Aikapa Financial Bites

2010 and the Year ahead

Edi Alvarez, MSc, CFP

Life Happens, so enjoy it! Regularly you should track your finances BUT do enjoy and appreciate the wonders of life in the moment. Do remain centered on your family and personal goals and don’t keep up with the Jones’s or act on water-cooler investment advice.

Always work on understanding & visualizing your goals. Try to live within your existing budget even as your income improves. Consider using software like mint.com or Quicken to track your spending.  Always save for a rainy day because when those days arrive you need to be well prepared to ensure you don’t drown.

 Negotiate everything from cable bills to credit card fees to rent. You never know until you ask. Many service providers will work with you.  Always be polite and ask for a reduced rate but don’t divulge your finances.

Employee benefits. Many firms have begun offering Roth 401Ks and Health Savings Accounts (HSAs), and firm equity. Review these benefits within your entire financial plan.  Are these benefits part of your wealth building plan?

Tax rates. Capital gains and dividend tax rates are low in 2010, but are expected to rise in 2011.  This may be a time to sell investments you are planning to sell in the next few years. Consider a Roth, it will likely benefit you to put some of your IRA money into it as long as you can handle the tax consequences all in 2010.  Since we don’t know the tax rates in 2011 consider carefully any suggestions to defer Roth tax payments to 2011 and 2012.  

Cash. Always evaluate your cash needs and only leave enough in cash that is not earmarked for short term uses or emergency savings.  You might want to keep your cash in the best earning conservative vehicle and the remainder should be in bond or may even be better used to pay down mortgage - you’ll need to check your overall plan and do the numbers to make sure which is the best choice for you.   

Rebalance regularly. The market continues to show us that we can’t predict when it will have sudden changes so don’t attempt to time the market, but do time your rebalancing to your portfolio allocation. This should give you opportunities to remove excess earnings from a winning security and buy those that are inexpensive.

Each year manage your credit report. If you have not already, implement a regular schedule of requesting your free annual credit report from www.annualcreditreport.com.  When making this request make sure that you are NOT paying a fee.  Carefully navigate the website and get one free report each year from each of the three main credit reporting agencies, make sure to request a different agency every four months. Always check the report for errors. 

Keep an eye on fees and expenses. Pay attention to commissions, fund management and other expenses incurred on your investments, banking and other services/products.  Make sure that the fees are appropriate with the service/results experienced.  Watch for hidden fees that are not providing you with value.

Love & Money

When I am asked what is the secret for a strong happy marriage.  I always answer that for more than 20 years I have found that sharing values, respect and trust are often key ingredients.  Over time a willingness to plan and share our lives has deepen our relationship.

Serious relationships should include open and honest discussions about credit, debt, income, retirement, savings along with a serious conversation about family & career plans.  They should also include a healthy participation by both in family finances.  Since there is NO BLISS IN NOT KNOWING I would encourage you to begin these conversations by reviewing each other’s credit reports.  Begin healthy financial communications before you solidify your social contract with each other.

You can obtain each agency’s credit report 
www.equifax.com
www.transunion.com, and
www.experian.com

 Long before you say “I DO” ensure that you really do accept each others past, present and future behavior around money.  

Communication is critical in any relationship and failure to discuss finances is at the core of many failed relationships.  It is a huge red flag if you are both ready to join your lives and yet are not able to discuss and plan for your lives together.

If you need assistance consider a third party which may be covered by your benefit plan at work.

Begin 2010 with a plan in mind!

2010 has begun and you should have received our annual financial planning calendar. 

You should review the calendar adding your own important dates and family target dates.  Post it somewhere that will be visible daily.  This will help you enjoy the inspirational views from around the world as well as regularly target you and your family to think of the financial consequences of our actions. 

Don’t forget to mark your personal financial review/planning times as well as your family meetings.  We recommend that financial family meetings be set quarter or semi-annually.  Allow for enough time to prepare your financial data for these family financial planning meetings.

Engage our help if you need a third party to run or coach you to run these family meetings.

I encourage you to focus on your career, family life and worthy causes with a solid financial plan/structure for you and your family.  Although we live in an interconnected world it is up to us to ensure that we keep moving towards our goals and dreams.

Remembrance Day and the Poppy

In Flanders Fields

In Flanders fields the poppies blow
Between the crosses, row on row
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.

We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie
In Flanders fields.

Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields.

John McCrae (1872 - 1918)

The American Moira Michael from Georgia, was the first person to wear a poppy in remembrance. In reply to McCrae’s poem, she wrote a poem entitled ‘We shall keep the faith’ which includes the lines:

And now the Torch and Poppy Red
We wear in honor of our dead.

Many two-minute silences are followed by a lone bugler playing The Last Post, reminiscent of times of war when trumpets were as much a part of battle as bayonets. A poem called ‘For the Fallen’ is often read aloud on the occasion; the most famous stanza of which reads:

They shall grow not old, as we that are left grow old:
Age shall not weary them, nor the years condemn.
At the going down of the sun and in the morning
We will remember them.

Fourth stanza of ‘For the Fallen’ by Laurence Binyon (1869 - 1943)

 

Earth Quake Planning Basics

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

We strongly encourage you to insure against catastrophic risks.  Katrina was a recent example of a catastrophic risk as would be a category 7.0 earthquake.  The best way to prepare is to plan for both your physical and financial safety.  

