FAQs - Experiencing Financial Contentment


Below I provide answers to common (and not so common) questions including references for more information.

Topics include:

Debt & Cash Flow Management Planning

Keep in mind that after fully funding an emergency savings account which would be at least 3 months of living expenses, you generally want to direct additional savings to investment.  This should be done in a manner that maximizes tax-deferral (on the growth) and/or tax-efficiency.

For example, you might:

    1. Contribute the maximum amount to employer sponsored plans.  Even if these don’t have an employer match, you lower your taxable income;
    2. Contribute the maximum amount to a traditional IRA or a Roth IRA.  (In some cases, contributions may be deductible);
    3. Contribute the maximum amount to education savings plans like a 529 plan (if applicable);
    4. Contribute the maximum amount to health savings plans (if eligible);
    5. Pay off your mortgage (if applicable)

References:  See also Dave Ramsey’s Baby Steps.

First of all, debt in and of itself is not bad.  We will all need to borrow money at some point.  The problem always lies with the asset to which the debt is attached and our current level of cash flow. However, as a general rule, try not to accumulate debt on depreciating assets.  This is what industry practitioners refer to as “bad debt”.

There are two debt ratios used in financial planning practice:

  1. Total Debt Ratio:  Your total debt to total assets should be less than 36% of household gross income (more conservatively use take-home pay). For every dollar of assets you own, you should have 36 cents or less of total debt payments (against those assets);
  2. Housing Debt Ratio:  Your housing payment (rent or mortgage) should be less than 28% of your household gross income (more conservatively use take home pay).  In this calculation, your mortgage payment includes principal, interest, taxes and insurance.

These are just guidelines, but they allow for you to save at least 10% of your gross income for future goals like retirement, education, and emergencies.  So anything within those guidelines would correspond to having a “good” debt ratio.

Estate Planning

Estate planning is a crucial component of any financial plan.  Most people think death when the term estate is mentioned.  However, your risk management portfolio (or insurance program) should not be excluded from planning.  Insurance is just another way to transfer risk.  You can learn more about that here.

Here are the basic types of insurance most individuals carry:

  • Property & Casualty – In this category is auto, home and personal liability insurance (e.g. “umbrella”policies).  These types of insurance are put in place to protect against major damage to your personal property.
  • Health (or Medical) – In this category is your major medical insurance (usually offered through your employer), long-term care and disability insurance.  These types of insurance are in put in place to protect you if your health fails.
  • Life – In this category are all types of life insurance.  Life insurance is commonly separated into two more distinct categories:  term or permanent.  Term insurance is just that, it covers the life of the insured for a specific term of time, whereas permanent insurance covers you until death and accumulates a cash value while in force.
Category: Estate Planning

Investment Planning

The answer really depends on the perspective.

Inflation is the increase in prices whereas deflation is the opposite. From a consumer perspective (like you and I), we would like a “decrease”. However, if you think of the effects that has on the whole picture, there are other things to consider. With deflation, producers of goods will have less profitability, and thereby cut expenses, which would lead to laying off workers. This increases unemployment and slows the economy down. This can be a vicious cycle to stop. Inflation on the other hand, has the opposite effects and can be primarily controlled by raising interest rates or other policy (fiscal or monetary) tools to slow down the pace of spending.

History would tell us that each have their disruptive effects on a economy. Japan is probably the poster-child economy experiencing long deflationary periods.  There are a host of other emerging economies that have experienced inflation and have used policy tools to slow its effect. In my opinion, it seems the effects of deflation are harder to stop and have a more damaging effect on output, whereas inflation is bad if you’re deeply in debt as the real value of money erodes.


  1. Look for a fiduciary.  A fiduciary is held to the higher standard of client’s “best interest” as opposed to the “suitability” standard used by broker-dealers.  The suitability standard has been used for years, but the industry is changing to something much more strict.
  2. Look for someone with the heart of a teacher.  Your advisor’s main job is to serve your financial needs.  This has to be carried out with patience and understanding.  If you feel an air of condescension or impatience, I would consider those red flags.
  3. No violations or fines.  Do some homework and check them out.  Look for someone without client complaints and a history of misuse of client funds.  Both FINRA and the SEC have websites for background checks on your advisor.  LinkedIn provides a decent resume of professional history, and by all means….Google them for any other relevant content.
  4. Expertise.  Look for someone that specializes in what you need.  Our training is often specialized, so it is best to decide what you want to accomplish from a planning and investing perspective, and then ask the advisor to be transparent about what he or she does well.  Often, this is the best strategy for success.

Resources:  5 Tips To Consider Before Choosing and Advisor, “Help Finding an Advisor

As a personal advisor I don’t think my answer will ever be “robo-advisor”, although there are several functions that robo-advisors execute very well on.  Let’s look at the main aspects of the advisor-client relationship to fully answer this question.

Bed-side manner.  Unless your advisor is in the stone-age, a person will always win in this category.  All of the conversational topics that trigger the emotional or behavioral aspect of the client-advisor relationship can’t be addressed by robo-advisors.  This takes a person that understands and has experience with dealing with people.  This is where a personal advisor will usually provide the most value in the relationship.

Cost vs. Value.  This can be tougher to judge and is quite subjective.  However, it is fair to say that advisor fees have historically hovered around 1% of assets under management versus robo-advisors at about half that amount.  Clients will have to evaluate the level of value being received to address that difference.  Personal advisors providing a full service model which includes wealth management as well as financial planning may start to be more of the norm for the industry going forward.

