Accounting Talk – Page 2 – Wilson Rogers & Company

The Benefits Of Mutual Funds

Mutual fund ownership by U.S. households has grown appreciably over the past three decades. Forty-four percent of all U.S. households owned mutual funds in 2011. In 1980, this same figure was less than 6 percent. Furthermore, approximately 89 percent of total mutual fund assets were owned by these same estimated 90 million individual investors. So just what is it about mutual funds that make them such an attractive investment option?

Diversification. Mutual funds invest in a broad spectrum of securities and debt instruments. Thus, an investor can potentially limit their investment risk by reducing the effect of a decline in any single security. For example, if you own 100 shares of XYZ stock and it all tanks, you lose your shirt. However, if you own 100 shares of ABC mutual fund which is comprised of 5% XYZ stock, when the stock declines, your portfolio won’t feel the full brunt of it. Another benefit of diversification is that one can gain ownership to more companies and industries with a lower overall purchase price when compared to purchasing outright individual shares.

Professional Management. Most investors don’t have the time or wherewithal to perform the necessary research and continual analysis required to protect their investment. By pooling the money of many investors, mutual funds are a way to receive full-time professional management that few investors would be able to otherwise afford. These “fund managers” have teams of analyst and researchers who routinely update them and provide recommendations as to how the fund can achieve its goals. Thus, by investing in mutual funds you can rest assured that someone is continually monitoring you investments performance and making the necessary adjustments when warranted.

Liquidity. Buying and selling shares in a mutual fund is just as easy as it is to purchase shares of an individual stock. Most people can either invest or divest of their holdings within the same business day. This makes this vehicle extremely attractive for those who may need “relatively” quick access to their funds.

Convenience and Simplicity. Instead of having to track down and purchase each individual share, you only have to keep track of one; that of the mutual fund itself. Additionally, you will still receive the benefits of owning a diversified portfolio and a wide range of services including:

The ability to purchase or sale your shares via mail, telephone or internet
Minimal investment floors; allowing you to invest with as little as $50-$100 per month
The ability to schedule automatic investments/transfers into or out of the fund via your bank account

By Administrator|2012-09-04T16:12:30-06:00September 4, 2012|Categories: Accounting Talk|Tags: benefits of mutual funds|Comments Off

Probate & Estate Planning

The term “probate” generally refers to the court procedure for validating a will and passing ownership of property from a decedent to others. Said another way, probate is the process by which the decedents property is collected, debts and taxes are paid and the remainder is distributed to the heirs. The process is overseen by the appropriate court in each state.

While things often go smooth with the process, factors that can complicate it are the existence of minor beneficiaries, disputes among heirs, insolvency and other circumstances that necessitate formal probate. In many states, it can take a year or longer to probate an estate, even if there are no legal challenges. With that being said, it is both the cost and time of probate that make probate avoidance an important estate planning goal of many people.

There are many ways to avoid probate, either totally or in part. Listed below are some of the common mechanisms to transfer property without the necessity of a will, and therefore probate.

Gifts

Gifts made prior to the donor’s death are not subject to probate. These gifts are referred to as inter vivos (Latin for “during life”) gifts. The reason such gifts are not subject to probate is obvious: once given, the subject matter of the gift is no longer part of the decedent’s estate. In order to make a valid gift before death, all of the following elements must be present:

The intent on the part of the donor to make a present transfer
Delivery of the gift, either actual or constructive
Acceptance of the gift by the recipient

Joint Tenancies

Joint tenancy ownership is a terminable interest that terminates at death. When one joint tenant dies, the other joint tenant(s) succeed to the property without probate. But making someone else a joint tenant of property an individual owns alone, just to avoid probate, is often a bad idea. The new owner could sell his or her half-interest, or the new owner’s creditors could go after it.

Pay On Death Accounts

Pay on death accounts allow an owner to have the proceeds disbursed to a beneficiary at death. Using these accounts are the simplest way to keep assets held in bank and brokerage accounts from becoming part of an individual’s probate estate. Not all states have a POD law. However, individuals may still be able to make use of the accounts by doing business with a broker or a bank based in a state that has one on the books.

Life Insurance

The proceeds of life insurance are paid directly to the beneficiary or beneficiaries and are not subject to probate. Gifting life insurance is a popular way of transferring wealth without significant tax implication. The gift tax is assessed on the value of the policy at the time of transfer (not on its cash value at the time of the insured’s death). To be an effective gift for tax purposes, the policy must be given away at least three years before the donor’s death.

