What Warren Buffett Might Say about “When to take Social Security?”

4/15/2015 AZ Republic by Dr. Harold Wong

Warren Buffett, for those who don’t know, has the nicknames such as “The Oracle of Omaha” or “The Stock Market King”. He owns over 80 companies, lock stock and barrel. He has owned household names such as Dairy Queen, See’s Candies, and Geico for decades. The Forbes 400 survey in 2015, ranked Warren Buffett, founder of Berkshire Hathaway, as the 2nd wealthiest man in America. He’s worth $67 billion and only Bill Gates of Microsoft, worth $81 billion, is richer. He has given away nearly $23 billion to charity over his 84 years of life. Warren Buffett is ranked the 3rd wealthiest person in the world, behind only Bill Gates and Carlos Slim Helu of Mexico.

Buffett got his Master’s degree in economics from Columbia University in 1951 and returned to Omaha, NE. When asked many times why he moved back to the middle of nowhere (compared to Wall Street, America’s stock market and financial capital), here’s Buffett’s response (paraphrased): “If I had stayed on Wall Street, eventually I’d be subject to group thinking and be just as much of an idiot as most of them…” Instead, he likes nothing better than to be left alone, studying annual reports and thinking of his next company to buy.

Buffett’s Rule #1 is: Never Lose Money!

Most people start their Social Security Retirement Benefits at age 62, the youngest you can start. Only 5.2 percent of men and 11.4 of women waited until age 66 (considered your full retirement age for workers who were born between 1943-54). For every year that you wait after age 66 to take your SS benefits, you get 8 percent more. So, if you wait 4 years until age 70, you get 32 percent more. For most, you get 70-90 percent more SS benefits at age 70 than age 62. Source: “How Social Security Strategies Affect Your Retirement” by Dr. Wong, published 5/23/2014 in The AZ Republic.

Buffett would say that you are violating his Rule #1. Buffett is extremely logical in anything that he does in the financial world. My observation is that most people take SS early because of emotional reasons. “God-darn it, they’ve been taking SS taxes out of my paycheck for decades; the moment I get old enough to collect, I’m going to stick it to the man.” Buffett would probably say: “Where in the world of money can the average person get a guaranteed 8% increase for every year he waits to take SS, without risking any of his investment capital?”

Another famous saying by Buffett is “Be fearful when others are greedy. Be greedy when others are fearful!” When most take their SS benefits at 62, they are either greedy (“I want it now”); or they are fearful (“SS may run out of money”). Either is illogical. Wall Street insiders have a crude saying “The masses are asses.” This means that you should do the opposite of what most people do. If almost everyone is taking their SS benefits early, you should take them as late as possible. You should take them at age 70 because you do not get a raise if you wait beyond age 70 to take your SS benefits.

Free Seminars: On Thurs. 4/23/2015, 6:30-8:30 pm, “Secure Your Financial Future: Lessons from Warren Buffett” will be the topic. It will be preceded by a light supper from 6-6:30 pm. On Sat. 4/25/2015, 10-12 noon, the topic will be “How to Maximize Your Social Security & Other Retirement Income”. It will be followed by a light lunch from 12-1 pm. Both seminars will be held at Keller-Williams University, 2077 E. Warner Road, Tempe, AZ 85284. It’s ¼ mile W. of the 101 freeway on the S. side of Warner Road. RSVP is required at (800) 955-1408.

If you want a private consultation, contact Dr. Wong at (480) 706-0177, haroldwong1@yahoo.com, or www.drharoldwong.com. For his archived research, click on www.DrWongInvestorGuide.com.

The Benefits of a Multi-Generational IRA

April, 2015 CITY SunTimes by Dr. Harold Wong

Many have substantial amounts kept in tax-deferred retirement accounts, such as an IRA, 401(k), 403(b), TSA, or 457 plan. All of this money is either tax-deferred wages or profits from a self-employed activities. For those who own businesses that make substantial profits, even larger amounts may be stored in a SEP-IRA, family 401(k), defined contribution, or defined benefit plan. For simplicity purposes, this article will designate all of these tax-deferred retirement accounts as an IRA. This article will cover the benefits of establishing a Multi-Generational IRA (MGIRA).

