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Archive for August, 2012

12
Aug

Do you agree with John C. Bogle’s philosophies?

Jeff Sommer’s article “A Mutual Master, Too Worried to Rest” in Sunday’s The New York Times provides a summary of Mr. Bogle’s accomplishments and his philosophies. 
John Bogle sees uncertainty and thinks “This is the worst time for investors that he has ever seen…”  “Even so, he says, long-term investors must hold stocks, because risky as the market may be, it is still likely to produce better returns than the alternatives.  “Wise investors won’t try to outsmart the market,” he says. “They’ll buy index funds for the long term, and they’ll diversify.

Generally he belies in bonds as an alternative to stocks.  He believes that bonds do not look
good for the next decade.  “Dark as this outlook may be, he says, people need to “stay the course” if they are to have hope of buying homes or putting children through college or retiring in comfort.”
He is still preaching the gospel of long-term, low-cost investing. “My ideas are very simple,” he says: “In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”
The article discusses some of his other beliefs he has to improve investing environment.  He was criticized when he created index funds and Vanguard.  Index funds “…are now the industry standard”.
John Bogle’s philosophies have not always been accepted.  Many now believe that his long term approach to investing were (are) right.  Implementing them is difficult and requires patience and perseverance.
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10
Aug

Parents need to educate their children about money.

The Journal of Accountancy reported, 08/09/2012, the results of a survey conducted for the AICPA.
Some of the findings were:
30% of parents never talk to their children about money or have had only one talk with their children about money.

67% strongly agreed that they knew enough about personal finance to teach their children about personal finance. 
Some tips from the National Financial Literacy Commissions include:

Start early by discussing that delayed gratification is the basis for budgeting and savings goals.

Discuss things they are interested in. 
Frequent discussions about good financial habits should include how they relate to current and future benefits (needs).

Your actions should reinforce good financial behavior.

There is a lot of evidence that children are not getting introduced to financial related matters early enough.  Some schools are starting to include these topics.  These efforts need to be expanded.  Parents should assume the responsibility now and not wait for the schools to provide these topics.  Parent should also request/demand that the schools include financial educations.

These topics should include behavioral finance.  This is an increasing volume of studies showing that some of our instincts are detrimental to our financial well being.

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Link to AICPA’s 360 Degrees of Financial Literacy:

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8
Aug

Most under 45 underestimate their life expectancy.

This was the finding of a survey by the Society of Actuaries, as reported the Financial Advisor Magazine August 1, 2012.

Many people forget that the average represents the middle.  That is half will live longer and half will not live that long.  The life expectancy for newborn American males increased from 66.6 years to 75.7 years between 1960 and 2010.  During the same period the life expectancy for newborn American females increased from 73.1 to 80.8.

A majority say they would be very or somewhat likely to make significant reductions in their living expenses if they thought they would live 5 years longer than they expected.  “More than half of per-retirees would also use money they otherwise would have left to heirs or downsize their housing.”

The survey also found many underestimate their planning time-line when making major financial decisions.  Retires generally look 5 years into the future and per-retirees look 10 years into the future.

The report concludes this can result in underfunding for retirement.   Understanding the increased life expectancy, the current state of the economy and the volatility of the stock market require people to do a better job of managing their finances and planning for retirement.

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2
Aug

The “Fiscal Cliff”

What is the “fiscal cliff”? It’s the term being used by many to describe the unique combination of tax increases and spending cuts scheduled to go into effect on January 1, 2013. The ominous term reflects the belief by some that, taken together, higher taxes and decreased spending at the levels prescribed have the potential to derail the economy. Whether we do indeed step off the cliff at the end of the year, and what exactly that will mean for the economy, depends on several factors.

Will expiring tax breaks be extended?

With the “Bush tax cuts” (extended for an additional two years by legislation passed in 2010) set to sunset at the end of 2012, federal income tax rates will jump up in 2013. We’ll go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). The maximum rate that applies to long-term capital gains will generally increase from 15% to 20%. And while the current lower long-term capital gain tax rates now apply to qualifying dividends, starting in 2013, dividends will once again be taxed as ordinary income.

Additionally, the temporary 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax, in place for the last two years, also expires at the end of 2012. And, lower alternative minimum tax (AMT) exemption amounts (the AMT-related provisions actually expired at the end of 2011) mean that there will be a dramatic increase in the number of individuals subject to AMT when they file their 2012 federal income tax returns in 2013.

Other breaks go away in 2013 as well.

Estate and gift tax provisions will change significantly (reverting to 2001 rules). For example, the amount that can generally be excluded from estate and gift tax drops from $5.12 million in 2012 to $1 million in 2013, and the top tax rate increases from 35% to 55%.

Itemized deductions and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).

The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit all revert to old, lower limits and less generous rules.

Individuals will no longer be able to deduct student loan interest after the first 60 months of repayment.

There continues to be discussion about extending expiring provisions. The impasse, however, centers on whether tax breaks get extended for all, or only for individuals earning $200,000 or less (households earning $250,000 or less). Many expect there to be little chance of resolution until after the November election.

Will new taxes take effect in 2013?

Beginning in 2013, the hospital insurance (HI) portion of the payroll tax–commonly referred to as the Medicare portion–increases by 0.9% for individuals with wages exceeding $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

Also beginning in 2013, a new 3.8% Medicare contribution tax is imposed on the unearned income of high-income individuals. This tax applies to some or all of the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

Both of these new taxes were created by the health-care reform legislation passed in 2010–recently upheld as constitutional by the U.S. Supreme Court–and it would seem unlikely that anything will prevent them from taking

Will mandatory spending cuts be implemented?

The failure of the deficit reduction supercommittee to reach agreement back in November 2011 automatically triggered $1.2 trillion in broad-based spending cuts over a multiyear period beginning in 2013 (the formal term for this is “automatic sequestration”). The cuts are to be split evenly between defense spending and nondefense spending. Although Social Security, Medicaid, and Medicare benefits are exempt, and cuts to Medicare provider payments cannot be more than 2%, most discretionary programs including education, transportation, and energy programs will be subject to the automatic cuts.

New legislation is required to avoid the automatic cuts. But while it’s difficult to find anyone who believes the across-the-board cuts are a good idea, there’s no consensus on how to prevent them. Like the expiring tax breaks, the direction the dialogue takes will likely depend on the results of the November election.

What’s the worst-case scenario?

Many fear that the combination of tax increases and spending cuts will have severe negative economic consequences. According to a report issued by the nonpartisan Congressional Budget Office (Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013, May 2012), taken as a whole, the tax increases and spending reductions will reduce the federal budget deficit by 5.1% of gross domestic product (GDP) between calendar years 2012 and 2013. The Congressional Budget Office projects that under these fiscal conditions, the economy would contract during the first half of 2013 (i.e., we would likely experience a recession).

It’s impossible to predict exactly how all of this will play out. One thing is for sure, though: the “fiscal cliff” figures to feature prominently in the national dialogue between now and November.

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