Blog Archives - PFwise.com

A Better Way Than Cosign Your Child's Credit Card or Loan

6/30/2016

Q. I heard advice not to cosign a child's credit card or other loans. Is there a better way to help my child?

A. It's true that by cosigning your child's credit cards or loans, in many states you will become liable for overdue payments and penalties without ever knowing there was a problem, therefore hurting your own credit.

There is a better way to help your child out -

Let your child to cosign your credit card. In this way, your child will have access to the credit line and build a credit history, while you will receive the monthly statements and know if there is a problem or not.

Is There Any Trick With Term Life From Costco?

6/29/2016

Q. I checked the term life offering from Costco, it looks pretty good. Is there any trick with it?

A. Costco partners with Protective and offers competitive term life rates to Costco members. However, there are a few things you need to be aware of:

1) Only 10 and 20-year Terms. If you want other terms, such as 15 years, 25 years, or 30 years term, they are not available.

2) Not available in every state. For example, if you are a resident of New York state, you can not find a quote from the Costco/Protective offer, because New York state's life insurance regulation is very stringent and many providers opt out of that state.

3) The best rate requires Costco Executive membership. If you are a Costco executive member, you will find the Protective offer is very competitive, at least a lot better than regular member's rates.

4) Not the best 20-year term rate. Unfortunately Protective does not have the best 20-year term rates, we can find AM Best A+ rated insurance carrier with better rate than the rate you can find from Costco, even you are Costco Executive member!

Please contact us if you want to shop Term Life offerings, we can guarantee you the best rate from a reputable carrier!

Save and Invest for Retirement - Details of 4 Distinct Phases

6/28/2016

In our last blog post, we introduced a 4-phase-based framework to look at save and invest for retirement. Now we will look at the details of each phase, we will discuss the key concern and the actions to take for each of the 4 phases.

Preparation Phase
In the Preparation phase, one's earning ability is limited, after spending, there is very little left for anything else, even with compound growth and long time horizon, the saving at this stage has very limited impact in the future.

But that doesn't mean there is nothing to do when it comes to retirement planing. In fact, this is a foundation building phase. The key concern is to find ways to increase one's earning potential down the road.

Key actions to take:
Learn new skills that could help your future career development, learn investment basics so you are ready to invest when money becomes available, explore ways to get a side gig.

Saving Phase
In the Saving phase, one's earning has reached a level that after all the basic spending, there is a meaningful amount left to invest for the future. The key concern here is not to spend all you have, it's time to start building your nest egg now, and let time help your portfolio grow.

Key actions to take:
Develop a good habit to set aside a fixed amount each month to invest for your retirement. There could be many temptations in life that you could easily spend all your earnings, but the knowledge and skills you have learned in the Preparation phase should help you understand that you need to save for tomorrow, consistently, starting from now.

Accumulation Phase
In the Accumulation phase, your saving has reached a stage that most of your portfolio's annual growth comes from your past investment, rather than the new money you put in each month or year now. Of course this will take at least a decade, if not more, time to reach this phase. But at this phase, the key concern is to maximize your portfolio's growth, not how to cut spending or find ways to save!

Key action to take:
Learn basic portfolio building skills, even a small percentage improvement in return now will lead to huge benefits down the road. You need to ensure your portfolio is optimized and diversified for growth, with appropriate risk control.

Risk Management Phase
In the Risk Management phase, you are close to retirement time, the goal is no longer to keep saving or keep growing the portfolio, instead, the key concern is risk management, not to quickly lose your lifetime saving in a major market downturn which is bound to happen once a while!

Key action to take:
Pay extra attention to your portfolio's risk exposure, reconstruct the portfolio with safety first, with modest growth as the goal, because in the end, your retirement life could stretch several decades, a modest growth is still needed.

In Conclusion
A person's journey towards retirement could include 4 phases: prepare, save, grow, and manage the retirement portfolio saving and investing. If you missed or late in any phase, you need to catch up, are you on the right track?