If you, John Smith, are married and designate your spouse Mary as your primary beneficiary, when you die the spouse has two choices. She can rollover all of your IRA funds into her own separate IRA, Or, she can designate your IRA funds as an inherited IRA, such as John Smith, deceased, IRA for benefit of Mary Smith. Either way avoids immediate taxation. However, if she does not implement the MGIRA strategy, upon her death all the IRA money gushes out typically in the year of her death and is taxed to the beneficiaries (typically the kids).

The benefit of the MGIRA strategy is that upon the death of the IRA owner, the funds can go to the kids or grandkids without all of it gushing out and being taxed immediately. If you had $500,000 in your IRA and 2 kids, without the MGIRA, each would get $250,000 in a lump-sum. If each kid had a good income, the extra $250,000 income would probably push them into the 40% combined federal and state income tax bracket. This would result in $100,000 of tax paid by each of your kids. If you had two 40-year-old twins as your only kids, a MGIRA would allow each to distribute only $5,868.54 from their $250,000, allowing most of it to grow. Per the IRS Required Minimum Distribution (RMD) rules, each year they would have to distribute a bit more, but most would remain in the IRA, growing tax-deferred.

Warning: Virtually no company 401k and few financial institutions allow a true MGIRA strategy when one has multiple kids and/or grandkids. A true MGIRA strategy allows one to name multiple beneficiaries, and each kid or grandkids is distributed their own RMD based on their separate age. Think about the company you work for. Assume that you have 2 kids, ages 30 and 40, and 3 grandkids ages 5, 7, and 10. Once you quit working, you are no longer making that company money. Does that company have the computer system or the desire to pay out the correct RMD every year to your 5-year-old grandchild for the next 90 years (assuming he lives until age 95)? If they don’t pay out the correct RMD, there can be up to a 50% penalty.

At least 90% of my clients, once they know that the MGIRA strategy exists, prefer that the kids and grandkids get an annual check every year for the rest of their life and are restricted from raiding the IRA principal. This way, it becomes (after your death) a lifetime annual gift to them. When we do the analysis, $300,000 deposited in a MGIRA can become $1-2 million of total income over the life of young kids or grandkids. However, the MGIRA is set up so that you retain total control, and can spend all the income or principal if you need it.

Contact Dr. Wong at (480) 706-0177 or haroldwong1@yahoo.com. For his previous research, go to www.DrWongInvestorGuide.com. For his future seminars, click on www.drharoldwong.com

Retirement Planning for Success

3/27/2015 AZ Republic by Dr. Harold Wong

Retirement is not what most people in American think about until they hit 50. Then, many panic as they realize they have not saved enough. Several years ago, I wrote an article, citing a study that surveyed families whose total household joint income was between $50-100,000 annually. Of those in their 50s, the average savings (not counting any home real estate equity, personal property such as cars, and any pensions) was under $30,000. What do you do if you are in your 50s and have not saved enough?

Plan on working until age 70 so that you can maximize your Social Security retirement benefits. The average Social Security (SS) check for retired workers in 2014 was $1,294. Among elderly SS beneficiaries, 52 percent of married couples and 74 percent of unmarried persons receive 50 percent or more of their income from SS. Among elderly SS beneficiaries, SS is 90 percent or more of the income for 22 percent of married couples and for 47 percent of unmarried persons.

By working until 70, one can get 80-90 percent more SS income than if one started SS benefits at age 62. Yet, only 5.2 percent of men and 11.4 percent of women waited until age 66 (considered Full Retirement Age for older Baby Boomers). Only 1.2 percent of men and 2 percent of women waited until age 70. For more information, read my 5-part Social Security series, with the first article published on 5/23/2014, found online on www.DrWongInvestorGuide.com.

