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Let the Debate Begin: Waiting for Tax Reform Details

Posted by on Apr 25, 2017 in Community, Philanthropy, Planning, Simplicity, Tax

Now that your 2016 tax return is behind you, you might be thinking about how tax reform changes expected under the Trump Administration might affect you. We are expecting a big announcement tomorrow, but despite some advance hype of “massive” changes, we’re likely to get only minimal details. The tax code is 4,029 pages and covers a multitude of taxes and entities. Tax reform, like Repeal and Replace, is going to take longer than originally planned. The Big Three Goals of current tax reform proposals are: 1-Reduction of the corporate tax rate 2-Lower tax rates on individuals (reducing tax brackets from 7 to 3) 3-Simplification In general, Republican proposals strive to broaden the tax base and lower tax rates. Under the banner of freedom and personal responsibility, these proposals support the idea that government should be as small as possible, providing minimal benefits to individuals, but counter that with lower tax rates, meaning more after-tax dollars in pocket, with which people are free to do what they want. What are the things to watch for tomorrow? Here’s what I’ll be watching for: 1. Corporate tax rate: Republicans originally wanted a 20-25% top rate, which even they felt was unrealistic. Expect Trump to hold out for the 15% corporate rate he campaigned on. The argument for a lower corporate tax rate is one of global competitiveness. The Tax Foundation reported that the US ranks 32 of 43 countries in the OECD in terms of international competitiveness. Note that the Tax Foundation is the oldest non-profit think tank in the country, described as an “independent tax policy research center” but it is also noted for a conservative, business-friendly bias. The top US corporate tax rate is 35%. But who really pays this? The US Government Accountability Office (GAO) issued a report in March 2016 that reviewed US corporate taxes over a five-year period. “From 2008-2012, profitable large US corporations paid, on average, US federal income taxes amounting to about 14% of the pretax net income that they reported in their financial statements. When foreign and state and local income taxes are included, the average effective tax rate across all of those years increases to just over 22%.” One of my sources for tax policy research is the Tax Policy Center (TPC), a nonpartisan joint venture between the Urban Institute and the Brookings Institution. From TPC’s perspective, a 15% corporate tax rate would make the US one of the lowest corporate tax regimes – until other countries cut their own rates, as they did after the Tax Reform Act of 1986. It would also create a ginormous loophole for high-income individuals. Under the Trump proposal, the 15% rate would apply to partnerships and sole proprietorships, which would create a huge path for tax avoidance by sheltering wages through such an entity. If the new rules let pass-through entities, such as sole proprietors and LLCs (like this firm) be taxed at the lower corporate tax rate, then that benefits me (and dentists). Let’s be clear about how this works: it’s not like there is one bucket for corporate tax receipts, and a separate one for individual tax payments, and yet another for payroll taxes. All tax receipts go into the same bucket, and go right out again to pay our collective expenses. Those...

