Hands on Retirement Planning… By Steven Wightman, CFP
Note: In life, the old Chinese proverb says; “A thousand mile journey begins with the first step.” Trouble is, when it comes to retirement planning, most of us never take that first vital step. Others start and stop - as soon as it becomes inconvenient. Procrastination ruins the best ideas. Most agree; the biggest inconvenience in life is poverty – a place where the majority of Americans end up, not because they planned to fail, but because they failed to plan and execute that plan just as an athlete does. No excuses, just the road ahead!
The purpose of this exercise is to help you arrive at a rough estimate and to get you started. The first step is a giant one in the direction of your future. To simplify, we have removed the costs associated with investing and taxes. We assume you will employ tax-deferred savings vehicles such as retirement accounts and variable annuities.
Consider that millionaires spend an average of 4 hours each month planning their finances and their future, should you? The results speak for themselves: To have the body of an athlete, you have to train regularly. To have the mind of a millionaire, you have to think and act like one – starting now. Why? From the table below, you may learn that 1 million or more is what you’ll need to save to retire and maintain your current standard of living.
Smart financial planning can yield a multiple of your total life earnings into your savings. Example: $10,000 invested in the entire stock market 40 years ago would be worth 1 million dollars today - through the miracle of compounding. For the average college graduate, cutting your taxes in half early in life can yield another million dollars in your account. You get the picture…
Bonus: One last incentive for acting now: The Federal Savings Credit is available to those who qualify (see table) for up to one thousand dollars per taxpayer in addition to your regular tax deduction for contributing to your retirement plan. Catch? You must open and fund a plan by April 15th.
Make the golden years truly golden with these easy retirement planning steps:
How much will you need?
See table B for a reality check.
Figure what you need to save each year. J/C
Choose an asset allocation
Open a retirement account and start dollar-cost averaging with monthly purchases
Pay yourself firstwith payroll deduction
Save 10-20% of gross income
Monitor at least quarterly
Work with a CFP Pro to coach you
Start now! First year savings allow compound-ing the longest. 10k x 40 Y = 1 million
X
X
X
X
X
X
X
X
X
CFP
CFP
X
CFP
X
X
Most financial Institutions
Assume tax-deferred savings.
Morningstar Quicken.com
Major brokerages
Credit unions and banks offer this
Morningstar Quicken WSJ brokerages
FPA NAPFA
Friend & work network
Any Brokerage firm can help you.
Some lessons from a pro: When it comes to your retirement, don’t rely on anyone but yourself, i.e. an inheritance, or a marriage, and don’t put it off! Your future is just too important to be left to chance. Today, more than ever, there are wonderful planning tools available to you in books and on the web and there are now 40,000 + Certified Financial Planner Licensees. The future is welcomed by those who prepared for it and feared by those who have not. Be the former and live a great life.
A
B
C
D
E
F
G
H
I
J
Planned retirement age?
Current age?
# Years to SAVE for retirement?
A-B =
Annual expenses?
Less annual expected Soc. Sec. dollars
Less all other annuities annually
Annual need.
D-(E+F)
Number of years you expect to live in retirement
Total estimated need?
=G x H
Total Est. funds need to save?
(C x I ) – current savings & investments
Adjusted Gross Income Limits for the Savings Credit for years 2002-6
Married Filing Joint
Head of Household
All Other Filers
Credit
$0-$30,000
$0 - $22,500
$0 - $15,000
50% of contribution
$30,001 - $32,000
$22,501 - $24,375
$15,001 - $16,250
20% of contribution
$32,501 - $50,000
$24,376 - $37,500
$16,251 - $25,000
10% of contribution
Over $50,000
Over $37,500
Over $25,000
Credit not available
Securities Disclosures
Steven D. Wightman
Wightman Financial Network, LLC
1 Aaron Road; Lexington MA 02421
(781) 862-6642
www.wightmanfinancial.com
February 28, 2011
This Brochure provides information about the qualifications and business practices of Wightman Financial, LLC. If you have any questions about the contents of this Brochure, please contact us at (781) 862-6642 or
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. The information in this Brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority.
Additional information about Steven D. Wightman also is available on the SEC’s website at www.adviserinfo.sec.gov.
Item 2 – Material Changes
On July 28, 2010, the United State Securities and Exchange Commission published “Amendments to Form ADV” which amends the disclosure document that we provide to clients as required by SEC Rules. This Brochure dated February 28, 2011 is a new document prepared according to the SEC’s new requirements and rules. As such, this Document is materially different in structure and requires certain new information that our previous brochure did not require.
In the future, this Item will discuss only specific material changes that are made to the Brochure and provide clients with a summary of such changes. We will also reference the date of our last annual update of our brochure.
In the past we have offered or delivered information about our qualifications and business practices to clients on at least an annual basis. Pursuant to new SEC Rules, we will ensure that you receive a summary of any materials changes to this and subsequent Brochures within 120 days of the close of our business’ fiscal year. We may further provide other ongoing disclosure information about material changes as necessary.
We will further provide you with a new Brochure as necessary based on changes or new information, at any time, without charge.
Currently, our Brochure may be requested by contacting Steven D. Wightman, Manager at (781) 862-6642 or
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.
Additional information about Steven D. Wightman is also available via the SEC’s web site www.adviserinfo.sec.gov.
The last changes made to Wightman Financial Network, LLC’s brochure were dated March 2011.
Item 3 -Table of Contents
Item 2 – Material Changes.................................................................................................................. ii
Item 3 -Table of Contents.................................................................................................................. iii
Item 19 – Requirements for State-Registered Advisers....................................................................... 8
Item 4 – Advisory Business
Wightman Financial Network, LLC offers fee-only financial planning services to clients. Steven D. Wightman is the principal owner with no other subsidiaries or intermediate subsidiaries.
Wightman Financial Network, LLC specializes in personalized college planning services, investment planning, retirement planning, risk management, and financial planning. We specialize in working with women and high net-worth individuals. We do tailor our services to fit the individual needs of clients depending on their interest level. We have had clients who chose to focus on just one area of our services, i.e. college planning, and we are happy to help them reach their goals in any area they need our expertise in.
The Registrant estimates that most of the comprehensive financial planning services offered to clients will not involve investment advice. The areas of financial planning other than investment advice include consultations with a client’s attorneys, accountants and other sources; risk management analysis, budgeting, tax planning and estate planning and employee benefits. Once these matters are reviewed, a strategy is proposed and a financial plan draft is written and presented to a client for approval. At the client’s request, the Registrant then works with the client to implement the financial plan with the goal of improving his or her financial situation.
Wightman Financial Network, LLC provides advice in equity securities, warrants, corporate debt securities, commercial paper, Certificates of deposit, municipal securities, variable life insurance, variable annuities, mutual fund shares, and US government securities. He also offers options contracts on securities and commodities, futures contracts on tangibles and intangibles, and interests in investing in real estate and oil and gas interests.
As part of the financial planning process the Registrant will advise clients as to the appropriateness of a specific security or their portfolio as a whole. Such advice will take into account the information gathered by the Registrant, combined with information developed in a current financial plan, should one exist. Analysis is based upon the criteria outlined in a client’s stated goals, risks, investment time horizon, economic environment and valuation of securities using standard valuation models such as price over earnings or cash flow, tax efficiencies, and cash distributions verses price ratio analysis.
Our current assets under management are zero; this includes both discretionary and non-discretionary funds. This is as of March 1, 2011.
Item 5 – Fees and Compensation
Rolling Fee Schedule for Managed Clients
1.00% per annum of household net worth defined as a reasonable valuation of all assets minus all liabilities. Determination of net worth is computed by tallying all statements of assets and liabilities issued by independent parties such as appraisers, custodians, insurance companies, and taxing authorities.
How Managed Fees are Accounted
Fees will be billed to the custodian holding client’s investments and deducted from the client’s account and paid on a monthly basis in accordance with the client’s written instructions to the custodian. Management fees are computed based upon 1/12 of 1% of client’s household net worth in accordance with the above fee schedule. Monthly billing statements explaining how fees are computed are sent to clients for all managed accounts. Clients may elect to be billed directly by email and via PayPal, an electronic check and credit card payment system.
Fees
Fees are assessed for two distinct services:
The creation of a financial plan
Ongoing asset management and total wealth management services
For authoring a financial plan, Wightman Financial Network, LLC will charge a fee (fixed fee and/or hourly) for financial planning services and consulting services. Registrant’s fees are negotiable, but hourly fees generally range from $250 to $500, depending upon the level and scope of the services required. Registrant’s minimum hourly charge is $250.00. The first hour of consultation is $250.00 The Registrant will require a five thousand dollar ($5,000) retainer paid in advance of providing financial planning services. This retainer will cover the cost of analyzing a client’s financial situation and the authoring of a written financial plan and a planning meeting to fully review the written financial plan by clients. The Registrant charges a flat fee of $5,000 to write a comprehensive financial plan and he will provide monthly statements to clients. If a client’s financial plan is not completed within 150 days from the commencement of the engagement, funds held on account will be returned to the client, after a deduction for services already provided by the Registrant, but not yet billed and credited to the client’s account.
2. Asset management and total wealth management services are charged 1.00% per annum of household net worth defined as a reasonable valuation of all assets minus all liabilities. Determination of net worth is computed by tallying all statements of assets and liabilities issued by independent parties such as appraisers, custodians, insurance companies, and taxing authorities. A minimum $5,000 retainer is charged upon engagement. Thereafter clients may elect monthly, quarterly or annual billing periods. In addition to being invoiced and writing a check directly to Wightman Financial Network, LLC, they also may elect and authorize automatic payment from their accounts under management from their separate asset custodian on a monthly, quarterly, or annual payment schedule.
Financial planning clients and asset management clients may terminate their agreements with the Registrant upon thirty business day’s written notice delivered by certified mail. Fees for work already performed will be deducted from the retainer and the balance returned to the client within thirty days of notice of termination along with a statement of services, fees and any remaining balance or credit due.
Both asset management fees and hourly rates may be negotiable depending upon the complexity of an individual client’s case and/or portfolio. The Registrant further reserves the right to adjust the above referenced fees based upon individual client circumstances.
Clients may incur certain charges imposed by custodians, brokers, third party investment and other third parties such as fees charged by managers, custodial fees, deferred sales charges, odd-lot differentials, transfer taxes, wire transfer and electronic fund fees, and other fees and taxes on brokerage accounts and securities transactions. Mutual funds and exchange traded funds also charge internal management fees, which are disclosed in a fund’s prospectus. Such charges, fees and commissions are exclusive of and in addition to Registrant’s fee, and Registrantshall not receive any portion of these commissions, fees, and costs.
The Registrant offers investment advisory services for clients. For clients who have committed to completing a comprehensive financial plan, or those who seek investment advice, the Registrant will assist clients in implementing their investment strategies. In addition, the Registrant will review managed accounts and suggest any needed changes at least on an annual basis based upon risk tolerances, goals, tax liabilities, and needs identified in the financial planning process. Hourly fees may be waived for clients with assets under management for all financial planning services provided beginning on the date clients engage for asset management services.
Item 12 further describes the factors that Wightman Financial Network, LLC considers in selecting or recommending broker-dealers for client transactions and determining the reasonableness of their compensation (e.g., commissions).
Item 6 – Performance-Based Fees and Side-By-Side Management
Wightman Financial Network, LLC does not charge any performance-based fees (fees based on a share of capital gains on or capital appreciation of the assets of a client).
Item 7 – Types of Clients
Steven D. Wightman provides portfolio management services to individuals and high net worth individuals, and the ability to provide said services to corporate qualified pension and profit-sharing plans.
Item 8 – Methods of Analysis, Investment Strategies and Risk of Loss
Investing in securities involves risk of loss that clients should be prepared to bear. Methods of analysis include charting, fundamental strategies, and technical strategies. Sources of information include financial newspapers and magazines; corporate rating services; Steele Mutual Fund Database, company press releases; annual reports, prospectuses, filing with the Securities and Exchange Commission; and research materials prepared by others.
Investment Strategies used to implement any investment advice given to clients include long term purchases (securities held at least a year), short term purchases (securities sold within a year), trading (securities sold within 30 days), hedging strategies including short sales, margin transactions, and option writing (including covered options, uncovered options, or spreading strategies).
Item 9 – Disciplinary Information
Registered investment advisers are required to disclose all material facts regarding any legal or disciplinary events that would be material to your evaluation of Steven D. Wightman or the integrity of Steven D. Wightman’s management. Steven D. Wightman has no information applicable to this Item.
