Blog Archives - PFwise.com

5 Simple Rule of Thumbs of Personal Finance - How Much to Save

12/31/2017

How much do I need to save for retirement?
10x Retirement Rule

To get to your retirement end zone, aim to have saved 10 times your salary by retirement, assuming you retire at age 67. The best way to reach that goal is to save consistently throughout your life.

Below are some age-based goal posts. Simply multiply your income at certain ages by your savings factor to see how much you should aim to have saved by that point.

By age Save
30 1x your salary at age 30
35 2x salary at 35
40 3x salary at 40
45 4x salary at 45
50 6x salary at 50
55 7x salary at 55
60 8x salary at 60
67 10x salary at 67

5 Simple of Rule of Thumbs of Personal Finance

12/30/2017

Using a rule of thumb can help you estimate important figures in your financial life.

Below are 5 simple rules of thumb for budgeting, saving for college, saving for retirement, and buying a house.

How much need to save for retirement
How much to save each year for retirement
How much to spend each month
How much to save for college
How much house to afford

Two Common RMD Withdrawal Mistakes - Part B

12/29/2017

In our last blog post, we discussed one common RMD withdrawal mistake - mix different types of accounts. Now the second common RMD distribution mistake.

Many people know that IRS Publication 590 contains a table showing the amount that must be withdrawn each year — but the amount is based on the account value as of the prior Dec. 31, not on the value at the time the funds are withdrawn.

Account values usually rise, so it’s usually not a problem if you use, say, a May date instead of the previous December’s date, because the account value in May is probably higher. But remember what happened in 2008? That year, the stock market was down sharply; if you took the withdrawal late in the year, your account value likely was far less than it was the previous Dec. 31 and you could have ended up withdrawing too little. The difference would have been subject to the penalty.

These rules are needlessly burdensome. They penalize people who, often because of cognitive decline in their 70s and beyond, handle the complex paperwork incorrectly and end up owing double or triple the amount they should have to pay.

Two Common RMD Withdrawal Mistakes - Part A

12/28/2017

Q. What are the common RMD withdrawal mistakes?

A. The first common RMD withdrawal mistake - mix different types of retirement accounts.

For example, you have money in both 401(k) and IRA accounts which is common for most people. When you reach RMD age, you calculate the required minimum withdrawals from both, but you can NOT simple take the grand total out of one account, for example, IRA. If you do, you will incur 50% penalty from IRS.

However, if you have multiple IRA accounts with different values, you could add up the total RMDs and withdraw the entire amount from just one of the IRAs.

Taking the 401(k) portion from one of the IRAs triggers the penalty. Even though you took the proper total amount from all the accounts, the IRS will say you didn’t take it from the proper place. Thus, a simple paperwork error costs you a 50% penalty on the amount you were supposed to take from the 401(k) — and that’s on top of the taxes.

To make things simple, you can roll your dormant 401(k) into an IRA, then you could take the total withdrawal from just one of the IRAs.

In our next blog post, we will discuss another common RMD withdrawal mistake - wrong account value calculation.

Which Retirement Saving Strategy Will You Choose?

12/27/2017

Q. None of the super rich billionaires made it through diversification, should I concentrate my retirement saving portfolio?

A. It is true that most billionaires achieved their wealth through heavy concentrations of their investment, at least during their initial growth periods. What's the appropriate retirement saving strategy for one to consider? You can refer to the following Bush Strategy vs. Redwood Tree Strategy:

Bush Strategy
The Bush Strategy is to diligently save everything month and put that money into a well diversified portfolio. Even if you only invest $300 a month, at 8% annual growth, after 40 years, you will be a millionaire too. If you could maximize the annual $18,000 contribution, you will be a multimillionaire.

Redwood Tree Strategy
However, if you want to achieve more than $5M or more, diversification will not help. You need to use the Redwood Tree strategy - concentrate during your growth stage, once you accumulate a sizable amount, it's time to diversify. However, the Redwood Tree strategy surely has its risks, otherwise, every tree will become a Redwood tree.

