It is no secret that America is currently experiencing an economic recession. Furthermore, it may seem like the effects of that recession are magnified in the state of Michigan. While the general economic climate may not be treating people as well as it has in the past, fortunately, Dentistry has been more resilient to economic cycle than many other professions. However, I still encourage dentists, young and experienced, to keep prepared for the ebbs and flows of our economy. The following are some tips and best practices I strongly encourage you to consider.
Prepare a Budget and Stick to It:
It is important to have an idea of what it costs you to live. This is especially important in your first few years out of dental school as you are working on paying down student loan debt as well as other debt you may have incurred (mortgage, credit cards, auto loan, etc.). Find a system that works for you to track your expenses. This will help you to manage your living expenses and show you budget surpluses (or deficits) that can be used to help fund financial goals.
Knowing what it will take you to pay your day-to-day living expenses is particularly important in the process of evaluating practice opportunities. Since associate doctors are generally paid on a production basis, you will need to know how much dentistry you must produce in order to earn the amount of money you need to live.
Don’t Get Tempted By the First Big Paycheck:
Frequently, the first few checks a dentist earns from practice are the largest paychecks they have ever received, and it can be very tempting to spend recklessly. Frequently, a new doctor can fall victim spending recklessly on cars, boats, homes, or vacations. This can lead to a pattern of reckless spending and no savings. That pattern can be particularly dangerous in economic times like these when it may be more difficult to keep the dental practice schedule full, or patients aren’t accepting as high a level of treatment as they once were.
Make Growth a Priority:
In generations past, a dentist could open a practice in town with no patients, hang a sign in the window, and attract enough patients to keep themselves busy. This is not the case anymore. Gone are the days when dentists had to do little or no marketing to keep patients coming into the practice.
The world that today’s dental school graduate lives in is one where we must make a commitment to continually grow the practice. Be prepared to spend anywhere between 1% – 4% of production on marketing. The average dental practice loses 10% of its patient base each year. So in order to maintain even moderate growth, a dentist must grow by 15% per year.
In addition to external marketing like direct mail, website, and television/radio commercials, it is even more important to focus on internal marketing techniques like asking for referrals, addressing patients concerns and objectives effectively, and refined case presentation.
Remember the Relationship Between Supply and Demand:
As new or upcoming graduates, I encourage you to remember the relationship between supply and demand when you are considering where you want to practice. The dentists that generally suffer the most in a down economy are the ones that practice in an area that is already saturated with dentists. This makes for fierce competition and intensifies the adverse effects of economic downturn.
In a recessionary environment, patients tend to become more price and service sensitive. Given that is the case, it is more difficult to compete in areas where the patient base has numerous options for their dental care.
Success Starts With You:
In times like these, it is very easy to become pessimistic. We are being forever inundated with negativity by numerous mediums (network news, the internet, periodicals, etc) and it can sometimes be difficult to tune that distraction out and stay focused on success. It is for these reasons that it is so important to stay positive and focused even in tough economic times. The most successful dentists are the ones that have a clear vision and stay focused on whatever goals they have set out for themselves, regardless of what is going on in the rest of the world. Ultimately, one’s ability to stay positive and focused on growth and success will be the differentiating factor between the successful dentist and the unsuccessful one.
Sunday, June 21, 2009
Monday, April 6, 2009
Michigan College Savings Plans: MET vs. MESP
Financing the higher education cost for children ranks among the top goals for many of our clients, and for good reason. As dentists, you understand both the value and soaring cost of higher education and have the wisdom and resources to plan accordingly. Fortunately, there are several ways to save for college; each strategy comes along with its own pros and cons, which need to be examined when deciding which is right for you.
For many people, the use of state-sponsored 529 Plans has been the way to go. The term “529” refers to the section in IRS code that provides tax-advantaged features in these plans. 529 plans are also referred to as “Qualified Tuition Plans.” In Michigan, there are two state-sponsored qualified tuition plans available:
· The Michigan Education Savings Plan (MESP)
· The Michigan Education Trust (MET)
The plan that we most often recommend to our clients is the Michigan Education Savings Plan (MESP). The MESP is an investment account established for purposes of paying higher education expenses. Money is contributed and invested in an age-based investment allocation for the future benefit of your student. MESP investments are subject to decline in down markets just like any other investment. When the student is ready to use the funds in the MESP, whatever has been accumulated is what they have to work with.
Funds accumulated using MESP can be used to pay qualified higher education expenses including tuition, room and board, fees, and the cost of books, supplies, and equipment related to enrollment. The MESP can be used at colleges and universities all over the country, and it allows for unused benefits to be transferred between members of the same family.
The Michigan Education Trust (MET) allows for years of college tuition to be purchased for the future use of a student at today’s price. For example, if you have a child that is 7 years old today, that will begin attending college at age 18 (in the year 2020), you could buy years of tuition now, at year 2009 prices, for that child to use when they enter college in 2020.
The Michigan Education Trust will cover tuition; however, it lacks the flexibility of the MESP to pay for other related expenses.
