Comprehensive personal financial planning begins with just plain getting organized. The best way to start is to prepare a Personal Net Worth Statement. Conceptually, that is as simple as listing all your assets, and subtracting from that total all your liabilities (debts). This produces a snapshot of your financial position at one point in time, called your Net Worth, or your wealth. In corporate accounting, the equivalent process produces a Balance Sheet.
In financial media and politics, wealth is often mis-defined using income. A millionaire has a Net Worth of $1,000,000+, but too often the term is applied to someone with a Million Dollar annual income. Many wealthy Americans have low incomes, because they own assets that do not provide income, preferring assets with a good chance of increasing in value (growth assets). Conversely, many high-income Americans have a low (or even negative) Net Worth, because their assets are burdened with mortgages or other liabilities. Wealth refers to Net Worth, whether individual or corporate.
A reasonable goal when entering into a Comprehensive Financial Plan is to establish a Net Worth target. Whether working with a competent financial advisor, or simply playing the home game, deciding on a target is vital to beginning a plan to achieve the goal of Financial Independence.
Problematic for many people is identifying and valuing all assets. Home values change over time, bank accounts and brokerage accounts fluctuate, and many forget to count items such as life insurance and annuity contracts. Others have old 401(k) accounts they left behind and rarely think to include those values as assets. Competent financial planners will remind clients to dig through everything to find forgotten assets. Old insurance policies, annuity contracts, and 401(k) Plans may be valuable, and must be included.
Thanks to various pension reform legislation, accounts can generally be rolled over into self-directed IRAs, to be invested in a manner consistent with reaching defined goals. In our “day jobs” as Certified Financial PlannersÒ, we have assisted many clients in finding and regaining control of forgotten (or even ignored) assets. Annuities are classic examples, as most underperform market-based portfolios over time. Depending on the individual annuity and the nature of the ownership, most can be incorporated into a comprehensive investment plan.
Every retiree needs a level of lifetime income, which can include Social Security, pensions (public or private), and annuities. Loads of annuities have been sold over many decades to unsuspecting Americans who do not need them. Many of those can be converted to more productive uses. We can help.
Van Wie Financial is fee-only. For a reason.
Adam was recently featured on Stan The Annuity Man’s podcast!
Click the link above to check it out!
In 2019, on the Van Wie Financial Hour radio program, we reported on a spreading phenomenon known as “FIRE,” for “Financial Independence Retire Early.” In cultlike-like instructional guides, FIRE proponents attempt to entice people into a utopian world of carefree decades of cushy retired life, beginning in early or middle-age. To me, this is a component of the “Big Lie” Americans are being fed on a daily basis by money-grubbing gurus, most of whom probably retired too early.The FIRE movement tells people they can retire at age 40, 50, or even 60. Studying the literature on FIRE from the zealots (who claim to have all the answers) reveals that a successful FIRE candidate must go to WORK! We’re not talking about volunteering, but a real paid endeavor; even a “side hustle.” Apparently, when doing something you enjoy, it is not considered by FIRE to constitute work, much less a new career. Instead, it is supposed to provide some kind of self-fulfillment, justifying the cut in pay. Think of it as a paid hobby.
I have a better idea. My concept is called “DREC,” for “Delay Retirement Extend Careers.” DREC offers a path toward the real financial goal of most people – true Financial Independence.
Under DREC, a young worker who enjoys his or her occupation and career path should set a retirement goal of Financial Independence. Physical age is only relevant for insurance planning and Social Security claiming purposes.
Don’t enjoy your current job? Change now and work until you are financially prepared.
Wasting years in a “going nowhere” situation, and meanwhile skimping and saving pennies toward an unrealistic FIRE goal, makes for unhappy and unsuccessful lives. People will always require food, clothing, shelter, and a wide variety of expensive non-luxuries (including taxes). Financial Independence requires our nest eggs to be sufficient to cover a lifetime of expenses.