Really understand and follow Warren Buffett’s Rule of 100. This means one subtracts one’s age from 100, and this is the maximum percentage of one’s life savings that should be in “red money. This is also known as risky money”, which is any asset that can lose principal. Example: if the average age of a couple is 58, no more than 42 percent of their life savings should be invested in risky assets. When one reaches age 50 and realizes one has not saved enough, many will panic and say to themselves “The only way I can retire is if I take huge risks with my money to try to make huge returns”. That’s akin to the gambler at a blackjack table who started with $100,000 but has lost $50,000. It’s tempting to “double down”, but that usually means losing most of your life savings faster.

Understand that it is impossible to reach the “Efficient Frontier” the way most people invest. Harry Markowitz won the Nobel Prize in Economic Science in 1990 for his pioneering research on modern portfolio theory. Here’s a passage from Wikipedia, “A Markowitz Efficient Portfolio is one where no added diversification can lower the portfolio’s risk for a given return expectation (alternately, no additional expected return can be gained without increasing the risk of the portfolio). The Markowitz Efficient Frontier is the set of all portfolios that will give the highest expected return for each given level of risk. These concepts of efficiency were essential to the development of the capital asset pricing model.” It’s mathematically impossible to reach the “Efficient Frontier” with only stocks and bonds, which are the two basic asset classes that have historically composed Wall Street investments. Most investors have an inefficient portfolio, meaning they are taking way too much risk for the returns they get; or, are getting way too little return for the given level of risk they take.

Free 6-hour “Retirement Planning for Success” course: will be held Part 1: Wednesday 4/8/15, 1-4 pm and Part 2: Friday 4/10/15, 1-4 pm at Desert Foothills Library, 38443 N. Schoolhouse Road, Cave Creek, AZ 85331. Please RSVP at (800) 955-1408. The course is free but many students will want to purchase the optional student workbook for $15, cash or check only, at the class. The class is based on recent academic research.

Contact Dr. Wong at (480) 706-0177, haroldwong1@yahoo.com, or www.drharoldwong.com. For his archived research or seminar schedule, click on www.DrWongInvestorGuide.com.


Secrets of the Rockefeller Trust

3/25/2015 AZ Republic by Dr. Harold Wong

In September, 1992, I came from UC Berkeley to the Phoenix, AZ area for a 2-year research project. For a year, I wrote a column, Asset Protection, in a legal publication. Every month, I would research and publish on a concept in advanced estate planning or asset protection that was little known. For example, Limited Liability Companies had recently become legal in CA, but were not yet legal in AZ or many other states. After a year of research, I developed a seminar “Secrets of the Rockefeller Trust”, that became the most popular seminar in Sun City, AZ. This seminar has not been given in 21 years.

Revocable Living Trust: is the standard in the estate planning field for the last 40 years. The main advantage of a Revocable Living Trust (RLT) was that assets put into the RLT did not go through probate. Probate can be quite costly, depending on the state where the individual dies, and total fees to attorneys and the court can be 2-8% or more of the value of the estate. Even worse, the probate process is public and the whole process can take a year or even years. In certain cities known for corruption, there have been cases where the courts and attorneys have taken a huge percentage of the estate assets.

The main limitation of a Revocable Living Trust is that there is no asset protection. The average age of those who have attended my 50 plus seminars every year in AZ is 75. Most are grandparents. If a grandchild visited and borrowed their car, and then hurt someone badly in an auto accident while they were drunk, the injured persons could sue the grandparents who owned the car. They could lose everything, including assets inside the RLT.

The Rockefeller Trust was pioneered by John D. Rockefeller, who at one time controlled 90% of the oil refining capacity in America. He consolidated much of the oil industry and was considered the wealthiest man in the world. Between 1860 and 1960, he, and his son known as “Junior” donated over $1 billion. Famous heirs include Nelson Rockefeller, the multi-term Governor of New York, who became VP of the U.S under President Gerald Ford. John D. Rockefeller created the Standard Oil and Trust to consolidate the oil industry. The Rockefeller family eventually had hundreds of trusts to protect their assets and keep their activities highly secret.