Bush Strategy or Redwood Tree Strategy - which retirement saving strategy will you choose?

What To Do If I Foresee a Market Crash Coming?

12/26/2017

Q. What should I do if I am concerned about the stock market crash?

A. There will always be a market crash, as the market does not always go up like a straight line, it is more like a U or V curve. As an investor, you should do three things:

1. Diversify
So some of your money doesnt' fall in value when the market declines.

2. Rebalance
So you can buy while prices are down.

3. Keep a long term focus
So you are able to participate the eventually recovery.

5 Tax Moves Before 2017 Year End to Max Out Itemized Deductions

12/25/2017

Q. What actions I need to take now before 2017 ends in order to minimize my tax in both 2017 and 2018?

A. With the new tax goes effect on Jan 1, 2018, here are 5 actions you should take before Jan 1, 2018 -

1. Give more to charity now instead of 2018
Because the tax rates will be lower for most people in 2018, it makes sense to donate more now than next year. Plus, you might not even itemize in 2018 in the new tax rules.

2. Prepare 2018 property taxes
With the new tax rules, there is a $10,000 limit on all of your state and local taxes, so it is better to prepare your 2018 tax bill now to take that extra deduction before the rules change.

3. Make your business expenses now
You can deduct a lot of your unreimbursed business expense on your taxes if the total is more than 2% of your adjusted income, that deduction is going away entirely in 2018.

4. Max out as many other deductions as you can
The general rule of thumb is to take the credit or deduction in 2017 as you can, because with tax rates lower in 2018, such credits and deductions are more valuable in 2017.

5. Delay income until 2018
Given the new tax rates will be lower from 2018, you should try to delay income until 2018 if possible.

Are Medicare Benefits Entitlements?

12/24/2017

Q. Are Medicare benefits entitlements?

A. Medicare is not an entitlement.

Medicare will create staggering financial challenges for U.S. government. According to a report, there are 57 million beneficiaries of Medicare. But with majority of Baby Boomers to retire between 2022 and 2029, by 2030, at least 80 million people will have Medicare. That is two taxpayers for every one recipient, this is simply not sustainable, just like Social Security is not sustainable as we discussed yesterday.
The unfunded liability for Social Security is approximately $15 trillion. The unfunded liability for Medicare is approximately $100 trillion. These figures will be compounded by the increased longevity of the American people. Each year of increase in longevity will increase the unfunded liability for Social Security and Medicare by trillions of dollars. Dollars that we do not have.
But recipients of Social Security and Medicare will allow very little tampering with their benefits, and they have the votes to elect candidates who will not try to tamper with them.
So where will we, as a country, get the money to pay for this? Will we have to make reductions in many other areas of services that are provided by government? What and where will those reductions be? Won’t that require higher taxes, create lower benefits, cause serious money printing, or trigger some combination of all of those actions?

Are Social Security Benefits Entitlements?

12/23/2017

Q. Are social security benefits entitlements?

A. Security is not an entitlement. In fact, it is not even guaranteed by U.S. government.

In 1937, in Helvering v. Davis, the Supreme Court ruled that Social Security is not a contributory insurance program. Instead, FICA taxes will be paid to the U.S. Treasury like any other revenue and will not be earmarked in any way. It is completely legal for our representatives to use FICA taxes in any manner they choose. When you think about it, doesn’t that make the FICA tax into a payroll tax and not a pension contribution? Doesn’t that make Social Security a welfare benefit?

In August, the Social Security and Medicare Trustees released their annual report. Here are some numbers from the report that you will find startling. 171 million Americans paid into the Social Security program in 2016, and there were 61 million people receiving benefits. That means there are fewer than three people paying for every one person who is receiving benefits. According to the U.S. Bureau of Labor Statistics, we will have between 80 and 100 million people receiving Social Security by 2030. That means we will near two taxpayers paying for every recipient of benefits. This is simply not sustainable.

