When the ball bounces funny

football_on_grassSo football’s back, and all’s well. Every Saturday morning, it’s chocolate chip muffins, coffee, and College Game Day. It’s beautiful. And a close second in entertainment value for the boys is watching their mom digest the game. “Why do they just run into a pile and then stop?” “Where’s the ball?” “Why did he just kick the ball to the other team?" And my favorite, "Who won?” The boys and I do have fun at her expense, I must admit. But despite all the questions she has, she’s a gamer.

She’s decided that she doesn’t have to understand the game in its entirety to appreciate its value to the family. She knows she can ask us a question if she needs help with anything and understands that losses come with the territory.

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Oui, You Can Be Chris Froome

images[5]Well, this will likely be my last post with Tour de France references for quite a while. Interesting to note that at least a few of you are not that familiar with Le Tour - as we aficionados call it. It’s true. You say,

“Isn’t it just a bunch of skinny men riding their bikes through France?”

Well, just like NASCAR is a bunch of good ol’ boys driving their cars in maddening circles. Wait. Bad example. That’s exactly what NASCAR is. Professional cycling is quite complex, actually. As you may (or may not) know, Great Britain’s Chris Froome won the Le Tour by a margin of 1:12. That’s one minute and 12 seconds.

One minute and 12 seconds over a three-week race that covered roughly 2,100 miles, some of them over the Pyrenees and the Alps mountain ranges, and divided over 21 different stages.

To put that margin of victory into perspective, Froome spent 84 hours, 46 minutes and 14 seconds on the bike – just 1 minute and 12 seconds less than the guy who finished second. Staggering, really. And while it’s only Chris Froome standing atop the winner’s podium in Paris, the victory is due in no small part to the team surrounding him. Not too dissimilar from our personal quests for financial victory. Let’s draw the parallels using some metaphorical language.

The bike:

It’s not about the bike. A bike’s a bike in this metaphor. His may have cost $10K more than yours, but that’s beside the point. Your bike is your job. It gets you from the start to the finish. You may change bikes every now and again, sure. But your goals are accomplished, in no small part, by how well you handle your bike and the caliber of team you surround yourself with. There will always be obstacles, blessings and uncertainties to navigate. You may even crash every now and again. It’s okay. Just get back on the bike…or maybe try a different bike if it suits you? Point being, you must keep pedaling if you’re going to win this race. Coast after the finish line – not before it.

The Team:

Chris Froome didn’t win the tour alone. No one wins the Tour de France alone. It can’t be done. Better yet, it doesn’t have to be done alone. It takes a team. Froome is one of nine riders on Team Sky. And these team members are called “domestiques” (doe mess teeks). Their role is to serve for the benefit of the team leader. It’s not about them, it’s about the team and the team leader. Domestique translates as servant. Together, the team leader and his "servants" create a plan for each stage of the race. With plan in place, and each member’s role clearly defined, they ride. It’s said that over the course of a race, the domestiques can save 20 to 40% of their leader’s energy. Typical roles of the domestique: take the head wind so the leader won’t have to, sit back in the peleton (the peleton is the main group of riders in the race which may number over 150 at times) and protect the leader, get food and beverages for the team, give up a wheel, or even a bike, should the leader have a mechanical issue requiring assistance.

2948144734_c5ceaefedd[1]In short, the domestique’s job is to ensure that the leader is afforded his/her best chance of winning the race. Many teams have domestiques that also serve as specialists like sprinters or climbers. Their primary role is to position their leader and team for victory as best as possible in the stages where mountains and long flat lands are present. These men and women are selfless specialists all working for the leader and for the sake of the team. They might well say to their leader, “You keep riding, we’ll execute the plan.”

And here’s where the rubber hits the road.

You: The Client

You are Chris Froome.  You’re the team leader. At the end of the day, the domestiques are working for you, to accomplish the goals and objectives set forth in your plan. A plan that you helped create with the team you assembled.

This is about you.

And your team has been specifically chosen because of its unique ability and desire to serve you. You’ll do your share of the pedaling, for sure. But you won’t have to do all the work. And it’s your team’s role to help you make the most of the work you put in on your bike.

Me: The Financial Advisor

I am your domestique. Together we create the plan, work the plan and modify the plan to accommodate your race. We’ll have multiple domestiques to assist us with the highs of the mountains and the lows of the valleys. We are here to serve. Providing you with financial and estate planning, with investment allocation counsel and with tax planning and charitable gifting strategies. That’s not an all-inclusive list; we’re just approaching the starting line, folks. We’ll put a plan together and we’ll take it one mile at a time with the finish line in sight.

I am your domestique. I am here to serve.
And I also like metaphors.

