harvard law school presentation 3 27 2013

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Financial Planning Workshop
March 27, 2013

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Agenda
Introduction
The Financial Planning Process
Budgeting, Debt Management, and Saving
Personal Taxes and Tax Planning
Retirement Planning
Investing
Risk Management and Personal Insurance
Estate Planning
The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Introduction
Patrick Donnelly, CFP®
• Vice President & Senior Financial Counselor

• Certified Financial Planner, CFP®
• 12 years of financial services experience, 8 as a personal financial planner to high net worth
clients

Matt Ilteris, EA®, CFP®
• Financial Counselor
• Enrolled Agent, EA®
• 8 years of experience with The Colony Group

Shaun Thompson, CFA, CFP®
• Financial Counselor
• Chartered Financial Analyst, CFA
• 8 years of financial services experience

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


The Financial Planning Process

Gathering
data and
goals

The Colony Group, LLC

Analyzing and

evaluating
your financial
status

Developing
a plan

Implementing
the plan

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Monitoring
the plan

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Budgeting

Where does my
paycheck go?

Why is budgeting
important?

• Taxes
• Insurance – Health, Dental, Home, Auto, Life, Disability, etc.
• Debt service – Student Loans, Mortgage, Auto Loan
• Retirement Savings

• Utilities
• Food, Clothing, Furnishing
• Entertainment
• Travel, Vacation
• Child care
• Personal Savings
• Identify your spending patterns
• Prioritize your spending (needs vs. wants)
• Eliminate potentially damaging spending behavior
• Control your money or your money will control you
• Piece of mind and increases probability of reaching goals

Note: www.mint.com is useful for tracking expenses and identifying trends.
The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Debt Management
Organizing and prioritizing debt obligations is critical to successful financial planning

Fixed Rate vs. Variable Rate

Student Loans

Credit Cards

Auto Loans – Lease vs. Buy

Mortgage – Rent vs. Buy

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Savings

Non-retirement savings

•
•
•
•
•
•

Emergency fund (3-6 mos. of expenses)
Down payment on home (20% of purch.)
Car purchase
Vacation
College savings for children
Investing

Retirement savings

•
•
•
•
•
•

Starting now makes it easier
Take advantage of tax-deferral
Maximize employer contributions
Target a 15% savings rate
Avoid pauses
Do not touch it until retirement

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Personal Tax
Introduction

•
•
•
•

Filing Requirement

Tax Rates
Tax Calculation
Tax Savings Tips

“In this world,
nothing can be
said to be
certain, except
death and taxes.”
- Benjamin Franklin
The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Personal Tax

Filing requirement

Enforcement in a “Voluntary” Compliance System
• Unlike the taxing systems of certain other countries, the U.S.
taxing system depends largely on voluntary compliance.
• Federal and state returns need to be filed by April, 15th.
Taxpayers are allowed a six-month extension to file their
return. It is an extension of the time to file, NOT to pay.
• Online is easiest and inexpensive. Will pick up most
deductions and relevant scenarios.
• Accountants tend to be relatively expensive, but can be

helpful if your return is complicated (i.e., rental property, selfemployed, etc.)
The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Personal Tax

2013 Income Tax Brackets
2013 Ordinary Income Tax Rates
Single

Married (Filing Jointly)

$0-$8,925

10%

$0-$17,850

10%

$8,925-$36,250

15%

$17,850-$72,500

15%

$36,250-$87,850

25%

$72,500-$146,400

25%

$87,850-$183,250

28%

$146,400-$223,050

28%

$183,250-$398,350

33%

$223,050-$398,350

33%

$398,350-$400,000

35%

$398,350-$450,000

35%

Over $400,000

39.6%

Over $450,000

39.6%

Alternative Minimum Tax Rates: 26%, 28%

2013 Long-Term Capital Gain and Qualified Dividend Tax Rates
Single

Married (Filing Jointly)

$0-$36,250

0%

$0-$72,500

0%

$36,250-$400,000

15%

$72,500-$450,000

15%

Over $400,000

20%

Over $450,000

20%

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Personal Tax
History Class

Highest Marginal Ordinary Income Tax Rates
100
90
80
70
60 e (%)
Tax Rat

50
40
30
20
10
0

1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008

Year
Top Marginal Tax Rate

The Colony Group, LLC

The Smart Choice in Wealth Management.™

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Personal Tax
Calculating Your Tax Liability: The Basics

Income Tax Calculation
$ Gross Income
- Adjustments
= Adjusted Gross
Income
- Deductions
- Personal Exemptions
= Taxable Income

x Tax Rate
= TAX LIABILITY

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Personal Tax

Calculating Your Tax Liability: Gross Income

Income Tax Calculation
$ Gross Income
- Adjustments
= Adjusted Gross
Income
- Deductions
- Personal Exemptions
= Taxable Income
x Tax Rate

Compensation (W-2)
Dividends
Alimony received
Interest
Business profits
Gains

Rents
Royalties
Refunds
Other

= TAX LIABILITY

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Personal Tax

Calculating Your Tax Liability: Adjustments

Income Tax Calculation
$ Gross Income
- Adjustments
= Adjusted Gross
Income
- Deductions
- Personal Exemptions
= Taxable Income

