how do you use your year-end - me I do financial housekeeping

Historically, I would always use my year end to clean-up my financial house. Actually, sometimes it involved actually cleaning up my house.

Here are some of my clean-up activities:

1. Liquidate my insurance investments - done
2. Transfer insurance proceeds to investment accounts at Vanguard - 80% done
3. Make end of year 401k contributions - done
4. Make end of year custodial roth contributions for children - done
5. Set-up new custodial roth accounts at Vanguard for children - done
6. Move 529 investments from Illinois' expensive and cumbersome Bright Start Beginnings program to Vanguard's 529 - in process (waiting for the roll over)
7. Roll-over / transfer our IRA accounts from Schwab to Vanguard (paper work done, waiting on asset transfers)
8. Make final flex spending reimbursement requests
9. Make final dependent care reimbursement requests
10. Change payroll deductions for wife (moved flex and dependent care to my payroll at Big Company)
11. Set wife's 401k savings rate to 27% of paycheck
12. Elect my benefits - select maximum 401k contribution rate per paycheck
13. Cancel short term disability insurance (no longer needed now that baby delivered)
14. Order extra birth certificates for new baby (10)
15. Configure Quicken to download Vanguard information
16. Use Quicken's account management feature to remove inactive accounts from the navigation bar and re-order accounts for improved visability
17. Set-up on-line accoutns with Vanguard to facilitae #15 and track transfers
18. File some of the loos papers on my desk (3 feet worth of papers)

The following are activities I haven't had time to do, but should have been doing:

• Finish filing (and scanning) loose papers
• Migrate old files from 2004 into file cabinets used for storing old documents
• Scan entire living trust / estate plan & share with IL attorney to get estimate for re-domiciling trust
• Transfer assets and close my remaining accounts at Schwab (except my trading account SNDA is making a turn-around from 12 to 21 per share)
• Move my individual 401ks to Fidelity (Vanguard doesn't have such)
• Move college saving money from my money market into my brokerage account into a balanced mutual fund - at year end 2007 I will put it into the 529
• Move money in new Vanguard accounts into their target retirement 2025 mutual fund
• Identify and establish asset allocation for my 401k at Big Company
• Create an end of year summary for 2006's accomplishments
• Cancel excess insurance policies (not within our irrevocable life insurance trusts (ILITs))
• Identify lessons learned for 2006

As you can tell, I still have alot to do. Most of which will be addressed in the first two week's of next year.

Am I missing anything?

What are your year end financial housekeeping activities?

Regards,

makingourway

How 1% improvement in return makes our lifetime savings plan work

Based on a comment from Ann on our post discussing Quicken's Financial Planning tool, I decided to experiment with long term investment return assumptions.

Our initial assumption would be earnings of 8% (I assume including inflation / non-real returns) before retirement and 4% before retirement.

Ann wisely questioned our assumptions asking if it made sense to keep all of our investments in what would appear to be mostly fixed income asset classes (for a 4% return) - especially if we were going to draw on the proceeds over 30 years. Perhaps, Ann recommended, we could invest a portion of our assets in more aggressive asset classes.

Ann raised an excellent point - frankly I would probably do so. I was very curious to see the effect of a single extra percentage point of return.

Using Quicken 2007's What If function, I decided to model increasing our retirement returns from 4% to 5%. What an amazing difference - just at the push of a button our situation changed entirely from:

(before) - a three year shortage where we would have to sell assets or reverse mortgage our house

to

(after) - an extra three years plus of money, so we can live longer if we decide to do so!

Ann, thank you! It was a very interesting experiment.

Actually, it's in line with a number of industry articles I've been reading that advocate higher equity asset allocations for retirees due to increased longevity.

Of course, with the end of one's financial plan uncertain - do we really know how long we live - volatility can be especially challenging.

My gut says to keep 4% just to be safe and motivate me to earn more money, but when it comes time to retire to put retain a larger percentage of assets in higher producing asset classes.

What would you do? Are you retired at this time? How are you allocating equity versus fixed income? What do you plan to do?

Regards,
makingourway

MEME: Are brokerage firms raiding your 401k?

Fellow bloggers - this is a very important matter - the 401k industry (members of it at least) is busy raping the savings of future generations with outlandish dishonest fees. Please help create a meme and linking back to this topic - if we do not raise the public consciousness, it will not be fixed!

I've been having two very frustrating experiences - the first deals happens every month and it involves my wife's 401k. The second is current and not yet resolved and it deals with my 401k at Big Company.

In short, my wife's employer - a small busines, has been suckered into placing their 401k plan with a regional bank. It has high asset management expenses on top of what would be otherwise ok, but undesirable, expense ratios. It also has a poor selection of funds.

A regional bank administrates the 401k for my wife. They provide a mediocre assembly of mutual funds - nothing very special - all actively managed with expense ratios between 0.8 - 1.x%. Average for the active managed fund, but high compared to the index funds which usually beat them. I've put her money into a life cycle fund 90% (3 stars - no better option exists) and added foreign developing markets 5% and international 5% to increase the international weighting. I suppose I'll eventually need to rebalance it for her.

The problem with her 401k plan - despite the poor selection of funds, is that the regional bank charges a 0.5% asset management fee. This is ridiculous -- none of our other 401k plans have ever charged such a fee. It effectively destroys the return of more stable value products such as short term bond funds. Over the long term, it seriously eats away the employee's investment. So the undesireable, but not unreasonable expense ratios I quoted earlier move sky high into the rip-off zone. Would you pay 1% for an index fund when you can get it between 0.08% and 0.35% at Fidelity or Vanguard?

