Financial planning – what is it and when do you use it?

Articles on line discuss how planners get paid, whether you should trust them or not and what they do.

However, the best point made may be the distinction between “answer person” and “counselor” (or “financial guide”).

You can access so much on line today that some people believe that a financial advisor is only needed when the answer cannot be found. This misses much of what a good financial planner can do for clients.

A good planner applies experience and knowledge to each client’s goals and resources to help guide them in the decisions that they face. This is real value added, but also requires a compensation scheme that allows the planner to ignore commission and other incentives so that the best advice can be given.

Furthermore, this type of guidance can involve encouraging changes in behavior, expectations and overall knowledge of finances. This takes time and cooperation between the financial planner and client. So, again, the incentives have to be correctly set.

This is why our firm charges for time, and dedicates the planning work to the individual goals of each client. There is no confusion from commissions or fees based on assets under management.

If you have comments on this, please let me know.



Economics of the downturn – thoughts for investing

Researchers are still trying to explain why we had a bubble that burst, or if we had a bubble at all….

The January 11, 2010 issue of the New Yorker has a great article on Posner, the Chicago School of Economics and other matters that have come from the sub-prime mortgage mess (a summary appears below).

Also, there is a humorous video on line, comparing Keynes and Hayek on their approaches in rap format at:

Let me know what you think



John Cassidy, Letter from Chicago, “After the Blowup,” The New Yorker, January 11, 2010, p. 28

Read more:


LETTER FROM CHICAGO about the state of the Chicago School of economics after the financial crash. Earlier this year, Judge Richard A. Posner published “A Failure of Capitalism,” in which he argues that lax monetary policy and deregulation helped bring on the current economic slump. Posner has been a leading figure in the conservative Chicago School of economics for decades. In September, he came out as a Keynesian. As acts of betrayal go, this was roughly akin to Johnny Damon’s forsaking the Red Sox Nation and joining the Yankees. Ever since Milton Friedman, George Stigler, and others founded the Chicago School, in the nineteen-forties and fifties, one of its goals has been to displace Keynesianism, and it had largely succeeded. In the areas of regulation, trade, anti-trust laws, taxes, interest rates, and welfare, Chicago thinking greatly influenced policymaking in the U.S. and many other parts of the world. But in the year after the crash Keynes’s name appeared to be everywhere. In “A Failure of Capitalism,” Posner singles out several economists, including Robert Lucas and John Cochrane, both of the Chicago School, for failing to appreciate the magnitude of the subprime crisis, and he questioned the entire methodology that Lucas and his colleagues pioneered. Its basic notions were the efficient-markets hypothesis and the rational-expectations theory. In Posner’s view, older, less dogmatic theories better explained how the problems in the financial sector dragged down the rest of the economy. In the course of a few days, the writer talked to economists from various branches of the subject. The over-all reaction he encountered put him in mind of what happened to cosmology after the astronomer Edwin Hubble discovered that the universe was expanding, and was much larger than scientists believed. The profession fell into turmoil, with some physicists sticking to existing theories, while others came up with the big-bang theory. Eugene Fama, of Chicago’s Booth School of Business, was firmly in the denial camp. He defended the efficient-markets hypothesis, which underpinned the deregulation of the banking system championed by Alan Greenspan and others. He insisted that the real culprit in the mortgage mess was the federal government. Mentions John Cochrane. Gary Becker, who won the Nobel in 1992, says that Posner and others raised fair critiques of Chicago economics. Mentions Robert Lucas and James Heckman. If the economic equivalent of a big-bang theory is to emerge, it will almost certainly come from scholars much less invested in the old doctrines than Fama and Lucas. Mentions Richard Thaler. Raghuram Rajan, an Indian-born Chicago professor, is one of the few economists who warned about the dangers of the financial crisis. In 2005, he said that deregulation, trading in complex financial products, and the proliferation of bonuses for traders had greatly increased the risk of a blowup. In a new book he’s working on, “Fault Lines,” Rajan argues that the initial causes of the breakdown were stagnant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The side effects of unrestrained credit growth turned out to be devastating. The impact of the financial crisis shouldn’t be underestimated, especially for Chicago-style economics. “Keynes is back,” Posner said, “and behavioral finance is on the march.”

