You see, I’m doing something a little different here this week. As you know, I love to write about current events, personal finance issues and information that matters to YOU with my Weekly Note (we try to keep the tax information concise and as pertinent as possible — knowing that most of our clients prefer we handle that all for them), as we did, for example, last week with the information about the looming higher ed bubble.

Well, with two months (less!) remaining in 2011, there may be a few moves we can make that can help your tax hit before we’re forced into “reaction mode” — which is the only mode out of which after-the-fact tax work can be done. So, if at all possible, I’d like to change that paradigm for you by having you answer a few short questions…

So, without further ado — some questions for you:

1) Have you had a significant change in your wage income this year?

2) Have you taken capital gains or losses this year? Are you planning to?

3) Did you start or sell a business this year?
BONUS QUESTION: Do you know anyone who did, that would like input on their tax situation?

4) Did you purchase real estate?

5) Did you make your full contributions to retirement accounts?

6) Have you considered a Roth IRA?

7) Did you withdraw from retirement accounts, and for what purpose?

**8) Have you sent your family and friends our way — and, if not, is there something which we can help you with to make this easier?

9) Are there any other issues you think we should know about?

Now — the answers to these questions form the “tip of the iceberg”, and they will help us to know which direction to take as we work with you over the next two months to prepare for year-end. With your permission, we’ll contact you back, as appropriate, and set up a time to discuss them further with you, whether by phone or other method.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

                          

But before I get there and speaking of burgers, how WAS your weekend? I sure hope it was restful. We business owners don’t enjoy the government-mandated holidays, but at the same time, sometimes the best policy really is: “If you can’t beat ‘em, join ‘em”! we took Monday off too

There’s a couple beautiful things about Memorial Day, in my humble opinion:

1) Summer is here.
The pools open, the shorts become a permanent staple and even the flip flops begin to make an appearance. For us, around here, we spend a lot of time in our summers sitting down with families to conduct careful analyses of their tax situation — BEFORE the winter strikes, and our moves become much more limited. This is called “tax planning,” and it’s an essential move, if you want to get the maximum tax savings possible.

2) Memorial Day reminds us that our current struggles have been overcome.
With all of the chaos in our current events (tornadoes, Mideast turmoil, government debt, etc.), it’s important to remember that even just one or two generations ago, our nation faced much worse–and prevailed. The “sacrifices” we may be forced to make in the midst of a bad economy are nothing compared to the rationing and privation of the WWII generation. And the young men and women who have served overseas in the past decade or so could also give us a good lesson in what REAL need looks like.

It’s right that we honor their triumph, and for many thousands of families — their deep sacrifice.

–

Too many clients (almost all of them) wait until the winter before they look at their tax obligations. Even worse, they wait until that season before they speak with their professional in any kind of proactive way.

That’s a problem, and it could be costing you some serious savings.

Here’s an example:

Let’s say that you were considering taking money out of a pension (401k) to finance the down payment on a house. It’s quite a common maneuver. But let’s say next that you do this withOUT discussing it ahead of time with a professional. That could be a four (or five) figure mistake.

If you were to come into our offices before such a move, I would ask you a few easy, but very important questions, and then (depending on the answer) likely advise you to first roll the money ($10,000) into a Traditional IRA. You could then withdraw the money at a savings of $1,000.00. This is because money used for a first home, up to $10,000, is penalty-free when taken from an IRA, but NOT a 401K.

Would you be pleased by that move? I’d guess “yes”, especially if you knew about other clients I know of who failed to plan. This couple just learned of the $41,000.00 penalty they had to pay for doing the same thing, but from their 401k.

Ouch.

There is no guarantee that you will save by speaking to us in advance. But this I CAN guarantee: If you don’t speak with us, we won’t be able to save you a dime.

Financial Planner Richmond
Financial Advisor Richmond
Financial Planners Virginia

                          

Effective money management is based on the idea that very small changes can yield enormous gains in your family’s finances. This process, both easy and simple, is worth millions. Unfortunately, only a tiny percentage of American families take advantage of the tools available to implement this automated technique.

So here’s how you pull this off: Have all income flow into a joint taxable investment account. Make saving and investing your default. Putting all of your money in this account helps ensure that you move only the money intended for some other purpose into a different account.

For working families, this means an automatic deposit of paychecks into their joint account. Banks will try to entice you into setting up automatic payroll deposit into their checking account. They will offer you additional interest if you do so. Resist. The additional interest is not worth the failure to not only save but to save and invest. Your taxable investment account should be the default.

For retired families, this means an automatic deposit of Social Security checks. It also means their required minimum distributions (RMDs) from their individual retirement accounts (IRAs) should be deposited first into this account.