Item 10 – Other Financial Industry Activities and Affiliations
The Registrant has established a non-exclusionary business relationship with TD Ameritrade and E-Trade, as an independent investment advisor. These organizations act as a custodian, where clients may establish accounts to hold securities such as stocks, bonds, insurance products, and no-load mutual funds. Both TD Ameritrade and E-Trade also offer retirement account custody and discount brokerage services. For continuing updates, clients may review services and products via their custodian’s website.
Item 11 – Code of Ethics
Steven D. Wightman has adopted a Code of Ethics for all supervised persons of the firm describing its high standard of business conduct, and fiduciary duty to its clients. The Code of Ethics includes provisions relating to the confidentiality of client information, a prohibition on insider trading, a prohibition of rumor mongering, restrictions on the acceptance of significant gifts and the reporting of certain gifts and business entertainment items, and personal securities trading procedures, among other things. All supervised persons at Wightman Financial Network, LLC must acknowledge the terms of the Code of Ethics annually, or as amended.
Steven D. Wightman anticipates that, in appropriate circumstances, consistent with clients’ investment objectives, it will cause accounts over which Wightman Financial Network, LLC has management authority to effect, and will recommend to investment advisory clients or prospective clients, the purchase or sale of securities in which Wightman Financial Network, LLC its affiliates and/or clients, directly or indirectly, have a position of interest. Wightman Financial Network’s employees and persons associated with Steven D. Wightman are required to follow Wightman Financial Network’s Code of Ethics. Subject to satisfying this policy and applicable laws, officers, directors and employees of [“ADVISER”] and its affiliates may trade for their own accounts in securities which are recommended to and/or purchased for Wightman Financial Network’s clients. The Code of Ethics is designed to assure that the personal securities transactions, activities and interests of the employees of Wightman Financial Network will not interfere with (i) making decisions in the best interest of advisory clients and (ii) implementing such decisions while, at the same time, allowing employees to invest for their own accounts. Under the Code certain classes of securities have been designated as exempt transactions, based upon a determination that these would materially not interfere with the best interest of Wightman Financial Network’s clients. In addition, the Code requires pre-clearance of many transactions, and restricts trading in close proximity to client trading activity. Nonetheless, because the Code of Ethics in some circumstances would permit employees to invest in the same securities as clients, there is a possibility that employees might benefit from market activity by a client in a security held by an employee. Employee trading is continually monitored under the Code of Ethics, and to reasonably prevent conflicts of interest between Steven D. Wightman and its clients.
Certain affiliated accounts may trade in the same securities with client accounts on an aggregated basis when consistent with Steven D. Wightman's obligation of best execution. In such circumstances, the affiliated and client accounts will share commission costs equally and receive securities at a total average price. Wightman Financial Network will retain records of the trade order (specifying each participating account) and its allocation, which will be completed prior to the entry of the aggregated order. Completed orders will be allocated as specified in the initial trade order. Partially filled orders will be allocated on a pro rata basis. Any exceptions will be explained on the Order.
Wightman Financial Network’s clients or prospective clients may request a copy of the firm's Code of Ethics by contacting Steven D. Wightman.
It is Wightman Financial Network’s policy that the firm will not affect any principal or agency cross securities transactions for client accounts. Steven D. Wightman will also not cross trades between client accounts. Principal transactions are generally defined as transactions where an adviser, acting as principal for its own account or the account of an affiliated broker-dealer, buys from or sells any security to any advisory client. A principal transaction may also be deemed to have occurred if a security is crossed between an affiliated hedge fund and another client account. An agency cross transaction is defined as a transaction where a person acts as an investment adviser in relation to a transaction in which the investment adviser, or any person controlled by or under common control with the investment adviser, acts as broker for both the advisory client and for another person on the other side of the transaction. Agency cross transactions may arise where an adviser is dually registered as a broker-dealer or has an affiliated broker-dealer.
The Registrant may from time to time take positions in his own account in publicly traded equity securities, bonds or mutual funds. It is possible that the registrant may recommend the purchase or sale of the same equity securities, bonds, or mutual funds with respect to his client’s positions. Under no circumstances will the Registrant hold positions in such securities in any magnitude so as to impact on the price or market movement of such securities. Furthermore, while it is extremely unlikely that any transaction the Registrant may consider effecting for his own account will have any impact upon the positions held by his clients, the Registrant will not engage in any trading activity ahead of or in a manner adverse to his client’s interest.
Item 12 – Brokerage Practices
The Registrant may suggest discount brokerages to clients with the goal of finding the best service or price. The Registrant has the authority to determine, without obtaining specific client consent, the securities to be bought and sold. The Registrant does not have the authority to determine, without obtaining specific client consent, the amount of the securities to be bought or sold, the broker or dealer to be used, and the commission rates to be paid.
Item 13 – Review of Accounts
Reviews are offered quarterly during the first year of services to each client and then at least annually thereafter. The reviews focus on actual risk and performance experienced and the degree to which investments are on track toward reaching client’s stated goals revealed in the first pre-engagement meeting with us. We review the Investment Policy Statement, IPS, annually and compare the asset allocation, the client situation, and the expected investment performance with the actual to determine if any adjustments are needed.
The only reviewer is Steven D. Wightman, CFP who reviews according to the prior criteria and for no more than 30 clients per year.
TD Ameritrade and Nebraska College Savings Plan send statements directly to clients at least quarterly unless the client opts out in accordance with procedures governed by the custodian and between the custodian and the client.
Item 14 – Client Referrals and Other Compensation
The Registrant is not paid cash or receives economic benefit from a non-client in connection with giving advice to clients. The Registrant has paid NAPFA and the FPA a fee to have the registrant’s website listed on the NAPFA and FPA websites. This fee is an annual fee and is not dependent upon the number of referrals received as a result of the listing. The only restriction regarding ongoing listing is continued membership in good standing with these organizations. In addition, several other web sites provide free links to the registrant.
Item 15 – Custody
Clients should receive at least quarterly statements from the broker dealer, bank or other qualified custodian that holds and maintains client’s investment assets. Steven D. Wightmanurges you to carefully review such statements and compare such official custodial records to any account statements that we may provide to you. Our statements may vary from custodial statements based on accounting procedures, reporting dates, or valuation methodologies of certain securities.
Item 16 – Investment Discretion
Steven D. Wightman usually receives discretionary authority from the client at the outset of an advisory relationship to select the identity and amount of securities to be bought of sold. In all cases, however, such discretion is to be exercised in a manner consistent with the stated investment objectives for the particular client account.
When selecting securities and determining amounts, Steven D. Wightman observes the investment policies, limitations and restrictions of the clients for which he advises. For registered investment companies, Steven D. Wightman’s authority to trade securities may also be limited by certain federal securities and tax laws that require diversification of investments and favor the holding of investments once made.
Investment guidelines and restrictions must be provided to Steven D. Wightman in writing.
Item 17 – Voting Client Securities
As a matter of firm policy and practice, Steven D. Wightman does not have any authority to and does not vote proxies on behalf of advisory clients. Clients retain the responsibility for receiving and voting proxies for any and all securities maintained in client portfolios. Steven D. Wightman may provide advice to clients regarding the clients’ voting of proxies.
Item 18 – Financial Information
Registered investment advisers are required in this Item to provide you with certain financial information or disclosures about Steven D. Wightman’s financial condition. Steven D. Wightman has no financial commitment that impairs his ability to meet contractual and fiduciary commitments to clients, and has not been the subject of a bankruptcy proceeding.
Item 19 – Requirements for State-Registered Advisers
Steven D. Wightman, CPF born Feb. 28, 1947 is a Certified Financial Planner, registered with the Board of Certified Financial Planners, Washington DC. www.CFPBOARD.org. He graduated in October 1994. He also received a Bachelor of Science from Rivier College in Nashua NH in 1979.
BUSINESS BACKGROUND
1995 – 2003: Principal, Lexington Financial Management. Practicing fee-only financial planning since 1994. Wightman Financial Network, LLC is a Service Disabled Veteran Owned Business (SDVOB). The Registrant is a member of and currently serves as a trustee and Veteran Service Officer for the Lexington MA Veterans of Foreign Wars. He is also serving as a philanthropy chair of an advisory committee for the Hanscom Federal Credit Union and he has provided pro bono financial education to pre and post deployment National Guard and Reserve units from 2003-2010 under the jurisdiction of the Massachusetts Financial Planning Association, FPA. He is founder of Business Network International, Lexington, MA Chapter. He is a veteran member of Toastmasters International. He enjoys speaking on veteran and family financial planning concerns. He is a contributing author to Tips From The Top, Targeted Advice From America’s Top Money Minds, 2003, by Alpha Publishers and author of Women, Wealth and Wisdom, C. 2011. Professional memberships include the National Association of Personal Financial Advisors (NAPFA), www.NAPFA.org. Past affiliations include the Boston Estate Planning Council. National Institute of Certified College Planners the Institute of Certified Financial Planners, the Lexington Chamber of Commerce, and Sports Financial Advisors Association.
Annual Question & Answer Session with Dallas Scoffield and Steven Wightman, CFP, Principal
What education and training do you have that qualify you to manage my investments?
I started with Bachelor of Science degree in Technology and Teaching. This degree is perfect for someone in my field as technology is very involved in today’s world of financial planning and the teaching side is involved in communicating difficult and confusing information clearly and concisely. I also have earned the Graduate level certification and license of CFP (Certified Financial Planner) in which I passed five written exams on taxation, estate planning, employee benefits, investments, and risk management. This certification also requires ongoing education on the newest and up to date information – all to the benefit of my clients. In addition, I have completed life planning counseling and training with two modern day masters, Mr. George Kinder and Mr. Bill Bachrach. Last, but not least, I have completed professional training in post secondary (college) education advisory services to clients. This commitment to continuing education, training and certifications is further evidence of my dedication to my clients’ well being.
Why should I choose your firm over any other?
We focus on Values-Based Financial Planning. It is Life Planning blended with Financial Planning for a more well-rounded approach to integrating your finances with client values.
Other distinguishing characteristics include:
Tax efficient investing. We focus on investments that will lower your taxes. Many clients will see a five digit drop in their taxes.
We prefer to invest with Exchange-Traded Funds far more than with mutual funds. These funds have far lower fees and trade like stocks producing low tax rates. We pass these substantial savings along to clients in the form of higher reinvested returns than a like asset allocation enjoyed with mutual funds alone.
Retirement Specialization: We know retirement because we live it. We aspire to “go into the future” to do ourselves what we will later ask clients to do once we are convinced it is a prudent choice. For example, before we ask a client to enter into a private investment, chances are we have done that ourselves and we have a history of its success. We want to walk our talk.
Low Cost-Platform for investing that you can’t find elsewhere. Our style, like our experience, is unique.
Alternative Investments often outperform traditional investments. Instead of flat returns, investors often see returns that are asynchronous to standard equity markets. This kind of investing can ad real value in bear or flat markets. These include private placement into real estate, energy investments and conservative managed futures strategies.
Lower risk- Because of low expenses, we are often able to increase levels of return and thus invest with a lower risk than with mutual funds or stocks.
Concierge Style of a family office to fully support a wide range of our client’s financial and non financial family needs.
Fee-onlyfiduciary- This means that we are not paid on commission so we will never influence you to purchase investments designed to make us money. Also, as a fiduciary, we only have the client’s interest at heart, not a large institution’s.
NAPFA Registered Advisor- We adhere to NAPFA’s code of ethics and fiduciary oath. For more information on why NAPFA is so highly regarded, please see the article by Kiplinger’s magazine on page 72 and Investment News (Elliot Spitzer Article)
Lots of hand-holding for families allows them to reach their goals for reasons that are important to them.
In summary, clients receive the lowest level of risk for their investments at the lowest tax because we adhere to the highest standards of ethical conduct, continuing education, and professional practice protocols.
Clients come to us because they desire less risk and more certainty that their financial health will be strong and their retirements and their families - secure.
What services do you offer?
We offer all of the traditional services offered by most financial planning firms (taxes, education planning, investment planning, employee benefit planning, Social Security planning, and insurance planning), while also offering very non-traditional services. These include using alternative investments like precious metals, real estate, oil, and natural gas to name a few. We also offer private placement investment opportunities, like commercial real estate, for those who are interested in choices other than listed investments. We also bring experts in as part of our network to offer clients the best products at the most reasonable price. In addition to these, we also offer a well-diversified list of services to fit a variety of needs. These include: travel arrangements, aviation arrangements (in case you need a private jet), event planning, limo service, etc.
