A General Outline for Lifetime Planning: 300-35-100K

Some look at my writings and critique the simplicity of the financial numbers I use.  In case, you need some substance for my technical expertise, check out my dissertation hosted at scottizu.files.wordpress.com. This way, you know I can discuss the gobbly gook of mathematics with the best of them (perhaps).  My straight forward approach may seem offensive to some but in reality, getting my PhD was in a sense one of the worst things that happened to me.  I made me think I knew something.

It was several years later that my passion for exploration opened up again and this journey showed me how little I knew and opened my eyes to an endless world to explore.

If you have gotten to this point, I must apologize for the rant above and you may be asking yourself why am I reading this?  Is there some financial tip here?

Woodie Guthrie once said, "Any fool can make something complicated.  It takes a genius to make it simple."

So that's exactly what I want to do.  Make it simple.  Here it is... A general guideline for your overall financial life.

According to www.daveramsey.com, saving $300 per month for a 35 year period (need to enter 36 in how much investment will be in ...), will yield 1.95 million dollars.  Roughly 2 million dollars.

And if you decided to annuitize 2 million dollars through a life insurance company after these 35 years of saving you could probably get lifetime payments of 5%.  This would pay you $100,000 per year for the rest of your life.

So, in summary, putting away $300 per month for over 30-40 years would help you to accumulate roughly 2 million dollars which translate to roughly $10,000 per month to retire on.

Jim Rohn's Take on the Law of Sowing and Reaping

It is amazing that the law of sowing and reaping applies to so much today. Check out this video by Jim Rohn.



There are three areas I'd like to discuss where this law applies. The first is in your personal life. The bible teaches, "God is not mocked. A man reaps what he sows." I know for myself that I actually hated this law when I realized the truth of its reality. When I realized that some of my bad decisions lead to poisonous fruit and I had no one to blame but myself for making these decisions, it was hard to accept. So having a field with both good and bad fruit can be hard at times. But in the end, every day, all you can do is all you can do. And what you can do, is to plant new seeds, by making good decisions, even in the midst of eating the rotten fruit that life has handed you.

The second area is investing. One of the most shocking thing I see is when people start to get into investing and they go our and purchase Apple stock. It is amazing to watch! In small business, in large business, 90% of companies fail. Over a 40 year period, out of the S&P 500 only General Electric stayed afloat. So, to pick a single stock like Apple and put all your eggs into that basket baffles me. You are not going to win that game, so don't play. It's like going to a roulette table where you have a 1 out of 10 chance of winning. So what should you do? Well, the venture capitalists in Silicon Valley know that 90% of businesses fail. So what do they do? Well, they pick 10 solid companies, take a calculated risk. They know that 90% fail. They know that they cannot predict which company will make it. But time and time again, they watch 9 out of 10 fail. But the one, the one seed that lands on fertile ground, it takes hold, and bears fruit for decades and decades. So, if you wish to invest, sow your seeds into companies. Over and over. And in time, your money will grow.

The last area is in business. This could include your life's purpose or your personal mission. You already know that your message will rarely land on fertile ground. Out of 10 people, you deliver a message to, only 1 will act of it. Only 1 will be affected. But sow those seeds. Over time, you will see the seeds grow. But remember, you can only plant the seed. You cannot bring the rain. You cannot bring the sun. You cannot determine the time or season that the first leaf will spring from the ground. All you can do is sow. But one day, if you hold steadfast, you will see and abundance of fruit from the efforts you build.

Government Incentives for Low Income Retirement Contributions

Did you know that low income earners have an incentive to contribute to a retirement account?  That is right, the government will give qualified people a credit up to $50 for every $100 deposited in their personal IRA.

See Form 8880.

Other tax links include:

1040 Insructions - Form 1040

1040A Instructions - Form 1040 A

1040 EZ Instructions - Form 1040 EZ

540 Booklet - Form 540 Instructions - Form 540

Also, for those interested in Small Business expenses, see www.irs.gov for Topic 509, Business Use of Home.

How the Online Poker Industry was a Threat to National Security

In 1971, the US came off the gold standard. What that meant was that banks no longer had to back paper money with gold. At that time, our money became fiat money.

In the 90's, Clinton helped to pass several laws allowing banks to perform investment and mortgage transactions inside the actual bank. What that meant was that banks no longer had to keep 60% of money on hand as collateral.  Not only that, banks went from helping people save to helping people borrow.

Although the FDIC now insures cash up to $250,000 per individual, the banks only have roughly 44 cents per hundred dollars. This means, the bank has roughly $1,100 on hand for the $250,000, in the event of a national crisis.