My 2 Percent's Worth

Screen-Shot-2014-05-15-at-1.55.10-PMRiding my bicycle 23 miles last Saturday was fun. It was the 23 miles on Sunday that got me. Possible culprits include consecutive 95 degree days and the fact that I’m no longer 25. Some (my wife) might suggest it was male ego, or something like that. I couldn’t really hear her for all the screaming from la region de derriere. Yes. La derriere. (And yes, thanks to Google, I am bilingual. And this French offering is brought to you by le Tour de France which begins July 4th. My favorite sporting event EVER, and maybe the only reason I’d mention France in a post. But I digress.) A friend had borrowed my bike a few weeks before, and I neglected to adequately adjust a certain aspect of the seat position upon its return. You see, I raised the seat, but didn’t move it – ever so slightly forward – which would have maintained the proper distance between la derriere and the handlebars. Consequently, I was poorly positioned for the 46 miles, and certain parts of my body still have not forgotten. Enough said. Point being, ever so slight adjustments can make a world of difference.

Take your 401(k) for example. (I’m a master of segues.) As you’ve gathered from previous posts, I’m also a big fan of participating in employer-sponsored retirement plans. They’re a fantastic benefit - but only if you’re participating in them. If I’m speaking to you here, look into it. Here’s why: They’re easy to use and often provide free money in the way of a company match. This would be the free lunch you’ve always been told there was no such thing as? Let’s see how we can make the most of this free meal.

401k Contribution Comparison

This comparison assumes a $75K annual salary, 8% annualized growth and a company match. Results are not guaranteed.

The above illustrates the benefit of saving just 2 percent more of your check each pay period. You were saving 4%, now you’re saving 6%. Your employer, in this case, was matching 50% of your 4% contribution, now they’re matching 50% of your 6% contribution. With this slight increase, not only are you saving more of your own money for retirement, you’re now taking full advantage of the company’s money – or maxing the match, as they say. Before the increase, however, you were leaving 2% on the table in uncollected matching contributions - or free money as we’ve called it.

If they’re offering you free money…take it.

Here’s where the rubber hits the road: Your slight adjustment in contribution percentage, after 20 years of compounding interest and the additional employer contribution, could yield nearly $162,000.00 of additional padding to your 401(k)! That’s a big benefit for a relatively small change, no? As stated, assumptions are being made here – a $75K annual salary, 8% annual growth, there’s a company match, and the fact that you can swing the contribution increase in the first place. Given the likelihood of rising healthcare costs and the uncertainty swirling around social security, the case could be made that you can’t afford not to swing the contributions. What would a small increase in your 401(k) contribution percentage look like? Looks like additional padding to me. And who among us couldn’t benefit from additional padding…ahem.

The IRA: 2 Great Flavors, 1 Great Retirement Instrument

The "Traditional" IRA and The "Roth" IRAIcecream-2-Flavors

If you're like me, you relish those moments when you can retreat to that one place in the house that everyone knows to be yours, enjoy a cup of jo, and just reflect on the attributes of the Traditional IRA and its cousin, the Roth IRA. Who am I kidding, that's nothing like me... and there's no place in my house that's recognized as just mine. And if this indeed does describe you, then allow me save you a little time. Here's a comparison of the two at a glance:

Any age limitations you should know about?

Roth IRA: You can contribute to them at any age.
Traditional IRA: You must be under age 70½ to contribute to one.

Could your income level affect your contribution eligibility?

With a Roth IRA, the amount could be reduced, and possibly eliminated, based on your modified adjusted gross income (MAGI).
Traditional IRAs have no income level restrictions, but they do have deductibility restrictions which we’ll cover later.

And for both, you must have earned income as defined by the IRS in order to make a contribution at all.

Taxable earned income includes:
• Wages, salaries, tips, and other taxable employee pay;
• Union strike benefits;
• Long-term disability benefits received prior to minimum retirement age;
• Net earnings from self-employment if:
o You own or operate a business or a farm or
o You are a minister or member of a religious order
o You are a statutory employee and have income. Statutory workers are those who meet the independent contractor rules    as employees for employment tax purposes by statute.

Examples of income that are not earned income:
• Pay received for work while an inmate in a penal institution
• Interest and dividends
• Retirement income
• Social security
• Unemployment benefits
• Alimony
• Child support

Are there any contribution limits you should know about?
For the 2014 tax year for both the Roth and Traditional IRA:

If you're under age 50, you can contribute up to $5,500.
If you're age 50 or older, or will be by the end of the year, you can contribute up to $6,500.

Limits could be lower as the amount of your contribution can't exceed the amount of income you earned that year.

Can you claim your contribution as a deduction at tax time?