Advantages of a Rockefeller Trust (RT): One can pass assets across several generations, without each generation being hit hard with estate taxes. If your kids or grandkids get divorced, the spouses cannot get any of the money in the RT. A huge advantage is protection against creditors and lawsuits. Fife Symington, the former Governor of AZ, was on the board of Western Savings and Loan, which went under during the Savings and Loan Crisis of the 1980s. The law firm, CPA firm and all the directors were sued. He was the only one that did not have to pay, as his and his wife’s assets were shielded in RTs.

Free Seminars: “Secrets of the Rockefeller Trust” will be held Thursday 4/2/15, 10-12 noon, at the Golden Corral Surprise; Thursday 4/9/15, 10-12 noon, at the Golden Corral Mesa; and Saturday 6/6/15, 10:30 am -12:30 pm at the Desert Foothills Library in Cave Creek. Registration is restricted to those with at least $1 million estate size. Please RSVP at (800) 955-1408.

For those who have at least $500,000 in financial assets, there is a separate seminar “How You Can Maximize Your Social Security & Other Retirement Income”. This will be held: Sat. 4/4/15, 10-12 noon at the Golden Corral Surprise; Sat. 4/11/15 10-12 noon at the Golden Corral Mesa; and Sat. 5/2/15, 10:30 am–12:30 pm at the Desert Foothills Library in Cave Creek. Please RSVP at (800) 955-1408.

Contact Dr. Wong at (480) 706-0177; haroldwong1@yahoo.com, or www.drharoldwong.com. For his archived research and other seminars, click on www.DrWongInvestorGuide.com.


Why You Should Consider a Roth IRA Conversion!

March, 2015 City SunTimes by Dr. Harold Wong

Thousands have attended my retirement and tax planning seminars in the last 6 years and many complain about taxes. For many Baby Boomers, the majority of their savings is either in 401k plans or IRA’s. They may want to consider a Roth IRA conversion.

Imagine you are a farmer in Mobridge, South Dakota, a small town where the entire population of the county is 2,000. It’s early March, 2015 and you hear a knock on the door. “Hello, Farmer John, I’m from the IRS and I’m here to help you. The Federal Government is experimenting with a new tax system and here’s how it works. We can go right now to your barn and take the physical weight of your seed corn that you plan to plant in April. I will then tax you on its value in 2015. If you take that choice, no matter how much corn you grow on your farm, there will be no tax after 2015 for the next 3 generations.” You stand there in silence, trying to understand exactly what he has said.

The IRS man continues: “However, I know that farmers are very conservative. You probably don’t want to try a tax system that is something different from what you have experienced for your entire life. If you stay with the current tax system, I will come back at the end of this year’s harvest, and tax you on the value of the physical weight of the mature corn kernels, the corn cob, and the 7-foot-tall corn stalk. In fact, I will return every Thanksgiving dinner and tax you on every harvest that this farm produces as long as your family owns this farm.”

After spending a few minutes considering the IRS man’s offer, Farmer John remembers going to a seminar “Secrets of the Roth and Multi-Generational IRAs” that he attended at one of the Cave Creek libraries during January, 2015. He realizes that the physical weight of the corn seed right now is far less that the total weight of the corn plant at harvest, especially when the weight of future harvests will be taxed for the next 80+ years. He tells the IRS man: “I understand that you think that the physical weight of all this seed, held in a self-directed IRA, is worth $300,000. If I convert this to a Roth IRA, you will tax me on $300,000 and never come back. Over the next 80 years, this farm will produce $300 million worth of corn crop, and my family will not have to pay any tax for 3 generations. I will gladly accept your offer. Now I finally understand what a Roth IRA conversion is all about”.

P.S. Farmer Brown is in a 33.33% tax bracket and normally would have to pay $100,000 of tax on the $300,000 taxable income that would occur from the Roth IRA conversion. However, he remembers a strategy from a series of articles, “Secret Advanced Tax Strategies”, found at www.DrWongInvestorGuide.com. Farmer Brown buys a $300,000 combine that he needs for the upcoming harvest, and deducts the full price. This creates $300,000 of tax deduction to offset the $300,000 of taxable income from Roth IRA conversion. So, Farmer Brown pays NO TAX on his $300,000 Roth IRA conversion. He turns to his wife and says: “The IRS man wanted me to pay $100,000 of tax, but we farmers aren’t as dumb as we look”.

