Financial Planning for the Self Employed April 12, 2016

(1)

Financial

Planning

for

the

Self

‐

Employed

April

12,

2016

1. Financial

Decision

‐

Making

‐ Get ‘er done!!!

2. Retirement

Isn’t

the

Goal

‐ Just ask Johnny Paycheck



a.

Save

early,

save

often!

‐ The most powerful force In the universe!

b.

Avoid

the

big

mistakes–

You Can’t Fix Stupid!

c.

Life

is

a

Journey

‐ Lead, Follow, or Get Out of the Way!

3. Investment

Strategy

–

If you come to a fork in the road, take it!

4. Estate

Planning

‐ Mama always said, dying was a part of life. I sure wish it wasn’t.

a.

Legal

Documents

–

Your free Texas will

b.

Supplemental

Documents

–

Who Gets Grandma’s Yellow Pie Plate?

5. Taxes

‐

April

18

th

_‐

_…,

_{You Might be a Redneck}

6. Free

money

–

And lead me not into temptation…

7. Resources

–

I’ll get by with a little help from my friends…

8. Just

One

Thing…

(2)

1. Financial Decision‐Making – Get ‘er done!!!

a. Decision‐making = f(equations, emotions)

b. Figure out the costs/benefits and determine if the difference between choices is worth it – based upon

your values. Easier after you’ve done the equations piece!

2. Retirement Isn’t the Goal ‐ Just ask Johnny Paycheck…

a. Financial Freedom – do what you want on your terms

b. If you’re fortunate enough to be doing something you’re passionate about, it’s not really work. Why

would you want to “retire?”

c. How to get there?

i. Save early, save often – the greatest determinant of financial security (and, you control it!)

ii. The most powerful force in the universe!

iii. Avoid life’s big mistakes… limited economic cycles to recover… You Can’t Fix Stupid!

d. Life is a Journey – Lead, Follow or Get Out of the Way

e. Life Happens… how we deal with it is our choice.

i. Glass is half‐full

ii. Circle of control; circle of influence – Stephen Covey, The Seven Habits of Highly Effective People

3. Investment Strategy – If you come to a fork in the road, take it!

a. Markets are relatively efficient – but they do tend to overcorrect high and low (momentum).

b. No credible evidence that any strategy goes up all the time uninterrupted.

c. Economic cycles tend to be three to seven years long.

d. Time of need determines the ‘appropriate’ investment vehicle

i. Near‐Term – Operating funds ‐ checking, savings, money markets

ii. Short‐Term – Emergency Fund plus cash needed this year which can’t be met out of cash flow –

savings, money markets, short‐term CDs. Self‐employed need larger E‐Funds!

iii. Medium‐Term ‐ savings, money markets, short‐term CDs, short‐term bond funds, target year

funds. Buffer to prevent you from having to sell when the markets are down

iv. Long‐Term – Asset Allocation of Exchange Traded Funds (ETFs) or index mutual funds based

(3)

e. Ride the Long‐Term Trend (Up and to the Right)

i. Buck the trend ‐ Don’t sell when the markets are down – buy more! Be a Contrarian!

ii. Buffer funds (Near‐, Short‐, and Medium‐Term) enable you to avoid selling when the markets

are down. Replenish when markets are up – Sell high!

f. Tactics:

i. In each economic cycle, every asset class has its day – we just don’t know when that will be in

advance.

ii. Time In the Market is More Important than Timing the Market

iii. Costs Matter ‐ Use low‐cost, index funds ‐ Exchange Traded Funds (ETFs) or Mutual Funds

iv. Asset Location for Tax‐Efficiency – Hold the least tax‐efficient asset class(es) in most tax‐efficient

account, e.g. Fixed Income in retirement accounts.

v. Recipe for making money ‐ Buy Low, Sell High (most people do the opposite!) Disciplined

rebalancing forces this behavior and is a contrarian strategy.

