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Monday, December 23, 2013

What Should My Children Pay For?

What should my children pay for? There are many different opinions out there and reading this article from the Wall Street Journal on November 23, 2013 got me thinking about my own parenting habits. Obviously, the strategy used to determine what my children should pay for will depend on their age, but we have started to create some accountability in the Smith household. My 4 kids are all under age 10 and are at various levels of the “understanding money” spectrum. The little income they do earn comes from gifts and household chores. The current requirement is that a portion of everything they earn gets put in the collection at church on Sunday. Maybe it’s 50 cents for the youngest and a dollar or two for the oldest, but either way, a gift of some level is made. The other requirement is that when buying a gift for one of their siblings, they are required to spend some of their own money. We want them to truly appreciate the feeling of giving and are finding that using their own funds seems to enhance the gift giving spirit even more. As they continue to age we will continue to add more responsibilities that the kids fund from their own earnings. We have discussed having a status quo (e.g. pair of shoes) that mom and dad will pay for but anything beyond that, the child will be on the hook for.

As with all things parenting, teaching kids about the importance of money is a work in progress. We don’t claim to have all of the answers, but through trial and error hopefully we can create some sense of fiscal responsibility among our kids.

Monday, December 9, 2013

Insurance the Ignored Component in Financial Planning

In our planning process we always discuss someone’s current insurance coverage, or make a planning recommendation to get the proper coverage. I found a very interesting article on that spoke to this exact situation. Over the last year I have had a number of folks come to me to review their existing life insurance. Many times I get the question “Which type of insurance should I buy?” They are referencing term, whole life, etc. The most profound answer to that question is in this article:

It is important to remember when a death benefit check is delivered, a beneficiary isn't concerned about the type of insurance it is; rather he/she is concerned with the amount of the check. Therefore, worry less about the type of insurance you are buying and focus more on getting the proper amount of coverage. If you have questions about insurance, please reach out and let us guide you.

Monday, November 25, 2013

Navigating the Affordable Care Act (ACA)

If you are reading this blog and are not familiar with the ACA, maybe you will recognize it as Obamacare. We have had a number of clients reach out to us for our opinion on this legislation and the effect it will have on their existing health insurance plans. There has been a one year delay on the implementation of this law for employers with over 50 employees, so if you work for a larger employer you get one more year before you will see the impact of this. If you currently have an individual plan or work for a small employer you are probably experiencing some changes right now. We have a client that is a self-employed individual and had her policy canceled as the plan was not ACA compliant. Finally after 31 days and working with a health insurance specialist she was able to obtain coverage through the exchange. If you are experiencing changes in your plans and have questions, please reach out to us and we can put you in contact with one of the health insurance specialists we use.

Tuesday, November 19, 2013

Paying for Health Care

Ugh! If you’re like me you are tired of hearing about health care reform. It is dominating the news and politics. Unfortunately, we can’t avoid it. We place great value on our health and understand that it is a major expense, now and in the future. I am not going to go into great detail in this blog post, but I wanted to make some observations based on what we have learned so far.
  •  In spite of the fact that you can no longer be turned down for health insurance due to a pre-existing condition, it still would be very risky to wait until you have a health problem to sign up for insurance. The new law only guarantees you coverage during the open enrollment period each year. You could have to wait many months for your coverage to kick in. In the meantime, you could run up thousands of dollars in bills.
  • In most situations, it is more cost-effective to keep your kids on your plan until they turn 26 years old. 
  • Calculating your cost for your health insurance will take into consideration your plan that you choose based on benefits and deductibles, your premium based on your age, and your tax credit (subsidy) based on your income. It is complicated. It will also become an important new tax consideration for those that may experience increases in their income.
  • Health insurance plans on the exchange have been standardized into four types, Bronze, Silver, Gold, and Platinum. All plans will provide preventive services with no out-of-pocket costs. Also, there are no annual or lifetime benefit limits. 
  •  All plans must provide 10 “Essential Health Benefits” however deductibles and out-of-pocket maximums can vary widely by plan.
One thing is for certain, you cannot go without health insurance. The risks are too great. Due to the complexity of the new law, it will take time to fully understand the impact on our clients and their planning.

Monday, November 11, 2013

How Work Affects Your Social Security Benefits

There seems to be a lot of confusion when it comes to earning an income and deciding on whether or not to start drawing retirement benefits from social security. This is a regular conversation topic with clients. There are a few things to remember when facing this important decision:

1) Find out when your full retirement age is for retirement insurance benefits. If you were born between 1943-1955 this is age 66.

2) If you are younger than full retirement age know your expected annual income for this year and future years up to your full retirement age.

3) The income limit you can earn for 2013 is $15,120 and not have your social security benefits reduced for making too much income.

4) There are special income rules for the year in which you start taking benefits.

5) Once you reach the age for full retirement insurance benefits there is no more income limit.

