08 May 2013
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Financial Planning for College Graduates

Money (Recent Articles)

We’ve all read stories about recent college graduates who face significant obstacles when it comes to their financial futures.  The narrative generally goes like this.  While the broader employment picture has improved since the depths of the Great Recession, college grads in their twenties have higher unemployment rates than in the past.  Many of those who are gainfully employed do not hold positions that require a college degree.  While we may hope that this is merely a hiccup in a long successful professional life, going through a prolonged period of unemployment can leave behind a career crater with a lifetime impact.  Don’t mention that this group is graduating with unprecedented levels of student loan debt.

The doom and gloom continues.  For this generation, the traditional safety nets have showed signs of fraying.  Most have little faith that Social Security will be there when they retire.  While this abject pessimism may not be warranted, we’ll probably see an increase in the retirement age, means-testing penalizing good savers, and reduced annual cost of living increases.

It’s hardly what a newly minted graduate wants to hear after toiling away for at least four years.  While we should recognize the challenges of graduating seniors, there’s no reason for them to marinate in this Millennial malaise.

In her new book, Coin: An Irreverent Yet Practical Guide to Money Management for College Graduates, Broomfield author and financial planner Judy McNary gives twenty-somethings a bright, fun playbook for those just getting started with the real world.  By giving the latest generation tools to transform their personal financial lives, she helps redirect pessimism about national trends outside of our control into positive steps that recent college grads can make today to improve their futures.

Those turned off by thick, boring tomes will be encouraged by this colorful, bantam-weight guide that invites and inspires its readers to start using its wisdom today.  This is book that’s designed to be actively used with its worksheets and exercises.  Rather than getting bogged down in esoterica about asset allocation that are largely irrelevant to this age group, Coin launches into meaty subjects such as managing credit card and personal debt, building a credit record, and setting up an emergency fund.

Most books I’ve read targeted to this group have neglected the question of insurance.  Insurance of course is all about covering the “what ifs” that would sock us in the financial gut. For example, few recent college graduates give disability insurance much thought.  It’s vitally important to young workers as it protects their earning power for the rest of their working lives.  The short chapter on insurance should make an impression even on the most immortal feeling Millennial.

McNary also gives ample coverage to spending priorities for this group giving specific recommendations for categories such as transportation, housing, personal care, and food.  Largely avoiding the dreaded “B” word, she pulls them all together in a spending plan.  It may seem like mere wordsmithing, but for many the budgeting process can not only be tedious but also involves a scarcity mentality.  When you think of a budget, you think of all of things you can’t buy.  A spending plan is a more positive approach to your money.  Instead of thinking about the luxuries you pass up, instead the emphasis is on having your money flow to your biggest needs and priorities.

You can get excerpts of Coin and free spending plan and goals worksheets at coininthebank.com.  The author will be giving a talk tonight at 7:30pm at the Boulder Book Store and signing copies of her book.

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25 Apr 2013
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Scary app proves you’re not getting younger

Piggy bank (Recent Articles)

If there’s one thing as financial advisors we can do to serve our greater community, it’s to impress upon young people the importance of spending less than they earn and saving for the future.  Unfortunately, bland lectures from graying, well-meaning advisors or wise uncles usually have little impact on our tweeting twenty-five year old targets.  The answer?  It may be to scare them.

The mathematical benefit of saving while young is indisputable.  Let’s say you’re 25 and save $5,000 a year.  You do this for ten years and then upon getting married and having kids you stop putting money away for good.  Compare this with your friend that doesn’t start saving $5,000 a year until age 35.  They far outlast your meager ten year record by keeping it up for thirty years.

So you’ve saved $50,000 over ten years and your friend has saved $150,000 over thirty years.  With 7 percent annual earnings, guess when your friend’s account will be higher than yours?  The answer is never thanks to the power of compound earnings.  You’ve heard me say this before.  But we can show young people spreadsheets and articles all day, but with many Millennials it fails to sink in.   We can’t blame the latest generation.  Humans as a species are generally horrible at delaying gratification.  But Millennials have one advantage that trumps the impact of a dry spreadsheet.  It’s an app.  A very scary app.

In spite of employing many good, honest stock brokers, Merrill Lynch as a firm hasn’t always made positive headlines.  It paid big SEC fines related to trading against their customers, had to be rescued in the middle of the 2008 crash due to its toxic assets, and has worked to avoid having its brokers being held to a higher fiduciary standard that puts the client’s interest first.

