Archives for September 2011

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Investing Blog Roundup: CPA Exam Update

Thanks to all of you who have been following along with my progress through the CPA exam. Last weekend, I received my score for the final portion of the exam.

I passed!

Now there are just a few administrative things to be done. If all goes smoothly, I’ll be able to call myself a CPA within a couple months.

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Thanks for reading!

A Request for Vanguard (or Fidelity, or Schwab…)

I don’t particularly enjoy the administrative aspect of managing my portfolio. And my correspondence with readers suggests I’m not alone. Many people find rebalancing to be confusing and/or a hassle.

Some financial advisors provide a rebalancing service. But I don’t think that’s an ideal solution in this case. The value of a financial advisor is in the advice that he or she provides. If you don’t need any advice, it’s probably not worth hiring an advisor just to handle menial stuff like rebalancing.

Similarly, target retirement funds are a step in the right direction, but they still leave some things to be desired:

  • At companies other than Vanguard, they cost too much;
  • Even at Vanguard, it’s possible that none of the funds have an allocation that’s a good fit for a particular investor (for example, somebody who is in a high tax bracket and investing in a taxable account would probably want to use tax-free muni bonds for his/her bond allocation); and
  • There’s always the possibility that the fund company will shift the fund’s allocation (away from the allocation you were counting on) without you noticing.

My Request: A Rebalancing Service

I’d like my brokerage firm to be able to handle rebalancing for me.

In its simplest form, this would just be an alternative method of placing buy/sell orders. Currently, when I rebalance, I calculate the dollar amount of each fund that I need to buy/sell, then I place a transaction for each fund.

Rather than using dollar amounts, and rather than having to execute multiple transactions, I’d like to be able to just enter a percentage for each fund, click one button, and have the account rebalance to that overall allocation.

Even better would be a “build-your-own-target-date-fund” concept. I’d love to be able to:

  • Pick a group of funds,
  • Pick a current allocation between them and an asset allocation glide path (i.e., what the allocation will be in the future), and
  • Have my brokerage firm automatically rebalance back to that allocation for me on pre-determined dates.

Potential Hang-Up: Multiple Accounts

Admittedly, I’m not entirely sure how the service would most-ideally work in the case of a portfolio made up of multiple accounts. It’d be easy to set things up to rebalance each account to the desired allocation, but that’s not always ideal, as it can result in higher costs as a result of:

  • Holding tax-inefficient funds in taxable accounts, or
  • Not qualifying for the lower-cost admiral shares as quickly as could be done otherwise.

In addition, things get tricky when the investor has a retirement plan at work that has to be considered as well when calculating the investor’s overall asset allocation.

But I don’t think that’s necessarily a problem. It seems to me that as long as the current method of rebalancing is still offered, investors could simply use that approach when it’s a better fit.

What Do You Think?

For investors: What do you think of this idea? Would you use it? Do you have any suggestions for ways to improve on it?

For fund companies/brokerage firms: Is there anything stopping you from offering this service? I know of one brokerage firm (Folio Investing) that offers something like this, but why not the larger brokerage firms too (ideally those that offer commission-free trades)?

Will Social Security Be Around When I Retire?

Carol writes in to ask,

“I’m 53 now, my husband is 56. We’re both hoping to retire shortly after 60. I enjoyed your series on Social Security and when to claim it, but I’m not even sure we can count on it to exist when we get to retirement, much less pay how much we’re currently being promised.

We’re currently planning as if we’ll get nothing and that anything we do end up getting will just be a bonus. Do you think this is wise, or is it just going to postpone our retirement unnecessarily?”

I get questions of this nature frequently, so I thought it might be helpful to share my thoughts. But to be clear, I’m not an expert here. I’m not an economist, and I’m not an expert on politics. This is just an “average joe” sort of opinion.

Are Changes Coming?

In 2010, for the first time since 1983, Social Security expenditures exceeded the program’s non-interest income. And a deficit is projected for 2011 as well. According to the Social Security Administration, without any legislative changes, the Social Security trust fund is expected to be depleted by 2036.

Again, I have no special expertise here, but to me, those numbers sure make it seem likely that cuts are coming in some way, at some point.

It’s Not Economics. It’s Politics.

On the other hand, as GOP candidate Rick Perry’s recent difficulties have shown us, Social Security is still very popular with both parties. And proposing changes to it is politically dangerous.

I think common sense tells us that the more severely a proposed cut would affect people who are reliant on Social Security, the less politically viable that cut would be. In other words, if I had to make a guess, I’d guess that changes would focus more heavily on:

  • People further from retirement, and
  • People with higher incomes.

But will it focus on people who are currently under 60? Under 50? Under 40? I have no idea. Ditto for income — there’s just no way to know what changes to the program will look like. But I do think that the younger you are and the higher your income, the more risk there is that you’ll receive less than what the current system would promise.

It Depends on Your Risk Tolerance

Finally, in addition to your age and income, there’s a third factor at play: Your risk tolerance.

