Atlanta Planning Guys

Fox 5 Atlanta asked us for some tips that parents could give their recent college graduate children about finance, spending, and saving (see the clip here).  Here are my top five, though there are certainly many others:

Contribute at least as much as the employer match to your 401(k)

This is a “no brainer.”  The employer match is free money, though you must contribute your own money to receive it.  A typical employer match might be 3 or 4% of salary.  Given that these are pre-tax contributions, contributing to your 401(k) will not reduce your take-home pay by as much as you might think.  By all means, if you can put more than that towards your 401(k), do it! Just be sure that, at a bare minimum, you are contributing up to what your employer will match.

Be aggressive

Most retirement plans should be thought of as long term investments.  With a few exceptions, you can’t easily access the money in a retirement plan until you are 60, so take advantage of the fact that you have a long-term investment horizon by investing in equities and other asset classes that may involve a bit more risk than others.  Over 30 year time frames, investments in equities (stocks) have outperformed investments in fixed income (bonds).  Past performance is no guarantee of future results, but I like your chances of success by staying aggressive when you are young.

Don’t stop – EVER

Recessions and market downturns are a fact of life.  Between now and when you retire you can expect to experience a few more of them. If you are contributing on a systematic basis (monthly or bi-weekly through your paycheck), then a market downturn can be looked at as an opportunity.  Many employees stopped contributing to their 401(k) in 2008 and 2009 because of the financial crisis—the worst time to stop contributing.  When the market dips, and you are contributing consistent amounts of money, you will be accumulating more of that particular investment since it is now less expensive.  When the market turns around, you will be greatly rewarded for having stuck with it.  Many people who continued to invest right through the crisis have been pleasantly surprised when they opened their most recent retirement plan statements.
 

Don’t buy a townhouse or condo just because you can afford to

 
Atlanta has an abundance of condos and townhouses for sale right now.  Many of these properties are for sale by people in their late 20’s or early 30’s who bought them right out of college.  The thinking was “why pay rent when I can build equity in real estate?”  As these people got older and got married or had children, many wanted to move into a house.  When the housing bubble burst, many of these townhouses and condos couldn’t be sold for what the seller paid for them.
Remember, it costs money to both acquire and sell a piece of property.  If you are only going to live in the place for a few years, is it really likely that the property will appreciate enough to offset the acquisition and disposition costs?  Instead of buying a property like this, rent within your means for awhile.  Build up a reserve of money so that when you are ready to move into a house you can make a sizable down payment and therefore borrow less. 

Force yourself to save

The 401(k) is a great tool.  But it is money for retirement.  What about saving money to buy a car?  Or a house?  There are several online brokers who charge very low fees to open and maintain separate savings accounts.  Even having them draft $25 per month from your checking account can make a difference.   My experience has been that people are much more successful saving and investing money when it is automatically transferred and before you have a chance to consider it spending money.

Summary

• The ultimate goal of purchasing a long term care insurance policy is to guard against spending more than your nest egg will allow, thus protecting your, and your family’s, assets.
• Buy an insurance amount equal to the increased spending that may result from the incapacitation NOT the full amount of the cost of the incapacitation.
• It is important to speak with an independent agent about your specific situation, but a good rule of thumb is 2/3 of the “average cost of care” in your area.

Long term care insurance is one of the most important, and often overlooked, financial purchases that a senior can make.  We have previously assisted with information on how LTCI works and when to buy it, but we would now like to focus on how much insurance an individual should purchase.
With policy benefits ranging from $50 a day to as much as $500 per day, it is important to remember why you are purchasing the insurance in the first place.With policy benefits ranging from $50 a day to as much as $500 per day it is important to remember why you are purchasing the insurance in the first place.

The ultimate goal of purchasing a long term care insurance policy is to guard against spending more than your nest egg will allow, thus protecting your, and your family’s, assets.

That is a mouthful.

Allow me to elaborate…

In retirement, the risks that we are faced with are very different than those when we are working.   The risk of losing a job, and thus an income, is gone.  The risk of losing the ability to work (disability) is not applicable.  And, in the case of a husband and wife, the risk of premature death is not a threat to the overall retirement plan.  Strictly financially speaking, the death of a partner, in many cases, will strengthen a retirement spending plan as there is only one person is left to provide for.

