story written by fellow ACA member: Sheila Padden, Padden Financial Planning

John “Jack” Bogle, founder of the $3 trillion Vanguard Group and the world’s first index mutual fund, spoke to the Alliance of Comprehensive Planners (ACP) recently in Philadelphia at our annual conference.

Why did one of the investment industry’s “Giants of the 20th Century” choose to speak to us for free? He summed it up succinctly: “We are on the right side of history.”

Bogle appreciated our commitment to comprehensive financial planning based on a fiduciary relationship with our clients. “I’ve always liked the financial planning field, particularly the fee-only field,” he said.

Bogle was well aware of ACP’s emphasis on client service. “Ultimately, clients have to be served…groups like yours, people like you, are perfectly capable of being a great place to begin all that,” he said.

He also stressed the need for long-term relationships and a long-term investment perspective. “Your clients and our clients are or should be investing for a lifetime…investing for 80 years,” Bogle said. “Think of active management this way…the average portfolio manager lasts for seven years, and 50% of mutual funds go out of business every 10 years.”

He observed that the possibility of outperforming the market over that time is “substantively zero.”

And these plans need to be implemented in a way that keeps costs low, such as a passive, low-cost index approach.

“Trading is murdering,” Bogle said. “The more you trade, the less you make.”

His prescription for a better financial world fit right in with the ACP philosophy. When asked what he would do to change the financial world for the better, Bogle called for three things: 1) a federal standard fiduciary duty for investment advisors, 2) investor education, and 3) a change in corporate focus.

He explained his views on the fiduciary duty owed to customers very simply: “Anybody who touches other people’s money is a fiduciary. …Did I make myself clear there?”

Bogle said he saw investor education as one of the key services provided by ACP advisors. “You all are accomplishing this every day,” he said.

He also stated that the knowledge and hand holding provided by financial planners is invaluable. Bogle particularly noted the importance of understanding cost – lifetime cost.

Finally, he issued a challenge to current management in the financial industry. “Directors have to wake up and make sure their companies are run in the interest not of their managements, not in their political contributions, and not in their executive compensation, but in the interest of their stockholders,” Bogle said.

His lifetime of achievements in the financial services industry adds heft and credibility to his opinions. We were honored to have Bogle address our group and endorse our approach.

Doing your own taxes is frustrating: finding the forms, deciphering the instructions, finding your paperwork, doing the math, figuring out what needs to be attached, worrying about a tax audit.   

What you may not realize is that doing your own taxes also costs you money. It costs you money because you don’t know all the credits and deductions you are entitled to, so you end up paying more tax than you truly owe. (After all, when was the last time you settled down for a quiet evening with the Internal Revenue Code?)  

But besides missing opportunities to lower your tax bill, it also costs you money just to fill out your tax return. The IRS does projections for how long it takes the average taxpayer to complete each tax form. These projections are presented below (in hours:minutes). Referring to this table you can see that if you only have wage income (Form 1040) and some bank interest (Schedule B), the IRS calculates it will take you 3 hours and 33 minutes to learn about the law and the forms and 6 hours and 41 minutes to actually fill out the forms: a total of 10 hours and 11 minutes. If you have capital gains from a mutual fund, the total jumps to 15 hours and 5 minutes.                                                                                                                                                                                                       

Form               Description                             Education          Preparation       Hours:Minutes

 1040               Basic form                                  3:25                  6:16              9:41

Sch A              Itemized Deductions                   :39                  1:34              2:13

Sch B              Interest Income                            :08                    :25               :33

Sch C & E      Small Business &                         1:41                  2:52              4:33

                        Self-employment Tax

Sch D              Capital Gains                              3:04                  1:50              4:54

Sch E              Royalties and Rents                   1:01                  1:25              2:26

2106               Employee Business Expenses     :12                   :24                :36

2441               Child/Dependent Care Credit     :25                   :50              1:15

4562               Business Depreciation               5:10                 5:59            11:09

 So, how much is that time worth? If you get an hourly wage, say $10 an hour, multiply your wage by the estimated time. Fifteen hours and five minutes is 15.08 hours (the .08 comes from dividing 5 minutes by the 60 minutes in an hour, which gives you the decimal fraction.) Ten dollars an hour times 15.08 hours equals $150.80, your cost for doing your own taxes. 

If you receive a salary, you can calculate your hourly wage by dividing your salary by 235 (365 days minus weekends, holidays, vacation and sick days) and then dividing that figure by 8 (for an 8 hour workday). If you earn $35,000 a year, the calculation is $35,000 divided by 235 (148.94) divided by 8 (18.62), which gives you your salary-based hourly wage. Multiply $18.62 by the IRS time estimate for each form and you will know how much it costs you to do your taxes. The same tax return as above (Form 1040 with Schedules B and D) would cost this salaried worker $280.74 in terms of the value of his own time (or, more correctly, in terms of how much his employer values his time).