Why Brexit Should Be No News to Investors

6/27/2016

Q. The market was very volatile on Friday after the Brexit news, what should I do with my investment portfolio?

A. Nothing, is probably the best answer.

The market volatility we saw on Friday would be barely noticeable if you have longer term time horizon. Sure, some stocks or funds were down as much as 10% on Friday, for example, the Vanguard FTSE Europe ETF was down 11.3% on June 24, 2015, but that was only the eighth-worst monthly fall in the fund's history, making the daily fall on Friday not as frightening as it appeared.

If you did feel the pain, here is one thing you should consider - your investment maybe too aggressive and beyond your risk tolerance level. It's probably time for you to reassess your risk tolerance level and build up a portfolio that appropriate to it.

If you are a patient long term investor, the more severe such a drop of the market, the happier you should be - because a rare buying opportunity just presented itself in front of you.

Save and Invest for Retirement - the New Framework

6/26/2016

In our last blog post, we shared the conventional wisdom when it comes to save and invest for retirement and its problems.

Now we will introduce a new framework to tackle the save and invest for retirement topic, it will divide your journey towards retirement saving into four phases, and each phase has its unique focus.

The New Framework
We can use four key words to describe this new framework, if you do well according to each of the key words in each of the phase towards retirement, you will have great results waiting for you!

Preparation ==> Saving ==> Accumulation ==> Risk Management

The reason we have such distinct phases is each person's income, spending, and ability to save varies greatly throughout life. Steady saving towards retirement is not always easy - just ask anyone who just started working! While saving might not be a problem for baby boomers with no kids to take care of, their worry is no longer saving for retirement, but how to ensure the saving is safe in a few years!

We will explain in more details each of the four phases in next blog post.

Save and Invest for Retirement - the Flaws of Conventional Thinking

6/25/2016

Q. I just started working and don't have enough money left to save for retirement. What should I do?

A. Here is the advice you might expect from most financial advisors when it comes to save and invest for retirement:

Start saving for retirement as early as possible (ever heard of Rule of 72?)
Keep investing regardless market up or down (ever heard of dollar cost averaging?)
Compound growth and time are your best friend (did Einstein ever say Compound growth is the second wonder of the world?)

The above are all truths, for example, if you use this free online calculator (plug in your investment amount, number of years, expected annual gain), you will find you could become a millionaire easily after a few decades of saving and investing.

That sounds great! Except ...

Problems Of the Conventional Advice
Except the problem is, like you described - for people who just started working, there is little money left to save for retirement.

For other people in other phases of their saving for retirement journey, there could be different problems.

For example, when your retirement portfolio reaches certain size, annual saving will only have a small effect because the annual growth from the portfolio will be the driving force.

Another example, if you are near retirement age, the concern of saving for retirement will be replaced by the concern of preserving the years of savings.

All these problems tell us the simple saving mindset is not adequate to serve the retirement saving goal, we need a new framework for saving and investing for retirement.

We will discuss this new framework in our next blogpost.

Factors to Consider When Rollover 401K Money

6/24/2016

In our last blog post, we showed 6 options one could have when retire and have access to 401k funds. There are many rollover options, and to determine the best option, you have to consider many factors, including:

Fees of the different options
Available investment options within the different plan options
Service provided by the different options
Avoid the 10% early distribution penalty
Ensure creditor protection
Simplicity and convenience of the different options
Required minimum distribution requirements
Be part of the overall Estate Planning
Many more ...

6 401K Plan Rollover Options

6/23/2016

Q. I am about to retire and could access my 401k savings. What can I do with the fund?

A. You have as many as 6 options in front of you when you retire or have access to the plan funds:

Leave the funds in the current employer plan and keep investing, nothing changes
Move the funds to a new / alternative employer plan, if you will have one
Roll the funds over to an IRA, if you already have an IRA elsewhere
Convert the funds to a Roth IRA, better do it when your income tax is low
Complete an in-plan Roth conversion (in-plan Roth rollover)
Take a lump-sum distribution, make sure there is no penalty, then invest on your own

Which option is the best? The answer varies with different people. There are many factors to consider. For example, just rollover alone, you need to consider many factors, see our next blog post discussion.

Is There Capital Gain Tax On Roth IRA Earnings?

