The Association Factor

December 27, 2015 — Sam H. Fawaz

What’s the best way to be happy and successful? What do most happy and successful people have in common?

If you answered “money,” or anything to do with meditation or networking skills, you’re off the mark, according to Jason Butler, a former financial planner who is currently working as a motivational speaker. He says that after reading biographies of political, business, scientific and charity leaders, and hearing the personal stories of several hundred financial planning clients, one factor tends to be present in the happiest, most successful individuals, and it’s entirely in your control: who you surround yourself with. Call it your “association factor.”

There are several dimensions to this. If you’re an athlete who wants to improve your fitness or skill level, hanging out with (competing with) superior athletes will do more to help you ‘up your game’ than if you were associating with people you can beat without breaking a sweat. If you employ or work alongside people who have a diligent and service-oriented attitude, you can delegate work, avoid micromanaging, and feel confident that the workload will be shared fairly. If your social circle is full of people who are pessimistic, negative, defeatist or cynical, then it will pull you into pessimism or defeatism. We all know people who suck the life out of anybody they’re around. Why let it happen to you?

Butler says that cultivating meaningful personal relationships with the right types of people should be an essential priority for anyone who wants to live a meaningful, fulfilling, successful and happy life—which basically means all of us. You should consciously try to surround yourself with people who are optimistic, positive, capable and excited about the future.

The interesting thing about this advice is how few people seem to be intentional about their friendships. Most of us make friends by happenstance, because we shared an experience together or have something in common. Consciously creating a circle of friends, and constantly looking for business relationships that will be productive and supportive, is not often a priority.

But it can be, and the results could be dramatic.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

I wish everyone a happy 2016 with many successful associations!

Sam

Source:

https://www.linkedin.com/pulse/one-thing-all-happy-successful-people-do-jason-butler?trk=prof-post&utm_content=bufferf8382&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in Financial Planning, General, retirement planning. Tags: , , . Leave a Comment »

Three Year-end Tax Reduction Tips

December 19, 2015 — Sam H. Fawaz

Even though April 15 now seems a distant deadline for filing your 2015 tax returns, in order to take advantage of some of the biggest tax reduction strategies, you have to act before the end of this year. Without further ado, here are three “go-to” maneuvers that you may want to execute by December 31.

1. Maximize Contributions to Tax-Advantaged Accounts

Contributing to your employer’s retirement plan is one of the smartest tax moves you can make. For 2015 (and 2016) you can save up to $18,000, or $24,000 if you are age 50 or older. Because contributions are typically made on a pretax basis, qualified plans such as 401(k)s and 403(b)s help to lower your current taxable income. Plus, the money in the account is allowed to grow tax deferred until you begin taking withdrawals, usually in retirement.1

If you are interested in supplementing your contributions to your employer’s plan, you may be eligible to fund a traditional IRA with a deductible or non-deductible contribution. You can contribute up to $5,500 in 2015 and 2016, adding $1,000 to that total if you are 50 or older and catching up on your retirement savings. Like 401(k)s, IRAs offer a “one-two punch” in tax savings: tax deferral on your investment until you start withdrawing money, along with a potential tax deduction on all or part of your annual contribution if you meet the IRS’s eligibility rules.

You could also direct your savings to a Roth IRA or a Roth 401(k), if offered by your employer. Although contributions to Roth retirement vehicles are made with after-tax dollars, withdrawals are tax free provided certain conditions are met. Keep in mind that the annual contributions limits for 2015 — $18,000 per individual or $24,000 for those age 50 or older — apply cumulatively to all employer-sponsored plans, Roth or traditional.

Even though you have until tax day — April 15, 2016 — to fund an IRA for 2015, why wait? Funding it by year-end potentially gives it all the more time to grow in a tax-deferred shelter.

If you’re self-employed or own a small business, you may have just enough time to set up a small business retirement plan before year-end. In some cases, you can wait until next year to fund it, but the plan must be established in 2015 to get the deduction this year.

2. Consider Tax-Loss Harvesting

Simply stated, tax-loss harvesting is the process of balancing portfolio losses against gains to help minimize your exposure to capital gains tax. In a year like 2015, in which the stock market experienced a significant late-summer swoon, such a strategy may be particularly attractive.

Generally, the IRS allows you to offset capital gains with capital losses to the extent of your total gains — and above that, you may be allowed to deduct up to $3,000 against ordinary income each year, thus potentially lowering your tax liability. Losses in excess of that limit can be carried over to the next year.

Yet as simple as this strategy may sound, it is fraught with caveats. For starters, before selling, consider the length of time you have held a security. Securities sold within a year of their purchase can generate short-term capital gains, which are taxed at the investor’s ordinary income tax rate — up to a maximum rate of 39.6% for the highest earning individuals.

Gains from the sale of securities held for more than one year are considered long-term gains and are taxed at a maximum rate of 15% for most Americans, but that rises to 20% for those with taxable incomes of over $400,000 ($450,000 for joint filers). In addition, the Medicare surtax on net investment income, which includes capital gains, results in an overall top long-term capital gains tax rate of 23.8% for high-income taxpayers.

Also keep in mind that the IRS prohibits you from claiming a loss on the sale of a security in a “wash sale.” The rule defines a wash sale as one in which an individual sells or trades securities at a loss and then goes on to buy additional shares in the same or substantially identical security within the 30 days before or after the date of sale.

The bottom line on tax-loss harvesting? If you are considering employing this strategy, evaluate carefully the investments you may select for sale, then discuss your plan with a trusted financial advisor. You certainly don’t want to wag the investment “dog” with the tax “tail”.

