Blog Archives - PFwise.com

What is Quantopian?

11/30/2014

Quantopian is a browser-based algorithmic trading platform with the power of cutting-edge data science.

Quantopian makes the full potential of quantitative trading available to investors by giving them access to the power of data science. Quantopian gives people access to the tools, capabilities and community they need to create and optimize their own trading algorithms in an open and transparent environment, and then put those algorithms to work in the live market. Quantopian is also an engaged community where people can discuss concepts, processes and performance and learn from peers and experts. The result is a better way to understand and profit from quantitative trading.

How to Diversify on not Just Investment But Also Taxation - Part C

11/30/2014

In our previous blog post we showed the types of investments account that have before-tax contribution and taxable distributions.

In this blog post, we will show what investments are after-tax and distributions are taxable.

Contribution: After-tax
Distribution: Taxable
Most of our investment accounts belong to this category, such as:

Real Estate investment
CD
Stocks and bonds
Mutual funds
Business interests
Annuities

You might be subject to long term capital gains, short term capital gains, or ordinary income tax on the earnings from these types of investments.

Next blog post we will show what investments have after-tax contribution and tax-free or tax-preferred distributions.

Why Now Is Not the Best Time to Do Roth IRA Conversion

11/29/2014

Q. Should I consider Roth IRA conversion now?

A. We have introduced the Roth IRA conversion tactic several times in our blogs, see here.

Although you can do your Roth IRA conversion at any time, timing of the conversion matters. When you do the conversion, you will have to pay income tax upfront, what you are hoping is the future appreciation and the resulting tax savings will be more than offset the current tax pain.

MarketWatch has a good article explains why it advocated Roth IRA conversion 2 years ago, but advised against it right now. Worth reading it if you are thinking about the Roth Conversion at end of 2014.

What is DittoTrade?

11/29/2014

Ditto Holdings is a Financial Technology Company that combines online stock brokerage with social networking.

The company's online stock brokerage subsidiary, Ditto Trade, is a member of FINRA & SIPC and is licensed in all 50 states. The platform automates existing relationships of investors, allowing people to participate in the actual trades of someone they trust; while maintaining complete control and transparency.

5 Risks Every Retired Investors Face and How to Deal With Them - I

11/29/2014

Q. As I plan for my investment in my retirement time, what are the major risks I should consider?

Q. When you invest, you put your money at risk. Once you retire, the danger in any risk is intensified.

While there‘s no free lunch in the world of investing, it's best for retiree investors to understand the risk that they face and how to guard against each of them.

Capital loss -- You can lose most of your money if a bear market hits and the market plunges. During the Great Depression, the market went down 92%. In 2000, the market dropped 49%, and in 2008, it fell 57%. Those drops translated to capital losses for many investors.

Inflation loss — When people invest in "super safe investments" like CDs, they want protection from capital loss. However, inflation can cut their money in half about every 15 years. If you've been paying bills for a while, you know it costs more to live these days. That's not going to stop.

Liquidity risk — Sometimes you need money, but your investment has a five- or 10-year waiting period and you can't get at it. If you're retired, you should be especially aware of this type of risk. What if you have a health crisis and need your money now?

Legislative risk — Ever considered investing in something because it's got a tax loophole or legislation that makes it attractive? I believe you should never put money in those investments, because what Congress giveth, Congress taketh away. Back in the '80s, some oil and gas partnerships had 2-to-1 write-offs (you put $1 in and got $2 in tax savings). When Congress put the kibosh on those partnerships, many of those investments became worthless.

Interest rate risk — Many of you are experiencing issues with this risk right now. When you invested in CDs five or 10 years ago, you made somewhere between 5% and 8% interest. Now you renew at 1.5% if you're lucky.

How should retiree investors deal with these five types of risks? Please see our next blog post discussion.

North American and GenWorth, Who Is More Restrictive on Underwriting

11/28/2014

Q. Which one has more restrictive underwriting policy - North American or GenWorth?

A. If you just compare the two, North American's underwriting policy is more restrictive than GenWorth's.

Contact us if you want to compare their underwriting guidelines.