So what does this have to do with the online poker phenomena? Well, imagine 1 million online players depositing between $5 and $1,000. Imagine this money getting transferred to off shore accounts, then pulled out as cash.  On paper, inside the US, is not a threat.  However, someone pulling $4,400 out of the US, translates to $1 million of backed money.

Thoughts?

Are State Refunds Taxable?

Each year, when you file your federal tax return, you have the option to deduct your state taxes to reduce your adjusted gross income.

This option is available if you decide to itemize your deductions on Schedule A.  On this form, you have the option to either deduct state sales taxes or state income taxes, but not both.

Here are three cases to consider:

Exact Payment
$500 was withheld for state income taxes
You owed $500 in state income taxes

In this case, when you do your federal income taxes, assuming you take the "state income taxes itemized deduction", you will deduct $500.  If you are in the 25% tax bracket, this will save you $125.

Over Payment
$700 was withheld for state income taxes
You owed $500 in state income taxes

In this case, when you do your federal income taxes, assuming you take the "state income taxes itemized deduction", you will deduct $700.  If you are in the 25% tax bracket, this will save you $175.

Next year, you will report your $200 state refund as income.  If you are in the 25% tax bracket, this will cost you $50.

In the end, this will save you $125 total.

Under Payment

$400 was withheld for state income taxes
You owed $500 in state income taxes

In this case, when you do your federal income taxes, assuming you take the "state income taxes itemized deduction", you will deduct $400.  If you are in the 25% tax bracket, this will save you $100.

Next year, if you add the $100 paid in state income taxes to the "state income taxes itemized deduction", you will save an additional $25.

In the end, this will save you $125 total.

See brrinc.org and blog.turbotax.intuit.com for more details.

Calculating Taxable Income when Surrendering a Whole Life Insurance Policy Before Death

In general, whole life insurance involves overpaying ten times the cost of term insurance and placing that extra money into a separate account.

The State of California categorizes Whole, Universal, Variable, Indexed and several others under the category of Whole Life Insurance (as opposed to Term Life Insurance).

In order to determine the gain within a Whole Life Insurance policy, you must first calculate the cost basis.  The cost basis in most cases is just the total amount of premiums paid on the policy (see finance.zacks.com for more information).  In rare cases, there may be distributions in which case the distributions will reduce the cost basis.

Next, you determine the surrender value.  A common misconception is that a life insurance policy is worth the account value.  However, a more accurate estimation of value is today's value, which is the surrender value.

Gain = Surrender Value - Premiums

Compare this to a typical gain for any investment, such as a home:

Gain = Sale Price - Cost Basis

The Gain will be taxed under the IRS code 7702.  This gain is reported as ordinary income.  This is unfortunate, because most policies result in a loss and a capital loss would have the option to be offset with a capital gain.

How Can Financial Institutions Be More Transparent?

Consider these questions when thinking about a particular investment portfolio. Is it possible that fund performance is not quite as important as we thought? How much are hidden fees and charges are affecting your bottom line? With all the information given by financial institutions, how can we really simplify our life and figure out how we are doing? How can we determine our financial velocity?

When in comes down to it, your fund performance, while important is not the most important. Your sales charges or management fees are also not that important. What is most important is your bottom line, which takes into account both performance and charges. In other words, rather than looking at income or expenses, lets look at profit. When you look at your account, you want to know what your personal rate of return is.

When looking at your personal rate of return it is critical to take into account the dates of your deposits and your current value. Luckily, when it comes to current value, the valuation of portfolios is fairly accurate due to the liquidity of stocks. This is not the same as car or home valuation. On the other hand, the time value of money should be taken into consideration.

If you deposit $500 during the year and your money at the end of the year is $1000, the day you deposit has a large impact on the personal rate of return. If you deposited the money near January 1st, your personal rate of return would be close to 100%. If you deposited your money around December 28th, your personal rate of return would be closer to 10000%!

With all this in mind, institutions like Charles Schwab and Fidelity have been including personal rate of return in their statements. I did an independent audit and found the following:

See the algorithm at sizustech.blogspot.com
This is what I found...

