The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Mistake #2

The 5 Biggest Financial Planning Mistakes Made by Tech Professionals | Mistake #2

 

 

I love working with the tech community. I started my career at Microsoft and have since been inspired by the creative and innovative minds of folks working at tech companies large and small. I also enjoy working with tech employees, because as a personal finance nerd, I get to help people navigate the plethora of benefits available that are often only available at tech companies. Between RSUs, ESPP, Non-Qualified or Incentive Stock Options, Mega Backdoor Roth 401(k)s, Deferred Compensation, Legal Services, and even Pet Insurance, it is the benefits equivalent of picking from a menu of a Michelin three-star-rated restaurant.

 

Through my own experience as a tech employee and my experiences now as an advisor working with tech professionals, I’ve identified some of the biggest financial planning mistakes that can hold the tech community back from achieving financial independence and success.

 

Mistake #2 – Building and Maintaining Concentrated Stock Positions

 

I consider a concentrated position to be any investment that comprises over a quarter of your investable assets. It can be easy to accumulate a concentrated stock position in the same company that is responsible for your paycheck. If you receive stock as part of your compensation, without a disciplined plan to sell shares on an ongoing basis, you will continue to accumulate more and more company stock. Over the past several years, countless families have become wealthy because of the stock compensation they’ve received and its seemingly never-ending climb in price. While the strategy of holding onto RSUs and ESPP over the recent past has worked out incredibly well, we know that continuing to maintain a concentrated stock position is incredibly risky if you want to ensure you maintain your newly built wealth.

 

There are two explanations for not reducing a concentrated position that I hear most often: (1) My company has outperformed the rest of the market several years in a row. If I believe in my company and our growth prospects for the future, why would I sell? (2) If I sell my company stock now, I’ll have to pay a significant amount of tax on the gain. Let’s debunk each of these as reasons not to diversify:

 

(1) Typically, returns of a single stock position are intensely more volatile than the returns of a market index. This can work out in your favor, or it can work to your detriment. Historically, about 12% of stocks result in a 100% loss.* In addition, approximately 40% of stocks end up with negative lifetime returns, and the median stock underperformed the market by greater than 50%.* This means that a few star performers drive the positive average returns of the market. The odds of randomly picking one of these extreme winners is 1 in 15.* If you’ve been lucky enough to hold one of these outperformers, I encourage some humility around acknowledging that maybe being in the right place at the right time has attributed to your rapid accumulation of wealth.

 

Companies that achieve such success and become the largest company in their sector may become subject to what is called the winner’s curse. Since the 1970s, data shows that sector leaders underperform their sector by 30% in the five years after becoming the largest company in that sector.* Over a long time horizon, you are probably more likely to obtain positive investment returns by ensuring you hold the future Microsofts and Amazons of the world through broad diversification, not concentration.

 

(2) I hate to tell you this, but unless you hold onto an investment until you die, you will have to pay tax on the growth at some point. I encourage people to think of paying long-term capital gains taxes as a good thing, because it means your investments went up and you made money. A surprisingly small fluctuation in stock price can wipe out any benefit of delaying the recognition of capital gains tax. As advisors like to say, “Don’t let the tax tail wag the dog.” If you’d like to discuss your situation, don’t hesitate to contact me.

 

Be sure to read our previous and upcoming blog posts for additional mistakes to avoid as a tech professional.

Source: * Avoid Gambler’s Ruin: Bridging Concentrated Stock and Diversification 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Spring Document Cleaning

Spring Document Cleaning

 

It’s almost spring, which means it’s time for some spring cleaning—and this spring’s focus is paperwork. I don’t know about you, but I don’t love paperwork. I’ve spent years working toward zero paper, and I’m now finally down to a handful of documents. I’ll share some tips below so you can minimize your paperwork, too!

Document delivery. If you’re tired of getting statements for your accounts or bills in the mail, try signing up for e-delivery instead. This will help save time and energy opening and sorting mail and having to dispose of it as well. Don’t forget to proactively visit the proper websites to check those statements and pay those bills.

