Jim'sMoneyBlog

Financial Opinion and Insights

The Federal Debt Solution

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

If history is any guide, we may already know the answer.

Politicians will take the easy way out.

Given the increasing deficits, the outlook for growth is problematic.  It would appear there are three available options.  Which one do you think the politicians will choose?

(1) Reduce the level of debt, i.e., reduce spending; or

(2) A combination of higher taxes and reduced spending; or

(3) inflation. 

Since politicians can’t seem to get agreement on either of the first two, don’t be surprised if inflation will be the “solution” – the one that will bear no one’s finger prints and allow everyone to blame the other in their next re-election campaign… it’s always good to have another issue in your back pocket, you know.

Inflation is a common solution.  One study has found that in the past 400 years, inflation has been the most common way that governments have dealt with excessively high levels of debt.[1]  The reasons stated above help explain why.

Those of you who’ve been following my pontifications over recent years may remember my going on about this issue before.    

The short version:  Look for the U.S. to simply print money and inflate the currency to repay the debt – and taxpayers will be left paying for their spending to buy re-election.   

While the Main Stage debate will be over tax brackets and deductions, who pays, etc.,  the real action will be off to  the side out of sight:   Hidden taxes through higher prices, taxes buried inside the higher prices, fees we don’t know we’re being charged.  

My guess:  Expect average growth and above average inflation as countries around the globe attempt to deleverage by engaging in competitive devaluation to rebuild their economies.   The U.S. may be attempting to win that race.  This could be a five-year window – maybe more; I doubt it will be less.

 Jim

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[1] Carmen Reinhardt and Ken Rogoff paper, “Debt Overhangs: Past and Present”IFG Blog

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, the IFG Investment Blog and by subscribing to IFG Insights letters for corporate plan sponsors and individual investors.  Keep up to date with IFG on Twitter: @JimLorenzen


 

Written by Jim Lorenzen, CFP®, AIF®

October 16, 2012 at 8:05 am

Scattered Assets Can Be More Than Risky

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

They can be expensive, too!

What are scattered assets?  Many people have multiple investment accounts, often with multiple brokerages and or mutual fund companies.  There are even those who have multiple institutional managers in separately managed accounts.

And, all this is in the name of diversification.  I just wrote about this in our ezine which you can find on the IFG Insights Archive.  But, here’s an overview:

Problem is, most of these people aren’t diversified at all?  In fact, rather than reducing risk, they may actually be increasing it! 

There are three issues at play – issues many often ignore:

  • Duplication is not diversification.   But, there’s more:  Few people realize that you can’t really diversify-away market risk.  Think about it: If you bought stocks in the ENTIRE stock market, you’d only be replicating market risk, not eliminating it.
  • Mutual funds contain hidden taxes.  Sure, most people know that; but, what they may not know is this:  They don’t own the underlying fund holdings; they are shareholders of the investment company and as such they share in the fund’s capital gains.  If the fund sold a stock they bought ages ago at a low price and now has large unrealized gains; the shareholder will share in ALL of those gains, even if the stock is sold just after the investor bought-in!
  • Tax inefficiency.   This happens when there are multiple managers, even if one of them is the client, in addition, buying securities in his own online account.  The duplication mentioned above can result in some real costs that can far outweigh any perceived savings.  Again, you’ll find a detailed example in this morning’s IFG Insights, which you can find in our archive.

Like Warren Buffet once said, if you think investing is fun, the odds are great you’re doing something very wrong.

Enjoy!

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IFG BlogJim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, and by subscribing to IFG Insights letters  for  individual investors.  Keep up to date with IFG on Twitter: @JimLorenzen

Written by Jim Lorenzen, CFP®, AIF®

October 9, 2012 at 7:45 am

Company Stock and NUA

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Getting ready to retire?  Wondering whether you should sell or roll-over your company stock?   That’s really a tax-treatment question, which means you should consult with your tax professional; but, here’s a little information you may want to review

What you should know:  Shares of employer stock get special tax treatment, and in many cases, it may be fine to ignore this special status and roll the shares to an IRA. This would be true when the amount of employer stock is small, or the basis of the shares is high relative to the current market value.

However, if you have large amounts of shares or low basis, it might be a very costly mistake not to use the Net Unrealized Appreciation (NUA) Rules.[1]

If your company retirement account includes highly appreciated company stock, one option is to withdraw the stock, pay tax on it now, and roll the balance of the plan assets to an IRA.  This way you will pay no current tax on the Net Unrealized Appreciation (NUA), or on the amount rolled over to the IRA.  The only tax you pay now would be on the cost of the stock (the basis) when acquired by the plan.

By the way, if you withdraw the stock and are under 55 years old, you have to pay a 10% penalty (the penalty is applied only to the amount that is taxable).