Why Stock Market is More Luck Than Skill

12/22/2017

Jeff Sommers has an article at NY Times that reveals a shocking truth -
“The Best Investment Since 1926? Apple.”
As the headline indicated, “Apple has generated more profit for investors than any other American company.” At this time last year over that roughly 90-year period, the leader was Exxon Mobil Corp. Note that the oil giant has been publicly traded almost three times as long as Apple Inc"

Furthermore, "Only 4 percent of all publicly traded stocks account for all of the net wealth earned by investors in the stock market since 1926, he has found. A mere 30 stocks account for 30 percent of the net wealth generated by stocks in that long period, and 50 stocks account for 40 percent of the net wealth."

How can you do well in stock market? There are two strategies you can pursue -

1. Do your due diligence and find the next Apple, from thousands of stocks, this requires perfect timing - both buy and selling points.

2. Buy all the stock (index fund), so you make sure include the next Apple in your portfolio.

Each has advantage and disadvantage, which one works for you?

Permanent Life Insurance As An Asset Financing Tool

12/21/2017

As you prepare for retirement, you’re probably concerned about protecting the value of your assets, retiring comfortably and leaving a legacy for your family. Many people think preparing for retirement involves saving as much money as possible and investing it wisely by diversifying. However, in addition to diversifying investments, smart retirement savers also consider how taxes will affect their retirement dollars.

Utilize QLAC To Avoid Required Minimum Distribution

12/20/2017

Q. Is there anyway to avoid Required Minimum Distributions?

A. Yes, if you purchase a deferred income annuity as a Qualified Longevity Annuity Contract (QLAC), those funds may be excluded from Required Minimum Distribution (RMD) calculations. Reducing RMDs could help extend your savings and lower the taxes you pay.

Here are a few key advantages of a QLAC:

Allocate up to $125,000 (lifetime) or 25% of your IRAs, whichever is less
Delay paying taxes on money that isn't needed in early retirement
Guaranteed lifetime income later in retirement
Potential to leave more assets to a surviving spouse or heirs

With some exceptions, in exchange for higher payments, an income annuity permanently converts principal to a guaranteed income stream.

6 Investment Actions to Take Before Year End

12/19/2017

Q. As the year end approaches, what I should do to shore up my investment?

A. Here are 6 actions everyone should take before year end -

Increase your 401(k) contribution rate for the following year (if you haven't maximized it)
Check if you are eligible to fund an IRA, if yes, fund the IRA now instead of waiting till tax filing deadline in April.
Check if you are eligible for HSA, if yes, fund it.
Assess if your asset allocation strategy is still appropriate, if not, adjust it.
Rebalance your investment mix across 401(k), IRAs, and taxable accounts.
Harvest the losers in your portfolio to sell and scope out bargains to buy.

Safe Investments With Appropriate Yields - Part III

12/18/2017

In our last blogpost, we discussed that CD as safe investments, now we will discuss another safe investment with better than CD yields.

Pay Down Your Mortgage
This is probably the lowest hanging fruit in your investment choices.

Although we often hear that mortgage is tax deductible so it's worth to keep even during your retirement. However, interest earned on money not used to pay down mortgage is taxable. Furthermore, if you have safe money invested in CD earning 2%, it's better to use that money to pay down mortgage that costs you 4%. If you need liquidity, open a home equity line of credit which won't cost you anything if you don't use the funds.

Safe Investments With Appropriate Yields - Part II

12/17/2017

In our last blogpost, we discussed safe investment - high quality bond funds. What if you want higher safe yields? Here are two options

Secondary Market CDs
Secondary Market CDs also called Brokered CDs, they tend to have 50 basis points higher yields than the safe bond funds. You need to find a financial advisor who can help you purchase these Brokered CDs.

A few caveats of Brokered CDs:

Don't buy Callable CDs. Because if rates low or fall, the issuer might redeem them.
Make sure you don't need the fund before maturity date.
Only principal of CDs are FDIC-insured.