Case I

The following data represents deposits for the last quarter of 2013:

var currentNetWorth = createTransaction("12/31/2013", 4073.99);
var paymentArray = [];
paymentArray[0] = createTransaction("09/20/2013", 500.00);
paymentArray[1] = createTransaction("10/04/2013", 500.00);
paymentArray[2] = createTransaction("10/18/2013", 500.00);
paymentArray[3] = createTransaction("11/01/2013", 500.00);
paymentArray[4] = createTransaction("11/18/2013", 500.00);
paymentArray[5] = createTransaction("12/02/2013", 500.00);
paymentArray[6] = createTransaction("12/13/2013", 500.00);
paymentArray[7] = createTransaction("12/27/2013", 500.00);

The financial institution showed a 2013 rate of return as 3.6%. My calculation showed 13.60%.

Case II

The following data represents deposits for the first and second third of 2014:

var currentNetWorth = createTransaction("8/15/2014", 12011.36);
var paymentArray = [];
paymentArray[0] = createTransaction("12/31/2013", 4073.99);
paymentArray[1] = createTransaction("1/13/2014", 450.00);
paymentArray[2] = createTransaction("1/27/2014", 450.00);
paymentArray[3] = createTransaction("2/10/2014", 450.00);
paymentArray[4] = createTransaction("2/20/2014", 450.00);
paymentArray[5] = createTransaction("2/28/2014", 376.82);
paymentArray[6] = createTransaction("3/07/2014", 450.00);
paymentArray[7] = createTransaction("3/21/2014", 450.00);
paymentArray[8] = createTransaction("4/04/2014", 450.00);
paymentArray[9] = createTransaction("4/17/2014", 456.08);
paymentArray[10] = createTransaction("5/02/2014", 456.75);
paymentArray[11] = createTransaction("5/16/2014", 456.75);
paymentArray[12] = createTransaction("5/30/2014", 456.75);
paymentArray[13] = createTransaction("6/13/2014", 456.75);
paymentArray[14] = createTransaction("6/27/2014", 456.75);
paymentArray[15] = createTransaction("7/11/2014", 456.75);
paymentArray[16] = createTransaction("7/25/2014", 456.75);
paymentArray[17] = createTransaction("8/08/2014", 456.75);

The financial institution showed a YTD rate of return as 3.2%. My calculation showed 6.19%.

Notice that to calculate YTD, you need to take into consideration the value of the portfolio at the end of the previous year.

Case III

The following data represents the combined deposits:

var currentNetWorth = createTransaction("8/15/2014", 12011.36);
var paymentArray = [];
paymentArray[0] = createTransaction("09/20/2013", 500.00);
paymentArray[1] = createTransaction("10/04/2013", 500.00);
paymentArray[2] = createTransaction("10/18/2013", 500.00);
paymentArray[3] = createTransaction("11/01/2013", 500.00);
paymentArray[4] = createTransaction("11/18/2013", 500.00);
paymentArray[5] = createTransaction("12/02/2013", 500.00);
paymentArray[6] = createTransaction("12/13/2013", 500.00);
paymentArray[7] = createTransaction("12/27/2013", 500.00);
paymentArray[8] = createTransaction("1/13/2014", 450.00);
paymentArray[9] = createTransaction("1/27/2014", 450.00);
paymentArray[10] = createTransaction("2/10/2014", 450.00);
paymentArray[11] = createTransaction("2/20/2014", 450.00);
paymentArray[12] = createTransaction("2/28/2014", 376.82);
paymentArray[13] = createTransaction("3/07/2014", 450.00);
paymentArray[14] = createTransaction("3/21/2014", 450.00);
paymentArray[15] = createTransaction("4/04/2014", 450.00);
paymentArray[16] = createTransaction("4/17/2014", 456.08);
paymentArray[17] = createTransaction("5/02/2014", 456.75);
paymentArray[18] = createTransaction("5/16/2014", 456.75);
paymentArray[19] = createTransaction("5/30/2014", 456.75);
paymentArray[20] = createTransaction("6/13/2014", 456.75);
paymentArray[21] = createTransaction("6/27/2014", 456.75);
paymentArray[22] = createTransaction("7/11/2014", 456.75);
paymentArray[23] = createTransaction("7/25/2014", 456.75);
paymentArray[24] = createTransaction("8/08/2014", 456.75);

The financial institution showed a lifetime rate of return as 6.2%. My calculation showed 6.96%.

As a sanity check, if the 2013 rate of return was 3.6% and the YTD rate of return was 3.2%, how could the lifetime rate of return be 6.2%?

Know your personal rate of return. This will help you weed through the fund performance charts, the sales charges, the hidden fees, reported returns, etc.

This post was reposted from http://finlit.biz/uncategorized/how-can-financial-institutions-be-more-transparent/, originally written on August 15th, 2014.