Lakeside Financial Planning – Advisor Insights

5 Ways to Turbo Boost Your Savings in 2017

MONEY TALKS – Achieving your goals and aspirations may be closer than you think. Saving is the foundation to any good financial plan. Follow these five steps to boost your savings to the next level!

  1. Max Out Your Retirement Plans – In 2017 you can defer up to $18,000 of your salary into an employer sponsored retirement plan such as a 401(k), 403(b), or 457 plan. If you are age 50 or older, the IRS has a special “catch-up” provision which allows you to contribute an additional $6,000 for a total contribution limit of $24,000. If your employer doesn’t offer a retirement plan you may still be eligible to contribute to a Traditional or Roth IRA. The IRA contributions limits for 2017 are $5,500 or $6,500 for those age 50 or older. If you didn’t maximize your IRA last year there is still time. The Internal Revenue Code has a special provision permitting you to make a 2016 contribution up until April 17th of 2017.
  1. Know How Much You Are Spending – Most people have no idea what they are actually spending. While some bold participants may blurt out a response when asked, in my experience what people say they are spending and what they are actually spending are two very different numbers. A good back of the envelop approach to calculate your spending is to look at your final pay check for 2016. Take your year to date gross pay and subtract any taxes paid as well as any employee benefits such as medical, dental, and retirement contributions. This in effect is your take home pay. From there subtract any additions you made to long term savings accounts throughout the year and you have calculated your annual spending. Most people are surprised by how much they are spending. Now that you know how much you’re spending, keep any eye on major outflows and set up an automatic transfer to your savings account to ensure some money is put away before hitting your pocket.
  1. Review Your Investment Portfolio – When it comes to determining an appropriate asset allocation, most people take the set it and forget it approach. Meaning they randomly picked some stock and/or bond mutual funds when they enrolled in their employer retirement plan, and they have not looked at it since. For many of us this could be 5, 10, or even 20+ years. Review your most recent portfolio statement to see if your current allocation is still appropriate for your age. Traditionally younger investors can be more aggressive and allocate a higher percentage of their portfolio towards equities. On the other hand, seasoned investors whom are approaching retirement may want to reduce their risk by diversifying into more bond funds and less stocks. If your current asset allocation is appropriate for your age, be sure to rebalance your accounts annually to make sure your portfolio stays properly aligned.
  1. Take Responsibility – The glamorization and/or demonization of politics and economics by the media can be hard to ignore because they are on the face of every TV station, newspaper, and social media site. Nonetheless, it’s essential to remember that for the most part these situations are out of your control. However, that doesn’t mean you should sit idly by and hope for the best. To use a weather analogy, while you don’t have control over when the next snow storm will hit, you do have the ability to buy snow tires for your car, a new shovel, and salt for your driveway. By personally managing the internal factors in your life such as; how much you save, your consumer loan balance, and the size of the home you purchase, you are taking responsibility over the aspects in your life that allow you to control your own financial destiny rather than taking a back seat to external factors over which you are powerless.
  1. Invest in Yourself – Many people don’t realize that the greatest financial asset they have is themselves; i.e. their ability to earn a living. Investing in post-secondary education, technical training programs, and advanced degrees go a long way toward building a complete resume. Combine these skills with quality work experience and you have just positioned yourself for a financially rewarding career.    

Presidential Elections and Your Portfolio

MONEY TALKS – The 2016 presidential race may be the most tumultuous election the country has ever seen. Americans have been voicing their opinions now more than ever and the polls are expecting to see a record numbers of voters next Tuesday. Unfortunately, much like the national debates, the lead topics of conversation at the dinner table have not revolved around political policies. Rather than discuss the economy, foreign policy, immigration, or the Supreme Court, many Americans have been following the candidates’ leads and talking about email scandals and sexual misconduct. The result of these lewd conversations has left a negative taste in the mouths of democrats, republicans, and independents from Maine to Hawaii.