A study I read from Portfolio Solutions predicts that bonds will earn 3.5% over the long term. Would you be willing to give up 15% of your return for the next 20 years just to have the account at your bank?

On the other hand, Big Company, who you think would be much more astute has a 401k plan, run by a major international brokerage, that is so opaque, I can't even calculate the actual expense ratios. I've worked with many big financial companies. Quite a few have offerings from Vanguard or Fidelity, or even both. Big Company - no way.

Our national brokerage has a piss-poor website without on-line access to many of the prospecti. Over the telephone, there brokers do not have access to the prospecti and cannot answer even basic questions, such as expense ratios.

Why is the national brokerage going to such an effort to make the expense ratios unclear? My fear is that they are unreasonably high.

Big brokerage provides a smattering of funds that read like the best of Money Magazine from three years ago. There's a lifecycle fund that isn't bad, but when you look at it's investment composition it's heavily laden toward large cap growth - although it's a hot trend at times - a study of historical returns will tell you that large cap growth is a poor long term asset class - usually loaded with the prior cycle's winers - value selections, especially small cap, have the best long term (30 years plus) rewards. There are three index options - mostly domestic big, med and small. Of course there's no way to find out what expense ratios are - but I bet - they are sky high.

I'm new at big company, so it would not make sense to create a campaign to change things right away. However, yesterday's Wall St. Journal had articles about the pressure for 401k reform. So many employer sponsored 401ks are laden with high and often hidden expense ratios, 12b1 marketing fees and administrative fees or asset management fees. But employers seldom select 401k administrators on that basis - personal relationships and managerial reporting tend to trump employee retirement requirements.

Here are some changes that would fix this situation:

1. Let employees roll their contributions and balances our of an employer sponsored plan into a private plan at a brokerage of investment house they choose.
2. Require all 401k administrators to clearly document all expenses employees will bear on their investments.
3. Required all 401k plans to have low cost index fund options.
4. For those poorly read in finance, let the employers provide low cost lifecycle funds (to their kudos, many plans are now providing these).
5. Prohibit asset management fees charged as a percentage of assets under management - fees should be flat and specific

If your employer were consciously or through negligence imperilling your retirement - how would this effect your loyalties? Would you plan to spend the next 20 years of your career there?

The article at the Wall Street Journal raises some very interesting points:

1. employers are required to manage the 401k plan in the best interest of the participatns - hah!
2. many common arrangements in the 401k industry are illegal - such as mutual fund companies using investor fees to pay consultants - the same ones that recommend which funds to include inplans
3. another ridiculous practice is to provide investor class mutual funds - the funds with the highest expense ratios - when lower cost institutional class funds are available
4. a number of class action suits are brewing against 401k administrators (mainly by personal injury shops) - Fidelity lost a case in Wisconsin where it was accused of having unreasonable and excessive fees as well as hidden arrangements that misused investor's money - they plan to appeal - if they win - will you?
5. Will employers who abbrogate their fiduciary responsibility be the next target for lawsuits?

Regards,

makingourway

PS This is a very important issue that effects most working adults, their families and their spouses - please discuss, blog and talk about this issue. If you read this blog you are interested in personal finance and very likely to be more informed than the general public. As a member of the pfblog community it is likely that your friends and peers will look up to your growing knowledge of personal finance. Please make them aware of this issue. Ultimately, if this problem is not addressed very many people risk being unprepared for retirement (how can you be prepared when you're paying 2+% annual expenses in direct and hidden fees). It is naive to think that a public solution (massive welfare entitlements) won't be considered a serious option - this will be a massive cost that we will all have to share (and our children). Better to be prepared by saving wisely now and not mortgaging future generations retirement.

Reverse mortgages and leaving a legacy - money in your old age

Two interesting things have been whirling in my head - I've seen more and more articles discussing reverse mortages. I've also seen an increase in the number of retirement planning / analysis tools that model the ability of your savings to cover your long term expenses.

Have you ever used Quicken 2007's life planning tool.
It's very interesting tool. It takes a bit of work, but can help you determine if your savings plan will work. Granted assumptions like duration of your life (and your spouses) and your long term earnings rate are subject to influences outside of your manageable control, it's still worth knowing. Fidelity is supposed to have a similar tool - that is free - it's a monte carlo simulation designed to analyze the likeliness of your investments growing to the your target amount. Through third parties I have the impression it is less thorough on the expense side. A comprehensive analysis, would probably include both. I'll check it out in the next few months. In Quicken, I assume an 8% rate of return before retirement and 4% after retirement - I believe this is pre-tax (though much of our assets will be tax deffered).

Here is mine:

You'll notice that my plan doesn't carry us for the duration until I am 91 and my wife is 95.

It falls about 3 years short. If we can't change things - such as costs and expenses - we can consider a reverse mortgage, however, I'm not too excited about the thought of burdening our home in our 90s. Will we even be able to do it? Would it be appraised at a fair price?

Utlimately we need to increase our asset aggregation or decrease expenses.

Regards,

makingourway

PS I'll discuss this in more details later.

Collecting and spending: My Big Pile of Comic Books

Here's an interesting thought.
I now have about 7,060 comic books. Of which, 4,670 are catalogued on-line.
The on-line estimated value is $16,900 - a little bit above $3.60 each.
I have probably spent about $1890 on all of the comics ($0.20 each for the vast majority and about $50-$60 per month for the current monthly's I collect).

My gut says that if I can buy comics for $0.20 each, the liquidation value for the collection is probably not much more than $1 per book and maybe less - closer to $0.50 each.

