Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

Financial Planning Help with Mullooly Asset Management

At Mullooly Asset Management we want our clients to think of us as their personal CFO (Chief Finance Officer). We address many topics/questions that our clients ask us in this section. Financial planning is a very broad topic, some of the specific areas covered here include: saving for college, retirement savings vehicles, retirement planning, investor behavior, financial goal setting and much more.

Financial Planning

Here are some of our most recent articles:

Using a Roth IRA for College Planning

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We often get asked about putting money away for a child’s college education. Most people assume that they must use a 529 plan to accomplish this goal.

While 529 plans are sometimes great college planning tools, other times they are less than ideal. Many 529 plans come loaded with fees, and leave many parents worrying: what if our child doesn’t go to college? The point is that (like with all investments) people need to weigh their options before jumping in. 529 plans might be right for some, but not all investors.

In certain instances, a Roth IRA might be a preferable college planning tool. Tom discusses the viability of this on our weekly video.

In the case of 529 plans, money withdrawn for non-educational expenses will mean paying taxes and a 10% penalty. For many parents this is discouraging because they have no idea if their son or daughter will go to college. They’d like them to, but nobody can predict the future.

A Roth IRA might be preferable to a 529 plan in this regard because of certain qualified exceptions on distributions. One Roth IRA qualified distribution exception is for higher educational expenses, meaning money could be taken out to pay for college tuition, books, etc. The investor would not be subject to the typical early withdrawal penalty of 10% if used for this reason.

Another point to consider: not only could the money be taken out for college expenses penalty-free through the qualified exception, but it could also continue to be saved in the scenario that their child does not attend college. The money will continue to grow tax-free towards a goal that nobody can borrow money for: retirement. Many investors like knowing that they can use this money to pay for their child’s education, but if not it can go towards their retirement without any type of penalty.

529 plans certainly have their place as a college planning tool, however investors need to know that they have other options to consider as well. For some people, a Roth IRA might be a viable college planning tool.

Dissecting the Four Percent Rule

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Many financial planners commonly refer to something called the “four percent rule”. It’s frequently used by near-retirees looking to determine their savings withdrawal rate. It’s supposed to be a simple answer to the common retiree fear: running out of money.

David Mendels of Creative Financial Concepts explains the four percent rule’s roots stating:

“Back in 1994 a financial planner named Bill Bengen read an article in a popular financial magazine claiming that the “safe withdrawal rate” for a retiree was 6 percent.

What Bengen discovered was that the 6 percent withdrawal rate he had read about failed around 20 percent of the time, but 4.5 percent survived for every one of those periods—even those starting just before the onset of the Great Depression.”

The four percent rule suggests that retirees can withdraw 4% of their portfolio the first year they retire. Each subsequent year, they take out the same dollar amount plus an additional amount to cover inflation. This method projects that with a diversified portfolio, retirees will not run out of money for 30 years or more.

Matthew Sadowsky of TD Ameritrade makes a critical point about the four percent rule saying:

“It is a rule of thumb, not a law. It is often misunderstood. In its purest form, if you withdraw 4% and grow with inflation, your portfolio should not run out for 30 years. It does not mean you will not run out of money.”

Here’s the problem with things like the four percent rule: they’re more like general truths than ironclad rules. Calling the four percent rule a rule is, in fact, a misnomer. We’d be better off referring to it as the four percent axiom or the four percent adage.

If we’re speaking generally, the four percent rule is a good place to begin a conversation about retirement withdrawals. However, taking the four percent rule as doctrine is a mistake. Every investor has a different set of circumstances, and those circumstances can alter their financial situation drastically.

I don’t advocate leaving your future financial well-being up to a general truth. Before you accept any adage about financial planning, I recommend you discuss your situation with a professional.

Sources:

http://archive.pnj.com/usatoday/article/20774021

http://www.schwab.com/public/schwab/nn/articles/Is-the-4-Percent-Rule-Still-Appropriate

http://www.cnbc.com/id/102165628#.

The Importance of Knowing Your Monthly Number

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The beginning of a new year presents an optimal time to set goals for yourself. Last week, Tom discussed financial New Year’s resolutions on the weekly video. I recently read an excellent post from Kris Venne of Ritholtz Wealth Management regarding knowing your monthly number that I thought went well with that video’s message.

In his post Kris shares the first question he always asks when creating a financial plan for clients:

“Putting discretionary extras aside, what does your month to month lifestyle cost you?”

He goes on to explain how very few people are able to answer that question. Kris is spot on with this and I highly recommend reading his post, which I’ll link to below.

You absolutely must know your monthly number. The importance of knowing it cannot be stressed enough. How can you invest for the future when you aren’t aware of how much you can afford to put away each month? You really can’t. Knowing your monthly number is also important because it gives you a ballpark idea of what your expenses will be like when you retire. Kris’s recommendation to begin the year by sitting down (by yourself or with your spouse) to figure out your monthly number is an excellent one.

Once you have your monthly number, you can move forward with the three steps we discussed on the weekly video: creating an emergency fund, rounding up your “sleep easy” money, and  investing the rest in a way that suits your individual needs. Financial planning doesn’t have to be super complicated. As we discussed here on the site before, our financial planning sessions begin with a simple conversation and a yellow pad.

