Author Archive for JS Wolff

Financial Wellness for 2010 & Beyond – Plastic Revisited

Published by JS Wolff on February 2, 2010 in Economy and Financial Education. 1 Comment Tags: , , , .

Just last week, the Senate approved legislation increasing the federal government’s borrowing limit by $1.9 trillion.  When signed into law the federal government will be able to borrow more money than at any time in our country’s history, making our total national debt a mind numbing $14.3 trillion.  And this will only allow us to pay our bills through 2010!

Using credit for money

Putting this into perspective, according to the Heritage Foundation the federal government will take in an estimated $2.19 trillion of taxes in 2009.  Simple math tells us that owing $14.3T while collecting “only”$2.19T is not a recipe for fiscal health. So last week’s vote was essentially the Senate’s way of literally, passing the buck.  Recent groundbreaking election results indicate that American’s are telling elected officials to stop this madness.

But maybe leading by personal example is the best way to initiate national change. Instead of raising our personal credit card limits and unsecured debt as many Americans have done in the last decade; let’s consider taking a retro approach to plastic. Prior to the introduction of the binge inducing revolving card, the standard plastic issued was known as a “charge card”.  And now this concept is coming back.

What’s the difference? As opposed to revolving credit cards, most charge cards require payment in full at the end of each month.  If you can’t pay, typically a late fee is charged.  So while old habits are hard to break, after a few late fees you start to think long and hard before putting something in the shopping cart.

Charge cards can be less risky for both consumers and card issuers.  For the consumer, it’s obviously more difficult and painful to accumulate debt. Issuers like them because there’s less chance than with a revolving card that someone will be unable to repay them. There’s a much shorter leash.

So go ahead, buy anything you want and put it on the charge card, as long as you can pay for it by the end of the month. And then call your Senator to convey clear grass roots message…”I’m not buying stuff that I can’t pay for in 30 days, repeat after me!”

Financial Wellness for 2010 & Beyond – The Decade of Roth Savings Plans

Published by JS Wolff on January 19, 2010 in Financial Education, Financial Tools and Financial Wellness. 0 Comments Tags: , , , .

A real change over the next decade could be a massive reconsideration of tax deferred savings plans. Exemplifying this shift, the new 2010 Roth IRA conversion rules seem to be getting lots of press and stirring widespread investor interest. So what’s behind the buzz?

In our September 09’ blog, “Rethinking the 401(k) Pitch”  , we underscored how the tax landscape had changed since IRA’s were introduced in the early 80’s.  We recounted that federal income tax brackets reached as high as 70% when 401(k)’s and IRA’s were introduced and it made perfect sense to shield everything we could from the taxman and bank on taking the money out at lower tax rates in the future

For the following 30 years, the retirement planning community coached us to maximize tax deferral benefits of the 401(k). But over those same 30 years, tax rates moved steadily downward. Currently the top federal rate is 35%, which is historically very reasonable. However, with the current out of control budget deficits and government spending, this trend may very well start to move the other way. Translation…we seem to be on a collision course toward higher taxes.

The 2010 Roth conversion affords a timely opportunity for a course correction. You can pay taxes now, hopefully before they go up, and be set for tax free distributions at retirement.  It works like this:

  • If you have an existing traditional IRA, you can convert it or part to a Roth IRA. A Roth IRA allows tax-free growth and tax-free income — if you are at least age 59½ — and as long as you have held your Roth account for five years or longer.
  • When you convert, income taxes will be due.  The amount converted will be added to your W-2 income.
  • For 2010 conversions only, you can include the full conversion amount on your 2010 federal income tax return or you can split it equally between your 2011 and 2012 tax returns.

So the filters to making the decision to convert are…

  • Do you have an existing traditional IRA?
  • Do you think taxes (or your tax rate) will be going up the future?
  • If you believe they are going up, do you think this will directly affect your likely retirement income?
  • Do you have the extra cash to pay the taxes over the next 2 years?

If you answered, “yes” to all of the above, then a Roth conversion may be the right option for you.

