Blog Archives - PFwise.com

Is TIPS A Good Investment Choice for Retirees?

6/30/2013

Q. I am retired and don't want to take too much risk. Is TIPS a good investment choice for retirees?

A. Treasury Inflation-Protected Securities (TIPS) was designed to deal with inflation, its interest payments increase with inflation.

For retirees, you already have a powerful weapon against inflation - social security payment - it's adjusted with inflation. Therefore, you can include portion of your investment in TIPS, but don't put too much into it, because like regular bonds, when interest rates go up, TIPS' prices will go down, in fact, right now some TIPS' real yield is negative! So unless inflation goes up, your investment in TIPS will be a disappointment.

Are there any good weapons to deal with inflation? Yes, the answer hinges on what kind of inflation you are fighting against.

There are two types of inflation -

Expected inflation - such inflation is long term oriented, to deal with it, dividend-paying stocks and REITs are good choices.

Unexpected inflation - this is a sudden rise of short-term inflation (like in 1970's and 1980's), it doesn't last long, but the impact on retirees are significant. To deal with it, commodities or gold are good choices, because typically commodities and gold's price will rise during such period.

Are You Confused About Money? Keep These In Mind.

6/30/2013

Many marketers work overtime to confuse us about money. They take advantage of our misunderstanding of the time value of money, of our aversion to reading the fine print, of our childish need for instant gratification and most of all, our conflicted emotional connection to money.

Confusing customers about money can be quite profitable for marketers, but for consumers, what can you do?

You can at least try to keep the following in mind:

The amount of money you have has nothing to do with whether or not you're a good person. Being good with money is a little like being good with cards. People who are good at playing cards aren't better or worse than anyone else, they're just better at playing crazy eights.
Money spent on one thing is still the same as money spent on something else. A $500 needless fee on a million-dollar mortgage closing is just as much money as a $500 tip at McDonalds.
If you borrow money to make money, you've done something magical. On the other hand, if you go into debt to pay your bills or buy something you want but don't need, you've done something stupid. Stupid and short-sighted and ultimately life-changing for the worse.
To go along with #3: getting out of debt as fast as you possibly can is the smartest thing you can do with your money. If you need proof to confirm this, ask anyone with money to show you the math. Hint: credit card companies make more profit than just about any other companies in the world.
There's no difference (in terms of the money you have) between spending money and not earning money, no difference between not-spending money and getting a raise (actually, because of taxes, you're even better off not-spending). If you've got cable TV and a cell phone, you're spending $4,000 a year. $6,000 before taxes.
If money is an emotional issue for you, you've just put your finger on a big part of the problem. No one who is good at building houses has an emotional problem with hammers. Place your emotional problems where they belong, and focus on seeing money as a tool.
Like many important, professional endeavors, money has its own vocabulary. It won't take you long to learn what opportunity cost, investment, debt, leverage, basis points and sunk costs mean, but it'll be worth your time.
Never sign a contract or make an investment that you don't understand at least as well as the person on the other side of the transaction.
If you've got a job, a steady day job, now's the time to figure out a way to earn extra income in your spare time. Freelancing, selling items on Etsy, building a side business--two hundred extra dollars every week for the next twenty years can create peace of mind for a lifetime.
The chances that a small-time investor will get lucky by timing the stock market or with other opaque investments are slim, fat and none.
The way you feel about giving money to good causes has a lot to do with the way you feel about money.
Don't get caught confusing money with security. There are lots of ways to build a life that's more secure, starting with the stories you tell yourself, the people you surround yourself with and the cost of living you embrace. Money is one way to feel more secure, but money alone won't deliver this.
Rich guys busted for insider trading weren't risking everything to make more money for the security that money can bring. In fact, the very opposite is starkly shown here. The insatiable need for more money is directly (and ironically) related to not being clear about what will ultimately bring security. Like many on this path, now they have neither money nor security.
In our culture, making more money feels like winning, and winning feels like the point.
Within very wide bands, more money doesn't make people happier. Learning how to think about money, though, usually does.
In the long run, doing work that's important leads to more happiness than doing work that's merely profitable.