Is AUM Fee Justified?

11/27/2014

Q. Is the AUM (asset under management) fee justified?

A. It's really hard to say, let's take a look at the following different scenarios:

1. Financial firms offer financial planning services only, do not manage portfolios
Such advisors just charge hourly fees, monthly or annual retainer fees, or standalone project fees for modular financial plan solutions, there is portfolio involved, therefore there is no AUM fee being charged.

2. Financial firms charge an AUM fee to simply purchase a passive portfolio
These advisors charge AUM to just buy clients beta, but the price point of beta is moving towards zero due to competition, as a result, almost all the advisors provide some non-portfolio (and non-AUM-based) financial planning services to justify their AUM fees.

3. Financial firms provide alpha-related offerings
These advisors provide security or asset class level alpha-related offerings, the AUM fee could be justified if they could truly deliver, but alpha is difficult to find, so the pressure is to deliver alpha to justify their value propositions.

Many advisors, including robo-advisors, provide portfolio-related gamma, such as automated rebalancing, ongoing tax-loss harvesting, asset location, etc., will likely to continue to charge AUM fee, but pricing pressure is high so in the end they will need to develop some competitive advantages, such as technology or scale, in order to survive.

4. Financial firms offer both financial planning gamma and portfolio-related alpha
This is the most popular type in the current marketplace, as fee-for-financial-planning firms have struggled to scale, and investment-only firms have struggled with being commoditized and the rising pressure to justify their often-not-delivered alpha; by combining both under a single pricing structure and business model, firms effectively “diversify” their value proposition, such that hopefully at least one part or another will be “working” in any particular year.

From the above perspective, it’s really hard to say whether AUM fees are justified or not, and whether AUM fees will disappear or not.

In fact, with the “insourcing” trend of financial planning at large asset management firms and platforms, for example, the expansion of Vanguard Personal Advisor Services and the growth of Schwab Private Client. AUM fees become increasingly modest or entirely free because these firms recognize that if financial planning services improve client retention, the increase in lifetime client value justifies the entire cost of the service without charging the client at all.

Does MoneyGuard Require Medical Exam?

11/26/2014

Q. Does Lincoln Financial's MoneyGuard product requires medical exam?

A. If you are not familiar with MoneyGuard, we have an introduction blog post here.

Right now at the marketplace, there are big insurers competing in the MoneyGuard product area, they are Lincoln Financial and GenWorth (it's under another name - Total Living Coverage TLC).

While the key product features are largely the same, Lincoln Financial does not require a medical exam, and its underwriting decision will be a simple Yes or No. If it's Yes, it will be based on Standard class.

On the contrary, GenWorth's TLC product requires a medical exam, depending on your exam results, you could get either Preferred or Standard class.

So, if you believe you have pretty good health, you could give Genworth's TLC a try - it's a great combination of life insurance and Long Term Care product and makes sure your money won't be wasted.

Contact us if you need a quote.

Best Ways to Use Up FSA Savings Before Year End

11/25/2014

Q. I overestimated my needs for health care this year and overfunded my FSA. How can I use the extra money before year end?

A. There are 3 ways to use your extra money in FSA:

1. Move your FSA money if your employer allows carryovers
Generally FSA is use it or lose it, but an IRS rule change in 2012 allowed employers to op for a carryover of up to $500, giving employees the ability carry a balance into the next year.

In addition, some plays have a grace period (the maximum grace period is 2.5 months), during which period you can use the remaining FSA funds on qualifying medical expenses.

You can only have either grace period or carryover, but not both, per IRS laws.

2. Use FSA funds by the end of year on qualifying medical expenses
It's important to understand what are qualified medical expenses - they are the costs associated with diagnosing, mitigating, treating or preventing disease or illness, including equipment, medications, supplies, and out of pocket health care costs.

