Worcester Jewish Chronicle, March 23, 2006

How to have a long, happy retirement – Part 1

Procrastination.

It’s a word that most of us know all too well. While there are times when holding back can pay off; planning for your retirement is NOT one of them. There’s only one side to waiting and that’s the downside. It’s NEVER too early. But, while early is certainly preferable, it’s also NEVER too late.

Let me give you a few hard-to-ignore reasons to start saving for your retirement now.

•     Experts estimate that you will need 2/3 to 3/4 of your current income to lock in financial stability for your post-retirement years. On average, Social Security will only supply 40% or less of the income you’ll need in retirement.

•     You are likely to live a minimum of 20 or more years after you retire.  That’s good news – provided you have the money to afford this longevity.

•     If you start saving in your 20’s or 30’s, you can possibly be a millionaire by the time you reach retirement age.

•     Even a slight increase in contributions to your retirement savings plan.

•     1% or 2% – can reap huge benefits 15 or 20 years down the road.

•     If you stay the course, you are likely to maintain or improve your current standard of living in retirement.

Whether you’re a glass-is-half-full person, or a glass-is-half-empty one, the facts and figures just outlined hopefully have started you thinking about retirement saving and planning. But, as we all know, it’s really easy to fall into the “New Year’s resolution syndrome.” You know how it works. You get all fired up and then a few days or a few weeks later your resolve dissolves and you’re back to square one – or worse.

The strategies I am about to share will fight that natural, but dangerous, tendency because they will make it easy for you to stay on target and will also – pretty early on in the process – provide measurable results. In other words, you’ll have in your corner EASE and PROOF, two major psychological incentives for sticking with it.

In this series of articles, I am going to focus on the following 3-step program for successful retirement planning and saving:

STEP 1: Pinpoint Your Major Sources of Retirement Income

STEP 2: Take a Realistic Look at Your Retirement Costs and Goals

STEP 3: Close the Gap Between Income and Goals

Pinpoint Your Major Sources of Retirement Income

In this step you will basically inventory all of your anticipated sources of retirement income. As we walk through each of them, consider which ones you have, which ones you don’t, and which ones you should consider adding.

Let’s start with the one most Americans depend on – Social Security.  Social Security is a compulsory federal government insurance program that, in addition to retirement income, provides basic financial support for you and your family during disability and for your survivors following your death.

Each year, about two to three months before your birthday, you receive a statement from the Social Security Administration detailing the facts and figures surrounding your contributions and anticipated retirement benefits.

Review and keep this document. It’s a vital piece of information for your retirement planning. Especially relevant is the comparison of what benefit you can expect at various retirement ages. The longer you work, up until age 70, the greater your benefits.

You will need to consider these numbers to realistically assess when you can actually retire. For example, you should consider the ramifications of taking your Social Security benefits early and reinvesting that income in another vehicle that gives you a higher return than the increased benefits you could receive by waiting. In addition, you need to analyze the tax implications of receiving Social Security benefits while you are still working.  These are the kinds of questions that can be addressed in detail by a CPA or other financial planner.

You can obtain a copy of your Social Security Statement by contacting the Social Security Administration, either on their Website, www.sss.gov, or by phoning them at 800-772-1213. The Website also contains some very helpful information on all aspects of retirement. It’s worth a look.  One final note on Social Security. The system was never intended to provide complete financial independence at retirement by itself. Rather, Social Security is supposed to serve as a foundation for a comprehensive retirement plan, supplementing other sources of income. 

Another major source of retirement income is an Employer Pension Plan.

If you have a pension plan, you need to look at its provisions carefully and make sure you understand them fully. The most important thing to keep in mind is that your pension may be significantly reduced, or completely eliminated, if you are not with the company long enough to be fully vested.  Retiring even a few months too early (or leaving for another position in advance of vesting) could cost you tens of thousands of dollars over the course of your retirement.