Read more:

Let us know if you have questions or comments. Thanks,


Tax planning: 2009 tips and traps, and 2010 changes

Tax law changes for 2009 will require you to submit more information to your tax preparer to ensure that you get the most of tax credits and deductions. If the person working on your tax returns does not have all the proper information, you could pay too much or your return could be rejected.

Here is an overview of tax changes to consider when gathering your information:

* Making Work Pay Credit (“MWPC”), is a $400 credit to offset a reduction in withholdings enacted early in 2009. It is phased out for higher income and offset by the Economic Recovery Payment, described below. You could end up owing taxes if the credit does fully offset the reduction in withholdings (affects 2009 and 2010).
* Economic Recovery Payment (“ERP”) is a payment received as part of your social security benefits (for 2009 only), and affects the MWPC so that failing to report it could result in your tax return being rejected. The payment itself is not taxable.
* Government Retiree Credit (“GRC”) is for those not receiving social security, but affects the MWPC (2009 only). The new Schedule M reconciles the MWPC, ERP and GRC so you need all the information.
* First Time Home Buyer’s Credit is a $8,000 credit that applies to first time buyers purchasing between certain dates and requires a paper filing (electronic filings will not get the credit). If you buy the home in 2010, you have the option of amending your 2009 taxes for the credit. Note that this credit gets repaid over time on future tax returns beginning in 2010.
* Tax credit for long term home owners buying a new home, between certain dates, also requires a paper filing to avoid being rejected.
* American Opportunity Tax Credit (an expanded Hope Credit) allows use of the credit for two year more years than the Hope Credit, covering junior and senior years of college when the Hope Credit was not available.
* New Vehicle Purchase sales tax deduction (2009 only) is an additional Schedule A item, so long as your are not taking the general sales tax deduction.
* Energy Credit for solar power, fuel cells and certain energy efficient improvements are Schedule A deductions. There are two types of credit depending on what improvements were made to your home and taking the deductions requires you to have documentation.
* The Cash for Clunkers voucher is not considered income (2009 only).
* A tax refund can be used to buy U.S. Series I bonds.
* There is an AMT patch which helps for 2009, but falls back for 2010.
* There is an increased casualty and theft loss limit that helps for 2009.
* Note that a dependent child’s income is taxed when it exceeds $1,900.
* The Tuition and Fees Deduction applies to 2009.
* Unemployment Compensation has $2,400 excluded from taxable income (2009 only).
* Educator’s Expense enhanced for 2009.

Note that not all states accept the IRS changes, so the information and outcome could be different.

For 2010, some old provisions return and some new changes require action now:

* 2010 conversion to a Roth IRA has no income limit and two years to pay the taxes (please see To convert or not traditional IRA to Roth IRA).
* Certain changes lost for 2010 worth repeating (see What to watch out for in 2010 – investing, taxes and more):
* AMT patch falls back;
* Casualty and theft loss limits fall back;
* Educator and tuition and fees deductions against adjusted gross income are not available;
* Deduction of state and local sales taxes ends;
* Exclusion of $2,400 of unemployment income ends; and
* Exclusion of income from qualified distributions from IRAs to charities ends.
* The estate tax still has not been enacted retroactively, as expected (see Estate Planning – will we have a new tax law in time).

As we said before, tax planning involves a multi-year view to optimize what you end up paying (please see More Strategies – Three Year Planning…., Tax Credits and all Continued, and What to watch out for in 2010 – investing, taxes and more)

Let us know if you have questions or comments. Thanks,


What to watch out for in 2010 – investing, taxes and more

With a new year begun, now is a good time to take stock of your finances. Below are a series of areas to address. If you have questions or comments, please let me know Contact Us


The markets were up in 2009, some by over 70%, especially low grade stocks and bonds or what some have called a “junk rally”. Should you expect the same for 2010? Is there “a new normal” to which you need to respond?