The following are a few things to consider when deciding whether to use an MESP or MET plan:
1. The MET is good for use if you know that your child is going to attend a public university or community college in Michigan. If your child chooses to attend an out-of-state school or a private school, the MET won’t work as well. It will, however, provide a refund of benefits to the ineligible school based on a weighted average formula.
2. When using the MET program, you are pre-paying tuition and fees. This still leaves books, travel expenses, etc. to be paid out of pocket.
3. Years of tuition purchased under the MET plan must be used with 15 years of agreed upon start date. Funds in MESP have no expiration date.
4. Both MET benefits and MESP account balances and can be transferred to other family members to cover education expenses.
5. Contributions to both the MET and MESP are eligible for a state of Michigan tax deduction.
6. Funds in the MESP are subject to market volatility and could decline in value during down-market periods. At this point, the MET is a guaranteed contract. However, it is important to note that some states have encountered insolvency issues with their pre-paid tuition contracts. So far, this has not been an issue in the Michigan plan.
For many people, the use of state-sponsored 529 Plans has been the way to go. The term “529” refers to the section in IRS code that provides tax-advantaged features in these plans. 529 plans are also referred to as “Qualified Tuition Plans.” In Michigan, there are two state-sponsored qualified tuition plans available:
· The Michigan Education Savings Plan (MESP)
· The Michigan Education Trust (MET)
The plan that we most often recommend to our clients is the Michigan Education Savings Plan (MESP). The MESP is an investment account established for purposes of paying higher education expenses. Money is contributed and invested in an age-based investment allocation for the future benefit of your student. MESP investments are subject to decline in down markets just like any other investment. When the student is ready to use the funds in the MESP, whatever has been accumulated is what they have to work with.
Funds accumulated using MESP can be used to pay qualified higher education expenses including tuition, room and board, fees, and the cost of books, supplies, and equipment related to enrollment. The MESP can be used at colleges and universities all over the country, and it allows for unused benefits to be transferred between members of the same family.
The Michigan Education Trust (MET) allows for years of college tuition to be purchased for the future use of a student at today’s price. For example, if you have a child that is 7 years old today, that will begin attending college at age 18 (in the year 2020), you could buy years of tuition now, at year 2009 prices, for that child to use when they enter college in 2020.
The Michigan Education Trust will cover tuition; however, it lacks the flexibility of the MESP to pay for other related expenses.
The following are a few things to consider when deciding whether to use an MESP or MET plan:
1. The MET is good for use if you know that your child is going to attend a public university or community college in Michigan. If your child chooses to attend an out-of-state school or a private school, the MET won’t work as well. It will, however, provide a refund of benefits to the ineligible school based on a weighted average formula.
2. When using the MET program, you are pre-paying tuition and fees. This still leaves books, travel expenses, etc. to be paid out of pocket.
3. Years of tuition purchased under the MET plan must be used with 15 years of agreed upon start date. Funds in MESP have no expiration date.
4. Both MET benefits and MESP account balances and can be transferred to other family members to cover education expenses.
5. Contributions to both the MET and MESP are eligible for a state of Michigan tax deduction.
6. Funds in the MESP are subject to market volatility and could decline in value during down-market periods. At this point, the MET is a guaranteed contract. However, it is important to note that some states have encountered insolvency issues with their pre-paid tuition contracts. So far, this has not been an issue in the Michigan plan.
Tuesday, October 14, 2008
Ted's Tips for Financial Success
From time to time I am asked what the most important component is to achieving financial success. I have given it much thought, and to be honest, there is no one-thing you can do that will lead you to financial success. The road to financial freedom requires a commitment and a well-laid plan. That said, there are some things that I think everyone should know, or at least keep in mind. I call them Ted’s Tips for Financial Success. They are as follows:
Establish Goals, Both Long Term and Short Term and Develop a Plan to Achieve them: It has been said that if you don’t know where you are going you are never lost. The same is true on the path to financial freedom. It is important to take some time to examine what you truly want to accomplish financially, and develop a plan to get you there. Remember, thinking long-term is key in this process.
Establish and Maintain an Emergency Fund: Every now and then something unexpected happens that either causes an added expense in our lives, or a diminished income. It is for that reason that it is imperative that you maintain an emergency fund equal to 3-6 months worth of living expenses in cash should an emergency arise. The purpose of building this fund is to satisfy living needs until your income increases to normal levels. Take for example a disability situation. If your disability income policy has a 60 day elimination period, you will need to use some of the emergency fund to pay your living expenses until you disability policy begins paying out.
Remember the True Measure of Wealth: The truest measure of wealth isn’t measured in your earnings; it’s measured in net worth. Net Worth = Assets – Liabilities. Simply stated, Net Worth = What You Own – What You Owe. It is a measure of financial solvency and the best measure of true wealth. In order to truly build wealth, you need to build your net worth. To do this, it is important to keep you assets high and your debts low. To increase your net worth, keep in mind that it isn’t the amount of money you make that is important, it’s the amount of money you are able to keep that will help. If, for example, you make $300,000 a year, and spend $300,000 a year, you won’t be able to build wealth the same way someone that makes $300,000 a year and spends $250,000 per year and saves/invests the remaining $50,000 will.