Much of the negative energy from the presidential candidates themselves, political advertisements on television, and conversations with friends and family has transformed into fear and mistrust. In fact, a recent poll by the Washington Post and ABC News showed that 59% of registered voters have an unfavorable impression of Hillary Clinton, while 60% had and unfavorable impression of Donald Trump. It’s clear that regardless of whether Trump or Clinton win the election, the nation is in fear of what the future holds. With more cynicism now than ever, investors are anxiously waiting to see how the stock market reacts to the announcement of the nation’s 45th president.

Unfortunately, the uncertainty surrounding this year’s election has prompted many investors to make dangerous predictions about which presidential candidate will be better for the stock market. Rather than rely on patience and portfolio allocation, many investors are trying to outguess the market based on who they think will win the election. For example, some investors are selling off their investments now, and rather than reinvesting in the market, they are waiting for the election results to determine when or if they’re going to get back in. While enticing, this hasty strategy could lead to costly mistakes and is unlikely to provide any significant advantage. The following illustrative information was compiled by Dimensional Fund Advisors. Exhibit 1 shows the growth of one dollar invested in the S&P 500 over the last 15 presidencies which span just over 90 years.

Exhibit 1: Growth of a Dollar Invested in the S&P 500 January 1926 – June 2016


Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.

The data clearly shows that there is one key trend; over long periods of time, the market has consistently grown regardless of whether a democrat or republican was in office. Contrary to popular belief, there is no clear pattern that one party or the other will result in better market performance. As a matter of fact, from an investor’s standpoint, staying out of the market is a much more dangerous proposition than either Hillary Clinton or Donald Trump winning the election. By removing oneself from the market, an investor is eliminating any real chance of long-term appreciation within their portfolio.

At Lakeside, we counsel our clients to stick to a long-term investment plan and avoid the temptation of trying to time or outguess the market. Academic research has shown that it is very unlikely that investors can gain an edge by predicting how the stock market will perform based on the outcome of a presidential election. To capitalize in the equity markets, investors should develop a long-term investment policy and stick to the strategy regardless of the latest political headlines.

How Much Do I Need to Retire?

MONEY TALKS – Friends and family often ask me how much savings they need in order to retire. While I am more than happy to talk in generalities, I try to steer away from giving any specifics when I don’t have all the facts. Without a complete view of their financial picture, it would not only be impossible but irresponsible of me to answer their questions.

Unfortunately, more often than not, before I have a chance to respond, they hastily begin shouting out numbers. “Do I need ½ million? 1 million?” Typically this leads to me awkwardly trying to explain that the solution isn’t that simple and ethically I really shouldn’t answer their question. This response is usually met with a bewildered look and the inevitable “So you’re saying that’s not enough?” (Heavy sigh) At this point I coyly suggest that if they really want to know the answer they should become a client.

In an effort to provide friends and family with some guidance (and to quell the family banter), I have devised a quick back of the envelop calculation to give you a ballpark estimate of how much savings you need to retire. The calculation is rather easy to complete but does require some preliminary information before you can get started. I have included here a list of the necessary data as well as a simple worksheet that will walk you through this back of the envelope approach. Please bear in mind that this is a rudimentary calculation that won’t give you an exact figure, but it can be used as a reality check to see if you are on target to retire comfortably.

Here’s what you will need:

  • Pay statement
  • Federal and state tax returns
  • Social Security statement
  • Pension statement
  • Estimate of any other income you may receive in retirement.

In order to help illustrate the underlying methodology let’s consider the following scenario:

  • Tom (60) and Rachael (58) are married with four kids. Tom, an engineer by trade, is the primary wage earner with a gross salary of $150,000 per year. Rachael works as teacher earning $50,000 per year. Tom’s net take home pay is $3,750 and Rachel’s net take home pay is $1,250.
  • They both get paid twice per month, for a total of 24 times per year.
  • Last year they paid $18,400 in Federal taxes and $6,600 in state taxes.
  • Neither Tom nor Rachel are eligible for medical benefits through their employer after they retire. When eligible, they plan to go on Medicare and purchase a supplemental Medigap policy.
  • Tom is eligible for Social Security and expects his annual benefit at full retirement age to be about $43,000. Rachel earnings as a teacher do not qualify for Social Security benefits; however, through her teachers union, she is entitled to a pension benefit of $40,000 per year. Neither plan to seek part-time employment in retirement.
  • Tom and Racheal both plan to work until their mid-sixties. They live a healthy lifestyle and plan to live well into their nineties.