Document retention. We all know we need to hang onto certain tax, asset, and legal documentation, but sometimes the specifics can be tough to remember. Here’s a quick list of the most common situations where you’ll need to keep documentation. Please see this checklist for a detailed list.

Income tax returns. Keep at least three years of state and federal tax returns and supporting documentation on file. Supporting documentation includes records that prove any income, deductions (including medical expenses), or credits claimed (W-2, 1099, end-of-year statements from banks and investment accounts). Depending on the state (like CA), you may need to keep tax returns for longer than three years. If you think you forgot to report income and it’s more than 25% of your gross income, keep six years of tax returns. If you are claiming a loss for worthless securities or bad debt deduction, keep records for seven years.

Investment accounts or bank accounts. Consider keeping the most current statements on file and the end-of-year statement until you complete your tax return.

Retirement accounts. Consider keeping documentation on any contributions, withdrawals, and conversions. If you made non-deductible traditional IRA contributions, keep Form 8606 until the account is fully withdrawn to track cost basis.

Debt (student loans, mortgage). Keep the loan documents until the loan is paid off. Once the loan is paid off, keep documentation proving that the loan has been paid in full.
Property (automobiles, real estate). Consider keeping any deeds, titles, settlement statements, or bills of sale until you sell the property. Keep documentation showing purchase-related fees that were capitalized until you sell the property.

Home improvements. Keep any receipts related to home improvements as they may be used to substantiate any adjustments to the cost basis for your property.
Insurance policies. Keep the most current policies on file.

Estate plan. Keep a copy of your Will, Trust(s), Powers of Attorney (General and Healthcare), Living Will or Healthcare Directive, and beneficiary designations on file, and store the originals in a safe place.

Document storage. To reduce your paperwork, try storing these must-keep documents on your secure personal computer. Of course, with this storage method, it’s important to back up your electronic files and have firewall protection.

Document disposal. Please remember to shred any documentation that contains sensitive personal information, such as your Social Security numbers or account numbers. A personal shredder should do the trick and will be less expensive in the long run if you’re disposing of documents each year.

Password organization. How are you currently storing and keeping track of your passwords? I recommend using a cloud-based password manager like LastPass where you can store all your passwords in one place and only need to remember the “master” password to access them. LastPass has a random password generator to help you create complex passwords that are more difficult to hack. LastPass also offers two-factor authentication and doesn’t allow your “master” password to be reset to keep your account secure.

Digitize your photos. Does your paperwork include old family photos you’ve been meaning to digitize? Try sending them to a digitizing service like Legacy Box where they’ll scan and save them to a thumb drive, DVD, or the cloud. Legacy Box works with tapes and films, too. While this service may seem pricey, it might be worth paying someone to digitize those photos as they are priceless memories and should be backed up sooner rather than later in case something happens to the physical copies.

Inform your family. Make sure your family knows where you keep your documents and what your “master” password is in case something happens to you. This is especially important for estate planning documents. Having these conversations ahead of time will help alleviate the stress on your loved ones of not knowing what to do or where to find things.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

 

What Questions Do I Need to Ask a Seller Before Buying a Home?

What Questions Do I Need to Ask a Seller Before Buying a Home?

 

 

As you know, buying a new home is one of the most important financial decisions you will ever make in your life, which is why it’s vital to get it right.

You’ve heard horror stories before. A young couple buying their dream home only to find out six months later that the house’s structure collapsed due to water damage. Or the first-time buyer who gets caught up dealing with a probate attorney because someone was trying to sell an inherited property before the probate process had finished. Yikes.

No matter how confident you are that the house you’re about to buy is the perfect one for you, it’s always wise to ask as many questions of the seller as possible to make sure you’re getting exactly what you paid for, without any nasty surprises. With that said, let’s take a look at some of the questions you need to ask before buying a home.