How to Get the Most Out of Your 401K Plan?

6/27/2013

Q: Do you have any tips on getting the most out of my 401(k) plan?

Tip 1. Start Contributing NOW!

Let’s compare Slow Sue to Fast Fred. Slow Sue saves $5,000 per year for 30 years for a total of $150,000, earning 8% per year. Fast Fred delays contributions for 15 years, but contributes $10,000 for 15 years for a total of $150,000 and also earns 8%. When they retire on the same day, Slow Sue has $625,000 while Fast Fred has $290,000.

The earlier you get started, the better off you generally are.

Tip 2. Maximize Your Contributions

In 2013, employee contribution limits are $17,500 per year if you are under age 50 or $23,000 if you are age 50 or older. Maximize your contributions within your budget. The annual contribution limits are a one shot deal. You can never tell your employer - my finances were tight last year so I skipped my $17,500 contribution – just double it to $35,000 this year. Each year is a use-or-lose-it opportunity.

Tip 3. Get Employer Match

Many employers offer a match to your contributions. For example, many employers will match 3% of your savings by contributing dollar for dollar. This is like a 100% return on your investment, make sure to save at least 3% of your salary to get the employer match!

Clearly understand if you vest your employer’s contributions immediately or if you vest them over time (e.g.: 20% vesting per year over five years). Clearly understand when your match will occur. If your match vests immediately and is made each time you make a contribution, you have less at stake if you transition to a new employer in the middle of the year. If your match vests at the end of the year and your employer matches at the end of the year, you have more at stake with a middle of the year transition to a new employer.

Tip 4. Maximize Your Risk-Adjusted Return

Many of us have heard the rumblings around the water cooler: ‘You can’t loose money in gold, so put all your 401(k) money in the gold fund’ or ‘Real estate never goes down, so put all your 401(k) money in the real estate fund.’ So, which is it? Probably neither. Maximizing your risk-adjusted return entails building a portfolio of investments based on your risk level, expected return, goals and objectives. You can achieve this easily with several super low cost index ETFs.

4 Strategies in a Rising Interest Rate Environment

6/27/2013

Generally speaking, when interest rates rise, fixed income investment suffer. Below are 4 strategies you can apply to deal with a rising interest rates.

1. Remain diversifed

For many investors there are good reasons to stick with bonds no matter what the interest rate outlook may appear to be.
a) No one really knows where interest rates are going or when.
b) Bonds can help reduce overall volatility in a diversified portfolio.

The prices of many types of bonds have historically moved inversely with stock prices and fluctuated within a narrower range of highs and lows. So while rates are rising, bonds might lag stocks, but it may make sense to accept underperformance from that portion of your portfolio for the benefits of bonds when and if the environment changes and stocks struggle.

What's more, while the price [net asset value (NAV) for funds] of bonds or bond funds may decrease, the bonds should continue to make the same interest payments, assuming they don’t default or get called. And, as the bonds mature or are sold, they can be replaced with higher-yielding bonds, which could create more income. That could limit or decrease any price losses.

If you have a long-range outlook, a solid asset allocation plan, and plan to hold your bonds to maturity, sticking to your current stock and bond mix may be a strategy worth considering.

2. Shorten duration

Let's say you have a nonretirement goal with a shorter investing timeline—like paying a college tuition bill for which you need a lump sum in less than four years—and cannot afford much risk to the value of the principal. Or maybe you are already living on a fixed income, investing in bonds to create income. Or maybe you can't stomach the thought of adding risk to you portfolio.

Choosing high-quality bonds or bond funds with shorter durations (duration measures the sensitivity of bond price to changing interest rates) can help to mitigate the effect of rising rates. These bonds typically pay less than longer-term bonds and riskier bonds—so their low yields may not be right for investors with longer time frames. But these bonds do mature more quickly, allowing you or the fund manager to put that cash into higher-paying bonds sooner, helping to manage one of the challenges of rising rates.

