Mural on chain link, Fulton Street
Why I Love Tourists
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...
read moreStarting the Financial Conversation: Moving In
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...
read moreWhat Is Tax Loss Harvesting?
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...
read moreIf I Had a Million Dollars…Would I Be Rich?
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...
read morePlanning in One Page
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...
read moreMad Men. And Surprisingly Not Angry Women.
SPOILER ALERT: This post contains several spoilers for AMC’s Mad Men series finale. For several nights last week I was catching up with the rest of you on the trials and travails of Mad Men in time for the series finale. For years I avoided watching the Emmy-award winning show: Who wanted to relive the awful way women were treated in the late 50s/early 60s, especially in an office environment? But a good friend with style and an eye for mid-century design worked in advertising as a copywriter and was a fan of the show. She, along with the hype around the finale, persuaded me to tune in. Over a four-day marathon, I covered the ten or so years of the series, which coincided with ten of the more tumultuous years of change in the U.S. I was surprised to find I preferred the first few seasons set in the early 1960s: the world just looked better, cleaner, and more orderly than in the later seasons of the early 1970s, with sideburns and tie dye and slightly sloppy clothes (and some would say, sloppy morals). But as we all know, looks can be deceiving. These years were just on the edge of my personal history: I was born two weeks before President Kennedy was shot, and as an adult I wondered what my mom must have thought, having only immigrated to the States in 1952 and now with a baby girl, civil unrest and what must have seemed like chaos everywhere. We went from pill box hats to openly pill-popping in a very short time. We often forget how far we’ve come since. So we see Mad Men begin with the introduction of a new woman to Madison Avenue: Peggy Olsen. Sincere, ambitious, slightly naïve. I related to Peggy. The other women of the series – Joan (statuesque office manager), Betty (blonde and beautiful wife of Don Draper, former model, now mother of his children) – never settled into the stereotypes they might have. They all struggled with what we now call work/life balance. But in this era, the choices were few. In one episode the men mock how the young women in a focus group about cold cream only wanted to know if the product would help them find a husband. The reality of the time was that there were few other options: before the 1970s, a woman could be fired if she was pregnant (the Pregnancy Discrimination Act of 1978 changed this), she couldn’t get a credit card without a husband to cosign (changed by the Equal Credit Opportunity Act of 1974), and could be forced to retire at 32 (Pan Am’s requirement for stewardesses, changed by the Civil Rights Act). At the end of the Mad Men run, the women found contentment we might not have expected. Joan chooses love of career over romantic love, Betty chooses honesty and her education over the image of perfect domesticity, Peggy chooses career – and finds love that fits into that choice. The strength it took for the women to make these choices — and other difficult ones along the way — given the obstacles of their time, was for me the real draw of the series. The women focused on what they really wanted, and went for it, despite...
read moreWhen Your Partner Has a Secret Life
In the aftermath of the Boston Marathon bombings, many turned to the dead bomber’s widow for answers. What seems impossible for some to believe is that she knew nothing of her husband’s plans. How could she be so close and not know? Here, a year later, I can offer my perspective from my own experience. In the last years of my marriage, I discovered my husband had a secret life. There had been hidden addiction, other relationships, thousands of dollars from our accounts that went missing. It all came out slowly, painfully, over a period of years. It wasn’t until I saw the funds missing from our accounts, which couldn’t be explained away with a story, that I finally could see the truth. But prior to that, I wanted to believe my husband. I loved and trusted him. We’d met as sophomores in college and had known each other for 25 years. And even though he’d been caught in that first lie that started the unraveling of our marriage, I wanted to believe that after that he was telling the truth. That I fell for that over and over – well, that speaks to my contribution to our dynamic. I couldn’t see some of what was going on because I didn’t want to. Other parts he hid deliberately and effectively. Other people, friends, and family were complicit in the charade because they didn’t want to believe the truth about him either. From time to time I asked questions. And I would get answers that didn’t quite make sense. Or answers that were true – but incomplete. There were periods when I worried about my mental state. He said he’d told me something, but I was pretty sure he had not. Case in point was his description of a trip he was taking. He was going to see his brother and he’d found a hotel with a cheap local’s rate. That much was true. What was revealed after a forensic search of his credit card statements was that he made the trip with another woman (and her dog), paid for their airfare, meals and shopping from our money. The hotel with the local’s rate was a four-star resort. He could say what he’d told me was the truth. But there’s a reason they make you swear in court to tell “the truth, the whole truth, and nothing but the truth.” Slowly I began to see half-truths, omissions, and out-and-out lies. You want to believe the people you love, especially if the truth is too painful to see. There were many times I felt something was wrong, but didn’t know what to do about it. The lesson for me was how to press for answers, how to keep my partner engaged in a difficult conversations, and at least for me, if he can’t participate in these difficult talks, to leave. Some of the things you might look for if you suspect your partner is hiding something from you are the following: Creating distance between you – My husband was pulling away from me, physically and emotionally. All long-term relationships go through ups and downs. He also created distance by coming home consistently later than he’d said. I used to joke that if he said he’d be home at 5:30, I’d see him at 7....