Trusts

Trusts are a flexible mechanism for transferring property either before or after an individual’s death and avoiding probate. A trust may be created during the life of the donor or at the death of the donor. A trust can be either revocable (on which case the trustor is free to change their mind and retrieve the property within the trust) or irrevocable. Virtually anything can be the subject of a trust. The only significant limitation is that a trust cannot be used for an illegal purpose or to support an illegal activity.

By Administrator|2012-07-31T22:48:51-06:00July 31, 2012|Categories: Accounting Talk|Tags: estate planning, probate planning, what is probate|Comments Off

Health & Finances

Q: I have a small child and over the past few years my employer has really increased the amount their employees pay towards their health care cost. It’s getting to the point that it’s making my finances tight. Is there anything I can do to save on health care cost or should I just look for an employer with better health care benefits?

A: Medical cost can certainly put a pinch on your finances. However, there are several actions that you can take to try to keep things in line. The following are a few ideas to help you survive these rocky times:

Participate in a Flexible Spending Account. A flexible spending account (FSA) is a tax-advantaged savings account set up through one’s employer. It allows an employee to deduct an amount per family from their paycheck pre-tax and then spend it on qualified medical expenses. By deducting the money pre-tax, it is not subject to payroll tax, thus decreasing the amount of tax one has to pay on their income. This could reduce your income tax bill come tax time and result in a greater refund. The drawback to FSA’s is that the money must be spent within the plan year. Any money left unspent at the end of the year is forfeited; this is known as the “use it or lose it” provision.

Prior to the enactment of the Patient Protection and Affordable Care Act, the Internal Revenue Service permitted employers to enact any maximum annual election for their employees. The Act amended Section 125 such that FSAs may not allow employees to choose an annual election in excess of a limit determined by the IRS. The annual limit will be $2,500 for the first plan year beginning after December 31, 2012.

Review your coverage options. HMO or PPO? Premier level or standard level of coverage? Higher deductible or lower one? All of these questions should be reviewed annually to ensure that your health care coverage properly aligns with your current health status and budget. If you know you’re health is failing in a particular year you may want to contribute to a FSA, go with a PPO and pay the lower deductible for the next year if you foresee your problem continuing. In relatively good health and only plan on seeing the doctor for your annual physical? Increase the deductible, only fund the FSA with the cost of that visit and watch your health care cost fall that year. While these are condensed versions of what can be done, the benefits specialist of your HR department can help you review your options and make an accurate decision.

Get those routine check ups. When we’re younger, we often “hope” that whatever is wrong with us will just magically fix itself. Bad idea when it comes to your health as time may be of the essence when it comes to certain ailments. Ignoring a problem will not typically make it better; in fact it will almost always have the opposite effect. For example, Mr. Rogers often recants how he didn’t recall seeing a dentist any of the four years while he was away in college. Result? Two root canals, several treatments for periodontal disease, several “new” cavities and broken fillings and about $4,000 in dental cost that mostly had to be paid out of pocket because he exceeded the annual plan coverage amount. Thus, make it a point to go to the doctor/dentist at least annually and get your check up, as preventative maintenance is much less costly then fixing a major problem.

Live a healthy lifestyle. Healthy eating decisions, routine exercise and living a balanced life can help to significantly reduce health cost, stress and your overall living expenses. For example, “brown bagging it” for lunch can reduce your monthly budget and put you in control of healthier eating options. Mc Chicken sandwich or homemade tuna sandwich with a teaspoon of salad dressing and some relish? Cost wise they are about the same but the tuna sandwich is lower in sodium, fat and calories. Walking the last few blocks to the job versus taking the bus can reduce your weight and increase the efficiency of your cardio vascular system, which can in turn reduce stress and high blood pressure.

All of the above, when combine with the previous three options, can lead to decreased health care cost, less frequent doctors visits and a better state of health in general. But if your employer keeps raising cost at an unbearable rate, you might have to take these tactics to a new employer with better benefits and coverage.

By Administrator|2012-07-24T20:42:44-06:00July 24, 2012|Categories: Accounting Talk|Tags: health and finances|Comments Off

Women, Money & The Pay Gap

Q: My husband and I often argue over whether or not men or women are worse than one another when it comes to saving and investing. What’s your take on this?