For a lump-sum goal that's two years away, or less, you may want to consider short-term investments such as an FDIC-insured savings account, a short-maturity FDIC-insured certificate of deposit (CD), or a money market mutual fund, whose yield will tend to follow the federal funds rate closely. An exceptionally short-duration bond fund with high-quality holdings is another potential solution.

Or, build a "ladder" of short-term CDs by creating "rungs" of three months, six months, and twelve months, for example. You may have an opportunity to capture higher yields as you roll over the maturing securities. If you will be in the market a little longer, you may want to consider short or ultra-short duration bond funds, or you could build a longer bond ladder.

3. Accept more risk for higher interest potential

If you can tolerate greater credit risk and volatility, consider investment-grade or non-investment-grade corporate bonds. Despite periods of dramatic price changes, over the long term their relatively high income has contributed the most to their historic overall return. (Remember, past performance is no guarantee of future results.) Given the inherent credit risk associated with these types of bonds, it's important to diversify across many different issuers from different industries.

There are many ways to invest in the corporate bond asset class, including through mutual funds, exchange-traded funds (ETFs), or directly, through individual bonds. You can also construct a longer-term bond ladder. Each method of investing has strengths and weaknesses that you should consider carefully before making your choice.

Beyond traditional bonds, there are other income options. Consider real estate investment trusts, or stock/bond hybrids like convertible bonds, preferred shares, and dividend-producing stocks. Each can have unique risks, and aren’t right for everyone, but they may be worth investigating.

4. Look for products that adjust to changing rates

If the thought of navigating a changing market seems complicated or daunting, you don’t have to go it alone. A number of investing products aim to help mitigate the impact of rising rates, including:

Real return funds: Real return funds try to provide inflation protection by investing in debt securities such as U.S. TIPS and floating-rate loans, as well as commodities and real estate–related investments. The types of bond investments often found in these funds may be less sensitive to rate changes than typical bonds.

TIPS or TIPS funds: Treasury inflation-protected securities (TIPS) are adjusted semiannually to reflect changes in the U.S. government's consumer price index (CPI),3 a well-known measure of inflation. TIPS are tied to CPI in the hope that as the broad price levels in the U.S. economy rise, TIPS coupon payments will also go up. That potential flexibility could help mitigate the price loss of a rate increase.

Floating rate loans: Floating rate loan funds invest in non-investment-grade bank loans whose coupons "float" at a spread above a reference rate of interest, and thus automatically adjust at periodic intervals as interest rates change.

Of course, there is no free lunch in investing, and each of these comes with trade-offs.

Choose your own mix of strategies
You don't have to choose just one approach. Just as it makes sense to diversify your bond holdings, it may make sense to combine several strategies.

A List of Helpful Retirement Planning Books

6/26/2013

Below is a list of books appropriate for retirement planning reading.

1. The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad (Julie Jason)
Rank: 5/5
Summary:Real good overview and introduction to the many considerations for retirement.

2. Buckets of Money: How to Retire in Comfort and Safety (Raymond Lucia)
Rank: 4/5
Summary: Interesting concept on planning for retirement. Although I'm not sure I will use the plan Raymond lays out here, I think the general concept is a real good idea on how to think about tapping your assets as you plan for retirement.

3. Annuities For Dummies (Kerry Pechter)
Rank: 4.5/5
Summary: Great details on the highly complex subject of annuities, a critical tool for your retirement planning to alleviate longevity and market risk.

If you read the books above, I don't think there is a need for reading the books listed below since either they don't have the depth, or have already been covered in sufficient detail in the books above.

The Bogleheads' Guide to Retirement Planning (Various Aurthors)
Rank: 3.5/5
Summary: I think this book tries to cover a little to much, and as a result has topics that I don't think are appropriate for the retirement planning. Since the book attempts to cover so many topics, it really doesn't give real good details on any one topic. I think of this book, more as an executive summary for the various topics it covers.