 

 

How long has the house been for sale?

It’s an almost clichéd phrase that nearly feels like you’re trying to strike up some awkward small talk, yet it’s a very valid question indeed. Knowing how long the house has been for sale is essential to all buyers for several reasons.

Firstly, it gives you a clue as to whether or not the house is reasonably priced. If the property has been on the market for too long, it’s usually an indication that the seller valued the home too high, and you should be able to negotiate down.

Secondly, if the house has been for sale for a while and seems reasonably priced, there’s probably a reason why. While it’s not a major red flag, it’s certainly a cause for suspicion, so keep your eyes peeled and maybe solicit the opinion of an extra property inspector.

 

What is the reason for the sale?

Another obvious yet essential question. You need to know why they are selling the property. Are they downsizing? Pursing a new job in a different city? Moving to a retirement home? It’s all valuable information that you can use to bargain with later. Also, there’s a chance the seller is leaving due to a problem in the area, such as an annoying neighbor or something of the sort.

 

What is included in the sale?

When viewing a property, you need to ask what is included as part of the sale and what isn’t. After all, the seller will probably be taking most of their stuff with them, so you should be aware of what the house will look like once they are gone and what you need to bring with you when you first move in.

 

Are there any natural hazards or dangerous substances?

This is a great question that people forget to ask. It’s always wise to enquire about any hazards that are lurking in and around the house. If this house is in a potential flood zone, you need to know about it.

In addition to this, the seller should inform you about any harmful and toxic materials in the property, such as asbestos, lead paint, and even faulty wiring that could be classed as a fire hazard. They are required to disclose these things by law, but it doesn’t hurt to ask.

 

Is the house in probate?

Sometimes people are looking to sell an inherited house, and they usually want to get it done in a hurry. However, probate is an obligatory process that must be carried out in full; there’s no going around it.

 

The pros and cons of buying a probate house

On the one hand, buying a probate house is an excellent thing because usually it means the price is much lower, as the beneficiaries typically want to get rid of it as soon as possible. This gives you an excellent opportunity to secure a massive profit on the property right out of the gate—and if you wanted, you could even renovate it and flip it for a handsome profit.

However, there are downsides. The probate process is very time consuming, usually taking weeks, months, or even years. If you decide to buy the property, just be aware that you could be in for the long run, and there’s nothing you can do about it. In addition to this, it’s typical for a probate home to be in a below-average condition as most of the previous owners are generally elderly.

This means there is a higher likelihood that the home has fallen into a state of neglect, and things may not be up to code. If they aren’t, that means an added cost for you. The best advice is to hire property inspectors to assess the structure and the electrical and plumbing systems before you sign on the dotted line.

 

Would you consider an offer?

Last but not least, the most important question of all: “Would you consider taking $…?”

In other words, ask for a deal. Negotiate. Barter! It’s probably the most significant investment you will ever make, so even if you shave 1% off the house price, that’s a ton of money saved.

Thanks for reading!

 

Written by: Mike Johnson | Exclusively for Merriman.com

Author Bio: Mike Johnson is a freelance writer and a human rights activist and an enthusiast. He is not employed or associated with Merriman. Through his extensive research and commitment to the field of law, Mike has established himself as a well-decorated writer in this field. Mike currently settles in Las Vegas, and loves starting his day with a shot of espresso and cycling through his neighborhood.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

City of Tacoma Employees: Buy-Up Long-Term Disability Insurance Benefit

City of Tacoma Employees: Buy-Up Long-Term Disability Insurance Benefit

 

Starting Monday, January 11 through Friday, January 29, eligible City of Tacoma employees have an opportunity to buy affordable additional long-term disability insurance coverage through the City. While this benefit may not sound too exciting, it represents essential insurance coverage that can protect your income in the unfortunate event that you become disabled.

City of Tacoma employees should sign-up and take advantage of this benefit.