Retirees don’t all of the sudden dramatically change their spending habits…unless they HAVE TO.  The incapacitation of one spouse will likely cause a dramatic increase in spending.  Without insurance, the increased spending could cause the nest egg to be depleted prematurely—before both spouses are deceased.  Another byproduct could be a reduced estate to pass to heirs.

You should buy an insurance amount equal to the increased spending that may result from the incapacitation, NOT the full amount of the cost of the incapacitation.

Long term care insurance is often sold using sales literature that shows the “cost of care” in your area.  It is more expensive, for example, to be incapacitated in New York City that it is in Atlanta.  If the average cost of care in my zip code is $60,000 per year, this may only result in a $40,000 increase to my spending.  Whether I was incapacitated or not, I was still going to be spending on many basic things that would be included in that $60,000 number.  I might recommend that this person purchase a policy with a $40,000 per year benefit, or about $115 per day.

It is important to speak with an independent agent about your specific situation, but a good rule of thumb is 2/3 of the “average cost of care” in your area.

This is a very basic explanation of how to determine how much long-term care insurance one might need. For a more detailed, customized answer that fits your specific needs, please consult with your independent insurance advisor.

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It’s time to see if they are right for you

3 Reasons to Consider SMAs

 Executive Summary:

Once an investment vehicle for large institutions or the ultra wealthy, separately managed accounts (SMAs) are now commonly available for as little as $100,000. Separately managed accounts offer investors three potential advantages:

1. Cost structure which is transparent and usually allows for a decrease in fees as the account size grows;
2. Actual ownership of stock and bonds, potentially allowing for greater control and flexibility with tax planning issues;
3. More concentrated portfolio (typically) which allows an emphasis on the “highest conviction” stocks by the portfolio manager.

Click Here for an excellent piece from MFS Investments comparing SMAs to another popular investment vehicle

SMAs are investment accounts, managed by a professional portfolio manager, in which the investments are held in the name of the individual investor.  SMAs are similar to other investment vehicles in a number of positive ways.  It is their differences, however, which make an SMA so attractive to today’s investor. 

Who is investing the money?

In most cases, a portfolio manager is investing the money in the SMA.  Your financial advisor helps to decide when to switch to a new manager or a new investment style.

What do they own?  What do you own?

The answer to those two questions is the same: SMAs own individual stocks and bonds in your name.  A hypothetical portfolio manager might invest your account in 20 different stocks.  Your statement would show these shares.  As an example, you would own 8 shares of ABC inc, 23 shares of ACME co, 15 shares of COMP inc, etc, etc.
 
In this situation, the SMA manager can focus on her “highest conviction” stocks.  In other words, if only 20 stocks make up her best picks she doesn’t have to also invest in her “b” or even “c” selections to spread the money thinner and avoid becoming an “insider.”

Fees

Usually, a financial advisor will evaluate your risk tolerance and objectives and construct a portfolio consisting of several SMAs.  Each SMA is usually in its own account at the financial advisor’s firm.  The advisor will usually add his fee to the fee charged by the SMA manager.   Clients at our firm pay a total fee that includes all trading costs and expenses.  This fee is transparent.  It shows up on your statement as a line item.  The amount you pay in expenses would not be affected by the amount of trading that the manager does. 

The larger your account is, the lower your fee would be in an SMA.  It makes sense.  Charging 1% for an account worth $1,000,000 generates $10,000 in fees annually.  An account worth ten times that wouldn’t need to generate ten times the revenue for the advisor.  He can use the same approach in his pricing that big box retailers do: the more you buy, the less it costs. 

 Taxation

Since the stocks or bonds are held in your name, the cost basis is your own.  There aren’t capital gains and dividend distributions made to you at the end of the year which may, or may not, reflect whether you actually realized the gain.  With SMAs, your taxable gain and loss is figured off of when the manager bought it for you.  For this reason, one could potentially manage their tax situation better.  If the SMA manager has sold several stocks throughout the year, resulting in a net capital gain, you could instruct the SMA manager to sell a few of your “losers” too (usually).  This could help offset any of the gains.  This is called “tax loss harvesting.”
 