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Planning in the New Year

Posted by on Jan 9, 2017 in Community, Family, Planning, Tax

You all know I love to plan. The power of planning comes from setting your intention, and taking action to make it happen. It’s about dreaming, but it’s more about doing. Starting a new year is a perfect time to set your intention on how you want to affect the world outside your personal sphere. I know I’m not alone in that while I am glad to put 2016 behind me, I’m not altogether too sure about 2017. All the more reason to have a plan about how you want things to go down. It can be overwhelming to figure out where to start. So start at the beginning: 1. FOCUS – Ask yourself what the top issue is for you – it’s overwhelming to try and solve all the world’s problems at once. Believe me, my mom and I tried over numerous cups of coffee. What is the area that you feel most concerned about protecting? Civil rights? Climate change? Women’s health? Choose one (or two, tops) and put your energies here. When we’re talking about your portfolio, diversification is beneficial. For philanthropic investments, concentrating your giving – of time and money – focuses your precious resources on the specific goal you want to support, and can enhance your involvement in something you care about. 2. Next, DECIDE how you’d like to help. There are three main ways to support the causes that matter to you: • Gifts to traditional charities • Gifts to not-for-profits with a political agenda • Gifts of action Gifts to Traditional Charities Our tax code currently provides some incentive for charitable giving, allowing a tax deduction for giving to not-for-profit – and generally non-political – groups. We’re entering a whole new world this year, both with potential changes to the tax code and changes in the political climate. We don’t yet know how the changes to the tax code will affect charitable giving from a tax perspective. One thing we can know with some certainty is that there will be less spending of our collective tax dollars for social services or human rights protection. Organizations that work in these areas – food banks, civil rights groups, women’s health – are going to need your help more than ever. If they are 501(c)3 organizations, you can take a tax deduction to the full extent of the law as it stands now. From what we have heard thus far, the new administration is proposing tax reform that stresses simplification, part of which would reduce the number of tax brackets and substantially increase the standard deduction (from $6,300 to $15,000 for single filers, $11,500 to $30,000 for jointly-filed tax returns). Meaning many people who may have itemized and received a tax benefit for charitable giving will now receive no additional tax benefit from this unless their total itemized deductions exceed the standard deduction. Gifts for Political Action There are many reasons to give beyond a tax deduction, and giving to groups that lobby or otherwise take political action may now be on an equal footing tax-wise with giving to tax-exempt organizations. Some not-for-profit groups which lobby or otherwise participate in political campaigns don’t have 501(c)(3) status, so your donation may not be tax-deductible. It’s easy to get overwhelmed by the many areas of need, and you’re...

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Talking Turkey, Talking Trump

Posted by on Nov 24, 2016 in Community, Family

This month my book club read Where the Right Went Wrong, E.J. Dionne Jr’s book about conservativism in America, a selection made long before Election Day, and back when we thought we’d be in a different place politically when we met to discuss it. One of our group told us how she was anxious about her upcoming visit to family for Thanksgiving. Her political views differed from theirs, and she would be outnumbered. She told us about the letter she was drafting to send to them prior to the holiday, in hopes that they would sensitive to her feelings. Everyone in your household may be on the same page regarding the election. In case that’s not the case, before you lob a turkey leg or a fistful of Tofurkey across the dining room table, take a breath. Think about how you’d guide two kids arguing over a toy. What is the value you want to instill in the kids? Sharing? Fairness? Generosity? What is the value you want to demonstrate at your table? Respect? Gratitude? Love? Let that be your rock, and if the conversation starts to get heated or voices are raised, grab onto it and let it anchor you.Then consider these steps to help bring the folks at your table together: • Set some ground rules: In your first toast or when everyone sits down at the table, give your values a voice: I’m so glad we can all be together, and share this holiday, even if we don’t share the same views on events in the news OR I’m so grateful to be part of this family, and to respectfully sharing all the differing points of view we each have OR Thanks to everyone for coming, and for sharing this food, and good conversation, with love and understanding OR I have spent the last five hours preparing this meal, and I hope whenever you feel like saying something about the election, you will choose instead to say something nice about my cooking. I hope that’s something we can all agree on! There are some families in which this approach simply won’t work. In this case, you may have to accept that ground rules aren’t going to constrain some. You’ll need to decide with whom you want to engage, but I’d encourage you to ask for space, or time if needed, or to try turning what might feel like an attack to you into an exploration about what matters to the other person. And if none of that works, you can always change the subject and ask them to pass the mashed potatoes. • Acknowledge feelings: Think about how we encourage good sportsmanship in our kids. We encourage the same behavior in winners and losers. We encourage respect, and acceptance of the outcome as well as the feelings winning or losing brings with it. Expressing sadness or grief over the outcome of the election is not a sign of weakness.  If we can separate out the feelings from the events that generated them, we can start there. No one wants to see those they love hurting. Recognize that however YOU are feeling, not everyone may be in the same place, even if they are on the same side. At yoga the Saturday after the Election, our instructor...