But Merrill has performed an admirable service with their Face Retirement app available at faceretirement.merilledge.com.  With a snapshot taken with your computer’s camera and information about your gender and age, the app shows what you will look like fifteen, twenty, and even thirty years from now.   Truthfully the app is a little overblown and may accentuate how wrinkled and dour you’ll be.  It does offer helpful projections of what things will cost later on in life.

As you flip through increasingly older versions of yourself, your first instinct may be to reach for the moisturizer (or Photoshop) to counteract thirty more years of sunny and dry Front Range living.  While this may be a next generation parlor gimmick that makes you look like a sour old grump, it has a real purpose.  Having twenty year olds see their retirement aged selves may motivate them to place higher value on their futures.

 A Stanford University study (http://vhil.stanford.edu/pubs/2011/hershfield-jmr-saving-behavior.pdf) had college-aged subjects look at current photos of themselves while other participants interacted with realistic renderings of their 70-year old versions.  Those who looked at their older selves exhibited “lower discounting of future rewards and higher contributions to saving accounts.”  This means they started thinking more about their futures.  Although one theory was that when college students saw themselves at age seventy, they just didn’t feel like blowing money in a nightclub.

If you’re in your twenties or thirties or love someone who is, I encourage you to use this app to look at the future you.  After you’re done sharing how you look at age 77 with your Facebook friends, you may decide to kick an extra percent or two into your 401(k).   Your financial future depends on it.

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09 Apr 2013
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Caring for Your Credit

Money (Recent Articles)

Keeping track of your credit is necessity to your financial health.  While years ago there were charges and delays in accessing your credit report, now we have tools available for instant and free access.

Knowing your credit history and scores is not only for personal finance nerds.  According to a recently released Federal Trade Commission study, over one quarter of consumers identified an error in their credit report while fully five percent of consumers had a serious error significant enough to throw them in another credit tier.

An erroneous credit report doesn’t just hurt you when it’s time to refinance your mortgage or take out a car loan.  Many potential employers pull credit on their prospective hires.  Your homeowner and property insurer probably uses a credit service to determine the likelihood you will file a claim, which can affect your rates.

Need another reason to care for your credit?  Identity theft continues to be problem as well as stolen credit card and ATM data.  Monitoring your credit can help limit the damage done by scofflaws.

You’ve probably seen ads for credit monitoring and identify theft protection services that cost upwards of $100 a year.  Nice racket isn’t it?  The big credit agencies stalk your every financial move and then charge you for the privilege of being apprised of your own personal (and often erroneous) dossier.

While the full-page ads featuring the personal Social Security number of the CEO of a prominent identity protection company may impress you (reports are that his credit has been compromised several times), most of the credit care tools you need are free.

Your first stop should be at annualcreditreport.com.  Avoid all of the Google sidebar suggestions and go directly to this site.  If you’re not computer savvy, you can also call 877-322-8228.  Through this service you can access your personal credit report once a year from each of the three major credit agencies for free.   Of course you could get them all today, but if you really want to monitor your credit health, you can set calendar reminders to request a report from a different credit company every four months.

While these reports are helpful, they generally will not supply your credit score for free.  Your credit score, which can range from about 330 to 850, is compiled by each of the credit agencies based on your credit record.  Once you get above 720 to 740, you are considered to have excellent credit and can usually access the best credit cards, mortgage rates, and auto loan terms.

My favorite site for free credit scores is creditkarma.com.  In minutes you’ll have access to a genuine credit score along with tips to improve it.  Wondering how a foreclosure would affect your credit or maybe taking out a new credit card?  Creditkarma.com has a credit simulator so you can see how your credit score would be affected.  You can also elect to be notified of changes related to your credit profile.  So why is this free?  They get to present you with targeted loan and credit card offers.

—

The Laid Back Portfolio returned to its winning ways in the first quarter buoyed by the 10.6 percent return in the S&P 500 total return index.  We now see pressure on bond prices especially for long-term bonds so the bond index returned a measly -.1 percent for the quarter.  After rebalancing back to 60 percent stocks and 40 percent bonds and taking in account a 1 percent annual fee, Laid Back saw a 6.1 percent return for the quarter.  Since the beginning of 2011, Laid Back is up 20.8 percent.