What are your rates?
We charge a one flat rate for creating a written comprehensive financial plan and an additional retainer flat rate for ongoing financial and wealth management services. Please see our ADV II for current details and disclosures.
Why is a financial plan so beneficial to me?
I liken a financial plan to health. If, after ten years, you had eaten whatever you wanted and never exercised, what would your health be like? On the other hand, what would your life be like if you trained like a Pro athlete? It is the same with your finances. A financial plan makes you feel like a professional athlete. You know what your values and specific goals are and where you are along life’s road. You feel confident and poised. You know that you are better off and have taken necessary actions to be fully prepared for whatever life may bring.
How much experience do you have in this field?
I have been a practicing fee-only financial planning fiduciary since 1995.
Why do you work out of your home?
I believe clients hire me, not an office. They seek my guidance, advice, experience and time tested wisdom. The only difference is that I have only one, not two places to manage like some other financial advisors. I enjoy the comfort, convenience, and flexibility of my home office. It allows me to keep meetings that a traditional office may not allow. I don’t’ have to spend the time maintaining both a home and a distant office. I don’t have to pollute the air by commuting daily. This means I have more time to spend with clients and working on their behalf. If I save just 5 hours weekly, that adds up to 250 hours, or 31 days a year more time. I also save clients the expense of having my office costs passed on to them. Finally, today/s technology allows me to perform any function I need to and would do in any office around the world faster and better. My clients all benefit from this.
The Value of Your Personal Financial Advisor
1.Investment management services. Implementing an investment program requires giving careful thought to risk, time frame, goals, taxes, choosing a strategy, doing the investment research, and implementing and monitoring the strategy. Most people who seek out financial advisors don't want to take the time to do this regardless of whether they believe they are capable of doing it or not. Hiring an advisor is a time-saver.
2.Handholding and discipline. Many people seek out advisors because they are not confident in investing by themselves. While there are a growing number of sources of easy-to-follow advice, (e.g. on-line advice, newsletters, and fund company asset allocation services) many people are not confident in assessing whether these are right for them. Our experience suggests that many people really value the human connection they get from the advisor and it is this connection that is the source of the trust and confidence they need to commit to and stick with an investment program.
3.Competitive performance. It is our experience over many years that the majority of clients arewith competitive performance and don't necessarily expect their advisor to deliver consistently market-beating performance, provided that they are properly educated. They recognize that the advisor adds value by delivering competitive performance at appropriate risk levels and by bringing discipline to the table, helps to avoid significant mistakes. Of course, there is some subset of the client market that is very performance oriented. This is why it is so important for clients to make sure they understand our investment philosophy and that they have realistic expectations. We don’t over-promise. We focus on helping clients have the highest degrees of probability of achieving their goals within their time horizons.
4.Fees must be reasonable to allow for competitive performance. Fees on a typical qualified plan are taken from fund performance and not transparent to the consumer. These opaque fees reduce return on investments by up to 10% annually. We believe total investment costs over 3% make it extremely difficult to deliver competitive performance. In our platinum financial advisory practice we charge 1% of net worth. Further, with lower holding costs typically to less than 1% for investments we select. The typical 2% + investment cost savings combined with our confidence of our fund due diligence, tax savings though tax efficient investments, our asset class research and our proactive investment management style can more than make up for the fee over the long run, regardless of the return environment.
5. The value of an advisor is greater in a low-return environment. We realize that clients might not easily recognize this, but nevertheless it is true. It becomes an issue of understanding the difference between what the market is providing and what the advisor is providing. In a high-return environment, the absolute returns easily cover the fees but require little work. When the market isn’t just handing out high returns, the value of investment picking is amplified. Obsessively thorough due diligence conducted with a high level of intellectual integrity is, we believe, even more important and can add more value. In addition, our asset allocation approach, which allows us to look at many asset classes, gives us a fairly wide array of investment opportunities to pursue. Note that past performance is no guarantee of future results. Further, each client portfolio is unique to that individual’s needs.
Health & Savings
Health and Fitness Corner. In a former article, called “Fitness Facts”, we took a look at exercise. In this issue, it’s all about food. In the next issue, we’ll address mental health.
Slim into summer with these tips. By Steve Wightman, CFP
In today’s rushed lifestyles, people often find themselves eating out. Unless you’re careful, meals on the fly can pack on weight with hidden calories with hidden health effects.
Unlike food labeling at the grocery store, restaurants aren’t required to tell you what’s in the food you order. When is the last time your waiter stood by your table and recited the fat, cholesterol, sodium, allergic qualities and lactose food contents?
Fatty foods for example are deceptive, but potentially deadly. Sure they often taste great, but unless you work like a lumberjack, they stimulate your body to pack on fat. Fat in turn stimulates clogging of your cardiovascular system making it increasingly difficult for the heart to pump. In addition, extra weight that afflicts the majority of adults today, adds more heart strain and less of a chance to recover from a heart attack. Interestingly, once fat, or adipose cells form, they become somewhat self-perpetuating, increasing your appetite for more fatty foods. One of the many reasons people have so much difficulty loosing weight, is the lingering demand by millions of these hungry fat cells.
What’s one to do? Fight fat! First, skip the appetizers! Many pack fat and will fill you up before your meal arrives. Further, the more appetizers you eat, the less you’ll taste your meal. Your sense of taste and smell are most acute when your hungry, as a stroll by a bakery after a one-day fast, will attest. Ice those fat cells with a glass of calorie-free water instead. Now, watch those salad bars! They are full of all kinds of things that can get you, but most of all FAT hidden in sauces and pasta and potato salads. Choose fresh veggies and fruits instead. American diets are poor in both. The USDA recommends 3 servings of fruit daily. How much do you and your family eat?
Main course. White fish is rich in protein, vital fish oils and low in fat. New England natives were living healthy on fish as their primary protein source for millenniums before the Vikings and pilgrims landed. With so many kinds to choose from and so many ways that it is prepared, fish is becoming ever more popular today. Shellfish too are low in fat, as long as they are prepared sans oil, like steamers.
How is the food cooked? Lower your calories by choosing baked or broiled foods over fried or prepared in cheese or cream sauces. Avoid cream in soups too. Ask for sauces and dressings to be served on the side so that you are in control.
Food that is fat rich won’t make you rich, but health poor – the cruelest form of poverty. The cost of one restaurant meal for two could easily eclipse a weekly grocery bill. If you eat out once a week at a moderately priced restaurant, you’re close to doubling your food bill. What would a quiet meal at home do for your friendships and your family? With so many great recipes, like the quick-to-prepare ones we offer in Ear to the Ground, why not create more of your own masterpieces? At least now you can read the label. Smart eating is like smart investing, it is the learned art of being very picky. Eating less and smarter when your out and more meals at home, what better recipe for both your health and your wealth?
Money, Myths, and Morasses
Curing Our Monetary Malaise
By Steven Wightman, CFP
Investors are mesmerized into markets based on misunderstanding of information and pure myths. During the past ten years millions of investors have lost more than 50% of their savings – largely in retirement funds, according to July 14th article in both the NY Times and the Boston Globe. Why? Because they have been sold a false bill of goods by so-called money experts who were nowhere to be found when markets and the wisdom of their advice collapsed.
Major myths:
My investments will bounce back! People believe that no matter how unwise or bad an investment they made, whether it is XYZ.com or a technology stock or portfolio that somehow the 50% + decline will reverse itself and then climb as if time will go in backward to 1999. Here investors often show little understanding or concern about diversification or life-stage investing, never mind risks. Most investors began with an inappropriate asset allocation and ended with something worse because the severe impact of the 2007-8 market crash has mangled their asset allocation into a wreckage – now badly in need of a reworking. If stock equity is still the growth locomotive of investing, how will investors who sold stocks on shivers meet critical financial goals like retirement if they don’t replace half of the equity values they lost? Why do so many people continue to make knee-jerk asset allocation adjustments?
Sell on bad news, buy on good news. This is a formula for buying high and selling low. Media moves markets. People buy high and sell low based upon what’s in the news that day. When Tyco International’s CEO Dennis Koslowski was indicted for state tax sales evasion, millions of shares were sold off following the news. No one paid much attention to the fact that this conglomerate is in rock-solid financial condition with enormous free cash flows. Every time the media flagged a company or their employees for questionable practices, some truly justified, investors ran for the exits and stock values collapsed – hurting everyone.
Equity premium; that percentage amount that stocks historically have outperformed bonds is still widely touted by media and large brokerage firms even though it has likely evaporated due to the declining stock dividend yields since the 1970’s. Where stocks once paid a 5% dividend, today the average is about 1.2%. This shrinkage makes stocks less attractive and less valuable to investors. With less intrinsic value, they are less likely to beat bonds by 3-5% in the future. Hence, their higher volatility over bonds may no longer be worth the risk past investors were willing to take; yet investors keep buying because they expect stocks to deliver 10-13% returns. Brokerages are only too happy to encourage this myth.
Money managers make sure you understand fees, costs and alliances with firms and individuals they receive economic benefits from before you invest. Their requirement is to disclose, not to explain. There’s a vast difference between handing you a 60 page prospectus or sitting down with you to explain bone by bone the structure and costs of proposed investments. By far, most in the financial services industry are not fiduciaries. They don’t have to represent your best interests 24x7. Only those who bear the CFPä mark and NAPFA members can be relied on to meet this standard. The result is that you are probably either not getting any information or not the best information. Hence, investors often do not understand how a new investment impacts risk, return, and taxes in asset allocations. Consequently, their portfolios underperform expected total returns due to trading, fees, expenses and taxes because they didn’t read in the fine print of a prospectus. These costs may exceed the rate of return for a mutual fund or annuity for a given year and create substantial drag on investment growth. (See my quote in Kiplinger’s June issue on Exchange Traded Funds). In poor performing times, as in the past ten years, such investments aggravate losses. A portfolio with a 10% loss and 5% fees and expenses over five years can eat a savings plan.
Affluenza, the addiction to having things based upon a false sense of need and the belief that if we earn more and spend more we’ll be rich and happy. It is interesting to note that the more people earn, no matter how much that is, the more they spend. You can’t spend your way to wealth or happiness. It often sets the stage for just the opposite. The more we spend the more complicated our lives become. More complicated lives lead to more stressful situations which in turn rob us of our happiness, vigor and vitality. Last, because we are spending now and not saving, we are sabotaging our own future.
We’re saving enough and we’ll be fine for retirement. Perhaps the greatest myth of all. Although the vast majority believes they are on track, studies indicate that less than 5% are preparing adequately for retirement. The average retiree has less than $35,000 saved on the first day of retirement. Interestingly, the 5% who are on track plan for it. Those who think they are okay have no written plan and when questioned, have no idea of how much they need to retire or how much (it follows) they need to save to reach that milestone. A common finding in the book, The Millionaire Next Door is those who consume the most, save the least, pay the highest income taxes and confuse high income with wealth building. They are not the same. When income stops due to death, disability, joblessness or retirement, high-rollers often find themselves in poverty lines, living off Ebay, or parental outpatient care, aka, parent to child welfare.
We don’t need professional advice; we’ll do well without it! Millions of Americans march into poverty griping this belief and their empty retirement plans. The odds are stacked way against those who go it alone - the vast majority fail. For example, the top 3.5% of the wealthiest Americans own nearly half of the wealth in America. They have two things in common that all the rest do not. They plan their futures at least 8 hours per month AND they prize professional advice. They understand that you can’t will away all risks, but you can manage them. Getting the best advice helps them avoid big mistakes and make better choices. It’s their way of insuring a secure financial future. They believe that you get what you pay for. The results speak for themselves. A disproportionately high percentage of this 3.5% flock to NAPFA advisors – perhaps because they understand that these financial advisors meet the World’s highest standards for offering personal financial advice. The role of a good financial advisor is to treat money malaise. The untreated are likely to continue making ill thought choices.
We’re already getting high quality advice. Okay, then it follows that you should be able to readily cite the training, credentials and experience of your advisor. Take a moment now and answer these golden questions. How many times in the past ten years have you been given advice by your advisor that has resulted in a substantial increase in your net worth? How many times has your advisor provided you with advice the gives you a sense of peace of mind, enhanced your financial security?
If investors could learn a valuable lesson from a meltdown it is not to “pennywise and pound-foolish” as the wise Senator Edmund Muskie of Maine often said. The majority of people continue to loose tens of thousands of dollars each and every year, expose their families and estates to enormous risks. Risk wise, they are not unlike JFK, Jr. flying in the dark with his family on the fateful Martha’s Vineyard trip - but many won’t pay a fraction of what they’re loosing in markets for the unbiased advice of a Certified Financial Planner professional.