It seems like the larger the collection the lower the liquidation value due to the smaller number of buyers able to purchase and utilize the entire collection - unless the collection is very old, with some very expensive books - then an auction house might take the time to catalogue and auction everything (or large portions).

One expense that I didn't mention was the cost of bagging an boarding. For some reason most used books require fresh bags and boards. All new books do. They can be purchased cheaply if you know a friendly dealer and can buy from him/her in large volumes. With my recent acquisitions, I'll need to do just that.

One of interesting aspects of my collection is the change in orientation. I thought I would collect mostly independent press, smaller print-run products, but as I've started buying other people's collections, I've been acquiring mainstream titles like batman, superman, etc.... Actually, these are titles that are probably more appropriate for my children than some of the more arcane independent titles.

My biggest challenges with the hobby are emerging as:

1. Where will I put 50 short boxes full of comic books - I simply don't have room - they must be stored in an airconditioned environment.
2. My bulk used book purchases are beginning to see duplicates. It takes hours to buy 1000 comic books. There certainly isn't enough time to cross-reference buy lists. What do I do with the duplicates? Another reason to head toward more mainstream titles.
3. I have some increasingly complete print-runs for quite a few comic series. Do I increase my per issue spend by buying the missing issues on-line from mail order house's backlists?
4. How do I find the time to organize, bag and board everything?
5. I may have some issues that are modestly valuable - one actually - that might be worht $100 - do I pay to have it CGC graded?
6. Should I start buying Disney type comics for my children? The idea is to share the collection with them. Should I let a small child reach a 50 year old Disney comic worth $20?

Questions and questions.

When we relocate - I wonder how much the comics will add to our moving cost? They are rather heavy!

Have a wonderful day,

makingourway

Carnival of Personal Finance #80 is up & go visit My Personal Finance Blog!

Not only is the carnival of personal finance #80 up - go see it here, but it's being hosted by one of my favourite bloggers, My Personal Finance Blog. Actually I consider the owner of mypfblog a friend - despite the anonymity of such things.

We have quite a few common experiences and like him, I'll be moving to IL some time next year. He's already there. I hope he's enjoying it.

My PFBlog is a fascinating fellow. His wife is a brilliant engineering PhD. He's a dynamic marketing consultant and entreprenuer. Like myself, he's taken a risk and moved to the country from their home in MI.

He's had some dramatic entreprenuerial successes at a young age and some miserable disassters (like my real estate deal so long ago that wipe me out). But he has a strong analytic mind and an even stronger stomache - instead of giving up, he's working even harder to accomplish what he needs to do to meet his goals.

Reading PFBlog inspires me. Check it, I hope you'll find it equally inspiring. Here's PFBlog's self-description.

Regards,
makingourway

End of year tax tip: make January's mortgage payment early

If your cashflow will support it, make January's mortgage payment in December of 2006. This will allow you to claim the extra interest payment as a deductible in this year's taxes.
Depending upon where you live, this can be substantial.
In our circumstance, it will save about $1500 in taxes.

Good luck,
makingourway

Strategic Planning for Next Year

My wife and I spent some time discussing what the next year will look like. Strategically, it will be very interesting.

Here are some of the major events:

• Hopefully, I will keep my job with Big Company (having run my own business I often worry if I can fit into a corporate hierarchy)
• My wife will accept a job in Chicago - initially with a pay cut of about 15%
• My wife will give notice to her current employer
• We will buy a house in Chicago ($800k - $1.2M) - much more than our current house ($500k)
• My wife will have two months off (and we will have 1/2 income for that period)
• We will move / relocate to Chicago
• We will redecorate the new house with minor rennovations
• We will sell the old house (after having lived in it for about a year)

That's alot to have happen. There will be even more administrative work. Everything from changing address for financial accounts, legal businesses, etc... to redomiciling our Living Trust.

Health insurance and related benefits will change dramatically.

Currently my wife has returned to work from maternity leave. We have about six weeks deficit in our operating accounts from her time off (no pay) plus about $18k reduction in cash due to individual 401k contributions and custodial roth IRA's for the kids (plus the cost of maintaining a rental home in Chicago for a month).

By the end of April I will have returned all the money borrowed from our high interest internet savings account. We will also have about $20k in our operating cash reserve (a local money market). If I can keep my job, we should have almost $30k in cash. That will be more than enough to cover our monthly expenses (between my salary and dipping into the operating cash reserver).

However, a number of extraordinary expenses will exceed the operating reserve and need to find their own source of funding:

1. Downpayment on the new home
2. Rennovation or improvements to new home
3. Repairs for new home
4. Any relocation expenses not covered by Big Company and my wife's new employer (they are tight fisted)
5. Decorating costs for the new home (venetian blinds, window treatments, carpeting/flooring etc...). Historically, this has cost about $15k each time we've moved.
6. New furniture for the new house - my wife dreams of new bedroom furniture (I actually can't understand how people in their 30s can afford $25k bedroom furniture with house prices so high - do you know how?) [I have no idea where this money will come from]

In short, we have enough cash to live, but not enough cash - without liquidating investments or other assets- to cover large capital purchases or large cash layouts. So this is a conundrum we must address.

In the worst case, I can take the $70k liquidated from our insurance investments and use some/all of it to make the downpayment on our new home. It wont' effect my networth ($70k from liquid investments moves into a $70k asset account, but it will make the asset illiquid. The when we sell the less expensive house in NC, we can recoup some of the money invested into the new home.

Any thoughts or ideas?

regards,

makingourway

the end of year race

I have a few critical things that must get done before the year is over. I'm not sure how much time I really have or whether I must mail them before year end or actually have my brokerage process everything before year end, but I'll check it all out soon.