6) Benefits being reduced for income reasons and benefits being taxable are two separate issues.

7) If some of your retirement benefits are withheld because of your earnings, your benefits will be increased starting at full retirement. So in other words, you get the money that was withheld back.

The social security department has a great website where a lot of these types of questions can be answered. See this publication for details on this particular issue.

Monday, November 4, 2013

Estate Planning Is Not Only for the Rich

What comes to mind when someone says estate planning? Is it planning for someone with lots of money, houses, and toys? The big misconception is that estate planning is only for the wealthy.

Per Wikipedia the definition of estate planning is: “The process of anticipating and arranging for the disposal of an estate during your life. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses. Guardians are often designated for minor children and beneficiaries in incapacity.”

Let’s unpack this definition.  There are multiple reasons to complete an estate plan:

1. Anticipating and arranging your estate during your life - Who do you want to receive family heirlooms? Regardless of the dollar amount of your estate, do you want your children to inherit everything right now or a little bit now and some as they age?
2. Uncertainties of probate - Are your beneficiaries updated so the accounts transfer directly to them and avoid probate? If you do not have a beneficiary on an account, have you made the account a TOD (transfer on death) account?
3. Taxes and reduction of expenses are a portion of the reason too - Have you analyzed your assets to decide what to spend down in retirement and what to leave to your kids? For example, if your kids are in a higher tax bracket than you, maybe you should take more distributions from your IRA and pass on the brokerage accounts or Roth IRAs.
4. Naming of guardians and incapacity planning - Who would take your children if something happened? Would the people that become the guardians of your children also be in charge of the money that is left behind, or would you name a separate person? If you cannot make medical decisions for yourself, who is legally able to do this for you?

As you can see, there are many reasons to get your house in order when it comes to estate planning. Please contact anyone of us at Argus to get started on this process. We have extensive knowledge in this area and can refer you to attorneys that can help you execute your wishes.

Monday, October 28, 2013

Maximizing Your Employer Compensation Plan

I get asked on a regular basis how one can maximize their employer compensation plan.  One of the easiest ways, and often most overlooked, is to take advantage of the company sponsored retirement plan.  These plans come in many forms including SIMPLE IRAs, 403(b)s, and 401(k)s.  In general, it is a good idea for an employee to learn as much as possible about the retirement plan benefits their employer provides.  Once educated about the options, the employee can then decide what makes the most sense for their situation.  Here is an interesting Wall Street Journal article from the Sunday, October 6, 2013 issue of The Grand Rapids Press that offers 8 tips for getting the most out of a company retirement plan.

Monday, October 21, 2013

You Owe It to Yourself

There is a lot of attention being paid to debt and its impact on our financial situation.  Credit cards, mortgages, car loans, and student loans commonly consume our cash flow and create family stress.  We also have to read about the debt that our politicians have accumulated on our behalf but that is a whole new topic.

Your largest debt is probably one that we haven’t even talked about yet.  That is the debt that you owe yourself.  What do I mean by that?  You have a “future self” that is dependent on you making wise financial choices and preparing to cover the expenses associated with retirement needs.  Every year that we do not save and invest to cover these expenses, the debt grows.

Here is an example:

A 35 year old couple is planning to retire at age 65.  They calculate that they will need $1,000,000 in savings to accomplish their goal.  If they start today, the “monthly payment” necessary to pay down the debt to their future selves is $1,054.*

If they do not start until age 40, their “monthly payment” becomes $1,519.* Ouch!  Waiting has a cost!

I am finding that when we think of our retirement plan as a debt that we owe, we are more motivated to make it a priority. 

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

*Using the savings goal calculator on our website:

Tuesday, October 8, 2013

Should I Pay off my Mortgage?

I get this question on a regular basis: Should I pay off my mortgage? The answer is a difficult one and can vary by situation, but here is a general pro/con list:

Reasons to pay off
  • Peace of mind
  •  Feeling of victory 
  •  Reduce monthly expenses
  • Less stressful retirement
 Reasons not to pay off
  • Very favorable interest rates (Remember when rates were double?)
  • The mortgage interest deduction may help your tax situation
  • Potential loss of liquidity if lump sum is used
  • Possible difficulty getting the money back out
  •  Potential to move again and take on another mortgage
  •  Higher mortgage payment can encourage less spending
There is a huge variance in opinions with this age old question.  The best advice would be to sit down with your financial advisor, review your whole financial situation, and compose a game plan that will include paying off debt, saving money for stated goals, and not spending more than is earned.   

Monday, September 23, 2013

Understanding How to Efficiently Leverage Your High Deductible Health Insurance Plan

In the last few years many companies, including ours, have moved to a High Deductible Health Insurance Plan. The one that is most commonly used has the acronym HSA, or Health Savings Account.  Unfortunately, I have had extensive use of this account over the last few years; we have had a baby, my wife had a minor procedure, and I had reconstructive knee surgery.