To fine tune your Roth conversion decision process, you might want to model a few scenarios on a calculator built for this purpose.

Financial Wellness for 2010 & Beyond – Interest Payments

Published by JS Wolff on January 2, 2010 in Financial Tools and Financial Wellness. 1 Comment Tags: , , , .

The next few entries look at creating a positive financial future into the next decade by employing some common sense financial wellness principals.

First let’s consider using someone else’s money for to finance our stuff.

The financial wellness rule of thumb is that borrowing money to make a purchase only makes sense if the commodity to be purchased has a realistic chance of appreciating in value.

In other words, both the lender and the borrower should profit from the transaction. The lender benefits from the interest earned and the borrower’s asset has an opportunity to grow in value beyond the cost of interest paid.  While the real estate market has taken a recent short term hit, over the long haul purchasing the right property in the right area has a reasonable potential to achieve this objective.

But as we know, realistically, this mutually profitable borrowing scenario may not always possible.

For example, most of us need a car and it obviously is not an appreciating asset. If we have to finance a car or anything else, the key is to minimize the collateral financial damage.

Calculating the cost of borrowing

Calculating the cost of borrowing

Edmunds.com has some useful calculators and I used this one to model buying a car.  My fictitious purchase was a $30K car with a $5K down payment, financing the purchase over 60 months at a currently competitive rate of 5%.  Including taxes, license and other fees, the financed amount came to just shy of $28K, making the payment $527 a month. The total finance cost over those 60 months is $31,620 or $3,620 of total interest.  The monthly interest cost then calculated to about $60/month.

I also ran the numbers as if my credit score was damaged and the best interest rate offered was 9%.  The payment popped up to $580 per month making the total interest paid over the 60 months a hefty $6,800, or $113 per month in interest.

The next decade advice for those whom the second example hits close to home, would be to live with the clunker, ride a bus or do whatever while working on repairing the credit problem. Put the extra $53 per month totaling nearly $3,200 in your pocket, instead of someone else’s.

Financial Adrenaline

Published by JS Wolff on November 5, 2009 in Financial Education and Financial Wellness. 0 Comments Tags: .

What motivates someone to change their financial behavior? For example, can someone who is prone to spend every dime really be turned into a saver?

Fear can certainly be a motivator. For some it takes a tangible, in your face type fear like “I will lose my car if I can’t make the balloon payment that’s due in three months”. The force behind saving to avoid losing your wheels can be powerful.  But when the pain goes so away, often so does the temporary positive behavior. But still, something kicked in that worked.  I call this phenomenon, “adrenaline induced” financial behavior change.

Others are learning that adrenaline inducing techniques can work in more sustained, positive ways.

Inspired by a Harvard professor who combined the attraction of winning prize money with a savings program, a group of credit unions in Michigan created the “Save to Win” program. Members who put $25 or more into a Save to Win one-year CD are entered into a monthly “savings raffle” for prizes up to $400, plus one annual drawing for a $100,000 jackpot.

The outcome?   In a 6 month period the program attracted over $3 million in new deposits – many of which were from people who not been successful saving in the past.

Changing our financial heart rate, whether it’s a chance to lose big or win big looks like it has real possibilities. For me, longer term financial outcomes can change my heart rate if I let myself dream about something of value in vivid detail.

What financial outcome, if you really thought about it, would elevate your heart rate? If you can get really “pumped” about it, change will not be far behind.

Saving For College Not Adding Up Financially

Published by JS Wolff on September 28, 2009 in Financial Education and Financial Wellness. 0 Comments Tags: , .

Several significant trends are signaling a reset of how families plan and think about college costs. The evidence suggests that creative solutions will be required as key economic factors are conspiring to make a college degree financially more elusive.

Let’s look at the new realities of saving for higher education:

  • Trend # 1 – College costs are spiking due to reduced funding
    College costs have traditionally escalated 5%-6% per year already doubling the normal rate of inflation.  But now in many States, budget shortfalls have taken fees increases to a new level.