Invest According to Your Risk Tolerance: It bears mentioning, especially in these volatile times, that when you invest money for the long term you must it is extremely important to make sure you invest in what is appropriate for you. We are all familiar with the Risk/Reward relationship. It is natural to be a little nervous in down times. However, if you find yourself getting more nervous or upset during periods of poor market performance than normal it may make sense to re-visit your strategy and make sure it is still appropriate. Your plan is flawed if you are losing sleep over investment performance.
Make Sure you Have an Estate Plan: Having an estate plan put together will not only provide for the distribution of your property in the event of your death. It will also define who should make medical decisions for you in the event of your incapacity, when extreme measures should be taken to save your life, and, if applicable, who would be guardian of your children in the event of your death. In addition to executing the necessary documents to accomplish the above, you should also communicate with those people that might be involved in your estate plan. Let them know what their role is and share any information they might need such as account and insurance information. Having an estate plan put together allows you to make decisions as opposed to depending on family or court system to decide what is best.
The 5 above suggestions are not the only things that are important to keep in mind on the path to financial freedom. However they are some of the basic fundamentals that are important to keep in mind as you continue the pursuit of your goals and financial freedom.
Establish Goals, Both Long Term and Short Term and Develop a Plan to Achieve them: It has been said that if you don’t know where you are going you are never lost. The same is true on the path to financial freedom. It is important to take some time to examine what you truly want to accomplish financially, and develop a plan to get you there. Remember, thinking long-term is key in this process.
Establish and Maintain an Emergency Fund: Every now and then something unexpected happens that either causes an added expense in our lives, or a diminished income. It is for that reason that it is imperative that you maintain an emergency fund equal to 3-6 months worth of living expenses in cash should an emergency arise. The purpose of building this fund is to satisfy living needs until your income increases to normal levels. Take for example a disability situation. If your disability income policy has a 60 day elimination period, you will need to use some of the emergency fund to pay your living expenses until you disability policy begins paying out.
Remember the True Measure of Wealth: The truest measure of wealth isn’t measured in your earnings; it’s measured in net worth. Net Worth = Assets – Liabilities. Simply stated, Net Worth = What You Own – What You Owe. It is a measure of financial solvency and the best measure of true wealth. In order to truly build wealth, you need to build your net worth. To do this, it is important to keep you assets high and your debts low. To increase your net worth, keep in mind that it isn’t the amount of money you make that is important, it’s the amount of money you are able to keep that will help. If, for example, you make $300,000 a year, and spend $300,000 a year, you won’t be able to build wealth the same way someone that makes $300,000 a year and spends $250,000 per year and saves/invests the remaining $50,000 will.
Invest According to Your Risk Tolerance: It bears mentioning, especially in these volatile times, that when you invest money for the long term you must it is extremely important to make sure you invest in what is appropriate for you. We are all familiar with the Risk/Reward relationship. It is natural to be a little nervous in down times. However, if you find yourself getting more nervous or upset during periods of poor market performance than normal it may make sense to re-visit your strategy and make sure it is still appropriate. Your plan is flawed if you are losing sleep over investment performance.
Make Sure you Have an Estate Plan: Having an estate plan put together will not only provide for the distribution of your property in the event of your death. It will also define who should make medical decisions for you in the event of your incapacity, when extreme measures should be taken to save your life, and, if applicable, who would be guardian of your children in the event of your death. In addition to executing the necessary documents to accomplish the above, you should also communicate with those people that might be involved in your estate plan. Let them know what their role is and share any information they might need such as account and insurance information. Having an estate plan put together allows you to make decisions as opposed to depending on family or court system to decide what is best.
The 5 above suggestions are not the only things that are important to keep in mind on the path to financial freedom. However they are some of the basic fundamentals that are important to keep in mind as you continue the pursuit of your goals and financial freedom.
Back to School Credit Cards....BEWARE!
Another summer has come and gone. This time of year finds many young people leaving home, either again, or for the first time, and heading off to various institutions of higher learning. While this is a very exciting time, it is also a prime time to for students to learn some lessons in financial responsibility. Lessons that can hopefully be learned here, so that they don’t have to learn them the hard way, from experience.
One of the most important lessons that a college student can learn about money is to be responsible with credit cards and credit card offers. Nowadays students walking around college campuses are bombarded with credit card offers. Ironic, considering most students are either not employed, or have low-paying jobs. Some credit card companies even sweeten the deal with a free t-shirt or coffee mug. However, remember, the credit card company is not on your side! Most card offers look very attractive, especially when you convince yourself that the card will only be used for emergencies. It is not uncommon for credit card companies to advertise, “teaser rates” of 0% interest for the first year, then increase to somewhere near 24.99% after that. Ouch!
Visa and Master Card are not our only adversaries in the process of teaching credit responsibility. Department store credit cards must also be approached with caution. We have all been there; you bring your purchases to the counter of a department store, the clerk rings up your items, and then asks if you would like to put today’s purchases on your store charge card. When you decline, or tell them that you don’t have a store charge card, the clerk delightfully brings to your attention that if you open a store charge account, you can save 15% on today’s purchases. If you agree, you fill out the card application, you are most likely approved, and you leave the store having saved 15% today and a brand new credit line to maintain.