So, you can then defer the tax on the NUA until you sell the stock. When you do sell, you will only pay tax at the current capital gains rate, whatever it is at that time.  To qualify for the tax deferral on NUA, the distribution must be a lump-sum distribution, meaning that all of the employer’s stock in your plan account must be distributed.

Hypothetical Example:

Jackie just retired and has company stock in her profit sharing plan.  The cost of the stock was $200,000 when acquired in her account, and is now worth $1 million.  

  • The Rollover Option:  If she were to rollover the $1 million to her IRA, the money would grow tax-deferred until she took distributions.  At that time, the withdrawals would be taxed as ordinary income – for this hypothetical, let’s assume 35% federal.  When Jackie dies, her beneficiaries would pay ordinary income tax on all of the money they receive.
  • Withdrawing the Stock:  But if Jackie withdrew the stock from the plan rather than rolling it into her IRA, her tax situation would be different. She would have to pay ordinary income tax on the $200,000 basis. However, the $800,000 would not be currently taxable. And she would not have to worry about required minimum distributions on the shares. If she eventually sells the stock, she would pay the lower capital gains tax on the NUA and any additional appreciation.

Jackie’s beneficiaries would not receive a step-up-in-basis for the NUA. However, they would only pay at the capital gains rate. Appreciation between the distribution date and the date of death would receive a step-up-in-basis (we’ll assume a 15% capital gains rate); therefore would pass income tax-free.

With NUA

 

Without NUA

 

35% Tax on $200,000

$70,000

35% Tax on $1 million

$350,000

15% Tax on $800,000

$120,000

 

 

Total Tax

$190,000

 

$350,000

Let’s assume the stock value increases to $1.5 million in five years, and she decides to sell.

 

With NUA

Without NUA

Taxable Amount

$1.3 million

$1.5 million

Tax Rate

15%

35%

Potential Income Tax to Jackie

$195,000

 

Plus Amount Previously Paid

$70,000

 

Total Tax

$265,000

$525,000

Finally, assume that Jackie died in five years after the stock increased to $1.5 million. What would her beneficiaries have to pay?

 

With NUA

Without NUA

Taxable Amount

$800,000 $1.5 million

Tax Rate

15% 35%

Income Tax

$120,000 $525,000

Amount Receiving Step-Up in Basis

$500,000* 0

*Because 2010 is a transition year with estate taxes, there is a limit on the step up in basis of $1.3 million for capital gains.

Okay, now you know enough to be dangerous.  Next step:  Meet with your tax professional to (1) check for any possible tax law changes, and (2) plug-in your own numbers and tax rates, and (3) discuss any complicating issues this piece isn’t considering.

I have a report, entitled “Six Best and Worst Rollover Decisions”  available and there’s a link to it in our ezine that covers this topic.  You’ll find it in our Insights archive.  You might want to subscribe.


[1] IRS Publication 575

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IFG BlogJim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, the IFG Investment Blog and by subscribing to IFG Insights letters for corporate plan sponsors and individual investors.  Keep up to date with IFG on Twitter: @JimLorenzen

Written by Jim Lorenzen, CFP®, AIF®

October 2, 2012 at 8:45 am

Abnormal Markets – Abnormal Times

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

When the Fed announced an open-ended QE3, the stock market rallied.  In fact, the market’s been trending up since 2009 after the meltdown when all the government spending began.  But, was that good?  Have those stock gains been real?

Since the meltdown, people have been chasing returns whereever they could find them, whether it was with high dividend-paying stocks or  buying gold – a demand largely fueled by all those tv commercials.

The financial industry, of course, has responded to both fear and greed by packaging yet another series of products, some of which come with either high or hidden costs… and sometimes both.

The question, of course, is whether all these “black box” solutions are really the answer… or whether the ‘basics’ are still relevant.

After all, companies that declare dividends are adjusting the price of the stock downward to compensate – you could arguably simply buy growth stocks that don’t pay dividends and simply sell what you need for income and still arrive at the same result! 

And, while gold has increased in value – in terms of the numbers of pictures of presidents you receive for each ounce – have you really received more value when adjusted for inflation?  Some say ‘yes’ but a J.P. Morgan study says something else.

We have more about this in our IFG Insights E-zine, which is appeared earlier this morning and is available in our archive.

It’s my guess much of the increase we’ve seen in virtually all equity categories, have been more nominal than real and are driven by the growth of debt.

We’ll see, won’t we?

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  

Additional IFG Links:

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization. 

 

We’ve Been Here Before!

IFG BlogIf you’re wondering – and you probably aren’t, and rightly so – why nothing is being done in Washington, it’s because it’s election time; but, most people don’t pay much attention during the summer months because, unlike politicians, they actually have lives.

The news media knows this, too.  That’s why news coverage is about gaffs rather than real issues.

“There comes a time to put principle aside and do what’s right.”