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26 Mar 2013
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It's your tax return

Money (Recent Articles)

For many of us income taxes are an annual chore to delegate to a tax preparer.  You hand in all of your forms, later you get back a return, and soon your refund is deposited into your account. It’s almost painless, but do you know if your return is correct?

While taxes may be something you outsource, ultimately you are on the hook for submitting an accurate return.  It’s like shoveling the snow off your sidewalk.  You may pay a local kid to do it for you, but if it doesn’t get done right you’re still going to receive the citation.

Most professional tax preparers are working with hundreds of returns a season.  They may not have time to scrutinize every line of your tax forms.  About one quarter of prepared returns we see in our office have something that has been missed or misstated.

So what can we do except pray for the best?  It’s important that your tax preparer is qualified and keeps up on tax law as a CPA, Enrolled Agent, tax attorney, or Registered Tax Preparer.  Also have your tax professional walk through the prepared return with you.  One client forgot to submit numerous smaller charitable donations to our office.  With a client review we uncovered this missed deduction that saved them hundreds.

Last minute tax moves

Another advantage of discussing your return is identifying strategies to reduce your tax this year and in the future.  You should see your relationship with your tax pro as strategic in that the most valuable advice they can give is when you have some time to implement it.

One common move to make by April 15th is contributing to a Roth IRA or Traditional IRA if you’re eligible.  The big advantage of the Roth is that the investments inside can grow without ever being taxed.  For the Roth, you need to have earned income for the last year at least equal to the amount you contribute.  With an adjusted gross income of $173,000 or less for a married couple ($110,000 if filing single), you can make a $5,000 contribution for each of you for 2012 ($6,000 if you’re 50 or over).  Even if your income exceeds this level, you may qualify for a “back door Roth” with a non-deductible IRA contribution and later Roth conversion.  Also, self-employed taxpayers may have the option to reduce their taxes through a last minute 401(k) or SEP-IRA contribution.

Tax penalty

Once you have calculated how much tax you owe, you may find out you have an estimated tax penalty listed on the bottom of your 1040.  It sounds like a major transgression of IRS rules.  Instead it’s just the IRS charging interest.  The federal government counts on our paying taxes with wage withholding and estimated tax payments throughout the year.  If the IRS determines you have underpaid your tax, it levies interest.  The good news is that “borrowing” money from the IRS costs you 3 percent annual interest at today’s low rates.  What the IRS terms a penalty may be the cheapest money you can access.

You can avoid penalties next year by making sure you’re in the IRS designated safe harbor.  Just meet one of the following three requirements.  Owe less than $1,000 at tax time, pay at least 90 percent of your tax owed for this year, or pay 100 percent (110 percent for high income earners) of the previous year’s tax owed.  Conversely if you have a big refund this year, don’t celebrate your interest free loan to the IRS.  Change your withholding next year so you (rather than the government) can make money on your savings.

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11 Mar 2013
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Which Investment Bubble Should Concern You?

Pennies (Recent Articles)

It’s been five long years, but the Dow set a new all-time high last week.  Having it make front page news for positive reasons has some investors concerned about a downturn.  While the contrarian in me appreciates the hand wringing, it’s unclear whether the stock market is overvalued.  What is apparent is that we are in the midst of a historic bond bubble.  We’ll talk about the bubbly evidence, how it could affect you, and what you should do to protect your portfolio.

The Case for a Bond Bubble.  Savers and retirees are well aware of historically low Treasury bond rates.  The five year Treasury bond pays 0.77 percent annual interest.  Ten year and thirty year bonds pay 1.9 and 3.1 percent interest respectively.  As recently as 2010 you could earn 4.7 percent on the 30 year Treasury while in 2000 the five year bond paid 6.5 percent.

So why do we care about bond rates from the (recent) past?  Remember that as interest rates rise, the value of bonds decrease.  It’s easy to understand why.  Let’s say you purchase a 30 year Treasury that pays 3.1 percent interest for $10,000.  In a year, imagine 30 year rates increase to 5 percent, which is not an unprecedented leap.  What happens to your bond?  Now no one wants your 3.1 percent bond and it may have to decrease in value by 30 percent to attract a buyer.