Now let’s work through the numbers:


Based on the chart above, Tom and Rachel would need about $1.5 million in order to retire.

While I hope that you find the above exercise helpful, please keep in mind that is a static calculation which doesn’t take into account life changes that may occur in retirement. To get a more precise calculation or recommendation, I would encourage you to reach out to a qualified financial advisor.

*Multiplier is based on a success rate of 90% or more for a 15, 30, and 45 year portfolio. The calculations were completed by William P. Bengen, CFP® and can be found is his book Conserving Client Portfolios During Retirement.

** Note: the Savings Required field is not specific in nature and does not take into account your individual facts and circumstances. Accordingly, this should not be relied upon when determining how much money you need to retire, nor does it substitute for any legal, financial, tax, or accounting advice.

A Beginners Guide to Maximizing Your 401(k) Plan

MONEY TALKS – In today’s workplace environment, unless you are working as a teacher, police officer, firefighter, or state/federal employee, the chances are you do not have a pension plan. In other words, when it comes to funding your retirement YOYO (you’re on your own). For most private sector employees, defined contribution (DC) retirement plans are their primary savings vehicle. DC plans are a type of retirement plan where an employer and/or employee make regular contributions. They differ from a pension plan in that there is no guaranteed income stream at retirement. Instead, both the employer and employee contributions, plus any investment earnings, grow together in an account where the employee has control over the cash distributions during their retirement. The most common DC plan is the 401(k) plan which has grown to become America’s de facto retirement savings plan since its inception in the late 1970’s.

A 401(k) plan is a great savings vehicle for a number of reasons. First and foremost any contributions made by the employee are tax deductible. Secondly, any earnings in the account grow tax free until they are withdrawn. Unfortunately many Americans are not taking full advantage of the benefits a 401(k) plan has to offer. There are two primary culprits behind this underutilization; lack of participation and low contribution rates. In order to ensure you are getting the most out of your 401(k) plan, make sure to follow these guidelines.

Start Contributing Early
During your first week of work you will likely be given a large packet of information listing everything from your vacation accrual to your medical benefits. Included in this packet should be an enrollment form for your employer’s 401(k) plan. You should sign up for your 401(k) plan immediately. Some employers may have restrictions on when you can start contributing or an elimination period before the employer themselves match any contributions; however, these restrictions typically do not prevent you from enrolling in the plan.

If you have already been working but have yet to sign up, there is no time like the present. To borrow a line from a colleague of mine, “You will never be younger than you are today.” When it comes to investing, the longer the time horizon, the greater the growth potential.

Maximize Your Employer Match
Most employers will make a modest contribution to your 401(k) plan presuming you do one thing; contribute to the plan yourself. While there is a wide range of company match levels, a typical employer match policy might read something like this: XYZ agrees to match 50% of employee contributions for the first 6%-of-salary that an employee contributes. In this scenario, in order for an employee to maximize their employer match, they would need to contribute 6% or more of their salary into their 401(k) plan. Any contribution below 6% means the employer is not obligated to contribute the full match.

Maximizing your employer match is critical to building your retirement nest egg. Not contributing or under contributing to your own plan means you are essentially throwing money out the window. An employer match is a guaranteed return on investment which is rare if not impossible to find in this day and age.

Take It to the Limit
The most common way to contribute to a 401(k) plan is through automatic payroll deductions. Many plans allow you to designate a percentage of your gross income to be allocated to your 401(k) plan. A good rule of thumb is to contribute 10% or more of your salary into your 401(k) plan. Unfortunately, for many young or underpaid employees this figure is simply unrealistic. For those who can’t save 10% or more, start off by saving the minimum allowable contribution that enables you to maximize your employer match. Most employer plans require employee contributions between 4% and 8% to receive the maximum match.