For example, if your employer’s pension plan specifies that you must be with the company seven years before you become fully vested, and you’ve worked there only five, it may be wise to sit tight for another two years.  Also, don’t forget that the amount of your pension is often calculated using your final salary, so if you get raises in that period, you are also adding to your potential retirement income.

Employee Contribution Plans, with the most common being a 401(k) plan, are a highly effective approach to putting money away for retirement.  If your employer makes matching contributions, all the better. In addition to accruing retirement income, there are a number of other advantages to 401(k)s and other plans:

•     Your contributions are not subject to tax. If you put $5000 into a 401(k) and earned $50,000 that year, your taxable compensation would be $45,000.

•     Employers often offer a variety of investment options, so you can find the investment vehicle or vehicles that best suit your goals and your temperament.

•     Some plans allow you to borrow against your 401(k).

•    Should you leave your current employer, you can roll your 401(k) over into another tax-deferred retirement plan such as an IRA, or Individual Retirement Account

But far and away the best feature of employee contribution plans is that you build your retirement nest egg using pre-tax dollars that grow tax-free until you withdraw them.

IRAs are also tax-advantaged retirement vehicles that you can easily establish with your broker or banker. There are two types of IRAs –traditional IRAs and Roth IRAs. A traditional IRA contribution can be fully deductible, partially deductible, or totally non-deductible. This depends on whether you or your spouse has retirement coverage with your employer and on the amount of your adjusted gross income. Distributions from traditional IRAs are generally fully taxable and if made prior to age 59-½, are generally subject to a 10 percent penalty. Annual minimum distributions must begin when you reach age 70-½.Contributions to a Roth IRA are not deductible. However, distributions from a Roth IRA are generally tax-free if taken after (1) five years from the year of the contribution and (2) age 59-½. Unlike a traditional IRA, no annual minimum distributions are required after age 70-½. As a result, a Roth IRA can continue to grow tax-free. For 2004, the combined contribution limit for both traditional and Roth IRAs is $3,000 ($3,500 for individuals age 50 or older). For 2005, the contribution limit is increased to $4,000 for individuals under age 50, and $4,500 for individuals’ age 50 or older. Consulting a CPA or other financial adviser to learn more about which IRA is best for you could be a critical step in your retirement planning. 

More and more experts agree that, in order to afford retirement, you will also need to have private investments to supplement other sources of income. Here again, advice from an objective party who does not have an interest in promoting a particular investment can be invaluable. Many have been turning to their CPAs for that kind of advice. I’ll talk more about specific investment vehicles when we get to Step 3: How to Close the Gap.

Finally, as you assess where you will be getting retirement income, you may want to consider a second career. More and more Americans are doing that. Some out of necessity. Some because they feel they want to pursue a passion. Whatever your reasons for a retirement career, you should include it in your retirement scenario, and not just the projected income. You also need to look at the tax consequences. Will it affect your Social Security? Will it kick you up into a higher tax bracket? Will a part-time job or career generate enough income or will you have to consider working full time? These are the types of questions you need to be asking now.

You now have an idea where your retirement income will be coming from? In our next article we will be looking at Step 2 – Taking a Realistic Look at Your Retirement Costs and Goals.

 * * * * *

William E. Philbrick, CPA/ABV, MST, CVA is a Senior Vice President and Tax Director at Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached at wphilbrick@GRK&B.com.

Worcester Jewish Chronicle, September 15, 2005

Nothing Succeeds Like Success- Part III

William E. Philbrick, CPA, MST, CVA, CFF

This is the concluding article and we will look at other key areas on our “Financial Circle of Life” and how to deal with the surprises life brings.

A primary key area on our “Financial Circle of Life” is the workplace…our jobs.  Of course, you want to earn a good salary.  We all do.  It goes without saying…but that’s the beginning, not the end of what you should be looking for financially from your job.  Let’s take a look at some specifics.

