Confident. Returns.

Should I Pay Down Debt or Invest in the Market?

By Michael Lecours, CFP July 8, 2015 In Investment Behavior, Rule of Thumb, Saving, Uncategorized

As individuals approach retirement they often ask themselves what they should do to maximize their income. Specifically, they may wonder if they should pay down their debts (credit cards, auto loans, or a mortgage) or should they invest more in the markets. The answer is often times more complicated than they expect.

Exploring Investments

It’s important for investors to understand what the after-tax cost of borrowing is, especially when a mortgage with interest rate is involved. It’s possible that after-tax returns can be higher than after-tax cost of debt. Borrowers who pay a low interest rate are in a better position to invest. Other factors that determine whether or not someone should invest instead of pay down debt favor the entrepreneur and people who are willing to take risks. An investor with a loan costing them 2% per year may want to keep that debt and instead invest in the market if they think they can get 5%-6%.

Managing Risk

Risk is determined by several factors such as age, income, time frame, market activity and taxes. Most experienced investors are aware that equities can be high risk assets. A leading factor that favors investing is high disposable income, which allows for higher risk tolerance. If we revisit the above example, the investor does run the risk of investing in the market in a bad year. In that case the investor still has to service the debt, but also watch their portfolio decline in value. The higher the interest rate on the loan, the more risk the investor takes that the return on the investments will not beat the interest rate.

Paying Debt & Cash Flow

Even though debt seems like a bad word, it is helpful to a credit score to have a certain amount of debt or credit history. The first priority should be saving up six months worth of monthly expenses as part of an emergency or safety net fund. Once this fund is in place, excess money can be used to pay down debt or invest. The main barometer for deciding between debt and investing is debt-to-income ratio. If the ratio is high, paying debt is usually the wiser choice. Tight cash flow is a red flag that budget cuts will be needed.

With low interest rates like we’ve seen, now is a good time to review your situation.

How to Avoid the Biggest Mistake When Starting Social Security

By Michael Lecours, CFP June 25, 2015 In Investment Behavior, Investment Strategies, Retirement, Uncategorized

The media is causing millions of Americans to make a serious mistake when it comes to social security collection strategies. We see articles that discuss ways to “maximize” the social security benefit using clever, new methods such as the “file and suspend” approach. But they completely miss the ball on the most critical issue. They do not stop and ask what your GOALS are for Social Security, which should be the discussed first. Only then should specific strategies be evaluated. Here are a few goals to consider:

We want to retire at a specific age and start collecting social security
We want to start claiming benefits as soon as possible
We want to maximize the income over the years we have together
We want to minimize any decline in income for the surviving spouse
We want the surviving spouse to receive the maximum annual benefit
We want to maximize the survivor benefit (and receive income early)

Once you know your goal, then you can move to the next step and decide how should you collect the benefit. Maximizing the cumulative benefit is just one goal and may be a poor choice once you take the time to compare them to other options.

Stock Buybacks

By Cliff Jarvis June 22, 2015August 21, 2018 In Economy

Not discussed enough is the effect stock buybacks are having on the stock market over the last several years. The concept is simple. Corporations buy shares in the open market the same way ordinary investors do, however, when corporations do it, they ‘retire’ these shares leaving fewer shares outstanding. Each remaining outstanding share then represents a larger piece of the corporation. Therefore, when total earnings are reported a smaller number of shares divide into them. This increases earnings per share more than total profit of the corporation would indicate. Share prices then rise accordingly with the increase in earnings per share. Additionally, buying shares in the open market provides a further boost to share price.

However, this may be sacrificing long-term growth for short-term gains. Corporate cash used for stock buybacks is diverted from investing in additional opportunities,i.e. of buying plants and equipment and employing more people to create more profits over the long run. Corporations are even borrowing to finance stock buybacks; putting more and more debt on their books for future managers to deal with. Activist investors concerned only with immediate gain are forcing the issue. Managers who do not implement buybacks are soon unemployed.

Stock buybacks are a major component of what is driving the stock market to record valuations. It also helps explain why the market is soaring while full-time jobs have not recovered to pre-recession levels.

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Steps to Take After Graduating College to Get Your Financial Life in Order

By Michael Lecours, CFP June 19, 2015 In Economy, Uncategorized

Graduating from college can be as much a source of anxiety and dread as it is pride and joy—even students leaving the harshest, most exacting academic programs can feel some level of worry about the future stretching out before them. But fear not—our step-by-step guide will ease the burden by helping you get your financial life in order and engage the ‘real world’ on your own terms.

Make a budget you can live with.

Budgets are the core of financial planning, so that’s where you should start. Don’t fall for the trap so many young people do; saving doesn’t have to be all or nothing; if your current financial situation only allows for minor savings, that’s still better than not saving at all. Create a budget you can live with, with proper allowances for entertainment AND saving, then stick with it. And don’t forget, the little expenses add up over time!

Start investing.

You might be tempted to delay saving for your future (a house, or retirement) until you get a raise in a few years. That’s a trap. Take advantage of employer match in a 401(k). The compounding effects that happen by saving early will help you tremendously in the future.

Start paying your loans down quickly.

If you’re lucky enough to lock in a loans with low interest, it’s ok to pay the minimum amount. But if you have private student loans, or loans with high interest rates (more than 5%), consider paying them off sooner—the faster you clear them from your ledger, the better off your finances will be moving forward. We can help to advise you on the most appropriate strategy.

Put together a career development strategy.