Source:

http://krisvenne.tumblr.com/post/106645348700/whats-your-number

Preparing for Financial New Year’s Resolutions

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As 2014 comes to an end, we share some timely tips for those who intend to make financial New Year’s resolutions. Tom has some words of wisdom that you should keep in mind: Don’t play the stock market with the rent! He elaborates on the meaning of this in our weekly video.

What Tom means by his advice to avoid playing the stock market with the rent, is that being ambitious about saving is good, but doing so at the expense of other critical financial safety nets might be a mistake. We’ve seen people increase their retirement contributions, only to withdraw those savings because of an unforeseen event.

You can think of your financial situation in terms of buckets to simplify things.

Bucket 1 – The Emergency Fund

Accidents happen and they tend to cost money. A new car transmission can cost $2,500, and a trip to the emergency room can cost even more. Be sure to have an emergency fund in place before designating money for investing.

Bucket 2 – Your “Sleep Easy” Money

Some people enjoy having a certain amount of money in the bank at all times. We like to refer to this as your “sleep easy” money. Whether it’s $5,000 or $50,000, your number is appropriate and should be in that savings account helping you sleep at night.

Bucket 3 – Investing

After you’ve earmarked your emergency fund and “sleep easy” money, the rest can be allocated for long term growth.

We thought this would be a nice reminder for any investor looking to make financial New Year’s resolutions in 2015. Remember, don’t play the stock market with the rent!

High Interest Annuities May Not Work How You Think They Do

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Over the years we’ve fielded calls from people asking us different variations of this question: “I was offered an 8% guaranteed annuity by my insurance guy and wondered what you thought?”. That’s why Tom and Brendan decided to discuss high interest annuities on this week’s Mullooly Asset Management podcast. These products may not work the way many people believe they do. A lot of investors don’t fully understand them, and (sadly) neither do the people selling them.

What we’re really talking about in these instances is typically a variable annuity with an income rider attached to it.

Let’s break down the statement from above: “I was offered an 8% guaranteed annuity by my insurance guy and wondered what you thought?”.

– Yes, you were offered a guaranteed annuity by an insurance company.
– No, your money will not grow at 8% per year.

Nobody can get a guaranteed rate of 8% a year with Treasury yields under 3%. There’s a catch in this scenario, like there almost always is with annuities.

A lot of people don’t understand that there are two parts to these types of annuities: the accumulation value and the income rider value.

Two parts means two separate calculations and two separate sets of rules. The income rider calculation can only be used for income. This means you can’t tangibly take the 8% a year out of the account. You also can’t transfer that amount or take a lump sum distribution at the end of your surrender period. In order to get the income rider total, you have to annuitize the contract. In plain English: you trade ownership of your money for a monthly check from the insurance company.

Here’s a simple way to think of the two separate values these annuities have. The accumulation value is the real value, meaning you could take a lump sum at the end or transfer that amount. It is not guaranteed to make 8%, it makes whatever the underlying investments you select within the variable annuity do in a year. The income rider value is as good as phantom value. It’s getting 8%, but only if you agree to annuitize your contract and take a monthly check.

Now here’s an example with numbers:

– You start with $100,000
– Your surrender value is $120,000 after 10 years with ABC Insurance Company
– Your lifetime income value is $180,000 (8% simple interest credited over 10 years on $100,000)

Your options look like this:

– Take the $120,000 and do what you want with it (invest, spend, etc.)
– Take the income stream on $180,000 in monthly payments (no lump sum, no transfer, etc.)

Unless you plan on annuitizing the contract for the income stream, that advertised 8% is as good as Monopoly money. This saying goes for plenty of things, but most definitely applies for annuities: if it sounds too good to be true, it is.

Source:

http://www.marketwatch.com/story/why-your-high-interest-annuity-might-pay-less-than-you-think-2014-12-16

Zero Percent Financing Deals: Too Good to Be True?

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On this week’s Mullooly Asset Management video, I cover a basic financial planning topic related to credit. In the midst of the holiday season, all of us at Mullooly Asset thought it would be timely to discuss zero percent financing deals.

A lot of big-ticket items like furniture, appliances, and TV’s come with zero percent financing offers. Zero percent financing is also offered on balance transfers, where you consolidate different debts onto one card. You need to be VERY aware of the terms involved with these deals.

Zero percent financing is typically offered for twelve month periods (sometimes six). If you read into these offers, there’s normally an unpleasant surprise. Carrying a balance past the terms of the offer (like day 366 on a one year deal) frequently results in the credit company taking all of the interest you would’ve paid, and adding it to your remaining balance. Here’s the catch: It’ll be at a much higher rate of interest, like 30%. Probably not what you wanted to sign up for, right? Unless you enjoy high cost debt for some strange reason, I suppose.

Zero percent financing deals aren’t without use. If you understand precisely what the deal states, you can use them to your advantage sometimes. Here’s an easy way to determine if a one year, zero percent financing offer is for you: Take the cost of the item you’re interested in and divide it by ten. If that number is a cost you can afford for the next ten months, then the deal might be something to consider. If you can’t afford that payment for the next ten months, you cannot afford the item. Forget it!

The underlying message here is to read the fine print on zero percent financing deals. If something sounds too good to be true, it probably is.