Taxes Explained

Jan 27, 2020 David Kennon

Tax Time is rolling around, which confuses many of my clients.  There is a lot of daunting terminology out there. I’m going to stick with stuff you actually need to know. Disclosure: I’m not a CPA but I’ve learned some things through the years. Get ready to learn. 1099-MISC: A “1099-MISC” is for work you did as an independent worker or freelancer. 1099-INT:  This reports interest income you’ve received from savings/CD/money market accounts.  It also includes any interest you receive from bonds outside a retirement account. This income is taxed at your federal income tax bracket. 1099-DIV:  If you are receiving dividends from an account outside a retirement account you must pay taxes.  These tax rates can be more favorably. As an aside, most people believe the long term capital gains rate to be 15%.  It often times isn’t.  If you are married and show less than $80,000 in income, the tax rate for long term capital gains is zero.  If you add your social security plus your IRA withdrawals plus the capital gains and it totals less than $80,000- no capital gains tax. 1099-R:  This is probably the most important forms to most of my clients. It reports how much money you distributed from your retirement accounts (IRA, 401k, etc.).  It does not apply to Roth IRA’s. Required Minimum Distributions (RMD’s):  I get a tremendous number of questions on this subject.  The IRS just raised the age at which time you need to start withdrawing money from your retirement accounts (from 70.5 to 72). The amount you need to remove depends on your age.  At 72 the amount is around 4%.  Do you need to worry about RMD’s?  My clients don’t.  By taking the 5% of their portfolio, they naturally satisfy the RMD. Stretch IRA:  When you pass your retirement accounts on to your heirs there is no need for them to cash in the account right away.  This would trigger massive taxation.  The IRS now gives them 10 years to spread the tax burden over time. Standard deduction:  The vast majority of you will utilize the standard deduction.  If you are married you can deduct $24,800 from your income. Meaning- if you income is $100,000, you only have to pay taxes on $75,200 after the standard deduction.  If you are single the number is $12,400. The only time you would not use the standard deduction is in situations where you have several other deductions (mortgage interest, charitable giving, etc.). These are called itemized deductions. About 90% of the U.S. population just use the standard deduction. For example, if your mortgage interest is $15,000 you do not get to deduct it from your taxes, as it is less than the standard deduction. Progressive Taxation:  I find some people can have difficulty with this concept.  Below are the current tax rates: This is where the confusion comes in.  Looking at the table above, some people believe if they make one dollar over the 12% threshold they must pay 22% income tax on all their income.  This is not how this works.  Let’s say you are single and make $85,526. The first $9,875 is taxed at 10%.  From $9,875 to $40,125 you pay 12%.  From $40,126 to $85,525 you pay 22%. So if you are one dollar over, you would only pay 24% on that one dollar. Cost Basis:  First look at how much you paid for a stock, bond, or real estate property.  Then look at the selling price. You must pay taxes between the cost basis and the selling price.  This does not apply to retirement accounts. Estate Tax:  In Florida this only applies to people worth over $10 million dollars.  If you have that much please call for an appointment. Gift Tax:  This is also extremely misunderstood.  Unless you are worth millions, you can gift as much as you want.  The $15,000 rule does not apply. Give freely. The recipient does not have to pay taxes on it. In addition, I always talk about how retirees are surprised at how little they pay in taxes once retired.  I’m going to include the chart below so that you do a quick estimate of your monthly tax liability based on your monthly income. Income is basically derived from Social Security + Pensions + 401k/IRA withdrawals.  Of course this is not exact, but you get the idea. Married Married Single Single Monthly Income Monthly Tax Monthly Income Monthly Tax 0-5k $0 0-3K $0 5-6k $150 3-4K $150 6-7k $400 4-5k $350 7-8k $650 5-6k $550 8-9k $850 6-7k $750 9-10k $1100 7-8k $1000 10-11k $1300 8-9k $1300 11k+ Congratulations! 10k+ Good Work! Be Blessed, Dave P.S.  Please keep sharing.  I’ve had a lot of new subscribers.  Keep it up!  Facebook seems to work best.