Who am I? My name is Geoff, and I am a financial planner with Puget Sound-based Merriman Wealth Management, LLC. I got excited after seeing the special benefits notice my wife received as a City of Tacoma employee. I do not work for the City or the vendor, and I do not receive any personal benefit from you enrolling in this extra disability coverage. I am just passionate about helping families make the best financial decisions possible and wanted to provide additional information on a topic that can seem overly complicated or may often be overlooked.

The FAQ below illustrates just how important this additional long-term disability coverage is, whether or not you have dependents:

 

What is disability insurance?

This type of insurance is used to protect your income and financial livelihood in the event of an untimely illness or injury.

There are two types of disability insurance: short-term and long-term. Long-term disability coverage is the most valuable because it replaces a portion of your income starting 90 days after your disability until recovery or age 65, whichever is sooner.

 

Don’t I already have long-term disability coverage through the City of Tacoma?

You do. However, for most employees this basic employer-paid benefit only protects 60% of the first $1,500 in monthly pre-disability earnings. This means that if you earn $6,250 a month or $75,000 a year, you will only receive $900 a month in benefits.  Will $900 a month cover your bills?

 

How much extra income protection will this additional benefit provide me?

Up to $4,100 of extra income per month of pre-disability earnings. Combined with the basic employer-provided benefit described above, you could receive up to $5,000 of income replacement (i.e., a total of 60% of $8,333 pre-disability earnings). The employee from question two above, earning $6,250 a month or $75,000 a year, would receive $3,750 a month in benefits, which would go much farther toward being able to cover bills.

Note: Employees earning $100,000 or more would receive the maximum benefit of $5,000 a month.

 

What is the difference between the 90-day and 180-day waiting period options?

This waiting period, otherwise called the elimination period, is how long you have to wait to start receiving long-term disability payments from the insurance carrier. Premiums are naturally higher for the 90-day waiting period option as you will start receiving benefits earlier. The difference in premium for choosing the 90-day waiting period over the 180-day waiting period is offset by starting to receive income 3 months earlier.

 

How much does this benefit cost and how is it paid?

The benefit costs 0.303% of pre-disability earnings up to the pre-disability earnings cap for the 90-day waiting period option. This means the employee earning $75,000 would pay an extra $18.94 per month or $227.28 a year (i.e., 0.303% X $6,250 pre-disability earnings). Employees earning $100,000 or more a year would pay an extra $25.25 per month or $303 a year. This extra benefit far outweighs the additional premium cost.

Note: This premium cost would be deducted via payroll as a post-tax cost.

 

What happens if I stop working at the City of Tacoma?

Generally, you cannot keep group disability benefits like this one offered through the City of Tacoma if you leave (i.e., not portable).

 

If I do become disabled, how does the benefit work? How long would the benefit last?

In the unfortunate event of an illness or injury that qualifies for disability insurance benefits, you would file a claim with the disability insurance carrier that includes medical evidence of your disability. If approved, you would start receiving the above-described benefits after the waiting period until recovering from the disability or age 65, whichever comes first.

 

Would the benefits received from this extra policy be taxable?

Because the premium is paid post-tax rather than pre-tax where you receive a tax deduction for the premium cost, the disability payment you would receive would be tax-free. SAID AGAIN: All of the income received from this extra long-term disability coverage would not be subject to taxation. The tax-free nature of the payments further helps replace your pre-disability income (as your pre-disability income is gross income or otherwise subject to taxes).

Note: Income received from the employer-paid basic long-term disability coverage (i.e., 60% of the first $1,500 in monthly pre-disability income) would be subject to taxation. This is because your employer pays the premiums for this benefit.

 

What if I earn more than $100,000 a year? Do I need additional income protection beyond this extra benefit offered by the City?

Maybe. Start by asking these questions:

  • Does my contribution to covering household expenses exceed $5,000 a month?
  • Do I expect these expenses above $5,000 a month to continue for at least another year?
  • Do I expect my income and expenses to increase in the future?