One third of Americans fail to take advantage of a 401-k or other investment options offered by their company.  They may spend weeks or months deliberating on an effective strategy to get a 5% or 10% raise, and then turn their backs on the chance to have hundreds of thousands of dollars for their future security.

 If you are part of this group, please start participating the minute you can.

A few other ways to use your job to improve your long-term financial picture:

If automatic deposit is available, use it to keep you honest about your savings by splitting your deposit between checking and savings.  It’s also amazingly convenient. 

• Find out about retirement plans…how they work…when you’re eligible…when you’re vested
• Check out what your company offers in terms of disability and life insurance. They may make better rates available than if you found a carrier on your own.
• Investigate your company’s health plan carefully.  Don’t take too much or too little insurance.  Don’t go for options that can be costly but that you are unlikely to use.  Consider deductibles, prescription plans, and other add-ons.

If you are faced with the awful reality of being fired or laid off, make sure you understand 100% of what you are entitled to get.  Unemployment insurance.  Severance Pay. COBRA health options.  Outplacement Services.  There is no better time to make a pest of yourself…you have absolutely nothing to lose.  Don’t stop asking questions until you are totally satisfied that you have all the answers you need…and all the benefits you are entitled to.

Unfortunately, bad things do happen to good people, and job loss is not the only crisis that can rain down financial havoc.  That’s why you need to follow that old piece of advice:  “Hope for the best. Expect the worst.”

In the event of a divorce…and remember over 50% of marriages today do end that way…ask yourself:  Do I make enough to support myself?  Which assets do I want?  Can I afford to keep the family house?…or…are we better off selling and dividing up the proceeds?  If there are children, be sure you spell out your wishes regarding custody, visitation and child support.  Whether or not you hire counsel, you need to be totally clear on your rights.  Most importantly, you need to park your anger at the door when it comes to making financial decisions.

Disasters can also derail us emotionally and financially.  Fires.  Floods. Earthquakes. A prolonged health issue.  The death of a spouse.  Whatever the specific disaster, there are common financial strategies that can help you weather the crisis. 

• Get advice from professionals such as insurance agents, financial advisers, CPAs and/or lawyers.
• Locate important documents and financial records.  Always make sure you keep them in a safe, fireproof place either at home or at a financial institution.
• Evaluate short-term income and expenses to determine the immediate magnitude of the problem. You may actually discover you’re better off than you thought if you separate what must be handled right away from what can wait until the dust settles.
• Avoid making hasty decisions.  If you are so inclined, use a trusted family member or friend as a sounding board.

Another life stage, becoming more and more common, is what’s come to be called the “sandwich generation.”   That’s the term coined for those caught in the middle between raising and educating their kids and tending to the needs of aging parents.  The load can be oppressive.

It’s important to learn about your parents’ ailments so you can make a realistic budgeting assessment.  Of course, it is always easier if you can have an open, honest dialogue with your parents about their financial situation and their wishes in advance of their illness.  As you work at prioritizing your emotional and financial resources and theirs, an elder care specialist can provide enormous advice and support for the entire family.

And what about your own “golden years?”  How will they shake out?  Are you preparing for them adequately?  Most people seriously underestimate the cost of retirement.  Remember, it’s getting more and more likely you’ll live to be a 100…and less and less likely you’ll be able to afford it.  You’ll need about 70% of your current income to finance your retirement.  Social Security generally covers less than 30%.

That’s why it is so important to start early and take full advantage of every retirement option your employer offers.  Also, invest the maximum allowed in an IRA…and do it every year.

Let me give you a little dollars-and-cents proof of what a difference starting early can make.  $2000 a year invested at age 25 in a tax-deferred account, earning a 10% average annual return will become $885,000 by age 65.  Start at 35, and the nest egg would total only $329,000.  The $20,000 NOT invested during those 10 years cost you $556,000.