These are my time critical to do's:

1. Open a custodial Roth IRA for our newest family member - she worked for the family business (actually and legally, she did)
2. Make Roth contributions for my children
3. Make my individual 401k contribution

So hear are my deadline questions:

1. Do I need to open the Roth IRA or merely pay my children and then have until 4/15/2007 to both open and fund their accounts?
2. Do I have to mail my individual 401k contribution by 12/31/2006 or does it have to be deposited by Schwab?

I don't think much else is necessary. If I did not have significant forthcoming cash expenses, I think I would make coverdale contributions for the kids, too. Maybe next year.

As soon as January 1st hits I'm going to take several boxes of charitable contributions and delivery them to their respective beneficiaries. They certainly are cluttering our house. With all of the year end, new job and travel, I haven't had time to catalog and document everything we plan to give away.

XMAS Holiday Budget $300

Well, did we live up to the $300 budget?
We made our monthly trip to Costco (sometimes bi-weekly) and spent about $350, at least half of which were our regular monthly dry and bulk goods.
Let's assume about $150 was for Christmas.

Last night we spent another $45 on last minute food items at the local super market.

All in all $195 or so - not bad.

This included everything necessary for Christmas dinner, etc....

Now if we include the $100 Christmas tree, the $30 in varous long hanging ornaments, we're about $25 over budget. Still not that bad.

Then again, our guests failed to show up for dinner - my friend's wife contracted food poisoning from lunch earlier today - seems like she'll spend Christmas Eve doing something other than eating - poor girl - maybe we could have saved $40 on food.

Oddly, having Christmas with just the family: kids, us, in-laws, was really very nice. We had fun, joked around, watched five months worth of family videos and made special wishes for each other.

The highlight of the evening was when one of our diaper training young children, didn't quite make it to the potty (after four false alarms) and tried to walk with a pair of full underpants -imagine a toddler with arms spread, like an airplane trying to take off, waddling, slowly, with legs spread apart to avoid feeling the unwanted material in his underpants. Perphaps you needed to be there.

In central Europe there's folklore that says what you do on Christmas Eve is what you'll do for the rest of the year. I wonder what that says for my friend's wife, my child's potty training and...well, I should probably wake up my wife...we still have two and a half hours....

Have a wondeful holiday,
makingourway

Configuring Quicken to Access Your Vanguard Accounts

To configure quicken to access your Vanguard accounts is quite simple - initially.
Let quicken know you want to add a new account, type in Vanguard Group as the institution and it will offer to download the account data from Vanguard. However, you also need to now your account numbers - especially if you're already created the accounts in Quicken. Specifically - which account is which.

Quicken will download the list of accounts and ask you to associate them with existing accounts or select new accounts. Oddly, Quicken did not offer to set-up my son's 529 account. I'll have to ask Vanguard why.

I have a non-retirement brokerage account with Vanguard. My primary purpose is to use it for Vanguard funds. The brokerage fees are ridiculous - $35 per transaction - compare that to first trade at $6.99 or so. However, Vanguard does set-up two accounts for you to download, so Quicken must also have two accounts (not one - even if you, like I, think of them as one). You need one account for the Vanguard non-retirement mutual funds and the other quicken account will act as your vanguard non-retirement brokerage account (for things other than their mutual funds). Kind of tricky.

Bottom line, if you have the brokerage feature, plan on setting up two accounts in quicken.

Regards,
makingourway

Quick thoughts on Christmas Shopping

We've decided to put the kabash on Christmas shopping. Well maybe not entirely. We've bought gifts for our children and sent out family picture cards from costco ($15.99 for 50), but otherwise, haven't spent much on anyone else. My kids (those old enough to understand gifts) will net about 10 gifts - but only two are substantial - figure $250 total.

I did buy my wife a necklace from Costco. I felt the money back guarantee would help if she didn't like it. I was prepared to spend about $1000, or even $1250, but the one that caught her eye was ony $350. [my wallet sighs in relief]. Actually, I'd like to get her something nicer and more expensive - a unique piece I found in the carribean, but the jewelry store's telephone number is disconnected - who would expect such a thing?

The gift I'm most proud of is a hand-made custom belt for my eldest - he's finally old enough to try to un-buckle it. Wearing a belt is one of those important steps toward manhood!

Hmm...did we buy anything for anyone else - no - not even Grandma and Grandpa. I did send about 6 sets of photos for about $100 to various close relatives - but that's as close as it gets.

I suppose my last gift will be to renew my mother's ceiva subscription - that would be a nice thing. If she were more technically comfortable, I'd rather get her a digital picture frame that takes SD cards. I could load up a card - 256 MB cards are so cheap now with many more pictures that Ceiva supports and send her a new one every month or two. Oh well.

I noticed a Wall St. Journal article today that quoted a professor from George Mason University in VA(?). He claimed that Christmas gift giving was uneconomical - inefficient and that most gifts were not what people wanted.

For myself, I really don't care for anything. I have a new child, my family is healthy and I have a new job that pays alot more than my last. All that I can ask for is continued good fortune, good health and happiness.

Perhaps there is something I can ask for, the chance to wish the same good things:

good fortune
good health
and good happiness

to you, my readers.

Thank you for reading, commenting and motivating me to more ahead with this crazy idea.

Did you know that my goal was to have a thousand visits this year? Well, we're certainly past that. Thank you.

Regards,
makingourway

SHOPPING: a neat little gift

While ordering a bunch of photos for relatives, I decided to explore the more esoteric photo-labelled products. One I liked quite a bit was a photo sticker. It's not too expensive - $3.99 for a page of stickers containing a photo.