DREC (Delay Retirement Extend Careers) will yield a significant improvement in your probability of achieving true financial independence. If your only goal is early retirement, chances are you’ll be working forever, only not by choice. FIRE may be trendy, but DREC is practical.
Van Wie Financial is fee-only. For a reason.
Last week we chronicled the evolution of investment portfolio diversification, from individual stock buying to Mutual Funds, and more recently, into Exchange-Traded Funds, or ETFs. Conceptualized in 1989, by 2003 there were 276 publicly-available ETF offerings. As investor acceptance broadened, new funds were launched by both existing and startup financial services companies. As of February, 2022, statista.com identified 8,754 worldwide ETF offerings, spanning about 70 categories.
Early ETFs emulated Market Indices, such as the S&P500 Index. From humble beginnings arose Sector Funds, created to represent market sectors for investors favoring Modern Portfolio Theory-style Sector diversification. Success breeds imitation, as the saying goes, and soon ETF companies of all types were branching into bonds and other arenas. Fixed-income, commodities, foreign equities and bonds, real estate, and eventually leveraged ETFs emerged and became mainstream investment offerings.
Growing popularity of ETF investing was due to several factors, including instant diversification, low ownership cost, flexible trading (during market hours), and tax efficiency. A single ETF share represents ownership of every asset in the fund, in proportion to the fund’s holdings. The very name Exchange-Traded Fund signifies that shares are bought and sold among individual investors at lightning speed during trading hours. But perhaps the most desirable feature of the ETF is tax efficiency.
One common complaint regarding traditional mutual funds is a legal requirement that the fund must distribute to shareholders (at least annually) all dividends and capital gains realized by the fund during the year. For fund shares not held in tax-deferred or tax-exempt accounts, these distributions are taxable when received. Many mutual fund investors prefer to reinvest their distributions into new shares, which the fund company will do automatically, and at no cost. For those owners, income taxes must be paid outside the fund.
Understanding tax features of the mutual fund industry, pioneers in ETF development received from IRS a requested exemption from the annual distribution requirement, eliminating the annual taxation on unsold shares. That is not to say that no ETFs pay dividends, as many choose to do so. The voluntary nature of dividend and capital gain distributions allows potential shareholders to evaluate their own tax strategies, and to choose ETFs that match their goals.
No short Blog Post could describe all the complexity of any investment vehicle, but an understanding of the workings of ETFs is instrumental in creating long-term portfolios with specific features for the investor.
Van Wie Financial is fee-only. For a reason.
Defining success in saving and investing is challenging; setting realistic goals is critical. Aiming too high requires excessive risk, increasing chances of failure. Seeking low, but stable, returns results in sure and steady loss of real value, as inflation and taxes punish already meager growth and income.
Beating inflation over time should be a primary goal for investors. Realistically, this requires at least some exposure to the stock market – the best reliable track to long-term positive real returns. For generations, investors and advisors have argued details of stock market investing. Market Indexes (or Indices, both acceptable) were developed as yardsticks for investors to measure their own success (or lack of same) against the market itself.
From early, high-commission stockbrokers plying their trade for the wealthy, emerged the Mutual Fund industry, which offered investments at reduced costs with increased diversification. Finally, an average investor could emulate a Market Index of choice, using a Mutual Fund designed to do exactly that. Investors were able to evaluate their own results by comparing them to Indexes. New investors eagerly jumped in, and the mutual fund industry flourished.
Nothing shouts success louder than imitation. Innovative people soon realized the positives and negatives of mutual funds, and began to conjure up a “better way.” Mutual funds are not truly free market tools. By law, trading activity only takes place between the buyer or seller and the fund company itself, not on an Exchange.
Evolving from mutual funds, beginning in the 1990s, emerged the Exchange-Traded Fund (ETF) industry, which offered similar diversification, but with added benefits of lower costs and flexible trading. From humble beginnings, the ETF industry has grown to over $7 Trillion in assets.
