Category Archives: Personal Finance

What You Keep

By Larry Luxenberg  

The easy thing to do when you are investing is to look at how much your portfolio is going up or down.

But that’s not what’s really important. What’s important is how much of your investment portfolio, you get to keep and how much goes to Federal, state and local taxing authorities.

For example, an IRA defers taxes until you take the money out. Under current law, once an investor turns 70 1/2, he has to start taking money out of the IRA. This is called a required minimum distribution.

When an investor takes money out of the IRA, he has to pay ordinary income taxes on the withdrawal. This can be a third in combined taxes or even more.

If he has a Roth IRA and is over $59 1/2 and the Roth has been open five years, he probably won’t owe any taxes.

If he has a regular taxable account — no retirement savings vehicles — and owns mutual funds, he may owe taxes even if he doesn’t do any trading himself for the year. Mutual funds must distribute most of their income each year to avoid saddling their shareholders with double taxation.

In a strong stock market, like the market this year, gains accumulate in actively managed mutual funds and taxable distributions can be quite high.

Investors need to be aware not just of their investment returns but of how much of those gains they will keep. That makes a huge difference in long-term financial well being.

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Under the Hood

By Larry Luxenberg  

All investors crave simplicity. That can come at a high cost.

Many investors look at the title of the investment but don’t look under the hood.

A prime example is target date funds. These investments are one of the fastest growing investment products in history. According to the Investment Company Institute, more than $1 trillion is invested in target date funds.

A target date fund is is invested based on your retirement date. Essentially the only thing the investment manager knows about you is your age. But are all 52 year olds the same? Maybe some are skinny and some are fat. Some have plenty of money and some can barely rub two nickels together. Some will retire before 65 and some afterwards. Some will work part-time and some will retire in Central America. Few are average but that’s what target date funds assume.

It’s important to know a lot about an investor to decide how to invest for him. Otherwise you might take too much risk or not enough and returns and investors’ piece of mind might suffer.

Even more compelling, each target date fund is different. Investment managers have different ideas about how to invest for the average 52 year old.

It’s OK to invest in a target date fund but make sure you look at more than just the name. Otherwise, you may learn too late that you and the investment manager had different ideas about what was good for a 52 year old and the consequences may not be pleasant.

 

 

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A Great Casino

By Larry Luxenberg  

After one of the worst endings to a year in stock market history, it’s easy to despair and bash the market. When the stock market is collapsing, it’s hard to take the long view and be optimistic. But if you do, you’ll soon realize that the U.S. stock market is generally a friend to investors.

We have good data on the U.S. stock market since 1926. For those 92 years, including 2018, the stock market has been negative for a calendar year only 25 times. That’s using the Standard and Poor’s 500 as a measure for the stock market and including dividends. Of those 25 negative years, 15 years, including 2018, had losses of 10 percent or less. In 6 of those years, the market declined by less than 5 percent. In only 3 of the 92 years has the S&P declined by 30 percent or more. Only 4 times has the market declined for a second consecutive year.

The 4 bad times — with two or more consecutive years of losses — were during the Great Depression (1929 to 1932), the start of World War II (1939-41), the deep recession in the 70s after the Arab Oil Embargo and Watergate (1973-74) and the recession and tech collapse around 9/11 (2000 to 2002).

Other than those 4 times, the broad market has never had two or more straight declines. Of the 92 years, we’ve had 67 positive years or 73 percent of the time.

Following the most recent financial crisis, in 2009, after the Great Recession, the year started terribly, down more than 20 percent in the first few months but ended up by 26.5 percent. In 1987 following the crash that included the single worst day in U.S. stock market history, the market closed the year up by 5.2 percent.

Most people think of the stock market as a casino. But if you are a long-term investor, over the last century, you are the house and 3 out of 4 years, you are a winner, often by a large amount. I like those odds. Over the course of my 36 year investment career, the Dow Jones Industrial Average has gone from 800 to more than 23,000 as of year-end 2018. If you ask me, that’s a great casino and no cause for alarm just because of the recent unpleasantness.

 

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Paying for a Child’s Retirement for the Price of a Car

By Larry Luxenberg  

One of the best presents you can give a child is to fund their retirement. And it costs about the same as a modest car. The key to the gift is time. Having a long time to invest is critical but it costs you nothing but patience.

First let me explain how this works and then the four ways it could go wrong.

The initial step is to fund a Roth IRA. A child must have earned income but you can contribute an equivalent sum up to $5,500 a year to the child’s Roth. A Roth provides no deduction on the way in but if you hold it until age 59 1/2, there’s no tax on the way out. A $5,000 contribution to a Roth at age 20 and invested 100 percent in a diversified stock fund, earning the long-term return of stocks, would be worth $587,000 at age 70.

This sounds too easy so what could go wrong?

First, Congress could change the law so that the withdrawal would be taxed.

Secondly, inflation could eat up some or all of the returns. At the 3 percent inflation which has been the U.S. average in recent years, inflation would drive down the purchasing power by a third. Still, it would be a nice bundle to have in retirement.

Third, stocks could have disappointing returns. The longer one owns a diversified fund of stocks, the more likely that returns will be good but there are no guarantees in the stock market.

Finally, the child could mess things up in a variety of ways: invade the account early, change the investing approach or some other, unanticipated way.

Still, for the price of a regular car or less than a full semester at a good college, a parent could prepay a child’s entire retirement. An interesting idea and one I believe in strongly enough to try it.

 

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Digital Assets

By Larry Luxenberg  

Digital assets are usually dismissed as a futuristic concern. But every estate I’m involved with now has at least some digital components and they are usually needlessly troubling. We spend much of our lives now in the digital world whether it’s on email or Facebook, Instagram or Twitter.

If we have a small business or a profession, some of the value of our business is certainly wrapped up into the digital world.

Last night I spoke to the Rockland County Estate Planning Council (http://www.rocklandcountyepc.org/   about the growing importance of planning for digital assets.

With many of us this might be small — airline points or deposits at paypal — but for many estates this could already be a big number. Most of us have trouble from time to time accessing our digital accounts. Imagine how difficult it will be for an executor to do this.

A good first step is to make an inventory of your digital assets and accounts and then figure out how an executor might access them. You can give such a person separate authority to act on your digital accounts.

This is not accepted in every jurisdiction but in the fast changing digital world, this is a good first step.

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Savings and Tax Time

By Larry Luxenberg  

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

By Larry Luxenberg  

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

By Larry Luxenberg  

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

By Larry Luxenberg  

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

By Larry Luxenberg  

 

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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