Tag Archives: retirement planning

Taxation without Complication

Albert Einstein is synonymous with genius. Yet, when talking with his friend and personal tax account, he once said, “The hardest thing in the world to understand is the income tax.” His story reveals two things: First, filing taxes can be difficult. Second, even geniuses consult financial planners.

Because filing taxes can be a complicated process, people are more likely to make small errors that can have costly consequences. But, there are steps you can take to simplify the process, avoid mistakes and save money.

  • Get organized: Start with the basics: save, centralize and organize your important tax-related documents to avoid losing important information. This includes earning statements such as W-2 or 1099-MISC forms; additional income statements like investment earnings; and information on potential tax breaks such as deductible student loan interest documentation and charitable contributions.
  • Collaborate: Two heads are better than one. Discussing these materials with your spouse can help you more accurately organize tax statements, such as deductions and credits. When both partners understand their tax forms, each individual can help prepare for future filings and check for errors.
  • File strategically: How you file a tax return can impact how much you pay. Consider all of your options before completing a tax return, such as head of household, married and filing separately, and having your dependents file separately.
  • Timing matters: Failing to pay larger expenses in the last quarter of the year, such as a mortgage payment or large medical expense, can significantly reduce your potential tax refunds. Instead, plan ahead to reduce the risk of late fees as well as missed refund opportunities.
  • Maximize your IRA contributions: Unless your spouse is covered by an employer-provided retirement plan and your adjusted gross income exceeds IRS limits, maximizing your traditional IRA will reduce your taxable income through relevant deductions. If you use a nondeductible IRA, consider a Roth IRA, which has a higher income limit and the potential to avoid taxation after withdrawing earnings.
  • Be careful: Many Americans wait until the last minute to file their taxes, which often results in basic mistakes, such as using wrong or missing Social Security numbers, incorrect bank numbers, misfiling a return and simple math mistakes. In the event that you make a small error when filing, wait to see if the IRS calls. For more significant errors, you should amend your tax return via a 1040X form as soon as possible. In addition, if you can’t make the April 15thdeadline, file a 4868 form. This will grant you six additional months to file, but will also require you to pay added taxes owed for the year.

There are steps available to avoid mistakes while potentially saving you more money.

We also recommend following Albert Einstein’s example and consult a Pro- A tax professional and a financial advisor. They can help you better understand your options.

From Taxation without Complication Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.

Retirement for Baby Boomers when there isn’t one

Every generation believes itself unique. Unfortunately for Baby Boomers, this may be especially true about their ability to retire.

Some sociologists argue that the Baby Boomer generation has taken historical uniqueness to the extreme, rewriting the rules on just about everything: sex, marriage, work ethic, consumption, faith, and even death. Now that Baby Boomers are in or entering their 60s, it’s ironic then that many lament they cannot retire as their parents did.

In a recent survey by AARP, 44 percent of Boomers said they believed their standard of living will be worse than that of the previous generation.

Despite this result, the first Baby Boomers are often declining to delay their retirement past the age that Social Security defines as their full retirement age, according to a 2013 MetLife study. Even though these Boomers enjoy approximately five more years of life expectancy than their parents did at age 65, 52 percent of these Boomers have retired at an average age of 59.5.

On the plus side for Boomers is the fact that one of the biggest threats to retiree security — inflation — is mercifully low. Older Americans will recall a time when annual inflation averaged between 6 percent and 10 percent a year, and how cumulative inflation from 1970 to 1989 ran a whopping 162 percent.

So what’s left to retirement for Baby Boomers to figure out?  What rules should they break, and which should they keep?