Contact Dr. Harold Wong at (480) 706-0177 or haroldwong1@yahoo.com. For his previous research or future seminars, go to www. drharoldwong.com or www.DrWongInvestorGuide.com.

Affording Retirement Travel

If you’re like most people who think about retirement, you probably imagine traveling in your golden years. Before you browse Acapulco websites and whip out the credit card to buy your ticket, make sure your finances can handle your trip.

First, don’t wait to fulfill your dream. Enjoy the items on your bucket list now while you are healthy enough to walk easily. If that list involves extensive travel that’s suddenly possible with free time after working, realize that seeing the world isn’t cheap.

You can do two things to afford it: increase your spendable income and decrease your travel expenses.

The bonds trap. In today’s virtually zero-interest world of bank accounts, increasing income can be a huge challenge. You either risk your savings in the stock market, hoping for more-or-less continual appreciation of your equities, or you go into bonds.

Except bonds might well be the next big crash. If interest rates finally rise from today’s historical lows, bond values will decrease substantially. In June 2013, the well-known brokerage firm Oppenheimer issued a report entitled “Effect of Higher Rates on Fixed Income Portfolios,” widely taken as a warning about bond investments.

As noted in the report, an interest increase of three percentage points will nearly halve the value of a 30-year U.S. Treasury bond; a jump of only one percentage point will cause an 18% drop in this bond’s value. You take a big loss after even the smallest budge upward in rates.

You have options. Consider a personal pension, where you contribute part of your salary (omit “salary” and replace with the word “savings”) to a financial institution that in turn invests your money to build a lump-sum available (omit “a lump-sum available to you at retirement” and replace with “a lifetime pension income for you at retirement”) to you at retirement. These pensions are based on actuarial principles that offer a higher cash flow than most alternatives.

For instance, if you are 70, deposit $200,000 and wait five years to start withdrawals, you can often get about $17,000 to $18,000 of annual income for the rest of your life. This can fund a lot of travel, particularly when you mix one big foreign trip with two cheaper domestic ones each year.

Look for bargains. You can find many websites to one-click breaks on airfare, hotels, car rentals and all-inclusive packages. Innovative thinking helps, too: Just consider the Gentlemen Host Program.

The cruise industry has long known that older, single women constitute a significant share of shipboard vacationers. These women, often either divorced or widowed, enjoy cruises for the organized activities, lavish dinner and drinks and the entertainment after the dinner. Only thing missing: someone to dance with.

Gentlemen Host, a placement program operated through Compass Speakers and Entertainment, matches groups of such female travelers with outgoing, unmarried conversationalists – who preferably can cut a serious rug on the dance floor. The requirements of the hosts are extensive and activities strictly platonic; participants’ (replace “participants” with “hosts’”) cruises are almost free.

How much of your nest egg and estate on travel? About three years ago, I met a couple in their 80s who had been educators in public schools. They retired about three decades before and took two cruises each year since.

With only some $80,000 saved for retirement through their entire lives, the couple relied on generous teachers’ pensions and Social Security to fund extensive travel. They estimated that they spent slightly less than $700,000 on the cruises – but the trips were a big life dream.

The couple expected to leave nothing except their house to their kids.

New Year’s Retirement Travel Resolutions

1/9/2015 AZ Republic by Dr. Harold Wong

Now that the holiday season is over, people are left with their New Year’s resolutions.  However, I challenge you to consider making some New Year’s resolutions regarding your travel dreams in retirement.

Enjoy those bucket list items now, while you are healthy enough to walk easily. For many, this means extensive travel, which you never had the time for while working. You can afford it by doing two things: increasing spendable income and decreasing travel expenses.

In today’s virtually zero bank interest world, increasing income can be a huge challenge. Your choices are to either risk your life savings in the stock market, hoping for continual market appreciation of your stocks, or go into bonds.