Direct CDs
If you don't want to talk to an advisor, you can purchase Direct CDs from a bank or credit union by yourself. They have comparable yields.

We will discuss another safe investment in next blog post.

Safe Investments With Appropriate Yields - Part I

12/16/2017

In our last blog post, we showed the risk of some of the high yield investment candidates. Now we will discuss some "Safe Yields".

As an investor, you want to pursue risk (and high return) with your stock investments, for your fixed income investment, their role is not to pursue higher yields, instead, they should act as a cushion when stocks tank therefore you can rebalance your portfolio and buy stocks on the low.

High Quality Bond Funds
An appropriate fixed income investment candidate is high quality bond funds, such as Vanguard's Total Bond Market ETF (BND) and iShares Core U.S. Aggregate Bond ETF (ACG). More than 60% of each fund's investment is in U.S government backed bonds, the rest are in investment grade corporate bonds, both bonds gained more than 5% in 2008 and served its role exactly as expected - stock shock absorber.

At this time, both funds have yields in the low 2% range, not spectacular, but decent safe yields.

Do you want to boost your safe yields further? We will introduce another investment candidate next blogpost.

Why Junk Bonds or Even Dividend Stocks Are Bad for Your Portfolio

12/15/2017

Q. I need fixed income, are high-yield junk bond funds and dividend stocks good investments for me?

A. Due to the low interest rate environment, lots of investors seek higher yields from "safe investments", however, below are some bad options.

High-yield Junk Bonds
There are a lot of promotions of low credit quality bonds and bond funds (junk bonds) right now, however, investors seem to forget what happened in 2008, when the average high yield bond funds tanked 28%, at the time when investors needed fixed income to act as shock absorber.

Dividend Stocks
Dividend stocks are no safe heaven as well, just recall General Motor, Eastman Kodak, and large banks used to be "safe" dividend stocks and looked at their historical performances. In 2008, large-cap value funds lost more than the 37% S&P 500 lost.

MLPs
Even just 5 years ago, when Master Limited Partnerships were promoted heavily as "a safe toll-taking business", the JPMorgan Alerian MLP Index ETN (AMJ) has lost about 31% over the 3 years that ended in Sept 15, 2017.

The truth is the current bull stock market will come to an end, when it ends, those safe heaven investments will lose principal, no where need to be made up by the little "income" from them.

In our next blog post, we will discuss some truly safe investments with appropriate returns.

10 Year End Charity Giving Tips

12/14/2017

10 tips on making charitable donations:

Give to qualified charities. Only gifts to eligible organizations are tax deductible. Select Check, a searchable online tool available on irs.gov, lists most eligible organizations. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations even if they are not listed in the tool’s database.

Determine the fair market value. The IRS says the fair market value of clothing, household goods, appliances, furniture, shoes, books and other items is the price a willing buyer would pay for them. Items generally must be in good used condition or better to be deductible. For items worth more than $5,000, you must submit an appraisal. Some charities will pay for an appraisal; find out before you donate. By law, a charity cannot tell you what your donated items are worth. You should determine that with the help of your tax advisor.

The calendar is key. Contributions are deductible in the year made. Thus, donations made via credit card before the end of 2017 count for 2017 even if the credit card bill isn’t paid until 2018. Also, checks count for 2017 if they are mailed in 2017. Contributions made by text message are deductible in the year your contribution is charged to your telephone or wireless account (even though you might pay the bill the following year).

Save your receipts — even for cash gifts. Cash donations, regardless of the amount, must be proven by a bank record such as a canceled check or credit card receipt showing the name of the charity, or a written document from the organization showing its name, the date and the amount donated. For noncash donations worth $250 or more, including clothing and household items, get from the charity a receipt showing its name, date of the gift and a reasonably detailed description of the property. If a donation is left at a charity’s unattended drop site, keep a written record that includes that same information, as well as the fair market value of the property at the time of donation and the method used to determine that value.