Myths make morasses and more asses make myths. Money myths are like religious beliefs: People hold them dearly and reticently closely to their chests – even when their finances are in a death spiral. These common myths are our gossamer wings on which we ride superficially blissful of the growing storm. Instead of carrying us to our desired sunny levels of a secure retirement, they shatter in downdrafts, leaving us and our futures in a free fall. Take a lesson from Shakespeare’s legacy; don’t let your money control you, but take control of your money – and your life. That’s the cure for monetary malaise.
Health and Fitness Corner. In a former article, called “Fitness Facts”, we took a look at exercise. In this issue, it’s all about food. In the next issue, we’ll address mental health.
Slim into summer with these tips. By Steve Wightman, CFP
In today’s rushed lifestyles, people often find themselves eating out. Unless you’re careful, meals on the fly can pack on weight with hidden calories with hidden health effects.
Unlike food labeling at the grocery store, restaurants aren’t required to tell you what’s in the food you order. When is the last time your waiter stood by your table and recited the fat, cholesterol, sodium, allergic qualities and lactose food contents?
Fatty foods for example are deceptive, but potentially deadly. Sure they often taste great, but unless you work like a lumberjack, they stimulate your body to pack on fat. Fat in turn stimulates clogging of your cardiovascular system making it increasingly difficult for the heart to pump. In addition, extra weight that afflicts the majority of adults today, adds more heart strain and less of a chance to recover from a heart attack. Interestingly, once fat, or adipose cells form, they become somewhat self-perpetuating, increasing your appetite for more fatty foods. One of the many reasons people have so much difficulty loosing weight, is the lingering demand by millions of these hungry fat cells.
What’s one to do?Fight fat! First, skip the appetizers! Many pack fat and will fill you up before your meal arrives. Further, the more appetizers you eat, the less you’ll taste your meal. Your sense of taste and smell are most acute when your hungry, as a stroll by a bakery after a one-day fast, will attest. Ice those fat cells with a glass of calorie-free water instead. Now, watch those salad bars! They are full of all kinds of things that can get you, but most of all FAT hidden in sauces and pasta and potato salads. Choose fresh veggies and fruits instead. American diets are poor in both. The USDA recommends 3 servings of fruit daily. How much do you and your family eat?
Main course. White fish is rich in protein, vital fish oils and low in fat. New England natives were living healthy on fish as their primary protein source for millenniums before the Vikings and pilgrims landed. With so many kinds to choose from and so many ways that it is prepared, fish is becoming ever more popular today. Shellfish too are low in fat, as long as they are prepared sans oil, like steamers.
How is the food cooked? Lower your calories by choosing baked or broiled foods over fried or prepared in cheese or cream sauces. Avoid cream in soups too. Ask for sauces and dressings to be served on the side so that you are in control.
Food that is fat rich won’t make you rich, but health poor – the cruelest form of poverty. The cost of one restaurant meal for two could easily eclipse a weekly grocery bill. If you eat out once a week at a moderately priced restaurant, you’re close to doubling your food bill. What would a quiet meal at home do for your friendships and your family? With so many great recipes, like the quick-to-prepare ones we offer in Ear to the Ground, why not create more of your own masterpieces? At least now you can read the label. Smart eating is like smart investing, it is the learned art of being very picky. Eating less and smarter when your out and more meals at home, what better recipe for both your health and your wealth?
Pyschology of $
Money, Myths, and Morasses
Curing Our Monetary Malaise
By Steven Wightman, CFP
Investors are mesmerized into markets based on misunderstanding of information and pure myths. During the past ten years millions of investors have lost more than 50% of their savings – largely in retirement funds, according to July 14th article in both the NY Times and the Boston Globe. Why? Because they have been sold a false bill of goods by so-called money experts who were nowhere to be found when markets and the wisdom of their advice collapsed.
Major myths:
My investments will bounce back! People believe that no matter how unwise or bad an investment they made, whether it is XYZ.com or a technology stock or portfolio that somehow the 50% + decline will reverse itself and then climb as if time will go in backward to 1999. Here investors often show little understanding or concern about diversification or life-stage investing, never mind risks. Most investors began with an inappropriate asset allocation and ended with something worse because the severe impact of the 2007-8 market crash has mangled their asset allocation into a wreckage – now badly in need of a reworking. If stock equity is still the growth locomotive of investing, how will investors who sold stocks on shivers meet critical financial goals like retirement if they don’t replace half of the equity values they lost? Why do so many people continue to make knee-jerk asset allocation adjustments?
Sell on bad news, buy on good news. This is a formula for buying high and selling low. Media moves markets. People buy high and sell low based upon what’s in the news that day. When Tyco International’s CEO Dennis Koslowski was indicted for state tax sales evasion, millions of shares were sold off following the news. No one paid much attention to the fact that this conglomerate is in rock-solid financial condition with enormous free cash flows. Every time the media flagged a company or their employees for questionable practices, some truly justified, investors ran for the exits and stock values collapsed – hurting everyone.
Equity premium; that percentage amount that stocks historically have outperformed bonds is still widely touted by media and large brokerage firms even though it has likely evaporated due to the declining stock dividend yields since the 1970’s. Where stocks once paid a 5% dividend, today the average is about 1.2%. This shrinkage makes stocks less attractive and less valuable to investors. With less intrinsic value, they are less likely to beat bonds by 3-5% in the future. Hence, their higher volatility over bonds may no longer be worth the risk past investors were willing to take; yet investors keep buying because they expect stocks to deliver 10-13% returns. Brokerages are only too happy to encourage this myth.
Money managers make sure you understand fees, costs and alliances with firms and individuals they receive economic benefits from before you invest. Their requirement is to disclose, not to explain. There’s a vast difference between handing you a 60 page prospectus or sitting down with you to explain bone by bone the structure and costs of proposed investments. By far, most in the financial services industry are not fiduciaries. They don’t have to represent your best interests 24x7. Only those who bear the CFPä mark and NAPFA members can be relied on to meet this standard. The result is that you are probably either not getting any information or not the best information. Hence, investors often do not understand how a new investment impacts risk, return, and taxes in asset allocations. Consequently, their portfolios underperform expected total returns due to trading, fees, expenses and taxes because they didn’t read in the fine print of a prospectus. These costs may exceed the rate of return for a mutual fund or annuity for a given year and create substantial drag on investment growth. (See my quote in Kiplinger’s June issue on Exchange Traded Funds). In poor performing times, as in the past ten years, such investments aggravate losses. A portfolio with a 10% loss and 5% fees and expenses over five years can eat a savings plan.
Affluenza, the addiction to having things based upon a false sense of need and the belief that if we earn more and spend more we’ll be rich and happy. It is interesting to note that the more people earn, no matter how much that is, the more they spend. You can’t spend your way to wealth or happiness. It often sets the stage for just the opposite. The more we spend the more complicated our lives become. More complicated lives lead to more stressful situations which in turn rob us of our happiness, vigor and vitality. Last, because we are spending now and not saving, we are sabotaging our own future.
We’re saving enough and we’ll be fine for retirement. Perhaps the greatest myth of all. Although the vast majority believes they are on track, studies indicate that less than 5% are preparing adequately for retirement. The average retiree has less than $35,000 saved on the first day of retirement. Interestingly, the 5% who are on track plan for it. Those who think they are okay have no written plan and when questioned, have no idea of how much they need to retire or how much (it follows) they need to save to reach that milestone. A common finding in the book, The Millionaire Next Door is those who consume the most, save the least, pay the highest income taxes and confuse high income with wealth building. They are not the same. When income stops due to death, disability, joblessness or retirement, high-rollers often find themselves in poverty lines, living off Ebay, or parental outpatient care, aka, parent to child welfare.
We don’t need professional advice; we’ll do well without it! Millions of Americans march into poverty griping this belief and their empty retirement plans. The odds are stacked way against those who go it alone - the vast majority fail. For example, the top 3.5% of the wealthiest Americans own nearly half of the wealth in America. They have two things in common that all the rest do not. They plan their futures at least 8 hours per month AND they prize professional advice. They understand that you can’t will away all risks, but you can manage them. Getting the best advice helps them avoid big mistakes and make better choices. It’s their way of insuring a secure financial future. They believe that you get what you pay for. The results speak for themselves. A disproportionately high percentage of this 3.5% flock to NAPFA advisors – perhaps because they understand that these financial advisors meet the World’s highest standards for offering personal financial advice. The role of a good financial advisor is to treat money malaise. The untreated are likely to continue making ill thought choices.
We’re already getting high quality advice. Okay, then it follows that you should be able to readily cite the training, credentials and experience of your advisor. Take a moment now and answer these golden questions. How many times in the past ten years have you been given advice by your advisor that has resulted in a substantial increase in your net worth? How many times has your advisor provided you with advice the gives you a sense of peace of mind, enhanced your financial security?
If investors could learn a valuable lesson from a meltdown it is not to “pennywise and pound-foolish” as the wise Senator Edmund Muskie of Maine often said. The majority of people continue to loose tens of thousands of dollars each and every year, expose their families and estates to enormous risks. Risk wise, they are not unlike JFK, Jr. flying in the dark with his family on the fateful Martha’s Vineyard trip - but many won’t pay a fraction of what they’re loosing in markets for the unbiased advice of a Certified Financial Planner professional.
Myths make morasses and more asses make myths. Money myths are like religious beliefs: People hold them dearly and reticently closely to their chests – even when their finances are in a death spiral. These common myths are our gossamer wings on which we ride superficially blissful of the growing storm. Instead of carrying us to our desired sunny levels of a secure retirement, they shatter in downdrafts, leaving us and our futures in a free fall. Take a lesson from Shakespeare’s legacy; don’t let your money control you, but take control of your money – and your life. That’s the cure for monetary malaise.
Military
Stepping up free help to military
By Charles Paikert
December 20, 2004
NEW YORK - With newspaper headlines serving as an all-too-poignant reminder that members of the U.S. military need all the help they can get, financial planners are stepping up their efforts to offer free assistance to them and their families.
"It will be a major focus of our pro-bono efforts next year," said Clara Lipson, the New York-based director of pro-bono services for the Financial Planning Association, which is based in Atlanta and Denver.
"There's a major problem out there, especially with so many reservists now serving in the military," she said. "They don't have a support structure, and there's a tremendous need for financial recovery when they finish their tour of duty."
Crisis is seen
According to Mark Passacantando, director of pro-bono services for the FPA in Massachusetts and a managing member of Westwood, Mass.-based Financial Planning Partners LLC, inadequate financial guidance for military personnel has reached crisis proportions.
"There are soldiers coming back as double amputees, which has profound financial consequences," he said. "Soldiers are coming back with all kinds of debt problems, and they have to assimilate back to their civilian job - if it exists."
One of the FPA's major goals in 2005, Ms. Lipson said, will be to match military bases that need help with nearby FPA chapters that can provide it.
Ms. Lipson denied that the damaging insurance and mutual fund gouging scandals re-
ported earlier this year by The Wall Street Journal were the catalysts behind the FPA's flurry of military pro-bono efforts.
"This is really an outgrowth of the pro-bono program that we started after 9/11. When the Iraq war began in 2003, we immediately got phone calls from our members that we need to do something," she said.
"We also got a call from the Department of Defense and the National Military Families Association," Ms. Lipson said. "It was clear that military families were going to be impacted financially and that we needed to help out."
This summer's insurance scandal did, however, give the FPA's efforts "more impetus," she acknowledged.
"It became even more [urgent] that something needs to be done," Ms. Lipson said. The scandal "brought the issue more into the limelight, and we didn't want to see the abuses perpetuated."
Just last week, Fort Worth, Texas-based First Command Financial Planning agreed to pay $12 million to settle charges by NASD and the Securities and Exchange Commission that it used misleading sales material to promote high-fee mutual funds to military officers.
Local FPA chapter members said their pro-bono efforts were being driven by either personal involvement with the military or growing requests for help from local military bases or service families.
Ralph Lunt, a lieutenant colonel in the Air Force Reserve and a vice president for Strategic Capital Advisors in Cleveland, said that as the war intensified this year and more reservists were being called up, he realized that other reservists "might not be as familiar with the financial repercussions if they get called up."
As a result, he began giving training sessions to other planners who volunteered to do pro-bono work for military families to explain such issues as "the unique qualities of military benefits" and how they meshed - or didn't - with a reservist's civilian benefits.