A question I pose to you:  Has your employer explained how to efficiently use your HSA?

What I mean by efficiently use is: Have they discussed the world of negotiation with your providers? The caveat to this is that you need to regularly fund this account so there is money to make payments, or you need to have money saved so you can make a lump sum contribution to the account if necessary.  

Typically you go to the doctor, hospital, or provider and present your insurance card.  You are then asked if you have a co-pay, I always say “I have an HSA, please send it through my insurance.”  Your insurance provider then sends it through their system and sends you a summary of what they covered and what their negotiated rate for the service is.  Next comes the fun part, bills from various providers that you must pay.  Did you know that you can negotiate a lower payment on those bills with each provider after it has gone through insurance? Let me give a few examples of how this has worked:

Example one:  This happened a few years ago:  I received a statement for the birth of my son and it was a pretty large bill. The statement said, “Please call us and ask about our payment options.”  I called and asked what those payment options were. The answer was 0% for 12 or 24 months if I made monthly payments, or 10% off now if I paid in this billing cycle.  Sold, 10% now!

Example two:  A couple of years ago I received a bill from the same provider as above and called to ask what my options were.  Guess what?  The new payment option was 20% off if paid now!!

Example three:  I just had a client call last week and I discussed this HSA payment info.  She said, “I will try and call them and discuss my payment options.”  I received an email that night with a big smiley face that our conversation saved her over $450!

Understanding your benefits and using them efficiently can greatly benefit you financially.

Monday, September 9, 2013

Finding the Right Financial Advisor

I was reading the Grand Rapids Press a few weeks ago and came across a great article with tips on how to find the right financial advisor.  It came from the Wall Street Journal from July 27, 2013.  Finding an advisor is not an easy process, but should be a rewarding one.  The bottom line is to find an advisor that that is trustworthy, has a proven track record and is enjoyable to work with.  It should not be a chore to meet for an annual financial checkup.  Put together a list of questions and be prepared.  There are many great financial advisors out there, the trick is to find the right one for you.

Tuesday, September 3, 2013

Don't Ignore These Risks

Generally, when people talk about the risk in their investments, they are talking about the likelihood that the money that they have will go down in value. This represents a combination of business risk and market risk. A common mistake is to only consider these risks and ignore other types of risks that can adversely affect our savings.

Can you imagine if you got a monthly statement showing the fluctuating market value of your home? What if you could log in and see the market value every day? I suspect that you would find that there are wide fluctuations. In fact, market value is zero on days in which you do not have a ready buyer. If for some reason, you needed to sell your home or other real estate quickly, you may be forced to accept a lower price. This kind of risk is called ‘’liquidity risk’’. Some assets that are not easily sold or do not have ready markets contain higher liquidity risk.

The most commonly overlooked risk in my observation is inflationary risk. These are investments that lose money slowly, often, without us noticing. “I bought this fixed annuity in 1985 and it never lost money, now it’s worth double what I put into it’’. That’s great. Unfortunately, it lost money, nonetheless. That annuity fell victim to ‘’inflationary risk’’. The overall return was not adequate to keep up with the purchasing power. When we use short term investments to meet our long term goals, we take on a high level of inflationary risk.

When choosing savings and investments, we must understand the different kinds of risks. If our goals are short term such as saving for a new car or building up our cash reserve, we need to minimize market risk and liquidity risk. In this case, we are not worried as much about inflationary risk. Inflationary risk becomes the biggest problem as our goals become more long term. Understanding how to achieve the right balance is the key

Monday, May 20, 2013

Helping the Grandchildren with Education

Paying for a college education has never been more expensive and complicated.  Often, grandparents want to help by making a gift to their grandchildren.  You would think this would be great, but in fact, it may do more harm than good.
After admission to a college or university, the next step is determining how much need-based or merit-based aid the student will receive.  This is calculated using a formula that determines the family’s “Expected Family Contribution”.  If the gift is made improperly, it is possible to decrease the amount of aid the student receives.
Fortunately, there is a special opportunity for grandparents to help.  Grandparents are able to pay tuition directly to the school without being subject to gift tax rules and, more importantly, without having an adverse impact on the student’s eligibility for financial aid.  To get this favorable treatment, the payments must be made directly to the school and cover only tuition.  Payments to cover other expenses such as room and board would be considered gifts.
If you have grandchildren who will be going to college, prior to starting any college gifting, it is important to review your individual situation before taking action.

This information is not intended to provide tax or legal advice.  LPL Financial does not offer tax advice.  Before considering any of this or any tax strategies described, consult your tax and legal advisers before making decisions regarding your tax situation.

Monday, May 6, 2013

Avoiding Debt or Creating Debt?