Can I Retire? How Much Money You Need to Retire and How to Manage Your Retirement Savings, Explained in 100 Pages or Less (Mike Piper)
Rank: 2.5/5
Summary: What do you expect for 100 pages? Although the author does seem to stay on-topic in this book, its just to broad to really give you any actionable information. Perhaps a decent book if you are just wading into the whole concept of retirement and don't want to put alot of thought into details(IE the big picture). This book does not answer the question it poses in the title.

Is HSA A Retirement Planning Vehicle?

6/21/2013

Q. My company offers HSA, I heard I could invest money in HSA for retirement purpose, is it true?

A. Yes, HSA is probably the least known yet a very powerful retirement planning vehicle.

Why? Because we know there are two things one cannot avoid in the U.S. - tax and death. HSA actually avoids tax entirely (if used appropriately) and also helps you prepare the unavoidable death.

HSA was introduced in 2003 as part of the HDHP (high deductible health plan). Every HDHP participant is responsible for at least $1,250 deductible (individual) or $2,500 deductible (family), plus other out of pocket expenses. To make HDHP attractive, government introduced HSA. Here are three benefits of HSA:

Pre-tax contribution
Every HDHP participant can save pre-tax dollar into the HSA account to pay for deductibles and other healthcare related expenses. The maximum saving amount is $3,250 (individual) or $6,450 (family), these amounts could be adjusted with inflation.

Tax-free growth
Money in an HSA account could be used for invest purpose, with no tax implication, this is especially powerful for young people with long investment time horizon.

Tax-free withdrawal
Each year, money in HSA could be rolled into next year for future use, there is no risk of losing it. When you actually use the money for health care related expenses, you pay no tax!,

Can you another tool with such great tax benefits?

What are some popular HSA money's uses?

HSA withdrawals could be used to pay for long term care bills, COBRA premiums, or medicare expenses when you reach age 65, just to name a few.

One effective way to use HSA is to open it for long term care expenses. When you reach age 50-55, use the money from HSA to purchase a basic LTC policy, and use the rest to pay for any gap.

For more information about HSA, check out Treasury Department's website.

Does the 4% Withdrawal Rule Still Work?

6/20/2013

Q. I plan to retire soon, I heard that if I take out 4% from my saving each year, I shouldn't worry about outliving my money, is that true?

A. The 4% rule of thumb was developed in 1990's, and it has since been adjusted up to 4.5%. It means if you take 4.5% of your savings out each year, your savings should be able to last 30-years.

But I think the underlying assumptions for 4.5% no longer hold, for the following reasons:

1. The 4% or 4.5% rule was developed based on the assumption of the following asset allocation: 60% stock and 40% bond holdings. But with interest rates at near historical low level, the return from the bond holdings can't match the original assumptions.

2. The stock market performance is near historical high level, based on return to mean rule, don't expect the good performance of the stock market will continue in the future.

3. The "sequence of returns" is very important - if the initial years' returns of your assets are less desirable (due to reasons explained above), your asset won't grow as much as the original 4% inventor assumed, which means you will need to take more money out in order to meet your lifestyle requirement, which means you might outlive your savings.

4. Most importantly, people are living longer, if you plan to retire at age 55, you are probably still very healthy at age 85, but will your asset be as healthy as originally expected?

How to make sure you won't outlive your money? Annuity is a solution.

There are many types of annuities, and most of those products work for insurance companies rather than retirees. The only type of annuity worth considering is immediate fixed annuity - when you decide to retire at age 65, purchase the immediate fixed annuity, and insurance company will start giving you 5-6% of your money right away. This payment combined with social security income will give you a peace of mind for the rest of your life.

But don't put all your retirement money into the immediate fixed annuity - spend a third to half on it, and invest the rest by yourself.

Is Pet Insurance Worth It?

6/20/2013

Do you have a pet? How much are you spending on your pet's health? Do you need a pet insurance? I will share a few tips here regarding pet insurance.

Q. Who Needs Pet Insurance
A. I think the following two types of owners should consider a pet insurance:

Owners with a pet that has a high risk of getting sick or hurt and owners with less disposable income to cover expensive surgery and treatment.
Owners who consider their pets as part of the family, and not make a financial decision about their pets' health.