A: Men and women both have it bad when it comes to spending money. Women will go on a shopping extravaganza and come back with bags of stuff. Men will just blow a few thousand dollars on that new motorcycle, Jet Ski, boat; you name it and not think twice. Yet, when it comes to investing, women often face significant inequalities when it comes to finances: they usually earn less, have shorter careers, and live longer than men.

According to the 2012 study The Simple Truth About The Gender Pay Gap, released by the American Association of University Women, the average female graduate just one year out of college working full time will earn only 80% as much as their male counterparts. According to the same study, 10 years after graduation 23% of the women who had children were out of the work force, while 17% worked part-time. Those same stats for men with children were only 1% and 2%, respectively.

According to the U.S. Department of Health and Human Services, women in the U.S. have a life expectancy of 80 years from birth, compared with fewer than 75 for men. That means women must save for an average of at least five years longer than men. But it also means five more years of investing – time that can be used to close the gap.

Reversing the Trend

While all the inequalities of the working world can’t be erased over night, there are some things that can be done. The first is to wake up and realize that you have to do something. Barbara Stanny, author of several books on finance for women, including Prince Charming Isn’t Coming: How Women Get Smart About Money and Secrets of Six-Figure Women offers the following advice:

“Our attitudes to money are inherited from our parents,” she says. “My father honestly believed he did not want me to worry about money. But I think he knew on some level that it was time for me to grow up.” Stanny believes strongly that taking financial responsibility is a rite of passage into adulthood. “Women, even young women, still have this dependency or believe that someone will take care of them. It’s insidious.”

Don’t be so conservative. Studies show women are more conservative investors than men, when in reality they need to be more aggressive. Taking an overly conservative approach increases the chances that inflation will erode your retirement savings. Take the extra time that longevity has given you, and don’t be afraid to invest in growth-oriented stocks. The longer you have to invest, the easier it is to ride the market’s ups and downs.

Since 1925, according to Wachovia, the chances of losing money invested for any one year has been 28%. But hold an investment for five years, and the chance you will lose money falls to 10%. More than 10 years, and it’s 3%. Over 20 years: 0%.

Get yourself a financial adviser. You don’t have to navigate your financial course alone. A good adviser will do more than just tell you how to invest; he or she will sit down with you and discuss your life’s goals and come up with a clear, sound strategy for achieving them. And, just as importantly, they can help take the fear out of finances.

A little bit can add up. You don’t have to have a lot of money to invest. Some mutual funds have minimum investments of as little as $50 a month. Setting aside even a small amount for your retirement on a regular basis will pay off in the future.

Stuff your 401(k). If your employer offers a retirement plan, participate as much as you can. If your company matches, try to at least invest as much as the matching limit to get the most “free money” from your boss.

Think of yourself first. Almost any parent’s instinct is to think of their children’s well-being ahead of their own. While this is laudable, it doesn’t apply to saving for retirement; you should do this before you save for your kids’ education. There are all kinds of ways to borrow money to pay for school, but no one will lend you money for your retirement.

By Administrator|2012-06-30T08:07:54-06:00June 30, 2012|Categories: Accounting Talk|Tags: money pay gap, the pay gap, women pay gap|Comments Off

How To Save On Gasoline

Q: Gasoline prices seem like they have a mind of their own these days. Other than giving up my car, is there anything that I can realistically do to try to save on gas?

A: The rise in gasoline prices is really putting a hurting on the economy and the average American’s pocket book. Years ago General Motors converted their factories that made large rear well drive cars into places that would make nothing but trucks because the SUV market was the next “big” thing. Ask GM how many Denali’s they are selling now and they would probably tell you that they can’t give them away!

So what can you do to ease the pain at the pump? Here are some tactics that can help you fill up less often and hopefully reduce the overall amount you pay for gasoline.

1. Ask yourself every time you plan to use your car, truck, SUV, or van, “Is this trip really necessary?” Every mile you drive your vehicle will cost you at least an average of 36 cents. If the trip is not necessary, think twice before using your vehicle.

2. Drive at a conservative speed on the highway. According to the U.S. Department of Energy, most automobiles get about 20 percent more miles per gallon on the highway at 55 miles per hour than they do at 70 miles per hour.

3. Decrease the number of short trips you make. Short trips drastically reduce gas mileage. If an automobile gets 20 miles per gallon in general, it may get only 4 miles per gallon on a short trip of 5 miles or less. The U. S. Department of Energy says that trips of 5 miles or less make up 15 percent of all miles driven each year, but these trips burn 30 percent of the gasoline.