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A Post-Election Note

Posted by on Nov 9, 2016 in Community, Investments, Planning, Tax, Women

Like me, you may have felt that the world would look different this morning (if we even woke up at all) after the results of the presidential election. And yet, the sun rose, the day began, and here we are. What we know after the election is that our country is seriously divided. As we saw when we elected Barack Obama, we want real change. The trouble as I see it is that the direction in which President Trump will lead us will be more of the same. Right now, markets — and the people who make them up — are orderly. There may come a time when the emotions that drove this election will react negatively to a lack of any real change. Here are a few thoughts on what comes next: • Economics – We have limited specifics on Trump’s plans for “national growth and renewal” in the economy, but there are echoes of Reaganomics: lower taxes, relaxed regulation, big government spending. If the fiscal stimulus he plans repairs and expands our infrastructure, that’s a plus. Reduced regulation (such as repeal of the new DOL Rule (which requires advisors to your 401k to act in your best interest), repeal of Dodd-Frank (Wall Street reform), repeal of the Affordable Care Act) means you’ll be more on your own to protect your interests. • Taxes – We can expect lower taxes, at least on higher earners. I am doubtful Trump’s plan to bring overseas corporate earnings home; if he is able to do this, that’s again a plus for higher earners. Given the structure of our Federal budget, we can’t grow our way out of a deficit spending situation, so lower taxes means increasing deficits. • The World – We are more connected globally than ever, and building walls and reducing trade is likely to hurt us economically, as well as in our leadership role in the world. Bombastic rhetoric in discussions with other leaders and nations could have dire consequences. • The Rhetoric – The most difficult part of the campaign for me has been the vitriolic, threatening language that stirred up some of the ugliest facets of the American character. As a woman, I feel unheard, less safe and decidedly second-class. But I believe we can’t change what we don’t acknowledge, and we must admit this election cycle has revealed a dark side we have wanted to ignore. How we continue the conversation around these issues and change them is the real challenge. Markets are mixed this morning, after some strong negative indications overnight. We can expect to see more volatility in the months and years ahead, and increasing economic inequality. What we can do is focus on what we can control: diversifying the risk in portfolios, organizing your accounts for tax diversification and to keep expenses as low as possible, saving more, and when we spend, spending with intent. The table next to mine at the Election Watch Party I attended last night joked that at least here in California we also passed a recreational marijuana law, which we’ll need all the more after this election. (To be clear: I don’t recommend that as a personal financial strategy.) In the meantime, we need to continue the conversation, and fighting for what we believe: “Let us not...

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Three Easy Resolutions for 2016

Posted by on Jan 3, 2016 in Health, Planning, Relationship

I love making resolutions. I make them at New Year’s, at mid-year, and in the Fall when we’re headed into the end of the year.  Even if you’re not the type to make resolutions, here are three I hope you’ll consider: Move – Whether you hit the gym, run in the neighborhood, walk in the park or dance around the house, it doesn’t matter. What does matter is that you move. You can sit on your backside for 23-1/2 hours a day, but for at least 30 minutes, get up and shake up your system. In addition to helping any “lose 10 pounds” resolution you may have, this one also helps your other bottom line:  one of the big contributors to disability is stress, and one of the biggest unexpected costs in retirement is medical expenses.  Exercise improves your health (and its associated costs) in many ways, and boosts your mood. Love – It takes 20 seconds for a hug to change your body chemistry for the better. According to the University of North Carolina study, after 20 seconds you get the oxytocin release that reduces cortisol (the stress hormone) and supports the bond you have with that person. If you’re looking to build meaningful relationships, one easy way to do that is to hug a little longer. Your longer hugs can benefit your heart and blood pressure, too. Save – You might guess this resolution would be on my list, but it’s not what you think. Often we’re pulled in multiple directions by the different threads of our lives, and at the end of the day we can end up feeling, well, frayed. This year, make a resolution to save a part of your day or week just for you. It won’t make you a bad parent, a weak employee, or a selfish spouse. It may just help you do all those other things better. We each need something that’s just ours. A mediation practice, learning a musical instrument, cultivating a sport. It might seem frivolous, but those 15 or 30 minutes of focus on this thing that’s yours can take you out of whatever the rest of life may be throwing at you, and give you not only a break, but also something you can never lose. These three goals can leave you with amped endorphins, oxytocin, and joy. And who knows what other resolutions you could tackle after these? Imagine what your life could be like – working towards all those other goals we all set – with an energetic, relaxed, and joyful countenance?  If your financial planning goals are intended to ultimately lead you to a happy and fulfilled life, aren’t you making a good start towards meeting those goals with these three? Mantras In the last few years, I’ve also added a “mantra” for the New Year, a phrase or saying that will encourage me in certain ways. The first year I did it, I had realized that I had become way too attached to certain outcomes, a sure path to unhappiness. My mantra that year was “Just Say Yes.”  Yes to the movie the friend suggested, yes to speaking at an event I wasn’t sure about, yes to going with the flow (and “no” to trying to control everything).  Shonda Rhimes, one of my heroes, did a...

