Where Does The Time Go?

When I was a little kid, it seemed to take FOREVER for Christmas to get here.  The tree would be up for ages, the presents underneath teasing me.  When my parents were at work, I would shake the presents and try to determine the contents.  I confess I sometimes lifted the corner on some of the packages.  It’s a great way of learning whether or not you are getting that Barbie you wanted.  It worked well until my little sister tattled.  No one likes a snitch, Amanda.

In my adult life, time flies by.  It seems like only yesterday we were celebrating a new year; now Thanksgiving is almost here, and the holiday madness is about to begin.  Everything kicks into overdrive as we rush from holiday party to family event.  We spend hours in the kitchen, preparing dishes that will be engulfed in minutes and forgotten almost as quickly.  It seems that chaos reigns during the holiday season.

In the midst of all this activity, let’s not forget our financial lives.  If you plan to donate appreciated stock to charity or give it to relatives, take care of it now.  Do not wait until late December.  Go ahead, and cross it off your list.  The later you wait, the more difficult it becomes to process the transaction before December 31.

It is also important to take a look at your portfolio.  Do you have any gains that could be offset by losses?  Do you anticipate any big financial events next year (i.e. your child will be starting college; you plan to remodel your home; et cetera)?  A quick conversation with your financial advisor sets up for a smooth start to 2012.

Take a deep breath.  It will be okay.  The holidays will be over before you know it!  I hope you and your family have a happy, healthy, and peaceful holiday season.

Cristy Freeman, AAMS
Senior Operations Associate

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The Asset Allocation for College Funds

Asset allocation, the proportion of stocks, bonds and cash in a portfolio, is one of those topics that financial advisors think about constantly.  Because we have clients with such a variety of needs and changing financial scenarios, we are always working with someone to help them find the appropriate investment allocation for their personal situation.  For the typical investor however, it shouldn’t be so hard.  Once you’ve chosen the appropriate allocation, you should stick with it as long as your financial or life circumstances haven’t changed much.  This type of “set it and forget it” mentality is the mark of a disciplined investor.

But what about the asset allocation for a college fund?  For a newborn child you only have 18 years before you have to pay out a significant portion of the fund, which you will then deplete over 4 years.  If you start saving later, the time frame is even shorter.  This is very different from a retiree who will often have a longer time frame than 18 years.  Also, for a retiree, typically the intention is to spend around 4 to 5% of the retirement portfolio value every year, so that the retirement funds continue to grow over time.  This isn’t the case with a college fund.  It can be both long-term (18 years to grow) and short-term (all paid out over 4 years) at the same time.  It makes the asset allocation decision a conundrum.  Now throw in the fact that somehow children grow up faster than you can possibly imagine and each year the time until payout grows exponentially closer, requiring more frequent allocation tinkering.

If you are able to save when your children are babies, the allocation decision is fairly easy.  With an above-average risk tolerance you might choose 100% equities.  Once kids are in their teens though, you could switch to a more conservative allocation with a mix of stocks and bonds.  As they approach their final year of high school, you could move to all fixed income.  There is no easy solution here, and often it depends on the parents outside resources.  If the parent is entirely dependent upon the college funds to pay for college, the fund should be more conservative as they approach age 18.  The give up is potentially less money for college if the stock market is doing well during these years.

If you have multiple children with 529 plans for each, and outside resources in addition to this, you may choose to stay with a higher equity allocation.  If the stock market doesn’t perform well during the college years, the parent could choose to pay some expenses out of pocket and then roll any excess 529 funds to younger siblings.

Regardless of the allocation you choose, you are taking a risk.  If you’re too conservative you may not have enough money to pay for college.  Conversely, if you’re too aggressive, you stand the chance of losing money you’ve saved all along just at the time that you need to withdraw it.  My advice is to discuss the allocation with your financial advisor.  Your risk tolerance will be the main driver in this decision.  Other important factors will be outside resources for paying for college, as well as your family’s unique circumstances.

Harli L. Palme, CFA, CFP®

Financial Advisor

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I Bonds Revisited

With interest rates remaining at very low levels, there are few options for earning any sort of a return on cash balances.