I decided to take a picture of my oldest child and place it on the sticker. We'll put these stickers on school supplies and materials so both he and the other young children know what's his.

Should be a nifty thing. I haven't shown my son the stickers yet, but I think he'll like them.

Have a wonderful day,
makingourway

Insurance investment liquidation update & putting all investments into one mutual fund!

I've received the cash from liquidating my largest Variable policy - but no statement as to how it was calculated.

The other policies have sent statements showing how they will liquidate the policies, but not the checks.

I have not received anything from the whole life policy, but was told verbally the request was received and will take about a week longer to process.

By the end of the day I expect to have $73,500 after paying about $9-$10k in various surrender charges.

I'll place the money in Vanguard's 2025 target retirement fund (VTTVX) of the next six months until we're ready to move forward with our formal asset allocation plan. The target mutal fund isn't perfect for a taxable account, but it is balanced and close to our general asset allocation (stocks vs bonds).

All my retirement acccounts will also be in Vanguard's 2025 target retirement fund - this will have several pluses and minuses:

• Consistent asset allocation throughout all accounts
• Balanced funds eliminate the need for annual or quarterly rebalancing
• Vanguard's target funds have dramatically lower expense ratios and no 12b1 fees
• Consolidates most of my holdings with one provider -helping me obtain lower costs (Vanguard tiers prices by assets with their firm)
• Simplifies reporting

Vanguard's 2025 target fund has a 0.2% expense ratio - one fifth (1/5) of similar funds at Schwab (SWERX)! Big difference.

Have a wonderful day,

makingourway

check out tax carnival #8

Kay Bell has tax carnival #8 up.
You can see it

Check out the carnival of investing #53

Lazy Man is hosting it

Tracking your non-deductible ira contributions and how high income earners can have roth ira's too

Tracking the cost basis of your non-deductibe IRA contributions is very important. If you were to convert them to a ROTH IRA you would need to demonstrate that the payments are post-tax, otherwise you would owe income tax on them.

The federal government tracks your non-deductible tax basis on form 8606, which is submitted with your annual tax return.

I was unaware of this. Actually my accountant and I made a mistake and the form was never submitted for 2005. My accountant told me it would not be much work to revise the 2005 submission - I wonder how much extra it will cost me?

Here is the IRS information on form 8606:

Form 8606 keeps track of non-deductible contributions to a retirement plan. See the link below for more information on form 8606. Anytime you have a question on any tax forms you can always check out http://www.irs.gov/. They list every form and instructions for each which explains their purpose.

http://www.irs.gov/pub/irs-pdf/i8606.pdf

If you make non-deductibe contributions, keep a sharp eye on this.

Hmm... why are we making non-deductible contributions? Due to recent tax law changes (2006), high income earners are allowed to convert IRAs into Roth IRAs in 2010. Buy making post-tax contributions, I won't have to pay income tax on the basis when I convert from a traditional IRA to a Roth IRA.

One of the techniques to minimize growth on the gains is to transfer the gains and any pre-tax contributions to other accounts before the conversion. I'm not sure how well that technique will work, but I'll certainly try it.

Have a wonderful day,
makingourway

carnivals for you

Check out the Dec 18th Carnival of Personal Finace at A Penny Saved....

Enjoy, makingourway

reshuffling our investments for 2007 - the strategy

I've mentioned before that we're moving our investments around.

Here's the overall plan:

1. Move high cost investments to low cost investments
2. Move active investments to passive investments
3. Consolidate or reduce the number of accounts to facilitate asset allocation planning
4. Consolidate the size of investments (aggregate $) to reduce fees with brokerag / mutual fund companies and maximize leverage
5. Simplify things - paperwork, etc....

Quick thoughts on what these mean:

1. Lowering investment management costs is one of the few things an investor can control about their investment's performance.
2. 85% of active investments can't beat their relevant index over long periods of time. Why pay for unnecessary research and risk?
3. The more accounts you have the less money per account you have to work with. It makes it difficult to allocate assets if there's not much money between accounts. Some providers (like Vanguard charge fees if you have less than a $3k in an index fund).
4. The more you have with a particular broker / mutual fund company, the more leverage you have. This translates into reduced fees (Vanguard and Schwab) and lower expense ratios.
5. The less paperwork, the more time for blogging.

Regards,
makingourway

PS I need to make a posting on our ultimate account configuration soon - still researching asset protection issues.

Rescuing our college savings from Illinois's overpiced and inflexible Bright Start Savings Plan

In preparation for consolidating my retirement and brokerage accounts at Vanguard, I found a very interesting discussion and comparison of 529 plans.

My initial interest was spurred by the idea of consolidating as many of my holdings at Vanguard to accumulate price breaks on fund and account fees. I dug in more deeply. Where I had heard that New York, Arizona and Nebraska had good 529 plans, I was very impressed with what I saw available at Vanguard's plan (which is Nevada's).

Basically the plan has 3 life cycle products available and the largest number of vanguard mutual funds. Many of the mutual funds are low cost index funds, which would fit very nicely into my asset allocation model.

Most interestingly, the fees are advertised as ranging from 0.5 - 0.7%, which is quit a bit less than Illinois' 1% or the Arizona Upromise Plan at close to 1%. When we actually examined the various mutual funds we would consider, we found the costs to be closer to 0.55%, which ends up being 0.01% cheaper for the same funds in New York's 529 plan.

Here is a link to the Vanguard 529 plan.

Here is a link to a very helpful 529 plan comparitor from Vanguard. It takes quite a bit of effort to find it at their site, so keep this posting handy. The comparitor allows you to compare various 529s - it's the best I've seen so far.