What are non-qualified medical expenses? Here is a list:

Over-the-counter drugs, unless you have a prescription
Treatments and products solely for cosmetic benefits (plastic surgery, spa treatments, anti-aging creams, etc.)
Products like Vitamins, unless prescribed for a specific deficiency or for treating an illness.

3. Spend FSA on supplies or treatments that you won't do otherwise
Here is a list of FSA-qualified expenses:

Acupuncture
Bandages
Blood-pressure monitor
Chiropractic care
Dentures, adhesives and cleaners
Diabetic supplies
First-aid kit
Heating pad
Hearing exams and aids
Lasik eye surgery
Medical ID bracelet
Non-cosmetic dental treatments including crowns, implements and sealants
Orthotic inserts and ovulation tests
Smoking-cessation programs and medications
Vision exams, eyeglasses and contact lenses

Tax Consequence for Giving or Receiving Large Sum of Money

11/24/2014

Q. Is there any tax consideration when give or receive a large amount of money?

A. First of all, I am not a CPA, so the following are just for your reference only. Please consult your tax advisor before you taking any action.

First, a gift must be quite substantial before the IRS takes notice.

A gift of $14,000 or less in a calendar year doesn’t even count.

If a couple makes a gift, the IRS considers the gift to be given half from each. Mom and Dad can give $28,000 with no worries.

The effective annual limit from one couple to another couple, therefore, is $56,000 ($14,000 X 4 = $56,000).

Gifts that don’t count
Some transfers of money are never considered to be gifts, no matter the amount.

For purposes of the gift tax, it’s not a gift if:

It’s given to a husband or wife who is a U.S. citizen. Special rules apply to spouses who are not U.S. citizens.
It’s paid directly to an educational or medical institution for someone’s medical bills or tuition expenses. (It doesn’t have to be a child, or even a relative, for this exception.)

Gift tax is not an issue for most people
The person who makes the gift files the gift tax return, if necessary, and pays any tax.

If someone gives you more than the annual gift tax exclusion amount ($14,000 in 2014), the giver must file a gift tax return. That still doesn’t mean they owe gift tax.

For example, say someone gives you $20,000 in one year, and you and the giver are both single. The giver must file a gift tax return, showing an excess gift of $6,000 ($20,000 – $14,000 exclusion = $6,000).

Each year, the amount a person gives other people over the annual exclusion accumulates until it reaches the lifetime gift tax exclusion.

Currently, a taxpayer does not pay gift tax until they have given away over $5.25 million in their lifetime.

Does the gift recipient ever have to pay gift tax?If the donor does not pay the tax, the IRS may collect it from you.

However, most donors who can afford to make gifts large enough to be subject to gift taxes can also afford to pay the tax on the gifts.

Forbes 2015 Top 15 Stocks

11/23/2014

Trying to outguess the market can make a fool of anyone. Instead of trying to move in and out of the market, a better strategy is to buy quality stocks that you can ideally hold for the longer term. With that in mind, Forbes asked some of the investment advisors for their best ideas for 2015. Here is the special report and the list of the top 15.
Do your own DD before investing in stocks!

forbest_2015_stocks_to_buy.pdf
File Size:	821 kb
File Type:	pdf

How to Diversify on not Just Investment But Also Taxation - Part B

11/22/2014

Continue from our previous blog post, in this blog post, we will show what investments are before-tax and distributions are taxable:

Contribution: before-tax
Distribution: taxable
These types of accounts include, but not limited to:

401(k) plans
403(b) plans
Tax-sheltered annuities
IRAs

Note, these types of accounts are not ideal if you think your income tax rates will be higher when taking the distributions.

Next blog post we will discuss what investments have after-tax contribution and taxable distributions.

Want to Gamble on Legal Claims?

11/21/2014

If you are an accredited investor, now is another way you can diversify your investment portfolio - use LexShares to invest in legal claims.