Aside from a multitude of offers, one of the reasons that it is so easy for young people to get into trouble with credit cards is because there is a psychological disconnect when making a purchase on a credit card. This is so because you are not physically taking cash out of your wallet or writing a check, thus making it more painless to buy often and overspend. Even if you are someone who likes to use debit cards that draw automatically from your checking account, you are more likely to track debit purchases because the money is immediately removed from your account. It is for this reason that credit card holders must exercise great caution in purchases.
As you know, when you use a credit card to buy something, you are in effect, borrowing money from the credit card company. If you pay the credit card company in full at the end of that billing cycle, you will not accrue any interest and you will have essentially used the credit card company’s money for free for that time period. However, credit card companies make it all too easy for customers not to pay off their balances in full every month. For a college student, it’s very easy to overlook the part of the billing statement that lists the full balance, and instead concentrate on the part that lists the much-smaller minimum payment.
This can be a dangerous game, especially if you continue to charge on the card and only make the minimum monthly payments. For example,
If you have a $500 balance on your credit card with a 24.99% APR, and make a minimum payment of $20 per month it will take you 3 years to pay off that credit card. Furthermore, you will end up paying a total of $720 to the credit card company for $500 worth of purchases. This assumes you don’t make any additional purchases!
From the above example, it’s no wonder that so many students get into credit card trouble.
Credit cards are not inherently evil. Credit is a financial tool that, if used effectively and responsibly, can help you to achieve your goals. It is important to know how credit works, and how and when to use it appropriately.
One of the most important lessons that a college student can learn about money is to be responsible with credit cards and credit card offers. Nowadays students walking around college campuses are bombarded with credit card offers. Ironic, considering most students are either not employed, or have low-paying jobs. Some credit card companies even sweeten the deal with a free t-shirt or coffee mug. However, remember, the credit card company is not on your side! Most card offers look very attractive, especially when you convince yourself that the card will only be used for emergencies. It is not uncommon for credit card companies to advertise, “teaser rates” of 0% interest for the first year, then increase to somewhere near 24.99% after that. Ouch!
Visa and Master Card are not our only adversaries in the process of teaching credit responsibility. Department store credit cards must also be approached with caution. We have all been there; you bring your purchases to the counter of a department store, the clerk rings up your items, and then asks if you would like to put today’s purchases on your store charge card. When you decline, or tell them that you don’t have a store charge card, the clerk delightfully brings to your attention that if you open a store charge account, you can save 15% on today’s purchases. If you agree, you fill out the card application, you are most likely approved, and you leave the store having saved 15% today and a brand new credit line to maintain.
Aside from a multitude of offers, one of the reasons that it is so easy for young people to get into trouble with credit cards is because there is a psychological disconnect when making a purchase on a credit card. This is so because you are not physically taking cash out of your wallet or writing a check, thus making it more painless to buy often and overspend. Even if you are someone who likes to use debit cards that draw automatically from your checking account, you are more likely to track debit purchases because the money is immediately removed from your account. It is for this reason that credit card holders must exercise great caution in purchases.
As you know, when you use a credit card to buy something, you are in effect, borrowing money from the credit card company. If you pay the credit card company in full at the end of that billing cycle, you will not accrue any interest and you will have essentially used the credit card company’s money for free for that time period. However, credit card companies make it all too easy for customers not to pay off their balances in full every month. For a college student, it’s very easy to overlook the part of the billing statement that lists the full balance, and instead concentrate on the part that lists the much-smaller minimum payment.
This can be a dangerous game, especially if you continue to charge on the card and only make the minimum monthly payments. For example,
If you have a $500 balance on your credit card with a 24.99% APR, and make a minimum payment of $20 per month it will take you 3 years to pay off that credit card. Furthermore, you will end up paying a total of $720 to the credit card company for $500 worth of purchases. This assumes you don’t make any additional purchases!
From the above example, it’s no wonder that so many students get into credit card trouble.
Credit cards are not inherently evil. Credit is a financial tool that, if used effectively and responsibly, can help you to achieve your goals. It is important to know how credit works, and how and when to use it appropriately.
Tuesday, September 2, 2008
I HOPE YOU DIE.....
.....with appropriate estate planning in place!
Of course I wish all of my reader(s) lives a long and prosperous life. But the fact of the matter is this; that long and prosperous life will inevitably come to an end (Sorry!). When that occurs, something not only has to be done with you, but anything you have accumulated over that long and prosperous life. Hence this article. The following article will contain a few suggestions of how to make sure everything is the way it should be when your time comes.
First let me be honest; this a boring and depressing topic. Furthermore, this isn’t just something that affects the “seasoned” age group. Arguably, estate planning would be more important for those that have young families that need to be taken care of in the event of the bread winner’s death.