Finally, and this is truly the final thing you can do for your loved ones…be sure you have a will—one that clearly spells out your wishes.  A will is one of the most important documents you will ever prepare.  It guarantees that your assets are handled according to your specific wishes.  It allows you to formulate a strategy that preserves—from taxes—the greatest amount for your heirs. And, it spells out who will be guardian of your minor children. Most importantly, don’t try to draft a will on your own.  Use the services of a lawyer and financial planner. It’s too important to get wrong. 

So there you have it—a blueprint for 360 Degrees of Financial Success.  Using these simple ideas as your basis, you can be confident that wherever you are—or will be—in the Financial Circle of Life, you will be able to enjoy the good times and work your way through the tough ones.

Remember the Disney movie favorite, “The Lion King?”  It has some neat music centered on the circle of life…especially the song “Hakuna Matata,” which translated from Swahili means “no worries.”

With care and planning, it can be your financial motto. No worries.

No worries because you save and curb spending…because you look ahead…because you are able to Think Small and Do It Regularly!

So when you ask yourself that all-important question:  “How prepared am I to handle my financial future whatever that future holds?”  I hope you will soon be able to honestly answer:  “No worries.”

 * * * * *

William E. Philbrick, CPA, MST, CVA, CFF is a Senior Vice President and Director of Taxes and Forensic Services with Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached at wphilbrick@GRK&B.com.

Worcester Jewish Chronicle, August 11, 2005

Nothing Succeeds Like Success- Part II

William E. Philbrick, CPA, MST, CVA, CFF

In part I, we looked at a number of possibilities for easing the two biggest financial problems individual Americans face:  too little savings and too much debt.

Let’s now embark on what I like to call—and what CPAs across the country are calling—“360 Degrees of Financial Success.”  It’s an approach that looks at the life events that require your financial attention—childhood, parenting, college, jobs, home ownership, unexpected crises, retirement, and estate planning.  We are going to pinpoint strategies that will help keep you financially healthy during each of these life cycles.

In other words, wherever you are in the “Financial Circle of Life,” I’ll offer you ideas and suggestions for staying on solid financial footing and hopefully stimulate your thinking and your desire to financially protect yourself and your family.  You can follow up on your own…or with a financial adviser.  The only wrong thing to do is to do nothing about protecting your financial future. 

Let’s start with homeownership.  Here are some tips that will keep the dream of owning a home from turning into a nightmare:

• Decide if this is the right time to buy—both personally and based on the real estate market in which you are interested.
• Investigate financing early on. Shop around for the best rates and terms.
• Be sure you can afford the monthly mortgage payments.  A rule of thumb:  Generally, your monthly housing expenses (mortgage principal and interest, real estate taxes, and homeowners insurance) should not exceed 25 to 30 percent of your gross monthly income.
• Use a real estate attorney—at least for the closing.
• Always consider the future marketability of your home.  You never know when you’ll have to sell.
• Make sure you have enough home-owner’s insurance…and comparison shop for the best premiums, starting with companies who currently insure you in other areas.
• Consider how you will pay for needed repairs, both at purchase time and in the future.
• Avoid charging high-ticket items in advance of your  home purchase. It might detrimentally impact your credit rating.

As a parent, you face two challenges: teaching your children about money and managing your finances so your kids will have every opportunity to become productive, responsible adults.

 Educating your children about money management is rated G—good for any age.  Here are a few tips for various age groups.

 For 5 to 8 year olds:  This is a great time to start with an allowance.  Monthly is better than weekly for this age group, so they can learn a bit about planning ahead.  Also teach kids how to comparison-shop.  For example: let them select two kinds of orange juice from the supermarket.  A name brand and a store brand and do a blind taste test.  If they see no difference, they’ll learn it’s pointless to pay more.  Also teach them to wait for sales and specials on items like clothes and electronics—whether they’re spending your money or theirs.

 For 9 to12 year olds:  This is the ideal time for kids to start earning money to supplement their allowance.  Lots of possibilities: a lemonade stand, dog walking, fence painting, leaf raking and snow shoveling are all terrific options.