4. Cut down or combine the number of shopping trips you make. Try to plan your shopping so that you can run all of your errands in fewer trips. Driving to run errands many times a week can become very expensive. So if possible, try to run necessary errands on your way to and from work or get them out of the way during your lunch break by walking to nearby stores, the library, and other places.

5. Don’t drive all the way across town to save five cents on an item. As pointed out above, ” it costs an average of at least 36 cents a mile to own and operate an automobile.” If you drive 10 miles, it will cost you $3.60 or more.

6. Turn off your engine if you stop for more than one minute (this does not apply if you are in traffic). Restarting the automobile will use less gasoline than idling for more than one minute. Also, don’t wait until you unbuckle your seat belt, turn off the lights, turn off the air-conditioner, and gather items from the seat to take with you, etc. before you turn off the engine when you finally arrive at your destination. When you turn off the ignition, your gasoline costs stop.

7. Run your automobile air-conditioner only when really necessary. Alternatively, use the economy vent. Running the air-conditioner results in more fuel consumption and fewer miles per gallon of gasoline.

8. If your automobile is equipped with a cruise control, use it when possible. It helps you get better gas mileage. Most automobile manufacturers recommend, however, that the cruise control not be used in heavy traffic or on wet roads for safety reasons.

9. Keep your vehicle in good working order. Have your automobile tuned-up as recommended in your owner’s manual or as needed. A poorly tuned engine could consume three to nine percent more gasoline than a well-tuned one. The tune-up will pay for itself in gasoline savings and performance. Likewise, check your tire pressure regularly and keep your wheels in good alignment. Tire pressure that is too low will increase rolling resistance and reduce gas mileage. You can lose about two percent in fuel economy for every pound of air pressure under the recommended pounds per square inch.

10. Shop around for the best price on gasoline. There could be as much as 20 cents or more per gallon difference in price at different places that sell gasoline. Also, when you do find the best deal, don’t overfill your gas tank. The gasoline draining down the side of your automobile is expensive and may also damage the finish on your car.

11. Consider purchasing a shopping card offered by such places as Wal-Mart that gives you a three cents-per-gallon discount at their pump if you use the shopping card when paying for the gasoline.

12. Vacation near home this year. Most of us fail to see and enjoy the attractions in our own city or state. Instead, we tend to drive long distances for a vacation. People hundreds or thousands of miles away from us drive to see our attractions, and we drive to see their attractions even though we haven’t seen our own nor have they seen their own. Discover some exciting things close to home this year and save hundreds of dollars in transportation costs, including gasoline.

13. Consider taking public transportation or biking to work. This city has an incredible infrastructure in place that not all cities enjoy. You can get from one side of the city to the other in about two hours via the CTA, RTA or Metra. If you bike around this city during the summer, not only will you save on gasoline, but you can also shed a few extra pounds! All in all, think outside of the box for gas savings because it will probably get a lot worse before it ever gets better.

By Administrator|2012-05-30T23:34:34-06:00May 30, 2012|Categories: Accounting Talk|Tags: save gas money, save on gasoline|Comments Off

Innovative Ways To Save Money

Q: I am getting married this year and really need to stash some cash away. I’ve got some time before the big day, but what is the fastest way to save up a few thousand dollars?

A: Usually when we stress the importance of saving money, people start to moan and groan. Well, we’re hear to tell you from experience, saving a few extra pennies a year is not as hard as it sounds. You just have to piece some things together, kind of like a jigsaw puzzle, to get to the big picture. Combine a few of these ideas and we’re positive you will be able to stash away $2,000 or more this year:

Collect Coins. The ones in your wallet, purse, coat, etc. that is. Every time you spend cash and get change back, take it and put it in a jar or something. Doing this for a month typically can add up to $20 to $60 depending on your spending habits. Annual Savings = $240 – $720.

Put Your Insurance Company on Trial. Some may notice that their insurance rates have gone nowhere in the past 5 years despite them getting older – which is extremely annoying. So why not look at changing companies? Also, look at that deductible you are obligated to pay in the event of an accident. If changing companies or your deductible from $500 to $1,000 can save an extra $40 a month it may be worth it. While you’re at it, see if you can bundle the companies that provide your insurance if you currently have more than one. You may be able to get another 15% discount just for doing more business with them. Annual Savings = $300 – $400.

