Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Thursday, December 31, 2009

A Financial Diet for Your 2010 New Year’s Resolution

It’s that time of year when we all think about a new start for the New Year. Often our thoughts turn to getting back into shape and losing weight. This year, why not consider getting your financial house in order? An annual review of your finances can have a huge impact on your financial future. All too often, as the New Year rolls around, we just continue doing the same old things we’ve done in the past. We spend all our time working and little time managing our hard-earned money. A financial check-up may likely indicate the need for a “financial diet”.

What do we mean by a “financial diet”? In the same way losing weight and getting into shape can improve your health and increase your life expectancy, reducing investment fees and lowering taxes can improve your overall financial well being and the “longevity of your portfolio” (i.e. How long your money will last in retirement).

With mutual fund fees often greater than 1% annually, and sometimes even greater, it makes sense to examine your portfolio to see what your funds are charging. It’s easy to check a funds expense ratio on the Morningstar® website. Even a small reduction can have a huge impact on the future value of your portfolio. For example, in about 30 years, a 0.25% reduction in fund expenses for a $200,000 portfolio can increase the portfolio’s value by over $15,500!

With many index funds charging less than a quarter of a percent, it is relatively easy to reduce some fund expenses by as much as a half percent or more than what one of your current funds is charging. For example, the Fidelity Large Cap Stock fund (Symbol: FLCSX), a large cap blend, three-star-rated stock fund, has an expense ratio of 0.83% annually. In contrast, the Fidelity Spartan 500 Index fund (Symbol: FSMKX), also a large stock fund and also three-star-rated by Morningstar® has an expense ratio of just 0.10%, annually, or 0.73% less. What’s more, the ten-year-return of the Fidelity Spartan 500 Index fund exceeds the long-term return of the Fidelity Large Cap Stock Fund by 1.38%.

In general, funds with lower expense ratios outperform funds with higher expense ratios. Keep in mind, however that there are many other factors to consider when picking a mutual fund.

Just as reducing fund expenses can increase your net worth, reducing taxes can also play an important role. Morningstar® tracks fund tax efficiency via the tax-cost ratio. The tax-cost ratio measures how much of a fund’s pre-tax return is reduced due to taxes. A fund with a three-year annual pre-tax return of 10% and a tax-cost ratio of 2% would have returned 8% after-tax, annually. You also need to pay attention to the fund turnover ratio. This calculation indicates the percentage of the portfolio typically bought and sold on an annual basis. Higher turnover can lead to higher taxes and higher fund expenses.

Your 2010 “financial diet” could also focus on reducing your budget and increasing savings. Some financial advisors provide relatively low-cost “financial physicals” as a service. However you do it, putting yourself on a “financial diet” for 2010 could well improve your financial fitness and help improve your long-term financial wellbeing.

Saturday, December 26, 2009

Aligning Your Money and Your Goals

With the economy struggling and the outlook questionable, it’s more important than ever to make sure your spending is aligned with your values and your goals. Many people dislike the dreaded “B-word” (budget) and in our experience few follow any sort of strict spending plan.

We won’t be surprised to see a return to high interest rates and high inflation in the not-too-distant future, coupled with very modest investment returns (inflation-adjusted after-tax returns). Stretching our income further will become more important than ever before. So, even if you dislike the idea of budgeting, you may find value in taking some time to focus your spending on those things you value most.

To do this, we suggest you take some time to give serious thought to what is most important to you and to what you value the most. If you are married, we suggest you and your spouse do this individually and then get together to compare notes. Discuss how your goals and values are different and how they are similar. Try to reach agreement on three to five key financial objectives.

We ask our clients to complete “Life-Planning Questionnaires” to facilitate this process. A couple of the questions on our questionnaire may help you discover what’s really important to you. Ask yourself what you would do if you only had two more years to live and what would be your biggest regret if you learned you only had two days to live. These questions help surface those things that are really important to you.

Next, take time to document how you are currently spending your money. We suggest you track your spending for at least a couple of months. You may discover in this process that you are spending a lot of money on things that don’t really offer a payback in terms of your real goals and values. Adjust your spending accordingly and you will enhance the quality of your life while at the same time stretching your dollars further.