Automatic contribution increases are another great way to get the most of your 401(k) plan. As the name infers, an automatic contribution increase is simply an election you make to annually increase your contribution percentage (typically by 1%). The beauty of this election is it forces you to save more each year and they typically coincide with a merit increase so the effects are negligible. If your company doesn’t offer this election then remember to manually adjust your contribution percentage each time you get a raise.

Keep in mind that the Internal Revenue Service regulates how much an employee can contribute to their 401(k) plan. In 2016 the contribution limit is $18,000. If you are lucky enough to be age 50 or older, the IRS has a special “catch-up” provision which allows you to contribute an additional $6,000 for a total contribution limit of $24,000.

What Makes America Great!

MONEY TALKS – Last week I spent the fourth of July holiday with family and friends up at Lake Winnipesaukee. The weather was gorgeous which naturally lead to some of my favorite summer activities; barbequing, back yard games, and boating. On Monday we took a trip to the scenic town of Meredith to shop and grab some ice cream. During our boat ride home the temperature finally began to drop, the winds calmed, and as the boats steadily returned to their docks the water transformed to its natural glass like state. As nightfall set in I gazed across the water and smiled. The hustle and bustle was behind us and a feeling of deep relaxation had set in. Before long the fireworks were bursting and I began to reflect and appreciate some of the things that make America great. Here is a quick list of 50 things that make me smile.

  1. Football
  2. Hot dogs
  3. Pool parties
  4. Iced coffee
  5. Corn-on-the-cobb
  6. Amusement parks
  7. Lobster rolls
  8. Marshmallows
  9. Cable TV
  10. 30 Year fixed mortgages
  11. Tattoos
  12. Hamburgers
  13. Disney World
  14. Drive-in movie theaters
  15. Arcades
  16. Denim blue jeans
  17. S. stock market
  18. BBQ chicken
  19. Roof decks
  20. Pick-up trucks
  21. Farm stands
  22. Hiking
  23. Outdoor concerts
  24. Mutual funds
  25. Outdoor dining
  26. Ice cream
  27. Tax advantaged retirement plans
  28. Tailgating
  29. Waterslides
  30. Baseball hats
  31. Camp fires
  32. Corn-hole
  33. Fenway Park
  34. Harley Davidson motorcycles
  35. Government backed loans
  36. Steak kabobs
  37. Horse shoes
  38. Kites
  39. Balloons
  40. Country music
  41. Penny candy
  42. Pizza
  43. Fireworks
  44. Exchange traded funds
  45. Frisbees
  46. Sunroofs
  47. Gas grills
  48. Free trading
  49. Sidewalk chalk
  50. Sand castles

I encourage you to take the time out of your busy lives to reflect on all that is important to you. Spend less time working and more time with family and friends. Appreciate what you already have and make plans to do something you have always wanted to do but haven’t done yet. Challenge yourself to try something new and don’t be afraid to stop along the road to simply enjoy the little things in life.

Why You Need an Estate Plan

MONEY TALKS – There are three common misperceptions in our society regarding the need for an estate plan. A general failure to understand what an estate plan can do for you while you are still living; believing you are not wealthy enough to need an estate plan; and the third, perhaps most prevalent misconception, is that only the elderly need an estate plan. Unfortunately, more often than not, these false impressions, along with a lack of understanding, lead many people into believing they don’t need an estate plan. In fact, according to the American Bar Association, 55% of Americans die without a will or estate plan.

Failure to Understand

Most people recognize that an estate plan allows for the transfer of property at death. However, what many fail to understand is that an estate plan also focuses on the control and decision making of your affairs while living. A comprehensive estate plan will address who will make medical decisions on your behalf if you are unable to make your own decisions. It will also allow you to name a trusted person to manage your financial affairs. These important medical and financial decisions could be temporary, such as if you were recovering from a car accident, or permanent in nature if you were to develop a life changing medical condition.

