Does Money Bring Happiness?

 

The financial news has been decidedly grim for the better part of the last 18 months.  Many people have seen their wealth, both actual and perceived diminish substantially over that time frame.  While many more people are concerned about their financial future than they were before, has this reduction in wealth led to a reduction in happiness and it again raises the question of whether there’s a correlation between money and happiness.

 

Most psychologists and sociologists will tell you that happiness derives primarily from social interaction.   Those with good relationships with their family and friends generally describe themselves as happy.

 

As to the link between increased wealth leading to increased happiness, surveys have shown the following:

 

·         American wealth has increased dramatically in the 20th century, but on average,
Americans are no happier than they were a century ago.

·         Once your level of wealth allows you to have basic creature comforts, happiness doesn’t increase markedly as wealth increases.

 

So, if more acquiring more wealth doesn’t increase happiness, does increased spending help improve happiness?  We all know somebody that loves to indulge themselves in a little ‘retail therapy’ when they’re feeling down.  The reality is that spending can increase happiness, but it depends on where the money is spent.  For example:

 

·         Spending money on oneself can actually decrease happiness.  Too many people fall into the trap of having to work so hard to achieve the appearance of ‘wealth’ that their happiness is actually decreased due to stress.

·         Study after study has shown that $1 given to somebody else provides much more happiness than the same $1 spent on oneself.

 

Finally, from my completely unscientific standpoint as a financial planner helping clients acquire and maintain health, it is my firm opinion that money does not lead to happiness but instead simply magnifies your innate state of happiness.  If you are a generous, happy person when you have no money, there’s a strong likelihood that you will be equally or even more happy with more money.  If you are a naturally unhappy person, the increase in wealth will simply provide you more reasons to be unhappy and more things to complain about.

 

Money is clearly an emotional topic for a lot of people and this topic is one that has fascinated me since I started working in the financial services field and I would love your thoughts on the topic.

 

 

Is Now The Time to Convert Your Traditional IRA to a Roth IRA?

 

With great adversity comes great opportunity. While nobody likes to see the account balances in their IRA drop 40% or more, the reduced value in your IRA may make it an opportune time to convert your Traditional IRA to a Roth IRA since it will cost you much less in taxes than it would have in any of the past 4 years.

Traditional IRA vs. Roth IRA Basics

A Traditional IRA allows you, with some limitations, to deduct your IRA contribution when you make it. Over time, your account grows tax-free until you start taking distributions. Once you begin to take distributions, the amount you take each year after age 59 ½ is taxed at your rate at your current income tax rate.

A Roth IRA on the other hand, does not provide you with an up-front tax deduction. Like the Traditional IRA, your account grows tax-free but, unlike a Traditional IRA, when you take distributions there is NO tax liability.

Why Convert?

Roth IRA’s have four big advantages:

1. Tax-free growth. Like a Traditional IRA, the growth in your account is not taxes.
2. Tax-free withdrawals. As long as you’ve owned your Roth IRA for five years or have reached age 59 ½, the amount you take out of the account is not taxed.
3. Contributions can be made after age 70 ½. While you can longer make contributions after age 70 ½ in your Traditional IRA, there is no such restriction for the Roth IRA.
4. No mandatory distributions. In a Traditional IRA, one you reach age 70 ½, you must start taking Required Minimum Distributions (RMD’s) each year from the account. Because you didn’t get an up-front tax deduction for your Roth IRA, you’re not required to take RMD’s.

Reasons Not To Convert

1. Taxes. When you convert from a Traditional to a Roth IRA, you’ll need cash to pay taxes on the earnings and pre-tax contributions you made. Warning: you can’t use your IRA to pay the taxes since the amount you use for taxes would be considered an early withdrawal, subject to income tax and a penalty.
2. You anticipate being in a lower tax bracket in the future. If you’re currently in the 35% tax bracket and you think you’ll be in the 25% bracket in retirement, you’ll be paying taxes at your higher current rate.