Take for example my friend Dr. Young. Dr. Young is a few years out of dental school, and happily Dr. Young’s wife, Mrs. Young, recently gave birth to the couple’s first child Junior. Until now, the couple has not done any estate planning, but as any parent will attest; the Youngs’ lives have drastically changed. Fortunately, in addition to their fee-only financial advisers, Dr. and Mrs. Young have enlisted the help of a competent estate planning attorney to help them straighten out their estate plan. The attorney suggests taking the following action as soon as possible:
Establish guardianship for Junior- If, unfortunately, both of Dr. and Mrs. Young were to die simultaneously, someone would have to care for Junior until he reached the age of majority. If no one were appointed, the court system would decide who that person would be. Establishing legal guardianship is crucial to determining who should care for a child should both parents die.
Establish living wills and medical power of attorney for both Dr. and Mrs. Young- Establishing a living will outlines Dr. and Mrs. Youngs’ wishes in the event that they sustain medical difficulties and outlines whether or not extreme measures should be taken to preserve life. Effectively, a living will says when the plug should be pulled. Similarly, a medical power of attorney will appoint someone (frequently the alternate spouse) the power to make medical decisions on behalf of someone who has become incapacitated.
Execute a Will or Living Trust for both Dr. and Mrs. Young – Executing a Will or Living Trust will allow for the disposition of a decedent’s property. Disposition of a decedent’s property to an intended recipient is fundamental to an effective estate plan. Frequently, a Living Trust can be more effective than a Will because it can transfer property outside of probate, while allowing the property owner to maintain control over the assets. It can also allow for a timing element to be attached to property disbursement, and, if set up properly, take advantage of available tax credits upon a Grantor’s death. Probate is a legal proceeding that occurs upon someone’s death; it is a court supervised process which is also open as a matter of PUBLIC RECORD. A trust on the other hand can transfer property to intended beneficiaries outside of the probate process. This keeps the transfer private and out of public eye.
In addition to completing a transfer in a private matter and taking advantage of some tax credits, a trust can also be designed to disperse property according to a time frame outlined by the grantor. This is especially important if minor children are involved.
Take, for example, if Dr. and Mrs. Young have established a living trust and funded it with a $50,000 bank account, the trust could stipulate that if both Dr. and Mrs. Young were to die before Junior reaches age 18, the trustee should pay 1/3 of the trust funds to Junior on his 18th birthday, 1/3 of the trust funds money on his 21st birthday, and 1/3 of the funds on his 30th birthday. This insures that Junior won’t get the full $50,000 sum at an age when he may make poor decisions (Its hard to pass a New Car Dealership when you are 18 and have the money)!
Make sure that insurance contracts, bank accounts, and retirement plans have appropriate beneficiary designations- It’s a good idea from time to time to review insurance policies, and other accounts that have beneficiary designations to make sure the current beneficiaries are appropriate. Beneficiary designations of insurance policies and financial accounts supersede the provisions of a Will or Trust. Frequently spouses are designated as beneficiaries, which is appropriate in most circumstances. However, in the unfortunate event of divorce, it is important that beneficiaries will be revisited to make sure that no property is still marked to go to a former spouse in the event of the owner’s death. As far as contingent beneficiaries, it is sometimes advisable to designate a Trust as a contingent beneficiary. This will allow property to pass to intended beneficiaries via trust provisions or trustee discretion.
The above discussion contains a few of the most important estate planning elements. If you find that you have been neglecting any estate issues, I encourage you to contact an estate attorney and ask them about appropriateness of executing the following:
· Guardianship (if you have minor children)
· Living Will (when to pull the plug)
· Medical Power of Attorney (who decides what medical care you should get if you can’t)
· Will or Trust (Who your property goes to and when)
· Beneficiary Designations (Primary and Contingent)
Please take a moment to consider what your current estate plan is and what it should be. I wish you all long, happy, and prosperous lives. As unpleasant as it may be, I encourage you to take a few moments to examine your current plan and assess how it would function and whether or not it takes care of those you would leave behind in the event of your untimely death.
Of course I wish all of my reader(s) lives a long and prosperous life. But the fact of the matter is this; that long and prosperous life will inevitably come to an end (Sorry!). When that occurs, something not only has to be done with you, but anything you have accumulated over that long and prosperous life. Hence this article. The following article will contain a few suggestions of how to make sure everything is the way it should be when your time comes.
First let me be honest; this a boring and depressing topic. Furthermore, this isn’t just something that affects the “seasoned” age group. Arguably, estate planning would be more important for those that have young families that need to be taken care of in the event of the bread winner’s death.
Take for example my friend Dr. Young. Dr. Young is a few years out of dental school, and happily Dr. Young’s wife, Mrs. Young, recently gave birth to the couple’s first child Junior. Until now, the couple has not done any estate planning, but as any parent will attest; the Youngs’ lives have drastically changed. Fortunately, in addition to their fee-only financial advisers, Dr. and Mrs. Young have enlisted the help of a competent estate planning attorney to help them straighten out their estate plan. The attorney suggests taking the following action as soon as possible:
Establish guardianship for Junior- If, unfortunately, both of Dr. and Mrs. Young were to die simultaneously, someone would have to care for Junior until he reached the age of majority. If no one were appointed, the court system would decide who that person would be. Establishing legal guardianship is crucial to determining who should care for a child should both parents die.