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Why I Love Tourists

Posted by on Oct 12, 2015 in Community, Planning, Simplicity

Most people who live someplace even moderately interesting are likely to say they hate tourists. Tourists can be slow, plodding, don’t know where they are going. They drive too slowly and walk erratically. They gawk, mouths agape, and point at things. That they do these things is exactly why I love them. This past week I was back from a business trip to New York City and I was walking over the Fourth Street Bridge in my neighborhood. The bridge is a World War I relic, a working drawbridge rebuilt in 2006, which spans Mission Creek. From the bridge there is a view of houseboats, Potrero Hill, cormorants, herons, cranes, and occasionally seals, manta rays and starfish. But to see these things, you have to be paying attention. I was walking across the bridge, my head down, looking at the wooden slats of the pedestrian walkway, thinking of the 12 million things I needed to do now that I was back from my trip. I was halfway across when I thought to look up. To notice the light on the water, the brown gull crying out, the fog beginning its morning retreat to out to sea. I cross the bridge every day, I was taking it for granted, and I was missing my life. Tourists remind us of what we often miss. What does this have to do with financial planning? Because it’s true what they say about life happening while you’re making other plans. These little things, these minutiae, so easy to miss, are critical to happiness. It is important to have a portfolio that meets your needs. It is important to know that you have a complement of insurance coverage that protects you from catastrophic loss. It is important to have plans in place to help you break down and tackle the Big Goals. But it is the small things that make up our lives and bring us happiness. Planning doesn’t guarantee you certain outcomes. But it starts a process of clarifying what is important to you, and putting your attention there. When you can be confident you’re taking care of your financial business, you can allow yourself to focus on the rest of life. Take the time to look up, notice what’s happening around you. Slow down. Put the museum exhibit you want to see on your calendar. Stop in at that café that you pass by every day, though it looks so inviting. Our days turn into months, the months turn into years. Add up those years, and that’s your life. This may be a long weekend for some of you. Even if it isn’t, take a minute this morning before you get swept away in your daily routine and look around. At the kids playing with their breakfast, at the garden bed you planted this spring, at the other passengers on the bus or train. Gawk, point, be in awe of something new. Even something mundane. Be a tourist in your own life. We can lay out plans for a good financial life, but the good life, truly, is in the...

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Starting the Financial Conversation: Moving In

Posted by on Oct 3, 2015 in Divorce, Planning, Relationship

Five Things to Do Before You Move in Together TALK! Talk about your financial expectations in the relationship. Talk about how you are going to handle money. Who will pay for what?  Will you split expenses fifty-fifty?  Or according to how much each earns?  Have you shared complete financial information? Or do you want to keep certain things private? (I would recommend an open book relationship.) Talk some more: Whose name is on the lease/mortgage? What will happen if someone loses his/her job? If one of you ends up moving out?  Now is the time when you want to consider how to protect and care for each other, to consider a range of future scenarios, even those that seem remote. Frame your money conversation around how you will agree to protect and support the other in all ways — emotionally, physically, and financially — through your anticipated life transitions. It’s fair to also talk about what’s yours, but start with the easy stuff.  Retreating into self-protection can set you up for a defensive response, closing off a conversation before it gets started. If you can stay open to listen to your intended, your conversation can reveal what you value. Educate yourself about how to share and/or protect assets with your partner.  You may unwittingly create community property or a third party interest in separate property if you’re not careful.  If you get married and later divorce, the time living together could be factored into what would be considered a meretricious/common law relationship. Find a facilitator, whether an attorney, or couples counselor, faith-based advisor or secular guide. An objective party can be helpful not only for the necessary financial conversation, but to help you communicate and manage other negotiations you will have as time goes by. It can be difficult to have these conversations, but if money conflicts are at the root of the majority of couples’ crises, don’t you owe it to yourself to tackle the questions that will help you establish a strong foundation from the...

