Where's the "Relief"?

Why do they call it the “Taxpayer Relief Act of 2012” when it increases everybody’s income taxes and it was passed and signed into law in 2013?

In mimicking the Wendy’s ad of decades ago, “Where’s the beef?” our friends in Washington DC have decided to label a tax increase bill as relief.  OK, where’s the relief?  Surely, they jest.

This past week I sat in several hours of live presentations on federal income and estate taxes.  There was some good news on the federal estate tax side in that changes in the law were labeled “permanent” unlike previous changes that were subject to sunset provisions and therefore requiring frequent visits to attorneys by lots of taxpayers.

Well, guess what?  Looks like many of you will have to go back to your attorney and change your trusts again (or even create them) or at least make sure your old living trusts (may be called revocable) don’t need changing.   It’s all a matter of A, B and C, our speaker stated.   Sounded more to me like a continuation of the estate planning attorney full employment act.

Oh, by the way, the greatest laugh was from the audience when the speaker said the estate law changes were permanent, as permanent as any law that can be changed by a subsequent congress.  As a note, the President has already presented a budget that proposes to lower the limit of tax-free assets passing to other than a spouse.  Permanent, my foot.

Now to income taxes.  More Alternative Minimum Tax for the upper middle class is what I heard in the lecture I attended.  The congress took away more deductions and exemptions that you think you’re getting under the regular tax code and added a “permanent” fix to inflation creep that was frequently labeled a “patch” to protect middle class taxpayers. 

That creep began decades ago when 150 very rrhigh-income people didn’t pay any income tax.  Now AMT affect 5 million taxpayers.  Thanks congress.

So here’s my takeaway from meetings this week on income taxes.  The congress gives tax breaks in the regular tax code and takes them away in AMT.  You should see the chart I now have to look at to try and figure out how much clients might owe. 

Oh, by the way, we just ordered a thousand dollars worth of software to deal with “Relief”.  Bye, bye Turbo Tax.  What a relief.

Why are Soc. Sec. retirement benefits so confusing?

Why are social security retirement benefits so confusing? Don't say it's so financial advisors, financial journalists, financial educators and former Social Security Administration officials can write and sell books. You could say it's so I can write a blog. There, now we're even.

Now selling books, doing book signings, writing blogs, doing interviews, and giving speeches certainly sets you up as an "expert" in some circles.  Just check out social security retirement benefits on amazon.com to find out that it appears to be a growing book category probably because all of us baby boomers are staring retirement in the face.

The other day I was reading a question and answer on Fox Business News' website concerning ex-spouse benefits. I'm assuming if you're reading this blog you know about ex-spouse benefits.  I'd venture to say in my practice, more that half of eligible ex-spouses have no clue they might be entitled to this kind of benefit.
I was led to this story by Google Alerts "Social Security", which every couple of days sends me a summary of stories on social security.  It's a great help to someone like me who is busy giving advice and needs help to find all the stuff that's out there on a particular topic.
 
Anyway, I'm fusing about the answer which first focuses on the confusing rules that say before full retirement age you don't really get any choices when it comes to social security retirement benefits. I can't imagine most readers giving up after about the second paragraph of the response to the question. I would have answered the question differently.

Taking social security benefits whether on your own work record or your ex-spouse's (or even your current spouse's work record) is a bad decision if you plan to continue working at a modest income or higher job which is a fact stated in the question.  I would have started out answering the question by saying you stated you are continuing to work until age 66 your full retirement age.  Then forget about any kind of spousal benefits and figure out how your son can do things on his own. Then I would have laid out the rules and the readers could fall asleep before the got to the end of my response.

I know that sounds harsh and cruel to answer the question this way, but social security is an insurance program to partially support needs in retirement and is structured to accomplish just that. The writer of the question wasn't retiring, she was looking for money as a single parent to support what appears to be an able bodied adult child who is unemployed and is going to college.
 
My opinion is not going to change how social security is structured. I leave that up to the congress.  Ok, stop laughing, but that's how we got to this point in the first place.  What I can argue for, is more direct answers to these kinds of questions.  Secondly, all of us in this arena of educating and giving advice need to do a better job and drop the ignorance and misunderstanding factor much lower that it currently appears.