Create a 45-Day Month. If you have a bi-weekly or monthly recurring expense, why not do it a little less often? By putting some time between how frequently you perform activities like haircuts, messages, manicures, etc. you will cut down on their annual frequency. With 3 less hair appointments at an average of $20 for the men and $50 for the ladies, the savings add up. Annual Savings = $250 or more.

Cut the Landline. Some people still have both a cell phone and a landline. Why not drop the home line and just go cellular? For an extra $10 a month you could add some minutes to cover yourself and ditch the home phone. This is only advisable if you are not extremely ill, accident-prone or need the line for DSL or home alarm, but for most it is a possibility. Annual Savings = $300.

Flex Those Benefits! Using pretax dollars always has an advantage in that it cuts your taxable income. By using a Flexible Savings Account (FSA), you can use pre-tax dollars to save for medical expenses. It’s really easy for a person who puts $2,000 into an FSA to see a $600 reduction in their tax liability if you are in the 25% tax bracket. Where does that $600 reduction wind up? In your tax refund of course! The only downfall is that FSA’s are a “use it or lose it” program – meaning any money not used at the end of the year is forfeited. Thus, estimating how much you will spend on medical expenses is crucial. Annual Savings = $600 or more.

Stop Drinking Like A King. While the Remmy, Chris and Henn-o taste good, they are definitely not for the weak of financial heart. Neither are those $12 martinis! So why not scale down the liquor to some wine or less expensive brand of liquor and help both your body and your wallet? This can shave at least $50 a month off your bar tab if you are a frequent drinker. Annual Savings = $600.

Stop Paying A Premium. The truth be told, most cars will run on just about any grade of gas you can find, including that ethanol blend you find in the sticks of Southern IL. Unless you have a “high performance” engine that will not run properly on premium gasoline, ditch it in favor of some cheaper go juice. By switching to a lower octane gas, you can easily save 10 to 20 cents per gallon. While this may only equal $2 to $4 per fill up, it can equal close to $50 a year. Annual Savings = $50

Punch A Gift Horse In The Mouth! We often mention this around Christmas time but we’ll mention it here and now. We all like to give things to our friends and family – sometimes we even feel obligated to do so. But don’t feel obligated to spend more on gifts than you can afford to. The average outlay on gifts during the holiday season of 2011 was close to $1,000 per household. Add in some birthdays, weddings, anniversaries, valentine’s days and that number can quickly get out of control. So, scale back a little, give within your means and don’t worry about the rest. People who really care about you place more importance on you being in their life then they do on what gift you give them. Annual Savings = $750.

By Administrator|2012-05-08T21:08:04-06:00May 8, 2012|Categories: Accounting Talk|Tags: innovative ways to save, ways to save money|Comments Off

Relationships and Money

Q: My girlfriend and I are in a rather serious relationship and I am thinking about asking her to marry me. One thing that bothers me is that we tend to argue a lot about money – our views are just different. I’ve been told that money can ruin a marriage so I’m just not sure what to do at this point. Any ideas?

A: It seems like most people in relationships argue about money to some degree. Some argue about spending too much, making too little, not saving enough – the list is almost endless. Yet, at some point you’ve got to stop and ask yourself, is it the money that’s the problem or is it just the result of another issue?

The primary reason that couples argue about money is that they fail to gain “alignment” regarding a particular situation. He wants the Chevy Camaro and she wants the Lexus IS – the two items aren’t aligned so let’s start WW III to see who wins! Arguing in general isn’t healthy, and it sure won’t solve any money problems that you’re having. The key is to figure out what the problem is and solve it. In the above case the problem is: we need a car without too hefty of a monthly note. Once the focus is shifted to addressing that problem, then we can address what car we can afford.

Here are some ways for people to constructively talk, not argue, about their money:

Is it really the money? As stated above, the cause of most “money arguments” isn’t really the money itself. It could be related to one person making more than the other. It could be that you all are sharing expenses but not in a way that is “even” according to how much you individually make. When you figure out what the real problem is you should address it and not the money. For example if you make 55% of the monthly income and she makes 45%, why not try splitting the joint bills that way? You’ll both be shouldering your appropriate amount of the expenses and it may make you feel as if you are really being treated as equals.