 Current yields:

Schwab Bank High Yield Savings                    0.40%

1 Year CD National Average                            0.46%

5 Year Treasury Note                                   1.85%

5 Year TIPS Note                                         -0.32% (plus inflation)

10 Year TIPS Note                                        0.70% (plus inflation)

Series I Savings Bonds                                4.60% (for the next 6 months)

One thing to consider for smaller balances is Series I Savings Bonds (“I Bonds”) issued by the U.S. Government.  The new rates came out May 1, and I was surprised to see that I Bonds are currently earning an annual rate of 4.60% for the next 6 months.  Please refer to my earlier blog posting “How to Make a Little More Money on Your Excess Cash (with a Bit of Work on Your Part)” or visit www.treasurydirect.gov for a more detailed description of I Bond features.

The earnings rate for I Bonds is a combination of a fixed rate, which applies for the life of the bond, and an inflation rate that changes semi-annually (think “I” as in “inflation”). The 4.60% earnings rate for I Bonds purchased through October 31, 2011 will apply for their first six months after issuance. I Bonds cannot be redeemed for 12 months after issuance, and there is a penalty of 3 months’ interest if they are redeemed before 5 years.  Purchases are limited to $5,000 per Social Security Number in electronic bonds and $5,000 in paper bonds, so a couple could purchase up to $20,000 annually.

If you act by October 31, you are in effect creating a 1 year CD with a yield of at least 2.30%.  For the next six months, I Bonds will earn interest at an annual rate of 4.60%.  The inflation rate will then reset.  Since the fixed rate is zero for the life of the bond, the earnings rate for the next 6 months will be the inflation rate.  If the semi-annual inflation rate stays the same at 2.30%, the earnings rate for the next 6 months will also be an annual rate of 4.60%.  In this case, you would earn about 3.83% for 1 year after factoring in the penalty for early redemption.  Even if the inflation for the second 6 months is zero, which is unlikely, you would earn a return of 2.30% over the next year versus 0.46% in a bank CD.

What if there is an emergency and you need the money?  Since you cannot redeem the bonds for 12 months, you need to leave some liquid cash on hand.  After 12 months, a penalty of 3 months’ interest is deducted from the redemption value.  But even after paying the penalty you would still be ahead of a bank CD, and considerably ahead if the change in inflation continues at its current level. In addition, I Bond interest is exempt from State income taxes and is tax-deferred until you redeem the bond.  Also, if you buy the bonds on the last day of the month, you still get interest for the full month.

All I Bonds have the same inflation component.  The only difference is in the fixed rate that each bond offers.  If the fixed rate increases significantly in the future, just redeem some bonds and pay the penalty.  Then buy some new bonds with the higher fixed rate (but remember the $10,000 annual limit on purchases for each Social Security Number).  After 5 years, there is no penalty on redemption. 

Another possibility is a short-term, high quality bond fund.  However, these do carry some interest rate risk.  For example, a popular short-term bond fund has a current yield of 1.41% and an effective duration of 1.85 years.  This means that if interest rates were to suddenly move up by 1%, the value of the fund would be expected to fall by about 1.85%.  This would wipe out over a year’s worth of interest, making it a less attractive alternative for cash balances.

Bill Hansen, CFA

May 13, 2011

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An Unexpected Windfall

At the start of every new year people make resolutions to lose weight, alter bad habits, or save more money.  While I cannot help you with some of those issues, I can offer a little advice on saving money.

For 2011, the IRS has reduced the employee-paid portion of the Social Security tax from 6.2 to 4.2 percent.  While that may not seem like a large amount of money on a per-paycheck basis, it can add up to a nice sum for the year.  If you earn the maximum Social Security wage limit of $106,800, 2 percent represents $2,136.

Before you grow accustomed to having a few extra dollars in your paycheck, I recommend you implement a plan now.  Here are a few suggestions:

  • Deposit the funds into your emergency savings account.  Everyone needs an emergency savings account.  Opinions vary about the amount.  Some suggest 3 months’ worth of routine expenses.  Other say 6 to 9 months are needed.  
  • If your emergency savings account is well funded, apply the dollars to debt.  You could apply the extra money toward the smallest debt, if you want to experience the rush of the early payoff.  However, you will be financially better off if you to apply it to the account with the highest interest rate.  Reducing debt levels is always a great idea.
  • Fund a Roth IRA if you qualify.  If not, apply the savings to another retirement vehicle, such as your company’s 401(k) or a traditional IRA account.

I recommend that you use automatic bank drafts for any of the above options.  It is a simple way to transfer the funds from your account before you can spend them.  Parsec can assist you with setting up an automatic transfer into your brokerage accounts.

I hope you have a safe, healthy new year and wish you the best of luck in accomplishing your goals!

