Monday, March 23, 2015

It’s about time you started saving

The first Monday morning after we adjusted our clocks for Daylight Savings Time, the topic of time sort of took over the news. Later that day, Apple unveiled the much-anticipated Apple watch. It sounds like the new watch will be able to perform an incredible number of functions, in addition to keeping the time of day, of course.

Also that Monday, although there was never a formal bell to signal a bull market, investment experts agreed that the current bull market started its run precisely six years prior.

In other words, while all of us leaped forward an hour and adjusted to daylight savings time, the most famous tech company in the world unveiled what they believe will be revolutionary changes to the wrist watch. Concurrently, many investment experts, while establishing a beginning for the bull market, continue to debate just how long it can continue without a major correction.

That’s the thing about time: when it is gone, it is gone. You can’t roll back the hands of time, nor can you control it. Fortunately, you can manage it.

One thing that investors, especially young ones, need to learn is how to turn time into an ally. Let’s take a look at an example involving two investors, each earning a hypothetical 10 percent per year.

At the age of 20, Ms. A began saving $2,000 per year every year for 20 years. At that point, after investing a total of $40,000, she totally stopped investing for the next 20 years. That is to say, she let time take over for the final 20 years.

Meanwhile, Mr. B played hard for the first 20 years and saved nothing. Then he suddenly became serious and invested $2,000 per year for the next 20 years; also a total investment of $40,000. Now, both are age 60 and want to accept an early retirement offer from their employer.

On the surface, you might think they’ll both have the same amount of money. After all, they both invested exactly $40,000 for exactly 20 years. Of course, that’s not the case.

Ms. A used time as an ally and benefitted from the magic of compound interest. By starting early and taking advantage of time, her $40,000 will have a value of $317,000. Mr. B who saved the identical $40,000 but began twenty years later will have a significantly smaller amount. Just $82,000. The difference, time!

This is just an example, but it demonstrates that time is an integral yet often overlooked component of investing. Over an extended period of time, the investment world will have its ups and downs. That’s why investors need to begin at a young age and use time to their advantage.

It doesn’t matter what kind of device you use to keep time. It could be with an old sand-filled hourglass or your great grandfather’s Swiss pocket watch. Perhaps you sport a Rolex or maybe even the new high-tech watch from Apple.

What does matter is how you manage time. So, come age 60 when you’re thinking about retirement, which song will you be singing? The Willie Nelson classic “Ain’t It Funny How Time Slips Away?” Or the early Rolling Stones song “Time Is On My Side?”

If you start investing early, I know the answer.

Tuesday, March 17, 2015

Traveling back through time and into the future

Some popular old television shows seem to live on forever. Seinfeld comes to mind, but I believe one television show in particular has gone where no other show has gone before. I’m speaking, of course, about Star Trek.

Leonard Nimoy, aka Mr. Spock, recently passed away. You might forget that he was a stage actor, an author, a poet, a film director and a photographer. You might forget that he had recurring roles on other television series, including Mission Impossible and Fringe.

But you will never forget that he was Spock.

The Spock character he played as an actor was probably his greatest life defining moment. No matter what he did after the Star Trek television series, he was always typecast as Mr. Spock. Years later, even though he was much older, the producers found ways to incorporate his character into the Star Trek film franchise. He even directed a few of them.

Yes, Star Trek and Mr. Spock bring back many memories of the 1960s. But Star Trek was a television show, not real life. Many other significant cultural and social events were taking place. Many other people were rising into prominence.

In no particular order, when I think about the ‘60s, I am reminded of the Kennedys, Dr. Martin Luther King, the Beatles and the British Music Invasion, the Ford Mustang, social unrest in Detroit and, of course, the Tigers winning the 1968 World Series.

I do not mean to slight anyone here. Certainly there were many more significant events and great accomplishments. These people and events are simply those that quickly came to mind.

Getting back to Star Trek, it’s been almost 50 years since it first aired in 1966. At that time, there were no 401(k) retirement programs. In fact, the deductible IRA didn’t come into existence until 1974. True, life expectancy was less than what it is today, but at that time you just had Social Security and savings.

Some, especially autoworkers, were fortunate enough to have pensions, but for most other hard-working citizens there were no other retirement accounts.

A common method for measuring the cost of living is the Consumer Price Index. Using the CPI inflation calculator, it would take $7,200 today to be the equivalent of $1,000 in 1966. I mention this because I fear that too many retirees seem to ignore that costs tend to go up over time.