Q. What typs of insurance I should consider?
A. There are three main types of pet insurance:

Accidents only - average monthly premium of $10-20 for dogs, lower for cats
Accidents and illnesses: $30-40 on average
Wellness (vaccinations and checkups) plus accidents and illness - $60-75 per month, on average.

Regardless which tier, most plans reimburse 80% of vet bills, with the owners co-pay 20% and deductibles usually start at $100.

Q. What if I don't plan to purchase pet insurance?
A. You should at least get an insurance for the first year of the pet, after that, most shots should have been done, and you can shop around to get the other required shots done.

A Few LTC Related Q&A's

6/18/2013

Q. Is there tax benefits associated with Long Term Care insurance?

A. Yes. Based on the Health Insurance Portability and Accountability Act (HIPAA) passed by Congress in 1996, long term care insurance policies that meet certain standards receive favorable tax benefits.

The benefits are: the LTC payments you receive are tax free, you can also deduct long term care insurance premiums (subject to your age and income).

Q. I already have Medicare, why should I get long term care insurance?

A. Medicare only covers skilled nursing care but doesn't pay for continuing care in nursing homes or assisted-living facilities. Nor does Medicare pay for home attendants, who provide personal care, such as dressing or bathing, which can easily cost $400 or more a day.

Q. What does Long Term Care policy pay for?

A. Read your policy and make sure it covers care at a range of facilities, including nursing homes, assisted-living facilities, adult day-care and hospices. Newer policies reimburse for at-home care, even if not from a certified health-care professional, while old policies might require the home-care attendant to be a certified nurse.

Q. How much does Long Term Care policy pay?

A. It depends what policy you bought. Many people overestimate what their policy will pay. It might cover a percentage of certain costs or a percentage of "usual and customary" charges.

Q. Should you replace your coverage?

A. If you decide your current insurance doesn't stack up, make sure you are able to get a new policy before dropping your old one.

Q. What if I don't need Long Term Care but I bought a policy?

A. First, call yourself lucky! But if you want to feel better, there are two options available from insurance companies:

Option 1. Return of premium LTC policy. It returns all the premiums you paid if you pass away and never use the policy.

Option 2. A combination of Life and LTC insurance policy. It pays either a LTC benefit, a death benefit, or both if you only use a portion of the LTC benefit.

Remember, there is no free lunch. Insurance companies already calculated the risk they are taking when they introduce the various policies.

How to Turn Lifetime 401(K) Savings into Lifetime Cash Flows

6/17/2013

Q. I have both 401(k) and IRA accounts and about to retire soon. I don't know how to manage my money and am concerned I might outlive my retirement fund. Is there any service on the market helping people like me?

A. With few people have access to defined benefits accounts (pension) and most people's retirement accounts are defined contributions which lacks the automatic conversion mechanism to turn lifetime savings to retirement cash flows, some 401(k) service providers as well as financial planning firms realized such need on the market and started providing a service helping retirees to develop strategies to convert 401(K) money to retirement cash flows.

Two such service providers are Financial Engines and GuidedChoice.

As a customer, you need to ask them: what's your strategy and how much will be the fees?

Financial Engines' strategy is to allocate a bigger portion of the 401(K) fund into bond funds (for cash flows) and the rest to stock funds (for higher growth), at an appropriate age, convert the entire account to immediate income annuity to ensure lifetime income.

GuidedChoices adopts a similar asset diversification strategy, it also provides a service helping clients to maximize social security income.

Why Target Funds Are Bad For You and What Can You Do About It

6/16/2013

Target funds are portfolios that turn more conservative as you age, without you lifting a finger.

The trouble is, you got to pay for someone to do it for you.

How much are you paying for the service?

A lot. Let's take a look at 2 examples.

Example 1.
BlackRock's LifePath 2040 has a projected 10-year expense of $2,478 per $10,000 invested.

If right now you are at age 40 and you put $300,000 in it, in 10 years you would have paid BlackRock $74,340. Do you get better return with this service? In the past 5 years its average return was only 1.9%. What do you get from its service? A gradually declining portion of your portfolio invested in the stock market, that's it!