  • The “4 percent” withdrawal rule:  Developed two decades ago, this rule sets the inflation-adjusted amount that retirees can take annually from their savings in order to avoid running out of money before their deaths. The rule was based on historic asset return data, and focused on the negative returns of the Great Depression and the stagflation of the 1970s as presenting the greatest threats to individuals living on investment income. Four percent was determined to be the maximum rate that would allow a retiree to live through periods like these without exhausting his resources. But while 4 percent was created to work for Boomers’ parents or grandparents, it‘s unclear as to whether it will work going forward. Near-zero real returns to bonds as well as increased global volatility have many financial planners believing the “safe” withdrawal rate will need to be lower for Boomers. At the very least, Boomers will need to be flexible in their retirements, able to dial down their rate of withdrawal in extremely negative return environments, delaying consumption until more positive returns are achieved. BREAK IT
  • No debt in retirement:  Boomers are already carrying much more debt – think mortgages and credit cards – into their golden years than did their forbears. But today’s retirees would do better to honor their elders’ example.  Being debt-free in retirement provides necessary cash-flow flexibility. KEEP IT
  • A care-free retirement depends on smart investing:  While not exactly a “rule,” the many brokerage ads depicting happy couples strolling the beach have a lot of retirement-bound Boomers believing that if they just pick the right investments, they will do fine. The reality is a bit more complex:  Prudent investing is wise, but not a complete solution until combined with expense control, down-sizing, health care and disability management, and even part-time work. A diversified “portfolio” of solutions, not a single hot stock or fund, will be the winning formula for many retirees. BREAK IT
  • A carefree retirement, period: Isn’t this the deal that all generations, not just the aging hippies, subscribe to? Unfortunately, Boomers’ increasing life expectancies – theirs and their parents – have meant that their retirements may include much elderly caretaking. Meanwhile, their children – hard-hit by the economy – are also asking mom and dad for help.  Boomers will need to establish realistic priorities, and to set financial limits for their retirements that they might not have anticipated. They’ll need a multi-generational approach to financial planning that addresses both their needs as well as the needs of their extended families.

Defiant Boomers have always done things their way, and navigating retirement will be no exception.  They are, in fact, the first generation that has to look primarily to their own resources and management – rather than to government or corporations – to invest for retirement and create an income stream from these investments.

Fortunately, financial planning and the certification of competent, ethical professionals have come of age with the Boomers, to help them make the most of this uncharted territory.  Boomers will no doubt continue to “do their own thing” in retirement, but with a CFP, they can do it prudently and successfully.


From Retirement for Baby Boomers when there isn’t one Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.

Crunch Time- Strategies for Aggressive Saving

If people want to be able to save more, there are basically three choices:  spend less money, earn more money, or some combination of the two. There’s also another option – granted, a more aggressive option – of aggressive spending cuts to achieve aggressive savings goals.

But why? Simple. Americans need to save more if they want to achieve not just wealth, but enough money to live off of and not work forever.

According to the March 2016 Retirement Confidence Survey, 54% report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit (DB) plans, is less than $25,000.  This includes 26% who say they have less than $1,000 in savings. That’s not good news.

So, how to kick start saving aggressively – cut spending. Here are some tips:

  1. Conduct a spending audit with your personal/miscellaneous expenses.  I think most people have a good idea of how much they spend on food, shelter, transportation, and clothing but have no idea just how much they are spending on everything else.  A great place to find low hanging fruit is by conducting a spending audit on the places you like to go and the things you like to do.  From expensive hobbies, traveling, entertainment and gifts, these types of places where we spend money can add up very quickly.  Am I saying that you shouldn’t spend money on fun?  No, but I am saying that you need to identify just how much you are spending and then decide on where you can cut back.  For example, if you like to golf every weekend, consider going out every other weekend.  If you take two big trips a year, consider cutting it down to one.
  2. Cut your housing expenses by 15%.  It is the largest expense for most people.  It is also one of the broadest spending categories.  Mortgage payments or rent, homeowner’s or renter’s insurance, utilities, phone, internet and cable TV are some of the expenses you likely have.  You may be able to save hundreds of dollars each month by shopping for a cheaper mortgage rate.  If renting, consider moving to a smaller, less expensive place.  Think about cancelling your cable TV, getting rid of your land line if you have a cell phone, and trading your cell phone plan for a prepaid plan if you only make occasional calls.  By just reducing 15 percent of household expenses, the average household could save approximately $3,700 a year.
  3. It’s OK to say NO to your children and grandchildren.  I have always joked with the younger wealth builders I have worked with in the past that have children, that as soon as their kids are out of the house, they will have this magic money tree in their backyard that will seem to have grown out of nowhere.  It is a joke of course, but truthfully, if you are supporting children, grandchildren, or in some cases both, it may be time to cut the umbilical cord.  I understand that I may have offended some by that statement, but if you are serious about wanting to save aggressively, you must be able to spend less.  Spending money, cell phones, car insurance, gas money and car payments are a few things you may be supplementing for a child or grandchild that you might consider cutting out or at least reducing.  Wanting our children and grandchildren to have everything we didn’t have growing up may make us feel better, but it could be hazardous to our wealth.

I have always said that spend, spend, spend may lead to the poorhouse and save, save, save may lead to resentment.  But if it is crunch-time and you are serious about saving aggressively, in order to save, save, save, you have no choice but to spend less, less, less!


From Crunch Time…Strategies for Aggressive Saving Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.


Financial Planning for Small Business Owners

At HFM we know many business owners that are great at what they do, (build houses, sell appliances, provide IT services) but need help managing their finances. We agree with this article that these are the areas where expertise is a necessity. 