Investors have concluded that, claims to the contrary, “beating the market” over time is likely a pipe dream. Instead, observing the growth in various Market Indexes, matching that growth with personal results is a laudable and lofty goal. With the advent of extremely low cost Indexed ETFs, it became achievable. “Owning the Index” is impossible, because an Index is a number, derived from the value of the assets represented. Owning the Index Share, however, is readily accomplished, and provides nearly equal results, with only extremely low internal costs in most cases.
Many young investors use exclusively Index ETFs, until their portfolios grow enough to seek further diversification. Most wealthier investors retain Index shares as “core” holdings, and diversify further over time..
Next week we will further examine the ETF Industry’s offerings.
Van Wie Financial is fee-only. For a reason.
Achieving eventual Financial Independence requires more than diligent saving habits. Once contributed, retirement dollars must be deployed into investments that are likely to grow over time while experiencing a level of volatility acceptable to the investor.
On the low-risk extreme of investments are Money Market Funds and CDs, which earn interest at a rate that loses every year to inflation and taxes. Banks and credit unions, looking to control a larger percentage of their customers’ cash assets, offer only fixed-income products, robbing customers of the opportunity for their assets to grow with the entire financial market. Many banks offer (and fiercely solicit) fixed annuities, a topic for another Blog.
At the high-risk end of the investment, scale is extremely volatile individual stocks, which provide returns ranging from negative to outsized. Many savers hire stockbrokers, who too often claim that they can outperform the market with well-researched stock picks. While some brokers may achieve this result occasionally, over time they are much more likely to underperform the market, as trading costs continually erode account values.
Neither is acceptable for most savers and investors.
Savers who become investors understand (or will learn) that the key to long-term success lies in diversification among Asset Classes, as well as assets within those Asset Classes. Basic Asset Classes include Domestic Stocks, Domestic Bonds, Foreign Stocks, Foreign Bonds, Real Estate, Cash and Equivalents, and Alternatives, such as Commodities. Successful portfolios will include significant numbers of assets from many of the basic Asset Classes.
In the course of our day jobs as Certified Financial Plannersâ, we field questions from a wide variety of savers. From the range of questions we field, we know that Americans have long been burdened with a lack of financial education from our public education system. Thankfully, that is changing, led by Florida public schools.
When investing in equities, how much diversification is enough to protect an investor, while accumulating a reasonable rate of compound growth? This question has been studied for generations, with no specific conclusion. One recent study concluded that 30 stocks was sufficient, while the same study showed that an individual could only reasonably track 15 at once. Sounds to me like they were drumming up business for stockbrokers.
In today’s investment world, it is possible to hold very large numbers of stocks, using Exchange-Traded Funds, or ETFs, which we will discuss in next week’s Blog Post.
Van Wie Financial is fee-only. For a reason.
My first “real” job was exciting and challenging, with a steady paycheck previously unknown to this student. Fringe benefits presented another entirely new, and decidedly welcome, concept. However, mandatory and optional payroll deductions depleted an otherwise impressive gross earnings amount to an underwhelming “take-home” remainder. From there, monthly obligations further challenged those limited resources. Fear of running out of money before running out of month suddenly became a very real concern. The resultant deflated ego stimulated my financial learning experience, which continues several decades later.
Last week we discussed the difficulty of getting started as savers and investors. Despite challenges during early years in the workforce, time is the best friend of the investors we hope to become. Only once a savings regimen is established, can it become a habit. Over time, routine saving, along with investing carefully, will lead to the true goal – financial independence.
Young savers typically favor Roth IRA Accounts, to which current contributions are not tax deductible. Generally subjected to low tax rates in early careers, people are drawn to the promises of future tax-free retirement income Roths provide. Roth IRAs also provide flexibility for young savers, as funds may be withdrawn tax-free for certain qualified expenses, including purchase of a first home.