The legal claims are reviewed and then offered through WealthForge, a registered broker-dealer. Accredited investors, those who meet the wealth criteria specified by the Securities and Exchange Commission, can then fund a portion of the claim. If the plaintiff wins, the investor gets a portion of the proceeds. In losing cases, the investor gets nothing.

How to Diversify on not Just Investment But Also Taxation - Part A

11/20/2014

Q. When evaluating my various investments, I noticed I have diversified a lot, what else should I do to improve the overall performance?

A. Many people put lots of emphasis on diversification of investments, which is the right thing to do. However, they forget taxation diversification. It's important to remember that the overall performance of your investments is not only about what account you put money into, but also the tax treatments.

In short, there are three tax treatments of your investment contributions and distributions:

After-tax contribution and taxable distribution
After-tax contribution and tax-free or tax-preferred distribution
Before-tax contribution and taxable distribution

In next several blog posts, we will look at each of the above blocks.

Does a Fully Insured Pension Plan Fit You - Part C

11/19/2014

In our last two blog posts, we have discussed the typical profile of someone who needs a Fully Insured Pension Plan and why defined benefit plans are better.

Now we will further show a key difference between two different kids of defined benefit plans, and why that makes the Fully Insured Insurance Pension plan a perfect fit for the profile discussed.

How is a Fully Insured Pension Plan Funded
While the traditional defined benefit plans are funded with a wide range of investment options, funding for the Fully Insured Pension Plan is accomplished through products available exclusively from insurance companies, with fixed annuity, or a combination of fixed annuity contracts and whole life insurance contracts in which the life policies are used to protect the insured's beneficiaries in the event of death before retirement.

Front or Rear Loaded Contributions
A traditional defined benefit plan is deemed rear loaded, meaning it uses higher (non-guaranteed) funding assumptions, based on market conditions, therefore an employee's benefit grows slowly during the early years, then rises sharply as they grow older.

In contrast, the fully insured pension plan typically enjoys larger annual contributions (in other words, larger tax deductions) because it is required by law to use the conservative (guaranteed) assumptions of fixed annuity contracts, which means the plan generally allows larger contributions in early years. Overtime, excess interest earned above the guaranteed minimum interest rate will decrease the required contributions.

The Bottom Line
The design of the fully insured pension plan is very appealing to the older business owners who are looking to front load their contributions and tax deductions.

A Easy Way to Invest in Hedge Funds

11/18/2014

Q. As an individual investor, how can I invest some of my money in a hedge fund?

A. Unless you are an accredited investor, the door of hedge funds is shut for you.

However, even for accredited investors, the threshold of entry to the world of hedge fund is high and difficult as they generally require minimum $5 million investment.

Thanks to SlicedInvesting, which makes hedge fund investing simple, transparent and accessible.

It dramatically reduces the minimums to enter, and unlike a financial advisor or fund of funds, it adds very low fees to investors. Its cloud-based platform makes private fund investing efficient and simple.

If you are an accredited investor and have just $20,000, you can get started investing in hedge funds through SlicedInvesting.

The Mutual Fund ABC - Part II

11/18/2014

Class-A Shares
Class-A shares charge a front-end load that is taken off your initial investment.

Pros

Lower 12b-1 fees - Class A shares tend to have lower 12b-1 fees, so if you plan on holding these shares for several years, a front-end load might be beneficial in the long run.
Breakpoints - These provide a discount off regular front-end load rates each time your investment reaches a certain amount in a series. If the first breakpoint is $25,000, you could invest that amount initially to receive the first discount. (To learn more, read Break Free Of Fees With Mutual Fund Breakpoints.)
Right of Accumulation - This gives you the opportunity to receive a discount on the front-end load if you reach the first breakpoint with the second installment. So, again, say that the first breakpoint is $25,000 and your initial investment is $10,000. If you invest $15,000 to reach the breakpoint on the second installment, you'd receive a discounted front-load fee.
Letter of Intent - Some companies also offer front-end load discounts up front to individuals who initially express their intent to invest an amount over a certain breakpoint by a certain point in time.