read moreTax-Diversify Your Portfolio Part 3: Back-Door Roth IRAs – Advanced
For those of you with income higher than the limits to contribute directly to a Roth IRA, you can still achieve tax-free savings through a “back door” Roth strategy: contributing first to a Traditional (non-deductible) IRA, followed by conversion to Roth. This “Contribute-then-Convert” strategy provides a tax efficient way to tax-diversify your accounts provided that you do not have other IRAs that contain pre-tax contributions. These IRAs with pre-tax savings include rollover IRAs from 401ks or 403bs, and SEP-IRAs from self-employment. The existence of these other IRAs changes the math involved in the conversion calculation, and lessens the tax efficiency of the strategy. The non-taxable part of a Roth contribution is calculated according to the following formula: Tax basis of all IRAs —————————————————— X Amount of IRA converted to Roth = NONTAXABLE Value of all IRAs at end of year of conversion Example: If you had contributed $11,000 to a Traditional IRA (and taken no tax deduction), you have an IRA with a tax basis of $11,000 (the total of after-tax contributions). If you convert that IRA to a Roth when its value is $11,050, the non-taxable part of the conversion is ($11,000 / $11,050) x $11,050 = 0.9955 x $11,050 = $11,000. $11,050 converted – $11,000 not taxable = you’ll owe tax on $50. Example: Same facts as the previous example, but now let’s say you also have a rollover IRA (all pre-tax savings from a 401k) valued at $100,000. If you convert the $11,050 IRA to a Roth, you’ll have to include the $100,000 balance of the rollover IRA. In this case, the non-taxable part of the conversion is ($11,000 / $111,050) x $11,050 = 0.0991 x $11,050 = $1,095. $11,050 converted – $1,095 not taxable = you’ll owe tax on $9,955. In each case, you only converted $11,050 to Roth, but the tax consequences were vastly different, given the presence of the other IRA money. If you have other IRAs with pre-tax savings that will dilute your Roth conversion, there are some things you can do. The effort to tidy up accounts to lay the foundation for a tax efficient Contribute-and-Convert strategy is not immaterial. But the long-term benefits are numerous: Never having to take taxable required minimum distributions Tax-free compounding on savings until you need the money When you need your Roth savings, you can take it out tax free Your heirs can take it out any income from a Roth you leave them tax free A Roth can reduce the impact of the new American Taxpayer Relief Act of 2012 (“ATRA”), which brought back the phase-out of itemized deductions and gave us the new net investment income tax If you believe your accounts will grow in value, converting a smaller account balance results in a smaller tax liability today, with any future growth now occurring in a tax-free account Here are some tips if you find yourself in a Roth conversion situation complicated by other IRA assets: Planning Tip #1: If You Have an Old IRA – Roll It to Your 401k Many employer plans will accept rollovers of previous employer’s plan balances. If you rolled a previous employer’s 401k or 403b to a rollover IRA, check with your current employer’s plan administrator to see whether you can roll those old retirement...
read moreTax-Diversify Your Portfolio Part 2: Back-Door Roths – Contribute & Convert
The uncertainty of future income tax rates makes planning for taxes more critical. Effective IRA planning is one way to achieve tax diversification to manage this uncertainty. As noted in Part 1 of this series, you may be limited in your ability to contribute directly to a Roth IRA. But you can use a “back door” strategy to convert non-deductible contributions to a Traditional IRA to Roth, and thus make tax-deferred savings tax-free. Tax-Free Savings If you are not eligible for the up-front deduction of a Traditional (deductible) IRA, you may be eligible to contribute to a Roth IRA. Roth IRAs don’t give you an up-front deduction, but earnings are tax-free under current law. For tax diversification, this can be a better option that the deductible IRA. But you are only eligible to contribute if you have MAGI below certain limits: Roth Contribution Limits Based on MAGI Can contribute Up to maximum Can contribute reduced amount Cannot contribute to Roth Single <$112,000 $112,000-$127,000 $127,000+ Married Filing Jointly <$178,000 $178,000-$188,000 $188,000+ Contributions with No Income Limits Despite these income limitations for Roth contributions, taxpayers with any level of income can contribute to a Traditional (non-deductible) IRA. You won’t be able to deduct your contribution, but the earnings will grow tax-deferred. And despite your level of income, you can then convert the Traditional IRA to a Roth IRA with little or no tax cost. The Contribute-and-Convert Strategy When you convert the Traditional IRA to a Roth IRA, you will only be taxed on any earnings. If you made a $5,500 contribution to the Traditional IRA and it’s worth $5,510 at the time of conversion, you will only owe tax on the $10 of earnings. Because your contribution to the IRA