From this account you can then withdraw what you need for daily expenses. Do this by setting up a regular transfer of funds from your joint investment account to your checking account. Make sure the transfer matches the amount you have allocated in your budget, ideally 65% or less of what you need to support your lifestyle. The other 35% should remain in your joint taxable account, much of it to be invested.

Part of what remains is the 10% you have designated for “unknown unknowns”. In the ideal world, this money will not be needed, but few families can anticipate every possible expense. Each stage of life presents new challenges. Having the financial margin to absorb some of life’s shocks is simple wisdom and offers financial peace of mind.

Because the time horizon for this emergency money is unknown, invest it in a balanced portfolio. If unused, your emergency money will double in 7 to 10 years and provide a greater safety net for your family. If you have to dip into this fund, keep track of the amount. If it approaches the full 10% every year, you are using your emergency money to extend your budget, not simply for unanticipated expenses.

The less you use this account, the more quickly you will reach financial independence. These funds are mixed with your other taxable investment savings and continue to grow your net worth. If you are meeting all of your expenses without any major surprises, these funds can be used to purchase a home, start a business or for additional charitable giving.

Another portion of what remains in your taxable investment account will be the 5% you are specifically designating as taxable savings. Because this 5% gets mixed in with charitable giving that is being invested and your unknown expenses, the entire portfolio should be balanced. If an emergency arises, any portion of the portfolio could be sold to furnish the needed funds. Similarly, when you want to gift appreciated stock, any portion of the portfolio could be gifted.

The last portion might be the 10% for funding your retirement accounts each year. Many people put this money directly into a retirement account as part of the payroll process through a pretax deduction. If that is the situation, you don’t need to flow anything through your taxable investment account. But you may want or need to fund your retirement outside of a payroll deduction. One example is funding your Roth IRA each year. In this case you may want to collect the money in your taxable investment account and then transfer it to a Roth account.

If you want to fund a Roth IRA account for the maximum $5,000 (in TY2011), you could transfer the entire amount once during the year or set up a monthly transfer of $416.66. The money from your paycheck would provide the cash, either letting it build up throughout the year or supply the funds for each month’s transfer.

Busy people forget to make the necessary transfers each year. That’s why a monthly transfer is preferable. Saving and investing should be automated so it occurs regularly without any additional effort. Whatever is in your checking account you are likely to spend. Whatever is in your investments you are less likely to spend.

Automating the process of saving and investing is like damming a river to form a reservoir. The alternative is the manual process of hauling buckets of water from your stream to a water tower. You will never grow rich by hauling buckets, and it’s much harder work.

No matter what income you have, you probably already have enough to grow rich! Saving and investing just $10 a day builds a million dollars over your working career at average market returns. You build wealth by what you save and invest, not by what you spend. Automating the process of saving and investing grows your wealth while you sleep.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

                          

No more extended family (which might be a relief?), no more parties, no more presents. Just …daily life. And, in my opinion, this week is actually crucial to how the rest of your year goes. Why?

Because intentions and actions matter. No, I don’t subscribe to a mystical “universal” law of attraction–but I DO believe that how we act out what we intend sets a sub-conscious belief system in place which can have an impact for months at a time.

So … are you making resolutions? In some ways, this whole ritual of “resolution-making” can become very cliche, but look–we all need little “nudges” to help us actually make changes in our lives. I see it as my role in your life to not only provide authoritative and actionable advice for your financial situation, but also to play the role as “coach” for your particular situation.

This is why our clients and their friends seek us out for *more* than simple financial advice, but a whole host of other services as well–from planning, to business services, to simple encouragement. I get to be someone in your life who says: “You can do this. You’re not alone.”

It’s my great hope that our relationship will continue to grow into 2011, and beyond. And not just for “business purposes”. We love our clients … you’re a family to us! I should say I mean that in the *positive* sense…we all might be a bit “familied-out” right about now!

So, with my coach hat firmly in place, here are some thoughts for effectively creating and pursuing your personal financial goals, as we move into 2011…

Thomas Marshall’s
“Real World” Personal Strategy
New Year, New Financial Goals

Not to make you feel guilty, but for every seven years you delay saving and investing for the future, you cut in half the income you would enjoy at the end of your life. So, let’s make 2011 the year we get on the right financial course, shall we?

Here are some suggestions to get started…

1) Set Realistic Goals First, ask the right questions and stay the course until you’ve found the answers. Goals that are shared are ten times more likely to be acted on. Don’t wait until you have everything set up to seek out accountability.

2) Make those goals concrete and then document them. Set your savings goals as a specific annual percentage of your adjusted gross income (AGI). It’s a great idea to save at least 10% of your AGI in tax-deferred retirement accounts and another 5% toward retirement in taxable investments. If you are behind on your savings, you may want to save even more in order to catch up.