Wealth is not a Factor

Another common belief among Americans is that they are not wealthy enough to warrant an estate plan. But an estate plan isn’t all about wealth. Do you know who decides where your assets go? Who will take ownership of your house? Who will be granted guardianship of your children? Without a plan in place, you are taking the control out of your hands, leaving your loved ones to handle the burden and subjecting them to the rules of the state, even if those rules may not be aligned with your wishes. This could result in your children being cared for by someone other than who you had imagined or a lifetime of hard earned dollars going into the pocket of an estranged relative.

Age is Irrelevant

The notion that estate planning is only for the elderly is another fallacy in our society. In fact, I recently had a conversation with a woman who recalled feeling insulted when an attorney brought up the topic of estate planning. She felt that she was too young to need an estate plan, and the attorney in question must have overestimated her age. While this may seem farfetched, the numbers don’t lie; 92% of people under 35 have no will or estate plan. Unfortunately accidents happen every day, and we cannot pick or choose when they will occur. The premise behind any good estate plan is to put it in place before you need it. Unfortunately when it comes to estate planning, if you wait until you need it, then it is probably too late!

Three Core Documents

Regardless of your financial status or age, here are three core estate planning documents that every adult should have.

  • A Healthcare Proxy is a legal document that allows you to name someone you trust to make important health and medical decisions on your behalf should you become incapacitated or are unable to speak for yourself. This person, known as your “Heath Care Agent,” can be a relative, friend, co-worker, neighbor or anyone else you choose as long as they are eighteen years of age. In addition to traditional medical decisions, your Agent also makes decisions on “life-sustaining” procedures. It is important for you to communicate your wishes with your Heath Care Agent so they understand your preferences from a medical, moral, and religious stand point. A Health Insurance Portability and Accountability Act (HIPAA) Release should also be included in your estate plan either as a separate document or incorporated into your Healthcare Proxy. The HIPAA language is what authorizes your Agent access to your medical records.
  • A Durable Power of Attorney is a legal document that allows for a trusted friend or relative to make financial and business decisions for you in the event you are incapable of managing your own affairs. Your appointed Agent can then handle important matters such as paying bills, managing investments, and accessing online accounts. The DPOA is most commonly used due to incapacitation relating to old age or a medical condition such as Alzheimer’s. However, they can also be quite useful in other circumstances such as managing your affairs while you are traveling abroad.
  • The Last Will and Testament is a legal document that states your final wishes in terms of who you want to inherit your assets. This includes giving your beneficiaries anything from your home to your investments to your family heirlooms, and can even include your pets! Additionally, and often more importantly, you can name guardians for your children. A named guardian prevents your family from fighting the state (or one another) in probate court and guarantees your children are being cared for by the person(s) of your choosing.

Plan Now

Creating an estate plan now can have a tremendous impact on your own life as well as that of your family. A basic estate plan that is customized for your individual needs can be drafted by a local attorney and shouldn’t break the bank. Don’t leave your health, finances, and children in the fate of someone other than your choosing. Put a plan in place now, before it’s too late!

Need an Estate Planning Attorney?

Mention this newsletter and receive a free consultation ($125 value) and 20% off a basic estate plan package at Levine-Piro Law.* Basic estate plans include: Health Care Proxy, Living Will, HIPAA release, Durable Power of Attorney, Last Will and Testament, and final disposition instructions.*

Levine-Piro Law, P.C.
63 Great Rd #101, Maynard, MA 01754
(978) 637-2048

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Protect Your Retirement Nest Egg

MONEY TALKS – Retirement planning can be a stressful time for many baby boomers because there are so many questions that cannot be answered; how long will I live, what will my health be like in twenty years, will my spouse or I need long term care, and the elephant in the room; how much money do I need? Scientific advances in the medical community have made it not only possible but likely that a healthy retiree in their sixties could live well into their nineties. While it’s great that retirees are living longer, healthier, and more active lifestyles than ever, on the flip side of the coin, there is a vast amount of time their retirement savings must last. Pulling funds out of a portfolio for thirty plus years creates tremendous strain on the portfolio. To further compound things, factors such as the retiree’s age, withdrawal rate, and current market conditions have a paramount impact on the longevity of the portfolio. Perhaps most frightening, even a modest loss in the early stages retirement, regardless of the size of an investment portfolio, can derail an otherwise solid investment plan leaving a retiree in a precarious position.