Don’t shout, talk it out. Shouting gets you nothing but a night on the couch and some high blood pressure – both of which are unnecessary. When you have differing views about a particular item, ask some questions to find out what the issue is. Make sure that you listen to what the other person has to say before you respond. Most of all just make sure that you are respectful of the other person’s views. No one likes to feel as if his or her opinion isn’t important. Besides, you wouldn’t yell at your boss so why would you yell at someone you love?

Set the goals and then put them on autopilot. Let’s say you both want to buy a house and agree that you should be saving up for that gigantic down payment. But when she gets your joint credit card bill she sees that you charged $500 on new stereo components for your car. Then you all argue about who is dedicated to the goals and why one person is holding you both back. Sound familiar? The easy fix is once you set goals, automate their funding so neither of you has to worry about it materializing. Set up a separate bank account, have the money deducted from each of your checking accounts and call it a day. Automate to eliminate the arguing.

Make it a family affair. Family finances are not the sole responsibility of one person – no matter who the breadwinner is. Couples have to make it a priority of discussing THEIR finances TOGETHER – this can’t be stressed enough. So once a month the two of you should sit down and go over the money earned, bills paid, expenses incurred, progress towards goals, banking statements, etc. If you all see something that starts an argument, take a step back and look at your long tem goals. How does whatever you all are arguing, excuse us, talking about fit into your long-term goals? By putting your finances into the open, you all shouldn’t be surprised by something when you see the bill for it.

Work out the kinks BEFORE not AFTER the wedding. Don’t think that the words “I do” will solve anything that you have a problem with now – it will just make you committed to those differences. If you have concerns about your partner’s approach to finances, or vice versa, make sure you all realistically confront those differences. If one person is a spend thrift and the other person is Ebenezer Scrooge, you all need to figure out if there is some type of middle ground between you two. If the other person doesn’t want to change, you might want to reevaluate the relationship. Simply thinking that not discussing the issue will make it go away is like hoping that a bill collector just forgets your phone number – it ain’t gonna happen! Besides, if you don’t address the problem now and you all do have very different perspectives, then you are setting yourself up for one stressed-out marriage – we know some good therapists if you want the numbers.

By Administrator|2012-04-10T14:33:53-06:00April 10, 2012|Categories: Accounting Talk|Tags: couples and money, money ruins relationships, problems, relationships and money, relationships and money advice|Comments Off

Advantages of Investing With Pre-Tax Dollars

Q: My employer offers several “pre-tax” investing options. I have considered enrolling in one, but was curious if they are really worth all the hype people make about them?

A: When it comes to investing, there is no such thing as “is it worth it.” There are few things in life that will provide you with a greater benefit than investing in your financial future. Having a sizeable and secure asset base allows for many things. Some of these include peace of mind, reduced anxiety, freedom as well as the knowledge that you will be provided for in the future. There is no worse feeling than having the desire to do something but not being able to because of financial limitations. So when it comes time to retire, you don’t want to be forced to prolong the daily grind because you don’t have enough cash.

The current tax law encourages making certain investments on a pre-tax basis. Some of these investments include 401(k) plans, deductible IRAs and SIMPLE plans; all of which are funded through payroll withholding arrangements. Yet many people fail to take full advantage of these investment vehicles for various reasons.

Investing money on a pre-tax basis has two major benefits that tend to be overlooked. These include becoming a disciplined saver and investing a greater amount of money when compared to investing on an after-tax basis. When individuals enroll in any of the programs named above, the amount they stipulate to be invested is automatically withheld from their paycheck. Therefore, the participant doesn’t have to remember to make a contribution because it’s done automatically. This is especially beneficial for those who tend to procrastinate or let money burn a hole through their pockets. Plus, the individual tends to not miss the deducted funds because they never see the money.

Where the true benefit can be seen is in the differential between the amounts available to invest, as well as the return on investment. Let’s say, for example, an individual contributes $11,000 of their gross wages to their company 401(k) plan through payroll deductions. This amount will not have federal or state taxes withheld when the contributions are made. Also, when they receive their W-2 form around January of the next year, this amount will not be included as income. Consequently the tax liability calculated on their income tax return will be lower because the income base will be smaller.

The employee will also benefit from their pre-tax investment with regards to growth. Because their $11,000 was not reduced by tax withholdings, it is larger when compared to an after-tax equivalent. This larger amount forms the base for the investment to grow or compound over time. In turn, a larger investment base leads to faster growth over the life of the investment and a bigger payout when the funds are eventually withdrawn.