Why Don't Some Retiring Feds Get It?

Why don’t some federal workers nearing retirement in today’s interest rate environment, get it?  It’s all about the G Fund and bond allocation in a time period approaching increases (ok, I have no crystal ball) in interest rates after having been kept artificially low by the Federal Reserve in an effort to simulate the economy.   This is called interest rate risk.

Recently I was counseling a newly retired federal worker as he approached his 70^th birthday and faced his first required minimum distribution, having received an announcement from TSP officials of his need to make some decisions.

Versus an IRA, the TSP is much more limited in taking withdrawals in retirement.  You can take up to two partial withdrawals and you can take a fixed amount monthly or annually or just your Required Minimum Distribution (RMD) of about 3.6% of last year’s balance.  IRAs are a lot more flexible and give retirees a lot of options beyond the same percentage withdrawal requirement beginning at age 70.5.

But let’s stick with our retired federal worker for the moment.  Faced with blunt demands from TSP, most workers opt for a rollover to a traditional IRA.  Folks who sell products (mutual funds, stocks, bonds, annuities) like this.  It’s an opportunity to make some money, sometimes at the consumer’s expense (another story).

We frequently encourage our clients to take a partial withdrawal from the TSP and leave the remainder in the G Fund.  Why?  Because its magic.  How is it magic, you ask? Well, it doesn’t go down in value like normal bond funds when interest rates rise.  Why not?

The G Fund, for federal workers and the military, is special.  It’s based upon an index of various maturities of Treasuries and that is what depositors in the G Fund receive each year.  It is not subject to the supply/demand fluctuations like other securities in the rest of the TSP and in the real world of securities transactions.

Most retirees become more conservative in the allocation to stocks (equities) as they grow older for two reasons: 1) they don’t want so much volatility opportunities and 2) they want more assured income that bonds or cash instruments like CDs or immediate annuities offer to depositors or owners.

With that assured income stream comes the risk of early redemption.  The market re-prices bonds and bond funds just like appraisers re-price houses based on previous sales.  CDs suffer an interest penalty for early withdrawal. So if interest rates have risen since you purchased your bond or bond fund, then those higher paying bonds are more attractive to new purchasers.  Your bond or bond fund will have to sell at a discount (read: loss) to meet the same income stream for a potential purchaser.

The G Fund does not operate the way we just described.  It never goes down due to supply/demand.  It’s not publically traded.  It is a true fixed (annually) income stream.

So Federal workers, after you’ve determined your comfort level and/or need of exposure to equities, consider using your TSP as your “fixed income-holding bank” up to the percentage of fixed income you need in your family asset allocation.  If you’ve been a diligent TSP saver, you’ll have more than enough in your TSP to have your bond percentage in the G Fund and either retain the rest in equities, or for more flexibility send the equities to a rollover IRA.

Now this is just a general discussion and not investment advice.  For that you have to pay me. This concept, however, comes to you courtesy of the TSP.  Don’t forget after you bail out of the TSP as a retiree, you can’t get back in.

Jim Ludwick is the President and founder of MainStreet Financial Planning, Inc., an hourly fee-only provider of advice on many financial issues.  This is just an educational story and not individual advice, says my attorney.

Andy Made Me Do It

You have probably enjoyed listening to and watching Andy Rooney.  Me too. I’ve read a couple of his books.

Andy didn’t always understand what was going on, and neither did I.   His introductory sentence, “How come….” always got my attention. I sensed a fuss was coming.  Andy was a person I could identify with as I ended watching an hour of investigative reporting on 60 minutes.  Yes, I miss him.

In my daily life, mostly involving financial services, I come across a fair amount of products and actions that I just don’t understand.  Human behavior probably fits in this category too; in fact it either is producing some consequence or is a reaction to some event or product pitch.  You know what I mean.

I find myself frequently asking myself the question in my mind, “Why would they do that?”  It could be about someone’s purchase of a financial product or a news report about an SEC investigation.  I suspect others like me have a similar reaction because of your personal observation or reading the financial news.