Now it’s true if you hold that bond for 29 more years, you will receive $10,000 back.  But you will have given up the higher prevailing rates for all that time.  Treasury bonds haven’t cornered the market on fixed income inflation as high quality corporates, high yield bonds, and munis have also seen significant price appreciation.

Other options.   Let’s consider alternatives that investors are using to fight low Treasury yields.  Long-term bonds pay higher interest rates than short-term bonds as we saw above.  While you will receive more income, if interest rates were to rise the long-term bonds would suffer a much more severe decline than short-term alternatives.

Another choice are so-called extended quality bonds, also known as high yield or junk bonds.  Here you are loaning money to companies with marginal creditworthiness.  While they pay higher yields, they don’t serve the important safety blanket function in your portfolio.  When the S&P 500 was down 37 percent in 2008, high yield bonds were down 26 percent as a category.  High dividend paying stocks are in the same boat – a good idea but not as a bond replacement.  You need bonds to counterbalance the panic you feel in market declines, not reinforce it.

Treasury Inflation Protected Securities (TIPS) pay interest plus inflation except now rates are negative 0.7 percent real yield for ten year bonds plus inflation.  Accepting a negative real yield is hard to swallow.

So what are we left with?  I Savings Bonds available through treasurydirect.gov are paying the rate of inflation right now, although you can only purchase $10,000 per year per person plus an additional $5,000 out of your tax refund.  Short-term corporate bond funds can give you a little better yield with manageable risk.  Some CDs such as those available at ally.com pay 1.6 percent for five years, with low early withdrawal penalties.  Finally, if you participate in a 401(k) or 403(b) plan, you may look at the stable value fund for better returns in a tax-deferred wrapper.

The bottom line is now is when you want to conserve your principal when it comes to your bond allocation.  You may earn paltry interest with these tactics above, but more than anything you are preserving your cash for when then interest rate environment improves.

David Gardner is a certified financial planner with a practice in Boulder County. He can be reached at yellowstonefinancial.com.

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25 Feb 2013
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Five important financial tips for your 20s and 30s

Money (Recent Articles)

While some recent career entrants take a pass on their personal finances, by making smart choices now you can have an incredible impact on your future.

Maximize your human capital.  Your shrewdest investment may not be your 401(k) or Roth IRA.  With most of your working life ahead of you, spending money to improve your future earnings and career satisfaction is a wise choice.  Be careful here, as public and private lenders can abet education overindulgence.  Take a hard look at the program you’re considering, talk to recent graduates to determine the career outlook, and determine how much income you would be sacrificing while retooling.

Don’t forget insurance.  Most of you have auto and health insurance (and homeowners insurance if you own a home) but may not be protected in other areas.  Long-term disability insurance supplies valuable income replacement if you’re not able to work for an extended period.   Often it’s an employer benefit and pays from 60 to 70 percent of your salary once disabled after a waiting period.   You can purchase individual disability insurance directly, but be prepared for an extensive evaluation process and annual premiums that can easily get into the thousands.  The good news is that individual disability insurance can stay with you even as you move from company to company.

Renters often forget about renter’s insurance for if your home is burgled or burns down, or you’re found liable for injuring property or person.  Is there anyone else who is dependent on your current or future income?  You may have a life insurance need.  Term life insurance is dirt cheap if you’re young and healthy.

Maximize your 401(k) match.  Every year more employers bring back the 401(k) match.  Often it’s a 100 percent match on the first 3 percent of your salary you contribute to the plan.  If your company has a match and you’re not contributing, drop your paper or iPad right now and sign up for the plan today.  Until you do so, you’re giving up thousands in free money.

A lifetime of saving begins now.  You may think that the odds of collecting Social Security retirement benefits are akin to the chance we’ll see a tropical cyclone in Colorado.   While the future of Social Security is not as dire as you fear, we have entered a new normal where big pension plans are not doing the saving for you.  It’s up to you to save 15 percent of your income through 401k contributions, Roth IRA contributions, and taxable savings to provide for your future.  Such savings is doubly virtuous.  Not only will you have a future nest egg but you will get accustomed to living on less income along the way.  This hastens the time when you could leave a traditional career, work fewer hours, or take a year-long sabbatical.