Traditional IRA contributions are usually tax deductible. As incomes rise over time, workers are subjected to higher marginal tax rates, increasing the appeal of deductible contributions. Young families often find themselves conflicted, and many decide to split the difference. One spouse contributes to a Traditional (deductible) IRA, while the other funds a Roth (after-tax) IRA. This combination provides flexible tax planning in retirement years.
Roth IRAs are darlings of giant media and financial industry insiders. But that does not make them right for everybody. Learning the mechanics of the Tax Code enables planning budgets, taxes, and cash flows. Fortunately, Florida is leading the way for young people by re-introducing requirements for personal financial education prior to graduation. The more you know and understand, the better your decisions will serve you over time.
Trading dollars between retirement savings and taxes (now vs. later), is among the first major financial decisions facing young families. There will be many more to follow. Choosing Roth and/or Traditional IRAs is important.
Next week we will discuss the need to diversify retirement assets, while at the same time keeping expenses as low as possible.
Van Wie Financial is fee-only. For a reason.
Now that Tax Day has come and gone, let’s discuss planning for 2023 taxes. In Comprehensive Personal Financial Planning (as routinely takes place at Van Wie Financial), there are constant trade-offs, such as between current income and retirement savings, taxes paid now vs. taxes paid in retirement, prestigious colleges vs. practical schooling, and the list goes on. Because the future is unknowable, we have to make decisions based on circumstances.
Statistically, younger people earn less money that do their parents and older co-workers. For a majority of these young workers, the Roth-style Retirement Account (tax paid now, but not in retirement) is most suitable, due to their low Marginal Tax Rate (the percentage paid on the next dollar earned). As incomes rise over time, many will shift into Traditional (deductible from current income) Retirement Accounts, on which taxes will be due in retirement.
Problematic among these young savers is gaining access to qualified professional advice. For those who decide to pursue a relationship with a financial professional, many seek help first from insurance salespeople masquerading as financial planners. Often, this proves to be a costly mistake.
Certain high-earning younger people, such as medical professionals, technology experts, and other highly educated career people, can justify a long-term professional planning relationship that assumes a strong probability of steady growth in assets. Those in less lucrative positions are not beyond receiving assistance, but should utilize differing helpful opportunities.
Younger people can learn about money, investing, insurance, taxes, and multiple other financial topics, by using today’s wealth (pun intended) of free resources. For our part, Van Wie Financial (VWF) contributes to the body of free knowledge in several ways. First is the Van Wie Financial Hour, broadcast live every Saturday morning at 10:00 on WBOB radio, 600AM and 101.1FM. Questions for our firm can be asked while we are live on-air, and may also be submitted through our website email address. Once completed, our radio shows are podcast and distributed wherever podcasts are made available, and are always free.
Additional free VWF Resources include those on our website, strivuswealth.com, where information is made available to the public on a variety of topics, and Blog posts are added weekly. Topics range from A to Z, financially speaking, and are each short enough for a brief, but educational, read.Next week we will discuss the dilemma posed by saving for retirement now vs. spending on the many priorities experienced by young taxpayers.
Van Wie Financial is fee-only. For a reason.
Our current Vice President is known for her “sincere” opinions and annoying speaking style. A recurring theme is her love of, and for, a big yellow school bus. Many of us have fond memories of yellow school bus rides, such as attending out-of-town football games on an autumn evening. But most of us are not prone to episodes of giddiness when the subject arises.
“Climate Change” proposals receive equivalent “sincere” treatment from the Vice President. Now the two topics are being interwoven, as Americans are being required to pony up for Big Yellow School Bus EVs (Electric Vehicles), and the results are (predictably) awful. Following are a few stories from recent media articles and newscasts. See if you can detect an underlying theme.