So I’ve decided to change the direction of my blog, Advice Only Musings, in a fussing sort of direction, much in the style that Andy Rooney might have done if he was a financial advisor/observer.  You may now switch the dial if this does not appeal to you.  However, you do this at your own risk of missing some important and useful fussing.

I’m not going to fuss in this first edition other than announce the change of focus as I observe the comings and goings of products, promotions, styles, and behaviors as reported in the press or other medium including my personal observation.

If you too ponder these seemingly strange occurrences in our daily financial lives, I’d appreciate your input and feedback.   I appreciate the interaction with clients, colleagues, acquaintances, and general correspondents as we travel this road of making our dreams come true, or seeing them dashed on occasion.  Maybe a fuss or two will help you avoid the later.

Until our next engagement, here’s to greater understanding, as Andy would have it.

Jim 

Overcoming Obstacles to Achieving Financial Goals

We are in the goal business. Helping people define, refine and achieve their financial goals.

What does it take to achieve and surpass financial goals?

1.     It takes willpower.  Remember the “protestant work ethic” of delayed gratification?  Starting early and staying with a plan is a key component to attaining financial success.

2.     It takes resources.  Income in excess of expenses is the primary means of developing resources to put towards goals like retirement, housing, education and travel.

3.     It takes knowledge of knowing where you’re going and if you’re on track to get there.  That’s called feedback.  You need a mechanism to keep you informed of your progress and to alert you to altering your actions to stay on track or ahead of schedule.

Now what are the most frequent obstacles we see that prevent goal achievement?

1.     Procrastination.  Lower priorities take over disposable income and not enough resources are directed to higher priority, but longer-term goals.  Parties, video games, you name it. In our society it’s easy to become diverted by slick marketing, peer pressure, and poor habits.

2.     Lack of resources.  Decisions that affect expenses whether they are day-to-day living expense decisions or long term debt decisions like student loans lead to an inability to save adequately for long term financial goals.

3.     No goals in the first place.  We call this the “seat of the pants” plan.  Without a roadmap any highway will take you there.  The majority of baby boomers might fit into this category.  For most of them it’s too late and they are going to work many more years and retire at a much lower standard of living than they otherwise might of because they never planned ahead.

So what can we take away from this discussion?

1.     It’s never too late to plan although the longer you wait the harder it is.

2.     It takes discipline and a denial of other counterproductive opportunities.

3.     It takes a feedback mechanism, including coaching in some cases, to stay on track and know when to hold ‘em and when to fold them (thanks to Kenny Rogers).

As this year comes to an end.  We want you to be thinking of goals and what you will be doing next year to achieve them.  Good Luck.

Why I Fired My Bank

Seems like a catchy title doesn’t it?  Well let’s see if you think I did the right thing by the time you get to the end of my story.

My personal bank is USAA Federal Savings Bank. This story is not about them.  I love USAA’s one and only San Antonio, Texas branch which I have never visited, but they always seem to be the top rated bank in the United States.  I know why.  Whenever I have a question, need, or problem, I just pick up the phone or email them and ….BINGO, I get a resolution.

Several years ago USAA started letting us drop our deposits off at the local UPS store.  Then they let us scan checks at home and deposit them over the internet.  Then came their iPhone app and I was in heaven.  Wish I could do this with my business account.

Now I run a small business and USAA doesn’t have business accounts.  I asked the owner of the local UPS store where I should open my new business account ten years ago.  He pointed me to the local bank just down the street.  Nice manager, friendly staff and good hours especially for drive in deposits.

Several years later our local bank got bought out by the regional bank from New York State.  Not much changed except the manager got promoted and the teller staff retired or moved on.  Things seemed to be working ok but going to the bank every day to make deposits became a chore for my assistant or my wife, but it was usually either done on the way home or during errand time at the beginning or ending of the work day.

A couple of years ago the big bank (P**) bought out the regional bank. You know where I’m going, don’t you?  More staff turnover. Everyone was a part timer or so it seemed. They all wished me a nice day, but when anything went wrong I had to find it, no one ever called to tell me there might be a problem.