6/22/2016

Q. Is there capital gain tax on Roth IRA?

A. No, there is no capital gain tax on Roth IRA at all. With one exception - if you withdraw money from it before the required 5 years time, any gain would be taxed as ordinary income.

How Do I Know If I Need Life Insurance?

6/21/2016

Q. How do I know if I need life insurance?

A. Whether you need insurance or not really relies on your financial strength and goals. If you have a few million dollars in liquid assets you probably don't need, but want insurance, such as Whole Life or other types of Cash Value life insurance, just like millions of other wealthy people do, they are the biggest buyers of WL insurance, because they see the value in WL.

On the other hand, if you are not rich, you have even more reasons to need a life insurance so your loved ones will not suffer if you die in an accident.

So the answer to your question is, you do need life insurance, regardless you are rich or poor. There are many different kinds of life insurance products, you can consult with a life insurance professional, preferably someone who is not tied to just one provider and can help you determine the best product from the best providers out there.

Please feel free to contact us at PFwise.com if you have any questions.

Why Buy Stocks That Pay Dividends?

6/20/2016

Q. Why should I buy stocks that pay dividends instead of selling the stocks directly?

A. Many people buy a stock anticipate to sell the stock later at a higher price. However, a stock's price is determined by many factors, including factors related to the underlying business and factors driven by the market supply and demand.

If you hope to sell the stock at a higher price, there has to be another person who is willing to buy at that higher price from you. But it's solely the company's call to decide whether to issue dividends or not. Many quality companies issue dividends consistently quarter after quarter.

According to Ibbotson Associates, since 1926, only 40% of the profits from owning the stocks of the S&P 500 came from price appreciation, the rest 60% came from dividend payments!

Perspective on Market Moves - June 19 2016

6/19/2016

How to Find a Good Financial Adviser?

6/18/2016

Q. How to find a good financial adviser?

A. A good financial adviser could help you secure a safe and rich retirement, so it's worth taking time to do research first before selecting one. Here is a list of steps an ordinary investor could follow to do the research and comparison:

1. Look for fee-only advisers
Search the following website to find several local financial advisers:
a. National Association of Personal Financial Adversers - napfa.org
b. CFP website - letsmakeaplan.org
c. Financial planning website - plannersearch.org
d. Garrett Planning Network - garrettplanningnetwork.com

2. Prepare a list of interview questions
You can find a list of prepared such questions at the following websites, download it then email to your candidates:
a. Plannersearch.org
b. Garrettplanningnetwork.com

3. Research candidates
You can use the following websites to research financial advisers, pay attention to lawsuits, fees and compensation, customer disputes, etc.:
a. Regulatory agency - Brokercheck.finra.org
b. SEC's investment adviser public disclosure website, read Form ADV brochure - adviserinfo.sec.gov

The Form ADV is mandatory disclosure form for many advisers, if you can't find it from your candidates, move on.

4. Meet in person
This should have no cost, you meet with the candidates face to face and note the one you feel comfortable to work with and trustworthy.

5. Decision time
Do not make the decision on the spot. Get a written agreement on fees and services to be provided. Then come home and put all the information in front of you and your spouse, make the best decision based on all the factors.

Does Lower Credit Card Limit Help Improve Credit Score?

6/17/2016

Q. I want to refinance, therefore I need to improve my credit score. Will lower my credit cards' limits help?

A. On the contrary, lower your credit cards' limits will hurt, rather than help, your credit score, for one simple reason - lower your credit card's limit will increase your credit utilization ratio.

What is Credit Utilization Ratio?
It calculates how much of your available credit you have tapped in a given month. Even you pay your credit card balance in full each month, the balance due on your credit card's statement will be reported and used in the credit utilization ratio.

The lower the credit utilization ratio, the better, since this ratio counts towards 30% of your credit score!

Why Not To Pay Off Mortgage Early In Retirement?

6/16/2016

Q. I am going to retire soon, should I pay off my mortgage early?

A. If your source of fund is your retirement money, such as savings in 401(k), it's best not to pay off your mortgage early, for one simple reason - the tax!