Cristy Freeman, AAMS
Senior Operations Associate

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There are No Loans for Retirement

In preparing for a child’s college education, parent’s can plan for the future expense in one of three ways: hope for scholarships, pay for part of it, or pay for all of it.

As I watched my 4 year old daughter play her favorite game over the snowy holiday, I began to consider what her future holds.  I can’t help but chuckle at some of the sayings she comes up with. Some of her other favorite games include tea party and art, though I must admit, it gets a little old when she plays “teacher” and is in charge of the crayons.  After all, one can only find so many uses for a single color. 

While I can’t be sure what she’ll choose as a career, a dentist, teacher, pre-school director, or stay-at-home-mom, my wife and I have started saving for her future through the North Carolina 529 college savings program and that is what brings me to this writing.  College is hopefully in her future, but if not we have the option of changing who the beneficiary is on the account.  We are comforted in the knowledge that if she chooses not to further her education, the funds can be used to pay for another member of the family (including a cousin).  Also, saving with the benefit of a tax deduction is a nice feature.  When considering what savings program to choose, an investor basically has three philosophical options:

  • Do nothing and hope for scholarships
  • Save for part of the expense
  • Save for, or pay for, all of the expense

 We chose to save for part of the expense.  We got a bit of a late start on having a family so our daughter will be entering college right about the same time that we are going to be slowing down for retirement.  We are faced with an interesting dilemma: We can sacrifice our future savings goals so that she can graduate college with little to no debt, or we can allow her to grow and accept responsibility for her own education through loans and work study programs.  Our philosophy for her education is best described as follows: we will save what we think we can afford and if we are in a position to help by paying down or paying off student loans when she graduates, then we will.  But one thing is for sure: there are no loans for retirement.

Neal Nolan, CFP(R)

Financial Advisor

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2010 Roth IRA and Regular IRA Contributions

The deadline to contribute to your Roth or Traditional IRA for the tax year 2010 is April 15, 2011. You can contribute $5,000 or the amount of earned income for the year, whichever is less. If you’re over 50, you can contribute an additional $1,000.

Your income determines if you qualify for a tax-deductible Traditional IRA contribution, or if you qualify to make a Roth IRA contribution.

Do you qualify to deduct your Traditional IRA contribution?
 If your income is less than the beginning of the phase-out range, you qualify.  If your income is over the phase-out range, you do not.  If your income falls inside the range, you partially qualify.
  Modified Adjusted Gross Income                                          Phase-Out Range
Single, participates in an employer-sponsored retirement plan      $56,000 – $66,000
Married, participates in an employer-sponsored retirement plan      $89,000 – $109,000
Married, your spouse participates in an employer-sponsored retirement plan, but you do not.  $167,000 – $177,000
Do you qualify to contribute to a Roth IRA?
Single $105,000 – $120,000
Married, filing jointly     $167,000 – $177,000


Harli L. Palme, CFP®

Financial Advisor

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Gold-Plated Paper Clips for All!!!

I recently saw one of the “Oprah” episodes where she gave away mountains of stuff.  I am always shocked at the reaction.  She could say she is giving away a gold-plated paper clip, and people in the audience would lose it.  I mean, people were screaming, crying, hugging each other, jumping up and down.  Really?  The only thing that would garner that type of reaction from me would be if she brought out George Clooney, in an electric blue Bugatti Veyron.  He hands me the keys and says, “Let’s go for a ride.”  Oh, yeah. 

As I continued to watch the show, I realized that I have been working at Parsec way, way too long.  She brought out expensive gift after expensive gift.  Two thoughts popped into my head: “Geez, the taxes on this stuff will be terrible” and “I wonder if you could say no to some of this junk and yes to the other stuff, to reduce the tax liability.”  I doubt anyone in the audience thought the same thing.  They were too excited about rhinestone-studded mop handles.

Just out of curiosity, I asked one of our advisors about the tax consequences.  Unfortunately, the answer is more complicated than I anticipated.  It all depends upon each person’s individual situation and state of residence.  How you receive the gift also comes into play.  Oprah’s gold-plated paper clip might be considered contest winnings, so you might have to pay tax.  However, if Uncle Joe gives you a wad of cash, he might incur a tax liability, again, based upon certain factors.  So, if Clooney does appear in my driveway on Christmas Day in that lovely sports car, I should consult with a tax professional.  (I wonder what the tax appraisal for Clooney himself will be?)

Should Santa be extra generous to you this year, keep the gift tax in the back of your mind.  Do not get all excited about the gift and forget that the tax man always cometh for someone, either Santa or you!