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What Is Tax Loss Harvesting?

Posted by on Sep 27, 2015 in Investments, Planning, Tax

Part of what a good financial advisor does is help you respond to changes in our economic environment. Sometimes that includes managing your money when markets are behaving badly. No advisor has a crystal ball, and financial markets will go up and down. When they go down, what can you do about it? You can sell, hold, or tax-loss harvest. For many investors, taking investment gains and harvesting tax losses can be an important tool for reducing taxes now and in the future. If used properly, this active tax strategy can save you money and help keep your portfolio diversified. It won’t restore your losses, but it’s a silver lining in a dark economic climate. What is “tax loss harvesting”?  Investment losses have tax benefits. Selling and staying out of the market locks in your losses, but it gives you a tax break. Continuing to hold a security that has lost value means you stay invested, but you have to wait for markets to make up for the decline in your holding. With tax loss harvesting, you sell an investment that has experienced a loss in value, but replace it with a similar one, realizing a tax benefit while maintaining your target asset allocation. Benefits of tax loss harvesting are two-fold: You have a store of tax losses that can be used to off-set future gains, and You have up to $3,000 each year in tax losses to use against ordinary income How does this work?  Investments fall into asset classes: Short-Term Bonds, Large-Cap Stocks, International Developed Markets, and the like. Let’s say you invested $10,000 in XYZ S&P 500 Fund. As you likely know, the S&P 500 index tracks a list of 500 large US companies, so in our example, our investment in XYZ gives us a holding in Large-Cap Stocks. You hold on to XYZ S&P 500 Fund for a couple of years, it goes up and down, and then we have a financial downturn. The value of your XYZ S&P 500 Fund holding falls to $6,000. While this may start the acid in your stomach churning, it’s helpful to take a deep breath and not panic. You are a long-term investor and know that markets have cycles, downturns are temporary, and the S&P 500 will recover (if it doesn’t, we have bigger problems). So you want to stay invested in the market, but who knows how long it will take to recover your losses. If you sell your holding, you have a tax benefit in the form of the $4,000 investment loss ($6,000 current value of your investment – $10,000 purchase price, or cost basis). Let’s say you sell and take your tax loss. But then you’re out of the market. A better strategy might be to take your losses – but stay invested: SELL XYZ S&P 500 Fund; take the $4,000 tax loss  THEN BUY ABC Large Cap Fund  ABC Large Cap Fund is also in the Large-Cap Stock asset class, just like XYZ S&P 500 Fund. You have “banked” the tax loss from your original investment, and stayed invested in the same asset class by investing in a similar fund. You won’t miss out on a recover in large cap stocks, and you don’t have to try to time the market to do it. The...

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If I Had a Million Dollars…Would I Be Rich?