Now banks make a lot of money on the deposit float.  I should know, I’ve worked for two of them. Our business has a nice five figure float where we don’t make a dime, but P** bank does.

Last year I noticed that the big bank was letting people make deposits with their iPhone but they had a limit.  We have five offices around the country and really enjoy making deposits on the iPhone since we travel for business. I found out the monthly limit was very low for our kind of business and for our average deposit. So I went in the see the branch manager - the new branch manager. I observed they had cut back the lobby hours and the drive in hours.  No early or late drive in business at all.   (Our local grocery story bank branch is open seven days a week!)

I explained to the new manager my needs. He listened, but it was obvious he had no power to amend the low limits even though our float was ten to fifteen times larger than any conceivable check we might deposit and then bounce.  We asked him to elevate the issue and have P** make an exception.  A week later the “business banker” called.  He listened to my story.   He said couldn’t change anything, but would call my first branch manager (from 10 years ago) who was now in some elevated position in the bank and address the issue with her.

A week or so later my voice mail message told me sorry, no change in their limits. Guess how I felt? Guess what I did?  Right, I went to Google “business banks that let their customers bank remotely and use their smartphones to make deposits”.

BINGO. EverBank is now our bank. The monthly limit for smartphone deposits is 2.5 times our normal amount of deposits. FedEx delivers the paperwork the next day.  New checks come in a week along with the debit card.  They call to see how we’re doing.  A month later they call again to check on us.

We are winding down our relationship (sic?) with P**.  Somehow the auto payment for the Amex bill didn’t get changed in time so we are overdrawn.  Does the big bank call, email, text us to let us know they’re charging us $25 for the overdraft and $7 a day for a beginning $141 negative balance? You can guess the answer. 

Today I paid the big bank $231 in cash and they said they would close the account in a few days.  Can’t even close an account on the same day!!  Well, goodbye big bank.  We admit we should have done this sooner, but it’s a pain to switch banks.

Sure do miss all the old employees from the local bank. In ten years, they were the only ones who seemed to really care about our business.

Conclusion: Every three years or so look around and comparison shop your vendors. There are companies out there that really want to listen to your needs and will do what it takes to exceed your expectations.

It's Never Too Late: But Get Going Now!

We are in the goal business. Helping people define, refine and achieve their financial goals.

What does it take to achieve and surpass financial goals?

1.     It takes willpower.  Remember the “protestant work ethic” of delayed gratification?  Starting early and staying with a plan is a key component to attaining financial success.

2.     It takes resources.  Income in excess of expenses is the primary means of developing resources to put towards goals like retirement, housing, education and travel.

3.     It takes knowledge of knowing where you’re going and if you’re on track to get there.  That’s called feedback.  You need a mechanism to keep you informed of your progress and to alert you to altering your actions to stay on track or ahead of schedule.

Now what are the most frequent obstacles we see that prevent goal achievement?

1.     Procrastination.  Lower priorities take over disposable income and not enough resources are directed to higher priority, but longer-term goals.  Parties, video games, you name it. In our society it’s easy to become diverted by slick marketing, peer pressure, and poor habits.

2.     Lack of resources.  Decisions that affect expenses whether they are day-to-day living expense decisions or long term debt decisions like student loans lead to an inability to save adequately for long term financial goals.

3.     No goals in the first place.  We call this the “seat of the pants” plan.  Without a roadmap any highway will take you there.  The majority of baby boomers might fit into this category.  For most of them it’s too late and they are going to work many more years and retire at a much lower standard of living than they otherwise might of because they never planned ahead.

So what can we take away from this discussion?

1.     It’s never too late to plan although the longer you wait the harder it is.

2.     It takes discipline and a denial of other counterproductive opportunities.

3.     It takes a feedback mechanism, including coaching in some cases, to stay on track and know when to hold ‘em and when to fold them (thanks to Kenny Rogers).

As this year comes to an end.  We want you to be thinking of goals and what you will be doing next year to achieve them.  Good Luck.