Conclusion

Click Here for an excellent piece from MFS Investments comparing SMA’s to another popular investment vehicle.

SMAs have several features that could make them attractive for investors.  These include: “highest conviction picks” (lower number of holdings), fees, and tax loss harvesting.  Many SMAs have lower minimum investment levels than even a few years ago (typically $100,000).  As always, investors will want to seek diversification in their portfolio by using multiple SMA strategies.

Your accountant does it.  Your mortgage company does it.  Why shouldn’t you take advantage of setting up a monthly accrual system to save for your annual expenses? Even just a little bit truly does add up over time, eventually becoming a sizable amount that can bring some relief when paying for larger expenses.  In a perfect world, you already have your 2011 budget locked down and have a good idea of what your major expenses should be. Now is a perfect time to carve some of those larger expenses out of the budget and start saving specifically for them.

Online banking has made it so incredibly easy to carve out money each month and sock it away for later use. Here are my top 5 expenses that you can save for in the coming years.

***See last week’s blog for tips on how to be careful when setting up any new accounts specifically to hold your monthly accrual***

#1. Travel Plans

I’m not talking about a spontaneous weekend excursion (although you can throw those in).  We all have that one trip we want to take every year. It can be a family trip to the beach or the annual ski trip to Vail.  In either case, you most likely know about how much you will have to, or are willing to, spend.  Starting a vacation fund today will help keep you on a budget and provide you with the money you need when it’s time to pack up the luggage.

#2. Auto Insurance/Auto Payments

Unless you pay by bank draft (auto debit), then you are either getting a bill once or twice a year for auto insurance.  Why not save for that expense systematically?  You should also always have a “car payment.”  Whether you are actually paying down a car you already own or saving for the next vehicle purchase.  A classic mistake consumers make is thinking that you are ever without an auto payment.  Sooner or later you will need to replace your vehicle.  How nice would it be to have the funds available to avoid the hassle of financing all over again?

#3. Medical Expenses

Some of these we simply can’t plan for.  However if you know the kids will need braces, why not save for them now.  This is especially true if you have an HSA (Health Savings Account). If you aren’t eligible for an HSA, find out if your employer offers a Flexible Spending Account (FSA) and see about taking advantage of some tax savings on money you set aside for these purposes.  Be mindful that FSA money must be used up by year-end or it will be lost.  So try not to save too much here in any one year, but it is hard to ignore the tax savings that can be had over time.

#4. Charitable Giving

First things first…if you don’t already have a designated month in the year that you make your contributions to your church, synagogue or favorite charities, now is the time to do it.  If your charity month is September, then you have a perfect answer for anyone that calls you the other 11 months of the year to ask for money.  If they want your support badly enough, they’ll pick up the phone again.  Aside from that, take a look at what you donated in 2010 and figure out how much you want to give this year.  Throw that in your monthly accrual.

#5. Gifts

Again, you’ll want to know how much you spent for birthdays, anniversaries, holidays and weddings for the year.  Knowledge is power right?  Setting aside the funds to cover these anticipated expenses is a brilliant way to start the year.

Certainly, you may find other recurring annual expenses that top your priority list, but the above will give you a few ideas of specific expense types for which you can start saving now.

The mechanics of monthly accrual are pretty simple.  When you have found the amount you need to set aside each month, have it automatically taken out of your checking account and put into separate savings.  You don’t need to have accounts set up for all these various expenses so long as you know how much of the account needs to be spent on each item.  When it comes time to pay the bill, simply slide that money back into your checking account and viola! You have just kept your monthly expenses in the black.

Whether you’re checking luggage or accumulating travel miles, chances are you have seen an increase to your fees in recent years.  As a financial planner, it’s old hat to educate clients on the fees associated with various credit cards.  For years, credit companies have lured in would-be cardholders with promises of points, cash back, and rewards; but at what cost?  As the financial overhaul comes into effect, there are additional proposals to cap merchant fees that are charged every time you use your card to purchase something.  These proposals represent a potential 80% drop from current levels.  80%!