At the end of the day, personal advisors (like myself) conduct difficult analysis and draw on years of experience in order to deliver consistent, meaningful solutions for clients.  By the same token, clients work hard for many years to accumulate enough savings to live a dignified lifestyle after earnings from work stop.  Each should understand the benefit being received by the relationship.

The purpose of a limited liability company would be to “limit” liability.  I would explore other ways to accomplish this more cheaply or more efficiently.

1.Homeowner’s policy. If you have a mortgage, the lender will require this and it will probably suffice.

2. Personal liability policy.  Sometimes referred to as an “umbrella” policy, this will kick in for any amount of loss not covered by your primary homeowner’s policy.

I challenge the notion of creating an LLC to “make the most profit” in this instance.  In an inheritance scenario, the adjusted basis will be “stepped up” to current market value and living in the house for 2 out of the next 5 years will allow for the first $250,000 (single filers) of profit to be exempt from federal taxes.  (see IRS link).

This is always an interesting question and the real consideration should be the time value of money.

In a general sense, the longer you are without “all the money you are entitled to” (i.e. your pension), the higher the required rate of return on that money you will want.  The constraint you are facing is the rate of return that you can receive on that money currently.  In low interest rate environments, equities are the better investment choice because they beat inflation.  In high interest rate environments, you may look to alternative asset classes.

So in the case of a pension, the longer your employer keeps the money the higher the rate of return you would want.  So the question to ask yourself is:  Considering the current interest rate environment, in taking the lump-sum pension now, could I earn a higher return [by investing the lump-sum] than my employer would pay? The answer is likely “yes” if we are in a low rate environment, because how could your employer pay you more than current fixed-income market rates?  You will likely come out better by taking the lump-sum and earning the return of equity markets.  The answer will be no if fixed income interest rates are very high, because you will probably do better by owning a guaranteed stream of cash-flow instead of the risk of doing it yourself.

Tax Planning

Most people do.  Research shows that on average, tax payments from federal withholding and estimated tax payments exceed taxpayer liability by 20% (for AGI between $75-100K) and 7% (for AGI between $100-200K) resulting in tax refunds for 27% of all returns filed.  Although those statistics are from tax year 2013, it likely remains a reason why a lot of individuals end up with a tax refund which is also known as an “interest-free” loan to the US government.

In most cases, the extra effort of looking at your last tax return and your itemized deductions would give you the numbers to properly complete Form W-4.  This exercise pays a huge benefit by providing more take-home income to spend or save.  This is a service we routinely perform for our clients and will gladly review for you.

Category: Tax Planning

Let’s first distinguish between penalty and a taxable event.

A distribution penalty is assessed when you make a withdrawal or distribution from a qualified plan before retirement. Here are the exceptions to avoid the penalty:

  • Death or disability,
  • Attainment of age 59 1/2,
  • Taking substantially equal periodic payments (72t),
  • Medical expenses >10% of AGI,
  • Qualified domestic relations order (QDRO),
  • Qualified public safety employee separated from service,
  • Attainment of age of 55 and separation for service.

If you don’t meet one of those, the penalty will apply to your distribution.  As a general rule, if the penalty applies, the distribution will be taxable.  The amount will be determined when you file your taxes since the entire distribution is included in your adjusted gross income.  That being said, you want to avoid pre-mature distributions from qualified plans if at all possible.

Category: Tax Planning

Yes, but whether your contribution [to the traditional IRA] will be deductible depends.

Some things to keep in mind for both:

  • Contributions cannot exceed $5500 ($6500 if age 50 and over) combined.  Meaning your aggregate contribution to both types cannot exceed $5500 or $6500.
  • Contributions must be made of “earned income”.  Earned Income is wage income, self-employed income and alimony.  Not investment income or social security income.

For the Traditional IRA:

  • If you and/or your spouse are active participants in a qualified plan at work, only a portion of your contribution will be deductible. Your adjusted gross income (AGI) is subject to phaseouts.
    • For example, if you and your spouse have AGI of $100K, the phaseout starts at $98K.  So approximately 10% of your contribution will not be deductible [(100-98)/(118-98)].
  • If you and your spouse are not active participants in a qualified plan, you can deduct your contributions;
  • You cannot contribute past age 70 1/2

For the Roth IRA:

  • For single filers, AGI has to be less than $132,000; for MFJ, AGI has to be less than $194,000 in order to contribute.  Again, your adjusted gross income (AGI) is subject to phaseouts.
    • For example, if you and your spouse have AGI of $190K, the phaseout starts at $184K.  So your contribution will be limited to 60% [(190-184)/(194-184)].Contributions are not deductible;
  • You can contribute past age 70 1/2
Category: Tax Planning

The deductibility of IRA contributions have to do primarily with two things:

– are you an active participant in your current employer’s plan; and

– where is your adjusted gross income (“AGI”)

If you are not an active participant in your employer’s plan, you can always deduct the amount of your IRA contribution regardless of AGI as an “above the line” deduction. If you are an active participant in your plan, then the deduction phases out depending on your level of AGI:IRA deductions

Source: www.irs.gov

Category: Tax Planning


Password Reset
Please enter your e-mail address. You will receive a new password via e-mail.