Financial Frontlines®

This post was inspired by the Feedback post in the February 2011 SmartMoney magazine. The post by “GenXer” states,

“The reality is, we GenXers trust the baby boomers less than they trusted the Greatest Generation—and with good reason. Baby boomer financial advisers have taken more and left less than any other generation throughout history. These advisers say we shouldn’t be conservative at our age, but I think our grandparents, the Greatest Generation, would disagree. We hear their message; we just don’t agree with them.”

Disclosure: I’m a Baby Boomer. I’m a Baby Boomer financial adviser. I have two daughters who just made it into the Gen X era. Based on the points I make in this blog, I think it’s safe to say, GenXer disagrees with me. And I’m okay with that.

However, I think GenXer may want to expand his/her breadth of knowledge before going down the path of the Greatest Generation.

Assuming the philosophy behind the Greatest Generation is one of conservative savings, this philosophy is full of risks and is based on emotion; the fear of failure. We know the Greatest Generation’s fear stems from the Great Depression. As I have stated before on these pages, being conservative can be more risky than investing in stocks and bonds. And making any decision based on emotions is asking for trouble.

Being conservative means you are purposely choosing to “save” money instead of “investing” it. Saving money specifically means, protecting its value. Investing money means building wealth through capital appreciation.

Saving money doesn’t build wealth because it doesn’t provide enough return to offset the taxes and inflation eating away at its return. Looked at the returns on money market, savings accounts, CDs, and bonds lately? Pathetic. Will their returns go up over time? Sure. I’ve lived through better times with returns on savings. But I also lived through the rising inflation and interest rates that caused the better returns on savings. Those eventual better returns on conservative savings will not keep up with the costs associated with taxes and inflation that will exist in that time.

Oh, and those who point to the great bond returns over the last few decades…  We lived through a unique environment of falling interest rates over that time.  That provided rich soil for bond holders to cultivate decent returns. Those days are over with current interest rates at rock bottom levels. The future is one of rising interest rates.  That is a killer for bond values. Best case scenario for bond holders is interest rates continuing to scrape the bottom which would mean bond values stay relatively stable with their low coupon rates. Not a future to bank on.

So if you follow the Greatest Generation down the path of conservative savings realize this; you are doomed to returns behind the power curve and a strategy that’s based in fear. Due to your lack of wealth building returns in a conservative account, you’ll have to compensate for your poor returns by pouring huge sums of your income into savings. Good luck with that. I’ve met plenty of folks who chose the conservative route who ultimately found they didn’t have enough savings to live the life they imagined in retirement—due to the fact, they didn’t save enough. Those that are satisfied with their savings either have no idea of how much they sacrificed in potential wealth or don’t care as they are willing to make do with less. Are you?

So where does that leave you? You have no choice but to be an investor. Only by being an investor can your money work hard enough to offset the taxes and inflation and build wealth. But, that’s where you disagree with me and you think investing is a time wasting, money losing proposition.

I’ll take a few wild guesses why you belief us baby boomers are wrong…

• You judge your success by your account value.
• You think account values and investments should produce fairly consistent positive returns year after year.
• Your account is up and down and generally going nowhere.
• The economy is rocky and unpredictable.
• People and the media talk about individuals losing their shirts, investment losses, and financial firms’ greed.
• The 99% protesters.
• The movies Wall Street and Margin Call.
• Mortgage companies stealing from people.
• Housing prices falling.
• Unemployment.
• The wealthy 1%.

For the most part, none of the items in the list matter concerning your ability to create wealth. I suggest the problem isn’t investing. The problems are:

1. personal beliefs based on incomplete knowledge, and
2. media/marketing efforts based on selling rather than providing a real public service.

To keep from writing a lengthy narrative to cover incomplete knowledge, you may want to check out these articles in this blog. They scratch the surface to explain why your beliefs are skewed at this point. They also explain how to manage investments to minimize risk. Believe it or not, “risk” is in all savings and investments. If you arm yourself with unbiased knowledge, you can manage and minimize risk using relatively simple investment techniques. As for the fear, fear is no match for knowledge.

• Chatting About Investments at Lunch
• Younger Worker-Investors Going Astray
• The Stock Market’s Not an Investment, it’s Gambling
• What’s a TSP/401k/IRA Investor To Do?