In comparison, if this person had made their investment using after-tax dollars, two things would be different. First, they would have only $7,920 to invest because the original $11,000 would have been reduced by tax withholdings (assuming the person was in the 28% tax bracket). Because of this smaller investment base, the growth that would occur would be smaller when compared to the pre-tax base. Second, the $7,920 could be further reduced when it came time to pay income taxes. This would arise because the person could have to include any returns earned (like savings account interest) as part of their income base on their tax return. The result? The tax liability calculated could be higher, triggering increased tax payments.

Yet despite all the good things about pre-tax investments, there is one primary downside. No matter how hard an individual may try, they can not entirely escape paying taxes. Although pre-tax dollars aren’t taxed when the funds go into the plan, they are taxed when they come out. Furthermore, not even death can alleviate the tax obligation on these saving plans. Whatever remains in the account at the time of your death will be taxed prior to distribution to your heirs. Yet in many people’s eyes, the benefits of investing with pre-tax dollars tends to outweigh all the above.

By Administrator|2012-03-22T11:01:18-06:00March 22, 2012|Categories: Accounting Talk|Tags: investing with pre tax dollars, pre tax investments, pre tax vs after tax investing|Comments Off

Saving For Retirement in an Uncertain Market

Q: In these uncertain times it’s a little hard to know how to manage our retirement savings. Is there anything that we should be doing different? If so, what do we change?

A: In August and September of 2011, there were some episodes of volatility present in the stock market; the likes of which we haven’t seen since 2008/2009. These were, for a large part, due to three specific events: the European debt crisis (which just doesn’t seem to want to go away), the political issues that surrounded the debt ceiling and finally the downgrade of the U.S. debt.

These bouts of volatility are often followed by a rash of media coverage. This is often accompanied by your average investor wondering what they should do, if anything. Some people will begin to shift their portfolios while others will simply stay the course. Which action is correct? To help determine the answer, let’s take a look at four topics.

Perception vs. Reality The media often makes it appear as if during turbulent times, investors are entirely selling out of one area and jumping into another. While there may be individual investors reacting and moving out of equities and into fixed income or money markets, when we look at the statistics and data, we see that the vast majority of investors stay the course.

Behavioral Finance This field of study combines psychology and economics in an attempt to explain why and how investors act and to analyze how that behavior affects the markets. Behavioral finance theorists point to the market phenomenon of hot stocks and bubbles to validate their position that market prices can be affected by the irrational behavior of investors. What this means in short is, when the markets move around or act in an irrational manner (read volatile), individuals tend to respond accordingly. This may not be the right course of action, but it happens.

Maintain A Sense Of Balance One of the best things to do in volatile times is to maintain a balanced portfolio. Sounds too simple right? The reality is that it works. According to Fran Kinniry of the Vanguard Investment Strategy Group “even from the peak of the market, a balanced investor is still positive. And when I say, “balanced,” I mean someone who has a combination of equity investments and fixed income investments.”

For those who struggle with this from an individual standpoint, let’s take a look at it from the market perspective. Let’s say you have $1,000 that represents all of the investment money in the economy. Then there are three pails on a set of scales, which represent the sectors that can be invested in (stocks, bonds and cash instruments). We can put the money into any pail we choose, but the equilibrium between the others will change. What this means is that one area will make money while another loses it. Yet one thing will remain unchanged, the amount of money in the market.

Thus, ones best bet is to spread the money around so that when you lose a little in one area, you’ll gain it back in another (and as a whole you shouldn’t be impacted too much). The problems arise when all of your eggs are in one basket, such as when you are nearing retirement. If everything you have is in stocks or bonds and the market goes through a prolonged period of adjustment, you may not be able to react fast enough to save your nest egg from severe losses. Thus, a little asset reallocation may give you that level of protection that you need.

Calculated Market Exploitation Maintaining a balanced portfolio doesn’t mean that you ignore trends or where the money is being made. However, what an investor should strive to do is indentify the trends, but don’t attempt to bet the house and ride a wave. By the time an investor decides to jump into an area that is “hot” or appears to be making money, the reality is that all of the “real” money has been made. What will remain are the speculators and more often than not, these will be the people who get burned when the market can no longer sustain the inflated prices.

A slightly more realistic approach would be to take a portion of your portfolio (that you won’t miss if things go south) and put it into a general area that encompasses the trend. For example, gas prices don’t look to be falling anytime soon. With that said, investing in an exchange-traded fund (ETF) that deals with energy might be a nice hedge in your portfolio. Energy will probably always make some money and we all know that these companies tend to pay out dividends. So while you’re not betting on a specific company or stock, you are inadvertently benefiting from investor and market trends.