Example 2.
Vanguard is known for its low cost approach to investment, indeed its Target Retirement 2040 fund has a 10-year cost of only $230 per $10,000 invested. But why pay someone else $230 when you can do it by yourself?

The Vanguard Target 2040 invests in the following index funds right now:

62.7% in Vanguard Total Stock Market Index Fund (VTSAX)
27.2% in Vanguard Total International Stock Index Fund (VTIAX)
10.1% in Vanguard Total Bond Market Index Fund (VBTLX)

If you have $100,000 to invest, you can open a Vanguard account and achieve the same Target 2040 fund's results, but only with a 10-year cost of $109 per $10,000 invested!

Where to Find the Best ETFs?

6/16/2013

The 2013 Investment Guide from Forbes has an article that includes a survey of the ETF landscape and a list of the best ETFs.

It looked at three major components elements of an ETF: annual expense ratio, the securities lending revenue, and trading spread.

The first one - annual expense ratio is a conventional one, as the main draw of ETF is its super low expense.

The second element is interesting - for some ETFs, especially the ones holding shares in small or international companies, they can lend the stocks to investors who want to short the stocks and profit from the lending. In fact, a few ETF's even have negative cost of ownership!

The third element is important for swing traders.

What are the best ETFs? It depends on which categories you are looking for. For example, the best diversified large cap ETF's are VTI, SCHX, and VOD. The best small company ETFs are VBK, VB, and IWM.

You can see the results here.

A Bucket-type Strategy for Retirement Planning

6/13/2013

JP Morgan & Chase has a great presentation deck that shows lots of interesting and useful data and strategies (such as a bucket-type strategy for retirement) for people who are thinking about retirement planning.

It's worth checking out -

www.jpmorganfunds.com/gtr

How Could A Rental Property's Depreciation Backfire?

6/13/2013

We all know that a rental property's depreciation is part of your onging expense which could be used to offset your rental income.

However, if could backfire if your rental property's value drops. Here is an example.

An example
You bought a rental house for $105,000 and hold it for 5 years.

The building is worth $85,000 and you claim your depreciation cost of $3,000 per year. In five years, your total depreciation claim is $15,000.

This reduces your cost basis to $90,000 (=$105000-$15000).

Now if you sell your property at $95,000, even you have lost money (because you paid $105,000 for the property but sell it for only $95,000), you still have to pay tax now for the $5,000 gain over your new cost basis of $90,000.

Free Website to Create a Living Will and Health Care Proxy

6/13/2013

Your retirement planning is not complete with a living will, and few people have thought about creating a health care proxy. Now you don't have to spend a penny to get both done, thanks to a website that offers free services for people to create a living will and health care proxy.

DoYourProxy.org is the first website to offer a free online tool that allows you to quickly and easily create, print, and save the forms required when completing one of the following documents.

A Health Care Proxy is a legal document that lets you name a healthcare agent - that is, someone you trust to make health care decisions for you if you are unable to make decisions for yourself in the future. It also gives you the option of listing specific health care wishes.

A Living Will allows you to leave written instructions that explain your health care wishes, especially about end-of-life care, should you be unable to speak for yourself in the future.

A Few Facts About Healthcare Marketplace

6/13/2013

Marketplaces are Federal or state-run marketplaces where consumers can compare and buy health insurance plans.
The individual Marketplaces will open on October 1, 2013, with coverage available beginning January 1, 2014.
All plans available through the Marketplaces will provide comprehensive benefits – from visits to the doctor or hospital, to prescriptions, to screenings for cancer and other conditions.
In addition to Marketplace for individuals, there will be Marketplace for small businesses.
To help consumers compare plans from different insurance companies, several standard levels of coverage will be offered. These include Bronze, Silver, and Gold plans. Platinum plans and high cost share/low premium plans will also be available in some states for some people.
The Marketplaces will also help determine if consumers are eligible for a reduced premium, lower cost-sharing, or for Medicaid or other publicly subsidized health benefits coverage.
Two types of financial assistance will available through the Marketplace for individuals: one reduces your monthly insurance premium, and the other helps with out-of-pocket expenses for care. Applicants may qualify for one or both depending on household income.
If you qualify, the Federal government will pay any financial assistance to the insurance company on your behalf.