When you’re young, your career serves as the vital engine driving any financial planning you make—so make sure you’re making the most of yourself. Figure out where you want to be and how you intend to get there, then start making it happen.

Start keeping yourself informed.

The last step of getting your financial life is one which lasts forever: Get informed, stay informed. You’re participating in the financial world now, so keep tabs on it: talk to a financial advisor, subscribe to a finance blog, and pay attention.

Steps to Take After Leaving a Job to Get Your Financial Life in Order

By Michael Lecours, CFP June 18, 2015 In Finding Confidence, Investment Behavior, Investment Strategies, Saving, Uncategorized

Leaving a job can be a frightening proposal, even if you’re moving up in the world—navigating retirement plan rollovers, lost and gained benefits, pay and cost-of-living changes, and the other variables can feel quite daunting. Fortunately, if you take a moment and relax, you’ll find that a methodical, thoughtful approach makes it all much easier. Today, we’ll help you navigate your way through the financials of leaving a job without getting stressed about the endeavor.

Figure out what you’re losing and what you’re gaining.

Take a close, hard look at the benefits you’re losing as you leave your job, noting the value of stock options, leave time, child-care, insurance, etc. If you’re moving immediately into a new job, you’ll want to evaluate what you’re gaining the same way, for ease of comparison. A firm understanding of the actual value of what you’re losing or gaining is important.

Look into what you can take with you.

Not every valuable benefit vanishes when you leave a job. You might have several decisions to make about more flexible benefits, such as stock options, which you’ll want to go over with a tax or finance professional—the details around these decisions can get quite complex quite quickly, so don’t let yourself drown alone in the specifics of rolling over your 401k to a new plan or an IRA, keeping or selling stock options, etc.

Negotiate to reimburse losses.

If you’ve noted a loss of value in moving to a new job, that information can be useful for negotiating additional pay, benefits, and one-time expense coverage (for relocation, etc.). Otherwise, look to a financial planning adviser for assistance in finding moves you can make to shrink the gap—you may be able to defray relocation expenses with tax deductions, qualify for new credits, etc.

Undertake a thorough self-audit.

When the dust settles, it’s time to conduct a thorough self-audit and see where your income, benefits, investments, retirement savings, and other financial considerations all stand. Make sure to review plans which, while not directly associated with the job you’re leaving, may interact strangely with your new situation—insurance, investments, estate plans, and the like all need a second look over after a major change such as leaving a job. Take your time, get professional financial planning assistance, and do it right, so you can rest assured that your big change is a move in the right direction.

How to Reduce the Pain of a Required Minimum Distribution

By Michael Lecours, CFP June 15, 2015 In Retirement, Rule of Thumb, Taxes, Uncategorized

When the government enacted legislation that allowed individuals to fund a Traditional IRA with tax-deferred income, those legislators also wanted to ensure that the taxes would eventually be paid. The concept was to defer income taxes until the time the money may be needed for retirement.

To ensure that the deferred taxes would eventually be paid back during the saver’s lifetime, a Required Minimum Distribution (RMD) of the balance commences when the individual turns 70 ½. The first year’s RMD is approximately 4% of the total of all tax-deferred IRA balances. Following that, the RMD percentage increases each year during retirement. The penalty for not withdrawing the RMD can result in a substantial penalty of 50% of the shortfall.

Below are a few strategies to consider that could help to reduce the pain of an RMD:

Plan Ahead

Individuals who will continue to accumulate substantial income from pensions and other sources can consider withdrawing portions of their IRA soon after age 59 ½, but only to the extent that the withdrawals do not force a higher tax bracket.

Defer Social Security

In some cases, deferring Social Security until 70 while using your IRA if needed up to that time can yield dual benefits. The RMD reduces while maximizing the Social Security benefits that increase each year that starting payments are deferred.

Conversion to Roth IRA

Converting portions of your existing traditional IRA into Roth IRAs before age 70.5 will allow the balance to continue to grow tax-free. Though taxes must be paid at the time of the conversion, subsequent withdrawals from the Roth IRA will be non-taxable.

Charitable Donations

Donating an amount equal to the RMD to qualified charities will offset the calculation of the taxable income.

Reinvesting into an Investment Account

One of the more popular strategies is to take the RMD, pay the taxes and reinvest the rest into a brokerage account. Investors can keep their money working for them.

When Clients Spend Through Their Savings

By Michael Lecours, CFP May 20, 2015 In Finding Confidence, Investment Behavior, Retirement, Rule of Thumb, Saving, Uncategorized

A reporter from Financial Planning Magazine, recently posed a question to several financial advisors asking:

“What happens when an elderly retired client runs out of money?”

Below is my response, which was included in the article:

WATCH WITHDRAWAL RATES

Michael Lecours, an advisor at Ohanesian/Lecours in West Hartford, Conn., says the time to address the issue of running out of money with retirees is when they start increasing withdrawal rates from their savings.

“We can see the writing on the wall five to 10 years away,” Lecours says. “After a conversation, most clients recognize the issue and find ways to reduce their expenses. They make plans to downsize, move in with a family member, or scale back on their lifestyle.”

Speaking at the Connecticut’s Financial Planning Association Conference

By Michael Lecours, CFP May 19, 2015 In Investment Strategies, Uncategorized

A few weeks ago, I had the privilege of moderating a panel of ETF experts where we discussed how financial advisors can incorporate these investments in their client portfolios. There were a lot of great questions and discussion on how advisors are using ETFs.

Right around tax time is a good opportunity to review your financial situation and to do some spring cleaning.

Here is a good article to reference