Sequential Risk

Sequential risk is not a term that is used in everyday conversation; however, anyone who has recently retired or has retirement on the horizon should make sure they have a basic understanding of the concept. In essence, sequential risk is the notion of making withdrawals from an investment portfolio during or immediately after periods of poor performance. A retiree who begins taking withdrawals from their portfolio following a market downturn is at a much higher risk to deplete their portfolio. To demonstrate the magnitude of sequential risk let’s look at two similar scenarios with drastically different endings.

Early Retirement Losses

John & Lisa have accumulated a million dollars and decide to retire at age 65. They determine that they will need $90,000 to live on of which $25,000 will come in the form of Social Security and the remaining $65,000 will be withdrawn from their portfolio annually (adjusted for inflation). Unfortunately for John & Lisa, during the first year of their retirement the market falls and has a 20% loss. In years two through fourteen their luck changes and the market remains stable returning 7% annually. In year fifteen they are hit with even more luck as the market surges and they receive a 30% return on their investment. The good news for John & Lisa is that they’ve had a healthy and active retirement and maintained their same standard of living for the last fifteen years. The bad news is at age 81 they can no longer support themselves financially because they have less than $25,000 remaining in their portfolio. To make matters worse, the recent financial stress has caused John & Lisa’s health to take a turn for the worse and now they are considering moving into a state subsidized nursing home.

Losses Down the Road

John & Lisa’s neighbors, Bruce and Diane, have also accumulated a million dollars and decide to retire at age 65. They too will need $90,000 in living expenses and will receive $25,000 from Social Security. Fortunately for Bruce and Diane in their first year of retirement the market spikes and returns 30%. In years two through fourteen the market remains unprecedentedly stable and returns 7% annually. Unfortunately in year fifteen their string of good luck changes and the market drops 20%. Fortunately for Bruce and Diane, due to the positive early returns, their portfolio was large enough to withstand the latest market downturn. Despite losing over $229,000 in their portfolio over the last year, they still have over $900,000 dollars remaining. Like John & Lisa, Bruce and Diane have lived a healthy and active retirement. However, instead of looking for nursing homes, Bruce and Diane are looking at independent living villas in Costa Rica because the winters in Florida are just too cold for them.

Similar Story – Different Ending

While the facts remain strikingly similar, the end of their stories is vastly different. Unfortunately no one can predict what the stock market is going to do tomorrow, let alone next month, year, or ten years from now. Unless you have a flux capacitor, trying to plan your retirement date around future market forecasts is a futile and will not get you far. So what can be done to mitigate sequential risk?

Mitigate Sequential Risk

There are a multitude of different strategies that work well to help reduce the risk associated with early retirement withdrawals. However, regardless of the specific strategy chosen, they all centrally revolve around two main concepts; minimizing volatility and monitoring withdrawal rates. Strategies that focused on minimizing volatility may be a more appropriate approach as changing your withdrawal rate in retirement is not feasible for many retirees, especially for those living on a fixed income.

Ultra-Conservative Portfolio

Rather than taking a traditional approach of starting at 60% stocks (40% bonds) and reducing the weight as you age, consider taking a road less traveled. In order to minimize volatility during the onset of retirement, switch to an ultra-conservative portfolio. Dropping to a 30% stock allocation in early retirement has historically kept losses, even during the worst bear markets, to single digits. Minimizing the effects of market crashes protects your nest egg during the most critical stage of your retirement. As you get further along into retirement, gradually increase your equity exposure to as much as 60%.