Cons

High Initial Investment Required - Investors who do not have the funds to reach a breakpoint before the deadline indicated by a letter of intent will have to pay regular front-end fees.
Long Time Horizon Required - These funds are not optimal for investors with a short time horizon. For example, say your initial investment is $4,750 after $250 in front-load fees, and your investment increases 3% during the course of a year. If you liquidate at the end of the year, you would have actually lost $107.50 [(4750*1.03)-5000], or 2.15%.

Return of Premium Evaluation Tool for Term Life Insurance

11/17/2014

Q. How do I determine if the return of premium rider is something good for me?

A. Most of Term life insurance gives you a choice of "Return of Premium" rider. What it means is you pay higher than normal premium, at the end of the Term, if the insured is still alive, it will return ALL of your paid premium back to you.

So it's like you are getting a free life insurance.

Or, is it really so?

Obviously not, the insurance company will go bankrupt if it does so. What this rider does is simply let you lend the extra premium to the insurance company to invest on your behalf. At the end of the day, the insurer returns your premiums back to you. If the return generated by the insurance company is better than what you can do by yourself, by all means go for the rider. Otherwise, think it again.

You can use the following tool to evaluate the return you are actually getting by lending insurer this extra premium (note, this return is guaranteed return, so don't treat it the same as the un-guaranteed return you can get from the stock market).

Does 10-pay Whole Life Make Sense For Me?

11/16/2014

Q. I am a female marred at age 40. I have a successful career and looking or more life insurance as well as supplement income during retirement time. Does 10-pay whole life make sense to me?

A. First of all, 10-pay whole life is a type of whole life insurance policy that is contractually paid up in 10 years.

A major difference between it and the other types of whole life policies is its significantly higher early year cash values, as well as higher supplemental retirement income.

Life Insurance Needs
For example, for a female at age 40, by budgeting $1,000 per month to fund such a policy, you will have an initial death benefit of $380,427 (this amount is determined by solving for the lowest life insurance coverage amount given $1,000 per month contribution, thus maximizing cash value of this policy).

At the end of 10 years, your account will have cash value of $135,371 - more than your cumulative premium payment. If you are not happy with the policy once it's paid up, you can surrender it without losing any money.

Supplement Retirement Income
This policy also helps to supplement your retirement income. Specifically, at age 65, you can withdraw $19,479 each year until age 86 which is your projected life expectancy). Over 21 years, you could receive over $300,000 cash - free of tax.

At the end of age 86, even you have taken out more than $300,000 to supplement your retirement income, you will still have death benefit of $221,513 and it will gradually to decrease by remains in force until age 100.

The bottom line
The shorter payment period gives policy owners a time horizon to focus on, once the policy is paid up, its cash value will continue to grow, tax free. And policy owners can take out money, tax free, during retirement time.

Does a Fully Insured Pension Plan Fit You - Part B

11/16/2014

In our last blog post, we showed the ideal profile of someone who should consider a Fully Insured Pension Plan.

Now we will discuss the reasons.

Defined Benefit Plan Tax Advantages
First, like other forms of qualified retirement plans, contributions are tax deductible.

Second, unlike a defined contribution plan, a defined benefit plan does NOT have contribution limits. This frees the business owner from the contribution limitations of 401(k) and Profit Sharing plans.

There is a maximum annual benefit (not contribution) which currently is $210,000. The allowable contribution amount is a function of a participant's age, compensation, and plan formula. That's the reason it fits an older business owner with high compensation, but with fewer employee and most employees are younger than the owner.

Two Types of Defined Benefit Plans
a. Traditional pension plan - where the employer assumes all the investment risks.
b. Fully insured pension plan - where the employer assumes no risk and risk is transferred to an insurer.

In our next blog post, we will discuss a key difference between the traditional pension plan and a fully insured pension plan, and why the latter is a perfect fit for an old small business owner.

