Savings and Tax Time

In a month, personal income taxes are due. You still have time to fund a Regular IRA or a Roth IRA for calendar year 2015.

IRAs are a good way to save for retirement and everyone who can afford to fund an IRA, should consider doing it. There are different eligibility rules for each and which one you should use depends on many factors.

Among the key factors for picking between an IRA and a Roth are your current and future tax rates, when you’ll need the money and where it’s going.

If your tax rate is low now and may be higher in retirement, you might be more inclined to fund a Roth. If your tax rates are the reverse — high now, and low later — you’d be more likely to do an IRA.

Except for higher income people, contributions to an IRA are deductible but taxable on withdrawal. Roth contributions get no deduction but aren’t taxable if taken out after the account has been open for five years and the holder is over age 59 1/2.

If some of your money might go to a charity, a Regular IRA would be good since you won’t owe tax on the distribution (up to $100,000) if you are older than 70 1/2.

If you are younger than 50, you can contribute $5,500 to an IRA or Roth as can your spouse. Those older than 50 can contribute an extra $1,000 annually.

The younger you are, the more time your investments have to work for you. Regular contributions to IRAs or Roths can be a key part of your retirement savings.

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The Sun Doesn’t Always Shine

We now have a solar roof and it takes care of our electrical needs on sunny days but the sun doesn’t always shine. At night, our panels rest. During storms and very cloudy days, the panels aren’t at peak efficiency.

Yet when it comes to personal finances, I generally come across people whose planning assumes that the sun will always shine.

Many of these people are do it yourselfers where one partner in a couple handles the finances and does it well. But what happens when that person gets too busy or injured or sick or passes away?

What about when old age and diminished mental capacity don’t permit them to perform in the way they’d like?

What happens to a couple who are living together for many years when the storms finally roll in?

Not long ago, someone asked me what happens if the bull market ends? Will the stock market go down?

I told him the question is wrong. We know the market always goes up and down.

The long-term trend for a century has been up but we know the market will go down and we need to plan for that.

We enjoy the sunshine and warm weather, the lazy days of summer. But we don’t throw out our umbrellas and raincoats and keep our flashlights handy.

We know that the sun doesn’t always shine and we always need to keep in mind the possibility of stormy days ahead and prepare accordingly.

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Contingency Plans

The Sun Doesn’t Always Shine
We now have a solar roof and it takes care of our electrical needs on sunny days but the sun doesn’t always shine. At night, our panels rest. During storms and very cloudy days, the panels aren’t at peak efficiency.

Yet when it comes to personal finances, I generally come across people whose planning assumes that the sun will always shine.

Many of these people are do it your selfers where one partner in a couple handles the finances and does it well. But what happens when that person gets too busy or injured or sick or passes away.

What about when old age and diminished mental capacity don’t permit them to perform in the way they’d like. What happens to a couple who are living together for many years when the storms finally roll in?

Not long ago, someone asked me what happens if the bull market ends? Will the stock market go down?

I told him the question is wrong. We know the market always goes up and down. The long-term trend for a century has been up but we know the market will go down and we need to plan for that.

We enjoy the sunshine and warm weather, the lazy days of summer. But we don’t throw out our umbrellas and raincoats and keep our flashlights handy. We know that the sun doesn’t always shine and we always need to keep in mind the possibility of stormy days ahead and prepare accordingly.

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Robert’s Rule

An Important Move

My friend Bob has an important rule that comes out of the school of hard knocks. He says that if you can do a transaction that is life-changing, you must do it. It’s not optional; it’s mandatory.

Most of us never have a chance to grasp the brass ring. How tragic is it for someone to have the opportunity and let it slip away.

With the economy in lousy shape for the last five years, most of us didn’t have to worry about what happens if fortune smiles on us. But a select few do and even for them, success is not assured.

Recently, Terrell Owens, the great football star, filed for bankruptcy despite earning $80,000,000 in his professional football career. Ok, you say, pro athletes have difficulty adapting to sudden riches. But this happens in all walks of life.

Donald Trump was saved from bankruptcy in the early 1990s because he owed the banks so much that it would have cost them more to put him out of business. Owe a little and you are a borrower. Owe a lot and you are a partner.

If you have made a fortune, protect those paper profits. You owe it to yourself to get a good advisor and work out a good plan.