Mr. Lunt also began doing a personal-finance TV show on The Pentagon Channel, the military's in-house network, "to get the word out and educate people more."
In addition, he has met with the Volunteers of America, which has a military rehabilitation facility in Cleveland.
In 2005, Mr. Lunt said, local financial planners will be offering regularly scheduled classes on personal finance for servicemen undergoing rehabilitation. "These are veterans who will be re-entering the work force," he said, "and they need to know as much as possible."
Pat McDonald, another planner with ties to the military, contacted his local Red Cross chapter in Orange County, Calif., earlier this year. It put him in touch with a Marine Corps base in the area.
Mr. McDonald, who is an Air Force veteran and owns an eponymous financial planning firm in Placentia, Calif., set up a group of planners who will offer financial counseling to families of active-duty casualties next year.
"We'll help them deal with benefits, as well as collecting insurance and their children's education and any other estate or budget
planning need they may have," he said.
Vietnam veteran Steven D. Wightman, principal of Lexington, Mass.-based Wightman Financial Network LLC, said he became aware of reservists' need for financial planning assistance when he was called up for the first Gulf War in 1991. "I made up my will and packed my bags," he recalled.
This year, Mr. Wightman is working with four other local planners and offering a seminar to 200 reservists at nearby Fort Devens on such matters as wills, debt management, educational benefits for reservists and available financial planning resources.
Mr. Passacantando said 43 financial planners throughout Massachusetts have volunteered to do pro-bono work with soldiers and their families, including those at Fort Devens.
Initially, he said, it was difficult to persuade the military command to open its doors.
But when Mr. Passacantando asked the officers if they wanted the soldiers "thinking about their personal financial problems instead of bullets flying around them, that did the trick," he recalled. "The
Marines said, 'When can you come?'"
Currently, Mr. Passacantando said, planners in Massachusetts are answering questions from servicemen by e-mail, phone or in one-on-one sessions.
Next year, he said, the FPA hopes to heighten awareness of the program for all branches of the military around the country.
"With increased communication and cooperation from the military," Mr. Passacantando said, "we want to leverage what we've done with national and other state chapters. The country is in a unique situation right now, and we want to make a difference."
Amid war, military families tap financial resources
By Craig M. Douglas METRO WEST NEWS, Sunday, March 23, 2003
Jennifer Johnson puts her best foot forward when discussing her husband Mark's military service, which was just extended indefinitely due to war with Iraq.
Life is good, the 27-year-old Hopedale resident says, and she's intent on making do until her infantryman, whom she is very proud of, is discharged from duty as a U.S. Marine.
Nonetheless, it's easy to hear the disappointment in Johnson's voice as she runs down a list of "adjustments" the couple has made over the past two years, when Mark was shipped overseas, offered military leave and then shipped out again for battle. The flip-flop of events has left the Johnsons with a total of six months together since their hastened wedding in December 2001.
And while absence may make the heart grow fonder, military pay and a shaky economy have all but frayed the nerves of the former office administrator, who recently filed for unemployment after losing her job at a technology company in Marlborough.
Today, Johnson is living with her parents, trying her best not to dip into her husband's meager paycheck which, she hopes, will buy them a modest home someday in MetroWest.
"He was supposed to be discharged last year in either March or February, but that was (scheduled) before 9/11 and all of this (war with Iraq) happened," said Johnson, who had originally planned to be married in May 2002. Despite all of the time and expenses that went into scheduling the spring wedding date, uncertainty after the terrorist attacks on New York and Washington, D.C., prompted the Johnsons to cut their losses and, instead, opt for a more immediate ceremony before Mark's inevitable deployment.
"All I really want to do is settle down and have a normal relationship. It's hard," Johnson said. "I have no resentment toward the military, because I've always known there was a chance this could happen. I just have to live on a budget, pay for the things I need and do without the rest...just do what I need to do."
As strange as it may sound, the Johnsons are two of the lucky ones. Thousands of families, with more than one mouth to feed, are often left to deal with the financial hardships brought on when a spouse or parent is called to active duty in the military. For reservists and members of the National Guard, service abroad can mean a dramatic drop in pay and considerable uncertainty, both financial and emotional, during their time served.
Under federal law, companies are required to hold an activated employee's job for up to five years of service and to extend his or her benefits for at least 30 days. There are no stipulations regarding the extension of pay or bonuses, leaving the average staff sergeant only $2,400 a month -- the equivalent of around $40,000 a year in gross salary -- to send back to a family at home.
With the plight of military families in mind, the U.S. House of Representatives moved last week to grant temporary tax relief as the operations in Iraq and Afghanistan unfold.
"Most families live right on the edge. There's usually no cushion there," said Steven D. Wightman, a financial advisor and Gulf War veteran living in Lexington.
As a master sergeant trained to deal with biological and nuclear warfare, Wightman said his family was forced to address financial issues that could arise during his time away, and he remembers well all of the morbid discussions and contingency planning that accompanied his deployment.
Fortunately for Wightman, the war ended before he was shipped overseas, nor were any weapons of mass destruction unleashed on American troops. Still, he said his last-minute scramble to straighten out his will, insurance contracts and finances was a lesson in the potential hardships facing military families, who more often than not are stripped of their household's "breadwinner" when war or other military obligations occur.
"The consequences to families are always the same (when soldiers are activated)," said Wightman, who prepared with his wife and stepson for deployment during the first Gulf War. "The only difference is that during war, a husband or wife actually has their life on the line."
Today, Wightman still answers the call to duty, even though he is long retired from the military. As a member of the National Association of Personal Financial Advisors, he and a network of his colleagues are volunteering their professional expertise to help military families persevere through an uncertain financial future. Whether it be a mortgage refinancing, a simple budget plan or a rundown of their legal rights and resources, Wightman said basic financial planning is a must for many military families, who are currently being squeezed by both turmoil abroad and a slumping economy at home.
"People tend not to be too concerned until a hot iron falls in their laps," said Wightman, who volunteers at the Family Support Center at Hanscom Air Force Base in Bedford. "The biggest thing is always the `New Budget.' Families need to learn to scale down their expenses as much as possible -- to rethink things. The key is finding ways to make up for their income gaps."
To do so, Wightman said families often have the option of renegotiating the terms or rates of their mortgages. For families who have lived in their homes for a number of years and are having an immediate cash crunch, they also have the option of drawing from, or "tapping into," the equity built up in their house.
In addition, Wightman and other financial professionals give military families an overview of their rights, ensuring them that no derogatory credit action or foreclosures can occur while their enlisted spouse or parent is on active duty.
"What's unique about Hanscom is that, with the closure of so many military institutions, we're sort of it for New England," said Dawn Andreucci, chief of programs at Hanscom's family support center. "We're really the only full-service military installation in a six-state area. So, we end up doing a lot by e-mail and phone."
Andreucci, along with Sondra Albano, the director of the family support center, manages programs for military families facing myriad issues, both financial and emotional. With a number of resources at their disposal, the center's staffers said their roles are equally balanced between preemptive and emergency programs.
"I'd say we have a two-pronged approach to financial support at the center," Albano said. "As soon as a soldier is notified, we have a family-readiness officer give the family a pre-deployment breakdown -- educating them about the emotional cycle as well as practical preparations to prevent problems from ever occurring.
"We also have an emergency component that assists families in desperate situations. Here, we have the Air Force Aid Society, although each branch of the military has its own assistance program. They provide no-interest loans and even monetary grants, depending on the member's ability to pay back a loan."
Albano said military families also have access to the base's commissary, which rivals the size and scope of any supermarket in the surrounding area. Albano estimates the average commissary shopper saves between 20 and 30 percent on their grocery bills.
Speaking from experience, the volunteers and employees at the Hanscom program all agree it is in every military family's best interest to take a trip out to the base, even if it means a one- to two-hour drive from an out-of-state community.
"If there is one thing that I can stress, it's not to go it alone. It's too tough," Wightman said. "There are people out there who really want to help."
Insurance ideas
Active Duty Reservists Need Portfolio, Insurance Changes
By LYNN COWAN May 27, 2004 1:17 p.m. Of DOW JONES NEWSWIRES
WASHINGTON---- When Steven Wightman received notice during the Persian Gulf War that his Army Reserve unit was being called up, he had three days to ponder the financial implications.
He updated his will and checked his insurance coverage. He made sure he had all the right beneficiaries listed on his accounts. Then he braced himself for what was likely to be a significant loss of income.
"The financial loss I would have incurred would have been in the six digits. I would have lost my health insurance and everything. My whole network, my financial structure would have fallen apart," Wightman said.
Three days later, he got the call: The war was winding down and his unit wasn't needed after all, news that he greeted with a mixture of relief and disappointment over not being able to serve. He left the reserves in 1997 and today is running another business, Wightman Financial Network, a fee-only financial planning firm in Lexington, Mass.
Wightman 's experience is being repeated all over the U.S. today as more reservists and Army National Guard members are getting called up to active duty, this time for the war in Iraq. A survey by the Department of Defense for Reserve Affairs found that nearly a third of families experienced a decrease in income when a husband or wife was called up.
Often, the emotional impact of leaving civilian life for a war zone overshadows the financial implications, but the financial effect of poor planning ahead of deployment can reverberate in a family for years, especially if a primary breadwinner is killed or injured in the line of duty, experts say.
Fine Print On Life Insurance
When reservists and National Guardsmen are called to active duty and know that their family's income is going to suffer as a result, financial planners and brokers say there are a number of measures they should take.
Mortgage payments are often the highest fixed cost for a family, and federal law allows people called to active duty to demand their banks give them a capped interest rate of 6% on their mortgages. But years of low interest rates means that many families may already have a 6% rate or less on their home loans. If that's the case, Merrill Lynch & Co. (MER) broker Heather Evans says an interest-only mortgage can bring down monthly payments during the early years of a loan.
Although the military offers its members group life insurance, the benefit is capped at $250,000. Those who need a higher level should add their own policy on top of that. But Michael Finer, a major in the Army National Guard and a co-founder of Major League Investments Inc. in Salem, Mass., said military personnel must take care to read the fine print in their policies: Many exclude coverage for soldiers who die in a war zone.
Disability insurance is also something that National Guardsmen and reservists should consider, since many tend to be older and in worse physical condition than full-time enlisted soldiers when they are sent to a hostile environment, said Wightman .
"By a hostile environment, I don't necessarily mean bullets whizzing by, but the environment itself is hostile -- there's hot deserts, chemical exposure, new diseases. These are the people who should plan on the possibility of having more health issues when they return. When they go back to their jobs, they may not be as able to work," said Wightman .
Altering Stock Portfolios
Advisors say in the ideal world, most clients will have saved a cushion of at least six months' salary to tide their families through their absence. Without it, they'll need to turn to their investment portfolios to generate income. Robert Gerstemeier, a lieutenant in the Naval Reserves who is president of the Gerstemeier Financial Group LLC in Naperville, Ill., said he believes everyone should rebalance their portfolios, and if necessary, increase an account's cash position for emergency purposes. But under current market conditions, he advises clients against moving into high-yielding securities or bonds.
"I think now is a bad time to do anything like that to increase income," he said.
Even if the portfolio doesn't need to be tapped for cash when a soldier is called to duty, advisors say it's important to make it as low-maintenance as possible. Besides giving a stateside relative or friend power of attorney to help make decisions during someone's absence, the number of potential decisions should be reduced by eliminating complex or volatile investments.
Merrill Lynch's Evans said she's counseled investors at her Tysons Corner, Va., practice who are "a little more aggressive" than most of her clients that they need to change their portfolios before heading into combat. Brokers can't take stock orders via e-mail, and clients can't track their investments from a war zone, so she advises them to move into mutual funds, managed accounts, or more conservative stocks. If higher-risk equities are still appropriate for a portfolio, she said there are lower-maintenance ways to get that exposure.
"It's still possible to have investments that are more aggressive even within mutual funds and managed accounts," but that require less monitoring, said Evans, who married a Marine and whose son is currently deployed in Korea.
Daniel Brownsberger, a financial management consultant who constructs portfolios at FirsTrust in Daytona Beach, Fla., said clients who are involved in transactions such as shorting stocks or options strategies can decide to offer discretionary power to a financial advisor, but only if they are certain they trust the person's acumen.
"You have to hire someone to do it for you or get out of it. You have to simplify your portfolio so that it can go on automatic cruise control for while," said Brownsberger, adding that exchange-traded funds and index funds are good choices.
Finer, of Major League Investments, said he advocates that reservists consider making their portfolios more conservative and geared toward income preservation rather than growth. Four months ago, he moved a lot of his personal portfolio into bonds and has sold some real estate he owns in case he is sent abroad.