Roth IRAs.  You probably qualify to put $5,500 in a Roth IRA for 2013 if you’re working and under 50.  A Roth IRA is a tax-free account that can be set up at a mutual fund company such as Vanguard or a brokerage firm such as TD Ameritrade.  You can use a Roth to invest in stocks, bonds, mutual funds and other investments.  Once your funds are inside a Roth, as long as you abide by the rules its earnings will never be taxed.  In fact, there’s still time until April 15th to contribute $5,000 to a Roth for 2012.  With over $16 trillion in national debt and income tax rates relatively low, higher taxes are in our future.  By keeping some funds in a Roth IRA, you’re protecting today’s assets from the tax increases of tomorrow.

David Gardner is a certified financial planner with a practice in Boulder County. He can be reached at yellowstonefinancial.com.

 

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11 Feb 2013
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When should you invest a lump sum?

Money (Recent Articles)

In the geeky world of wealth managers, it’s the equivalent of the electric blue horse statue you see upon entering DIA.  It provokes strong, divergent opinions that are rarely resolved to anyone’s satisfaction.   It also wades into the psychological side of money, which some analytical types may dismiss as irrelevant but those of us who do this for a living understand as incredibly important.

The question is if you have a sizable amount of cash to invest, should you do it over time using dollar cost averaging (DCA) or in one lump sum?  All right I know this is definitely a First World problem.  But it’s real.  An entrepreneur finally sold the company after years of toil.  Mom died and now the house has been sold.  A widow received a life insurance settlement and wants to use it wisely amidst her grief.  An investor went to cash in the winter of 2008 and now is wondering when to get back into the market.

Let’s say you receive $100,000 in sudden wealth.  You don’t have credit card or other consumer debt and you want to invest it for the future.  What are your options?  You could invest it all at once according to your target asset allocation.  Let’s say 60 percent stocks and 40 percent bonds is the best mix for your current financial status, time until retirement, and spending goals.  On day one you invest $60,000 in diversified stock mutual funds and the remainder in bonds.

As an alternative, you could decide upon a period of months that you would like to gradually move your cash into investments.  It could be done over three months, which would mean investing roughly $33,000 a month, or over 36 months.  By adopting a strategy of DCA over time, you are hoping to minimize the risk of your hardly won cash suffering through a sharp market downturn like we had four years ago.   You want to avoid regret.

The academic literature is in broad agreement that you will on average end up with a higher return if you invest your funds all at once.  Vanguard published a study last year that examined the results of investing a $1 million windfall in the US, UK, and Australia markets in a stock/bond portfolio with varying asset allocations and holding periods.  The conclusion was that the lump sum investor prevails over the DCA investor about two-thirds of the time, looking at a ten year time period of returns and using DCA over twelve months.   As you lengthened the time you used DCA, the better the lump sum investor performed on a relative basis.

Truthfully this is an obvious conclusion.  The stock market goes up most of the time, more than two-thirds of the years on average.  It stands to reason that the sooner you invest cash, you will do better over time on average.  But most lump sum investors are concerned with the negative outliers: 2008 (-37 percent), 2002 (-22 percent), and 1974 (-27 percent).  There’s a chance we may be on the precipice again, you may think, so you sit on your cash.

While your risk is reduced with DCA, its less obvious advantage is behavioral.  By committing to go into the market over three to twelve months in equal portions, you will not be second guessing when the scheduled trading days arrive.  Most likely you will be able to follow through on your plan.  With a lump sum, you may find yourself tracking the ups and downs of market and waiting (and waiting) for that perfect moment to jump in.  It may not come for months or years, and then the odds of financial success are strongly against you.

David along with Timothy Watson, CPA will be giving a lunch presentation on this year’s tax changes at noon to the Boulder Valley Rotary Club on Tuesday, February 19th at the Spice of Life Event Center in Boulder.  Admission and lunch is $15 and you can RSVP through Facebook, meetup.com, or bvrc.org. 

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28 Jan 2013
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Avoid a one-size fits all investment strategy

Money (Recent Articles)

How is a pensioner like a startup entrepreneur?  You may think their finances are nothing alike.   A monthly retirement pension is the result of years of government service or a dwindling number of big corporations.  Executives working for a startup must be nimble, cast their lot in with a small company with a good team and bright prospects, and then through a prolonged burst of hard work and luck reach a big payday.