Some items have special rules. The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. You should get a Form 1098-C or a similar statement from the organization and attach it to your tax return. If your deductions for all noncash contributions total more than $500, you must fill out and submit Form 8283 with your return.

Donations to individuals don’t qualify for a tax deduction. That’s true no matter how deserving you believe an individual to be. This includes handouts to the homeless and office or neighborhood collections for someone experiencing difficult times (perhaps due to illness or a tragedy such as an accident or fire). If the deduction is important to you, consider working with a qualified charity such as the Red Cross, which provides disaster and other relief.

Participate in payroll deductions for charity. Your employer might participate in a charitable giving program that allows you to give directly from your paycheck. If you contribute by payroll deduction, you must retain a pay stub, Form W-2 or other document from the employer showing the total amount withheld, along with the pledge card giving the name of the charity.

Appreciated assets can be valuable. Donating property that has appreciated in value, such as stocks, can provide a double benefit — in that not only can you deduct the fair market value (as long as you’ve owned the property for at least one year), but you will also avoid paying capital gains tax. Normally, appreciated assets are subject to capital gains tax when sold or gifted, but there is an exception for those donated to qualified charities.

You can’t deduct the value of your time. This is true even if you can easily put a dollar value on your time. For example, if you’re a professional — such as a lawyer, doctor or architect — and normally charge $300 per hour for your services, you can’t deduct that amount for donating an hour of service to a charity. However, out-of-pocket costs related to volunteering are deductible, provided they’re not reimbursed to you or considered personal in nature. These might include transportation and travel expenses, uniforms and supplies. As always, documentation is essential.

Your deduction may have limits. If you contribute more than 20 percent of your adjusted gross income (AGI) to charity, some limits may apply. The rules are complicated (ask your accountant), but in general you can deduct appreciated capital gains up to 20 percent of AGI, noncash assets worth up to 30 percent of AGI and cash contributions up to 50 percent of AGI.

Benefits of Hybrid Life Insurance and LTC Policies

12/13/2017

Q. What are the benefits of hybrid life insurance versus stand alone long term care insurance?

A. In our last blogpost, we discussed why the need for Hybrid life insurance. The advantages of hybrid policies are clear:

You will get tax-free reimbursements for your qualified LTC expenses. This often allows you to choose where you receive care, rather than choosing the least expensive option by default.
If you never need long-term care, the beneficiary receives the full death benefit. If you only used a portion of your available funds for LTC, the beneficiary gets the rest income-tax free.
Because this is a universal life policy, the premiums will never increase if you don’t take out loans or withdrawals. Similarly, there is likely no deductible or waiting period.
Some carriers may also offer full or partial return-of-premium. This provides additional peace of mind for those who feel strongly that they won’t use their coverage.

Two Types of LTC Payments
There are two types of LTC benefits payments -

a) The policy is structured to reimburse the care providers, the payment from the insurer will be tax free.

b) If the policy uses an indemnity model (in which insurance payments are a set amount), such policies typically pay a full daily or monthly benefits amount directly to the policyholder, if specified conditions are met, the benefits received from an indemnity policy can be untaxed up to the larger of actual outlays for qualified LTC or a per diem limit ($360 a day in 2017).

New Strategies for Covering Long Term Care

12/12/2017

Q. Should I consider purchasing long term care (LTC) policy to cover such needs if they arise when I am old?

A. Standalone LTC policies are going out of fashion, as shown by the annual sales amounts below, for two key reasons:

1) Rising LTC premiums. Insurers have the right to raise premium in the future which makes it unpredictable.

2) Possibility of not needing the care. Not everyone will need long term care in one's life. If you don't need it, your premiums are wasted.

However, it doesn't mean long term care coverage is decreasing, consumers are actually turning to the Hybrid solution to cover themselves. A hybrid policy could be Life Insurance - LTC combo or Annuity - LTC combo.

