Monday, November 25, 2013

For now, bitcoins are a currency to be cautious of

I may be dating myself, but when I was growing up, windows were things that kept the wind out of the house or let it in, depending on the season. An apple was something that grew on trees and was used for pies and snacks.

Today, technology has brought new meanings to both words. The new meanings of these words are ever-present reminders of how technology has changed our lives.

Back in the day, if a transaction wasn’t handled using cash, it was more than likely paid for by check. Many readers can probably recall going into a retail establishment and seeing a bounced check taped on the wall. I guess the intent was to let everyone know that Mr. or Mrs. Whomever wrote bad checks and that they should be embarrassed and not be deemed as trustworthy.

Then came credit cards and debit cards, which most people carry in their wallets today. Whether you use cash, checks or credit/debit cards, there is a common thread. They are all linked to a currency.

Obviously, the U.S. dollar is the American unit of currency. Our neighbors to the north have the Canadian dollar, featuring my favorite, the Loonie, a gold-colored coin introduced in 1987. The British have the pound, the Japanese, the yen, and the Germans, the mark. All these various currencies throughout the world have been associated with a specific nation. But, technology is trying to change the world again.

Recently on the business channel, I saw the Winklevoss twins, who made their name via their well-publicized battle with Mark Zuckerberg. The issue in dispute was who really started Facebook. Today, the Winklevoss brothers are big investors in digital currency. Yes, in today’s high-tech world, technology has brought us a new, digital currency straight out of cyberspace. A currency, by the way, that is not affiliated with any nation. The term for this new currency is bitcoin.

As a non-techie, I’m still trying to wrap my head around the concept and practicality of bitcoin. It’s far more complex than trying to convert one nation’s currency to another’s, especially since it isn’t backed by the full faith and credit of any country. Some people, like the Winklevoss twins, believe there is a lot of money to be made in this relatively new cyberspace currency. I bring this up because they may be right. Bitcoin may have the potential to make someone some money. It’s certainly possible that, as more and more people hear the term bitcoin, they may begin to use bitcoins in their transactions.

But, being somewhat of a skeptic, I believe there’s a great potential for a lot to go wrong. I say this because it’s difficult to regulate cyberspace. What’s more, bitcoin values fluctuate and I have yet been able to find anybody that can answer all my questions.

Basically, I just want to make my readers aware of this new cyber currency. But I also want to express my concerns because it’s somewhat complex, it appears unregulated and as a financial adviser, I see quite a few red flags. Years from now, bitcoin may be a household word. But right now, as I see it, it’s a word for caution. This may be one instance where technology has gotten ahead of itself.

Monday, November 18, 2013

Financial goals are a ‘marathon rather than a sprint'

A good friend of mine recently participated in the New York marathon. During our discussion, it occurred to me that financial planning is much like a marathon race. Fulfilling financial goals tends to be a marathon rather than a sprint.

As a financial advisor, I’m much like a trainer helping a runner prepare for a marathon. The goal may be funding a college education for a child or grandchild, or building a sufficient retirement nest egg. When you’re a seasoned veteran like me, it’s personally rewarding to see a couple financially comfortable in retirement. Especially when they thank me because they couldn’t have done it without my guidance.

I’m not patting myself on the back, I just feel fortunate to have a career in something I’m passionate about.  And the reality is that not everyone is going to achieve their goals, often because something goes horribly wrong during the marathon.

That’s why every plan should have contingencies to be prepared for the unexpected curve balls that come in life.

You shouldn’t go on a boat without life jackets or drive a car without seat belts, but too many people set and work toward their financial goals without the proper safety precautions. Proper planning allows you to adjust your stated goals and objectives when obstacles arise.

Death, disability and the need for long-term care are examples.  Nobody likes to talk about these issues, but they need to be discussed and incorporated into the planning process.

Many people believe that life insurance is only for those with young children. Well, parents with young children do need life insurance. But college educations shouldn’t be shelved because mom or dad died unexpectedly. I could make a mathematical argument that anyone with a child should have a minimum of $500,000 of life insurance protection. But life insurance should not be just for those with young children.

It may surprise some, but people over 50 purchase a significant amount of life insurance. One overlooked benefit is instant liquidity, which can prevent a family from an untimely sale of an asset because of death. like being forced to sell real estate at below market values.

Today there are even life policies that can offer double duty. By that I mean using the death benefit as a living benefit. For instance, if you needed long-term care, you could use the life policy death benefit value to help fund the astronomical cost.  You don’t have to meet St. Peter to collect on your life insurance.

While you’re employed, disability income protection is also important. Your largest investment is likely yourself and your education. If you couldn’t work, how would the bills be paid?  For many, lack of disability coverage is a gaping hole in their financial planning.

Life is a marathon in which we’d all love to cross the finish line in relatively good health. But life doesn’t always work that way. Some won’t cross the finish line and others will need assistance. But every one of us needs to incorporate the unthinkable into their financial planning.

It is easy to overlook, neglect and rationalize why life insurance isn’t needed.  But nobody can predict what roadblocks they’re going to encounter along the marathon of life. If you want to be prepared, you have to plan for them.

Tuesday, November 12, 2013

November 10, 2013

Puerto Rico a cause for concern for Michigan investors


 Over the years, I can’t tell you how many times I’ve heard people claim that they don’t pay any income tax. When I question them and ask them for a look at their pay stub, it shows that Uncle Sam is indeed getting a substantial cut.