 For teens:  A critical time for kids to learn money management skills. During their high school years, they should become progressively more versed in keeping a job, budgeting what’s earned, learning the do’s and don’ts of spending and overspending.  Teens should have a checking account and/or a debit card, but absolutely no credit card.

 For college students:  Staying within budget needs to be part and parcel of the lessons college students learn.  Bailing themselves out, curbing their spending lust and foregoing nonessential items are absolute musts.  As much as you would like to help, you have to stay out of the financial messes into which they may get themselves.  Too often, parents with the best intentions enable the worst financial behavior.

 In addition to teaching your children sound financial management principles, as a parent you also have to plan for the contingencies that come with parenting.

 Here’s a sobering thought.  In the year 2000, an average family had spent about $165,000 to raise a child to age 18.  Those numbers don’t include college.

 You can see how critical it is to plan for your kids’ financial future in good times and bad.  Forget the dolls. Forget the no-occasion presents.  Forget the umpteenth video game.  Save the money. Put it aside instead. The best gift you can give your children is financial security.

 Now let’s talk for a moment about college.  The price tag is staggering.  Of course, you should be putting money aside—from the day your child is born, but most of us don’t…many of us can’t.  When we do save, funds earmarked for college can get used for unexpected emergencies.  Does that mean your child can’t go to college?  ABSOLUTELY NOT.  You have a number of options available that can keep the door to higher education wide open, such as:

• Financial aid—There are so many more opportunities available in the public and private sectors about which parents are not aware. Time spent doing some research can pay big dividends.
• Scholarships and sponsorships—Many schools, organizations, communities and companies offer fellowships or scholarships for both academically and financially deserving students. Check out these opportunities.
• Part time jobs—Either on or off campus, students can earn needed tuition and spending money.  Just about every college is set up to help students find work.
• Delayed admission—Many colleges will accept a student and then let him or her defer attendance for a year.  During that time, both you and your child can put away funds to help finance college.  Or, consider a less expensive junior college for two years, followed by a transfer to a four-year program for the balance.

 In the next installment, we will be looking at other key areas on our “Financial Circle of Life” and how to deal with the surprises life brings.

 * * * * *

William E. Philbrick, CPA, MST, CVA, CFF is a Senior Vice President and Director of Taxes and Forensic Services with Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached at wphilbrick@GRK&B.com.

Complicated Tax Code Should Be Simplified

William E. Philbrick, CPA, MST, CVA

At more than 3,000 pages of small print, the Federal Tax Code is becoming longer and scarier than the collected works of Stephen King. Regardless of length, the tax code is appropriately named, as many sections are written in a code that only a seasoned professional can understand.

Simplification has been talked about since 1919 and was widely discussed in 1986, when the tax code was less than half its current length. Like all tax laws, the new Jobs and Growth Tax Relief Reconciliation Act of 2003 adds to the complexity of the tax code.

One reason the tax code has become so complex is that tax legislation requires compromise to be approved by Congress. Pressure from special interest groups, attempts at social engineering and other factor lead both parties to weigh down new tax laws with enough amendments to obscure the original intentions of the legislation.

Budgetary considerations also add to the complexity. To limit the cost of the new tax law to $350 billion, Congress set some provisions of the law to expire at the end of 2005. Similarly, provisions of the last major tax law, the Economic Growth and Tax Relief Reconciliation Act of 2001, are set to expire at the end of 2010.

Sunset provisions create inequities and make tax planning as difficult as predicting New England weather. For example, heirs of individuals with large estates could escape federal estate taxes if their benefactor dies in 2010, but they could be subject to estate taxes of up to 50% (after a credit for $1 million in asset value) if their benefactor dies in 2011. 

Sometimes provisions of the tax code lie dormant and create chaos for future generations. The most egregious example is the alternative minimum tax (AMT), which was created in 1969 to ensure that wealthy taxpayers could not use shelters and deductions to avoid paying their fair share of taxes.