If you answered YES to these questions (and be conservative on this), then it makes sense to consider buying an additional individual disability policy outside of your City benefits. This is especially important for households with a single earner.

 

An advisor can get quotes through an insurance broker to help you make an informed decision. It is also important to evaluate this decision through the lens of your overall financial plan, taking into account all of your goals and resources.

If you have questions about how much disability insurance coverage you need to protect your income or any other financial planning topics, like whether you are on track to achieve your financial goals, feel free to contact me directly at geoff@merriman.com.

Other useful resources:

 

Disclosure: The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital; past performance is no guarantee of future performance. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman Wealth Management unless a client service agreement is in place.

Making Sense of the WEP and GPO

Making Sense of the WEP and GPO

Do you have a federal or local government pension? Don’t let the WEP or GPO surprise you. The Windfall Elimination Provision and Government Pension Offset, often called the WEP and GPO, are two rules that can leave you scratching your head. Not only do many people find these rules confusing, but they are also often completely overlooked, which may result in a big surprise when filing for Social Security benefits. Unfortunately, this is not one of those good surprises.

What are the WEP and GPO?

The WEP reduces a worker’s own Social Security benefit while the GPO reduces spousal and survivor benefits received from another’s work record, such as a spouse.

Who is affected?

The WEP and GPO affect individuals who qualify for a pension from non-covered (did not pay Social Security tax) employment. These are typically your federal and local government workers, such as teachers, police officers, and firefighters. Whether these jobs are non-covered will depend on the state/employer. Overseas employees may also fit under this category.

For the WEP to apply, the individual must have an additional job with covered earnings (did pay Social Security tax) that qualifies them for Social Security benefits. Thus, the WEP applies to those who have a mix of covered and non-covered employment. Specifically, they qualify for Social Security benefits and receive a non-covered pension. The GPO applies when an individual with a non-covered pension receives a spousal or survivor benefit. Are you scratching your head yet?

WEP example:

Dan works as a public school teacher in California, one of 15 states where teachers do not pay Social Security tax. He qualifies for a pension through the California State Teachers’ Retirement System (CalSTRS). To make extra money for his household, Dan works an additional job during the summer, where he does pay Social Security tax. By the end of his career, he has worked enough summers to qualify for a Social Security benefit. The WEP will reduce Dan’s benefit since he has both a non-covered pension from his career as a teacher and qualifies for Social Security benefits from his summer job.

How will the WEP affect my benefit?

Understanding the details of the WEP is quite complicated. To simplify, the WEP tweaks the Social Security benefit formula, resulting in a reduction of the worker’s Primary Insurance Amount (PIA). The PIA is the benefit amount one would receive at full retirement age. The amount reduced depends on the number of years with “substantial earnings” in covered employment. The Social Security Administration provides the WEP Chart as a reference to understand the potential benefit reductions based on the number of years of substantial earnings. The maximum monthly reduction is capped at $480 in 2020. The amount reduced stays constant for the first 20 years of substantial earnings before decreasing incrementally per year until it is completely eliminated upon reaching 30 years of substantial earnings.

This offers an incredible planning opportunity for those who have already accumulated a number of years of substantial earnings. If you are thinking of retiring and have accumulated 20 years of covered work, it could make a lot of sense to work for ten more years to eliminate the WEP completely. Remember, you only need to have substantial earnings, so part-time work would count as long as you make what is deemed “substantial” in that year. For someone subject to the full WEP reduction and assuming a 20-year retirement, it could be worth more than $100,000.

It is important to note that the reduction is limited to one-half of an individual’s non-covered pension. This primarily comes into play when the majority of an individual’s earnings are in covered employment but have a small non-covered pension. For example, if you had a pension of $600 per month and your Social Security benefit was $1,200 per month, your benefit will not be reduced by more than $300 (half of your pension income).

How will the GPO affect my benefit?

This rule is more straightforward to understand than the WEP. The GPO will reduce an individual’s spousal or survivor benefit by two-thirds of their non-covered pension benefit.