In Boulder County our pensioners include many state employees at CU, federal workers at the Boulder Labs, and a select few with a defined benefit pension at IBM.   Startups in Boulder?  From the burrito mavens at EVOL to the email kings at SendGrid and the next-gen commercial lighting leader at Albeo Technologies, many are working hard on bringing the next Big Idea to the masses.

What do their employees share in common?  They are completely misled by formulaic approaches designed to assign an appropriate investment strategy.  You’ve seen the risk tolerance questionnaires passed out at the 401(k) annual review (or perhaps they have an app for that).   First enter your age, and then answer questions such as “how comfortable are you investing in the stock market?” and “are you willing to accept more risk for higher returns?”  Out pops an allocation recommendation.  You may even skip that modest step by picking an investment such as “Target Fund 2030.”

This conclusion can mislead future pensioners and entrepreneurs alike.  Imagine you have five years until retirement with the state government under a PERA defined benefit pension.  You may be eligible for $50,000 in annual payments.  Your spouse will receive $30,000 a year in Social Security.  Your house is paid off and you live on about $4,500 a month.  You also have saved $700,000 in retirement and other accounts.  The formulas will recommend from 30 to 60 percent in stocks (these questionnaires often disagree).  But they won’t delve into your purpose for those assets.  Realize that if your pension and Social Security will pay you more per month than you spend, then you may need to acquire some costly habits or begin a strategy to maximize gifting and a bequest to your children.

Conversely successful entrepreneurs and startup workers can have a high but uncertain payoff.  Ironically, they may be more risk averse and may be less able to accept the consequences of a market downturn with an aggressive portfolio.  Or they may have already reached financial independence and thus don’t need to take much risk to achieve their retirement spending goals.  Those in the financial industry know this as the Barbell Strategy in that so much risk is taken in their profession, that they take very little risk with their outside investments.

If you’re a pensioner, a startup executive, or simply have considerations that go outside the norm, at the least you should use a more sophisticated application such as financialengines.com.  Consider working with a qualified financial planner who focuses on your personal situation rather than putting you in a target retirement box.

———-

After big moves up and down throughout last quarter, the Laid Back Portfolio ended down 0.4 percent for the quarter including fees, with the S&P 500 decreasing 0.4 percent and the Aggregate Bond Index up 0.2 percent.  Who would think that in the year of the fiscal cliff, Eurozone antics, and Superstorm Sandy, that Laid Back would earn 10.2 percent for the year?  If you thought international and in particular Greek equity markets were a bad place to be last year, you missed a 33 percent increase in the Athens index.  Call that one? Opa!

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16 Jan 2013
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Cliff Diving to Cliff Hanging: the Taxing Changes

Pennies (Recent Articles)

Market watchers were relieved when Congress rolled out yet another dark eleventh hour deal to save our country from our own political dysfunction.  Domestic and international equity markets were cheered and registered significant gains.  Though it does feel as though this was a woefully underperforming student that managed to eke out a C-.  Better, yes, but not nearly good enough.

There are two stories here: the changes in our taxes and our cliff hanging for the next few months.  First the taxes.  As predicted, the Social Security tax holiday expired at the end of 2012, meaning that you will see your paycheck decrease by 2 percent on the first $113,700 earned this year.  Yes, this is a reappearing regressive tax that managed to make it through the rich versus poor debate.

The Medicare surcharges that are part of Obamacare went into the effect for high income earners, with a .9 percent additional tax on those with earned income over $250,000 and $200,000 for married and single filers respectively.  Plus there’s 3.8 percent surtax on investment and passive income for those with AGIs over $250,000 for married couples and $200,000 for single filers.

While these changes have been in the works for months, there are new provisions.  Those with taxable income of $450,000 filing jointly or $400,000 filing single will see their marginal income tax rate increase from 35 to 39.6 percent.  Even if you’re below this threshold, your taxes may increase with the return of the PEP and the Pease.

The personal exemption phaseout (PEP) affects those with an AGI above $300,000 and $250,000 for joint and single filers respectively.  No longer do you get the full personal exemption of $3,900 per person in your family.  Your exemptions are reduced by 2 percent of the income that exceeds the threshold.    The Pease takes a whack at your itemized deductions in this same income range by 3 percent of your AGI above the thresholds.

