traditional IRAs have not been taxed), and must report a proportional amount of the converted amount on his income tax return (10/11ths of $5,500 is $5,000: Zach must report $5,000 on his income tax return as taxable income).

Caution
As you can see, this could be a very complicated issue, please make sure consult your tax accountant before you take any action!

Can I Use Retirement Fund to Do Real Estate Investment?

5/22/2014

Q. I have some spare money to invest. I can either save as my retirement fund, or invest in real estate, which is a better option ?

A. How about using the same fund to do both?

Most of the time, funds in a retirement account can only be used to stocks or mutual funds, but there is a special type of IRA account called Self-Directed IRA, it A Self-directed IRA allows the account owner to direct the account trustee to make a broader range of investments, including real estate investment.

The benefit is obvious with a self-directed IRA as your investment horizon is broadened significantly and you won't have tax issue until at the time of withdrawal.

As expected, there are costs involved in setting up and administering a Self-directed IRA account, the good news is, there are only a handful of firms in U.S. provide this kind of service, so you just need to compare all of them and select one you feel comfortable to work with.

The Best Way to Save for College - Series EE and Series I Bonds

5/22/2014

This is part of the Best Ways to Save for College series, today we will focus on using U.S. savings bonds Series EE and Series I as a vehicle for college saving.

What Are Series EE and Series I Bonds?
These bonds are issued by the United States Treasury Department and allow for tax-free growth if proceeds are used to pay for a dependent’s education. These bonds do not pay out an income stream; instead, you can redeem them and the redemption value of the bond increases each month. Series EE Bonds have a fixed interest rate (see below) and Series I bonds have a variable interest rate.

Series EE Bonds
For Series EE bonds issued before May 1, 2005, they earn interest at a variable rate tied to five-year Treasury securities. For bonds issued on or after May 1, 2005, they earn a fixed interest rate. The rate is set on May 1 and November 1 for bonds issued in the following six months. Interest accrues monthly and is compounded twice a year.

Series I Bonds
The interest rate for Series I Bonds is calculated in two parts.
The first part of the interest rate is fixed and determined when the bond is issued. It is set on May 1 and November 1 for all bonds issued in the following six months.
The second part is based on a measure of inflation over the prior six months, and can be negative in deflationary periods. The composite interest rate will based on an annualized combination of these rates but will never be less than 0%.

I Bonds provide some buying power protection because their interest rate is linked to an inflation rate.

Who Are the Owners?
Anyone with a social security number may own a Savings Bond. There is no relationship between the beneficiary on a Savings Bond and the education tax exemption. The account owner is the person whose name is listed on the bond, even if someone else’s social security number is also on the bond.

The account owner controls the timing of the redemption of the bond and the use of the proceeds. If the account owner is a minor, then the minor’s parent has this control, but the minor may need to agree to the bond’s redemption.

How to Get Education Tax Benefits?
Funds may be used for any purpose. When used for education (tuition, required fees, the purchase of a Coverdell ESA, Prepaid Tuition Plan, or 529 Savings Plan), the bondholder may not have to pay tax on accrued interest or principal adjustments. Bonds must be held for at least five years to receive maximum benefits and penalty free redemption.

In order to get the education tax benefits the bond owner must meet two criteria:
1) The bond owner must be an adult taxpayer.
2) The bond owner must use the bond to pay for his or her own education, a spouse’s education, or the education of someone claimed on his or her income tax return.

What Are the Tax Treatments?
Contributions: Not deductible.
Growth:

Federal: Tax-deferred. The bond owner does not have to pay tax on earnings until the bond is redeemed. However, the bond owner may elect to pay federal income tax on an annual basis (see comments below).
State and Local: There is no taxation of federal bonds by state or local tax authorities.

Withdrawals: Tax-free for federal taxes when used for qualified expenses, when the following conditions are met:

The age of the bond purchaser when the bond was purchased was 24 or older.
For Series EE Bonds, the bond was issued after 1989. All Series I Bonds are qualified.
The bond proceeds (principal and interest) are used to pay for tuition and required fees at a qualified educational institution (see discussion of eligible educational institutions in the 529 Savings Plan section of this document), or to purchase shares of a 529 Savings Plan, a Prepaid Tuition Plan, or a Coverdell ESA. Note: room, board, books, travel, and personal expenses are not qualified expenses.
The bond owner’s modified Adjusted Gross Income in the year of the bond’s redemption is less than certain inflation-adjusted amounts
The bond owner must take an exemption on their income tax return for the student in the year the bond is cashed in.
The bond owner must be the tax payer. The bond can be co-owned by the taxpayer’s spouse. Bonds co-owned by a parent and a child are not eligible for the education tax benefit. If the child is listed as the beneficiary (not the owner) the tax benefit may still apply.

Withdrawals that do not meet these criteria are taxable at the owner’s income tax rate. If a bond is co-owned, but one of the co-owners purchased the bond, then that co-owner must pay 100% of the income tax on the accrued interest. If the co-owned bond was a gift, then each co-owner pays tax on 50% of the accrued interest.