Keep in mind that Vanguard's product is particularly compelling if you accept and believe in one or more of the following:

1. High fund expenses decrease overall long term performance and do not correlate with actual performance over the long term
2. Very low cost index funds allow the best long term performance vs. actively managed funds (compared to their specific target index)
3. 529 plan investments should be incorporated into your overall investment strategy and not compartmentalized - this means a 529 plan should offer investments compatible with your investment strategy
4. Transparency - 529 savings plan holdings should be as transparent as possible to support integration into your overall investment strategy. Ideally they are specific index funds.

Regards,

makingourway

Retirement accounts as an asset protection strategy

My wife and I consider our family to be at risk of frivoulous or opportunistic law suites. Specifically, our family's assets are vulnerable.

Why do we feel this way:

1. My wife is an executive in the healthcare industry - one rife with self-serving opportunistic lawsuits.
2. I am an entreprenuer involved in various business dealings, investments and partnerships (although less so now that I work for Big Company) - sometimes deals go south.
3. We relatively wealthy compared to many less fortunate in our poor rural town - therefore we are a more obvious target for legal opportunism.

Consequently, we feel it is important to protect our assets. We have a great distrust of off-shore asset protection plans - too little control and too many expenses. Quite frankly, we're not even wealthy enough to consider the possibility. Perhaps when we're worth more than $5M versus our much more modest $600k (right now).

For now, we can maximize our asset protection from creditors / suitors by doing the following:

1. Holding our house title as tentants in the entirety.
2. Placing as much of our assets and assest growth in retirement accounts.
3. Placing life insurance in irrevocable trusts (ILITs)

#1 is fairly easy. Your attorney can do it for you shortly after you buy your house or when you buy it.

#2 is not easy. Actually, it's very confusing. I've only learned the answers for half of the many questions I have. I'll probably have to pay a princely sum for an attorney to answer the others.

#3 is done, but not easy. It's also a great estate planning tool as the insurance proceeds bypass your estate / probate, etc.... The ILIT is funded by term policies. You gift the trust annual payments sufficient to cover the premiums. You may need an estate planning attorney to set an ILIT up, but it's pretty standard fare for most insurance brokerages.

This is where I am right now:

Priority of protection:

1. Defined contribution plans (such as 401k, SEP-IRA, 403b) (and Simple IRAs?) are ERISA protected by federal law and are off limits to creditors - regardless of the balance.
2. Funds rolled over from defined contribution plans into Rollover IRAs are also protected - but the owner must be careful to account for any non-rollover contributions made to the accounts - regardless of the balance.
3. Roth and traditional IRAs were originally subject to state specific creditor laws. Documents I have read protect these accounts from creditors in NC and IL.
4. The recent BAPCPA 2005 bankruptcy law (passed in 2006?) placed federal protections on IRAs (Roth and Traditional), but only with a limit of $1m.

The questions I have are as follows:

1. If I roll traditional IRA balances into a SEP-IRA or 401k, will they enjoy ERISA creditor protection (i.e. unlimited)?
2. Is my individual 401k, which is considered a defined contribution plan elsewhere in the tax code, enjoying ERISA protection? If not, what protection does it have?
3. I have individual 401ks and SEP-IRAs -can I / should I roll one into another? If I do, what are the asset protection consequences?

Does anyone have any experience on this matter?

I'll update this posting once I hear from a few attornies. I'm waiting to hear from one of my attornies.

I've talked with the retirement experts at Vanguard who are completely misinformed. I was told "anything ending in IRA has no protection." I'm not an attorney, but I can read and the law is pretty clear Vanguard was wrong. I was very disappointed. I've asked to speak with their higher ups, hopefully I'll get a good answer.

Regards,

makingourway

A Great Deal On Holiday Cards!

Costco's Photo Center is offering 50 photo holiday cards with envelopes for $16.00.

An additional 25 cards and envelopes cost $6.00.

This compares wonderfully to our local photographer's rate of $30 for 25 cards!! What a difference.

The cards take two days to print and I can pick them up at our local warehouse. If I don't like them, I don't pay for them.

What more can you ask?

Regards,
makingourway

Checkout the Carnival of Thoughtful Consideration #1

You can see it

A clear plan toward cashing in my insurance policies

After dealing with great amounts of frustration and an inability to arrive at concensus regarding a critical accounting question, I've decided to move ahead and cash in my insurance policies with cash value.

As I've mentioned before, the majority of policies are variable insurance policies with mutual fund sub-accounts. Obviously not the most inexpensive funds at that. There is also a small whole life policy.

The great question was this:

If one of the policies with a cost basis of over $50k, has a cash value of $35k due to insurance and surrender charges, can I do a 1035 exchange into a low cost variable annuity. Let the new, better mutual funds grow until the $15k net loss is eliminated and then cash out the annuity with zero capital gains / taxable income.

My CPA and my friend's CPA have both insisted we will pay a 10% penalty for cashing out an annuity before the age of 59 1/2. The 10% penalty would erase most of the capital gains offset benefits. The insurance people I talked with disagreed - but it's the CPAs who have to sign off on my tax return. This one went to the CPAs, though I'm not happy with it.

I contacted the insurance companies and learned that if I cashed in all the policies, they would report about $1500 in gains, which are reported on a 1099 form as ordinary income. I'll owe about $600. Also, I'll lose the hypothetical, but unproven, capital loss.

In the end, I'll have about $70,000 in cash, freed from the expensive and opaque constraints of the variable and whole life policies.

My plans are to put the money in low cost balanced index funds at Vanguard until I resume investment planning with my investment advisor Summer 2007.