Establish living wills and medical power of attorney for both Dr. and Mrs. Young- Establishing a living will outlines Dr. and Mrs. Youngs’ wishes in the event that they sustain medical difficulties and outlines whether or not extreme measures should be taken to preserve life. Effectively, a living will says when the plug should be pulled. Similarly, a medical power of attorney will appoint someone (frequently the alternate spouse) the power to make medical decisions on behalf of someone who has become incapacitated.
Execute a Will or Living Trust for both Dr. and Mrs. Young – Executing a Will or Living Trust will allow for the disposition of a decedent’s property. Disposition of a decedent’s property to an intended recipient is fundamental to an effective estate plan. Frequently, a Living Trust can be more effective than a Will because it can transfer property outside of probate, while allowing the property owner to maintain control over the assets. It can also allow for a timing element to be attached to property disbursement, and, if set up properly, take advantage of available tax credits upon a Grantor’s death. Probate is a legal proceeding that occurs upon someone’s death; it is a court supervised process which is also open as a matter of PUBLIC RECORD. A trust on the other hand can transfer property to intended beneficiaries outside of the probate process. This keeps the transfer private and out of public eye.
In addition to completing a transfer in a private matter and taking advantage of some tax credits, a trust can also be designed to disperse property according to a time frame outlined by the grantor. This is especially important if minor children are involved.
Take, for example, if Dr. and Mrs. Young have established a living trust and funded it with a $50,000 bank account, the trust could stipulate that if both Dr. and Mrs. Young were to die before Junior reaches age 18, the trustee should pay 1/3 of the trust funds to Junior on his 18th birthday, 1/3 of the trust funds money on his 21st birthday, and 1/3 of the funds on his 30th birthday. This insures that Junior won’t get the full $50,000 sum at an age when he may make poor decisions (Its hard to pass a New Car Dealership when you are 18 and have the money)!
Make sure that insurance contracts, bank accounts, and retirement plans have appropriate beneficiary designations- It’s a good idea from time to time to review insurance policies, and other accounts that have beneficiary designations to make sure the current beneficiaries are appropriate. Beneficiary designations of insurance policies and financial accounts supersede the provisions of a Will or Trust. Frequently spouses are designated as beneficiaries, which is appropriate in most circumstances. However, in the unfortunate event of divorce, it is important that beneficiaries will be revisited to make sure that no property is still marked to go to a former spouse in the event of the owner’s death. As far as contingent beneficiaries, it is sometimes advisable to designate a Trust as a contingent beneficiary. This will allow property to pass to intended beneficiaries via trust provisions or trustee discretion.
The above discussion contains a few of the most important estate planning elements. If you find that you have been neglecting any estate issues, I encourage you to contact an estate attorney and ask them about appropriateness of executing the following:
· Guardianship (if you have minor children)
· Living Will (when to pull the plug)
· Medical Power of Attorney (who decides what medical care you should get if you can’t)
· Will or Trust (Who your property goes to and when)
· Beneficiary Designations (Primary and Contingent)
Please take a moment to consider what your current estate plan is and what it should be. I wish you all long, happy, and prosperous lives. As unpleasant as it may be, I encourage you to take a few moments to examine your current plan and assess how it would function and whether or not it takes care of those you would leave behind in the event of your untimely death.
Tuesday, August 19, 2008
The 80% Myth
The 80% myth is what I call the belief that many people have about how much they are going to spend in retirement, and thus how much in assets is enough to retire. The belief is that retirees should be prepared to live on 80% of pre-retirement income. As a planner, I believe this approach is far too simplistic and can leave a lot to be overlooked. Hind-sight is always 20/20, however when it comes to retirement, my preference is to be as prepared as possible, I’m sure you feel the same way.
Preparing for retirement simply by assuming you can, or will have to live on 80% of what you are earning right now is inherently flawed. If you don’t believe me, ask yourself the following questions:
- Have I ever tried to live on 80% of what I make? How did it feel?
- What am I living on right now?
- Am I sure this is what I am living on right now? Does my work provide any perks that won’t be provided in retirement (vehicle allowance, health insurance, etc.)?
- Am I effectively saving and budgeting, or am I spending every dollar I make?What expenses do
- I have right now that I won’t have in retirement?
- What expenses will I have in retirement that I don’t have right now?
How did you respond to the questions posed above? Did any of your answers surprise you? Do you feel you have an accurate picture of your living costs?
The first step in truly preparing for retirement is figuring out what it costs you to live currently, and, as one of the questions above encourages you to do, make sure it’s a true picture. Put a pencil and paper (or Excel worksheet) to the task and begin to investigate your monthly/annual expenses. Be sure to be as specific as possible and to include as much discretionary spending as possible. Don’t just write down the basic survival costs. Don’t forget about any and all of the perks that your practice may provide to you (vehicle allowance, health insurance, travel, etc.) these costs may still exist in retirement, however they are often overlooked when preparing the pre-retirement budget.