In Connecticut, an electric school bus burst into flames in a parking lot, causing the school district to employ diesel buses to assure students a safe ride to and from their schools. New electric buses now utilize specialized (and expensive) fire detection systems to alert bus drivers when immediate evacuation is required. Once a fire starts, it is difficult to impossible to stop the burning if the fire reaches the battery, as each cell contains its own fuel supply.
In Michigan, The Administration spent a Billion Dollars (9 zeroes) to electrify the Ann Arbor School District bus fleet. Each bus is about 5 times the cost of a traditional diesel bus, and they have suffered performance problems.
While there are many stories of burning EVs, including cars and busses, perhaps the greatest story of government gone “green crazy” is from the thriving metropolis of Wrangell, Alaska. The Biden Administration awarded the Wrangell School District (3 schools total) an electric school bus, but their private bus company was mandated to destroy a working bus to make way for the Big Yellow Battery-Powered Boondoggle.
The bus company did not agree that it would be in their best interests to destroy a working people hauler. So, the School District itself got permission to purchase a used bus, in order to destroy it and get the “free” EV bus. The EPA mandated several requirements, including that it must be an in-service, working, diesel bus, and it had to be made inoperable forever in an approved fashion. Working model used busses cost about $10,000.
Does anyone remember the 2009 Obama-era “Cash for Clunkers” idiocy, in which the government incentivized trading in working older cars for newer, energy-efficient models? Like the Wrangell bus, the “Clunkers” had to be rendered forever inoperable, destined for landfills. The net result was a spike in prices for used cars, rendering many people unable to trade up. Hey, government, STOP HELPING!
And, BTW, how does all that electricity get generated in the first place?
Van Wie Financial is fee-only. For a reason.
In last week’s Blog, we explained potential tax problems arising from the purchase of certain assets in an IRA, only to find out that IRS has disallowed ownership in that form. One recent example involved the purchase of a Non-Fungible Token (NFT), which we explained in some detail. When an asset such as this is disallowed in IRAs, the purchase price of the disallowed asset becomes immediately taxable to the IRA owner. Should the asset have decreased in value, even if it becomes worthless, there is no relief granted to the taxpayer.
Other scenarios sometimes produce an even harsher result for the taxpayer, as IRS could declare the entire IRA invalid, with the entire account becoming immediately taxable as ordinary income. These events generally invoke the concept of prohibited self-dealing, often resulting from the purchase of real estate in an IRA. While not disallowed, IRA ownership of real estate must be and must remain, a totally arm’s length transaction. No interaction between the IRA real estate and the IRA owner is permissible. Generally, the IRA must be in the hands of a specialized Custodian, and costs are considerable.
Logically, this suggests a discussion of the definition of an arm’s length real estate transaction. Rules are actually quite simple—every facet of ownership and maintenance of the property while owned in the IRA must be handled only with IRA funds. The IRA owner is barred from using the property, performing repairs, maintenance, upgrades, or even cleaning. Any breach of this rule results in 100% of that IRA’s assets becoming immediately taxable as ordinary income.
Should the IRA real estate require funds beyond those available within the IRA, only qualified contributions and rollovers into the IRA may be used to satisfy the need. Injecting cash into the IRA above those limits constitutes self-dealing, and voids the tax-deferred status of the entire IRA. The resulting tax bill may necessitate the sale of the property to generate cash.
Another potential problem involves ownership of precious metals in IRAs, primarily gold and silver, due to their ready availability. Unfortunately, there are less than scrupulous salespeople everywhere, looking for a “one-up” on the competition. Some of these have adopted the pitch that you, too, can hold the shiny objects in your hand. That part is true until the sales pitch gets extended to the “ Gold IRA at home” fantasy, claiming that you can store your IRA gold in your home. As of this writing, we can find no valid exception to the IRS prohibition against storing precious metals IRA investments at home. In our opinion, based on plentiful research, anyone participating in the “at home” program is flirting with trouble. Learn more at Investopedia.com.
Protect your IRA funds. We can help you with the rules.
Van Wie Financial is fee-only. For a reason.