(4)

Asset Class Target/Initial Value

Subsequent Value

Rebalance to Target

US 20.00% 25.00% Sell “High” 5%

Int’l Developed Markets 20.00% 20.00%

Int’l Emerging Markets 20.00% 15.00% Buy “Low” 5%

Real Estate 10.00% 10.00%

Natural Resources/Commodities 10.00% 10.00%

Fixed Income (Bonds) 20.00% 20.00%

vi. Take what the markets give you

1. When the markets are temporarily down ‐ Tax Loss Harvest

2. When the markets are up‐ Tax Gain Harvest (offset the gains harvested with the losses

previously harvested – pay no capital gains tax and save on ordinary income tax too!)

4. Estate Planning ‐ ‐ Mama always said, dying was a part of life. I sure wish it wasn’t.

a. Legal Documents – Your free Texas will

i. if you don’t take the time, it’s ok – Texas has done it for you

ii. if you are over the age of 18, you need them

iii. if you have minor children, you need them

iv. if you are a blended family, you need them

b. Supplemental Documents – Who Gets Grandma’s Yellow Pie Plate?

i. Letter of Instructions

ii. Digital Will

iii. Ethical Will

(5)

5. Taxes – You might be a redneck…

a. Bracket Management – 0% Capital Gain, Others…

b. S Corp / LLC

c. Backdoor Roth

6. Free money and/or ways to get it ‐ And lead me not into temptation…

a. Delaying SS benefits until you turn age 70 – 8% guaranteed increase – tough to get that anywhere!

b. Employer retirement plan match/contribution – have to contribute as much as they match.

c. Capital gains if you’re in the 15% marginal income tax bracket ($37,650/$75,300)

i. $4050 Exemption

ii. $6300/$12,600 Std Deduction

d. Earnings on a Roth IRA (or, Roth 401(k) plan)

i. Direct Contribution (income limits),

ii. Backdoor Roth IRA (nondeductible contribution to Traditional IRA followed by Roth conversion;

taxes if you have a SEP‐IRA or other than nondeductible contributions in your Traditional IRA)

iii. Rollover from a Roth 401(k)

iv. Pre‐mature (before age 59 ½) Roth IRA withdrawal of the amount contributed (not gains) after

the Roth has been open for five years.

e. Earnings on a 529 education savings plan or a Coverdell Education Savings Account if used for Qualified

Educational Expenses

f. Interest on a tax‐exempt bond

g. Health Savings Account –

i. Pay medical expenses with pre‐tax dollars

ii. Growth on the account is tax‐free if used for qualified medical expenses

h. Deduction Bunching – two‐year tax planning (standard deduction one year; ‘bunch’ deductions the

following year)

i. Larger Sales Tax Deduction – the IRS table is low. Use the table and add large expenses (vehicle, boat,

etc.). Or, estimate your own based upon your end of year credit card statements. Spreadsheet.

j. Charity –

i. Gift Appreciated Securities (deduction + no tax on embedded capital gain)

ii. Gift all (or a portion) of your Required Minimum Distribution (RMD) from your IRA. Only works

if you are 70 ½ or over – none of you are, but living parents may be. No double dipping!

iii. Take a deduction for your mileage

k. Employee discount on employer stock (ESPP)

l. LLC/S‐Corp vs. Schedule C

m. Roth Conversion via nondeductible IRA contributions

n. Acorns – acorns.com or download the app. No fee < age 24 (use *.edu email address) Round up on

daily purchase, DCA, Lump Sum

o. Bank of America – keep the change

p. Tapping an IRA without penalty (not a preferred strategy, but difficult times call for difficult measures).

i. If unemployed, you may tap your IRA without penalty for medical insurance… after collecting

unemployment for 12 weeks in a row.

ii. If permanently disabled (IRS definition) and unable to work, you can avoid the early withdrawal

penalty.

iii. First time home purchase (up to $10,000/$20,000).

7. Resources – I’ll get by with a little help from my friends…

a. Assistance for the Do It Yourselfer – 7Twelve: A Diversified Portfolio with a Plan by Dr. Craig Israelsen –

www.7TwelvePortfolio.com

b. Assistance without talking to a real person – Robo‐advisors

c. Assistance with an advisor – Fee‐Only™ (no third‐party payments)

iv. National Association of Personal Financial Advisors (NAPFA) – www.napfa.org