Now about that media/marketing issue. The news and financial media are only interested in getting you to watch, listen or read them. Big and splashy stories are best. Plus they only care about what’s going on today. We are so short-sighted people can’t even go to the gym for a workout without constantly checking their phones and Facebook pages for fear of missing some lame information. To quote a current mobile phone company ad, “That’s so 27 seconds ago…”, who cares!?

The media won’t educate the public on useful market/economic information because it’s boring and takes time to explain. They won’t waste their precious time on complex issues. They sell the sizzle not the steak. That’s because we live our lives as people with no attention spans. So we get what we allow; 30 second sound bites and tweets rather than in-depth reporting. And we remain ignorant about the investment knowledge demanded to be good investors.

The evening news reports the DOW is up or the DOW is down. The message is, if it’s up you made money and if it’s down you lost money. That couldn’t be more wrong and misleading for the working aged public (this is not about you retirees out there). A good example of media public disservice. Did you realize a down market is actually your friend and the only time average investors can capitalize on wealth creation? If you don’t understand why this is case, start studying.

Personal finance magazines are all about the latest trends and the products and services to “help” you manage the current situation. Following this advice is a recipe for failure. Successful investing isn’t about today. It’s about what happened in the past and what’s likely to happen in the future based on long-term historical trends—50-100 years ago. Believe it or not, nothing is really new. We’ve been there and done that many times over. The times may change but people don’t. “100 Top Mutual Funds You Must Own Now,” anyone? Don’t understand this, start studying.

Your friends, family and the man on the street are uninformed about financial issues because they only know what they read, listen to or watch in the media. I don’t mean that in a pejorative way. We are all intelligent people for the most part but our knowledge is sketchy outside our areas of expertise. Where we lack knowledge we are more susceptible to following trends, hearsay and the media hype at the moment.

Same with investment strategies and techniques and the media. You won’t be taught valid, practical ways to invest your money; ways that work and don’t take long to learn, implement, and manage for average people. These methods are boring and once you learn them, there won’t be anything else to amaze you with. Better to paint investing as a game of chance with “make or break” opportunities because that’s exciting and gets viewers, listeners and readers. Another media public disservice.

Remember this…as members of the great unwashed masses; we are the last to know of a real investment opportunity. By the time an investment is discussed in the media or by your uncle Joe, it’s too late to participate. The media wouldn’t be hyping it unless it had already become news worthy and this is after the opportunity for investment has passed. All the hucksters pitching the next get-rich-quick-scheme are feeding off the media and your need for greed; another emotion looking to do you in. Gold anyone? Oil and gas investments? Commodities?

Forget the media. You need to operate on real economic data not tainted by politics or media hype. Study the history of markets and economies over long periods of time; 100 years and more. You need to realize that situations and technology may change but market and economic cycles aren’t new and they are fairly predictable. To get a better understanding of your situation, know where you are in the country’s economic cycle and where the country is heading according to the history. There will always be “bubbles” and they will always pop. Recognize a bubble and plan accordingly or you’ll be joining those on the news claiming they are victims.

One last thing…no one has “…taken more and left less…” because building wealth and the economy are not zero-sum games as the media wrongly suggests. The idea of the top XX% owning XX% of the wealth in this country is just plain wrong and misleading. And the media talk of the income gap and the loss of the middle class is also misleading and dangerous. These current day stories imply a zero-sum game that is patently false.

No one with wealth today inhibits your ability to have wealth tomorrow. And other than an unscrupulous financial huckster, the tax burden is the real threat to your financial future. Only taxes literally take your hard earned income away from you denying you the opportunity to save and invest. Your after-tax income is used at your discretion—even when you give it to hucksters. Ever figured your total tax burden by adding all federal, state, county, property, school, local, gasoline, tolls, and sales taxes you pay in a year? Compare that total tax bill to your gross pay. Steamed yet?

Some have said I’m cruel for piling on the individual as the cause of their investment woes. It’s not my intent to be mean. It’s meant to get people to wake up. The fact is the common denominator in all these financial hardship stories is us…individual people. No one cares about us like we do. No government bureaucracy will ever protect you from your actions like the politicians want you to believe. People spend more time picking out their next mobile phone or e-book reader than investing in their financial knowledge and health. Whether you like it or not, you have no choice but to get involved in your financial future for your own sake.

Take time to educate yourself on the history of markets and economies. Learn the proven methods to invest your income and build wealth. Start with this blog. Then you will understand why listening to this baby boomer may be time well spent.