We address earthquake planning with our AIKAPA Managed clients and AIKAPA Guided clients usually consult with us as they need.  If you’d like us to provide more specific and personal discussion feel free to call us.  You may also find value in the links provided in the AIKAPA resource page (www.aikapa.com/links.htm). 
Here are answers to your most frequent questions on earthquake risk planning:

1)  Can I be denied earthquake insurance?  It is mandatory, in California, that home insurance providers make available earthquake endorsement to all home policies sold in this state.  The CEA (California Earthquake Authority) was created after the last major earthquake to assist home insurance companies so that they would be able to offer home insurance in California.  I encourage you to call California Board of Insurance directly if your agent states that you can’t get earthquake insurance but you have your home insurance with them (1-800-927-HELP).   The laws to protect you are under the California Insurance Code at section 790.03(h) of the California Code of Regulations at Title 10, Chapter 5, and in judicial decisions.

2) What is likely to be my premium?  This year we’ve found that premiums are more expensive - some as much as 75% more.  The actual policy premiums, in the Bay Area, can vary dramatically depending on your home’s location, cost of recovery, and deductible.  Insurance rates are calculated based on your zip code and the current cost of rebuilding your home.  If you login to the CEA website (link provided via www.aikapa.com/links.htm) you can use their premium calculator to estimate your likely policy premium.  Most of our clients have policies in the range of $1,200 to $4,500 per year.  These policies do give you credit for retrofitting which you’ll likely want to implement to increase your physical safety.

3) How much of a deductible should I get?  This type of insurance only comes with a fairly large deductible.  It is usually in the range of 10-20%.  A home that costs $600K to rebuild could have a premium around $1,500 and a deductible around $60 to $120K.  This means that you need to self insure the first $60 to $120K in earthquake damage.  These funds need to be inflation protected but accessible as part of your ability to self-fund earthquake damage below this level.

 4) What is the risk of earthquake damage?  No one can yet predict this with any certainty how your home will fare during the next earthquake.  You can review your county and city disaster recovery (earthquake) planning to have a local view of how to plan for your safety and also visit the ABAG and USGS website to find out more about your home and business location with regards to the fault lines and shake areas (see our resource page at www.aikapa.com/links.htm).  It is your closeness to the actual fault line and the type of soil (how much shaking and aftershock you experience) that determine the damage you experience.

5)  What is the likelihood of a quake?  The probabilities quoted appear to rise each year.  The 2008 USGS survey states that there is a 62% chance of a 6.7 quake in the next 30 years.  It is also believed that the next quake will strike further north of the Loma Pietra (1989) 6.7 quake.  Those who use frequency analysis to make quake predictions rather favor the prediction that we have entered a higher quake activity period resembling that seen around 1911.  You can read more about Geologist’s view at the USGS website. (See the AIKAPA resource webpage www.aikapa.com/links.htm) 

6) Should I buy this insurance from my current home insurance provider?  You should do a thorough review of many providers.  This is a pretty expensive premium that you need to feel sure will be available when and if you need it.  First, get quotes from large insurance providers including CEA-backed providers (these are easy to find).  Second, get a contractor or structural engineer to review your home’s structural condition in case of an earthquake and secure your home (see www.aikapa.com/links.htm for several useful links).  You’ll next need to carefully review each policy - this is not as straight forward as choosing the least expensive policy.  You will need to compare the limits and be aware of exclusions.  Make sure that when comparing costs you are comparing the same type of coverage, from companies that are either backed by the CEA or are able to withstand the cost of the next big quake.  

7)  When does it make sense to self insure?  When you are covering risks that are not catastrophic it is our belief that you should consider self funding.  You should also consider self funding a large deductible thus allowing you to have enough cash flow to pay for needed catastrophic insurance and also provide for other cash flow needs.  Using your current financial statement, cash flow and home equity you can quantitate your risk and life style exposures. 

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

Introduction to Financial Bites

Aikapa Financial Bites is a “topical tidbit” forum to disseminate wealth planning information on the web for our highly active and resourceful clients.

If you engaged us to manage your wealth and are under the AIKAPA Managed Plan we will contact you when any of these topics are particularly relevant to your personal situation.  AIKAPA Guided Plan participants are encouraged to contact us if you think any of these topics appear relevant to your situation. 

All clients are encouraged to login on our website (www.aikapa.com/login) and submit topics or questions relevant to you.

Tax: First time home buyer credit

First Time Home Buyer Tax Credit and your 2008 tax withholdings:
Are you eligible?
This tax credit is limited to those with an adjusted gross income (AGI) of less than $95K and $170K (single and joint filer) and who buy a personal residence between April 9, 2008 and July 1 2009.  The credit is disallowed if the property is no longer your principal residence before the close of the tax year. It is also disallowed if you are classified as a nonresident alien, or your financing is from tax-exempt mortgage revenue bonds.  You must be a first time home buyer which is defined as having no ownership interest in a principal residence during the three prior years.  You must be a US citizen or US resident alien.
How much and how will you receive the credit?
The maximum amount for any Home Buyer Tax Credit is $7,500 and it is a refundable credit (which means that you will get the credit even if you don’t owe taxes).  If you owe $5,000 and your credit is $6,000 you will receive a check for $1,000. It phases out at $75K and $150K (single and joint filers).  You will receive the credit when you file but if you qualify you may adjust your withholdings or estimate taxes to accommodate this credit.
What is the catch?
The biggest catch for Bay Area home owners is that most do not qualify. If you do qualify for many home purchases you often need to earn enough to cover a fairly large mortgage which will, in many cases, place you above the limits to claim some or all of this credit.  In addition, this is not “free money.” It is a 15-year no interest loan that must be paid back at $500 per year.
What should you do?
First determine if you are likely to qualify this year or early next year.  If you do qualify, then consult with your tax planner or accountant and adjust your withholdings or estimated taxes either this quarter or early next year.
For the original documents, check the links on our resource page:  www.aikapa.com/links.htm
** Please note, this is a Financial Bites column provided for general use by our clients – always check with your tax planner or accountant **

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