Who Is Eligible to Convert?

In 2009, in order to be eligible to convert your IRA, you must have an Adjusted Gross Income (AGI) of less than $100,000. In 2010, there will be no income limitation on a Roth conversion.

Do-Over

If the market continues to tank through 2010, the government has provided you with the ability to take a mulligan. Otherwise known as a ‘re-characterization’, this give you until October 15, 2010 to reverse your decision to do the conversion in 2009 and re-do it on the new lower amount in your IRA.

Consult a Professional

The tax code is a fluid, complex animal. Before undertaking this type of conversion, be sure to consult your CPA or tax professional to ensure that you do everything right to avoid an unnecessary complications.

How Barack Obama’s Economic Policies Might Affect You

Congratulations to Barack Obama on becoming our 44th President.  It’s truly an historic moment when an African American man can ascend to the highest office in the land and it shows how far this nation has come in the last 40 years when it comes to racism.  Whether you voted for him or not, you have to admit that it is once again going to be an interesting time in America.

Mr. Obama comes into the office with an economy clearly on the decline and financial markets still largely in turmoil and he admitted that it will be an uphill climb for his administration to fix these issues.  How that will be done remains to be seen, but we can glean some insight into his economic philosophy from his comments at the debates to the numerous press interviews he’s granted over the course of the campaign.  Here are some of the trends you can anticipate during the Obama Presidency.

Capital Gains Taxes

Throughout the campaign, Mr. Obama has said that he would like to increase the tax rate on long-term capital gains.  Currently the rate sits at 15% and Mr. Obama has said he might raise them as high as 28%, which was the rate when Bill Clinton took office.

What should you do?  If you’re convinced he will raise the capital gains rate next year, you should realize as many gains in this year as possible so you can benefit from the low current rate.

Income Taxes

Mr. Obama has said that he intends to reduce income taxes on those making less than $250,000 per year and raise taxes on those making more than $250,000 per year.

If you’re currently make less than $250,000 per year and you anticipate you will make less than that in 2009, then pushing income into next year should save on your taxes.  If you make more than $250,000 then you should push as much income into this year in anticipation that your taxes will go up under the Obama plan.

Infrastructure Upgrades

We all know that our roads and bridges are, in many places, in dire need of repair or replacement.  During the campaign, Mr. Obama indicated that one of the tools he might use to prop up the economy is to use Federal money to do those repairs, thus pumping billions of dollars to construction companies, heavy equipment manufacturers and construction-related jobs.

If Mr. Obama is successful, you should position a portion of your portfolio to take advantage of those industries that would benefit, like construction and equipment makers.

Barack Obama has certainly sparked the imagination of many Americans and it’s good to see a sense of enthusiasm out there again.  The few items we’ve listed is far from an exhaustive list and I’m sure that, as we transition from the Bush Presidency to the Obama Presidency, many other trends will begin to develop.  All we can do is to try to stay on top of those trends so that we can all benefit to the greatest degree possible as this country recovers from our current economic malaise.

America rocks!!

What’s a Terrified Investor Supposed To Do?

The Dow Industrial Average is down more than 35% so far this year, with an almost 679 point drop today alone.  There’s not doubt about it, but this market is in the midst of a full-blown panic.

Stocks are down, bonds are down or barely hanging on, oil and gold are down, real estate is down.  So given all the doom and gloom, what’s a shell shocked investor supposed to do?  Here are few tips to help you ride out the current market.

  • Don’t panic. Now is not the time to sell all your stocks.  If you were going to do that, the time was 12 to 18 months ago.  By selling now, you’ll simply lock in what is still a paper loss.
  • Remember your time horizon. If you’re young, this market will provide a great buying opportunity.  If you’re nearing retirement, you may want to follow the next piece of advice.
  • Scale back your equity exposure. Don’t sell everything, but it would be wise to have a little more cash than usual.  We currently have our clients with a lot more cash than usual so we can start buying again when the panic subsides.
  • Review your asset allocation. Some asset classes have gotten hit harder than others.  Now is a great opportunity to reallocate your portfolio without the tax bite you might get under more normal circumstances.
  • Talk to your advisor. If you haven’t spoken to, or heard from, your advisor, now is the time to be proactive and schedule an appointment to review the above items.  You’ll most likely leave that meeting knowing you’re doing everything in your power to minimize the damage of our current situation.