Due to the 2011 NDAA retirees will be paid 13 times in 2011 (after 2011 it will return to 12 times per year). Basically what happened is the law was changed to require that the 1 Jan 2012 retiree payment be made on 30 Dec 2011.  This will increase your taxable income by one month’s pay for 2011.

But wait. Some of you are saying that your January retiree paycheck always hits the bank on the last business day of December. That was true for me. But when I cross checked against my 2010 1099R, I confirmed that the January paycheck (paid in December) was not included in my 2010 income.

So, what does it mean? Well, you may owe more taxes this year. Your withholding should take care of the additional tax unless the additional paycheck puts you into a higher bracket. The other “bad” scenario is if the additional paycheck puts your Adjusted Gross Income (AGI) above cut-off limits (For example cut-offs for IRA deductions, Rental Real Estate loss deductions, Medicare Part B premiums, or college expense deductions/credits). Finally, the extra paycheck will also reduce any itemized deductions you can take that are limited by AGI (medical expenses, some miscellaneous expenses).

There is still time to plan or adjust your withholding.

See this site for more details. http://www.dfas.mil/dms/dfas/aboutdfas/pdf/DFASRelease091102_RetPay.pdf

I’m getting ready to send my two boys off to college soon and college expenses occupy my mind quite a bit.  So, while recently doing some preparation for the IRS’s Special Enrollment Examination I came across something I hadn’t thought about for my own family’s tax situation that may apply to you as well.  And the issue is the combination of GI Bill and Scholarships.  Here are the basic tax rules:

1. Education benefits received from the VA are tax free.  So if your child is using your GI Bill benefits then all benefits, including the “housing allowance”, are tax free.
2. Scholarships/Grants used for qualified tuition and fees are tax free
3. Scholarships/Grants used for room and board are not tax free

So…

If the GI Bill benefits cover 100% of tuition and fees (which is most likely the case at an in-state public university), then, in my interpretation, any scholarships used for room and board are taxable income to the student.  There may or may not be an actual tax due for your child depending on other income sources.

On a related note, GI Bill benefits are “second to pay”.  So, if your child has scholarships that must be used for tuition and fees only, then those amounts will reduce the VA tuition & fees benefits received (again, assuming in-state public university).  In this scenario, it may make more sense to transfer the benefits to one child versus another based on “tuition only” scholarships or in-state versus out-of-state/private tuition.

Finally, if VA benefits (or VA benefits plus scholarships) cover 100% of qualified education expenses you cannot claim education expense tax deductions or credits.

Not end of the world stuff, but like most financial/tax related issues it is never as simple as it seems on the first look.

*Note:  Only post 9/11 GI Bill benefits are transferable to children and you must have been on active duty after 1 Aug 2009 to qualify.  Each Service defines its exact rules for transfer.

I was recently the target of a phishing expedition. I received an email from what appeared to be the IRS. The email address was IRS.gov. I got suspicious pretty quickly as I could see the addresses of others who received the same message. The message said that my account had been “locked” and that I needed to send in some information including a copy of my driver’s license. To be honest, having my account “locked” sounded o.k. to me. But, I confirmed my suspicion when I noticed a reference to the “Social Security Association” (vice the Social Security Administration).

I forwarded the email to the IRS anti-fraud/phishing department and I received an auto response from them. And here is the key. The response said the IRS NEVER sends unsolicited emails requesting information. Let me say that again, the IRS NEVER sends unsolicited emails requesting information.

Lesson learned. Don’t get caught by phishermen.

The reason for the withholding tax increase stems from the Making Work Pay (MWP) tax relief program that ended in 2010.  The MWP program temporarily decreased tax withholding rates in checks in 2009 and 2010.  This was to stimulate the economy by putting more take home pay in your pocket.

The program wasn’t extended for 2011 so the tax tables reverted back to the regular tax withholding rate tables.  Higher withholding, lower take home pay.

This is not a tax increase.  You won’t pay more taxes.  It means you have more taxes taken out of your pay and you’ll probably get a larger tax refund next year.

If the withholding tax increase causes you problems, you can always submit an IRS form W-4 to DFAS or your pay agency to change your withholding amount.  Changes can also be made to DFAS using the on-line ‘My Pay’ system.

Technically, the MWP provision was only meant for paychecks of working people.  The catch was that DFAS uses the same tax tables and pay systems for retiree checks as it does for currently serving checks.  DFAS determined it didn’t make sense in time or money to jump through hoops and change their pay systems to accommodate this temporary tax program.