Each time a tax cut is enacted, more taxpayers are subject to the AMT. Even though the latest tax bill increased the AMT exemption, millions of taxpayers must now complete an AMT tax form just to determine whether they are subject to the tax. 

It is not an easy form to complete. Depending on whether you are subject to the AMT, reading the instructions for filling out the form will either put you to sleep or keep you up at night. Simply calculating AMT income requires the taxpayer to consider 27 different deductions and sources of income, such as net operating loss deductions, 42% of qualified small business stock (why 42%?), income from incentive stock options, and the sale of property. 

Take out a home equity loan to buy a boat and a portion of your mortgage payments become "interest from a home mortgage not used to buy, build or improve your home," which makes them subject to the AMT. Even state and local tax payments must be included when calculating AMT income, as if taxpayers were paying state and local taxes to avoid paying federal taxes.

Achieving Simplification

It took the Joint Committee on Taxation 602 pages to summarize recommendations for simplifying the tax code. We don’t have that much space, but believe the following would be a good start:

• Eliminate the AMT. The AMT has outlived its usefulness and, because it is not adjusted for inflation, it is increasingly affecting middle-class taxpayers
• Eliminate phase-outs. The tax code includes more than 20 provisions that phase-out deductions, credits and other tax benefits for taxpayers who exceed income limits. The phase-outs use different definitions of income and, with one exception, each phase-out uses a different income range.
• Adopt a single definition for a "qualifying child." A qualifying child is defined differently for the dependency exemption, the earned-income credit, the child credit, the dependent care credit and head-of-household filing status. For example, to qualify for the child tax credit, the taxpayer’s child must be under 17; the taxpayer may file as "married filing separately." To qualify for the child-care credit, the taxpayer’s child must be under 13 or disabled; the taxpayer may not file as "married filing separately."
• Eliminate sunset provisions. Temporary changes in the tax law are inherently inequitable and are not worth making.

Congress should be able to agree on commonsense changes such as these, which would make the tax code not only simpler, but fairer. Tax simplification shouldn’t be an oxymoron.

 * * * * *

William E. Philbrick, CPA, MST, CVA is a Senior Vice President and Tax Director at Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached atwphilbrick@GRK&B.com.

Tax Simplification Shouldn’t Be An Oxymoron

William E. Philbrick, CPA, MST, CVA

At more than 3,000 pages of small print, the Federal Tax Code is becoming longer and scarier than the collected works of Stephen King. Regardless of length, the tax code is appropriately named, as many sections are written in a code that only a seasoned professional can understand.

Simplification has been talked about since 1919 and was widely discussed in 1986, when the tax code was less than half its current length. Like all tax laws, the new Jobs and Growth Tax Relief Reconciliation Act of 2003 adds to the complexity of the tax code.

One reason the tax code has become so complex is that tax legislation requires compromise to be approved by Congress. Pressure from special interest groups, attempts at social engineering and other factors lead both parties to weigh down new tax laws with enough amendments to obscure the original intentions of the legislation.

Budgetary considerations also add to the complexity. To limit the cost of the new tax law to $350 billion, Congress set some provisions of the law to expire at the end of 2005. Similarly, provisions of the last major tax law, the Economic Growth and Tax Relief Reconciliation Act of 2001, are set to expire at the end of 2010.

Sunset provisions create inequities and make tax planning as difficult as predicting New England weather. For example, heirs of individuals with large estates could escape federal estate taxes if their benefactor dies in 2010, but they could be subject to estate taxes of up to 50% (after a credit for $1 million in asset value) if their benefactor dies in 2011. 

Sometimes provisions of the tax code lie dormant and create chaos for future generations. The most egregious example is the alternative minimum tax (AMT), which was created in 1969 to ensure that wealthy taxpayers could not use shelters and deductions to avoid paying their fair share of taxes.