Market Bubble Set to Burst

Jan 21, 2020 David Kennon

Market Bubble Set to Burst Did this headline scare you?  Did it make you want to read this article?  Not to worry, there is no reason to think the Dow is going into a free-fall.  I made up the title. I’m really sorry I spooked you. I’m just trying to make a point. Recently I have seen more scary headlines than usual concerning the markets. I’ve found myself literally yelling out loud, “How are people even allowed to publish this stuff- let alone why it is showing up at the top of my news feed?!” This is not a victim-less crime.  I can’t tell you how many people like you let these headlines force them into making emotionally charged investment decisions. Emotion + Investment Decisions = Not a Good Idea It also causes untold worry and stress on the millions of readers who are depending on stocks and bonds to fund their retirement years. I did some digging and re-read articles from 2018.  The results prove my point. It’s kind of funny in a sad way. So let’s take a step back into 2018 and see what the prognosticators were prognosticating. We’ll start with an article from Marketwatch.com titled: “Prepare for the biggest stock-market selloff in months, Morgan Stanley warns.” Why This Drives Me Nuts: Nobody knows when the stock market is going to go up or down.  I can’t state this any more clearly: There is zero academic evidence that there has ever been a single person who could consistently predict when the stock market is going up or down. Morgan Stanley is a big name in the investment industry.  Using their name makes the article even scarier, because it sounds like it is coming from a reputable source. The website is using a “click-bait” strategy.  The owners of the website do whatever it takes for you to visit, so that they can display ads, so they can make money. Could stocks go down?  Sure. It is a natural part of the markets.  But it has no bearing on your long-term financial security.  It is about time IN the market, not TIMING the markets. By the way, did the stock market “correct” itself back in 2018-19?  No. It went up 30% in 2019. I hope you didn’t read that article and sell your portfolio.  If so, you may want to email the author and ask for your money back. This is the problem.  News outlets and writers take no risk when writing this stuff.  If they’re wrong, who cares? At least they found content to fill the pages.  If they’re right? Now they tout their incredible research skills. Let’s move on to the second article.  Also from Marketwatch.com. Also from 2018. “This ‘prophet of doom’ predicts stock market will plunge more than 50%” Why This Drives Me Nuts: Anytime the word “doom” is in the title of an article, you may want to take it with a grain of salt. The “prophet of doom” runs a mutual fund.  He gets paid based on how many people buy his mutual fund.  The more he can get his name in the news, the more attention he gets, and the more investors he recruits. The “prophet of doom” has been predicting a historic crash every year for the past 18 years.   He was “right” two times, and now he is “famous” for being a “prophet” because he predicted the corrections in 2001 and 2008.  Really?! If you followed this guys advice, out of terror, you might have buried your money in a safe in your backyard under concrete.  In this scenario, $100,000 in 2000, would be $100,000 in 2018. Do you know how much money you lost out on? $100,000 invested in the year 2000 would be worth $323,000 today. (source) The article also uses lots of technical looking charts and graphs- all of which have been proven to be completely ineffective at predicting the stock market.  But to the uninformed reader, they appear to give a lot of credibility to the idea. He is predicting that the Dow will drop 69%.  If the Dow dropped 69% it would spur on another Great Depression!  Really?!?!?! Ok, I better wrap this up before I get too fired up. Online newspapers sell advertising.  The more people who read the article, the more money the newspaper makes.  Newspapers will write any headline possible to get your attention. Unfortunately, the media learned long ago that doom and gloom gets a lot more “clicks” than sensible financial news coverage. Ignore.  These. Articles. Be Blessed, Dave

My Life in 5 Minutes

Jan 13, 2020 David Kennon

Somebody remarked me this week, “Dave, I like the articles you write because you just say it like it is.  You don’t get all fancy or wordy.” It reminded me.  I don’t like to read stuff that’s overly wordy either.  It seems that many articles I see contain 90% filler and 10% information.  So this week I am going to take things to a whole new level. Below you will find several concepts that I’ve talked about over the past few years- in as few words as possible.  I’m trying to take my entire planning philosophy and boiling it down into a five-minute read. Are you ready? Let’s go! 1. Nearly one-third of the country die with more money than ever.  This implies that many retired Americans are underliving and underspending.  Sound crazy? Just look at the data. 2. The media is your worst enemy.  With all the doom and gloom in regards to the economy and social programs, it is easy to fall into the trap of saying, “Oh my!  I might end up living in a van in the Walmart parking lot.” These fear tactics are completely twisting the reality of most retirees.  While, obviously, there is a portion in the country who find themselves in challenging situations, I would estimate two-thirds of you are in better shape than you realize. 3. Everyone is terrified of running out of money.  Everyone. I don’t care if you have $100,000 in the bank or two million.  I’ve met with literally thousands of retirees. This fear controls almost all financial decisions in your life (but it doesn’t have to). 4. Over the past eighteen years I’ve looked under every rock for a solution to the question:  Where the heck do I put my money once I retire? The conclusion I’ve found is now abundantly clear:  A diversified and balanced portfolio of stocks and bonds. Period. End of story. 5. On that note.  Stocks are remarkably powerful.  Over any long period of time (10-20 years), they’ve basically always returned around ten percent. 6. Taxes are far lower in retirement than while working.  If you are retired and married, bringing in $5000/mo or less, you will pay no income taxes.  If you are single, the number is $3000/mo. This doesn’t apply to those still working part time. 7. Inflation is not going to ruin you.  Social Security increases lock-step with the rate of inflation (if inflation grows by 2%, your Social Security check increases by 2%).  In addition, spending naturally goes down as you age. From your late 50’s to your early 80s, spending goes down by 40%. 8. If you are invested in a diversified portfolio of stocks and bonds, it is reasonable to spend 5% of the original account value each year. If you retire with $100,000 you can spend $400 a month. 9. Retirement is not all about golf and sipping margaritas by the pool.  Once you retire you need to find purpose.  Make sure you plan ahead of time. Whether you volunteer, start a new business, help raise the grandkids, or serve your church- do not fall into the trap of complacency.  Purposeless inactivity is literally bad for you health. 10. Give with a warm hand.  Generosity is contagious. Inheritance is overrated.  It is far better to help your loved ones and others in need, while alive, than once you’re gone. 11. Presidential elections have no long-term effect on the stock market. 12. Your friends have less money than you think. 13. Don’t buy into the hype.  No one on the planet knows if the stock market is going to go up or down this year.  Not Warren Buffett, not Jim Cramer, no one. 14. The most important factor once retired is not your savings, 401k or social security.  It is your budget. 15. Social Security is not going broke.  It just isn’t. Get it out of your mind.  I can go into great detail of why- but that is for another day. Whew.  That was fun.  I hope you learned something. Now go out there, grab the tiger by the tail, and proclaim, “I’m not going to live in fear.  I’m educated and ready to go!” Dave