Q. What if I cannot afford healthcare coverage?

A. The government may provide financial assistance – called subsidies – to help some people pay for health coverage or care if they can’t afford it themselves. This is usually determined by a person’s income level and family size. You will be able to find out if you qualify for financial assistance when the Health Insurance Marketplaces launch in October. But here are some general income guidelines that might be used by the government to see if you qualify and how much help you would receive.

If you’re single, the range of income qualifying for assistance could be between $15,282 and $45,960. In Hawaii, it could be between $17,596 and $52,920.
For couples, the range of combined income qualifying for assistance could be between $20,628 and $62,040. In Hawaii, it could be between $23,741 and $71,400.
For a family of four, the range of combined income qualifying for assistance could be between $31,322 and $94,200. In Hawaii, it could be between $36,030 and $108,360.

What Are the Key Differences Between Term Life and Cash Value Insurances?

6/8/2013

Many people are confused about the differences between Term Life and Value Value life insurance policies, this blog post will briefly discuss the key differences between them.

Term life insurance: your premium payments are applied 100% to the cost of the insurance. As retirement approaches, your need for life insurance is likely to decline, as children
become able to support themselves and your retirement savings have reached to a sizable amount. At this point, you can simply drop the term insurance without any penalty.

Cash value insurance: this is a big category, it includes whole life, universal life, variable life, and indexed universal life. These products combine term life insurance with a long-term, tax-sheltered savings plan. Only portions of your premium payment go to the cost of insurance, the rest goes to your savings account.

The most important thing to understand about cash value policies is that they are designed to be held for life, usually as an estate planning tool used by wealthy families.

It can be tough to spend your cash value savings if you want to use them for something other than insurance payments. Many policies allow you to borrow against your savings at low interest rates, but you are still paying for the use of your own money and the rules can be complicated, especially if you have no interest in paying back the loans (returning money to the plan).

An Example
You purchase a $500K cash value policy and expect your cash value to reach $300K in 20 years with your regular contribution.

Now 5 years later you find your income has increased and you decide to increase your contribution, and in 15 years your additional contribution has cash value of $100K. So your total cash value is about $400K now.

If you decide to take the $100K out to use with no intention to return, if you die in an accident, how much will your beneficiary receive? Only $400K! Because your policy has a loan of $100K outstanding, even though you thought this is your additional saving and you were just trying to take advantage the tax-deferred life insurance vehicle.

Surrender Charge
Insurance companies profit handsomely from folks who unwittingly buy into cash value plans and then drop them early. It's called surrender charge, because there are usually significant up-front charges associated with setting up the savings plan, investing the money, and paying the agent's commission. There is no surrender charge for Term life, you just stop sending the premium check to the insurance company.

A Common Misleading Sales Tactic
One common sales tactic when agents sell cash value policies is to stress that cash value policies are "permanent" and that a payoff is "guaranteed," as opposed to those "temporary" policies in which your money simply "disappears."

There can be benefits to a cash value plan, but these are not among them, because a Term life can be as "permanent" if you choose to make it, via guaranteed renewable policies, of course you have to pay more, just like in the case of Cash Value policies.

If someone tries to sell you cash value life policy, ask him or her to separate the two basic pieces -- insurance payments versus savings plan. You will find it can be like getting a politician to talk about the real issues.

2013 Tax At a Glance - For Both Federal and State Taxes

6/5/2013

What are the different tax rates for income at different levels?
How much are the standard deductions for single, married filing jointly?
How much are the personal exemptions? What are the phase-out ranges?
What are the scheduled gift & estate tax changes?
What are the various limits for the various qualified plans - IRA max contribution, SEP plan max percentage of compensation, Simple IRA employee contribution, 403(b) TSA employee deferral, ...

You can find all the answers to the above questions and a lot more from the attached 2013 Federal Tax Facts At a Glance.