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Aging and Financial Skills

 

Diminished Ability to Handle Personal Finances

As people age, they gradually lose their ability to handle their own finances. Often, this process is so gradual that the person himself and those around him are unaware of what’s happening until something serious happens. The elderly control the most assets and are the most susceptible to financial scams and poor choices. As people get older, their financial affairs often get more complex. They must deal with complex choices on healthcare, long-term care, taxes, life insurance, pensions, Social Security and estate planning. Often just handling the routine chores of daily financial affairs become beyond reach. Recently The New York Times had an article discussing the research behind the loss of cognitive skills needed for personal finance. Steps to mitigate these inevitable problems include striving to simplify your financial affairs — consolidating your holdings in a small number of financial institutions, trimming your actual number of holdings, avoiding complex or exotic instruments. Another common solution is to use automatic bill paying where possible. People should also find trusted family members, friends or professionals who can step in when needed. Appropriate advanced directives such as powers of attorney and health care proxies also need to be in place. Planning for the inevitable will help avoid many of the worst potential pitfalls.

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Scams for Elderly

Protecting Against Financial Scams

Financial scams are getting much more sophisticated and are a growing problem. It’s easy for anyone to momentarily let down their guard and get nailed. It’s especially easy for the elderly. So much has changed in recent years and the elderly often have a tough time sorting out the legitimate advances from the smooth talking con artists. A recent study showed that the elderly who have been working with a financial advisor or some other trusted advisor are much less likely to fall victim to scams. Financial products have gotten much more complicated over the years. With the advent of cheap computing power it became possible to add many more features to products. Now consumers have choice about everything but it’s much more difficult to sort out what is really important to them, what they need and what they are paying for. As we age, our brains become less agile and can get overwhelmed with this growing complexity. Nowadays, everything comes with an inch thick instruction manual. While there’s no sure way to ward off all scams, the one good rule is that if something sounds too good to be true, be especially wary.  Recently, Financial Planning Magazine ran an article on protecting against scams: http://www.financial-planning.com/30-days-30-ways/protecting-elderly-clients-more-scams-2692756-1.html?utm_campaign=30%20days%2030%20ways-may%202%202015&utm_medium=email&utm_source=newsletter&ET=financialplanning%3Ae4297713%3A1591a%3A&st=email

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False Precision in Financial Planning

Craving Certainty

Recently The New York Times published an article about financial planning and how much people crave certainty. The result is that many financial plans have page after page of numbers and graphs and charts. The more numbers, the more confident people feel about the future.

But these plans can be so overwhelming that many go unused. In the Times article, author  and planner Carl Richards deplores this kind of false precision. He argues that for most people, the future is impossible to predict and plans must be flexible to account for the vagaries of life.

The planning process itself forces people to think hard about their goals and priorities. Often, latching onto a firm goal, even if it’s one that’s difficult to attain, might make success more likely than having a vague but less lofty goal.

Being disciplined and thorough in planning can yield significant results even if the ultimate destination is far removed. Identifying the key variables and options during the planning process can provide a clarity of purpose and a route to get there.

Planning and adapting the plans from time to time are a valuable exercise. Just don’t get too caught up in the details and miss the big picture.

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Financial Affairs — Much More Complex Than Most People Realize

Do it Yourself? — Not!

 
I run into a lot of do it yourselfers who manage their financial affairs adequately, even capably.

But many run into issues and by the time I am called in, it is often too late or significant damage has already been done.

Recently, I’ve been brought it to work on the financial affairs of several people where the need arose unexpectedly. I had to guess the clients’ wishes and scramble for clues to piece together their financial pictures. If we’d had the opportunity to talk for even a short time, the process would have been much more successful and much easier. Other times I’ve come across mistakes where the do it yourselfer didn’t realize he was in over his head.

There’s no buzzer that goes off telling you that you have to make a significant decision or you should look into something that hadn’t occurred to you.

Most people manage their financial affairs one piece at a time without even a list of all the pieces that are required. Each piece, in and of itself may be fine, but the overall structure can collapse if even one critical piece is missing.

Personal finance is much more complex than most people realize. I encourage everyone to learn and be involved with their financial affairs. But I also strongly recommend calling in professionals before the crisis hits.

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