This has undoubtedly been a brutal market that has tested the stomachs of even the most seasoned professionals.  While you may have to make small adjustments to your current portfolio to reflect current circumstances, remember that your investment portfolio is built for the LONG TERM and that, over time, your patience and fortitude will be rewarded.

House Republicans Need to Get a Clue

Well, as cynical as I am about politics, the Republicans in the House of Representatives just dropped my own cynicism to a historic low.  The House just now FAILED to pass the bailout package that was negotiated over the weekend.  The result?  As this is being written, the Dow Industrial Average is down more than 500 points.

Republicans, who overwhelmingly rejected the bailout package, just had a press conference wherein they blamed not the package itself, but a ‘partisan’ speech given by Speaker of the House Nancy Pelosi that apparently angered some Republicans enough that they voted no, despite previously indicating that they would vote yes.  The bailout package didn’t change, but apparently hurt feelings are enough to change somebody’s mind.  Seriously, a no vote because you essentially got your feeling hurt?  What are we, in third grade again?  Are you so clueless that you truly cannot put aside partisan politics to help this country avoid economic calamity and get back on the road to recovery?

While our economic system is wounded, clearly our political system is completely broken, when a group of ELECTED officials find it impossible to do what’s right for the American public because they got their feelings hurt.

Life on some tropical Polynesian island run by a king is starting to look pretty appealing right about now.

Congress Just Doesn’t Get It

Congress continues to debate the government bailout package proposed by Treasury Secretary Henry Paulson, Fed chair Ben Bernanke and SEC chair Christopher Cox.  In the meantime, the markets are spooked and the credit markets are on the brink of complete collapse.  It seems, as always, that Congress just doesn’t get it.

The Congress may have forgotten (or most may not know) that the Great Depression not caused by the stock market crash of 1929, but by the failure of the Government to provide the liquidity banks needed at the time to keep their doors open and lend money to their customers.  While I’m not saying that we’re on the brink of another Great Depression (I’m an optimist by nature), we’re in a similar credit crunch and failure to act could damage our already struggling economy and add years to the time it will take to recover.

Ron Paul was right in his CNNPolitics.com commentary that this mess was created by artificially low interest rates that magnified the real estate bubble, and while his solution of rolling back stifling laws and regulations, divorcing oursleves of Fannie Mae and Freddie Mac, reducing the Federal buget deficit and reducing regulation will work in the long term, in the immediate term, this bailout is the best alternative we have to stabilize not only the U.S. economy, but the world economy as well.

Congress needs to finally get a clue, quickly put together a proposal with the oversight and CEO restrictions they want and pass the damn bill so the financial markets can return to some form of normalcy.

This Time is Not Different

With the bankruptcy filing of Lehman Brothers and the shotgun wedding between Bank of America and Merrill Lynch, many investors are concerned with the viability of our financial markets.  Oh, how short our memories are.

Ten years ago, in 1998, a hedge fund, Long Term Capital Management, failed, creating market panic similar to what we’re seeing today.  The fear at the time was that, due to the size of the fund and its leverage, having to sell its positions could destabilize the entire financial system.

Similar to today, the Federal Reserve and other large banks worked to minimize the damage from the collapse and the world financial system was ‘saved.’  Not only did the doomsday scenarios fail to materialize, but the stock market went on to log one of the longest bull market runs ever.

The moral of the story is that, altough financial crises like this are scary, even for the professionals, this time is most likely NOT DIFFERENT and our financial system will not only survive, but most likely survive.