    California is a particularly dramatic example.  University of California Regents will soon vote on a 32% fee increase which is in addition to last year’s nearly 10% fee hike. This story is being repeated in varying degrees throughout the country. 

  • Trend #2 – Growth expectations of college savings accounts have been unrealized
    According to the Boston consulting firm Financial Research, the value of 529 college-savings accounts sank 21% last year.  For many families whose son or daughter was on the verge of starting school, this loss could easily represent a year or more of college funding.

    While the investment world may suggest that 2009’s year to date market recovery supports remaining in the market, many burned college savers are reluctant. A look at market history suggests that their hesitancy may be well founded. In the last 100 years there have never been two significant downturns as close together as the 2000-2003 tech bubble and 2008’s global meltdown. Especially for those families whose kids are already in their teens, the prospect of another near term sell-off is a chance not worth taking.

  • Trend # 3 – Parents are saving less for college
    Even before the downturn parents were struggling to save for college. A 2007 study by Sallie Mae, the country’s largest source of funds for higher education, found that parents of high school children applying for college had saved less than half of what they needed to cover the expected expenses. What’s more, one in five hadn’t saved anything at all.

    In May of this year, in another survey released by Sallie Mae, 47% of parents reported saving less or aren’t saving at all for their kids’ education due to the current economic crisis.

    While the points listed above may feel like the obstacles are growing insurmountable, there are ways to be proactive in this tough environment. And remember, while there are varying opinions of how much a college degree is worth over a career, there is little debate that it remains a solid investment.

So while a college degree may be more difficult to pay for in the future, here are some strategies to pull it off:

  • Make college planning a family affair – get grandparents and other willing extended family members in the game.  Anyone can make a contribution to a 529 Plan and rather than giving something that will end up at next year’s garage sale, have them contribute to the college account.
  • Use Conservative Asset Growth Projections and Allocations – Obviously stock market exposure is more tolerable the longer you have before your student reaches college. That being said, it may be more realistic and comfortable in today’s world to position college assets for a 6% or 7% long term return as opposed to a 9% or 10% return.
  • Manage Expectations – Young people are very resourceful if they need to be. Let your kids know in their junior high years that getting through college will be a team effort and everyone will be required to pitch in, including them. My son’s college roommate knew well in advance that his parents could only afford a total of $10,000 for college costs. By holding down a couple of jobs he graduated with an engineering degree with minimal outstanding loans and somehow seemed to have a smile on his face in the process.
  • Consider a Low Cost General Ed Track – Employers typically don’t care where a candidate started their degree, but rather where it was finished. By taking transferable community college courses before moving to the graduation school of choice, overall education costs can be significantly reduced. Among other benefits, this allows both you and your student two more years to save.

Rethinking the 401(k) Pitch

Published by JS Wolff on September 14, 2009 in Benefits, Economy, Financial Wellness and Investment. 0 Comments Tags: , , , .

For nearly 30 years, employees have been coached that the best way to save for retirement is to take advantage of tax deferred investing, most prominently through their 401(k) plans. This strategy has always been anchored in the hope that lower tax brackets await us during our retirement years. But current economic realities are causing many in the financial community to question whether tax deferred saving remains a healthy long term strategy for employees.

When 401(k) plans were first rolled out in 1981, the income tax rates and bracket structure were very different than today.    The top federal tax rate was nearly 70% and there were 15 different income tax brackets separated by just a few thousand dollars of income (See Tax History).  Given those conditions 401(k) contributions presented a great opportunity to both avoid high current rates and reduce W-2 income in the contribution year just enough to move into a lower bracket.  So it seemed like a double win, lower taxes in the contribution year and in the future, when the Plan was accessed during retirement.

Since 1981 the sustained effects of “Reaganomics” led to a steady decline of both tax rates (highest federal bracket from 70% to 35%) and the number of brackets (from 15 to 6). During this period, with few exceptions, the US economy experienced robust economic growth.  401(k) Plans got even better as a result. To attract and retain employees, employers with healthy bottom lines began to offer generous matching incentives linked to 401(k) participation.