Business expenses
Losses from sales
Alimony paid

IRA contributions
Moving expenses
Rental expenses
Other

x Tax Rate
= TAX LIABILITY

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Personal Tax

Calculating Your Tax Liability: Deductions

Income Tax Calculation
$ Gross Income

Higher of:

- Adjustments

Standard Deduction

= Adjusted Gross
Income

Single: $6,100

- Deductions

Itemized Deductions

- Personal Exemptions

Taxes
Interest
Casualty losses
Charitable donations
Employee education
Medical expenses
Other

= Taxable Income
x Tax Rate
= TAX LIABILITY

The Colony Group, LLC

The Smart Choice in Wealth Management.™

MFJ: $12,200

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Personal Tax

Calculating Your Tax Liability: Exemptions

Income Tax Calculation
$ Gross Income
- Adjustments
= Adjusted Gross
Income
- Deductions
- Personal Exemptions

$3,900 for 2013

= Taxable Income
x Tax Rate
= TAX LIABILITY

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Personal Tax
Take-home pay

Cash Flow and Paycheck Analysis
Gross

$50,000

$100,000

Federal Tax

$4,600

$16,000

MA Tax

$1,700

$4,200

Social Security

$3,100

$6,200

$700

$1,400

Medicare
401(k)

$3,000

Medical

$3,500

6%

$6,000

6%

$3,500

Disability

$500

$500

Life

$500

$500

Calculated using “Single” filing status
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Net

The Smart Choice in Wealth Management.™

$32,400 65%

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$61,700

60%


Personal Tax

Keeping more in your pocket

Tax Savings Tips
• Transportation: Employees can pay for transportation costs, such as a mass
transit pass or qualified parking, on a pre-tax basis up to $240/month.

• Student Loan Interest: Individuals may deduct up to $2,500 of interest paid on
a qualified student loan used for higher education, subject to AGI limits.

• Education Credits: American Opportunity Tax Credit is available for the first four
years of postsecondary education. The maximum annual credit is $2,500, subject to
AGI limits. Lifetime Learning Credit up to $2,000 (annual) available for an unlimited
number of years, subject to AGI limits.

• 529 College Savings Plan: Contributions not tax-deductible, but earnings
grow tax-deferred and qualified distributions are tax-free.

• Massachusetts Rental Deduction: Limited to 50% of the rent paid to a
landlord up to $3,000 for your primary residence.

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Personal Tax

Keeping more in your pocket

Tax Savings Tips
• Flexible Spending Account (FSA): Allow employees to set aside a portion of
earnings pre-tax to pay for qualified medical and dental expenses. $2,500 limit in
2013.

• 401(k):

Traditional 401(k) contributions are made with pre-tax dollars (upfront tax break,
taxable when distributed).
Roth 401(k) contributions are made with after-tax dollars (no upfront tax break,
tax-free when distributed).

At the very least, contribute enough to obtain the maximum employer match, if
available.

• IRA: Make a Traditional IRA (pre-tax) or Roth IRA (after-tax) contribution if
circumstances warrant such a contribution.

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Retirement Planning
Savings Vehicles

Note: Social Security approx. max benefit is currently only
$30,000 /year – supplementing is necessary.
The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Retirement Planning
Power of Compounding and Tax Deferral
Example : Inve s t $50,000 to day, e arn 8% pe r ye ar fo r 10, 20, o r 30 ye ars
(50,000)(1.08)^10 = 107,900 (2.15 multiple)
(50,000)(1.08)^20 =233,000 (4.66 multiple)
(50,000)(1.08)^30 =503,100 (10.06 multiple)

Obs e rvatio ns

1.

If you needed 503,100 at retirement, but only had 10 years to invest, you would need to either
(a) invest 233,000 or (b) earn 26% per year.

2.

Tax deferral can increase the value of compounding because you avoid paying capital gains
taxes if selling appreciated securities.

3.

All else equal, if you anticipate your tax rate will be lower in retirement, it is advantageous to
invest with pre-tax dollars as opposed to the after-tax equivalent (i.e. 37,500 if a 25% current
tax rate was assumed).

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Investing
Basics

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Investing
Portfolio Construction

The ability to tolerate higher
volatility coupled with a long
time horizon equates to a more
aggressive
asset
allocation
(more equities and less bonds).

House purchase,
retirement savings, job
security, etc.
Are you averse to losses?
The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Investing
Portfolio Construction
Growth Investment Portfolio

Domestic Equities

 Large, Mid, Small
Fixed Income; 30%

International Equities
Domestic Equities; 55% Developed, Emerging

rnational Equities; 15%

Fixed Income (Bonds)
 Corporate, Municipal

Note: Remember to keep 3-6 months of available cash for expenses.

The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com


Investing
Marketplace

Note: www.morningstar.com is useful for researching mutual funds and ETFs.
The Colony Group, LLC

The Smart Choice in Wealth Management.™

www.thecolonygroup.com