"We put the portfolio on ice a little bit. If you miss a big gain while you're gone, that's not a big deal. Think instead of having a big loss while you're gone and your spouse losing access to that principle," he said. "I've designed my own portfolio so I won't have as many fluctuations. I've sort of gone into a retired person's portfolio."
Finer said there is the risk of missing out on market gains, something that anyone who reduced their stock portfolio in early 2003 can attest to. But he said he now feels the market is stronger than it has been in previous years, and he's more confident that playing it conservatively is the right call if he's activated.
Evans also prepares her clients for the possibility that any drop in income, changes to their portfolios and missed 401k opportunities during their deployment could affect their retirement plans. Some reservists may find they have to work longer before retiring because of the time spent in active duty; others may have to consider a more aggressive asset allocation in their portfolios when they return.
Military service "changes a lot of plans, but if you're flexible and prepare for it, it doesn't have to derail your plans," she said.
--By Lynn Cowan, Dow Jones Newswires; 202-862-3548;
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Wall Street's latest darlings, exchange-traded funds, are useful -- and they're cheap.
Those wizards of Wall Street, the folks who begot IOs and POs, Quids and Quips, Percs and Perqs, have created a new generation of acronyms. Some, such as Spdrs (or Spiders) and Vipers, sound thoroughly unappetizing. Others, like Diamonds, Holdrs and iShares, sound more palatable but are equally baffling -- at least on the surface. But once you get past the off-putting jumbles of letters, you may conclude that the financial engineers' latest investment tool -- the exchange-traded fund -- is their best invention ever.
Money managers are going gaga over ETFs, which are low-cost, easy-to-trade products that let you track a market index or a slice of one. "Once you're hooked, you'll never let go," says one manager. "It's the second evolution of mutual funds," says another. A third admirer says the ETF is the most tax-efficient investment product he's ever seen.
Individual investors are just as enamored. Take Lonnie Williams, a Detroit graphic designer. As his investments fizzled during the bear market, Williams, 38, decided he really wasn't cut out for selecting individual stocks and funds, and he wanted a new way to build a diversified portfolio. He read about Spiders (SPY), which track Standard & Poor's 500-stock index, checked them out, and invested. Williams is so enthralled with the ETF concept that he no longer invests in anything else for the stock portion of his portfolio.
Trade just like stocks
New financial creations often seem incomprehensible, but ETFs are simple to understand. An ETF owns a fixed basket of stocks that represents a slice of the investment world -- either an index, a subsector of an index or an industry. The main difference between ETFs and regular index funds is that you buy and sell ETF shares like stocks instead of asking the fund sponsor to create or redeem fund shares. You need a brokerage account to trade ETFs, and you'll have to pay a commission. But management fees are minuscule, and there are no loads or other charges.
ETFs sound a lot like closed-end funds, which have been around for some 80 years. Closed-ends also trade like stocks, but their share prices often diverge dramatically from the value of the funds' underlying assets. By contrast, ETF prices rarely stray more than one-half percentage point from the value of the funds' assets. That's because ETF sponsors continually create new units as investors need them. That prevents a supply-demand imbalance that could pull ETF prices well above the value of the assets. And if heavy selling of ETFs threatens to push the funds' prices well below the value of their assets, big investors swoop in to take advantage of tiny price discrepancies.
In the nine years since ETFs were invented, their assets have mushroomed to $81 billion. There are currently 117 ETFs. Some represent broad measures of the market. Diamonds (DIA), for example, mimic the Dow Jones industrial average; Spiders and iShares S&P 500 (IVV) follow the S&P 500. Others track narrower slices of an index, such as the Russell 1000 Growth (IWO; large, faster-growing companies) and the Russell 2000 Value (IWN; small, bargain-priced stocks). Still others own the biggest companies in a given industry, such as health or real estate. There are also single-country funds and diversified international ETFs. Bond ETFs aren't available in the U.S. yet, but are on the way. Most ETFs trade on the American Stock Exchange. The Amex Web site is a veritable encyclopedia on the subject. Another excellent resource is iShares.com, from Barclays Global Investors, sponsor of the iShares family of ETFs.
The planners' favorite
So why the buzz? Lower costs and taxes, mainly. ETFs slash costs to the bone and help minimize the tax bite that often comes with regular funds. In fact, the ETF boom owes a lot to those financial planners who tend to obsess over expenses and Uncle Sam's share. Such planners are predisposed toward index funds in the first place, and some are so taken with ETFs that they say investors need hold nothing else in taxable portfolios. That's an extreme position. Still, ETFs have a lot going for them.
Advantage 1: Rock-bottom costs.Using an ETF instead of a mutual fund is "like giving yourself a raise," says Steve Wightman, an adviser in Lexington, Mass.The most heavily traded ETF is the QQQ (QQQ), which tracks the Nasdaq 100, an index of the 100 largest nonfinancial companies on the Nasdaq market. The index is essentially a proxy for big technology stocks, with Microsoft, Cisco Systems, Intel and Dell Computer among its top holdings. The expense ratio of QQQ, often called Cubes, is 0.2% a year, or $2 per $1,000 invested. The cheapest regular no-load mutual fund that tracks the Nasdaq, Summit Nasdaq 100 Index, has an annual expense ratio of 0.65%. The cheapest no-load technology funds, E*Trade Technology Index and T. Rowe Price Science and Technology, cost about 0.85% per year. The average no-load tech fund charges 1.43% in expenses. These are large hurdles for traditional funds to overcome.
Some of the ETFs that focus on broader indexes are even cheaper -- as low as 0.09% a year for iShares S&P 500. ETFs' low expenses are due in part to the economics of indexing, which eliminates legions of managers and analysts. Neither ETFs nor regular index funds incur substantial trading costs. Moreover, ETF sponsors keep expenses down because they court institutions with millions to invest. And although individual investors are ineligible to buy institutional shares of mutual funds, you can buy the same ETFs that institutions do.
Advantage 2: Taxes. Frankly, we think the issue of mutual fund tax efficiency is vastly overrated (see "Penny Wise," Dec. 2001). Most investors don't hold on to their funds long enough to benefit from claims of tax efficiency. If, however, you plan to hold on to a fund for many years (or better yet, never sell it and pass it on to your heirs tax-free after you die), you will appreciate the tax efficiency of ETFs.
The structure of an ETF means there is no reason to distribute anything except dividend income, when there is any. For example, the Diamonds fund has never paid a capital-gains distribution since its inception in 1998, even though the ETF rose strongly along with the Dow Jones industrials in 1998 and 1999.
Some advisers say the smaller and more specialized ETFs, such as the single-country funds, will pay out small capital-gains distributions in the next major bull market. But those payouts should be much less than those of traditional funds. Sameer Shah, a financial adviser in Tampa, Fla., says there are two ways an index mutual fund can generate tax liabilities. The first is when too many investors redeem shares, forcing the manager to sell stocks and realize gains. The second comes when changes in the underlying index require managers to sell. "ETFs take away the first taxable event and have ways to mitigate the second," says Shah.
Advantage 3: Immediacy. If you place an order to buy or sell a mutual fund when the market is open, your trade is executed (with a few exceptions) at a price determined as of 4 p.m. eastern time that day. You could place a sell order at, say, 3 p.m. when stocks are up and assume that your fund would gain for the day, only to see a collapse in the final hour of trading. Vanguard, the biggest marketer of index funds, limits customers to two phone or Internet trades per year out of each of its index funds. It also doesn't permit any phone or Web exchanges between 2:30 p.m. and 4 p.m. eastern time.
ETFs are not subject to the pricing rules of mutual funds. They trade like stocks. If you want to sell your iShares Sweden (EWD) at 2 p.m. because you think there are better opportunities in streetTracks Wilshire Real Estate Investment Trust (RWR), you can do so midday at each ETF's current price. Instant pricing is one reason Mark Dio Dati, a 43-year-old firefighter from Hopewell Junction, N.Y., has switched entirely from traditional funds to ETFs. "I hate buying a mutual fund because you never know what price you're buying at," he says. "I don't have that problem with ETFs."
Advantage 4: Transparency. Mutual funds are required to report their holdings only once every six months. That means you can never be sure what your fund holds at any given moment. That doesn't matter when a fund tracks the S&P 500, but it does with sector funds. For example, Holdrs, exchange-traded sector portfolios, are seeded with what sponsor Merrill Lynch decides at the outset are the 20 or 50 most representative stocks in the group. When you buy a Holdr, you won't be sure of each stock's specific weighting in the ETF because that depends on individual price fluctuations. But you can be sure that Merrill hasn't added any names or deleted any unless a stock no longer trades (for Holdrs holdings, visit Holdrs.com).
Trading tricks
Because ETFs trade like stocks, they offer features that generally aren't available directly from fund companies. If, for example, you want to bet against the whole market, a slice of the market or just one country, you can sell an ETF short. If you want to leverage your wager, you can borrow from your broker and buy an ETF on margin. You can also impose stop-loss and limit orders that trigger, say, an automatic sale if an ETF you own falls to a certain price that you predetermine.
Perhaps the biggest shortcoming of ETFs is that they're not amenable to systematic investing programs. With a no-load mutual fund, it's no sweat to invest $100 a month or quarter in one or more funds. If you embark on a similar program with ETFs, the repeat commissions will sting.
Lonnie Williams socks $60 a week into a portfolio of four ETFs. He divides his money among iShares S&P 500; iShares S&P 600 Barra Value (IJS), which focuses on small, undervalued stocks; iShares S&P 350 Europe (IEV); and QQQ. Williams pays a fixed $12 a month through ShareBuilder.com, an online brokerage that caters to small investors. So you could say he's paying about a 5% load, although the freight, as a percentage of his investment, would fall if he were to raise his contribution. Williams could invest in Vanguard's low-cost index funds, but he prefers the flexibility and variety of ETFs. "I can waste $12 a month in late fees at the video store," he says. If you trade ETFs less frequently or invest bigger sums, the commissions virtually dissolve. But even with transaction costs, the opportunity to own the whole S&P 500 for 0.09% -- or play a technology rebound for less than 1% -- remains enticing.
The cost structure is all the more amazing when you consider who created ETFs. When was the last time the fee-hungry securities industry invented something this nice and cheap and made it available to everybody?
HOW CAN EXCHANGE TRADED FUNDS IMPROVE YOUR INVESTMENT RETURNS?
By Steve Wightman, CFP, Tuesday, September 18, 2001
Exchange Traded Funds or ETFs, are long overdue in the investment world and like the Internet, provide a more level playing field between individual and institutional investors. They come in three basis flavors; broad based, like the S&P 500 and NASDAQ; Sector, like energy with iShares Dow Jones U.S. Energy Sector Index Fund (IYE) and international, like iShares S&P Europe 350 Index Fund (IEV). ETFs are more tax efficient and far less expensive to own than mutual funds. The end result is improved investment performance over their mutual fund brethren because monies that investors formerly paid out in taxes and expenses are reinvested for profits.
How can they fit into your portfolio? With ETFs based on broad-market, sector and international indexes, you have a wide range of investment opportunities. You have the ability to establish long-term investments in the market performance of the leading companies in the leading industries in the United States, or you can custom tailor asset allocations using a range of ETFs to fit your particular investment needs or goals. You can hold ETFs based on a broad-market index as a core investment, for example, then use additional ETFs to increase your exposure in sector and/or international index performance.
ETFs allow each individual investor to act like his or her own mutual fund. You can do this because you virtually own every stock in the index and you decide when to buy and sell shares, not an unknown money manager. Also, because you are in control, you determine how much capital gain taxes you wish to incur each year. Best of all, you don’t have to have a billion to buy. You can own ETFs with as little as $1000.
ETF Highlights
An entire portfolio of stocks in a single transaction
Provide diversification
Long-term investments
Buying or selling throughout the trading day
Lower costs for investor affordability
Margin eligibility
Opportunity for dividends
Tax efficiencies
Ease and convenience
How best to invest? First, have a professional design an asset allocation that is right for your for your goals and risks. Then work with him or her to fill the basket with the best marriage of investments for your taxable and qualified accounts. When considering mutual funds, compare the costs and risks with that of similar ETFs. If you discover that ETFs are a better buy and perhaps a better fit for you, buy them! You can hold them in your brokerage accounts just like stocks, but without the inherent business risk of owning individual shares!
ETFs have a place in most portfolios that now use mutual funds. Ask your financial advisor about how they can work for you too.