Dedicated Cash Flow Stream

Another hybrid approach to minimize an early retiree’s volatility involves creating a dedicated cash flow stream to fund withdrawals. Using this approach, the amount of the withdrawal would be the same; however, a dedicated portion of the portfolio would be specifically set aside to fund the withdrawals. The simplest approach to create a dedicated cash flow stream is through the use of a laddered Certificate of Deposit. A ladder is sequential series of maturing term CD’s. For example purchasing a 12 month, 24 month, 36 month, 48 month, and 60 month CD. The maturing CD’s give a retiree a guaranteed cash flow without having to worry about current market conditions because the portion subject to withdrawals has already been prefunded and cannot lose value. The volatility in the remaining portion of their portfolio is mitigated because no funds are being withdrawn from this portion.

Fundamental Philosophy

Both approaches are based on the fundamental philosophy that an early retiree is at a greater risk from a market downturn than a mature retiree due to the number of withdrawal years. Consider reducing your sequential risk by transitioning to a more conservative portfolio at the onset of retirement or by creating a dedicated cash flow stream to eliminate or minimize early withdrawals from your portfolio.

5 Reasons Why to Consider Leasing Your Next Car

Last week I had an interesting conversation with a local automotive retailer in town. Our discussion centered on the benefits of leasing and which customers were good leasing candidates. At first I was cynical, but the more I listened the greater appreciation I had for the flexibility that leasing affords you. Leasing is not for everyone; however, there are some compelling reasons why you should consider leasing your next car.

1. Cheaper Monthly Payment

With a traditional auto loan, your payments are based on the entire cost of the vehicle. For example, if you purchased a $27,000 vehicle and secured a 36 month loan, the principle portion of your payment would average $750 per month. However, when you lease a vehicle, the principle portion of the lease is not based on the value of the car. In a lease, the principle payment is based on the vehicle’s decline in value, or depreciation, during the term. So if that same $27,000 car is expected to depreciate $9,000 over the first 36 months, the principle lease payment would only be $250 per month.

2. Less Tax Due

When you purchase a new car, the state sales tax due is based on the purchase price. Going back to our previous example, a $27,000 vehicle would generate a tax bill of nearly $1,700. In contrast, when you lease a vehicle, the sales tax is based not on the sales price, but on the total monthly payment (principle + interest). If we assume a 4% interest rate, the total lease payment would be about $325/month. This means that the tax due on the lease would only be about $20 per month. The beauty with leasing is you can amortize the tax payments over 36 months as opposed to purchasing, where you need to pay the entire tax bill upfront.

 3. Predetermined Residual Value

When you purchase a new car it’s often difficult, if not impossible, to predict what the resale value will be down the road. When you are ready to trade in or sell the vehicle, whether it’s two, three, or ten years from now, there are many variables out of your control such as the manufacturer reputation and market demand that can affect the worth of your vehicle. With a close-end lease, as most auto leases are, the residual, or future value is predicted up front and put in writing on the contract. At the end of your lease, if the car is worth less than the agreed upon residual value, simply hand over the keys and walk away. Conversely, if the car is worth more at the end of the lease then you have the option to buy the car at the lower residual value or negotiate that positive equity into a new lease.

4. Manufacturer Warranties

Most standard manufacturer bumper-to-bumper warranties cover 3 years or 36,000 miles, whichever comes first. Coincidentally, many leases have a term of 36 months. This means, in most scenarios, the car will be covered under warranty during the duration of the lease. This could save you thousands of dollars in repairs over the course of the lease. Not to mention the peace of mind from not worrying about an unexpected repair bill hitting your checkbook right before the holidays.

 5. Safety & Technology

Now more than ever, the automotive industry is being scrutinized and held to higher safety standards. By leasing a new car every few years, you are guaranteeing that you and your family are protected by the latest and greatest safety features such as collision avoidance, lane departure warnings, and drowsy driving warnings. Likewise, if you enjoy having the newest high-tech features such as advanced parking guidance, adaptive cruise control, and GPS-linked temperature control, then leasing is worth considering.