But the length and depth of the current recession is now changing the outlook for today’s 401(k) savers in two significant ways. First and most importantly, the government funded stimulus packages and propensity to grow overall government spending must be paid for at some point. This future “balance due” can only offset by higher taxes or a devaluing of the dollar (inflation).  The second effect of the current recession is that many companies have cut back or eliminated matching 401(k) contributions.

So the question for the employee now becomes, “if I no longer receive any company matching, and I may have to pay higher taxes on withdrawals in the future, is the 401(k) still the right way to save?”

Enter sound savings principles and the Roth 401(k) to the rescue.  Match or no match, automation and consistency are two key factors in any saving’s strategy.  401(k) plans are still great because the money is automatically deducted from every paycheck before it can get spent.  The recently introduced Roth 401(k) addresses the more daunting issue of higher taxes in the future by allowing after tax contributions now and tax free retirement withdrawals in retirement.

So rather focusing on the now suspect virtues of tax deferral, maybe it’s time to pitch the 401(k) as primarily a great way to save, period.  Wise portfolio allocations and a balanced approach between the Traditional 401(k) and the Roth 401(k) will address the constant winds of change that remain outside of the investor’s control.

The Health Wellness – Financial Wellness Connection

Published by JS Wolff on September 1, 2009 in Benefits, Financial Wellness and for Employers. 0 Comments Tags: , , .

It’s been well documented that effective corporate health wellness programs have produced positive results for employees and employers over the past twenty years. Probably the most studied, extensive and longest running program is Johnson and Johnson’s “Live for Life”(now called the “J&J Health Wellness Program”) which was rolled out in 1979. Incredibly, due to both financial incentives and a corporate culture that actively promotes healthy behavior, 90% of J&J’s US employees have participated. And considering this includes a pool of 45,000+ employees, the statistics derived from the study are significant.

Defining that a successful health and wellness program, “…must demonstrate that they can improve the risk profile of employees as a whole, and, in particular, those employees at highest risk.”, the study found that J&J’s program has done just that.  Additionally, as I’m sure they had hoped, helping their workforce become healthier also helped J&J’s bottom line. Overall it was calculated that their Health & Wellness program saved J&J $38 million from 1995 – 1999.

When they detailed where the savings was realized, which approximated $224 per employee per year, over $70 of that figure was due a reduction in mental health visits.  Certainly, a significant portion of these mental health visits were stress related. A Yale University Study cited on the National Institute of Occupational Safety and Health(NIOSH) website found that 29% of employees “feel quite a bit or extremely stressed at work”.

Apparently the J&J health wellness program did a good job addressing stress related issues. And they probably picked up a bonus here as well. While more difficult to measure, it’s not hard to imagine that someone who is less stressed is also likely to be a more productive employee.

But there’s good reason to believe that health wellness programs alone are not dealing with the primary root causes of stress. According to a 2007 survey by the American Psychological Association 73% of the respondents cited money as a significant source of stress in their lives. And a recent WebMD article cited an AP-AOL study which revealed that “debt-related stress was 14% higher in 2008 than in 2004. Those who report high levels of debt stress suffer from a range of stress-related illnesses including ulcers, migraines, back pain, anxiety, depression, and heart attacks.”

When law enforcement officials are trying to track down criminal activity, their first step is often to “locate the money trail”.  Similarly, I’ve found that for employees, their personal money trail is the source for all kinds of self defeating, stressful behaviors. While the term “work-life balance” implies a healthy lifestyle, gaining a “money-life balance” provides a vital dimension in the process toward personal wholeness and health.

The right Financial Wellness program can help your workers achieve this vital balance, while complementing and driving enhanced returns for your existing Health Wellness initiatives.

Here’s what to look for as you consider this critical addition:

- Its best to select a provider that is not associated with a financial provider even though it may be tempting to default to your 401(k) vendor. Trusted information is paramount here.  If someone has something to gain by selling more mutual funds, there is reason to suspect the objectivity of the education.