I hope you and your family survives the madness of the holidays and has a healthy, happy new year. 

Cristy Freeman, AAMS
Senior Operations Associate

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Charitable Giving Tips

I recently read a study by The Center on Philanthropy at Indiana University.  “The 2008 Study of High Net Worth Philanthropy,” sponsored by Bank of America, found that over 90 percent of households surveyed planned to make donations using cash and checks in the near future.  A little over 30 percent planned to donate securities.  

As you probably know, donating appreciated securities has tax advantages.  Sure, it is not as easy as writing a check.  With proper planning and some paperwork, you can lower your tax burden while providing the donation amount you already planned to give.  

It is important to consider the option this year if you had a major tax event.  Perhaps you converted from a traditional IRA to a Roth IRA.  Maybe you have a capital gain from a stock sale.  Donating appreciated securities could minimize the resulting tax burden.      

Such donations can also become part of long-term estate planning.  Do you want to provide a legacy for the charity or charities of your choice?  Do you want to donate a fixed sum every year?  Would you like for your children to be involved in charitable giving decisions? 

Your investment advisor can assist you with both your short-term and long-term charitable giving strategies.  If you are interested in donating securities this tax year, I urge you to contact your advisor soon.  It is best to submit securities donations as early as possible to ensure processing before December 31. 

Cristy Freeman, AAMS
Senior Operations Associate

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Too Much Information?

Too much information running through my brain
Too much information driving me insane
–The Police

The more you trade, the worse you do. This has been demonstrated in repeated academic studies over various time frames. Why does it work this way? Because the human brain is wired to do exactly the wrong thing at the wrong time in the stock market.

As our clients know, a core part of our investment philosophy is keeping a long-term perspective. When we purchase a stock, we intend to hold it. While it is difficult to calculate exactly, our average holding period is probably in the 4-6 year range.

Earlier this year, I chuckled when I saw there is now an iPhone application for mobile trading. As I have told some of my friends, do you really need to be able to place trades from your child’s soccer game? And shouldn’t you be watching the game anyway? Is this the type of logical, well-thought out investment decision that will enable you to select and hold a diversified portfolio of assets to help accomplish your financial goals? No! It caters to short-term thinking, which is often destructive.

So imagine my horror when I saw a commercial last week on CNBC for automated trading. Now you don’t even need to initiate the trade from the soccer field. You can select some strategy from a menu, set up your trades, and then go off to work. When you come home, your email inbox will have your trade confirmations and you can see how you did. While you’re at it, why not add some leverage by way of margin to help get wiped out sooner?

As I see it, the underlying problem is the constant media barrage of information telling us that we need to do something. You can watch financial news 24/7 these days, and every channel is urging some sort of action. But these experts are not talking about things like risk tolerance, what mix of assets is appropriate for a particular situation, how much you need to save in order to retire, and how much you can spend from your portfolio in retirement. Your financial plan is at least as important as your specific investment strategy, and perhaps more so.

There are many strategies out there, some good and some bad. But being able to liquidate your portfolio poolside, or trying to trade your way to riches without knowing anything about the companies you are buying sounds like a disaster waiting to happen.

Bill Hansen, CFA
August 13, 2010

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George, I Can Lie About My Age!!

This year, I celebrate a milestone birthday. Let’s just say I am now officially too old to be George Clooney’s girlfriend.

As often happens with milestone birthdays, you reflect about how you imagined your life would be at this stage. Perhaps you had envisioned retiring at an early age. Maybe you wanted to start your own business. Or save tons of money, quit your job, and travel around the world for a couple of years. (Hey, you can dream.)

Then, life happened. You devoted yourself to a career. You bought a home. You got married and started a family. The years go by. You wake up one day and realize you’re that age.

When you first began your journey with Parsec, your goals were just rough ideas of where you thought you wanted to be in 10, 15, 20 years. Now that time has passed, are those goals still the same? Have you been affected by any of these events:

• Started a family
• Sent a child to college
• Lost your job
• Dealt with aging parents

We would also be remiss if we overlooked the extraordinary market volatility of the last two years.  All of the above events can significantly alter your financial plan.

Do you still have the same goals now that you did before these events occurred? Has your “deadline” for achieving those goals shifted? It is very easy in the day-to-day rush to not think about these things. However, it is important to evaluate your financial situation and goals periodically so you can stay on track.

Your financial advisor is here to help you. Together, he or she can review your financial plan and work to keep it in line with your changing life. Just call him or her anytime.

Cristy Freeman, AAMS
Senior Operations Associate

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