What Are the Impacts on Financial Aid?
Financial aid formulas treat the bond value (principal plus accrued interest) as the owner’s asset. If a bond is co-owned by a parent and the student, then 50% of the bond will be treated as a parental asset, and 50% as a student asset.

What are the Contribution Limits?
Starting in 2012, taxpayers may purchase a total of $5,000 in EE bonds and $10,000 in I Bonds each year directly from the United States treasury and other means.

Can They be Transferred?
The bond owner may change the beneficiary of the bond at any time. There are limited opportunities to change the bond ownership. For details, please see www.savingsbonds.gov.

How to Buy These Savings Bonds?
Savings Bonds may be purchased directly from the United States Treasury at www.savingsbonds.gov, through payroll deduction, and by federal income tax refund.

The paper Savings Bond is being gradually phased out. Effective January 1, 2012, almost all new Savings Bonds will be electronic securities. Savings Bond purchases must establish an account with the United States Treasury at http://savingsbonds.gov/indiv/indiv.htm to purchase new bonds. Taxpayers may buy paper I Bonds after this date using their federal income tax refund.

What Are Other Important Notes?
Savings Bonds are backed by the “Full Faith and Credit” of the United States government, and are considered a very safe, very low-risk investment.

Savings Bonds cannot be redeemed within one year of purchase. Those redeemed between one year and five years of purchase are subject to an early withdrawal penalty equal to the prior three months interest.

Because Savings Bonds are considered a low-risk investment, the interest rates they pay may be moderate relative to other investments. Therefore, they may not be the best choice for a saver with a long-term savings horizon.

Since children have low income tax rates, and bonds owned by children are not eligible for the education income tax exemption, electing to claim the interest accrued on the Savings Bond on an annual basis may result in significant income tax savings over time. To take advantage of this tax saving strategy, you simply report all the accrued interest on all savings bonds owned by the child-taxpayer at the end of the year on their income tax return, and the interest that accrues in each subsequent year on subsequent income tax returns. Changing back is also possible (but challenging). See IRS Publication 550 or the instructions for IRS Form 3115.

Information about Savings Bonds can be found at www.savingsbonds.gov. This site also houses a Savings Bond value calculator that allows users to determine the accumulated interest, current interest rate, and other factors about a Savings Bond based on the Bond’s serial number and date of issue. It is this value, not the bond’s face value, which must be reported on financial aid applications.

3 Ways to Generate Retirement Income - Part IV

5/22/2014

Now we will introduce the last new idea of generating retirement income - it's an unique idea from Putnam Investment.

Basically, it asks people to consider an alternative approach to portfolio construction by focusing more attention on the sequence-of-returns risk after retirement.

Why this approach? Because from Putnam's view, there are two important factors for a successful retirement planning:

Proper asset accumulation;
The sequence of returns immediately before and after one's retirement date.

Putnam designed four absolute return portfolios to seek a specific level of return with a specific level of volatility. The portfolios target risk and return rates are 1%, 3%, 5% and 7% above cash, annualized over market cycles (around three years). Its goal is to get a Sharpe ratio of one.

In theory, these volatility-dampening, efficiency-enhancing products could help smooth the ride for retirees, because a retiree still need to grow the money while avoiding exposure to much equity risk.

How to evaluate this type of product?

You should ask the right question - what's the objective of the fund and how effectively have the managers achieved it - then look at return versus the target and volatility versus the target, and based on that, you can judge the fund's success.

What is the Best Ways to Save for College - Coverdell ESA

5/21/2014

In this post of the Best Ways to Save for College series, we will focus on Coverdell ESA plan.

What is Coverdell ESA?
Coverdell ESA is a tax advantaged savings plan for college, it also allows tax-free withdrawals for educational expenses from Kindergarten through college.

What are the Tax Benefits?

Contributions: Not deductible.
Growth: Tax-deferred.
Withdrawals: Tax-free for federal taxes when used for qualified expenses; may be subject to state and local taxes.

How to Use the Coverdell ESA Funds?
Funds in a Coverdell ESA may be used to pay qualifying higher education expenses in exchange for tax advantages. Qualifying expenses include tuition, fees, books, and equipment. Since 2002, qualifying expenses have been expanded to include room and board costs for students enrolled at least half-time at a qualifying institution, uniforms, and computer technology. Also since 2002, education costs for K-12 education (private, public, or parochial) are qualifying expenses for withdrawals from Coverdell ESAs.

Who Owns Coverdell ESA?
The Coverdell ESA is a custodial account that for all purposes except financial aid eligibility is owned by the beneficiary.

When the beneficiary of the account is a minor, an adult is a designated the “Responsible Individual” who must manage the Coverdell ESA on behalf of the child. The Responsible Individual makes all investment and spending decisions on behalf of the owner/beneficiary until the beneficiary turns 30, or at the age of majority.

Who Controls Coverdell ESA?
The Responsible Individual controls the funds in the account until the beneficiary reaches age 30, but may be able to transfer control to the student/owner when they reach the age of majority.