Money withdrawn from 401(k), even there is no penalty if you have exceeded the no-penalty age, there is still tax since the entire amount will be treated as your income, therefore subject to both Federal and State income taxes. Depending on your mortgage balance, this could be a sizable amount tax due! In other words, to pay off $100,000 mortgage balance, you need to withdraw a lot more out of your retirement account!

Arguments Against 529 Plans and Counter-arguments

6/15/2016

Q. What are the some arguments against 529?

A. Below are some common arguments against 529 and the counter-arguments.

1. Investment in 529 could loss money in the end.
Since 529 money is mostly invested in the stock markets, there is a chance it could loss money during the time it's invested. (True, but your investment could gain over time. In short, there is no guarantee.)

2. Money in 529 hurts financial aid chances
The more you save in 529, the less your financial aid chances. While other investments, such as Roth IRA, permanent insurance, etc. are excluded from the financial aid formula. (True, but the impact from 529 on financial aid is relatively small, only 5.64%)

3. The fees on 529 plans are outrageously high
The fees on most investment options under 529 plans are very high, and you are stuck with the limited choices. (True, you should shop around and find the best plan investment options, although if you buy from an out of state 529 plan, you will lose your own state's tax benefit, if there is any.)

4. If your child doesn't go to college or drop out, or you saved too much, you are out of luck.
In any of the circumstances, you will have to pay tax on all earnings (if there is any), plus 10% penalty. (If the child doesn't need the 529 money, you can transfer it to another child.)

Does IRA Conversion Count As Current or Prior Year IRA Contribution?

6/14/2016

Q. I made $2,000 contribution to non-deductible traditional IRA this year before April 15, this is counted as last year's contribution. If $2,000 grows to $2,100 due to earning and later this year I convert it to Roth IRA, does it count as this or last year's IRA contribution? How do I pay tax on this conversion?

A. Your conversion will not be counted as current year IRA contribution, in fact it will not impact your annual IRA contribution limit at all. Your eligibility for Roth IRA contribution is still subject to your income level.

Since the money is from a non-deductible traditional IRA account, you already paid tax on your $2,000 contribution. When you convert $2,100 to Roth IRA, you only have to pay tax on the earning part.

Does IRA Rollover Impact Roth IRA Annual Contribution?

6/13/2016

Q. Does traditional IRA rollover to Roth IRA count toward my this year's Roth IRA contribution?

A. No. Let's say you rollover $100,000 traditional IRA to Roth IRA (backdoor conversion), it has no impact on your annual Roth IRA contribution limit, you can still contribute $5,500 if you meet Roth IRA contribution conditions.

Why Diversification Helps Investment's Return?

6/12/2016

Q. Why diversification helps?

A. The following is an example and a chart that illustrates the benefits of diversification:

Assume you have $100,000 to invest for 25 years. You can put all that money in a CD earning 0.6% per year. After 25 years, you will have $116,000. This is pretty safe money.

Now, if you divide your money into 5 stacks: $20,000 each and invest in the following: lottery, cash account, CD, US Treasuries (2.1% annual yield), and Stocks (avg 8%).

The chart below shows the end results after 25 years:

How To Deal With Dividends Received In a Mutual Fund?

6/11/2016

Q. I have a diversified portfolio and have dividend distributions that I don't need to use. Should I put the dividend back to the fund that pays it?

A. Most brokers will ask you how do you want them to handle your dividends: Pay in Cash or Reinvest? Most people, thinking they don't need the money, choose Reinvest.

That is a mistake!

The best way to treat dividends is to put all of the dividends from all of your funds to a cash account, then put the cash to the fund or funds that need more investment. In this way, one dividend paying fund doesn't necessarily grow out of its appropriate weight in your portfolio, also your additional funds (dividends) get to be put at the most appropriate place, this is important and with long term effect, because study has shows over 1/3 of stock market's growth comes from dividends, so it pays to invest that dividend carefully!

Why Purchase Life Insurance?