You may even discover that a change in career is in order. If you are passionate about your work, it can provide you with a new, more affordable way to retire. In his book “The New Retirementality”, author Mitch Anthony explains how many people can avoid having to accumulate a large sum of money to fund their retirement by working at a job they love. If you love what you’re doing, there’s no need to quit at age 65 or even 70. If you love what you do, you can scale back and enjoy partial retirement, thereby reducing the amount of money needed for retirement.

Few people take time to sit back and think about where their life is headed. A growing number of financial advisors now help their clients with this new approach called “life planning”. Seeking help to align your spending with your goals and values may well be worth the cost.

(For more information about life planning, visit the web sites of Mitch Anthony ( or The Kinder Institute of Life Planning, founded by George Kinder. )

Monday, December 21, 2009

Time to Take a Moment to Think of Others

Since we started our blog, it’s primarily been focused on how you can improve your financial situation. We just received an email Christmas card from one of our clients that kind of puts things in perspective. And, it matters not what religion you practice or even if you practice a religion, the message was a good reminder that there are many others much worse off than we are who can use our help.

While we can’t vouch for the numbers quoted in the email, we’d like to share a few of the messages as a reminder that we need to help others with our gifts, not only now, during the holiday season, but throughout the year.

Hear are a few of the thoughts that made us take special note:

“If you have food in the refrigerator, clothes on your back, a roof overhead and a place to sleep, you are richer than 75% of the people in the world.”

“If you have money in the bank, in your wallet and spare change in a dish some place, you are among the top 8% of the world’s wealthy.”

“If you woke up this morning with more health than illness, you are more blessed than the million who will not survive this week.

“If you have never experienced the danger of battle, the loneliness of imprisonment, the agony of torture or the pangs of starvation, you are ahead of 500 million people in the world”.

“If you can attend a church meeting without fear of harassment, arrest, torture or death, you are more blessed than 3 billion people in the world.”

So while we write of how to increase your investments, lower taxes, save for college, plan for retirement and a myriad of other financial topics, we urge you now and throughout the year to share some of your wealth with others less fortunate. Even a little can go a long way.

Sure, the last couple of years have been tough, but if you’ve been reading our blog, it’s highly likely that you are far better off than a very large number of other people in the world. And, we believe strongly that any funds you give to others in need during these difficult economic times will provide a return to you that far exceeds any you might have received by investing the money for your own benefit.

Note: In a previous blog article posted December 8, 2009, titled “A Better Way to Give”, we discussed a way to better stretch your limited gifting dollars.

Wednesday, December 16, 2009

Further Proof - No Free Lunch!

In an article recently posted on our blog “That Free Lunch May Cost You Plenty” (August 24, 2009), we discussed that many investment seminars offer supposedly free lunches and free dinners, yet often pitch risky investments that can end up costing you dearly. That is not to say that that all seminars offering free food are unworthy of your time. Nevertheless, a recent article in the Sarasota, Florida Herald-Tribune written by financial columnist Humberto Cruz, titled “’Free Lunch’ Investment Seminars Often Cost You” (December 6, 2009), Mr. Cruz offers personal data to confirm what many suspect to be the case.

Mr. Cruz attended every investment seminar to which he was invited plus others advertised in the newspaper over a period of six months to see what was typical. He states in his article: “I soon realized I would learn little about investing but a lot about high-pressure sales tactics and high-commission products.” He went on to say: “After a while, the seminars became so predictably unpleasant that I stopped going this year.” He then discussed a new study by AARP and the North American Securities Association (NASAA) that he said confirmed that “little if anything has changed.”

The study found that while 78% of people who attended free-lunch seminars did go thinking it was an educational opportunity; nearly 40% were offered investment products. In another joint study by the Securities and Exchange Commission, NASAA and the Financial Industry Regulatory Authority (FINRA), it was found that 59% of the seminars surveyed reflected weak supervisory practices by the firms and 23% of the advisors holding the seminars recommended investments that did not appear to be suitable for the client. In this same study, 13% of the seminars involved indications of possible fraudulent activities.

In Mr. Cruz’ article, he stated that seminars often discuss products with high returns and low risk. We tell our clients that a good rule of thumb is that higher returns means higher risk. If someone offers you an exceptionally high return, this should be a red flag. If it sounds too good, it probably is, reminding us once again of the old adage that “there is no such thing as a “free lunch”.

Sunday, December 13, 2009

Don’t Overlook Beneficiary Designations

Some years ago an acquaintance passed away somewhat suddenly. He had been divorced some years earlier and left behind a second wife and grown children. The survivors were surprised to learn that his IRA specified his former wife as primary beneficiary.