Yes there’s some bad news there for all taxpayers, particularly higher income ones.  A silver lining is that your taxes may not increase if you’ve been paying Alternative Minimum Tax.  You owe the IRS the higher of the tax computed the AMT way or the standard method.  If you paid significant AMT in the past (look at line 45 on your 2011 Form 1040), your taxes may be stable.

There are some positive developments as well with the extension of the higher education, child, and earned income tax credits for five years.  AMT watchers loved the permanent change to a higher exemption and its being indexed to inflation.  The charitable IRA rollover was extended through the end of this year.  If you’re over 70 ½ you can designate a charity to receive part of your required distribution without it being taxable to you.   Finally estate and gift taxes were set at 40 percent and only above $5.25 million per person with spousal portability, also adjusted for inflation going forward.

Now for the cliff hanging.  Yes, we didn’t go over the fiscal cliff, but it has become a nightmare deferred by a mere two months.  In March, we will be running into the limits on the national debt ceiling including the use of all available accounting tricks.  The automated government spending cuts would begin then as well.  So we’re forced to keep our gaze on Washington at they navigate through another self-imposed crisis, with issues such as the $16.4 trillion national debt and future liabilities in Medicare and other programs totaling many times not even being addressed.    Happy new year!

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02 Jan 2013
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Here's my shortlist for the best and worst in personal finance for 2012

Money (Recent Articles)

First, the best:

Record low mortgage interest rates.  With Fed Chairman Ben Bernanke purchasing Fannie Mae and Freddie Mac bonds by the fistful, mortgage rates have swooned to incredible lows.  Thirty year mortgages at 3.25 percent may be available to those with excellent credit.  If you haven’t refinanced recently, shop around with at least two lenders.  To simplify comparisons ask them for a quote for a “no-cost loan” where you pay nothing out of pocket.  Use Zillow.com to get a read on current rates.  Locking in a payment for thirty years that will not increase with inflation could do wonders for your financial security.

 

Retirement plan cost transparency.  According to an AARP survey last year, 71 percent of retirement plan participants think they pay nothing in fees at all.  Nobody invests your money for free and retirement plans are no exceptions.  Starting in July 2012, retirement plans were forced to disclose all fees that you pay through quarterly and annual statements.  Now that some surprised savers see that 2 percent of their savings are going to fees, HR departments across the land are reviewing their plans and looking for lower cost options.  Anecdotally, I can tell you that expenses have started to come down with former high cost scofflaws such as insurance companies offering annual fees below 1 percent of the plan balance.  While these fee disclosures may be hard to decipher, it’s an intense beam of sunshine that will ultimately help those saving for retirement.

 

Prepaid mobile phone plans on the rise.  Now more smart phone plans can be had at dumb phone prices.  Republic wireless (republicwireless.com) offers unlimited talk, text, and data for $19 a month with no contract.  The catch is you need to purchase an outdated Android phone for over $200 and the service depends in part on your wifi connection at home.  Look for new phones to be introduced in the coming year.  Straight Talk (straighttalk.com) offers a $45 plan for unlimited talk, text, and data using any GSM phone including the latest Android models.  With T-Mobile scheduled to offer iPhone service and high speed LTE data, you’ll soon have access to an inexpensive plan as long as you’re willing to pay the one-time unsubsidized full phone price.  For those who have been paying $120 a month to keep their iPhone happy, this is great news.      

 

There are some things we’d like to forget about 2012.

 

The Fiscal Cliff.  Again Congress is unable to get its act together when it comes to taxes and government spending.  Starting tomorrow, income and payroll taxes will increase, government spending will decrease, the government borrowing authority will be exhausted as we run into the debt ceiling, and many unemployment benefits will expire.  It’s true that many of these changes can be put off until March through gambits, but our government’s ineffectiveness is laid bare for the world to see.  Look for changes in our tax system in the early part of 2013.  That way Congress can say they voted for a “tax cut” from the higher rates scheduled to go into effect next year.

 

Missed opportunity on higher education.  President Obama came to Boulder earlier this year to campaign in favor of keeping student loan interest rates down.  Numerous tuition tax credits and deductions also improve access to high education.  But very little focus has been placed on keeping the cost of higher education reasonable.  Indeed by making it easier for students and their parents to borrow, the federal government is a partner in the educational inflationary march.  In 2013, I’m hoping for federal help in keeping higher education costs down, not simply lowering the interest rate on burgeoning loan balances.

 

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