- You’ll want a program that reaches employees in multiple ways including leveraging current web trends. New “Web 2.0” formats are being introduced to deliver financial education in engaging formats that deliver lots of information in just a few minutes.  Blended with onsite workshops and personalized, education-only money coaching, employees can interact with the information however they feel most comfortable.

- And finally, to get buy-in from other key decision makers, look for a financial wellness program that provides the methodology, metrics and reporting tools to document year over year financial health improvement. While some measures may not be as direct as the Johnson and Johnson study, measuring a reduction in personal financial stress is doable.  In fact, there is a well researched assessment tool called the “Personal Financial Wellness Score” which measures personal financial stress and compares an individual’s results to national averages.

Raising Financially Responsible Kids Accidentally

Published by JS Wolff on July 6, 2009 in Financial Education and Financial Wellness. 0 Comments Tags: , .

Recently after conducting a financial education workshop for a high tech company, a young lady in her early 20’s wanted to get together to discuss how she could retire early. She had seen an infomercial that described the beauty of passive income and decided it was her ticket to an early exit.

Unfortunately, just after learning of her financial ambitions, she informed me that she had maxed out several credit cards and financed two cars (one for her boyfriend) to the tune of a significant five digit debt.  Even though she was making a good salary as a Human Resource professional, she was unable to pay her monthly bills and had stopped contributing to her 401(k).

Further, responding to the stress, she had just contracted with a credit repair outfit (another TV ad) to whom she had already paid $1,500 for services she was unclear about.  The only thing she knew was that the $1,500 somehow did not offset any of her debt.  Needless to say, it didn’t seem like passive income was going to happen anytime soon.

I wish I could say that I was a perfect dad when it came to teaching my kids about money, I wasn’t. But it looks like my three 20-something kids are avoiding the financial sabotage described above. In hindsight, I think the best idea we transferred as parents was that you don’t keep it all for yourself.  And though none of this was premeditated, the encouragement to give money away resulted in several hoped for financial behaviors and character qualities.  To name a few…

  • Although we were inconsistent about doling out an allowance, our kids figured out ways to make money and still chose to give some of that away. Seemed like it was more meaningful to give money that they had actually earned.
  • Don’ think the word “budget” was ever mentioned but  they seemed to pick up the idea on their own…they only spent what was left over after giving so they had to think more intently about financial  trade-offs early on.
  • The practice of giving apparently drew their attention to needs outside themselves, two of them have spent time working with non-profits and third world countries.

This blog entry is as close to a “raising financially responsible kids” book as you will ever get from this me.  Anything good that happened was purely by accident. But the best part is that accidents can sometimes have surprisingly decent outcomes.  And, as you probably noticed, I think my kids are cool.

As a final thought in keeping with our recent celebration of Independence Day, Thomas Jefferson spoke to the younger generation of his day regarding the wisdom of maintaining personal financial freedom…

“But I know nothing more important to inculcate into the minds of young people than the wisdom, the honor, and the blessed comfort of living within their income, to calculate in good time how much less pain will cost them the plainest stile of living which keeps them out of debt, than after a few years of splendor above their income, to have their property taken away for debt when they have a family growing up to maintain and provide for.”

Financial Wellness and Unintended Consequences

Published by JS Wolff on June 8, 2009 in Economy and Financial Wellness. 0 Comments Tags: , .

If my brother-in-law was lined up with 10 people and you were asked to pick out the economist, he would be easily identified. In the 35 years I’ve known Mitch, he has never cared a lick about the clothes he wears or the car he drives.  There is no pretense or image thing going on whatsoever.  He’s just a solid, albeit quirky guy who happens to be intellectually brilliant. And doing things his own way,  he retired early, owns a free and clear home in beautiful La Jolla, CA (my sister’s influence) and accumulated a fair amount of wealth, while never wavering from his extreme aversion to risk.

Since I’m in the financial education business, you can imagine that our conversations have touched on current economic events from time to time. He generally replies like the university professor he once was, exploring all the possible outcomes and remaining specifically non-committal. However, I was a little surprised by his very direct response to my most recent question…”What will be the most pronounced effect of the government’s stimulus package?”  “Inflation”, he replied.