Does a Fully Insured Pension Plan Fit You - Part A

11/16/2014

Q. I am 50+ old and own a successful small business. I heard a fully insured pension plan is a perfect retirement plan for my small business, why?

A. Nowadays, fewer and fewer employers offer pension to employees, but a fully insured pension plan might be the best retirement planning vehicle for someone who fits the following profile:

Age 50 above
A small business owner
Has not many employees (ideally all younger than the owner)
Would like to increase tax-deductible retirement savings
Would like to diversify retirement portfolio by increasing "safe money" assets
Has stable income

In our next blog post, we will discuss why a Fully Insured Pension Plan might be a perfect solution for a small business owner who fits the above profile.

How to Diversify on not Just Investment But Also Taxation - Part C

11/16/2014

In our last blog post, we discussed the first tax treatment block. Now, the second block.

Contribution: after-tax
Distribution: tax-free or tax-preferred
These types of accounts include:

Tax-exempt bonds
Roth IRAs
Non-MEC permanent life insurance

It should be noted that life insurance is best utilized when someone is unable to contribute to a Roth IRA or need death benefit protection.

The important take away from this block is that it is possible to pay taxes on your money only once, not twice.

In our next blog, we will discuss the third block.

How to Diversify on not Just Investment But Also Taxation - Part B

11/16/2014

In our last blog, we introduced 3 blocks every investor should pay attention to about their investment contribution and distribution, from tax perspective.

Now, the first block.

Contribution: after-tax
Distribution: taxable
These types of investments include, but not limited to:

Real estate
CD's
Money market accounts
Mutual funds
Annuities
Equities (stocks)

Your investment's distributions could be subject to long-term capital gains, short-term capital gains, or ordinary income tax on the earnings from these investments.

You might have a very good return, but your contribution has already been taxed and earnings will be taxed as well.

Next blog post, we will look at the second tax treatment block.

How to Factor in Inflation for Insurance Face Amount

11/16/2014

Q. I am considering a 30-year Term life, I am concerned if I purchase $1M face amount now, in 30 years, it will not be much. How to determine the appropriate amount to purchase now?

A. This is a good question, planning for inflation is important for term life insurance, because during the entire term period, the death benefit remains level. For a long period of 20 or 30 years, inflation could eat away a large chunk of the further purchasing power of the life insurance death benefit.

You can use the following tool to evaluate two things:

Given the assumed inflation rate, how much your face amount will be actually worth at the end of the term
How much face amount you should purchase now in order to achieve equivalent purchasing power in the future

Smart Student Loan Payment Strategies - Part C

11/15/2014

In our last two blog posts, we discussed what if you have trouble repaying your student loans and how to lower your student loan costs. Now we will discuss how to pay back your student loans as fast as possible.

First, whether to pay down student loans early is a borrower-by-borrower decision. Some people might think they can achieve a higher return in stock market investment than the student loan's interest rates, and some people just want to be debt free.

Set Priorities
Before you decide to put extra cash towards your student loans, make sure you have enough cash saved in an emergency fund to cover six months’ living expenses. It won’t matter that you’ve paid off your student loans if you lose your job and have no savings to pay for rent and food.

If you do decide to move forward making extra student loan payments, the first thing you’ll want to do is to ensure you’re making bigger payments on the loans with the highest interest rates first.

You’ll also want to prioritize paying off loans with co-signers (if you have them). When a parent or a spouse cosigns your student loan it affects his or her credit, too. And it’s a morbid thought, but if you become disabled or die, the co-signer is on the hook for repaying the loan in full.

Complications
Repaying your student loans can get complicated, and your plan will likely evolve as your situation changes. Take medical students, for example, who have large student loans and several years of a residency before they begin earning enough to make full loan payments. A smart medical student will take advantage of many of the above options – deferment and interest-only payments while in residency, for example, and consolidation or refinancing once they start earning more.

Even big student loans don’t have to sentence you to eternal poverty if work with your lenders to reduce your payments while you’re earning less and then increase payments when you can afford it.

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