April 19, 2012

Are we scared of getting old?  Yes!  Getting old means coping with longevity risk.

I recently heard that financial planners should project a life expectancy of 105 for clients, ten years longer than the typical 95 years old.  The extra ten years means a lot more people will run out of money before exiting the planet.  It is a frightening prospect.

There are no simple answers to this dilemma.  Maybe we should be forecasting our needs decade by decade in retirement.  What do our 70s look like?  What will our 80s look like?  What will our 90s look like?  How about the 100s?  How will we live, where will we live, and how will we pay for it?

In my family’s recent history, the seniors have faced new health challenges upon reaching their 80s.  They are also surprised to be living this long.  The earlier generation didn’t live into their 80s so what we’re experiencing is new.  If my generation is going to live another twenty years as aging seniors we better start planning now.

February 24, 2012

Everyone makes mistakes in the course of their financial lives.

One of my early mistakes taught me a lot about investing.  It taught me I could lose it all.  This lesson occurred right after I was married in the late 80’s.  We had a few hundred dollars in gifts and I thought it would be a great idea to invest it.  Based on a second hand tip through a relative who knew an experienced investor, I bought penny stocks.  The investment lost enough it wasn’t worth the transaction cost to sell it.   Today, more than 25 years later, I’m grateful the experience didn’t hurt too much.

My early mishap taught me a lot about investment risk, and the foolishness of acting blindly on a tip.  Of course, at the time I thought I knew what I was doing.  That’s probably the scariest part, but isn’t that part of any life lesson?

The key to a successful financial life is to make more good decisions than bad ones, and to always learn from the bad ones.

February 13, 2012

Two of my favorite financial products are Series I U.S. Savings Bonds and Health Savings Accounts.  Savings Bonds have been around a long time.  Today I love the Series I bond for its nice rate in a low rate world, 3.06% for six months.  I also like that interest is tax deferred and the rate is inflation adjusted every six months.  These attributes make Series I Savings Bonds a wonderful emergency fund cash stash.

Starting in January 2012, U.S. Savings Bonds are sold electronically via www.treasurydirect.gov.   Also starting in January, the limit on electronic purchases per person per year went up to $10,000 from $5,000.

Health Savings Accounts are a newer tool and must be associated with a High Deductible Health Plan.  People with a high deductible health plan who open a Health Savings Account have a tool to pay for medical expenses with pre-tax dollars even if they don’t qualify for the 7.5% limit on Schedule A.  This makes an HSA a great opportunity for taxpayers, especially those in the Alternative Minimum Tax zone.  In 2012, the deductible limits are $3,100 for an individual and $6,250 for a family.

Things get better with an HSA – if it’s not used, it stays and becomes a secondary savings account earmarked for medical expenses.  In retirement, an HSA instead of taxable IRA withdrawals can pay for medical expenses.

High Deductible Health Plans are not for everyone, and the rules governing management of a Health Savings Account are exacting.   An HSA, however, offers useful tax savings and retirement planning opportunities especially for upper bracket taxpayers.

In 2012 many savers are worried about low interest rates on their savings accounts.  U.S. Series I Savings Bonds and Health Savings Account are two tools that offer ways to maximize cash savings when used appropriately.

February 2012

I am glad to see the Presidential primary election focus on income tax rates.  It creates a teachable moment for U.S. taxpayers and I will also jump into the discussion!

Many taxpayers concentrate on one line of their income tax return – the refund line.  While it’s always pleasant or even thrilling to see that refund amount, it’s not the whole story about paying a lot or a little in taxes.  Usually, a refund means the taxpayer overpaid tax throughout the year.

This tax season, I advise you to take a closer look at your Adjusted Gross Income.  This line is well before your Taxable Income.  It’s an amount that drives a lot of different tax savings steps.  AGI determines how much of medical expenses or job-related expenses can be deducted to lower your overall tax rate.  It determines whether you can deduct education expenses or how much of a child tax credit is allowed.  It determines whether an IRA contribution is deductible.

Whatever your tax rate is now, 15% or 25% or something else, your goal for 2012 should be to bring it down.  One place to start is figuring out if you can reduce Adjusted Gross Income by taking advantage of the tax savings steps available to you.