Warning: bonds will be the next big crash. If interest rates increase from today’s historical lows, bond values will decrease substantially. On June 17, 2013, “Effect of Higher Rates on Fixed Income Portfolios”, was a warning by the well-known brokerage firm Oppenheimer. A three percent increase in interest rates will drop the value of a 30-year Treasury bond by 42 percent; a two percent increase will cause a 31 percent drop; and only a one percent increase will cause an 18 percent drop. If you sell that bond before maturity, you will take a big loss.

Instead, consider a private pension, where the funds are not at risk in the stock market. These pensions are based on actuarial principles that offer a higher cash flow than most alternatives. If you are 70, deposit $200,000, and wait 5 years to take income, it’s often possible to get about $17-18,000 of annual income, each year for the rest of your life. This can fund a lot of travel, particularly when you mix one big foreign trip with two U.S. trips each year.

About three years ago, I met a couple, age 80s, from New Jersey that had been educators in the public school system. They retired in their mid-50s and had taken two cruises each year for 30 years. They had only saved about $80,000, but relied on generous publicly-funded teachers’ pensions and Social Security to fund their extensive travel plans. They estimated that they had spent just under $700,000 on these cruises, but that was their dream. They expected that their house would be the only thing the kids would inherit.

Here’s an interesting strategy for single guys who want to take almost free cruises. The marketing studies in the cruise industry show that older, single women are a significant part of their clientele. These women are either divorced or widowed. One of the major reasons they like going on a cruise is that they have organized activities, including shore excursions that fill the day. At night, they like having a great served dinner, drinks, and entertainment after the dinner. The only thing missing is having no one to dance with. That’s why affluent cruise lines have the Gentlemen Host Program, a placement agency operated through Compass Speakers and Entertainment, Inc. If you are unmarried, can carry a conversation, and are a decent dancer, your cruise trip is almost free. You host a dinner table of eight women and then rotate each dance with them. The cruise line rules also state: “No Hanky-Panky Allowed!” Remember, you are there to dance and not to play the role of Richard Gere in the movie “American Gigolo”. However, after a long day in the sun, drinks and a big dinner, the dancing typically only lasts two hours or less.

Free Seminars: on many topics, including “How Women and Couples Can Increase Income and Reduce Taxes”, “Secrets of the Roth and Multi-Generational IRAs”, and “Lessons from Warren Buffett”, will occur during the next 3-6 months, at venues in Mesa, Surprise, Cave Creek, and Tempe. Click on www.drharoldwong.com for each month’s seminar schedule.

Contact Dr. Wong at 480-706-0177 or haroldwong1@yahoo.com. For his archived research, click on www.DrWongInvestorguide.com.

Kids’ Harsh Money Lessons

After last Christmas, millions of people – including maybe you – returned gifts you didn’t want and either exchanged or just pocketed a refund. The process only increased the pressure that exhausts everyone, especially parents: Rush and spend to the limit of your credit, often to help your kids. Your kids are watching, though, and for their own good you must teach realities about money.

Just before Christmas, I got a haircut. My haircutter talked about her only child, a 22-year-old son. She was a single mom who for 15 years supported him with a day-care service in her house before she started cutting hair.

Once her son turned 20, she asked him to pay a modest $100 monthly rent; he agreed. Then he started having his girlfriend over more often and my haircutter asked him to pay more because of the extra food and utilities. He refused and moved in with his grandparents.

My haircutter claimed the grandparents now spoil her son, an only grandchild they appear to see as capable of no wrong. The son attends the local community college and does not yet have a career.

The issue here is not the son paying $100 or $200 a month, but his learning to live in the real world where most people work hard every day to pay for rent, utilities, food and a car to get to work. If you know anything about the eating habits of a 22-year-old man and his girlfriend, my haircutter’s food bill alone probably hit $400 a month.

Rent for even a studio apartment averages almost $600 a month nationwide, not including utilities.  When one adds $400 of food for two who are in their 20s, the minimum cost would be $1,000 per month for food and rent. The grandparents are making a big mistake not charging him rent, not to mention undermining the authority of his mom.

