Structuring a Portfolio to Match Your Life Goals

On December 28, 2014, in Retirement, by Early Financial Freedom

basic2If we could categorize our desires into three groups, I think we will end up with “NEEDS”, “WANTS”, and “WISHES”. As an investor, I think our portfolios should be able to support these three categories before retirement and during retirement. “NEEDS” are the basic things that we must have in order to live; a roof over our head, food at the table, etc. Therefore, you must have a very secure income sources for these.

Potential Sources for “NEEDS”

  • Pension
  • Social Security
  • Bonds
  • Annuities
  • Cash


Our “WANTS” are needed to make our lives better, more enjoyable. A nicer roof over our head, better food at the table, in short, a better quality of life are our WANTS.

Potential Sources for “WANTS”

  • Equities
  • Bonds


Our “WISHES” or our Legacies, are for our sons, our daughters, wife, grand kids, in short, they are for our heirs.


Potential Sources for “WISHES”

  • Equities
  • Alternatives

Cash is good, but it is a terrible long-term investment due to inflation, etc. Equities (stocks) are better long-term investment but they are riskier. As you can see, without increasing risk, there is no easy way of getting better returns.

Therefore, it is prudent to match dependable income sources with fixed expenses, while arranging other investments with more discretionary expenses.


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Whenever I read a book, I like taking notes of key points mentioned in it.  Today, I was organizing my files and found one of my book notes. It was from “The Smartest Retirement Book You’ll Ever Read” by Daniel R. Solin, dated September 16, 2012. Below are what I wrote:

  • Investing in an income-only portfolio can be risky
  • A two-year cash cushion and a well-balanced portfolio can help reduce your portfolio’s volatility and give you the courage to invest in stocks
  • Investing in individual stocks is too risky for most investors. There are no safe individual stocks
  • Most investors do not need EFTs in their retirement portfolios
  • Risk is the foundation of all returns. There is no free lunch. This applies to bonds as well as stocks
  • Most investors do not need TIPS in their portfolios
  • Make sure that your bank and credit union deposits don’t exceed the FDIC’s insurance limits
  • An immediate annuity can help reduce the risks of outliving your money
  • Variable annuities are unsuitable for most retirees
  • Equity-indexed annuities are unsuitable investments
  • Don’t use investment averages to determine how much money you can prudently withdraw from your retirement accounts
  • To keep from depleting your retirement savings, limit your withdrawals to 2 to 4 percent per year
  • You can squeeze a little more from your nest egg by modifying the 4 percent rule to consider inflation
  • Intelligently tapping your retirement nest egg can add years to its life
  • A Roth conversation for some high-income earners can have a meaningful, long-term benefit
  • Taking Social Security benefits too early can affect the quality of life of the surviving spouse
  • Even if you are lucky enough to have a pension, you may not be able to rely on it
  • A few years of additional employment can have a significant impact on your retirement income
  • Your net worth is a key factor in determining your need for long-term care insurance
  • You can enhance the lives of your loved ones significantly by leaving them an IRA… and the knowledge of how to deal with it. The best parting gift is a Roth IRA
  • If a financial professional is offering you a free meal, run
  • If you need financial advice, stick with a fiduciary who makes no effort to beat the markets and who uses a well-known, independent custodian
  • If you need help coming up with a financial plan, use a fee-only financial planner (or a certified public accountant) who charges an hourly or a flat fee and who limits advice to preparing a plan and answering your questions

I hope you find it helpful!

2014 Tax Provisions for Individuals: A Review

On December 11, 2014, in Finance, by Early Financial Freedom

I receive monthly newsletters from my CPA’s office. In this month’s newsletter, some of the topics are below. Pretty timely advises, as always.

From tax credits and educational expenses to the AMT, many of the tax changes affecting individuals for 2014 were related to the signing of the American Taxpayer Relief Act (ATRA) in 2013–tax provisions that were modified, made permanent, or extended. With that in mind, here’s what individuals and families need to know about tax provisions for 2014.


Personal Exemptions

The personal and dependent exemption for tax year 2014 is $3,950.


Standard Deductions

The standard deduction for married couples filing a joint return in 2014 is $12,400. For singles and married individuals filing separately, it is $6,200, and for heads of household the deduction is $9,100.


The additional standard deduction for blind people and senior citizens in 2014 is $1,200 for married individuals and $1,550 for singles and heads of household.


Income Tax Rates

In 2014 the top tax rate of 39.6 percent affects individuals whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return). Marginal tax rates for 2014–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.


Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15 percent bracket from the 25 percent bracket is $73,800 for a married couple filing a joint return.


Estate and Gift Taxes

In 2014 there is an exemption of $5.34 million per individual for estate, gift and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $14,000.


Alternative Minimum Tax (AMT)

AMT exemption amounts were made permanent and indexed for inflation retroactive to 2012. In addition, non-refundable personal credits can now be used against the AMT.


For 2014, exemption amounts are $52,800 for single and head of household filers, $82,100 for married people filing jointly and for qualifying widows or widowers, and $41,700 for married people filing separately.


Marriage Penalty Relief

The basic standard deduction for a married couple filing jointly in 2014 is $12,400.


Pease and PEP (Personal Exemption Phaseout)

Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations were made permanent by ATRA (indexed for inflation) and affect taxpayers with income at or above $254,200 (single filers) and $305,050 for married filing jointly in tax year 2014.


Flexible Spending Accounts (FSA)

Flexible Spending Accounts are limited to $2,500 per year in 2014 and apply only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.


Further, employers may allow people to carry over into the next calendar year up to $500 in their accounts, but aren’t required to do so.


Long Term Capital Gains

In 2014 taxpayers in the lower tax brackets (10 and 15 percent) pay zero percent on long-term capital gains. For taxpayers in the middle four tax brackets the rate is 15 percent and for taxpayers whose income is at or above $406,750 ($457,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.