Roth IRA: Contributions cannot be deducted.
Traditional IRA: Some, and possibly all of these contributions can be claimed as an IRA deduction. The deductible amount could be reduced or eliminated by the following factors: whether you or your spouse are covered by a retirement plan at work, the amount of your modified adjusted gross income, and your filing status.

How about deadlines for making a contribution?

For both, the deadline is typically April 15 of the following year.

What if you want to take money out of your IRA?

Roth IRA: You won’t pay taxes on the withdrawals of your contributions. And you won't pay taxes on withdrawals of your earnings as long as you take them after you've reached age 59½ and you've met the 5-year holding period requirement.

Our friends at Vanguard detail the 5-year holding period below:
The 5-year holding period for Roth IRAs starts on the earlier of the date you:
• First contributed directly to the IRA.
• Rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA.
• Converted a traditional IRA to the Roth IRA.
If you're under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you're required to keep track of the 5-year holding period for each conversion separately.

Traditional IRA: You'll pay ordinary income tax on withdrawals of all earnings and on any contributions you originally deducted on your taxes.

Is there a penalty for withdrawals taken before age 59½?

Roth IRA: On earnings, yes. On contributions, no. No penalties on withdrawals of Roth contributions – just the earnings.
Traditional IRA: There's a 10% federal penalty tax on withdrawals of both contributions and earnings.

Our friends at Vanguard have listed the exceptions to the penalty tax. See below if any apply to you:

Distributions received before you're age 59½ may not be subject to the 10% federal penalty tax if they're:
• Due to your disability or death.
• Distributed to a reservist who was ordered or called to active duty after September 11, 2001, for more than 179 days.

Or if they're to be used for:
• A first-time home purchase (lifetime maximum: $10,000).
• Post secondary education expenses.
• Substantially equal periodic payments taken under IRS guidelines.
• Certain unreimbursed medical expenses.
• An IRS levy on the IRA.
• Health insurance premiums (after you've received at least 12 consecutive weeks of unemployment compensation).

Will you have to take RMDs? (Required Minimum Distributions)

Roth IRA: Nope. They don’t exist in the Roth world unless we're talking about an inherited Roth IRA. If you've inherited a Roth from a non-spouse, you must take a distribution no later than 12/31 of the year after the year of death.
Traditional IRA: Yes, you must take your first RMD by April 1 of the year following the year you reach age 70½.

Most of my clients hold Traditional or Roth IRAs – and many of them hold both . And the reasons for being in one over the other would be a great blog topic. I’ll get on that here shortly. Meanwhile, should you have specific questions about them, please don’t hesitate to give us a call.  Bottom line:  2 great flavors, 1 great retirement instrument.


Investment advisory services offered through CapSouth Partners, an independent registered Investment Advisor. CapSouth Partners does not render legal, accounting, or tax advice. Please consult your legal or tax advisor before taking any action that may have tax or legal consequences.

The Sirens Are Calling

Ulysses on board a boat passes the sirens and their seductive song. Based on Homer 's ancient Greek myth.

When I was growing up, it seemed as if my parents had this hidden and ever-expanding list of things I was too young to do.  On the list: ride my bike to school, have and/or shoot a BB gun, drive the car (peculiar, as I was 18 at the time), drink coffee, and put more than three mothballs in my mouth at any one time. There were others on this list that were SO prohibited they were never, ever discussed. Yet, I survived. But today, sadly, it seems like culture offers no “prohibited list” whatsoever.  It calls to our kids like Sirens to sailors to “start now, or you could miss out!”

As a father of four boys, I have a list as well.

But I’ll join culture’s call on one topic – saving for retirement. “Why start now?” you ask. Because one day you will retire. Because the government didn’t/shouldn’t take you to raise. Because living expenses don’t cease when the pay periods do. Most importantly – it’s your retirement, it’s your responsibility, and you’ll want to be ready for it. Enter:  The Rule of 72.

The Rule of 72:  A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the rate of return into 72. The result is the approximate number of years that it will take for your investment to double. So, let’s say you’re 30 years old and have $25,000 in your 401(k). Let’s also assume you receive an 8% annual return on your investment. Given the formula above, your money should double every 9 years. See the illustration below:

Age                        Balance

30                           $25,000
39                           $50,000
48                           $100,000
57                           $200,000
66                           $400,000

Granted, there are assumptions being made with respect to an 8% return year after year. But let’s look at it another way. Let’s say you opted for the Ford F150 with that $25,000.00, rather than having it invested in your 401(k) or IRA.  Are you even driving that truck 9 years later? If so, a quick value comparison with Kelly Blue Book and your retirement account will speak volumes. This is a $25,000 decision that could cost you $375,000. Listen closely and you’ll hear the sound of the Sirens beckoning…this time, however, it’s okay to listen.

Start saving.

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