But while costs may increase, technology improves and competition helps keep costs down. I doubt any of my readers or clients are watching the same television set they had in 1966. Since Star Trek debuted, we now have microwave ovens, wireless telephones, computers, E Readers and Dick Tracy Watches.

The calculator I paid plenty for in college can now be bought at the supermarket for a few dollars. And yet, the cost of living will probably continue to increase over time. Perhaps at an astronomical rate. That’s why people need to continue saving and investing.

As long as research and innovation continue, the quality of life is likely to improve. And with it, the cost of living. Nonetheless, I’m hoping that someday soon, instead of going through the hassles of the airport check-in, I will simply be able to ask the airline attendant to beam me up.

Monday, March 9, 2015

Preparing for the inevitable, no matter how difficult

For the second time in nine months, I buried an aging parent. This time it was my mother-in-law. On one hand, my wife and I were very fortunate to have them for as long as we did. But, as so many others have, we learned that assisting aging parents requires a lot of love, patience and time.

Unfortunately, aging parents often spend a lot of time at medical facilities. That being said, my hat’s off to the professionals in the health care industry. It was quite gratifying to see a doctor stop by the funeral home and comforting for my wife to receive condolences from other doctors.

It was my first real experience with hospice workers and I was truly impressed with the professionalism and the heartfelt concern they displayed.

As children, our parents make our decisions. As they age, we become their decision makers. That’s why it’s so important to know what they really want when they’re no longer capable of deciding for themselves.

As a financial adviser, I can’t stress enough the importance of planning for inevitable events. No matter how difficult discussions may be they can lead to appropriate actions and help minimize potential family conflict.

To my dismay, many go entire lifetimes without drafting a will or trust. Even approaching the back nine of life, they fail to complete the Durable Power of Attorney forms for health care decisions.

Ignoring discussions doesn’t eliminate problems; it often makes them worse because there is no resolution. It’s unfair to put too much on one sibling’s shoulders without adequate instructions or documentation.

Even when planning for life goals such as retirement, it’s important to prepare for the unexpected. You never know what lies ahead. I’ve worked with numerous clients that never quite close the planning loop.

For example, many have accumulated a substantial nest egg. When asked if all their children are capable of handling a large lump sum distribution, most couples smile and point out that one of their children will quickly and inevitably blow their inheritance.

With proper planning, you can put restrictions for specified beneficiaries on IRA distributions. With trusts, you can also dictate periodic distributions as opposed to lump sum.

A frequent mistake I encounter is aging parents putting their financial assets into joint ownership with adult children. Even if they all get along, how do the assets get distributed fairly to others without gift tax or adverse income tax issues? In most instances, they cannot.

Without proper life planning, families can be torn apart over money issues while mom or dad is hospitalized. The time to do end-of-life planning is when you’re in good health and have your wits. All parents should dictate what measures they want taken by medical professionals.

My father’s wishes were clear and there was no need for the emergency medical teams to attempt revival. My mother-in-law’s wishes and instructions made it easier for my wife and her siblings to say enough is enough and bring her home one last time.

Proper financial planning isn’t just accumulating wealth for such life goals as a college education. It also includes end-of-life instructions and post-life distributions to loved ones and charities, thereby enabling happy memories to live on. Poor planning can often lead to family turmoil and conflict.

Monday, March 2, 2015

Bonds, Lame Bonds: You can lose money as a bondholder

I can say with some certainty that most households are in better financial shape now than they were during the recent financial crisis that crippled the entire economy. In the years ahead, when historians look back at that financial meltdown, I believe we’ll discover that we were a lot closer to a financial collapse than we realized.

Things do seem to be improving, although perhaps not at the level we’d like to see. But it does appear that we are heading further and further away from a meltdown.

Locally, we nearly lost our region’s heart and soul, the auto industry. We also saw our state’s major city go through a long and contentious bankruptcy proceeding. From an investor’s perspective, I’d like to address bondholders about a couple of lessons we learned from these events.

To review, bonds are essentially nothing more than IOU’s. They are debt instruments with a promise to pay back the loaned amount plus interest. Bonds are generally considered safer than stocks, but as history shows, it’s possible to lose money when investing in bonds, just as with stocks.

That’s somewhat contrary to what you learn in financial planning classes. Bondholders are supposed to be the first in line to get paid in the event that something goes wrong with the company.

Looking back, when the auto industry was near collapse and trying to settle with creditors, I was somewhat stunned that the bondholders who thought they were first to be paid were, in essence,

demoted and pushed back in line behind the auto unions.