If you have read any of my Newsletters, you know my response: last year’s winners usually perform poorly in the following years; many individual investors buy these investments anyway, making it more difficult for fund managers to produce results (it is harder to find good investments when you have a great deal more to invest); individual investors also often sell investments that historically go up; any thesis about a “new normal” tends to either ignore long-term lessons of history or be a flashy way of pitching a tactical move that could make sense, but only if you know when to sell as well as when to buy; and what is out of favor usually returns to favor, so that the more stable stocks and bonds that seem too boring to buy could be the right investment to be making now, as so often investment returns track back to the norm over time.

Studies show that, on average, mutual funds over decades fared slightly worse than their respective indices but individual investors did far worse. On the last point, there is a good article entitled “Stop Listening to Jim Cramer” found at Stop Listening to Jim Cramer. The point of this and some other authors worth noting is that prudent investing requires a long-term strategy, and with it the urge to resist trying to pick winners based on a fad, their most recent performance or some other short-term gauge (see The Biggest Mistake Investors Make). Investing in index funds is very boring, but the fees are low and these funds often do well over time.

So what do you do? First, create or update your investment allocation with a long-term view that does not respond to fads. This is essential. Second, rebalance at least annually, selling the excess of your winners to buy your under-performing funds. Historically, this is a way to sell high and buy low. Third, as a tactical move, consider funds investing in large cap US stocks, dividend paying stocks, and adding or increasing your allocation to international stocks. Also, use bond funds that have short-term durations and try to find bond or convertible bond funds that are buying or holding bonds that are discounted. Finally, consider adding commodities as further diversification, with the goal of obtaining gains from either new building, especially in foreign markets, or the chance that we have inflation instead of deflation.

Tax law changes

In my 2009 year-end tax planning Newsletters, I highlighted Roth conversions and other ideas that still apply in 2010. I also pointed out that, with the Bush tax cuts expiring and the need to cover deficits, counting on marginal income tax rates to rise is a safe bet. (Please see Three-year Planning for this year-end and Year-end Tax Planning – Tax Credits – Continued)

This means that you should maximize your contributions to your 401(k), SEP or 403(b) plans, use your HSA or FSA, avail yourself of the first-time home buyer credit and even sell stocks and bonds to reset the basis before the long term capital gains rate rises.

With respect to the Roth conversion, you get two years to pay the taxes for a conversion in 2010. However, the 2011 rate could be higher so this may not be an option worth taking.

In the end, we all need to follow what Congress does to update our strategies during the year.

Estate tax update

Congress is expected to reinstate the estate tax retroactively to January 1. However, instead of the $3.5 million credit and 45% rate, there are some pushing for $5 million and 35% who may win in a compromise. We will update you when we know more.

Also, remember to use your $13,000 annual exclusion for gifting strategies.

Credit – mortgages, cards, etc.

Check your mortgage rate against what you can get on refinancing now. Rates are still low so you may be able to save. Also, if your appraised value is less than the mortgage, there are government programs to help (see Making Home Affordable – refinance eligibility).

If you have not purchased a house, rates are low as are home prices, so this could be a good time to act. First time home buyers have the tax credit as an extra incentive (as mentioned above), if they can act in time.

There are actions to take regarding your credit rating and use of credit cards. Monitoring your credit score will let you know if you can qualify for good loans and credit cards, as well as alerting you to any potential identity theft.

Check to see what accounts are open and use them, reasonably. An account that is not used can be closed under the new banking laws, which has a negative impact on your credit score.

If you do have higher fees or rates imposed, fight to see if you can get your old terms back. Many notices are sent without real scrutiny of your particular situation so, if you have a good history, you may win this fight. Also, opt out of the overdraft fees ($39 per time you go over your credit limit).

If you are looking for a new card, consider credit unions, as their rates are capped, unlike other credit card issuers.

Finally, consider adding a child who is in college to your card, because the new law requires them to prove sufficient income to afford the payments.