Tax smarts
HOW TO DISAPPEAR FROM THE IRS IN YOUR RETIREMENT
Or At Least Look Very Boring
By Steven Darwin Wightman, CFP®
NAPFA Registered Financial Advisor®
Friday, February 27, 2010
Did you know that federal income taxes are elective and that in the 65,000 or so pages of the Internal Revenue Code there isn’t a single line saying “every U.S. citizen must pay federal income tax.”? In fact, millions don’t pay any tax at all. A few of these tax filers have huge incomes. These folks have disappeared from IRS revenue sources – and you can too. The key work, “elective” means that you, and only you, choose your own mix of taxable and non taxable income sources and thus your personal tax rate.
Also, did you know that the IRS has computer programs specifically designed to select tax filings for audits? Selected filings are rated for the likelihood of a financial recovery of deemed unpaid taxes. Think of it as cheater-heater profiling. IRS logic works something like this: Find the cheaters and then find out who’s really, really hot in this group and work backwards from there. IRS runs these profiles 24x7 - like machines raking earth for gems. Unlike lustrous diamonds, you do not want your tax filing to glisten. You want it to look dull, very dull. The goal of this article is to help personal tax filers – you - to do just that. For simplicity of numbers, we examine the most common tax filing, married filing jointly, MFJ. If you’re single, the principle still applies. Disappearing from the IRS is not magic, it’s all about habits.
Through a closely guarded program called the TCMP, the Tax Compliance Measurement Program, IRS knows just how, when, where and how often people are likely to cheat on their income taxes. With the aid of the TCMP, about 0.6%, or 1.5 million tax filings are audited annually. Instead of looking at who is painted for an audit, let’s see who is least likely to be selected. Taxpayers with a low audit profile are people who:
1.Have little taxable earnings
2.Have simple tax filings like a 1040EZ or 1040A
3.Have error free filings.
4.Have clean filing histories.
5.Have normal deductible expenses for their income level on form 1040
6.Do not file a schedule C and who may not own a business interest wholly or as a partner.[1]
7.Have an IRS blessed professional such as a CPA, or an Enrolled Agent, prepare their taxes AND this Pro has a clean IRS record.
So what’s this got to do with you anyway? You think your filing is anything but this? Perhaps so, but we are not talking about being invisible. The question is how could you become invisible? The answer is to gradually look more and more like a small fish in the big tax pond. This is easier for retirees to accomplish than their working brethren because retirees can control their taxable income. You can do it too. Here’s how:
Add up all forms of non-taxable household income like Social Security, Roth IRA, Muni bonds and tax-free mutual funds, health savings accounts, health reimbursement arrangements, HRA, tax-free stock sales (yes like dividends they can be tax-free), non-taxable dividends and non-taxable disbursements such as insurance and law suit damages to you. From here, fill in the gap with taxable sources such as an IRA or a qualified retirement plan, QRP. At this point, you will find yourself in a marginal tax bracket, the tax rate owed on the last dollar of taxable income you got last year, ranging from 0 to 35%. The 2009 0% tax rate for married taxpayers filing jointly[2] is the sum of $11,400, the standard deduction, plus $7,300 for two exemptions. Thus, for married couples, $18,700 may be taken from a traditional IRA or a QRP tax-free if there are no other taxable sources.
The next $16,700 is taxed at 10% which would equal $35,400 in income. The nest step, a 15%, rate is for 2009 MFJ taxable income of $16,701 - $67,900. In the best scenario, retirees can live tax-free and be boring to IRS. If you are not there yet, here are a few ideas to discuss with your tax advisor:
Swap highly taxed investments such as bonds and bond funds in your taxable account with low tax investments like stocks and dividend payers residing in your Roth or traditional IRA.
Double indemnity: If have a tax liability and you earned less than $27,751 single, or $53,001 MFJ for 2009, think the Saver’s (50%) Tax Credit. IRS will credit qualified filers with up to 50% of every dollar contributed to a Roth, traditional IRA, Simple, or any QRP. With all but a Roth, filers will also enjoy a tax deduction to boot, further reducing AGI and tax rate. You can even delay till April 15th to make your contribution – even if the refund has been sitting in your bank account. See IRS pub 590 at www.IRS.gov.
Delay taking social security until at least your full retirement age to avoid a steep earnings penalty. Each year bumps income up by about 7.5% (potentially) tax-free. Try getting even half that guaranteed rate from Wall St. Fat chance!
Be honest and legitimate with all IRS dealings and keep good records for 7 years. Supply them with records early and often if requested always along with a cover letter because proof of dates can be crucial.
Contribute to and pay for medical expenses including Medicare parts A & B and LTCI premiums and OTC drugs, even aspirin, with an HRA or H.S.A. Contributions cut your taxable income and distributions are exempt from the 7.5% AGI rule to qualify for a deduction. See IRS publication 502 at www.IRS.gov.
Create a portfolio of low volatility dividend paying stocks. The yield can be over four times what CDs pay and the income may be tax-free in 2010. Growth stocks held over one year and sold this year also may qualify as tax-free.
Consider claiming charitable donations for Haiti before March 1, 2010 for the 2009 tax year under a new federal law IF it will help you cut your tax burden. Otherwise, use it in 2010.
Consider residing in an income tax free state like Florida, Nevada, or New Hampshire to free up more cash for your living expenses and thus circumvent pulling these dollars to pay taxes from taxable accounts – triggering even more taxation.
When you sell a personal residence add up your tax basis and take all your exclusions, $250,000 per person MFJ, to stay off the IRS radar screen.
Follow these steps and you could be earning up to six figures while paying as little as a zero federal income tax rate. A small tax liability can reduce your IRS profile. Being a nothing to IRS could be a gift to an important person, yourself! It’s all legal, but if you are feeling a tinge of guilt, just a tinge, you can elect to spread these tax savings to charities or governments at any level – local to federal, all with IRS stamp of approval. Look small and you will look very boring. If you keep at it and make it a habit, you may disappear happily into IRS obscurity.
Thursday, March 09, 2000, 5 p.m. EST
Easing Estate Taxes
Guest Speaker: Gideon Rothschild, estate planning attorney with Moses and Singer in New York.
Moderator: Melissa Phipps, community manager of Financial Planning Interactive.
Phipps: Hello everyone, welcome to our Live Forum with Gideon Rothschild, an estate planning attorney with Moses and Singer in New York who will discuss using trusts to lessen estate tax bills for high-net-worth clients. I am your moderator, Melissa Phipps.
Welcome, Gideon. Why don't you begin by telling us a little bit about yourself and your practice?
Rothschild: I'm an attorney and partner with the law firm of Moses and Singer in New York City, co-chairing the wealth preservation practice group. Our firm is a general practice firm of approximately 70 lawyers with various specialties, including new media, health care, corporate securities, banking and real estate. To find more information about our firm, you can visit www.mosessinger.com.
Joe Weiner CLU ChFC: Do you think estate taxes will be reduced or eliminated?
Rothschild: As you know, Congress had a bill that President Clinton vetoed. This bill proposed to repeal the estate and gift tax in 10 years. However, due to budgetary constraints, the year following its repeal it would be re-instituted. So, in essence, there was only a one-year window for clients to die and avoid estate taxes. It is unlikely that the minority of wealthy voters will succeed in convincing Congress to eliminate the tax entirely, which would be viewed by most Americans as pandering to the wealthy. Even if the tax is repealed some day, clients should continue to plan their estates in ways that require minimal outlay in the form of gift taxes. Many possibilities exist to accomplish these goals, including sales to grantor trusts, the use of unified credit exemptions and annual exclusion gifts.
Evan Simonoff (editor in chief and associate publisher of Financial Planning magazine): Gideon, I hate to be a party pooper but will folks like you do if we get a Republican president and Congress and the estate tax is abolished? Will you turn your attention more to charitable work and issues like estate equalization?
Rothschild: If the estate tax gets abolished there will still be individuals who need to address the transfer of wealth to the next generation, which requires drafting wills and trusts to accomplish those goals in addition to the charitable objectives that one may have. Query whether there will be as much philanthropy if there is no estate tax.
Nick N: Please comment on "Pure Trusts." My clients are hearing about these wonderful trust to transfer assets, get stepped-up basis, no gift problems, asset protection, no estate taxes, etc, etc. Please give an information source to protect clients from making mistakes.
Rothschild: Recently, the tax court held against a firm by the name of Estate Preservation Services, who were promoting trusts which they represented, would avoid estate taxes, income taxes and creditors. These trusts have been given various names, including "Pure Trusts," constitutional trusts, common-law trusts, etc. The bottom line should be: If it sounds too good to be true, it probably is. The IRS has announced a full-fledged attack against these structures and their promoters, and clients will face substantial adverse consequences, including possible criminal penalties, if they engage in these structures. That is not to say that asset protection trusts, which are tax-neutral, are in the same category as the foregoing.
Frank: What estate tax strategies are effective for S Corps. that hold highly appreciated marketable securities?
Rothschild: S Corporations that hold appreciated securities, as you know, are flow-through entities. Therefore, any gains on the sale of the securities would be reported by the shareholders. When a shareholder dies, there would be no step-up in basis on the underlying securities. However, the deceased shareholder's estate will obtain a step up in basis for the S Corp. stock. When the S Corp. is subsequently liquidated, the loss recognized by the estate will be offset by the gain recognized by the corporation if the transaction occurs in the same year. If the objective is to freeze the value in the shareholder's estate, then the strategy to recommend would be a sale to a grantor trust. A grantor trust is an eligible shareholder of an S Corp.
Phipps: What are dynasty trusts and how are they used within a financial plan?
Rothschild: Dynasty trusts are generally irrevocable trusts established in states which have repealed the rule against perpetuities (currently 12 states), and therefore allow these trusts to last in perpetuity for the benefit of future generations. They take advantage of the available generation-skipping tax exemption and therefore allow the grantor to transfer a substantial amount of wealth, either during lifetime or upon his death.
Milt Colegrove: Have you ever used trusts to protect your clients from tort liabilities by putting apartment buildings, commercial property, etc., in the trust? The trustee of the trust would be a professional trustee and the beneficiary would be another trust, so you have two layers of trusts before you get to the individual?
Rothschild: A better approach would be to transfer the real property to a LLC, which insulates the owner from personal liability, and the LLC interest can then be transferred to a trust with a professional trustee.
Phipps: A lot of financial planners will recommend life insurance to cover an estate tax, is this necessary? If so, when?
Rothschild: Life insurance is a useful tool, particularly where there may not be sufficient liquidity in the estate to pay the estate taxes which are due nine months after death. Life insurance can also be utilized to achieve other objectives, such as equalizing an estate between children who receive a family business and those who are not involved in the business. However, when recommending life insurance, it should always be owned by an irrevocable trust to avoid including the proceeds in the insured’s estate.
(Question received in advance): What do you see as the downside to the QPRT? My clients who are considering one on their second home have a net worth of $10 million, the majority of which are traded securities.
Rothschild: The downside that concerns most people is the fear of losing control of their home to the children or, perish the thought, their daughter-in-law or son-in-law. The other potential drawback is that the grantor is giving up the use of the equity in the home should he need it at a later date for his own retirement. The first concern can be addressed fairly easily by providing in the trust that at the end of the term the property remains in trust for the benefit of the children, with a reliable trustee controlling the property. This avoids the possibility of the home falling into the hands of an in-law, or conflicts between parents and children.
The other concern can be accomplished by transferring only a fractional interest in the home. So, for example, if the grantor retains 50% and transfers the other half to the trust, upon the sale of the home half the proceeds will go to the grantor for his or her own personal use, while the other half will continue to remain outside the grantor's estate, provided he outlives the term.
By the way, planners should note that the current AFR rate is at a high point (8.2%), and gifts to QPRTs are more advantageous at higher rates.
Jordan: I attended an [International Association for Financial Planning] meeting last fall and a speaker, Alan Eber, JD, was teaching on using life insurance wrappers in offshore trusts that used private annuities and variable life policies. Have you studied this and do you like this approach?
Rothschild: The use of life insurance wrappers is not new and does not accomplish anything that cannot be achieved by using more traditional variable life insurance. However, these life insurance products, which are sold by offshore insurance companies, are basically variable life insurance which allow the insured to select investment advisers to manage the investment portion of the policy. The investment adviser selected can include the insured's exsisting investment adviser. As in all insurance products, the increase in cash value remains tax-free and can be borrowed (provided the policy is not an MEC) tax-free, converting at death to an income-tax-free death benefit.