           Standalone LTC      Life Insurance-LTC Combo      Annuity-LTC Combo
2011        $550M                     $2,200M                                   $285M
2012 $580M                     $2,400M                                   $210M
2013 $406M                     $2,600M                                   $260M
2014 $316M                     $2,400M                                   $410M
2015 $216M                     $3,100M                                   $470M
2016    $228M                     $3,600M                                   $480M
Source: LIMRA

In next blogpost, we will answer the question - what are the benefits of the hybrid LTC solutions?

Why Some Life Insurance Carriers Have More Than One Term Life Product?

12/11/2017

Q. Why some life insurance companies offer two term life products?

A. Life insurance companies offer different types of term life products largely to target different market segments. Right now, the following life insurance carriers offer 2 term life products:

AIG: AG Select-a-Term vs. QoL Flex Term (with 3 free living benefits riders)
John Hancock: Term with UPR vs. Term with Vitality (with flexible premium)
Protective: Custom Choice vs. Classic Choice (no essential difference)
Prudential: Term Essential vs. Term Elite (no essential difference)
Transamerica: Trendsetter Super vs. Trendsetter LB (with free living benefits riders)

Differences Between the Two Transamerica Term Life Products

12/10/2017

Q. What are the differences between the two term life products from Transamerica?

A. Transamerica has two term life products - Trendsetter Super and Trendsetter LB.

Trendsetter Super is its regular term life products, like most of the other insurance carriers' term life products. Trendsetter LB includes free living benefits riders. Below is the detailed description of the Trendsetter LB product.

Differences Between AIG's Two Term Life Products

12/9/2017

Q. What are the differences between AIG's two different term life products?

A. AIG acquired American General in 2000's. AG's Select-a-Term product is a regular term life product without additional living benefits riders, however, the AIG's recently introduced QoL Flex term product has 3 free living benefits built in.

You can visit the official QoL Flex term product description here for more details. This is by far the most competitive term life products with free living benefits riders.

Differences Between the Two Prudential Term Life Products

12/8/2017

Q. What are the differences between the two Prudential term life products?

A. Prudential has two term life products - Term Essential and Term Elite. Below are the documents discussing the key differences between these two products -

Revocable Living Trust and Other Types of Trusts

12/7/2017

In our last blogpost, we discussed durable power of attorney, living will and health care power of attorney. Now we will cover several types of trusts.

Revocable Living Trust
A revocable living trust has many benefits:

A trust can go into effect as soon as you create it and can help if you become incapacitated for any reason. Typically, you would be the trustee of your own trust to start, but would name your spouse or a trusted family member or friend to serve as the backup or successor trustee if you are unable to handle everything. This provides a seamless way to assure that your assets will be handled as you wish throughout your lifetime.
Following your death, the trust allows your heirs to avoid probate court. This means assets will be distributed in months as opposed to years and will reduce legal fees substantially.
The provisions of a trust remain private after your death, avoiding unnecessary publicity.
Following your death, the revocable living trust becomes irrevocable, locking in your wishes. It will be up to your successor trustee to distribute assets according to your specific, written instructions laid out in your trust.

Other Types of Trusts
There are quite a few other types of trusts, each useful for a different, specific purpose:

QTIP (Qualified Terminable Interest Property) Trust: This type of trust is often used in second marriage situations. It provides income for a surviving spouse, while controlling and preserving underlying assets for distribution to children from a previous marriage or other beneficiaries.
Spendthrift Trust: You may want to create this type of trust if your child cannot effectively handle money, is in a problematic marriage, or suffers from drug or alcohol abuse.
Life Insurance Trust: This type of trust allows you to avoid estate taxes on the proceeds of a life insurance policy. If done properly, the life insurance proceeds that come through a life insurance trust following death are not counted as part of the estate.
Special Needs Trust: If you have a child needing ongoing oversight and custodial care due to a disability, this type of trust avoids the interruption of the agency or government benefits due to the child receiving an inheritance.
Charitable Remainder Trust: This type of trust is often used for a large donation to a charity, a university or another nonprofit. It can provide a tax deduction today along with the ability to generate income during your lifetime.

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