What these individuals don’t seem to understand is that they have enough taxes withheld from their paycheck, so that they’re not required to pay any additional tax when they file. They may even receive a tax refund. But, in reality, they’ve already sent plenty of money to Washington with every paycheck.

Over the past few months I’ve talked to a lot of people who are angry about taxes. The anger isn’t so much about the amount they pay, but rather about the inexcusable misuse of tax dollars in the form of spending snafus, cost overruns and just plain wasteful spending.

It seems that those in Washington are simply poor stewards of our tax dollars. They continue to spend recklessly and then at election time claim we need more tax dollars for teachers, policemen and infrastructure. The question that needs to be asked is how many teachers and policemen could be hired if they stayed within their budgets.

I speak of taxes today because many people turn to municipal bonds to help ease their tax burden. For most people, interest on municipal bonds is free from federal income taxes. If you’re a Michigan resident and own a Michigan municipal bond, the interest is free of both federal tax and Michigan state tax. However, for certain investors, interest may be subject to local taxes or federal alternative minimum tax.

That tax-free status makes municipal bonds very popular. But, as with any investment, they carry risk. For example, it’s likely that many Detroit bondholders will suffer losses as a result of the default.  And, of course, the market value can change on a daily basis.

So if you’re a Michigan resident who owns Michigan tax-free bonds within a mutual fund or unit investment trust, there’s something you need to do. Take a very close look at your holdings.
We’re all aware of Michigan’s past economic issues and our current rebound. But the real potential to hurt many investors in Michigan bond portfolios is not even a Michigan problem. The problem is Puerto Rico. Yes, Puerto Rico, a territory of the United States.

Puerto Rico is having significant financial problems. Many Puerto Rican bonds are at or near junk status according to various rating agencies. Most people are not aware that federal and state tax-free Puerto Rican bonds have a way of finding their way into various state portfolios.

For example, I recently came across a State of Michigan tax-free bond portfolio that had more than 20 percent of its portfolio in Puerto Rican bonds. In other words, the label of the portfolio doesn’t fully describe the contents.  If the Puerto Rican bonds default, there will be a lot of surprised Michiganders.

Portfolio managers of Michigan bond portfolios may have purchased Puerto Rican bonds to help boost returns. Unfortunately, the financial problems brewing in Puerto Rico are buried in the news. That tiny U.S. territory is on the brink of causing a lot of havoc for investors throughout our nation. If you own a Michigan tax-free portfolio, please check to make sure all of its holdings are indeed within our great state.

Fax your questions to Ken Morris at 248-952-1848 or email to Ken is a registered representative of INVEST Financial, member FINRA, SIPC and is vice president of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. INVEST and Society for Lifetime Planning are independent companies.

Friday, November 1, 2013

MORRIS: Public sector employees have much to think about

Well, the Tigers are finished until spring training, the Lions have a bye week, and Uncle Sam is staying open for a few more weeks. So now is a good time to review your finances.
I particularly want to address a group of people that are often overlooked by the financial industry. I’m talking about people who are employed by municipalities and school districts.
Impacted by years of a soft Michigan economy and changes in state and city hall budgets, many of these professionals need to make the same decision many in the business world have had to make. Should you retire early or remain on the job?
There are a lot more moving parts to analyze for public sector employees versus the private sector. For example, most automotive workers had a 401(k) plan and a pension. For most, the choice was simply whether to maintain a monthly pension check or select a lump sum distribution.
Certainly those were huge, life changing decisions that had to be made, along with some critical investment decisions. But with public employees there are even more moving parts. It’s going to require a sharp pencil to make some tough decisions.
For example, many educators, firefighters and police officers can increase their pension amount by purchasing additional years of service. The cost depends on such factors as years of service and income, and the financial return can be substantial.
Social Security can also be a bit more complicated for police officers and firefighters. Many had the option of not participating in the Social Security program during their careers and participating in an alternative program instead. Or they could choose to retire early then re-enter the workforce, making it possible to become Social Security eligible.
Many of these professional also have what is called a 457 Deferred Compensation Plan. They’re somewhat similar to corporate America’s 401(k) program, but with some significant differences, including the ability to receive income prior to age 59 1/2 without a ten percent tax penalty. The 457 funds can also be rolled into an IRA, but the 10 percent penalty gets back into the equation.
Another option unique to police officers and firefighters is the Deferred Retirement Option Program, aka DROP. Simply stated, DROP allows participants to elect their pension and continue to work.
While they work, what would have been pension contributions go into the DROP fund. The fund can accumulate significant dollars, which are taxed at retirement when the retiree is likely to be in a lower tax bracket. Or they can be rolled over in an IRA.
The public sector employs a large segment of the population. For educators it’s somewhat simple in that they can purchase additional years of service. For firefighters and police officers there’s even more to the equation.
Some decisions can be made simply by mathematics, while others are a question of lifestyle. By that I mean the choice to re-enter the workforce or just retire and forgoing the opportunity for additional income. Physical and mental health are obviously a part of that equation.
I encourage police officers, firefighters and educators to seek professional advice, especially with all of these moving retirement pieces and formulas. You risked your life every day. There’s no need to put undue risk on your retirement nest egg.

Fax your questions to Ken Morris at 248-952-1848 or email to Ken is a registered representative of INVEST Financial, member FINRA, SIPC and is vice president of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. INVEST and Society for Lifetime Planning are independent companies.