Estate plan and life insurance

As noted above, we await action from Congress on the federal estate tax.

However, you still need to make sure that your current will/trust/durable power of attorney/medical directive/etc. work under state laws, have all the people you still want as your fiduciaries and reflect any other changes you have experienced. If not, you should update these documents.

Other financial matters

Do you have an umbrella policy? Did you buy or update your disability policy? Have you checked to see if you can get a better deal on your auto insurance? Would increasing the deductible make sense for your risk tolerance and cash flow?

There are many other items to review. Please check out Finance Health Day – your own financial planning focus


Even if 2010 is not a repeat of 2009 for investments, there are many steps to take to make certain that you are in an optimal position on all your financial fronts.

Let us know if you have questions or comments. Thanks,


Year-end Tax Planning, Tax Credits, and all Continued

There are two parts to this e-mail – year-end moves for 2009 and planning for long-term capital gains rate changes over the next three years…..

First is a repetition of some year-end ideas to make sure you have addressed all that you should to save taxes, between 2009 and 2010 combined.

One idea to check out is the sales tax deduction for purchase of a large item like a new car, especially with all the sales on cars at year end. These and other ideas are reprinted from Kiplinger’s below, along with links to other articles.

Also, be careful about withholdings – some people had reductions early in 2009 and will end up owing taxes if they do not change the withholding rate now or pay an estimate

Remember to use the 2009 $13,000 gift exclusion before it expires.

Finally, you can adjust your withholdings the other way if you will have the benefit of the first-time home buyer credit or expanded tuition credit.

Second is a strategy on capital gains. As we said, this is a year for planning 2009, 2010 and 2011 taxes. The long-term capital gains rate will remain at 15% in 2010, but then the rate jumps back up to 20%. This argues for selling in 2009 or 2010 to increase the basis, buying back and then having less taxed in 2011 or later at the higher rates.

Reprinted below is a table from Wikipedia along with their description of the US Capital Gains Tax.

There are many issues raised in this Newsletter, so let me know if you have questions or comments.



Review Your Year-End Tax Plans

Making the right moves now can save you plenty.
By Mary Beth Franklin, Senior Editor, Kiplinger’s Personal Finance
November 17, 2009

The end of the year is fast approaching, but you can still take steps to lower your 2009 tax bill. Don’t focus just on this year, though. Look ahead to next year as well. That may help you decide whether you should take advantage of certain tax breaks due to expire at the end of this year, such as a sales-tax deduction when you buy a new car, or delay action so you can reap a tax break still available in 2010, such as claiming a tax credit of up to $1,500 for installing energy-efficient home improvements.

In general, it makes sense to accelerate as many deductible expenses into this year as possible to reduce the income that’s taxed on your 2009 return. But that’s not always the case. If you expect to be in a higher tax bracket next year, for example, you may be better off postponing some deductible expenses until 2010, when they will be worth more.

Those who itemize have plenty of leeway when it comes to shifting deductions. Start with state and local income taxes. Mail your January estimated payment in December and you can claim a deduction for the payment this year, not in 2010. (Warning: this doesn’t work if you’re subject to the alternative minimum tax. State taxes aren’t deducted under the AMT, so there’s no benefit in accelerating the payment.) Or, make your January 2010 home-mortgage payment before the end of this year and you can deduct the interest portion in 2009.

Accelerating charitable contributions planned for next year into this year will boost your itemized deductions. Just make sure your mail the check or charge the donation to your credit card by December 31 so the gift counts for 2009. And if you’re close to exceeding the threshold of 7.5% of adjusted gross income for medical expenses, consider getting and paying for elective procedures in 2009.

Sometimes you have to spend money to cash in on certain tax breaks, such as buying a first home or purchasing a new car. But pay close attention to income eligibility limits to make sure you’re able to capture these and other tax breaks. Some incentives, such as the home-energy tax credit, are not tied to your income.

In the coming weeks, we’ll be rolling out a new tax tip every weekday. You can sign up for outo have the best and latest tax information delivered right to your in-box.

Let us know if you have questions or comments. Thanks,