The second attached file includes everything about every State's Income Tax information - tax rates, income brackets, and exemption levels for different filing status.

2013taxfactsataglance.pdf
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Why Tax Equivalent Return Is Important - Using Numbers to Illustrate

6/4/2013

A tax equivalent return means whenever we look at the return, we should factor in the impact of tax, which could potentially be huge.

How huge that could be? How about 60%?

We will use a simple example to illustrate.

Example.
A household of a retired couple who live in the state of California is looking for $250K as annual retirement income. How much pre-tax income does this family need to have in order for this $250K to be after-tax amount?

More than 50% higher!

Let's assume the effective income tax rate in California is 9.21%. The marginal Federal income tax rate after $223,050 is 33%.

In order to achieve the equivalent $250K after-tax retirement income, the pre-tax income has to be $397,041, a 59% increase!

Unbelievable, isn't it?!

How Obama's 2014 Budget Will Impact Wealthy Families

6/4/2013

For wealthy families (definition see below), there was a good news in 2012 - the new law passed in 2012 extended the large exclusion amount as well as kept the top rate a moderate 40%.

But based on the latest Obama 2014 Budget Plan, it appears that some changes are forthcoming, and those are not good news for the impacted families.

In very broad terms, here's what's included in the budget proposal:

Increase in the top rate from 40% to 45%
Rollback of the exclusion amount from the current $5MM to $3.5MM
Elimination of the indexing for inflation

The impact on grantor trusts

Unfortunately, that's not the end of the story.

In addition to changing rates, there are elements of the budget that directly attack one of the tools that has been used for estate planning for decades: Grantor Trusts.

The primary target is the idea of estate "freezes".

Specifically, the proposed budget calls for inclusion, for estate and gift tax purposes, of any assets that are sold to a grantor trust or exchanged for existing trust assets.

Further, any growth of the trust that is attributable to those assets would also be included for estate and gift tax purposes - bad news for many wealthy families.

GRAT changes

There are also changes aimed at GRATs, including a minimum term of ten years.

This analysis from wealthmanagement is a good read if you want to know some details.

Other changes

The budget also proposes other items such as basis consistency, the forced liquidation of retirement accounts after five years for non-spouse beneficiaries, limitations to duration of generation skipping trusts, etc.

When Can I Teach My Kids Financial Skills

6/4/2013

Q. When is the time I can start teaching my kids some basic financial skills?

A. Financial literacy education doesn't have to wait until school time, when your child has some number concept, you can start communicating with him or her about some basic financial concepts.

Below are a few signs that indicate your child is ready and the kind of conversations you can have with him or her.

Your child could assign a value to a symbolic instrument, i.e., coins, bills, toys. This indicates you can tell him or her how an item is purchased with money and how many coins does it take to purchase. Do this on an ongoing basis, your child will understand the relationships between money, goods and value.
Your child understands the number of coins they put in a piggy bank will accumulate over time. This indicates it's time for you to tell him or her the relationship between time, saving, and growth.
Your child notices some of their friends have different lifestyles, e.g. play different kinds of toys, wear different types of clothes, etc. You can start linking such observations to their financial situations, this is not about other people's wealth, but more about linking money with lifestyle.

A Free "Introduction to Finance" Course Is Available Online

6/3/2013

Coursera is offering a FREE "Introduction to Finance" course online right now.

This course is designed to introduce you the methods and tools to make finance related decisions, both at work and for your personal life.

The main book used by this course is Ivo Welch's Corporate Finance, the good news is, it is also available free online.

Based on the rave reviews from Amazon, I can tell Ivo Welch's Corporate Finance book is a book written for MBA finance course, which I believe you can largely interpret as anyone with a college degree can take it, because the background of MBA students is very diverse, from pure liberal arts major to math whizs.

If you are interested in getting a free systematic education on Finance, I highly recommend this book.

One thing about the textbook, Amazon shows $523 price tag, you shouldn't pay this much for it, just a used version at Amazon at a fraction of that price should work.

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IMPORTANT DISCLOSURES
PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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