GPO example:

Sarah qualified for a pension of $2,100 per month from a government job. Her husband, Drew, worked as an engineer for a large corporation. Drew applied for his Social Security benefit at his full retirement age and receives $2,600 per month. Sarah applies for a spousal benefit once she reaches full retirement age. This benefit would generally be $1,300 (50% of her spouse’s); however, the benefit is reduced by two-thirds of her non-covered pension. In this case, she would not receive anything since two-thirds of her pension ($1,400) is greater than what her spousal benefit would be.

Let’s say Drew passed away unexpectedly. Sarah would normally qualify for a survivor benefit equal to Drew’s entire benefit of $2,600. Because of the GPO, she will only receive $1,200 since the benefit would first be reduced by two-thirds of her pension ($2,600 – $1,400).

Keep in mind the GPO only applies to the individual’s own non-covered work. If a surviving spouse is a beneficiary of a non-covered pension, their Social Security benefits will not be reduced.

Conclusion

These rules are tricky to navigate and important to understand for those affected. What makes it worse is that your Social Security statement will not reflect the reduction in benefits from the WEP and GPO. This means it requires work and effort on your part to figure out! The Social Security Administration has provided an online WEP and GPO calculator to help with this. It will ask for a birthdate, non-covered pension benefit amounts, and other relevant information to calculate your new benefit factoring in the rule. If you have a family member or friend with a non-covered pension, they may be subject to these two rules. Please forward this on to them or anyone else who may find it useful.

What Women Need to Know About Working with Financial Advisors | Tip #4

What Women Need to Know About Working with Financial Advisors | Tip #4

I want to acknowledge that all women are wonderfully unique individuals and therefore these tips will not be applicable to all of us equally and may be very helpful to some men and nonbinary individuals. This is written in an effort to support women, not to exclude, generalize, or stereotype any group. 

 

I was recently reminded of a troubling statistic: Two-thirds of women do not trust their advisors. Having worked in the financial services industry for nearly two decades, this is unfortunately not surprising to me. But it is troubling, largely because it’s so preventable.

Whether you have a long-standing relationship with an advisor, are just starting to consider working with a financial planner, or are considering making a change, there are some simple tips all women should be aware of to improve this relationship and strengthen their financial futures.

Tip #4 – Ask Questions

Studies have shown that women tend to be more realistic about their own skill level. It’s not necessarily that we lack confidence—more that we lack overconfidence. I think that’s a good thing; however, it means women lacking financial expertise are more likely to feel self-conscious about asking a question that could be perceived as foolish. This can be particularly hard if there is a third party present (such as a spouse) who has a greater understanding, likes to use the lingo, and/or tends to monopolize the conversation. If necessary, don’t be shy about asking for a one-on-one meeting with your advisor so you have a chance to ask all the questions you want without someone interrupting you or changing the subject.

I would always prefer that someone ask questions rather than misunderstand, and it can be difficult to gauge a client’s level of understanding if they don’t ask questions. I have many highly-educated clients who have never had any interest in investing or financial planning, so it just isn’t their strong suit. There is nothing to be embarrassed about. I promise that an experienced advisor has heard any basic question you might ask a thousand times before. If an advisor is unhelpful or condescending when you ask a question, you should not be working with that person. There are plenty of advisors out there who are eager to share what they know with you. Sometimes the hard part can be getting us to stop talking once you’ve asked! And of course, being comfortable enough to ask questions is always easier if you like the person you are working with (see tip #1).

There are many different considerations when hiring an advisor: Are they a fiduciary? Do they practice comprehensive planning? How are they compensated? What is their investment philosophy? They may check off all your other boxes, but if you don’t like them, you are unlikely to get all you need out of the relationship. If you’re looking for an advisor you’re compatible with, consider perusing our advisor bios.

Be sure to read our previous and upcoming blog posts for additional tips to help women get the most out of working with a financial advisor.