Who hasn’t dreamed about starting a business?

Becoming a successful entrepreneur has replaced home ownership as the new definition of the American Dream, thanks to the recent collapse of the real estate market and the made-for-Hollywood stories of folks like Steve Jobs or Mark Zuckerberg, of Apple and Facebook, respectively.

But while Jobs and Zuckerberg have become household names, fame ought to be the least of the attractions in owning a business. More compelling to the tens of thousands of individuals starting a small business every year is the allure of being master of one’s own professional success.

Being the boss can be exhilarating.

But there are also significant risks to going out on your own. Unfortunately, the failure rate of small business is high, with only 20 percent of new businesses surviving for five years. Another depressing statistic: fewer than 40 percent of self-employed persons working alone make more than $25,000 a year.

The old saying, “No one plans to fail, but many fail to plan,” has special applicability to the new business owner. Starting up can be deceptively simple: Facebook was launched with just an innovative idea, a laptop, and a dorm room. But from the very outset, business owners need to be aware that even the most basic business model entails considerable financial planning complexity.

Comprehensive financial planning for an individual or couple generally involves tax planning, risk management, investment planning, retirement planning and gift and estate planning.

For each of these areas, let’s consider how business ownership takes this planning to another level.

  • Tax Planning:  The legal structure chosen for the business – sole proprietorship, partnership, limited liability company (LLC), or a corporation – will determine how the business profits are taxed. As a sole proprietor or single owner of an LLC, your business income is treated the same as your personal income, making tax compliance considerably simpler. Add partners or additional LLC members, and while again the business income flows through to the individual return, it is possible to split the taxable income (and losses) of the business in ways that can benefit multiple owners. S-corporation status can allow business owners to take some distributions of income without paying self-employment taxes, whereas C-corporation status entails separate taxation at the business level, at different rates from what the business owner pays on his personal return. To the extent that individuals and C-corporations have different marginal rates at different brackets of income, it is possible to coordinate the taxation of business and personal income in a way that provides the greatest benefit to both the business and its owner.
  • Risk Management: Most individuals need to plan for the financial risk of early death, disability, illness and infirmity, and liability or loss related to property ownership.  Once an individual owns a business, however, the risks multiply to include: interruption of the business due to a disaster; death or disability of a person key to the success of the business; loss of business property; and lawsuits resulting from negligence or defective products.  This last risk can be addressed in part by the legal structure of the business, but the others require specialized insurance coverage over and beyond what the owner holds for himself and his family.  If the business has employees, worker’s compensation coverage becomes necessary as well.
  • Retirement Planning:  It’s not uncommon for business owners to assume they will never retire.  After all, they’re presumably doing what they love, so why not continue indefinitely? Alternatively, they may see the business as the only retirement plan necessary – as a source of capital that will fund their retirement needs. Thinking along these lines is generally a mistake: If anything, a business owner may need more retirement planning rather than less, to prepare for the time when he no longer can or wishes to work, and/or the business cannot fully provide for his financial needs. The good news is that business ownership affords all sorts of tax-advantaged ways to save for retirement, and the ability to put aside amounts considerably larger than what is permissible to non-business owners.
  • Investment Planning: Most small businesses are self-financed by their owners, which results in the business becoming the owner’s major or only investment. Even when the owner has extra capital to make other investments, he may still prefer to put his money back into his business, where he feels he has the most control over his returns. Prudent planning nevertheless must be focused on diversification. Asset classes and investments must be carefully selected for the owner’s personal portfolio to offset the concentrated risk he is taking with the business.
  • Estate Planning: If a small business grows and becomes a valuable asset, simple wills or family trusts set up for personal affairs may no longer suffice for the transfer of the business. More sophisticated financial planning techniques will be necessary to ensure business continuity after death, reduce any estate taxes assessed for the business, and to provide liquidity to heirs to pay those taxes. A reorganization of the business might be advisable to create different types of ownership for family members, and to make full use of IRS-sanctioned discounts in valuing the business for purposes of gift and estate taxes.  Insurance trusts and charitable trusts can also play an important role in the efficient transfer of a small business.

One point should be clear when it comes to financial planning for the small business owner: the do-it-yourself drive that helped you start your business will not serve you well when it comes to managing the many financial issues created by that business.  This is where professional expertise often becomes necessary.

Exercise your privileges as chief executive officer, and delegate these issues to qualified tax and financial planning professionals. Their advice can make all the difference in improving your chances of business success.

From Financial Planning for Small Business Owners Copyright ©2017, Certified Financial Planner Board of Standards, Inc. All rights reserved. Used with permission.