Each time a tax cut is enacted, more taxpayers are subject to the AMT. Even though the latest tax bill increased the AMT exemption, millions of taxpayers must now complete an AMT tax form just to determine whether they are subject to the tax.

It is not an easy form to complete. Depending on whether you are subject to the AMT, reading the instructions for filling out the form will either put you to sleep or keep you up at night. Simply calculating AMT income requires the taxpayer to consider 27 different deductions and sources of income, such as net operating loss deductions, 42% of qualified small business stock (why 42%?), income from incentive stock options, and the sale of property.

Take out a home equity loan to buy a boat and a portion of your mortgage payments become "interest from a home mortgage not used to buy, build or improve your home," which makes them subject to the AMT. Even state and local tax payments must be included when calculating AMT income, as if taxpayers were paying state and local taxes to avoid paying federal taxes.

Achieving Simplification

It took the Joint Committee on Taxation 602 pages to summarize recommendations for simplifying the tax code. We don’t have that much space, but believe the following would be a good start:

• Eliminate the AMT. The AMT has outlived its usefulness and, because it is not adjusted for inflation, it is increasingly affecting middle-class taxpayers
• Eliminate phase-outs. The tax code includes more than 20 provisions that phase-out deductions, credits and other tax benefits for taxpayers who exceed income limits. The phase-outs use different definitions of income and, with one exception, each phase-out uses a different income range.
• Adopt a single definition for a "qualifying child." A qualifying child is defined differently for the dependency exemption, the earned-income credit, the child credit, the dependent care credit and head-of-household filing status. For example, to qualify for the child tax credit, the taxpayer’s child must be under 17; the taxpayer may file as "married filing separately." To qualify for the child-care credit, the taxpayer’s child must be under 13 or disabled; the taxpayer may not file as "married filing separately."
• Eliminate sunset provisions. Temporary changes in the tax law are inherently inequitable and are not worth making.

Congress should be able to agree on commonsense changes such as these, which would make the tax code not only simpler, but fairer. Tax simplification shouldn’t be an oxymoron.

 * * * * *

William E. Philbrick, CPA, MST, CVA is a Senior Vice President and Tax Director at Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached atwphilbrick@GRK&B.com.

Worcester Jewish Chronicle, June 2, 2005

Nothing Succeeds Like Success- Part I

William E. Philbrick, CPA, MST, CVA, CFF

How prepared are you to handle your financial future…whatever that future holds?

Centering on that question, three key factors will help to shape your answer-

• How realistically you answer the question
• Pinpointing your own specific problem areas…and…
• Recognizing and acting on steps you can take to turn things around.

It’s a tall order. So let’s get started.  As individuals and as a country, we are in the throes of a huge problem with likely consequences for our families, our communities and our entire nation.

I’m referring to financial illiteracy.  It takes many forms and guises. You can be affluent and have financial blind spots or serious setbacks that cause you to lose it all.  You can be middle class.  You can be a college student…. a single mom, or an average Joe.  Your rank and station in life doesn’t matter.  Statistics show that the majority of Americans do not understand their finances sufficiently to protect themselves and their families. 

Let me give you a few examples of the magnitude of the problem and invite you—urge you—to be honest with yourself.  My purpose is to go beyond defining the problems and put you on the road to solutions.  To do that, you must take the first step and honestly assess if any of the following statistics apply to you.

Americans have the lowest rate of savings of any industrialized country.  We are spending 120% of what we make.  Based on that troubling fact:  How would you pay your bills and go on with life if you or another breadwinner in the family had a major financial setback like getting fired or being laid off?  How long would your savings last?  Are you at the recommended level of six months to a year of income put aside for a rainy day?  What can you do to fix the problem if your savings are nowhere near what they need to be?

Let’s focus on the last question.  What can you do to fix the problem?