While we don’t always agree, I totally concur that the recent government bailout actions will have inflation as their unintended consequence.  And if we think that a 40% market correction is bad, couldn’t a 40% devaluation of the dollar create the same effect?  The principles I learned in Econ 101 taught me that you can’t just print trillions of dollars and inject them into an economy without devaluing the underlying currency.  And it even feels more intuitively uncomfortable that we are using this “monopoly money” to buy assets that nobody else wants.

As Warren Buffet stated last month when commenting about where the bailout resources will come from, “I haven’t had my taxes raised,” said Buffet, “My guess is the ultimate price will be paid by a shrinkage of the value of the dollar.”

There are recent examples of country’s running into problems in this same way. In the early 90′s, the Yugoslavian government ran a budget deficit that was financed by printing money. This led to a rate of inflation of 15 to 25 percent per year.  The numbers actually got worse as they were dealing with other problems like socialism and rampant corruption… that are hopefully not part of our future.

Please hear me clearly, I don’t think the government should have stood idly by while the markets were imploding and institutions were failing at an alarming rate last year.  But for main street folks like you and I, it’s a good time to be thinking about measures to combat the potentially devastating effects of inflation.  Warren, Mitch and I are apparently not the only ones who are on this track. You may want to peruse this Journal article to learn more about some inflation fighting “vitamins” for your personal consumption. 

Financial Wellness and Home Ownership

Published by JS Wolff on May 31, 2009 in Economy and Financial Wellness. 0 Comments Tags: , .

There’s a difference between reading about the national housing crisis in the newspaper and actually seeing one of your neighbors lose their home. That’s just what occurred two doors down from us.

My neighbor, a hardworking guy with a nice family did what he thought was the right thing at the time. After all it was 2004 and with local real estate prices spiraling upward, it seemed to him that it was now or never to own a piece of California real estate. He plunked down most of his savings for the down payment and fatefully was directed to an “option ARM mortgage” (which as early as 2006, were referred to in Business Week as a “nightmare mortgage“).  In addition, he didn’t quite have enough for the down payment and borrowed the remaining amount from a family member.

All was going according to plan. The following year, the home’s value had escalated and he tapped a home equity line to pay back the family member and consolidate a few other bills. But just a few years later, the perfect storm of 2008 arrived.

By the time the dust had settled, not only did they owe more than the home was worth, gone were the low payments which marked the first five years of his “creative” mortgage plan.  If he wanted to stay in his home which was still dropping in value precipitously, it was going to cost him another $1000/month.  He literally handed the keys back to the bank.

For every disturbing story like this, there are many out there who will vehemently make the case that home ownership has been vital to the growth of their personal net worth. Yet, as I previously suggested in the midst of the stock market meltdown, the best time to study an asset class is when the thrill is gone, or at least on pause.

There have recently been some astute articles which challenge the validity of viewing our homes as long term wealth builders. Notwithstanding that housing prices nationally have reverted to 2002 levels, the question is, should I see my home as an investment or merely a great place to live? Last week Wall Street Journal Columnist, Brett Arends, concluded that, by his calculations, the real return on buying a home is lower than buying government bonds.
Over the years, anxious young homebuyers told me that they were justifying their home purchase because taxes were eating them alive.  Homeownership was a wise move because the tax deductibility of their new mortgage interest was going to net their payment to the near equivalent of renting.  Their logic was flawed by a significant omission…property taxes. In fact, I have calculated for many, at least in California, that the mortgage interest deduction benefit is just about totally offset by the annual property tax expense.

Sounds like I am anti-homeownership, but the truth is, I own one.  But having lived 19 years in the same house (not really the same house, we gutted the place 8 years ago and added a 2nd story), I have learned that, just like stocks, the residential real estate market is cyclical.  I’ve just talked myself into not caring.  It’s been enough that our house has served as a stable headquarters for the wellbeing of the family. With respect to its monetary value, let the chips will fall where they may, if and when we ever move.