was made with after-tax dollars (i.e. you didn’t receive any tax deduction for the contribution), you have what is called basis in the IRA. These dollars have already been taxed, and won’t be taxed again on conversion. After conversion, the savings now reside in a Roth IRA, where earnings will grow tax free under current tax law. A $5,000 contribution earning 5% annually will grow to $18,625 in 25 years. The Traditional IRA account may have provided a $1,540 deduction at the time of the contribution, but it comes with a deferred tax bill of $5,215 on distribution, assuming a 28% marginal federal tax rate. Beyond tax-free growth, Roth IRAs offer flexibility in pre-retirement distributions: you can always withdraw your contributions without penalty, and you are not required to take distributions from these accounts after age 70-1/2 as you are with other IRAs and 401ks (including Roth 401ks). This flexibility make Roth IRAs excellent vehicles for savings that could be used for multiple goals (retirement, education), and make ideal assets to leave to future generations. Don’t hesitate to consult your tax professional about your options – but note that many may not be familiar with the contribute-and-convert strategy, or may be partial to reducing all taxes today, without planning strategically for flexibility in the face of future tax rates. Contact Satori Financial LLC to find out how we can help you determine your Roth contribution or conversion options. If you have other IRAs, the Contribute-and-Convert strategy isn’t as tax efficient. See Part 3: Back Door Roth Conversions-Advanced if you have any rollover, SEP or...
read moreTax-Diversify Your Portfolio Part 1: IRAs and Roth IRAs – The Basics
We never know what the future will hold, but it is clearly possible that tax rates in future years could be higher than those we have today. Between new taxes and higher rates, and the elimination of certain deductions, planning for tax diversification has become critical. Effective IRA planning is one way to achieve this. In Part 1, we’ll cover the basics of the three types of IRAs and whether you can contribute directly to a Roth IRA. Your level of income may limit your ability to get an up-front tax deduction for a contribution to a Traditional IRA or contribute directly to a Roth IRA, but you can contribute to a Traditional IRA (with no tax deduction) regardless of your income. Using a strategy to convert traditional IRAs to Roth can shift taxable savings to tax-free savings. Here are the basic things to remember about IRAs: For a contribution to any IRA, you must have earned income (wages or self-employment income[1]). Your eligibility to contribute to the different types of IRAs also depends on your Modified Adjust Gross Income (MAGI). For IRA purposes, MAGI is your Adjusted Gross Income (AGI), the number on the bottom of your 1040, with some income added back. For detail, see http://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/modified-adjusted-gross-income/ For 2013 and 2014, the maximum contribution you can make to any IRA is $5,500 ($6,500 if you are age 50 or older at the end of the tax year). Participation in an employer’s retirement plan (like a 401k or 403b) doesn’t affect how much you can contribute to an IRA, but whether you can deduct a contribution to a Traditional IRA Three Types of IRAs Individual Retirement Accounts (IRAs) come in three main flavors: Traditional-Deductible Traditional-Non-Deductible Roth Traditional IRAs can be deductible or non-deductible. Your eligibility to deduct contributions will depend on your income. So will your eligibility to contribute to a Roth IRA. You can always contribute to a Traditional IRA, though you may not be able to deduct the contribution. You can never deduct a Roth contribution. Planning Tip #1: You May Be Eligible for Roth IRA Contributions Savings in a Roth IRA grows tax-free FOREVER, and is never taxed again under current tax law. You may be able to contribute the maximum or a reduced amount to a Roth, depending on your modified adjusted gross income (MAGI). Find your filing status below and learn what IRAs you are eligible for: IF YOU ARE SINGLE and … Your MAGI is Are you in an employer plan You can contribute Amount you can deduct Any No Up to max to TRAD IRA All <$59,000 Yes Up to max to TRAD IRA All $59,000-$69,000 Yes Up to max to TRAD IRA Partial >= $69,000 Yes* Up to max to TRAD IRA Zero <$112,000 Yes* Up to max to ROTH IRA Zero $112,000-$127,000 Yes* Reduced amount to ROTH IRA; Balance to Trad IRA Zero >=$127,000 Yes* Cannot contribute to ROTH IRA;Can contribute to TRAD IRA Zero IF YOU ARE MARRIED and … Your MAGI is Are you in an employer plan You can contribute Amount you can deduct Any No Up to max to TRAD IRA Full <$59,000 Yes Up to max to TRAD IRA Full $59,000-$69,000 Yes Up to max to TRAD IRA Partial >=...
read moreAbout Michelle
Ms. Fait is a Certified Financial Planning practitioner (CFP®) with expertise in investments and tax. She holds an MBA in Finance from Yale University and a bachelor’s degree in Economics from U.C. Berkeley.
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