As regulators continue to close in on some of the traditional revenue sources for banks, it is apparent that banks will look to make up some of that revenue by adding fees to common transactions or occurrences.  Those free debit cards might not be free anymore. The same may be said for “free checking accounts”.  Be on the lookout for more stringent spending limits and charges for non-usage of accounts and cards.  Any financial planner worth their salt will tell you to limit the number of cards you use annually.  This may come at a price in the future.  Those extra cards you simply leave in your desk drawer may cost you.

Here are just a few areas to keep an eye on as we welcome in this new era of banking:

Paper Statements:  There will be fees to get your statement in the mail.  We encourage our clients to turn off the paper statements they receive for investment accounts.  It looks like doing the same to your traditional checking and savings accounts may be prudent.

ATMs:  This one has two heads.  An inactive card will likely cost you in the future.  Some banks are already imposing inactivity fees for Debit Cards to the tune of $8.95 per month.  Additionally, you will likely see a new or increased fee to get cash from an ATM that isn’t associated with your bank.

Account Activity:  Use your account…or be charged.  In the case of most traditional checking accounts, this isn’t a typical concern; if you have extra accounts, you may need to consolidate.  But with a savings account, you could also incur a charge if you make too many withdrawals or transfers per period. Look for new guidelines on what constitutes allowable ‘usage’.

Account Minimums:  Carrying a minimum balance on certain accounts has always been the norm. In the past, higher balances were rewarded with higher interest rates to your balance.  But now you may be required to keep a minimum balance in your checking account in order to avoid a monthly maintenance fee.  Keep an eye out for additional fees going forward.

Direct Deposit:  Many banks already have fees for checking accounts that don’t have direct deposit.  However, the rules typically apply to aggregate deposits over the course of a month.  Aggregate limits will most certainly rise or a requirement for a larger single sum to hit the account at least monthly.

Giveaways & Sales Gimmicks:  If you have been to an airport, college campus, sporting event or shopping mall in the past 5 years, you know what I’m talking about.  Those “get a free T-shirt or pocket calculator to get this free debit or credit card” kiosks are a nightmare.  Don’t be fooled (not that you ever were).  Another gimmick is to give you a discount off your purchase if you apply for a store card at the time of purchase.  It is worth a conversation with your children.  Especially if they have, or will be, headed away to school.  There is NO such thing as free and the price young consumers may ultimately pay to these predatory vultures could be very costly.

Most banks are standing firm by these new fees saying that many of them can be avoided by simply complying with the rules of the account.  Be sure you educate yourself on how your bank enforces its rules so you can save in the long run.  They will squeeze as much out of you as you allow.

Being cooped up in the house for a few days this past week got me thinking.  How does one adequately prepare for lots of snow and ice?  The south is especially vulnerable to the crippling effects that inclement weather can have simply due to how seldom we get it.  In times of anxiety and feverish preparation for bad weather, here are my top 5 tips on making sound decisions that will save you in the long run:

Your Grocery List:  Pass on the milk and bread staples that most folks flock to.  You’ll need the following:

•  Fill your freezer with Meat. It will still be good a month from now (if you don’t use it) and a chuck roast takes up as much room as a single frozen meal.  Buy cuts of meat that can be easily cooked in a slow cooker.

•  Batteries. Candles are a fire hazard and if power goes out flashlights can get you to and from bed.  Time to catch up on that much needed sleep.

•  Water.  Loading up on 12 gallons of milk is overkill and water is plenty good for you.  Tap water will do for most folks.  However, if your pipes burst you’ll need a backup.

•  Snacks. Items that don’t have to be refrigerated will come in handy if you lose power.  And if you have children in the house, you know how hungry they can get when they’re bored and restless.

 Salt the House/Driveway:  the DOT isn’t going to make your sidewalk, driveway or carport safe to walk on.  The financial and physical impact of a fall at your house can ring loudly for months to come.  Make sure you can safely traverse your surroundings.

• You don’t have to salt the entire driveway.  Just make two strips for your tires and you should be good.

• Keep a big bag of rock salt laying around in the basement for such emergencies.  You will avoid having to go out and get it when you shouldn’t be driving the roads in the first place.