I’m not talking about the “tolerance for portfolio volatility” sort of risk tolerance. I’m talking about your tolerance for having to make real sacrifices. How much of a problem will it be if your income ends up being less than you’d planned on? Are there expenses you can easily cut? Can you go back to work if necessary?

The more flexibility you have with your spending, and the more ability you have to increase your income if necessary, the less danger there is in betting that Social Security will be there, in its current form, when you reach the age at which you could claim benefits.

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Investing Blog Roundup: Self-Publishing Questions

Aside from the obvious tax and investing-related questions, the most common thing readers ask me about is self-publishing — how to do it, how to get a book on Amazon, which printing company to use, how to market books, etc.

I’ll be doing my best to answer all those questions (and probably many more) at an “ask the experts” table at the Financial Blogger Conference this upcoming week. If you’re going to be there and you have any interest in publishing a book, please join us. 🙂

After the conference, I’m planning to publish an FAQ page here on the blog that will hopefully be helpful to any readers who are interested in the topic but who will not be attending the conference.

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2012 Tax Brackets and Standard Deduction

How Do Tax Brackets Work?

Just a brief reminder before we get to the tax bracket tables: Being in a given tax bracket does not mean that all of your income is taxed at that rate. Rather, only the portion of your income that is in that bracket is taxed at that rate.

For example, as you can see from the table below, a single taxpayer with taxable income of $8,701 would be in the 15% tax bracket. However, his first $8,700 of income would only be subject to a 10% income tax. It’s only the final dollar of income — the one dollar that’s in the 15% bracket — that would be taxed at 15%.

(See this article for a more thorough explanation.)

Single 2012 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$8,700 10%
$8,701-$35,350 15%
$35,351-$85,650 25%
$85,651-$178,650 28%
$178,651-$388,350 33%
$388,351+ 35%

Married Filing Jointly 2012 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$17,400 10%
$17,401-$70,700 15%
$70,701-$142,700 25%
$142,701-$217,450 28%
$217,451-$388,350 33%
$388,351+ 35%

Head of Household 2012 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$12,400 10%
$12,401-$47,350 15%
$47,351-$122,300 25%
$122,301-$198,050 28%
$198,051-$388,350 33%
$388,351+ 35%

Married Filing Separately 2012 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$8,700 10%
$8,701-$35,350 15%
$35,351-$71,350 25%
$71,351-$108,725 28%
$108,726-$194,175 33%
$194,176+ 35%

2012 Standard Deduction and Exemption

For 2012 the personal exemption is $3,800, and the standard deductions are:

  • $5,950 for single taxpayers and married taxpayers filing separately,
  • $11,900 for married taxpayers filing jointly, and
  • $8,700 for taxpayers filing as head of household.

The additional standard deduction for taxpayers who are blind or over age 65 remains unchanged at $1,450 for single taxpayers and $1,150 for married taxpayers.

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  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
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Are Roth Accounts Overrated?

As we’ve discussed here before, the question of whether you should use Roth savings (i.e., a Roth 401(k) or Roth IRA) as opposed to tax-deferred savings (such as a regular 401(k) or traditional IRA) is primarily a function of tax brackets:

  • If you expect your tax bracket to be higher when you’re withdrawing the money than it is when you’re contributing the money, a Roth is a better choice.
  • If you expect your tax bracket to be lower when you’re withdrawing the money than it is when you’re contributing the money, tax-deferred savings are a better choice.
  • If you have no idea, it’s probably wise to do some of both.

There are exceptions of course. But the above breakdown is generally true.

What if Tax Rates Are Going Up?

One of the most common arguments I see in favor of choosing Roth accounts is that tax rates are likely to rise in the future as a result of our country’s enormous deficit.

Leaving aside any qualms about that assumption, there’s a big hole in this line of thinking: It overlooks the fact that most people have meaningfully less taxable income during retirement than they had when working. (This is pretty intuitive; for most people, when they leave their jobs, their taxable income goes down.)

Where Will Your Income Come From?

When making the Roth vs. tax-deferred decision, rather than basing it entirely on the direction in which you expect legislative tax rates to move, it’s important to also ask what types income you’ll have in retirement.

For example, how much of your income will be from fully taxable sources such as:

  • A pension,
  • Part-time job income,
  • Tax-deferred savings, or
  • Rental property?

And how much of your income will be from sources that are only partially taxable (or fully taxable, but at lower rates) — things like:

And how much of your expenses will be satisfied with money that’s entirely tax-free, such as:

  • Roth IRA savings,
  • Roth 401(k) savings, or
  • Taxable holdings where your cost basis is equal to (or greater than) the market value?

The less of your income that you expect to come from the first (fully taxable) category, the lower your tax bracket in retirement is likely to be (even if legislative tax rates do rise), and the less sense Roth savings make relative to tax-deferred savings.

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Can I Retire Cover

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My Social Security calculator: Open Social Security