3. Timing Is Everything

Another popular year-end tax management strategy — particularly if you expect your taxable income to be higher than normal for the 2015 tax year — is to accelerate tax deductions and, where possible, to defer income. For instance, you could increase your charitable deductions or make advance payments for state and local taxes, insurance premiums, interest payments, medical procedures, or other deductible expenses for which you may be able to control the timing. Similarly, you may be able to delay some forms of discretionary income or hold on to stocks that have performed exceptionally well at least until early 2016, being mindful of what you expect your tax/income situation to be next year. Before prepaying any state income or local property taxes, be sure that the alternative minimum tax does not apply to you.

These are just some of the many steps you can take to help keep your taxes in check. Work with your financial and tax advisor(s) to make tax planning an integral part of your overall financial plan.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. If you would like to review your current tax situation or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Disclaimer:

1Withdrawals from traditional IRAs are taxed at then-current income tax rates. Withdrawals prior to age 59½ may be subject to an additional federal tax.

Posted in Financial Planning, General, retirement planning, tax planning. Tags: , , . Leave a Comment »

Rate Hike Hype

December 15, 2015 — Sam H. Fawaz

While I’m still a tad skeptical, we will almost surely see the U.S. Federal Reserve Board (Fed) start the long process of ending its intrusion into the interest rate markets, by allowing short-term rates to rise starting on Wednesday. It will be the first time the Fed has raised rates since 2006, and for some it will mark the beginning of the final chapter of the Great Recession.

Since 2008, as most of us know, returns on short-term bonds have been at or near zero percent, which is a consequence of the Fed keeping the Federal Funds rate—the rate at which it will lend banks virtually unlimited amounts of money, short-term—at 0.125%. The average Fed Funds rate has historically been 3.5% to 4.0%, so this is a considerable amount of stimulus.

At the same time, the Fed has purchased more than $3.5 trillion worth of Treasury securities and home mortgage pools as part of its quantitative easing (QE) programs, bidding aggressively against much smaller buyers, which is another way of saying: forcing the rates on these bonds down closer to zero.

Pulling back out of these interventions is going to be tricky, in part because shifts in interest rates have a direct impact on a still-fragile U.S. economy (higher rates mean higher borrowing costs, potentially less corporate investment and lower profits), and even trickier because we don’t know how investors will react. In the past, the markets have panicked at the mere mention of a cutback in Fed involvement, and (more recently) have also risen on the same news, presumably because people drew encouragement from the confidence the Fed was showing in the strength and resilience of the U.S. economy.

There are also some tricky mechanical problems. The central bank will try to control the extent that short-term rates rise and fall by raising the interest it pays to banks for the reserves held at the Fed, and also cautiously raising the amount it pays money market funds for short-term trades known as “reverse repurchase agreements.” The mechanics are highly technical and complicated—and still unproven, although there are reports that the Fed has been conducting tests for the past two years.

As the markets react, either upwards or downwards, there are a few things to keep in mind. First, despite the headlines soon to be blaring from every financial section of every newspaper in the country, the rate is expected to move very modestly from .125% to .375%—clearly a small first step in a long journey toward the long-term average. After each step—prominently including this one—the Fed will evaluate the consequences before deciding to make future changes. If the economy slows, or if there are signs that inflation is falling below the Fed’s 2% annual target, it could delay the next move by months or even years. That caution greatly reduces the danger of any kind of serious economic pullback.

It’s also worth noting that the Fed has announced no plans to sell the nearly $4.2 trillion worth of various bonds—including the aforementioned Treasuries and mortgages—that it owns. At the moment, the bank is simply rolling over the portfolio, meaning it reinvests $21 billion a month as bonds mature. Eventually, most observers expect the reinvestment to stop and the Fed to allow the huge bond holdings to mature and fall off of its balance sheet. The fact that this is not being done currently reflects the exquisite degree of caution among Fed policymakers, who don’t want to rock the boat too fast or too hard.

Finally, some have wondered about the future of mortgage interest rates as the Fed begins a cautious exit from the bond markets. Interestingly, recent history shows that mortgages haven’t been especially influenced by changes in the benchmark rate. The last time we saw extremely low interest rates, after the tech bubble burst in the early 2000’s, the Fed brought its Fed funds rate down to 1%. It began raising rates by 0.25% a quarter starting in the summer of 2004, but over the next four months, the 30-year fixed-rate mortgage actually fell from 6.3% to 5.58%. By the time of the last increase in the summer of 2006, mortgage rates were running at 6.68%, just a half-percent higher than they had been at the previous Fed funds rate low.

Nobody knows exactly what to expect when the announcement comes on Wednesday, but you can look for the investment markets to bounce around a bit more than usual, and economists—including the teams employed by the Fed—to examine every scrap of data about the impact on the economy over the next quarter. At that time, Fed policymakers will face another decision, and there is no reason to expect them to be less cautious than they have been recently. For many of us, the rate rise should be reason for celebration, a sign that the long recession and period of economic uncertainty is finally starting—carefully—to be put in our rear view mirror.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

https://www.washingtonpost.com/news/where-we-live/wp/2015/12/14/what-a-fed-rate-hike-could-mean-to-mortgage-borrowers/

https://www.washingtonpost.com/news/wonk/wp/2015/12/14/the-federal-reserve-will-likely-raise-interest-rates-this-week-this-is-what-happens-next/

http://www.usatoday.com/story/money/2015/12/14/this-week-december-13/77155714/

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in American Economy, Financial Planning, General, investing, retirement planning, Stock Market. Tags: , , , . Leave a Comment »
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