Many of the Greatest Generation (born between 1901 and 1924) or the Silent Generation (born between 1925 through 1945) complain about the money attitudes of boomers and boomers’ kids. Boomers, born from 1946 to 1964, benefited from the Great Depression hardships of their parents – moms and dads who vowed to save their children from suffering and who, consequently, often seemed to spoil the boomer kids.

Boomers in turn spoil their kids, so the trend simply accelerates. In this first American generation where most wives worked outside the home, material items sometimes substituted for quality family time. Many boomers’ kids grow up with their own room, television, computer, smartphone and eventually their own car.

A recent survey also showed that Americans largely believe their children know little about finances yet also talk to their kids about money only a handful of days annually: a scary disconnect.

No wonder the Great Recession of 2008 shocked these young people.  In May 2013, a Time magazine cover story identified Millennials as those born from 1980 or 1981 to 2000, Source: Stein, Joel (20 May 2013). “The Me Me Me Generation”. Time. p. 30.

Millennials ( delete these next 5 words: born between 1982 and 1994) must often live at home; those who hold college degrees also often hold jobs unrelated to a chosen career – if employed at all. Between huge student loan debt (almost $30,000, on average, for recent graduate) and bad job prospects, these kids delay marriage and owning a home.

Serious numbers, serious decisions and no clear solution: Giving too much support to your kids and grandkids usually only fosters unrealistic expectations. Your job, like it or not, is to use money to teach kids about an increasingly harsh real world.

2015 New Year’s Health Resolution

By Dr. Harold Wong for 12/12/2014 AZ Republic

There are less than 3 weeks left before the end of 2014 and it’s an American tradition to think of New Year’s Resolutions. Common ones include: stop smoking; lose weight; get healthier.

I’m going to join a health club: This is great, but it’s a total waste of money if you don’t actually use it. The holiday season is the time when health clubs have their biggest and most profitable membership drives. Please resist the temptation to sign up for a year, 3 years, or even a 5-year membership, enticed by the lower annual cost for the longer memberships. Some unscrupulous health clubs oversell their memberships; then go bankrupt; and open up a few months later under a different corporate name. If they go bankrupt after 2 years and you paid upfront for 5 years, you’re out of luck.

Dr. Wong’s suggestion: Even if you visit a reputable and honest health club, realize that most people do NOT keep their New Year’s Resolution of working out. In January, February, and perhaps March, the classes are crammed and there’s a wait to use the machines. By April, only the hard-core regulars are using the facility. It’s better to join a health club that has a small initial fee to join and charges you monthly without a contract. If you stop working out in a few months, you have not lost much. Similarly, avoid the temptation to sign up for a 6 month or 12-month personal trainer contract.

Don’t let them charge your credit or debit card: Insist on paying upfront for a specific number of months instead of letting them ding your credit card or debit card for the monthly charge. There have been a number of nightmare situations, where the member canceled his membership and the club refuses. Then the club keeps charging the member’s card and even has a collection agency go after the member is he cancels the card. Over a decade ago, I visited a large health club chain. They wanted to charge my credit card. I refused and paid upfront by check for a trial 3-month membership.

Use a city-owned facility: There are a number of city-owned facilities, such as the Mesa Multigenerational Center or the Gilbert Freestone Recreation Center that offer workout facilities. Kiwanis Park in Tempe also has tennis courts and a large indoor heated pool. The normal daily admission cost is $4-6 and one can lower the cost with a monthly pass. For years, I trained my championship tennis teams at Kiwanis Park. Unlike a high-end country club, there was not $thousands of dollars upfront in an initiation fee and high monthly dues. When we played doubles for 2 hours, each guy would chip in $4-5.