As with most things in life, one size does not fit all. While the attraction of driving a new car with a low payment can be compelling, there are some disadvantages to leasing that you should be aware of before you drive off the lot. Unlike a traditional auto loan where your monthly payment eventually ceases, once you’re in the leasing habit, your payments last forever. Another area to pay attention to is your mileage allotment. Most leases have a limited amount of miles you can drive, typically 10,000 to 15,000 per year. If you exceed your allotted mileage you are charged a steep penalty that can be as much as 25 cents per mile. Lastly, be sure to keep in mind that even though you don’t own the car you are still responsible for the maintenance including oil changes, tire rotations, and manufacturer recommended care. Failure to properly maintain the car during the lease could result in excess wear-and-tear charges when you turn the car in.

Clearly there are pro’s and con’s to leasing that should be considered before you sign on the dotted line. Each one of us has a unique set of circumstances that may make one option more advantageous than the other. However if you like the idea of trading up every few years for a new reliable car while enjoying a low monthly payment, then leasing might be worth considering.

It’s All about Your Asset Allocation


Asset allocation is the concept of diversifying a portfolio across several asset classes to reduce the portfolio’s exposure to risk. Your asset allocation is critical to the success of your portfolio because it is the driving factor that determines both risk and return. While the specific investment selections you make are important, they are far less crucial than the amount of money you commit to each asset class.

Creating a proper portfolio is a two-step process. The first step is selecting an asset allocation that is aligned with your needs. The second step is selecting the specific investments that fit into the asset classes you selected. Identifying your personal and financial needs is an essential step towards selecting your asset allocation. Traditionally a young investor can be more aggressive than an investor in their sixties because they have time on their side to overcome a market downturn. However, that is not always the case. Your health, job security, cash flow needs, and risk tolerance are all important factors that should be considered when selecting an appropriate asset allocation. The point is, your portfolio should be unique to you and your situation. Just because you and your neighbor are the same age doesn’t mean that you should have the same allocation. Likewise, your allocation at 25 will likely be inappropriate for you at 55. Find an asset allocation that works for you and your current situation and update it as your circumstances change.

Selecting specific investments that fit into an asset class can be a challenge because of the level of detail involved. Asset classes are broad categories of dissimilar investments such as stocks, bonds, real estate, and money market funds. Each asset class can then be divided into specific categories. For example stocks can be divided into U.S. stocks and foreign stocks, while bonds can be divided into taxable or tax-exempt. These specific categories can then be divided again into different styles. U.S. stocks can be divided into small, medium, and large cap. Bonds can be divided into investment-grade or below-investment-grade. This division can go on and on until you have narrowed down a broad asset class into a specific category, style, and sector such as U.S. small cap health care stocks. With thousands of investments to choose from one might ask; how can I possibly select investments that represent all these asset classes, categories, styles, and sectors?

Thankfully there are investments out there that allow an individual investor to create a broadly diversified portfolio at a reasonable costs. Index mutual funds and exchange traded funds (ETFs) are an excellent tool to build a portfolio that has an appropriate allocation where the specific investments fit into the appropriate asset class, category and style. The nature of these funds allow an investor exposure across broad market segments without the time, energy, and cost of purchasing individual securities. In fact, most investors can create a fully diversified portfolio by purchasing 5 or 10 of the right index funds or ETFs.

The question remaining is, how do I select the appropriate funds to create a successful portfolio that is diversified among different asset classes? Start by looking at the investment objective of the fund. For example, a fund designed to track the performance of the Standard & Poor’s 500 Index would be a good fit for the U.S. large cap portion of your portfolio. Next examine the strategy of the fund. Typically passive funds that are designed to match the benchmark index have much lower cost associated with them than do actively managed funds where the manager is trying to beat a particular market. Finally be sure to check the expense ratio which includes management fees, marketing fees, other expenses, and annual operating expenses of the fund. Two funds may be managed identically to one another, yet, one could have significantly higher fees.

Regardless of your investment strategy, it’s essential that you reduce your risk exposure by diversifying among different asset classes. Develop a strategy that is aligned with you and your future, and stick to it. Having said that, don’t be afraid to make changes as you mature and your responsibilities change. Review you asset allocation annually and rebalance as necessary, but avoid trying to build the perfect portfolio. Barring any major life changes, most of us should only need to overhaul their asset allocation every 5 or 10 years.