Posted by on Sep 19, 2015 in Divorce, Investments, Planning

Once I was in a Starbucks with my friend Marie. We were both working at the coffee giant, in the Finance department, and using our employee discount for lattes. The people-watching was free. Marie grew up in Seattle and knew who-was-who in town. While we were talking she nodded to someone leaving the store carrying two enormous coffees. He was big and tall, wearing jeans and a windbreaker, not a designer brand on him. He looked like a truck driver. “That’s Phil Condit,” she said. At the time Condit was Chairman and CEO of Boeing, then the largest aerospace company in the world and employer of over a quarter of a million people. Today there are lots more CEOs who wear jeans and hoodies, but back then you could say Condit didn’t look like a CEO, or a multi-millionaire. In their ground-breaking study, The Millionaire Next-Door, Thomas Stanley and William Danko revealed what America’s wealthy really looked like and offered some guidance for how to accumulate wealth. The bottom line was, in fact, a bottom line: often those who “looked” the wealthiest – living in the upscale neighborhoods, wearing the designer duds, eating in the toniest restaurants, and taking the posh vacations – were actually poor, at least in terms of their bottom line, their financial net worth. One path to poverty, despite high incomes and great resources, is often the pursuit of image. Wealth is distinctly different from stuff. But we can see stuff. We can show off stuff. We can drool over other people’s stuff. We are often comparing ourselves to others, to this image of wealth and success, and it gets in the way of actually being wealthy and financially successful. But how do we know how we’re doing, given what we have to work with? ARE YOU WEALTHY OR ON YOUR WAY? Stanley & Danko came up with a formula to determine whether you’re wealthy. Their formula combined two strong determinants of wealth — age and income — into a simple standard against which you can evaluate how you’re doing. Basically, the higher your income, the higher your expected savings, and the older you are, the more you should have saved. Here is the rule according to Stanley and Danko:  Age x Realized Pre-Tax Annual Household Income (all sources[1]) Divided by 10 = Expected Net Worth [1] Excluding inheritances You’ll note any family money through inheritances or trusts is not included in this metric. From their research, 80% of millionaires are first generation wealthy. How do you stack up? Let’s look at a couple of examples: Age                        =             55 Income                 =             $50,000 Expected NW      =             $275,000 Actual NW           =             $325,400 Congratulations! You are on your way to truly building wealth.   Let’s take another example: Age                        =             35 Income                 =             $250,000 Expected NW      =             $875,000 Actual NW           =             $325,400   Hmmm. You may have to adjust your lifestyle if you want to really build wealth. Stanley and Danko further divide their participants into quartiles. If you’re in the top quartile, you are a Prodigious Accumulator of Wealth (PAW). You have accumulated the expected net financial worth given your age and current earnings. Stanley and Danko found that PAWs are frugal, living in modest homes and driving inexpensive cars; they are investors, savings nearly 20% of their household...

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Planning in One Page

Posted by on Sep 14, 2015 in Blog, Community, Family, Planning, Simplicity

Colleague and sketch guy extraordinaire, Carl Richards, has a new book called The One-Page Financial Plan. My work is all about organizing, simplifying, and getting clarity around what really matters for you, and a one-page plan sounded awesome. As I often do, I test-drove this process myself and here’s what my One-Page Plan looks like: To be able to take care of myself: 1. Own my home 2. Financial freedom at 70 3. Ability to participate in the communities I love What you’ll see right away is that the plan is very focused, and simple. But for any of you who have practiced yoga or tried meditation, steadying the wiggly body or calming the monkey mind is harder than it looks. But this is exactly what you must do to have a plan that works: You must get to the “why” of what you’re doing. I call what I do “values-based” financial planning, and at its core it’s about what you value, what is important to you. The “why” will become your litmus test for financial decision-making. The “Why” Carl’s one-page plan starts where I also start the planning process, with the “why.” The Why is your financial mission. His question is: Why is money important to you? To have a secure retirement? To take care of your family? To die with the most toys? The Why is totally internally-driven. If you are looking for external validation, your “why” will always fail, because you’re not directing it. When it’s externally-driven, you’re looking to the outside for validation, and you won’t feel a sense of calm when you answer the question. When you answer truly, you relax, you feel a relief from anxiety. You’ve answered the question. What Gets in the Way of The Why Part of getting to The Why is digging into what money means to you. My financial mission is to be able to take care of myself.  My process looked like this: Money is important to me because I want to be financially secure. Because I want to be able to take care of myself. Because no one else will be there to do it. In those three sentences, I got to one of my core values: self-sufficiency. I came from a working class family. My parents bought their first house on the GI Bill, my dad went to school and worked part-time, and money was a struggle. I worked my way through college, and graduate school. There was a lot of messaging in my early life around my family not having any support outside the four of us — my parents, brother and me — and how we could only rely on ourselves. Being able to take care of myself financially – pay my bills, never get in over my head, take educated risks but don’t bet the farm, have a little money socked away, a few staples in the pantry always– is at the core of how I run my financial life. For you, it might be thinking you “should” have a house, but you’re really fine renting and would rather put your savings into a business idea. It might be feeling you deserve a certain standard of living, when the fear is really not living up to someone else’s (or your) standards, of not...

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