If the account is not closed before the beneficiary turns 30, the unused funds are automatically sent to the beneficiary, who will have to pay income taxes and penalties for non-use on any earnings.

What is the Contribution Limit?
Annual: $2,000 per year. Limits apply to the amount a beneficiary can receive from all donors combined in a tax year.

Can Coverdell ESA be Transferred?
Yes, Coverdell ESA can be transferred to another qualified family member who is not yet age 18.

What are the Investment Choices?
The Responsible Individual chooses the investment vehicle depending on those offered by the financial firm at which the Coverdell ESA is established.

What is the Impact on Financial Aid?
Parent funded Coverdells (Coverdells for which the parent of the dependent student is the “Responsible Individual”) are treated on the same manner as other parental assets.

What if Coverdell ESA is Not Used for College?
Earnings on funds not used for college (or K through 12 expenses) are subject to federal, state and local taxes and a 10% penalty. Since the child is the owner, the taxation and penalty are calculated at the child’s tax rates.

Account must be liquidated if not exhausted or transferred to another family member by the beneficiary’s 30th birthday, unless the beneficiary is disabled. This liquidation will trigger the above taxation and penalty.

What are the Other Important Things to Know about Coverdell ESA?
a. Limited Contribution for high income families
Coverdell contributions are limited to taxpayers with modified Adjusted Gross Incomes below certain thresholds. Single filers whose modified AGI is less than $95,000 may make the complete $2,000 annual contribution; eligibility is phased out and a partial contribution may be made by single filers with modified adjusted gross incomes between $95,000 and $110,000. No contribution can be made by a single filer whose modified AGI is greater than $110,000.

Donors who file joint tax returns may make the complete $2,000 contribution if their modified AGI is less than $190,000. Those with modified AGIs between $190,000 and $220,000 may make partial contributions.

b. Eligible Distribution to 529 Plan
Assets in a Coverdell ESA may be transferred into a 529 Savings Plan or a qualified Prepaid Tuition plan that has the Coverdell account owner (the student) as a beneficiary. This is considered an “eligible distribution”.

c. Read Agreements Carefully
Coverdell ESA adoption agreements (the enrollment contracts that financial services forms require Responsible Individuals to sign in order to open the account) may define plan specific limits that, among other things, may limit the right of the Responsible Individual to change account beneficiaries, transfer control of the account to the child-owner at the age of majority, etc. Before investing in a Coverdell, read these documents thoroughly.

Popular Financial Service Websites For Middle Class Families

5/21/2014

Q. I am looking for a financial service advisor to answer some confusing questions. I don't have much assets, where should I start?

A. It's not unusual that if you don't have half million assets for them to manage, the financial advisors' doors are shut to you.

But there are a few reputable websites that link middle class families to fee-only financial advisors who would welcome the opportunity to help you out:

http://garrettplanningnetwork.com (this is probably the most famous one)
http://www.paladinregistry.com

3 New Ways to Generate Retirement Income - Part III

5/21/2014

Russell Investments has a new Russell Retirement Lifestyle Solution, it's a planning tool available only through financial advisors to help reframe the thinking on retirement and income needs.

Here are its key points -

The goal is to pensionize a person's retirement portfolio by examining assets and expenses. The "funded ratio" compares the person's projected assets with the projected expenses, and can help a financial advisor determine an allocation strategy.

In other words, it aims to base a person's asset allocation on the person's capacity to experience investment volatility and to adapt the portfolio based on how much the person can afford to lose.

For example, if you only have 5% surplus beyond funded level, then you can't afford to take on as much risk as someone with a much greater surplus.

According to Russell marketing materials, this adaptive investing approach is implemented through Russell Model Strategies, a series of globally diversified portfolios with a range of asset allocations. Each person's situation determines the appropriate model -- conservative, moderate or balanced.

3 New Ways to Generate Retirement Income - Part II

5/20/2014

In this post, we will discuss BlackRock's CoRI product.

To create CoRI, BlackRock first developed an index based on the median purchase price of a single premium immediate annuity, then it used a process involves the following two steps -

Model cash flows in a manner similar to an insurance company's model for someone purchasing an annuity.
Build a bond portfolio (consists of Treasuries, Treasury STRIPS and high-quality investment grade bonds) to match those flows.

While other retirement strategies may attempt to manage asset volatility, CoRI provides a structure to measure and manage portfolios based on volatility and income. BlackRock claims this is the first time you can measure and build portfolios exclusively based on income and managing income volatility.

CoRI is not a bond ladder, which staggers the bonds' maturity dates, this new strategy applies the principles of an institutional approach known as liability-driven investing. In this case, a bond portfolio is built to produce yields that match the future cash flows the investor will need.

CoRI doesn't work for everyone. BlackRock developed it only for investors ages 55 to 75.

If you are younger than that, derivatives would be required to implement the strategy, which will introduce third-party risk.

For people older than 75, annuities may actually provide better value.

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