Financial Planning & Investing: Stephen L. Nelson, CPA

Financial Planning in the Post-sub-prime-crisis World

The stock market meltdown that occurred during 2008 means we all need to think more carefully and critically about our investing. Many of us need or will want to work longer or run our businesses for a few additional years. Most of us should try to save more. Almost every one of us learned where our investment portfolios weren't constructed as smartly or safely as they should have been.

Fortunately, one can take several important financial planning steps to deal with the new, post-subprime-crisis economy. Here are the best, most practical ideas I've seen:

Recalibrate Your Retirement Savings

This suggestion almost seems too obvious. But that obviousness doesn't mean we can ignore it. We all need to steel ourselves, look at the damage that's been done to our wealth, and then update our plans as to how we grow and protect our wealth over the long run.

Again, this seems like such an obvious point to make, but many people need to save more or work longer. Investors who have retired and now live off their investment income probably need to adjust their spending.

By the way, oddly enough, I think there's some consolation in this. Your friends and family are all pretty much in the same boat. (Some of them may not yet realize this, of course.)

Consider Using a Do-it-yourself Approach for Investing

As I've said many times in my books about personal finance and personal accounting, I strongly believe you can and should take a do-it-yourself approach to investing.

By using a generic asset allocation model and index funds, you easily save from one to two percent a year in fees, taxes and trading costs.

On a million dollar portfolio, for example, that might mean the do-it-yourself approach saves you $10,000 to $20,000 a year. And that adds up.

I would not jump into this without doing some upfront learning. Rather, pick up and read three books: Burton Malkiel's Random Walk Guide to Investing, John C. Bogle's Little Common Sense Guide to Investing, and David F. Swenson's Unconventional Success.

Burton Malkiel, by the way, is the Princeton University finance professor who (in my opinion) first evangelized index investing for individual investors. John Bogle founded Vanguard (which you might think of as the Costco or Walmart of mutual fund management companies). David F. Swenson is the chief investment officer of Yale University's huge and hugely successful endowment fund.

If you spend two or three Saturday's working your way through these three books, you'll know more about investing than most of the advisors and planners charging people for their inferior advice.

Consider a 2008 Roth Conversion

A bit of advice directed at people who already have substantial tax-deferred retirement savings: If your adjusted gross income is less than $100,000 in 2008, you may want to transfer money held in a regular IRA, SIMPLE-IRA or SEP-IRA to a Roth-IRA.

Now, when you do a Roth Conversion, you do pay regular income taxes on the money you transfer. So that's bad. But after the conversion, you would not have to pay income taxes again. Not ever. And that's really good.

Two big incentives exist for making such transfer in 2008. First, because the financial markets are way down, you would be transferring less money. That alone would mean you save income taxes.

But a second incentive also exists for making a transfer in 2008: Ordinary income tax rates may be lower in 2008 than in the foreseeable future.

Note that the "lower 2008 tax rates" incentive would apply to just about everybody considering a Roth conversion. The transferred money gets added to taxable income in the year of conversion. So even very middle income taxpayers might get hit with higher tax rates if, for example, one adds together a couple of teachers' salaries and a nice-sized Roth-conversion.

Take the (Tax Loophole) Free Lunch

One final comment: I'm not sure that Congress does us any favors with all these complicated tax loopholes. But especially in an economic and political environment where we're likely to see taxes going up-- no matter who is elected--you want to exploit any of the easy, tax loopholes available to you.

Even high income taxpayers, for example, can save and simplify saving for college using a Sec. 529 Plan. A Sec. 529 is sort of like a Roth-IRA for college. You don't get a deduction when you put money into the account. But the investment grows tax-free. And you get to withdraw the money without paying a tax as long as you use it for college.

Many families can save several thousand dollars a year in taxes by using a Sec. 529 plan for kids' college costs.

Another old but good idea: Pension plan options like 401(k)s, SEPs, and even your plain vanilla IRA. These loopholes delay and reduce the taxes you pay.

I'll note something I've repeated probably a thousand times: Much of the money you save in something like a 401(k) comes from other people. In fact, in the case where you're an employee with a generous employer, more than half of the money you save may come through employer matching contributions and federal and state tax savings.

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