Stay Home:  Getting out on hazardous roads will only lead to car damage.  If you’re getting stir crazy, go for a walk and enjoy the scenery.  It’s not worth the agony of an accident or car repair to make it into the office.  Your boss will understand.

Learn to cook:  Even if you’re a seasoned veteran of the kitchen, chances are that you have a meal or entree that you want to perfect.  You’ll likely have plenty of time on your hands.  Why not learn to make a killer pot roast or play around with a new recipe for lasagna or chicken soup?   The ability to call upon an awesome recipe in a pinch is a skill most would like to have.

Be Neighborly:  Check on those around you.  Be sure everyone is OK.  A small investment of your time can pay big dividends should you ever need a favor, such as having someone watch your house while you’re out of town.  Take this opportunity to be a good friend and neighbor.

A very Happy New Year to all of our clients, partners, friends and readers!  Hopefully the holiday season went off without a hitch.  After the champagne glasses and party hats have been put away, we like to help investors take a look at a few things that they can do now to get 2011 started off on the right foot.  Like my grandfather used to tell me, “You want to hit the ground running!”

Here are my Top 5 Ways to get 2011 started off with a bang:

#1. Start the Tax File

In the next several weeks and months, you will begin to receive important documents in the mail that you, or your accountant, will need to keep close by to prepare your 2010 taxes.  Get a file started so that when April rolls around you have each of these documents organized and accessible.  Schedule a discussion with your accountant now to be sure you’re on the same page as last year.  What’s changed?  What hasn’t?  How can you be best prepared for filing? You’ll thank yourself for these simple preparation steps come filing time.

#2. IRA/Roth Contributions

If you’re eligible to make contributions to either of these accounts, do so.  Did you make a 2010 contribution?  The sooner you put that money away, the longer it has to accumulate and grow.  Would it be possible to go ahead with your 2011 contribution also?  If so, you’ll need to write separate checks to the account.  The contribution limits are $5,000 if you’re 49 or younger and $6,000 if you’re 50 and over.  Put that money to work for you as soon as possible.

#3. Allocations/Contributions to 401k

Did you get a raise?  Great work!  Be sure to tweak your contribution percentage on your company retirement plan to maximize your contribution limit.  Cass recently touched on some common 401k Blunders that all investors should be aware of, so please review those.  You may also want to have your financial planner look at your portfolio to make sure your allocation is still in line with your long-term goals.  If you find that you do need to make a change, be sure and include current assets and future contributions for 2011.  One big change we are making to our client’s portfolios at present is a greater allocation toward the high yield bond space.  We are decreasing exposure to short term debt and re-allocating toward domestic and global high yield.   Many plans now allow you easily to make these changes online.

#4. Family Meeting

Set aside some time to sit down and put a plan together for the year.  Vacations, trips to the grandparents and business trips out of town are all important things to have on the calendar.  A simple meeting to get things on paper can keep everyone on the same page.  This is also a good time to go over the family budget.  Take this opportunity to show your kids how saving money on clothes, games and entertainment can lead to fun trips to the beach or Disney in the summer.

#5. Start Saving Now
  
Having just finished another year of holiday gift giving and vacationing, it’s a good idea to tally all those expenses up.   Savings accounts are inexpensive and most banks allow for automatic transfers to/from your checking account systematically.  Start accruing your holiday expenses now for next year.  This way, when the time comes for gift giving, you will have the money already saved.  Example:  I spent $600 on gifts this year.  Set up a savings account for gift giving and systematically transfer $55/month into that account.  You’ve got 11 months to save the money and hopefully you won’t miss the $55 each month.

All of us at Chappell, Mayfield & Associates are especially thankful for the opportunity to serve our clients.  2010 has been an amazing year full of challenges, victories and many blessings.

In May, I married the most wonderful woman in the world, Julie.  Cass celebrated the 1st of many birthdays for his beautiful daughter Olivia.  Our blog, www.AtlantaPlanningGuys.com, helped us to gain national recognition in several major publications.  Cass & I were featured on a consumer advocacy television program here in Atlanta regarding retirement planning.  Our business grew thanks to our many loyal clients helping to spread the word about the work that we do for them.
 