Even if the investments perform the same as within the variable insurance policies (which I doubt), the mutual fund fees will probably drop from 1.x% to 0.2 - 0.5%. Possibly a drop of more than 1% in expenses - huge difference over the next 30 years!

Most importantly, I'll be able to integrate the funds into my overall portfolio allocation strategy and rebalance as needed - though judiciously as they will be in a taxable account.

Regards,
makingourway

An explanation of our 2007 goals

Here are a few quick thoughts regarding our 2007 annual goals:

Networth - although it looks like we'll surpass $100k in networth growth in 2006, 2007 will be hard to achieve the same increase for several reasons:

• We will be moving to IL - moving expenses, closing costs for buying and selling, home furnishing costs
• My wife will be changing jobs - lost income for 2-3 months
• Cost of living increases in IL
• Many one time costs related to moving
• Redomiciling our living trusts and irrevocable trusts from NC to IL - legal fees
• I don't expect to be as tax efficient due to the demands of my new job

Savings seems self-explanatory.

Health - I really let myself go with my wif'e's recent pregnancy - call it sympathy weight. I need to take it off. I haven't felt fat like this in ages.

Investments - due to the job changes, move, home purchases and sale, etc... my investment advisor and I agreed to put things on hold until we were settled in IL. However, we also agreed that I should move our investments to lower cost institutions with lower cost products that would be more aligned with our investment agenda. Once settled, we will pick up where we left off and most likely enlarge the assignment to become a full financial planning process (not just investments).

Strategic and other should be self-explanatory.

Please share with me any thoughts or recommendations.

Regards,

makingourway

The carnival of personal finances is up!

Go visit kirk walsh to see the new carnival of personal finance.

Makingourway's article on end of year activities has a very prominent position (1st) - thianks Kirk!!

There are quite a few interesting articles. I plan to read the following:

FMF presents Ways to Save on Your 2006 Taxes
Andy Oshiro presents Maintaining your budget (part 2)
Victor Fam presents My Strategy Towards Weath Building
J.D. Roth presents Review: Kill-a-Watt Electricity Usage Monitor
Joe Cerny presents Baseball Cards can Teach your Kids about Stocks
Steve presents UFGC #1: Suze Orman vs. Doug Andrew - Paying off your mortgage early
Finance Buff presents Selling a Used Car

Regards,
makingourway

Financial Goals for 2007

Tags: planning, saving, home economics, goal setting, financial planning, budgeting.

Net worth

• Increase net worth by $80,000.00.
• Strech goal, increase net worth by $100,000

Savings

• Save to meet net worth increase requirements (in addition to investment returns)
• Restore operating cash reserve to $33,000.00 by end of March 2007
• Increase operating cash reserve to $50,000.00 by end of December 2007
• Contribute at least $20,000 to 529 plans
• Make retirement contributions for Mom, Dad and Children
• Fully fund Mom & Dad's 401k
• Fully fund traditional IRAs with post-tax contributions

Spending

• Move into and furnish new house (basic furnishings) ($5,000 - $15,000)
• Repay unleveraged debt ($8,124)
• Big family vacation ($3,000 - $9,000)

Health

• Lose 15-20 pounds
• Exercise regularly

Investments

• Move investments from Schwab to Vanguard and Fidelity (only individual 401k)
• Shift out of life cycle investments into low-cost index funds and index ETFs
• Restart investment planning process once settled in new home
• Complete financial planning process with financial advisor (budgets, insurance, etc...)
• Finish the liquidation of variable and cash value insurance products
• Reduce the number of investing accounts (if possible)
• Make sure investments rebalanced regularly

Strategic & Other

• See more family
• Increase monthly blog visits to 3,000 per month
• Play golf at least 12 times
• Dance lessons with wife
• Track goal progress on a quarterly basis
• Excel in new job or quit
• Family vacation to Europe
• Plan and have a Daddy day with each child at least once a month
• Obtain third car (for grandparents)

Simplifying life: Reducing the Clutter in Your e-mail box

I've noticed that I receive and insanely large number of e-mails every day. Many are important, while many are not.

Over the course of a month, I counted 800 e-mails totalling 25 MB - none of which were spam.

However, many were lists I had signed up to, or permission based newsletters and promotions from various retailers and organizations.

After thinking things through I asked myself:

1. Am I reading these messages?
2. Do I have time to read them?
3. Do I act upon what they recommend?
4. Do they address any of the priorities in my life?

For most of the e-mails the answer was simple - no.

When's the last time I acted upon a Brooks Brothers mailing? Never. I usually shop there when I need to and do so only occassionally - why should I suffer all the unneeded distraction?

The same goes for most of the mail feeds, etc.... If I really have time I can go to the website.

Actually, here's something interesting. My new Black Berry 8703e has a pretty nice web browser - the data plan is cheaper than Verizon's plan for my Palm Treo 650 and the pages render a bit more quickly - even with pictures. I now feel much more comfortable surfing to websites using my phone.

Silence

I am amazed at how much fewer messages I receive now. I've been rabidly unsubscribing - and anti-spamming when that doesn't work. Now - outside of work e-mails - I receive about a dozen messages per day - much more manageable.

Fewer distractions allow me to concentrate on what is important and my priorities - not that of a marketers.

Regards,
makingourway

DEAL: A most impressive offer for videophiles!!

Costco is selling a full HDTV hook-up kit for $49.99.
I find the pricing quite amazing since HDMI cables often go from $30 - $79.

They provide the following:


1x - HDMI Cable
1x - Component Cable
1x - Audio Interconnects
1x - HDMI/ DVI Adapter

All cables are 6ft lengths in an attractive braid.

Compare what you would pay at Radio Shack or Best Buy - big difference!