The answer is so easy and so promising.  You can begin immediately. I mean today, not tomorrow.  You just have to do two things.  THINK SMALL and DO IT REGULARLY.  Yes.  Think small.  Psychologists and financial experts agree that we most often fail to save because:

• We believe we don’t have any extra money…AND…
• We believe we need to save huge amounts for it to matter.

WRONG on both counts.

Thinking small can bring big rewards.  If today you begin to put aside just $2.50 a day—the equivalent of that designer cup of coffee—you’d be saving $17.50 a week.  That’s $78.50 a month…almost $1000 a year.  That’s what   thinking small means. If you don’t want to do it on a daily basis, then do it weekly.  Put aside $20 a week.  Is there anyone who can honestly say that he or she can’t find $20 a week to put aside?  That’s $1080 a year.  But, if I told you to find $1080 at the end of the year to save, you’d likely—and probably accurately—say to me:  “I don’t have $1000 to put away.”

Let’s take this example a bit further.  If you save $201 dollars a month for 25 years, at the end of that time, at a 6.5% after-tax return rate, you’ll have saved $150,000.  If you need advice once your money starts to accumulate, talk to a financial adviser, such as a CPA or qualified financial planner. There are many safe investment vehicles that require no more than a $500 initial investment.  But remember to be wary of an adviser who has a vested interest in steering you to a particular investment product. 

That’s why “Think Small and Do It Regularly” works.  That’s why “Pay Yourself First” works.  One of the surest ways to stay consistent is to have money automatically taken out of your paycheck and put in a special “DON’T TOUCH” account.

Another example of our country’s financial literacy problem is the staggering amount of credit card debt we carry as individuals.  Credit card debt is sapping us both individually and as a country.  For example:

• The average American owes over $8,000 on their credit cards.
• The average college student carries 3 credit cards, each with an average balance of nearly $3,000.  More and more students are dropping out of college because of overwhelming debt.
• If you have a credit card with an average balance of $1,500 and you pay only 2% of the balance each month at an interest rate of 18.9%, it will take you over 49 years to get the balance down to under $50.
• In 2003, 1.6 million Americans filed for bankruptcy – the highest amount in history and twice the number since 1993.  I’m not talking about companies or corporations; I’m talking about everyday Americans who have had to declare bankruptcy and become ineligible for credit—including mortgages—for 10 years.  That’s how long it takes for that black mark to get off your credit rating. 

You remember that scene in “Indiana Jones” where the walls keep closing in from all sides?  That reminds me of the predicament of credit card debt.  The more money we need…the more we use credit cards…the more interest we incur…and the more our financial walls close in on us, until we are so squeezed we can hardly take a breath.

What must come to mind right now is one of two questions—and they are totally linked to that original question:  “How prepared am I to handle my financial future?”

• How do I avoid the credit card debt squeeze?
• If I’m already there, how do I push my way out?

You will avoid the credit card squeeze by limiting the number of credit cards you use…by paying the total due—never just the minimum— every month…by never incurring the exorbitant 18%—or higher—interest rates credit card companies charge. And remember department store rates can often be as high as 21.99% or even higher.

If you already are in a credit card bind, how do you start to work yourself out of it?  First and foremost, stop using your credit cards…talk to a financial planner and pick a reputable one.  Secondly, work with your creditors and talk to them.    Avoid declaring bankruptcy unless you absolutely have to; and only after you’ve consulted with experts.  Make sure you have exhausted all your other options including a second mortgage or home equity loan if you are a property owner…but remember that these options put your home at risk if you fall behind or cannot make payments.  Or, you might ask family or friends for a loan on absolute business terms.

We’ve taken a look at a number of possibilities for easing the two biggest financial problems individual Americans face:  too little savings and too much debt.

In Part II, we will be looking at life cycle events that impact your financial future and strategies to keep you financially fit through these events.

 * * * * *

William E. Philbrick, CPA, MST, CVA, CFF is a Senior Vice President and Director of Taxes and Forensic Services with Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached at wphilbrick@GRK&B.com.

Worcester Business Journal – March 21, 2005