Because I have two children in high school, an article in the local Grand Rapids Press over the weekend caught my attention.  It was reprinted from the Wall Street Journal.  The author discussed how complicated it was for her and her husband to develop a plan for paying for college education.  What really struck a chord with me was their discussion of the possibility of borrowing for education.  Her husband was opposed to any debt at all.  In fact, he would prefer to cash out retirement savings in order to eliminate any debt.  Does this “avoid debt”?
I say no, it does not.  We build our retirement savings in order to pay for future anticipated expenses when we no longer work.  We either have enough saved or we do not.  If we do not, then that is debt that we owe our future selves.  If we borrow from our future selves, we either pay it back through additional savings or we will cut back on expenses in retirement.  Either way, it is no different from taking on an additional loan with monthly payments and interest costs.  Borrowing from future selves has significant costs, too.  We lose the potential investment returns of that money over time.
It was disappointing that the author did not make that point.  Often, I see people withdraw or borrow funds from their retirement accounts to pay off debt.  Many times, they pay significant penalties and tax cost to do so.  While reducing or minimizing debt is important to a healthy financial plan, it should not be done without understanding the impact on all aspects of the planning.  If we are just trading one type of debt for another, we may be doing more harm than good.

Thursday, April 25, 2013

The New Tax Law and Roth’s

At the last minute, our lawmakers in Washington avoided the “fiscal-cliff” with The American Taxpayer Relief Act.  While it is hard to determine who exactly will be getting the “relief”, it does appear to create new reasons to look at Roth IRAs and Roth 401(k)s.

If your company 401(k) plan does not currently allow for Roth deferrals, the new law creates a new incentive to add that provision.  Current 401(k) participants will be allowed to make conversions within the plan more easily.  Before the new law, only those eligible for qualified distributions could make conversions.

Because qualified Roth IRA and Roth 401(k) distributions are tax free, they have been an excellent way to diversify your future tax exposure compared to other taxable options.  Also, the new higher tax bracket and new Medicare taxes on investment income create added incentive to consider Roth accounts in your planning.

As is always the case, retirement and tax planning is very individualized.  For those considering a conversion of funds from their employer’s retirement plan to a Roth IRA, they should be aware of the tax liability for such a conversion, as any amount converted will be subject to the current income tax rate.  Depending upon your financial situation, taxes may be due either the year of conversion or the year after.  In addition, if the funds are invested in positions in the plan that cannot be transferred, they would have to be liquidated, which may incur trading fees.  Prior to utilizing such a strategy, please see your tax advisor as LPL Financial, nor its investment representatives, provide tax advice.

Tuesday, January 29, 2013

College Savings Plan Questions

“Do you know anything about 529 plans?”  This is a question that arises quite often in my business.  My answer is typically, “Yes, but a 529 plan may or may not be the best fit for you and your family.”  “But, we want to save for our kid’s college,” is the response I get.  And yes, 529 plans are one of many ways to save for college.  There are several questions to think about as the college saving decision is made.  Below are a few:

·         How much of a tax advantage do I want?

·         How much flexibility for the use of funds do I want?

·         How long before my kids go to college?

·         Do I want one account for each child or one account that covers all children?

·         Do I want the money to be available for higher education only or is secondary education a concern?

·         How do I want saving for college to potentially affect my ability to receive financial aid?

·         How much control do I want over the money?  

·         How much would I like to contribute per child?

These are 8 of the many questions that need to be answered before a decision can be made on what type of account will work best for a particular situation as it pertains to saving for college.  Make sure you meet with your financial advisor to help walk you through the process of choosing the right college savings strategy. 

Friday, January 18, 2013

Thoughts on Buying a Home

As a follow up to a previous blog post on selling our house this past summer, I also picked up a few ideas on buying a house (although I hope to never have to use them again).
·         Don’t be intimidated by the purchase agreement.  The purchase agreement is a legal document similar to one that would be signed in any other financial transaction.  Read it over carefully, but don’t let it scare you. 
·         Know the ideal price you would like to pay for the house and the maximum amount you will pay for the house before you write your first purchase agreement.  Knowing this number before you start the negotiations will help to keep some of the emotion out of the decision.
·         Decide how much cash you have to put down on the house and then weigh the other factors.  What will my interest rate be?  Is it a favorable rate over the term of my loan?  Will this seem like a good rate in 5-10-15 years?  Is it more favorable to put more money down on the house or keep more in cash knowing there is a likelihood for upfront expenses to fill a new house?  Should I have the seller pay some closing expenses to help preserve cash?
The biggest confirmation I had with our move this summer was one that I suspected all along.  The more emotion we could keep out of the decision making process the better off financially we would be.  There is one slight problem though—buying a house may be the most emotional decision a person ever makes.  Don’t be afraid to bring in a third party to check your math or go through the properties with you.  Ask them for an unbiased opinion.  It can only help.  Good luck!