For all of this and more, we wanted to say “Thank you.”  None of this would be possible without the trust and commitment of our clients.  We are so fortunate to have the opportunity to work with you all.  2011 will undoubtedly present us with a healthy mix of challenges and opportunities, and we are so thankful to be able to help steer you through them all.
 
From all of us at Chappell, Mayfield, we hope that you and your family have a save, happy and healthy New Year.  We look forward to continuing to dedicate ourselves to you in 2011 and beyond.

And get a Tax Deduction!

It really is better to give than receive.  But how cool is it to do BOTH!?!?!  Before January 1st gets here, you still have time to give to others AND receive a tax deduction.

Contribute $2000 to the Georgia 529 plan for your child’s education

There is no longer an income limit for parents, or grandparents, to receive a state income tax deduction for contributions up to $2000 per year.  At the 6% tax bracket here in Georgia, that amounts to $120 in state income tax savings.  Note: The contribution must be to the Georgia 529 plan in order to receive a Georgia state income tax deduction.  This tip only applies to Georgia residents.

Donate clothes or other items to charity

Goodwill has locations all over town and they always make it easy to drop off your unwanted clothing.  Make sure you get a receipt from them.  You will need it for your taxes.  There are also services that will come pick the clothing up from your home.

Accelerate future charitable cash contributions to this year 

If you are considering making a cash donation to a charity in the future, consider doing it this year.  You receive the tax deduction in the year that the contribution is made.

Add a little extra to your shopping cart at the grocery store

Many area Publix and Kroger stores make it very easy to give food to the needy.  At the check-out line they will either have pre-packaged meals for the holidays that they will distribute for you or pledge cards of varying denominations that can be added to your bill.  They will take care of the rest!  Be sure to keep your grocery receipt as the dollar amount of your gift is tax deductible.

How to take advantage of Net Unrealized Appreciation (NUA) in a 401(k)

Employer stock inside a 401(k), or other tax-deferred employer sponsored retirement plan, is quite common for employees of large publicly held corporations.  Unfortunately, another common trend among several American corporations in the last several years has been significant layoffs. But before former employers attempt to roll those shares over, they should consider the tax implications specific to these investments.

There is a special tax rule that may benefit any (former) employee who finds themselves holding company stock.  The term is Net Unrealized Appreciation (NUA).  NUA allows for a lump sum distribution of employer stock to be taxed as income to the extent of its cost basis, or it’s purchase price.  The difference between the cost basis and the current market value is known as the capital gains, which are taxed at the ordinary income tax rate.

This screams for an example:

• Mary has $500,000 in company stock in her 401(k)
• Mary only paid $200,000 for this stock throughout the years
• She takes a lump sum distribution-in-kind of this stock from the retirement plan, moving the proceeds to a bank account, brokerage account or other non-tax deferred retirement account (more on this later)
• $200,000 is taxable as ordinary income (her cost basis)
• When she sells the stock the $300,000 of NUA would be taxed as a long term capital gain (15%).  Any gain from the date of distribution until the date of sale would be taxed as either short or long term capital gains (depending on whether it was shorter or longer than a year)

What does this mean?

Currently, the highest tax bracket for income is 35% and the highest tax bracket for long term capital gains is only 15%.  In the example above, Mary (if she was in the highest tax bracket) would pay 35% on the $200,000 cost basis but only 15% on the $300,000 of NUA. HOWEVER, if Mary rolled the proceeds over into another tax-deferred retirement account, such as a 401(k) or an IRA, the company stock’s NUA would eventually be taxed at her ordinary income level or 35%.

Who does this apply to?

Anyone who has separated from his/her company and has employer stock in their retirement plan. If a distribution of this type is made before 55 (or in some cases, 59) then a 10% penalty may apply.

BE CAREFUL!

Financial companies have been encouraging people to rollover their old 401(k)’s for years now.  BUT…If Mary rolls her old 401(k) over to an IRA, the opportunity to use the NUA rule is lost.  This must be a lump sum distribution-in-kind of all stock from an employer sponsored retirement plan.  If you have a 401(k) at a former employer, you should seek out a knowledgeable advisor before making any decision to move those funds.