Third, craft the best strategy to implement your goals, including prioritizing the appropriate retirement vehicles. Start by investing just enough to get the entire match from a company’s 401(k) plan (if you have one) and then fund your Roth IRA accounts next. After these two, make certain you have enough non-retirement savings.

Fourth–and this is a BIG deal– automate your plan. Automating putting money in an employer-defined contribution plan is easy. Automating a taxable savings plan is just as painless. Most banks or brokers offer an automatic money link between an investment account and a checking account. They should also offer a monthly automatic transfer between the two accounts.

But I will say one last thing: the most critical component of wealth management in the new year will be tax minimization. With the potential for tax rates to fluctuate even more than the stock market in 2011, it’s never been more important to monitor what “Uncle Sam” is seeking to take from your wallet!

Financial Advisor Richmond
Financial Planner Richmond

                          

However, there is a very simple system that the average investor can use with no-load mutual funds or ETFs (exchange traded funds) that significantly outperforms buy-and-hold a risk-adjusted basis. Thank Professor Jeremy Siegel and his book, Stocks for the Long Run, for the ability to keep your sanity in a very volatile economy.

In his book, Professor Siegel tested a system from 1886 to 2006 that bought the Dow Jones Industrial Average (DJIA) when it closed at least 1% above the 200-day moving average. He sold the DJIA when it closed at least 1% below the 200-day moving average. When not invested, he was safely in Treasury Bills.

The Result: He concludes that market timing improves the absolute and risk-adjusted returns over buying and holding the DJIA. When transaction costs are included (taxes, bid-ask spreads, and commissions), the risk-adjusted returns are still higher when employing market timing. Our research shows it is effective with all asset classes and funds in reducing risk

When applied to the Nasdaq Composite Index since 1972, the market timing system thoroughly outperforms buy-and hold, both on an absolute and risk-adjusted basis. Siegel finds that the timing model outperforms buy and hold by over 4% per year from 1972-2006 even when accounting for all costs, and with 25% less volatility. Unfortunately, Siegel does not report drawdown figures, which would have further demonstrated the superiority of the timing model.

So if you’re near retirement and unsure if you should be in the market (or asset class), this simple model can be used by nearly everyone (including in your 401k) to reduce risk. Remember, it’s not how much you make, but how much you keep. Yahoo! Finance has free tools that allows charting of funds and asset classes. Best of all you don’t need a stockbroker for this. Just slap a 200-day moving average on that investment.

                          

A mutual fund’s fees and expenses may be more important than an investor might realize. Ads, rankings and ratings will often emphasize how well a fund has performed in the past. But according to the Securities and Exchange Commission (SEC), studies show that the future often is different. Fees and expenses can be a reliable predictor of mutual fund performance.

When considering a mutual fund, one of the most important numbers is the expense ratio, which tells you how much the fund costs. The ratio shows how much of the fund’s assets are paid to the portfolio manager and for other operating expenses. Typically, a fund pays an average of 1.5 percent of assets annually.

Three things typically figure into this ratio. The investment advisory fee pays the managers of the fund, which accounts for .50 to 1 percent. Then, administrative costs cover services such as record keeping, mailing and maintaining a customer service line, which can range from .20 to .40 percent. And often a fund will charge a 12b-1 distribution fee, which covers marketing, advertising and distribution services. This ranges from .25 percent to 1 percent of assets.

The upper range of these fees shows how high an expense ratio can be. And even though the fee seems to be just a few percentage points, it is charged in down years, when it can represent a significant slice of the return. Also, over time, the fee can cut the ultimate return by nearly 50 percent, according to one analysis. With an initial $10,000 invested after 30 years of 10 percent returns (a bit optimistic, perhaps), the fund has made $174,494, but with a 2.5 percent expense ratio, it has lost $86,944, according to an analysis by Moolanomy.com.

But even that isn’t the bottom line. There are still transaction fees incurred by the buying and selling of assets in the fund that go unreported, and that can double or triple the cost, according to Richard Kopcke of the Center for Retirement Research at Boston College.

Of the 100 largest stock funds held in defined contribution plans as of December 2007, trading costs averaged from 0.11 percent of assets annually in the quintile with the lowest costs to 1.99 percent of assets in the quintile with the highest costs, with a median of 0.66 percent, Kopcke found. But it is difficult for average investors to determine this percentage, he said.

The SEC has not been able to develop ways to report this percentage in the same way an expense ratio is reported, partly because fund managers say the number is too difficult to determine. One way to get an indication of the percentage is the fund’s turnover. The percentage of turnover shows at what rate stocks in the fund have been replaced. A high turnover rate would mean more fees.

The SEC last year required fund managers to disclose one year of turnover at the front of a prospectus in addition to the already required five years of turnover disclosed in the financial highlights section, according to a March 1 Wall Street Journal article. Turnover of more than 100 percent can indicate trading costs may be high, the Journal reported.