It is important to review all of your estate planning documents and beneficiary designations on a regular basis. At the least, this should be done whenever a significant change takes place or every couple of years. We encourage clients to keep copies of their beneficiary designations in a safe place along with their other estate planning documents. It’s not unusual for an account administrator to lose a client’s beneficiary documents.

While it is also important to name life insurance beneficiaries, for the remainder of this article we will discuss considerations related to IRA accounts. In most cases, these same considerations can apply to other retirement plans but you should be sure to double check before making changes.

Probably the worst mistake you can make is to not name any beneficiary on your account or to name your estate as the beneficiary. When no beneficiary is named at all, the retirement plan documents will determine who the beneficiary will be. IRA plans often default to the estate when no beneficiary is named. When the estate is named as beneficiary, you lose the ability to distribute the account over the life expectancies of the beneficiaries, since IRS rules require payout over five years when there is no “designated beneficiary”.

If you are married, typically the best choice for the primary beneficiary is your spouse. Spouses can roll over an IRA to their own retirement plan, thereby postponing distributions until they reach age 70 and ½, or even later if the plan is rolled over to an employer’s plan and the spouse continues working past age 70 and ½ (certain conditions must also be met). Non-spouse beneficiaries must take distributions over their fixed-term single life expectancy and must start distributions by the end of the year after the year of death of the IRA account holder.

If you are married and have a revocable living trust, it is often a good idea to designate your trust as contingent beneficiary. This gives your spouse the ability to disclaim the IRA assets, if necessary to fund the bypass trust.

If you are married and have children and have no potential estate tax issues, you will likely want to name your children as contingent beneficiaries.

If a minor is named as a beneficiary and death occurs before the minor reaches adulthood, a custodian will have to be named to manage the funds for the minor until he/she reaches age 18. Individual states laws may vary as to what is required to establish custody.

We have only scratched the surface as far as naming beneficiaries is concerned. The issues involving beneficiary designations can get quite complex. We highly recommend discussing your beneficiary designations with your estate planning attorney or financial advisor.

Tuesday, December 8, 2009

A Better Way to Give

At this time of year, our thoughts turn to giving, both to our loved ones and to the needy. Most people give cash or write checks to their favorite charities. While their gifts are tax deductible, they are using after-tax dollars to make their gifts. There’s a better way, we believe.

A number of investment management companies offer tools to help make gifting easier and at the same time maximize the funds available through asset management and tax savings. For example, Fidelity Investments, The Vanguard Group, Inc. and Charles Schwab and Co., Inc., all administer what are called donor-advised funds. Since they are all similar in how they function, we are providing a general description in order to explain how they work and what the benefits are. They are independent 501(C)(3) public charities that administer donors’ charitable gifts.

Investors can open charitable gift fund accounts and easily transfer cash and securities to the accounts. Once transferred, the gifts are irrevocable and qualify for a tax deduction in the year of transfer (with some limitations). If a stock is transferred, it is immediately sold by the gift fund managers. Any gains on securities transferred avoid taxation. Therefore, assets with large capital gains tax liabilities allow individuals to give more by avoiding the potential capital gains taxes.

Donors decide how the assets they have gifted are to be invested. A number of investment “pools” are typically available in which to place the donated funds. Some are more aggressive than others; some focus on capital growth; some focus on income. The donor can decide how aggressive he or she wants to be. With professional management, donors have the possibility of seeing their accounts grow, providing the possibility of increasing the amount they can give to charities.

Accounts must first be funded with a minimum investment amount, which is usually between $5,000 and $10,000. After opening the account, gifts can be granted to the donee (This can be done online). Minimum grants are usually $50 to $100. Gifts must be made to IRS qualified public U.S. charities.

A gift fund provides a way to reduce taxes in a year of unusually high-expected income. By bunching several years of gifts together, one can meet the gift fund minimum and receive a tax deduction for the total amount gifted in one year. The funds gifted can then grow tax free in the gift fund account and then be distributed to charities over the following years.

In summary, charitable gift funds provide a better way to gift and at the same time maximize the amount of gifts you can give to your favorite charities.

Saturday, December 5, 2009

The Roadblock to Retirement You Didn’t Plan On – Part II

In a recent article titled “The Roadblock to Retirement You Didn’t Plan On” we discussed the issue of parents continuing to provide financial support to their adult children longer than expected. Since writing the article, we came across an excellent article in the Journal of Financial Planning (October 2009 issue) that addresses the issue in more depth.