By Administrator|2012-03-02T12:08:37-06:00March 2, 2012|Categories: Accounting Talk|Tags: retirement saving, saving for retirement, saving for retirement in uncertainty|Comments Off

Is It Ever Too Late To Start Saving For Retirement?

Q: I’m 37 years old and really want to start focusing on my retirement planning but feel it may be a little too late. What should I do?

A: It’s never too late to start planning for retirement. The key is to not waste any more time once you make up your mind it’s what you want to do. In short – get on the ball now so you make up for some of the lost time and retirement dollars you’ve been missing out on. The following will provide you with the financial steps you should take according to your age and possible allocations you could have in your investment portfolio. If you find that you’re past a certain stage, work on getting caught up with the goals of the previous timeframe and get back to your stage goals as soon as possible.

20 to 29 – You’re young; you’re starting your career; you’re broke.

Start your 401(k) at work. Contribute at least up to the company match, if any.
Start a Roth IRA if you don’t have a 401(k) – or if you have a 401(k) and can afford a Roth, too. You can tap your Roth for a first-time home purchase, if needed and you can withdraw principal penalty-free.
Start an emergency fund – six months of take home salary being the minimum. If you don’t have money saved for a rainy day, you’ll have to go into debt for emergencies — or tap your retirement fund.
Make a living will so your family will know your wishes in case of a health emergency. You’ll need one when you retire, but you never know what will happen in the meantime.
Your Portfolio – Standard & Poor’s 500 stock index fund 50%, Small-cap core stock fund 25%, International stock fund 25%

30 to 39 – You’re still young; you’re starting a family; you’re in debt up to your eyeballs.

Don’t reduce your retirement savings to save for the kiddies college fund. You can finance college with student loans and scholarships; you can’t finance retirement.
Use your 401(k) to help you save and pay less income tax. A 401(k) lets you save money before taxes. Suppose you’re in the 25% tax bracket, earn $50,000 a year, and want to save $3,000 a year. Because of the tax savings, that $3,000 would reduce your take-home pay just $2,225 and cause you to owe less income taxes because your tax base will be reduced.
Don’t confuse whole life insurance with a retirement plan, says Peggy Ruhlin, a Columbus, Ohio, financial planner. “Life insurance is good, and you need it to protect your family. But it’s not for retirement savings.”
Write your will. You never know.
Your Portfolio – Standard & Poor’s 500 stock index fund 50%, International stock fund 20%, Small-cap core stock fund 15%, Mid-cap growth stock fund 15%

40 to 49 – You’re middle-aged; you’re doing OK; you’re starting to get worried.

If you’re not contributing the maximum to your 401(k), this is the time to do it.
Your rainy-day fund should now include cash and less liquid/higher yield assets such as CDs, mutual funds, etc.
If you plan to remain in your current home, refinance to make sure your mortgage will end when you stop working or sooner.
If you’ve previously funded a Roth IRA, you should be in good shape. Otherwise, look at alternatives for retirement savings plans, such as tax-efficient mutual funds.
Update your living will and make sure someone has power of attorney. You never know.
Your Portfolio – Standard & Poor’s 500 stock index fund 40%, International stock fund 15%, Small-cap value stock fund 15%, Mid-cap growth stock fund 15%, Bond funds 15%.

50 to 59 – You’re nearing retirement; you’re at the peak of your career; you’re terrified.

If the kids are out of college, consider reducing your life insurance and increasing your savings.
Take advantage of the catch-up provisions for 401(k)s and IRAs, which let you contribute more each year.
At 55, start reviewing your Social Security benefits estimate every year and get estimates for any pensions you might receive. See how much your savings will have to be tapped to meet your expenses.
Update your will. You never know.
Standard & Poor’s 500 stock index fund 30%, Bond funds 30%, Small-cap value stock fund 10%, Mid-cap growth stock fund 10%, Mid-cap blend stock fund 10%, International stock fund 10%

By Administrator|2012-02-17T20:16:55-06:00February 17, 2012|Categories: Accounting Talk|Tags: is 30 too late to start saving, never to late to start saving, saving for retirement in 30s, saving for retirement in 40s, saving for retirement in 50s, too late to start saving for retirement|Comments Off

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