 And this does not include all your time or costs. The IRS does not count the time it takes to do record keeping, the major headache in figuring capital gain basis for a Schedule D. The IRS also does not count the time it takes you to assemble, copy, and mail in all the forms – or the hours it takes to learn the latest computer program that promises “to do it all for you” (after you have entered in all the numbers).

 Furthermore, you cannot deduct the value of your time spent preparing your return.  Only money spent for professional tax preparation is tax deductible.  If the salaried employee found someone to prepare his taxes for the same $281 it costs the employee to do it himself, the after-tax cost would be only $202 ($281 minus the 28% tax deduction). Not only would this taxpayer get professional help with his taxes, it would cost him $79 less than doing it himself!

 Finally, remember that all the time you spend doing your taxes comes from your own personal time: weekends and holidays. This is time you spend with your family and friends; time for yourself. How much is that time worth?

 Article written by a fellow Alliance of Comprehensive Planners member,

Robert Reed, Columbus Ohio

We at Lighthouse Financial Advisors believe in investing strategically in Dimensional Fund Advisors (DFA) mutual funds because of their unique approach of translating financial science into practical investment solutions for clients.  We invest in Dimensional to build portfolios along the dimensions of expected returns that can be pursued in a cost-effective manner.  Their dynamic, market-driven process and flexible trading strategies allows them to manage the tradeoffs that matter for performance, while balancing opposing premiums, diversification, and costs.  Dimensional’s process is applied consistently across a broad range of competitively priced strategies, which span asset classes and geographies, to help meet the diverse needs of investors worldwide.

At Lighthouse, we avoid the traps of Conventional Investing.  Those are making prediction bets, searching for the “best” fund managers, investing based on what the media says and being influenced by stock tips from acquaintances.  We, and DFA, base our investments on the four principles of Strategic Investing listed below:

1)      Market Equilibrium:

• Trying to outsmart other investors is very tough to do, almost so that we feel it is impossible.  Market prices are based on many competitive buyers and sellers with the same public information, but different opinions about the expectations of an investment.

2)      Diversification:

• Regardless of what you’re invested in, each holding carries risk one way or the other.  By investing in many groups of investments around the world you help reduce the risk of losing your overall net worth.

3)      Asset Allocation:

• We work with you to discover the Investments you’re comfortable making.  Various groups of stocks and bonds carry various degrees of risk and expected return.  We want you to feel comfortable in the investments you decide on.

4)      Purpose and Discipline:

• Investing is the journey to a personalized financial destination.  First, the plan is created, then the process gets put in place and then you finalize with the product to invest in.  Whether it is a good or bad market you should always stick to your plan.

 

For more information on Dimensional Fund Advisors, view their site at: http://us.dimensional.com/

According to a recent study, more than half of Americans age 55 to 64 do not have wills (the numbers are worse for those 45 and 54).  I want to focus on the ramifications of why a will is necessary and why it is important to act now to discuss the matter with your financial planner.

A main reason to draft and execute a will is so you can choose who and when loved ones will inherit your assets, serve as the guardian for your children and make the financial decisions once you pass.  Yes, your spouse and children will most likely inherit your assets if you pass without a will (“dying intestate”) but they may be subject to estate taxes and an expensive, lengthy process called probate.  This is when you seek the courts help in sorting out a deceased person’s affairs.

A common reason people say they do have a will is the cost.  However, if you have a less complicated financial situation, there are numerous online DIY sites such as Legal Zoom or Smart Legal Forms.  They cost is approximately $40-70 for a will, living will, healthcare power of attorney and financial power of attorney.  It is recommended to hire an estate lawyer if you have a large estate or complicated family dynamics.

A forgotten aspect of the estate planning process is to ensure you have the correct beneficiary designations.  Retirement accounts and life insurance have special rules.  All too often, we see parents or ex-spouses listed as beneficiaries when someone has children or gotten remarried.  Although your will may specify your spouse and children are to inherit your estate, retirement accounts and life insurance flow outside of the will.

These are just a few of the many reasons to focus on drafting or updating your will.  Your loved ones will thank you later!

Adapted from:

Retirement Plan Contribution Limits
Type of Retirement Account	Additional 2014 Contribution	Maximum Contribution
401(k), 403(b), most 457 & federal govt. thrift savings	None	$17,500
IRA	None	$5,500
IRA catch-up contributions	None	$1,000
401(k) catch-up contributions	None	$5,500