Don’t get me wrong. I’m not bashing the unions; it was a good thing for them. But the whole procedure was contrary to what was taught in financial planning classes. Seeing that bondholders weren’t the first in line was quite a surprise.

For years, the city of Detroit borrowed money to meet many of its legal obligations. The investors who loaned the money to the city, the bondholders, loaned it because there were legal provisions that they thought guaranteed they would be paid. As it turned out, the bondholders did not get back what they thought they were guaranteed.

From the near collapse of the auto industry and the city of Detroit’s bankruptcy, I believe there are some serious lessons bondholders need to learn.

One obvious takeaway is that, in spite of the legal requirement, you may not get paid as promised, especially if the borrower is having financial issues. Apparently, the financial condition of the company or organization can outweigh your legal claims.

Another lesson you should learn as an investor is that, rightly or wrongly, you are considered Wall Street. If there is ever an issue that pits Wall Street against Main Street, you can be sure that the sentiment lies with Main Street.

In this day and age, not only do rules change faster than the weather, there are also exceptions to every rule. As an investor, in this case a bondholder, you are simply on the wrong side of public opinion.

Again, it’s great that the auto industry has rebounded and Detroit can put its bankruptcy behind it. Unfortunately, many investors were surprised that they lost money in what they thought were conservative, low-risk bond investments. Looking ahead, that’s something

Monday, February 23, 2015

Winter isn’t the only season before spring

We’re about to close the chapter on the shortest month of the year. Of course, there’s plenty more winter to endure, but I’d much rather look ahead to springtime activities. Especially baseball. The reports on the Tigers coming in from Florida are a daily reminder that winter will soon be a distant memory.

But there’s a season between winter and spring that’s my least favorite. Perhaps yours as well. Tax season. Every year I receive more and more inquiries from readers asking about various provisions of the tax code.

Most of the questions start out something like this: “I don’t have a complex situation, but I don’t understand why…” The questioner then goes into depth about why they’re confused.

Let me remind readers that most financial advisers, including me, can answer tax questions in a general manner. But when you get into specific detailed information about your tax return, I suggest you meet directly with your tax preparer, accountant or CPA.

True, there are some financial advisers that prepare tax returns and some CPAs that are financial advisers. Nonetheless, I suggest most would be better served by not combining the two professions.

Why? Because I believe using both a tax preparer and a financial adviser gives you the benefit of checks and balances. Even though the vast majority of advisers and preparers are people of integrity, if a financial adviser did something inappropriate it would be relatively easy for them to hide it if they also filed your tax return.

Over the years, during the financial planning process, I have also uncovered some tax preparation errors that required attention. That’s why I often encourage meetings with my client, their CPA and myself working as a team. This practice has led to many tremendous solutions to some complex tax planning and investment concerns.

This also works at the corporate level. Some years ago, the giant company, ENRON, collapsed. Their adviser and tax firm were one and the same. In hindsight, perhaps the checks and balances might have prevented or caught the fraud earlier.

In general, I believe most are better served by separating tax preparation and financial services. That being said, I’m deeply concerned that our tax system is far beyond complex. If it’s not already broken, it’s on life support.

For example, most people understand dividends. But there are various kinds of dividends that are taxed differently. I doubt that most people know the difference between an ordinary and a qualified dividend.

And how many really understand the difference between tax credits and tax deductions? There are many more examples of confusing items and terminology in the existing tax code. For example, healthcare is on the tax returns this year. I believe that’s going to add to the confusion.

Historically, there have been many attempts to overhaul our tax system that have never materialized. While there’s no solution that will please everyone, I believe reasonable steps can be taken to simplify the system. Persons who don’t have a complex situation should be able to get through their returns with minimal stress.

Personally, I enjoy various aspects of both seasons. It’s the season between winter and spring- tax season- that I disdain. I find it to be long, stressful and tedious. And I’m confident that many others would agree.

Monday, February 9, 2015

The federal government should not tax 529 programs

With the formation of the Michigan Education Trust in the late 1980s, Michigan was one of the first states to help encourage families to save for college. The Trust is a prepaid tuition program for Michigan families for Michigan universities.

In the early 1990s, Michigan once again was at the forefront of encouraging college educations when it formed the Michigan Education Savings Program, offering what are commonly called 529 College Savings Programs.

In 1994, the Sixth Circuit Court of Appeals upheld the tax- exempt status of these plans. The ruling opened the door for college savings not only for in-state colleges, but also for most universities throughout the nation.

Since then, virtually every other state has followed Michigan’s lead and created 529 College Savings Programs. There are minor differences from state to state, but basically these accounts are started for the benefit of a child.