(Question received in advance): A client is questioning if family limited partnerships are as safe as irrevocable life insurance trusts from the standpoint of the IRS, any chance they may disqualify FLPs?
Rothschild: First, we have to clarify that if life insurance is owned by an FLP, the death benefit can be included in the insured's estate to the extent the insured owns an interest in the FLP. If we are assuming the insured will be gifting the entire FLP interest to his children, then only perhaps 1% of the proceeds will be included in his estate. Since a contribution to an FLP does not require CRUMMEY notices to qualify for the annual exclusion and can be amended easier than a trust, some people have suggested using an FLP to hold insurance. I believe the IRS might take a contrary position if the FLP does not have an independent business purpose. One method I've used is to fund the FLP with income-producing property. An insurance trust can be the owner of the LP interests and thereby receive income distributions from the FLP sufficient to pay the insurance premiums.
M. Nommensen (question received in advance): Last year I missed the opportunity to convert to a Roth IRA, which would enable me to pay the resulting taxes over five years. Would a smaller Roth (funded with $2,500 for example) set-up for an infant be a good way to pay for their college costs 18 years from now?
Rothschild: A Roth IRA can only be used where there is earned income and where the tax payer's AGI is not greater than the allowable limits. Therefore, if the objective is to fund for college education, the only options besides a minor's trust or a UGMA account is an education IRA (maximum $500 per year) or a Section 529 plan. These Section 529 plans have become very popular, and many states provide for these. For example under New York's plan, an individual (who does not have to be a New York resident) can contribute up to $50,000 per child ($100,000 if married). The beneficiary can be changed by the grantor at any time, and should the grantor wish to take the money back he can, subject to a 10% penalty. If the child uses the funds for education-related expenses, the child pays income tax on the income distributed from the account.
Jordan: I understand and agree with your evaluation of the VUL wrapper. However what [Eber] is doing is even more. He would transfer appreciated assets into an offshore private annuity arrangement with an offshore trust. The VUL is then connected with the annuity in a business arrangement.
Rothschild: Frankly, I have participated in seminars with Alan Eber, and am familiar with his structure. However, I have some reservations as to the tax consequences.
Steve Wightman: Pertaining to your Roth IRA answer: If the owner will be at least 59 1/2 when college tuition hits, then a Roth is an excellent choice. Especially for aggressive portfolios because all distributions are tax free to the owner and not included in the financial aid calculation for a non-child student.
Rothschild: Steve, you're right. I was under the impression that the question was referring to a Roth IRA established by the child.
Frank: Are there any planning strategies available for underperforming GRATs that are projected to transfer all FLP units back to the grantor?
Rothschild: The recommendation I would consider is to continue to roll over the FLP units into new GRATs and hope that the future will be brighter.
Barry Kaplan (question received in advance): I am trying to find information about a technique using a limited partnership combined with a sale to a defective trust, but have been unable to. From what I’ve heard, let’s say the grandparents move some (rapidly appreciating) assets into a limited partnership in which they control all the general and limited shares. Then a trust is set up for the kids and grandkids. Grandparents sell the limited partnership shares (at a discount?) to the trust. The grandparents pay the income tax on any gains, because it is defective for income tax, but since its not defective for estate tax reasons, you get an estate freeze.
How can this be funded? A loan for the discounted sales amount funded by assets in the trust? Second-to-die insurance funded by annual gift exclusion money? Will it fly, or is this suspect? Is this done much? Do you do this kind of thing? Where can I find any literature on it?
Thanks for considering my long-winded question.
Rothschild: Barry, the technique you describe is being used extensively by us and many other estate planners. It is perfectly within the confines of the Code, and is not much different from a normal installment sale to a family member. The difference here, of course, is that by selling the partnership to a grantor trust, no gain is recognized and transactions between the trust and the grantor are ignored for income tax purposes. Provided the client expects the appreciation rate to exceed the Section 1274 rate (currently approximately 7%), the excess will remain outside the grandparents' estate. The other advantage of using this technique now is to lock in the discounts available on the valuation of the LP interests in the event Congress were to eliminate such discounts. The Wall Street Journal had an article describing this technique on February 28. If you would like a copy, e-mail me at
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.
The one caution I would make is to ensure the trust has the available cash flow to pay the interest on the note. If the trust does not have such cash flow available, it can pay the interest by using the LP interests in kind, but this would reduce some of the freeze benefits. The trust should also be funded initially with a gift transfer, which some commentators believe should equal 10% of the amount of the sale.
Phipps: Is there any particular estate planning software that you recommend?
Rothschild: There are many software products on the market, including USTrust's E-Plan, ProBate Software, Number Cruncher, among others. The American Bar Association has published a book on software for estate planning, including document drafting software as well as number-crunching software. I generally use a pencil to push my numbers.
Steve Wightman: What five top strategies would you use in estate planning with Roth IRAs? Also, I've lately heard attorneys tout using a trust as beneficiary for IRA assets. Do you think this is a good idea? Why?
Rothschild: I'm not sure I'll have five strategies for you, but we'll give it a try. The key to planning with Roth IRAs is to stretch out the deferral as long as possible. One limitation is, of course, the qualification for using a Roth IRA. Since a taxpayer can not have more than the threshold amount in AGI, it limits the client's ability to use these accounts. Most wealthy clients who have estate tax concerns do not qualify. Where the client does qualify, the key planning strategy would be to spend down all the other assets and allow the Roth IRA to grow. However, if left with a large Roth IRA account at death, there needs to be some consideration on how the beneficiaries will pay the estate tax, and the solution I've found to work best is to have life insurance available for that purpose.
As for using a trust as a beneficiary for IRA accounts, there are numerous types of trusts one might consider using. If a client doesn't have sufficient asset to use their exemption, we might suggest naming the credit shelter trust as a beneficiary. Another example would be where the client wishes to ensure that the IRA would be available for children from a prior marriage, in which event a QTIP trust would be advisable. Other trusts might include GST-exempt trusts and trusts for minors. As long as the trust meets the requirements to be considered a designated beneficiary, it will qualify the deferral over the life expectancy of the eldest beneficiary of the trust.
Phipps: Gideon, thank you very much. And thank you all for participating in our discussion.
Join us next week when our guest will be famed money manager Mario Gabelli, March 16, 5 p.m. to 6 p.m. EST.
Ret strategies
ROTH CONVERSIONS: ASKING TWO QUESTIONS CAN KEEP THE TAXMAN AWAY.
By Steven Wightman, CFP
Tuesday, February 23, 2010
With no income cap for 2011-2012, many people are thinking of converting their traditional IRAs to Roth IRAs. Pause before you leap.
I think two important and often missed questions should be asked for all Roth conversions.
How much should I convert and when should I do it?
First, will the conversion push the tax payer into a higher tax bracket?
The higher bracket may be distasteful to the TP. Ask will it trigger a less obvious phase-out penalty of a tax favored behavior like paying for college or taking certain credits?
Second, what percentages of your funds are in taxable accounts? If you have non-deductible IRAs, for example, and no other IRAs, you may convert them to Roth IRAs with no conversion tax whatsoever.
Why convert to a Roth? Consider clients who have a substantial non taxable savings percentage can actually control years of their tax rate by electing tax-free as the primary income source and then the taxable second. Done right, TPs can take QRP distributions tax-free up to their tax capacity (2009 level) after considering the exemptions and deductions to income. The first dollar over that threshold would be taxed at 15%, the first graduated step.
Think realistic future taxes after considering all sources including non taxable income like Social Security and non-deductible IRAs.
When will you have ordinary income losses to offset extra income triggered by a Roth conversion? How much will that be?
Should I elect to defer my Roth conversion taxes to 2011 and 2012 or should I pay it in the current tax year?
Answer these questions before you convert to a Roth. No worry, if you make a mistake, IRS lets you flip back to your original IRA. Do it before the annual deadline and the IRS treats the conversion like it never happened. For many, a Roth could be the road to low tax retirements and financial security.
Hands on Retirement Planning… By Steven Wightman, CFP
Note: In life, the old Chinese proverb says; “A thousand mile journey begins with the first step.” Trouble is, when it comes to retirement planning, most of us never take that first vital step. Others start and stop - as soon as it becomes inconvenient. Procrastination ruins the best ideas. Most agree; the biggest inconvenience in life is poverty – a place where the majority of Americans end up, not because they planned to fail, but because they failed to plan and execute that plan just as an athlete does. No excuses, just the road ahead!
The purpose of this exercise is to help you arrive at a rough estimate and to get you started. The first step is a giant one in the direction of your future. To simplify, we have removed the costs associated with investing and taxes. We assume you will employ tax-deferred savings vehicles such as retirement accounts and variable annuities.
Consider that millionaires spend an average of 4 hours each month planning their finances and their future, should you? The results speak for themselves: To have the body of an athlete, you have to train regularly. To have the mind of a millionaire, you have to think and act like one – starting now. Why? From the table below, you may learn that 1 million or more is what you’ll need to save to retire and maintain your current standard of living.
Smart financial planning can yield a multiple of your total life earnings into your savings. Example: $10,000 invested in the entire stock market 40 years ago would be worth 1 million dollars today - through the miracle of compounding. For the average college graduate, cutting your taxes in half early in life can yield another million dollars in your account. You get the picture…
Bonus: One last incentive for acting now: The Federal Savings Credit is available to those who qualify (see table) for up to one thousand dollars per taxpayer in addition to your regular tax deduction for contributing to your retirement plan. Catch? You must open and fund a plan by April 15th.
Make the golden years truly golden with these easy retirement planning steps:
How much will you need?
See table B for a reality check.
Figure what you need to save each year. J/C
Choose an asset allocation
Open a retirement account and start dollar-cost averaging with monthly purchases
Pay yourself firstwith payroll deduction
Save 10-20% of gross income
Monitor at least quarterly
Work with a CFP Pro to coach you
Start now! First year savings allow compound-ing the longest. 10k x 40 Y = 1 million
X
X
X
X
X
X
X
X
X
CFP
CFP
X
CFP
X
X
Most financial Institutions
Assume tax-deferred savings.
Morningstar Quicken.com
Major brokerages
Credit unions and banks offer this
Morningstar Quicken WSJ brokerages
FPA NAPFA
Friend & work network
Any Brokerage firm can help you.
Some lessons from a pro: When it comes to your retirement, don’t rely on anyone but yourself, i.e. an inheritance, or a marriage, and don’t put it off! Your future is just too important to be left to chance. Today, more than ever, there are wonderful planning tools available to you in books and on the web and there are now 40,000 + Certified Financial Planner Licensees. The future is welcomed by those who prepared for it and feared by those who have not. Be the former and live a great life.
A
B
C
D
E
F
G
H
I
J
Planned retirement age?
Current age?
# Years to SAVE for retirement?
A-B =
Annual expenses?
Less annual expected Soc. Sec. dollars
Less all other annuities annually
Annual need.
D-(E+F)
Number of years you expect to live in retirement
Total estimated need?
=G x H
Total Est. funds need to save?
(C x I ) – current savings & investments
Adjusted Gross Income Limits for the Savings Credit for years 2002-6
Married Filing Joint
Head of Household
All Other Filers
Credit
$0-$30,000
$0 - $22,500
$0 - $15,000
50% of contribution
$30,001 - $32,000
$22,501 - $24,375
$15,001 - $16,250
20% of contribution
$32,501 - $50,000
$24,376 - $37,500
$16,251 - $25,000
10% of contribution
Over $50,000
Over $37,500
Over $25,000
Credit not available
Life Planning
The title is “Is Your Life in Focus?” Try these questions daily.
Instructions: Come up with 1-3 answers to the following questions. If you have difficulty arriving at an answer, simply substitute with “could”. For example “What story could I get most excited about telling?”
What am I most grateful about in my life right now? Who have you sent a thank you note to? How long ago? How would it be if you did thank people often? Picture yourself there. How does that make you feel?
Who is in your life? Who do you want to be more a part of their lives? Picture yourself there. How does that make you feel?
What do you want to be known for? Appreciated for? Picture yourself there. How does that make you feel?
What are you enjoying most in your life right now? How does that make you feel?
What are you most happy about in your life right now? What makes you happy?
What are you most proud of in your life now? How does that make you feel?
What story do you get most excited about telling? Picture yourself there. How does that make you feel?
What are you committed to in your life right now? Picture yourself there. How does that make you feel?
Who or what are you passionate about? Picture yourself there. How does that make you feel?
What did you learn today? How does that make you feel?
How has today added to the quality of your life? How could tomorrow? Picture yourself there. How does that make you feel?
How have you given of yourself today? How does that make you feel?