Aside from overlooking “practice perks” another common mistake that clients approaching retirement make is assuming they will automatically spend less in retirement than they spent in working years. This is not necessarily true, in fact one expert, and I happen to agree, has found that Doctors tend to spend more money in their first years of retirement then they had anticipated. This could be for a variety of reasons, not the least of which being that in the first years of retirement, retirees are still enjoying good health and active lifestyles.
Step two in this process is to begin to design a budget for your retirement years. Start thinking about what expenses will still exist, and which ones may not. For example, if you have hobbies like boating or travelling, you will probably continue to enjoy these in retirement, and the costs must be planned for. However, you may also have paid your mortgage off, so that is one expense that may not exist in your retirement budget. It will also be important to factor inflation into the calculation.
As you can see by know, and probably knew already, planning for retirement is more complicated that just assuming that you will have to drop your standard of living down to a point where you can support it on 80% of your current income. Hopefully, I’ve given you enough information to begin to think about what it will truly cost you to live in retirement. Fortunately, with appropriate planning and saving, you will have a long and enjoyable retirement ahead.
Tuesday, August 12, 2008
Taking the Back Road to Roth
File your taxes, pay your taxes, let’s face it, you have a lot to do by April 15, 2009.
There is one other thing you might want to consider doing on or by April 15, 2009 and that is fund your IRA for 2008. That’s right, the IRS says that you have until April 15, 2009 to make a 2008 contribution to your IRA. This rule applies to both Roth and Traditional IRAs. The contribution limit for a 2008 IRA contribution is $5,000 if you are under 50, and $6,000 if you are age 50 or over. You can make a contribution up to these amounts as long as you have at least that much earned income. However there is a catch, if your adjusted gross income is above certain thresholds (limits depend on filing status), you probably already know that you can’t contribute to a Roth (after tax) IRA, and can’t deduct a contribution to a traditional (tax deductible) IRA
So what are you to do if you can’t contribute to a Roth and can’t deduct contributions to a Traditional IRA? The answer: Contribute to a non-deductible IRA.
Types of IRAs, a Quick Breakdown:
When an investor funds a traditional IRA they can sometimes deduct contributions made to that account. The investments then grow tax-free until retirement (age 59 ½) and are taxed at the regular income tax rates of that time upon withdrawal.
When an investor funds a Roth IRA however, there is not an immediate tax deduction. However, investments grow tax free until retirement (age 59 ½), and are then withdrawn tax-free. A great tool if you think you will be in the same tax bracket, or a higher tax bracket when you are planning on withdrawing assets.
If an investor opens a non-deductible IRA, they are essentially using a traditional IRA but foregoing the tax deduction. Then, upon retirement, (age 59 1/2 ) money is withdrawn using a ratio of contribution to investment earnings. For example, if an investor contributes $40,000 to a non deductible IRA that grows to $100,000 by retirement, 60% of all the withdrawals from that account are taxed as ordinary income. The remaining 40% of withdrawals are considered a return of basis to the investor and not taxed.
Until recently, contributing to a non-deductible IRA was barely worth investigating because you couldn’t deduct contributions, you can’t fund at a very high level, and withdrawals were partially taxable upon retirement, so why even bother?
Here’s why to bother:
In May of 2006 President Bush signed a bill that lifted the income limitation on Roth IRAs in 2010. This means that in 2010 there will be no income limitation on people who would like to convert their traditional IRAs to Roth. So in preparation for this magical year in financial planning, it could be appropriate for some clients to fund traditional (non-deductible) IRAs each year until the 2010 income limits are lifted. This will allow contributions to be built up for a few years then converted to a Roth IRA.
Getting in through the back door:
As I mentioned above, it may be appropriate for some clients to examine opening non-deductible IRAs to fund for the next few years until 2010. This way, in 2010 when the income limit on Roth IRA conversions is lifted, investors will be able to convert their non-deductible IRAs to Roth IRAs, paying only the tax on what investment gains the non-deductible IRAs will have experienced in those few years. Best of all, you don’t have to pay all the tax in 2011. The IRS has decided to let you split the tax on the a 2010 Roth conversion, paying half if 2011 and half in 2012! This is true as long as the funds aren’t immediately withdrawn from the Roth IRA following conversion.
Once the conversion to Roth is made, the investments can be withdrawn upon retirement tax free. In essence, using the non-deductible/Roth conversion strategy, allows investors who ordinarily wouldn’t be able to take advantage of the benefits of a Roth to get some of their retirement funds in position to take advantage of Roth tax treatment.
What if I already have a traditional IRA where some contributions have been deducted and some have not:
If you are like many investors, you probably have made some deductible contributions and some non-deductible IRA contributions. Unfortunately, for purposes of converting a traditional IRA to a Roth, the IRS does not separate deductible and non-deductible IRAs and all IRA earnings will be prorated to calculate tax in a conversion situation. This puts the burden of calculating basis in the IRA and historic deductibility on the shoulders of the investor. Furthermore, if contributions were deducted, they will be treated as earnings for purposes of a conversion. This means that you will have to pay tax at conversion on contributions you previously deducted as well as the earnings.