Titled “The Emerging Adult and the Financial Planner – Seven Years Later”, the article was written by Eileen Gallo, Ph.D, a psychotherapist who works with individuals and families dealing with issues related to money. Eileen had written an article seven years ago in the Journal, hence the reference to “Seven Years Later” in the title of her current article.

Eileen states in her article that “the phenomenon of extended adolescence has been recognized by psychologists as a ‘distinct new period of life that will be around for many generations to come’”. She quotes Jeffrey Arnett, a research associate professor at the University of Maryland, who calls this new period “emerging adulthood”. She says that based on Arnett’s research, this new period typically lasts until age 26.

Eileen stated that in her earlier article she emphasized that parents need to “understand that adult children continue to need emotional and psychological support” and suggested that parents focus on giving advice rather than directions to adult children.

In the current article she discussed five areas “in which financial assistance tends to fuel independence rather than prolonging independence.”

They are:

(1) Partial College Funding – Eileen says that while many parents fund 100% of educational expenses, “professional and anecdotal evidence suggests that the educational experience may take on more meaning for some emerging adults when they make even a nominal contribution to the educational costs.”

(2) Vocational Testing – Eileen states that emerging adults will do better “when they are pursuing a career that matches their innate abilities. She recommends the Highlands Ability Battery vocational test.

(3) Help Where Needed: Eileen says that paying for healthcare “does not make the emerging adult feel dependent”. Sometimes, she says, psychotherapy and rehabilitation are necessary.

(4) Help With Business Start-Up – Eileen says that if the emerging adult is planning to start a business, parents should consider helping fund the creation of a business plan and possibly provide seed money.

(5) Be Explicit About Terms of Help: Eileen says that if you provide financial support and expect certain conditions to be met, make sure you are explicit about them. If your conditions are merely implicit, it could lead to a misunderstanding and deterioration of your relationship.

While these ideas may not eliminate the need or desire for Mom and Dad to put out more money for their adult children, they could certainly help minimize the need. Approaching your adult children’s need in an intelligent way can help reduce this unanticipated roadblock to retirement.

For more info about Eileen Gallo’s work, visit her web sites: and

Tuesday, December 1, 2009

It’s Best to Remain Cautious

We are reading about signs of sustained recovery and that the recession is over. For sure, there is some good news and things are far better than they were a year ago. Nevertheless, there is still plenty to worry about. It’s not time to relax and return to the ways of the past.

Recent reports of improved GDP were fueled by the “Cash for Clunkers” program and the “First-Time Homebuyers’ Credit”. Many of the homes being bought by first-time homebuyers have been financed via FHA mortgages that required only a pittance down (3.5%). When you couple that with the $8,000 First-time Homebuyers’ Credit, many of those purchasers have essentially none of their own capital at stake. Wasn’t that what got us into this mess in the first place?

Although sales are improving in the residential market, recent forecasts are for substantially more foreclosures next year. This will drive home prices down further and hold back the recovery. The commercial real estate market has approximately $1.7 trillion in commercial loans on bank books, or 25% of the assets for the average bank, according to an article titled “Why This Bust is Different” (Business Week, November 16, 2009). With commercial real estate prices down substantially, many businesses will have great difficulty qualifying for refinancing. This will also be a drag on the recovery.

The budget deficit is growing rapidly with more government spending in the works. Unemployment remains in excess of 10% with Congress considering an expensive jobs bill. Healthcare reform will cost nearly a trillion dollars over the next ten years (The cost is really more if you consider that the spending does not start for about four years). More than likely, if healthcare reform is to be deficit neutral it will mean more taxes.

To top it all off there’s worry about long-term inflation and higher interest rates. Some worry about the crash of the dollar and others are dumping their money into gold (We ask, is that the next bubble?).

The bottom line is that we should remain cautious. Pay down your credit card and other debt. Build up your emergency fund. Cut back on discretionary spending. Increase savings. Avoid chasing the latest hot asset classes and maintain broad portfolio diversification. Rebalance your portfolio at least annually. Pay special attention to your investment advisor fees, your mutual fund expense ratios and the tax efficiency of your investment assets.

In summary, don’t get too excited about the recovery. We expect it will take considerable more time before things return to near normal. At this point, a defensive stance will very likely serve you well.