                       (anonymous congressman, most are)

Conventional wisdom says that most people won’t begin paying attention until after Labor Day, which means ‘conventional wisdom’ assumes most Americans can afford to take vacations and doesn’t mind unemployment.

“These are not my figures I’m quoting. They’re from someone who knows what he’s talking about.”

     (anonymous congressman during a debate)

Of course, the current spending debate isn’t new.   Much as we’re accessing capital from China today, we were doing much the same thing as far back as the 1830s, still dependent on British capital despite the Revolutionary War and the War of 1812.  Back then, while foreign capital was used in an attempt to stimulate economic development, interruptions in the availability of credit during times of uncertainty often had ruinous consequences for American borrowers.[1]  The inflow of foreign capital, combined with the expansion of the paper money supply drove up prices making American products less desirable on the foreign market.  At the same time, the profligate spending of several states left them deeply in debt.  This was also a time when Americans felt uneasy about the international banking system – a machine that few Americans only dimly understood.[2]  By the time Andrew Jackson left office in 1837, Eastern cities were experiencing bank failures and factory closings, making the U.S. dependence on foreign capital more apparent than ever. 

We’ve been here before.

“We’ll burn that bridge when we get to it.”

  (Anonymous)

Jim Lorenzen, CFP®, AIF®

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

Additional IFG Links:


[1] Unfinished Revolution, Sam W. Hayes, University of Virginia Press, 2010

[2] ibid

Written by Jim Lorenzen, CFP®, AIF®

August 7, 2012 at 8:11 am

The Non-Investment Issue – Almost

Jim Lorenzen, CFP®, AIF®This is the time of year when most people like to head-off to Wally World or some other vacation spot; so, rather than post my usual economic pontifications, I thought you might like something a little lighter – and more fun!

First, whether or not you like Frank Sinatra, I’ll bet you’ll really enjoy Andre Rieu’s tribute.  Take a look:  http://www.youtube.com/embed/e-y581HdWfY?rel=0.

My thanks to Harold Evensky for these two: 

First,  THE 401-KEG… a hot investment for you during this financial turmoil:

If you had purchased $1,000 of shares one year ago in:

1. Delta Airlines, you will have $49.00 today

2. AIG, you will have $33.00 today

3. Lehman Brothers, you will have $0.00 today

But if you had purchased $1,000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for recycling refund, you will have received $214.00.

Based on the above, the best current investment plan is to drink heavily & recycle.   It is called the 401-Keg.

Even better, a recent study found that the average American walks about 900 miles a year. Another study found that Americans drink, on average 22 gallons of alcohol a year. That means, on average, Americans get about 41 miles to the gallon!   Now that’s fuel efficiency!

And, second, on May 2, 2011, the Copenhagen Philharmonic amazed commuters at the Copenhagen Central Train Station, as they created a kind of orchestral “flash mob” – performing Ravel’s famed Bolero, with the musicians gradually assembling in place as the work progresses. The video – which shows not only the assembling orchestra, but also the delighted faces of the commuters – has generated overwhelming interest, and indeed has exceeded the orchestra’s expectations.  http://www.classicalarchives.com/feature/dont_miss_this.html

Now, wasn’t that better than reading about all that dull investment stuff? 

Jim

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IFG BlogJim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

July 31, 2012 at 8:10 am

Posted in Holidays

Is ANY Advisor Truly Unbiased?

Jim Lorenzen, CFP®, AIF®Probably not.

Everyone has some bias.

It doesn’t matter what an advisor’s business model is, each has its own built-in bias.  And, let’s face it, it’s probably true of every business model in any business.  It doesn’t mean the advisor isn’t honest or does quality work, it’s just good that you know that bias always exists.

Here’s the bias of the four primary business models.

  • Commission:  The bias may favor products that pay higher commissions.
  • Hourly fees:  The bias may favor stretching-out the work to increase income.
  • Asset-based fees:  The bias may favor advice given on existing assets to maintain higher asset levels.
  • Flat retainer fees:  The bias may favor doing less work – reduced incentive to work longer

The bottom-line:  The advisor, like any other professional, must be someone you trust to be acting in your best interest.  After all, the form of compensation doesn’t necessarily dictate ethics standards. 

Regardless of the compensation, I would simply ask if the advisor is willing to put in writing that s/he will actually accept fiduciary status in ALL his/her dealings with you, both in the planning stage and in the implementation stage.

If the standard is ‘suitability’, the advisor has wide latitude as long as the investments are ‘suitable’.  If the standard is ‘fiduciary’, the advisor MUST act in YOUR best interests.  The standard they’re willing to accept – in writing – can tell you a lot.

And, that may tell you all you need to know.

Jim Lorenzen, CFP®, AIF®

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IFG BlogJim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

Additional IFG Links:

Written by Jim Lorenzen, CFP®, AIF®

July 24, 2012 at 8:15 am