Due to a number of major injuries, I can no longer play tennis. So, I use the Kiwanis Park indoor heated pool and occasionally the small workout facility that has exercise machines. The cost is either $4 per daily visit or $39 for a monthly pass. I find that the city-owned facilities are much more low-key than private health clubs. Industry studies show that when people are out of shape, there’s a huge reluctance to join a health club. This is because most women are intimidated by younger, thinner women wearing the latest fashions in the aerobics classes; and most men are intimidated by hugely muscled guys, known in the trade as “meatheads”. I find that at city-owned facilities, you mainly have an older crowd, where people are just trying to stay healthy and no one is competing with anyone else.

Conclusion: Your health is important, but spend wisely when using a facility to work out. Remember, what’s important is not the cost of the facility but how often you exercise. It’s you and not your wallet size that does the exercise.

Contact Dr. Wong at (480) 706-0177, haroldwong1@yahoo.com, or www.drharoldwong.com . For his future seminars and previous articles, click on www.DrWongInvestorGuide.com.

2 Helpful Tax Strategies: Solo 401(k) and Multi-Generational IRA

If you’re like most taxpayers, you have no clue about the most effective tax strategies for these financial vehicles – especially if you lack access to expensive accountants and attorneys. Here’s some guidance.

Here are two common situations and innovative solutions that might help.

  1. You are self-employed and want to save tax. You feel you pay too much in taxes and want at least $17,500 of deductions. You are not an employee with a company that offers a 401(k) retirement plan but you still need more deductions than the $5,500 annual contribution ($6,500 if 50 or older) limit for a traditional individual retirement account.

Solution: a solo 401(k), aka an independent, one-participant or family 401(k). Using this vehicle in this case hinges on your being a sole proprietor or operator of the business with your spouse, and have no non-family employees.

Let’s say your spouse works in the business with you and is younger than 50. He or she can contribute up to $17,500 annually to the solo 401(k) plan, and this is called employee salary deferral of up to a full year’s compensation. If your spouse earns $17,500 this year ($18,000 in 2015) he or she can put all of $17,500 into the solo 401k(k) plan.

Assume you are 50 or older and now also contribute a maximum $23,000 (the maximum $17,500 contribution for 2014 tax year plus the $5,500 catch-up amount) employee salary deferral to a solo 401(k) plan. With an eye to even further deductions, you can also kick in the employer contribution – remember, you are both the employee and the employer – of 20% of your net earnings if you are a sole proprietor and 25% if your business is a corporation.

If you are 50 or older by Dec. 31, 2014, you can save up to $57,500 in the solo 401(k), a combination of the employee salary deferral and the employer contribution. For 2015, the total maximum contribution increases to $18,000 salary deferral plus $6,000 catch-up plus $35,000 employer contribution, or $59,000 total.

Additional points:

  • You can still contribute to an IRA in addition to your solo 401(k) contribution.
  • Setting up a solo 401(k) can be inexpensive and easy. A reasonably priced independent 401(k) administrator can cost as little as $500 for set up and $500 in annual fees. Brokerage firms can offer lower costs but you then are tied to their investment choices.
  • If you have non-family employees and want to offer a workplace retirement plan, your normal 401(k) plan may come with potentially higher set-up and maintenance fees. You will also be subject to non-discrimination rules, meaning that you must allow your permanent employees into the plan and that your employer profit contribution must treat all employees – including you the owner – equally.
  1. You want to leave a tax-free legacy. In one excellent example, a retired nurse, married, 75, wants to leave a legacy to her 9-year-old twin grandsons. The most tax-effective strategy: Combine the Multi-Generational (MGIRA) strategy with a Roth IRA conversion.

The MGIRA, aka an extended or stretch IRA, allows you to designate a successor beneficiary to pass on funds you saved for retirement. Converting other kinds of IRAs to a Roth IRA offers many advantages, including eventual tax-free withdrawals of qualified distributions.

We structured a Roth conversion of the nurse’s $385,000 traditional IRA and paid the conversion tax with non-IRA funds. The two grandsons will each get slightly more than $2 million tax-free over their lifetimes. Note that this is slightly over a 10 to 1 multiplier. It will be set up where they cannot raid the principal, but instead will get a check each year for the rest of their lives. Hopefully they will raise a glass and say “What wonderful memories of grandma we have. She’s no longer alive but she’s still looking after us”.

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