White Hot Economy (and what it means to you)

Jan 6, 2020 David Kennon

The stock market ended up returning over 30% in 2019.  The bond markets were up 9%.  A portfolio containing half bonds and half stocks  returned around 20%. Wow.  Wow.  Wow.

Now if the markets go down 10% next year, you are NOT allowed to freak out.  You will simply remark, “I’m just losing some profits from last year.  No big deal.  These things average out over time.”

Next year the markets could soar again.  There is just no way to know.  You need to continue to trust the process and reap the gains.

_______________________________________________________

I hear the same refrain nearly every day from people that I meet, “Dave, I don’t want to invest in the stock market because I don’t want to lose all my money like in 2008.”

While I empathize with their concerns, this week I wanted to help give some historical perspective on the history of market volatility.  As I mentioned above, when the stock market is expanding the rewards can be incredible.

But, Baby Boomers, you (and your money) have been through a lot.

The Retirement Revolution’s entire premise is based on the idea that once you retire you need to have your money working for you. Your money needs to be producing income because you no longer are. Baby Boomers have so many factors working against them when it comes to financial peace in retirement, and the 2000’s certainly didn’t help.

Many people in their 60s, 70s, and 80s have very strong emotions attached to the stock market because they lived through two of the worst recessions in U.S. history. From 2000-2002 the stock market struggled, and of course, 2008 was the worst recession this country has seen since the Great Depression.

All of this sets Boomers up for failure as it pertains to their investments. I am going to argue today that you may have a skewed understanding of market crashes.

Learn from financial history; don’t live in it.

Imagine you were retiring in 1995. There had not been a major recession since the early 70’s. The stock market had been chugging along, uninterrupted for nearly 20 years. While there was a large single-day crash in 1987, the market recovered completely by the end of the same year.

If you were retiring in 1995, you probably would not have the same fear and trepidation as you do today. “Of course I’m going to invest my money, it’s been a great way to grow my net worth for years and years.”

Imagine you were retiring in 1965. The economy had not experienced a major recession since the early stages of World War II in 1940. Same story. It would have been much easier to make smart, unemotional investment decisions.

Now as people plan for retirement, many have a mortal fear that they could wake up one day and find that the markets had crashed and all their money was gone.

Let’s start with a “worst-case scenario.” A retiree who had had their money in a diversified portfolio of stocks and bonds, in 2008. The recession hits. The common assumption is that the retiree lost everything.

The reality? Somebody who had 50% of their money invested in bonds and 50% in stocks would have lost 15.88 percent. That would sting, but it wouldn’t ruin you. (Source: New York University, Stern School of Business)

Let’s time jump to 2009. Same retirement portfolio referenced above made +16.2 percent (this is just a coincidence but it’s really cool). The concept that people “lost all their money” in 2008 just isn’t true. 

If you had all of your money in Tyco stock or Enron stock then, yes, you would have been in big trouble. But a diversified and balanced portfolio of stocks and bonds fared far better than most people realize.

Two stock market crashes in a single decade like 2001 and 2008 is exceedingly rare. The only other example would have been during the 1930’s during the Great Depression and the start of World War II. Could we go another 60 years without a bad decade like that again? I don’t know, my crystal ball is in the shop.

But it has happened before….

A 50/50 portfolio of stocks and bonds (besides 2008) has only lost money 4 times in the past 43 years.

Year	Return
1976	-2.06%
1993	-0.80%
2000	-1.72%
2001	-5.92%

Reality, not fear, should guide your investment strategy.

I want to repeat that fact. In 43 years, a balanced and diversified portfolio of stocks and bonds has lost money 5 times total. And 4 of those times were -6 percent or less! The concept that “you may lose all your money” just has no historical precedent.

By the way, this very same portfolio returned an average of +10 percent during that 43 year period. $100,000 invested in 1975 would have been worth over $5,000,000 today.

I hope this helps. Don’t let one bad decade sour you from investing. Stocks and bonds are incredibly powerful financial vehicles that have hundreds of years of history behind them. And even if we have another bad decade like the 2000’s, you will still probably be okay.

In fact, if you invested $100,000 in 2000 into the portfolio referenced above, you would have been left with a mere $145,000 in 2010. And that was the BAD decade.

Be encouraged. A well-diversified portfolio can support you and your loved ones throughout your retired years. Don’t let fear get in the way of good, solid planning. You deserve to live an empowered and fearless retired life!

Be Blessed,

Dave