Regards,
makingourway

mobile broadband access for my laptop using a tethered blackberry 8703e

I've been able to succesfully connect my Blackberry 8703e telephone/e-mail pda to my laptop bia the included usb 2 cable.

Verizon charges about $10-$15 on top of my unlimited blackberry e-mail service fee for tethered broad band access.

Web surfing works pretty well. Actually suprisingly well. It's not as good as my cable modem, but it is good enough. Especially when travelling.

Also, it looks like my telephone uses my laptops battery while on USB connection - so the phone should be usable after several hours of use.

One caveat, it does not look like I can talk and surf at the same time. Talking seems to halt broadband data flow.

Certainly cheaper than buying a dedicated WWLAN card with a separate fee.

I'm wondering if it will be good enough to use at a hotel instead of payng the $10 nightly internet fee.

Regards,
makingourway

An extra $1200 to the government and maxing out my 401k contributions

Well after receiving some nice links from Owtobahn, it looks like I'll need to make payroll tax payments on the salary deferal component of my individual 401k contributions I make through my privately held company.

I figure my new employer will cover about 40-50% of my aggregate salary deferal contribution limit to 401ks (defined contribution plans) ($15k), the balance will have to be made through my privately held corp's individual 401k. Self-employment tax adds about 15% (payroll tax times two for social security tax component). It's unfortunate, but a necessary approach to obtain a future tax benefit.

I wonder if you calculated things out, if I'd make back the 15% in over the next 30 years? I assume the capital gains deferal will exceed the 15% cost.

Regards,
makingourway

2006 end of year tax planning activiites

This weekend I'm gathering my financial papers and documents to send to my accountant for end of year tax planning.

The goal is to identify any last minute adjustments and other activities to minimize our tax burden and position favourably for the future.

Here are some of the actioins I anticipate:

1. Maximize 401k contribution available with my employer
2. Maximize individual 401k contribution for my company (to the extent #1 doesn't cover it)
3. Make retirement contributions for my children (open new account)
4. Consider opening and making coverdell education savings account for my children (and contributing) - need to investigate this one further - should broaden the available retirement investments - do we qualify - ask the accountant?
5. Finalize / formalize charitable contribution records for this year - we've given away alot ~ $14.5k
6. Spend some money ($400) setting up new internet based business venture (initial spending)
7. Very possibly moving as many of my accounts as possible from Schwab over to Vanguard and consolidating several duplicative accounts - this will make available more low cost index investment options.
8. Possibly liquidate my cash-value insurance investments and move them over to my new investment accounts at Vanguard (non-sheltered).
9. I've already sold a good portion of my Shanda Interactive investment (SNDA) - harvest a loss close to $3,000. That money has been reinvested in better performing ETFs. I'll sell the balance in January 2007 to harvest the next loss. If I'm thinking correctly the $3k can be written off against current income - so I'll recover about $1200 of the loss.
10. While I'm at it, rollover my IL Bright Start Savings 529 plan to New York's or another state plan.

This could lead to a very paper intensive December. Especially since I'll be travelling for a portion of it. One of my first activities will be to open the various accounts to ensure they will be available before year's end.

Does anyone else have any other tax planning activities to recommend?

Have a great week, Makingourway

Dealing with employer 401k contribution limitations

As things stand, I expect to contribute only 45% of my eligible 401k salary deferal of $15,000 for tax year 2006 through my employer's 401k plan.

To fill the gap, I'll probably contribute the balance to my personally owned company's individual 401k plan.

This has several advantages and disadvantages:

Disadvantages:

1. I may have to pay payroll tax on the salary deferal to my individual 401k - estimate about $1,200 - money that I wouldn't have to pay (or at least as much) through my employer's plan.
2. I have to move money around to be able to do it.
3. Yet another end of year financial activity competing with holiday time, etc....

Advantages:

1. I'll have $8k or so not participating in the ridiculous retirement plan available at Big Company.
2. The $8k will have a very large variety of investments available - especially low cost index funds.
3. I'll have better financial reporting for the money invested outside of my company plan - including better integration with Quicken.

Anyone have any idea if a small C corp needs to make payroll tax contributions if 100% of the salary earned by the employer is deferred into an individual 401k?

Regards, makingourway

Networth Update for November 2006 +$4,961.04

Here's our progress on our annual goals for 2006.
Although we've suprassed our networth goal, our operating cash reserve has been drawn on heavily. It will very likely be drawn on again for end of year investments opportunities. We should rebuild it fully by March 2007.

Despite a drop in our family income, we actually increased out networth this month by almost $5k. We were able to do so as a biproduct of my increase in income.

Last month is an interesting comparison - we had a $8.6k increase, but without the benefit of my new pay increase. Interestingly enough, $3k of that increase was due to investment performance.

December will be a challenging month as my wife will just start receiving her pay and a partial paycheck at that, while we will have end of year expenses.

My prediction for December 2006 networth growth is very modest - close to flat-line or perhaps $1k increase. At the moment I can't anticipate any significant cash expense other than a special birthday / holiday gift for my wife - actually it might even wipe out the modest increase. This of course assumes the markets remain fairly static.

January 2008 will be better - both our incomes will be firing full bore. By the end of February, we'll be close to making up the cash expenses for the month in Chicago and the no-pay portion of my wife's leave. My the first week of March we'll surpass where we were.

Here are the charts:

1. Networth change summary. We managed to go up!!

2. Our asset allocation - does it make sense to include our home equity value?

3. Trading Account (post tax)

[blogger won't cooperate and upload the picture - this has been an ongoing problem.]

Have a great Sunday, makingourway