6/10/2016

The 7 Wonders of Life Insurance

Buys time: Allows loved ones to focus on their grief by helping to pay for the funeral and other costs.
Provides a fresh start: Lets loved ones start with a clean slate by helping to pay off credit card bills, outstanding loans and even the mortgage.
Generates income: Helps replace lost income for years to come so that surviving family members can continue to pay for life’s necessities.
Offers flexibility: Gives a surviving spouse the chance to take time off or to switch to a job that offers a more flexible work schedule.
Creates opportunities: Can provide funding to start a business, or pay for schooling so surviving family members can train for a new career.
Funds the future: Offers a way to fund longer-range goals like a college education for the kids or a secure retirement for a surviving spouse.
Leaves a legacy: Gives parents the chance to leave future generations with the legacy of long term financial security.

Why Annuity Is a Great Choice Even When Interest Rates Are Low?

6/9/2016

Q. Is annuity a bad choice in today's low interest rate environment?

A. Contrary to popular thinking - annuities could be very valuable even when interests are close to zero, as a MarketWatch article shows -

Could annuities be more valuable when rates are low?

In the above article, the author considered a typical scenario - a 65-year old annuitizes $100,000 cash and receives guaranteed $5,048 payment per year, this is even assume the insurance company takes 15% marketing cost out of the money.

How about other options this retiree could pursue? The author identified 3 alternative options:

1. Self-annuitization.
Without using an insurance company, this retiree could withdraws $5,048 per year by himself. The problem is he would deplete his money after 18 years (at age 83), however, he will still have 54% of chance being alive at that time!

2. Long-life strategy
Now if this retiree assumes he would live to age 100 and do the annuitization by himself, while money could last till age 100, unfortunately he could only spend $2,857 per year, a lot less than what the insurance company would pay him.

3. Life-expectancy withdrawal strategy
In this case, the retiree spends a fraction of assets each year based on expected remaining years of life. For example, average male life expectancy at age 65 is 19 years, so the person would spend one-nineteenth of the $100,000, or $5,263. Income under this option is initially higher than that provided by an annuity, but the withdrawals fall with age, creating a significant chance of impoverishment in old age.

The Bottom Line
So the insurance company's annuity seems to be the best option, even when interest rate is zero. How could this be? The key reason is insurance companies could pool experience and use assets from deceased annuitants to pay those who still survive, producing a “mortality premium”.

What Tax Documents To Keep and For How Long?

6/8/2016

Q. How long should I keep the tax records?

A. Generally, you should keep tax records for 3 years.

What tax documents to keep for 3 years?
The following tax documents should be kept at least 3 years -

A copy of the return you filed
W2s
Logs for mileage
1099's
Receipts
Any paperwork that support your tax deductions or credits you have claimed

What tax documents to keep for 6 years?
Records dealing with property sales and claimed on your tax return. If more than 25% of your income was omitted from your tax return, the IRS has 6 years to impose any additional tax that is required.

What tax documents to keep for 7 years
Retirement accounts related documents: keep your tax records for 7 years after the funds have been completely withdrawn. Also, hold on to your documentations that long if you claim a bad debt deduction or a loss on securities you labeled as worthless.

Rich People's Retirement Portfolio

6/7/2016

Q. What does a rich person's retirement portfolio looks like?

A. If you have several million dollars in your retirement account, the following retirement portfolio could help meet your needs, wants and other desires, by taking appropriate risks at different levels while not giving up for the upside.

Conservative Portion
A bucket of conservative investments that will serve your needs well - food, housing, insurance premium, etc. with low risks.

Preferred stocks
Dividend-paying blue chip stocks
Fixed indexed annuities

Moderate Portion
The moderate bucket will generate income that serves your wants - travel, entertainment, etc. with a moderate level of risks.

Business Development Companies (BDCs)
REITs
MLPs
Structured notes (hybrid securities combining, for example, a bond and an option contract)

Aggressive Portion
After meeting your needs and wants, now the rest of your portfolio will aim for growth, by taking aggressive risks.

Private equity
Managed futures
Aggressive stocks

Muhammed Ali's Wisdom

6/6/2016

"It isn't the mountains ahead to climb that wear you out; it's the pebble in your shoe."

—Muhammed Ali