However, this is but only a minor setback. If you have a traditional IRA and want also to fund a non-deductible IRAs for the coming years, it may be possible (depending on plan provisions) to roll your traditional IRA into a 401(k). Once done, new IRAs could be opened and funded as non-deductible. This way, in 2010 your old IRAs are out of the picture (and into your 401(k)) for conversion purposes, and you only convert what you know to be non deductible.
Funding a non-deductible IRA until 2010 can be a very beneficial technique. If taken advantage of, using this strategy could allow you to establish a small, after-tax nest egg that can grow in the coming years tax free and be withdrawn at retirement with no tax. I encourage you to examine this option if you think it will work for you.
There is one other thing you might want to consider doing on or by April 15, 2009 and that is fund your IRA for 2008. That’s right, the IRS says that you have until April 15, 2009 to make a 2008 contribution to your IRA. This rule applies to both Roth and Traditional IRAs. The contribution limit for a 2008 IRA contribution is $5,000 if you are under 50, and $6,000 if you are age 50 or over. You can make a contribution up to these amounts as long as you have at least that much earned income. However there is a catch, if your adjusted gross income is above certain thresholds (limits depend on filing status), you probably already know that you can’t contribute to a Roth (after tax) IRA, and can’t deduct a contribution to a traditional (tax deductible) IRA
So what are you to do if you can’t contribute to a Roth and can’t deduct contributions to a Traditional IRA? The answer: Contribute to a non-deductible IRA.
Types of IRAs, a Quick Breakdown:
When an investor funds a traditional IRA they can sometimes deduct contributions made to that account. The investments then grow tax-free until retirement (age 59 ½) and are taxed at the regular income tax rates of that time upon withdrawal.
When an investor funds a Roth IRA however, there is not an immediate tax deduction. However, investments grow tax free until retirement (age 59 ½), and are then withdrawn tax-free. A great tool if you think you will be in the same tax bracket, or a higher tax bracket when you are planning on withdrawing assets.
If an investor opens a non-deductible IRA, they are essentially using a traditional IRA but foregoing the tax deduction. Then, upon retirement, (age 59 1/2 ) money is withdrawn using a ratio of contribution to investment earnings. For example, if an investor contributes $40,000 to a non deductible IRA that grows to $100,000 by retirement, 60% of all the withdrawals from that account are taxed as ordinary income. The remaining 40% of withdrawals are considered a return of basis to the investor and not taxed.
Until recently, contributing to a non-deductible IRA was barely worth investigating because you couldn’t deduct contributions, you can’t fund at a very high level, and withdrawals were partially taxable upon retirement, so why even bother?
Here’s why to bother:
In May of 2006 President Bush signed a bill that lifted the income limitation on Roth IRAs in 2010. This means that in 2010 there will be no income limitation on people who would like to convert their traditional IRAs to Roth. So in preparation for this magical year in financial planning, it could be appropriate for some clients to fund traditional (non-deductible) IRAs each year until the 2010 income limits are lifted. This will allow contributions to be built up for a few years then converted to a Roth IRA.
Getting in through the back door:
As I mentioned above, it may be appropriate for some clients to examine opening non-deductible IRAs to fund for the next few years until 2010. This way, in 2010 when the income limit on Roth IRA conversions is lifted, investors will be able to convert their non-deductible IRAs to Roth IRAs, paying only the tax on what investment gains the non-deductible IRAs will have experienced in those few years. Best of all, you don’t have to pay all the tax in 2011. The IRS has decided to let you split the tax on the a 2010 Roth conversion, paying half if 2011 and half in 2012! This is true as long as the funds aren’t immediately withdrawn from the Roth IRA following conversion.
Once the conversion to Roth is made, the investments can be withdrawn upon retirement tax free. In essence, using the non-deductible/Roth conversion strategy, allows investors who ordinarily wouldn’t be able to take advantage of the benefits of a Roth to get some of their retirement funds in position to take advantage of Roth tax treatment.
What if I already have a traditional IRA where some contributions have been deducted and some have not:
If you are like many investors, you probably have made some deductible contributions and some non-deductible IRA contributions. Unfortunately, for purposes of converting a traditional IRA to a Roth, the IRS does not separate deductible and non-deductible IRAs and all IRA earnings will be prorated to calculate tax in a conversion situation. This puts the burden of calculating basis in the IRA and historic deductibility on the shoulders of the investor. Furthermore, if contributions were deducted, they will be treated as earnings for purposes of a conversion. This means that you will have to pay tax at conversion on contributions you previously deducted as well as the earnings.
However, this is but only a minor setback. If you have a traditional IRA and want also to fund a non-deductible IRAs for the coming years, it may be possible (depending on plan provisions) to roll your traditional IRA into a 401(k). Once done, new IRAs could be opened and funded as non-deductible. This way, in 2010 your old IRAs are out of the picture (and into your 401(k)) for conversion purposes, and you only convert what you know to be non deductible.
Funding a non-deductible IRA until 2010 can be a very beneficial technique. If taken advantage of, using this strategy could allow you to establish a small, after-tax nest egg that can grow in the coming years tax free and be withdrawn at retirement with no tax. I encourage you to examine this option if you think it will work for you.
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