Most states offer a menu of investment choices ranging from conservative to growth. The invested money compounds tax-deferred and if properly used for educational purposes, withdrawals are tax-free.

In some states, including Michigan, you might be eligible to receive some minor tax benefits on your state tax return. But for the most part, the plans are a disciplined and organized way for families to save for the extremely high cost of education.

One of the reasons I like them so much is that most programs allow small deposits. In an investment environment where many firms won’t even talk to investors unless they have at least $50,000, most 529 College Savings Programs will accept as little as $50.

From personal experience, I have seen birthday money from grandma and grandpa gifted to a child’s account. Think about it, $50 added for future college savings versus a gift card for more stuff that will be long forgotten by the time the child reaches college age.

Contributing to the college savings of a grandchild, niece, nephew or anyone with college aspirations is one of the best things you can do for their future.

At the risk of touching some political nerves, there has been an abundance of proposals geared to helping jump start middle class America. But while many of these “free programs” are for the benefit of the middle class, the fact is that those tax payers in the top tax brackets will be paying for them.

Now understand, I neither agree nor disagree with the proposed shift in taxes to the wealthier. The reason I bring this up is because 529 College Savings Programs are among the casualties of the proposed changes.

As it now stands, any dollars that are withdrawn from a 529 program come out tax free, provided they’re used for legitimate college expenses. One of the proposed changes would make withdrawals taxable.

How that helps middle America is beyond me. Over the years, I have seen young parents, grandparents and even family friends make deposits into college savings programs for a loved one.

Most of us understand the importance of education and are keenly aware of how incredibly expensive it is to get a young adult through college. Unfortunately, many of them will carry their college debt for years.

In my opinion, we should do everything we possibly can to encourage college savings. Making them taxable is not one of them.

NOTE: Prior to the printing of this column, in response to public outcry, the government withdrew any attempt to tax 529 savings.

Monday, January 26, 2015

The NFL and the IRS: Birds of a feather

As a lifelong Detroit Lions fan, I can still envision the game-winning touchdown catch Calvin Johnson made in Chicago in September of 2012. You can watch the replay over and over and 99 out of 100 people will say, “Wow, that was a fantastic catch.”

Unfortunately for the Detroit Lions, the one person that didn’t call it a catch was an NFL referee. Consequently, the Lions lost.

Fast-forward to this season with the Detroit Lions and Dallas in the playoffs. A critical penalty was called against Dallas and announced on the public address system. Seventeen seconds later it was suddenly not a penalty and play resumed as if the flag were never thrown.

Football experts claimed they had never seen anything like this before and Dallas won the game. One week later, a Dallas player made what appeared to be a phenomenal winning touchdown catch. Again, everybody but the referees saw a spectacular catch and the pass was ruled incomplete.

So why am I bringing this up in a personal finance column? Because fans are being turned off by the NFL. Not because it isn’t exciting, but rather, because the rules have become overly complex. What appears logical or common sense isn’t happening on the field of play.

In today’s overly complex world, I think people want the rules simple and straightforward and they want them applied fairly across the board.

Segue to the real world. People are just beginning to receive the documents they need to complete their 2014 tax returns. Some taxpayers will soon be opening up the tax programs on their computers. Others will be calling the IRS for clarification or looking up tax information online. And many will bring shoeboxes full of papers to their tax preparers.

The point is simple; the tax code isn’t. Nor is it logical. What makes sense to you and how you interpret the tax code isn’t the issue. Your interpretation of the tax code is irrelevant. Just as your take on a touchdown catch doesn’t matter. The only opinions that matter are those of the NFL referees and the IRS.

A recent example of the overly complex IRS tax code is the new health care law. The IRS published a twenty-one-page booklet that explains the new law. There is also a booklet with a dozen pages with instructions on how to claim one of the 19 exemptions.

If by chance you’re eligible for a health care subsidy, there’s a two-page Premium Tax Credit form with thirty-six simple steps to complete. Also new to the 1040 form this year is a box labeled “full year coverage.”

The NFL is exciting, but the rulebook is becoming so overly complex the television analysts now have rules experts to explain to the fans why the catch they saw really wasn’t a catch.

The IRS has pages and pages of rules and regulations that often defy logic. While growing up, many youngsters dream of playing in the NFL in front of all the fans. Nobody grows up with the goal of being in front of even one IRS agent.

I believe the time has come for both the NFL and IRS to re- examine their rules with the objective of simplifying and bringing logic and common sense back into the entire process.