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Topics - Nords

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Taxes / Reducing expense ratios and avoiding the dreaded IRMAA
« on: May 04, 2017, 09:01:56 PM »
It's been real quiet around here.  Now that everyone's recovered from tax season, let me start a new question.


As some of you know, I'm my father's conservator.  He first noticed his Alzheimer's symptoms in 2008, he's been in a care facility since early 2011, and this year he's entering late-stage.  The next five years are totally unpredictable. 

I've been handling his finances since 2011, under the benevolent supervision of the Denver probate court.  I've conservatively projected his investments out to 2025, well past most of the Alzheimer's survival bell curve, so I doubt that Medicaid will rear its ugly head.  Let's not turn this thread into a Medicaid tactics discussion.

I'm getting ready to mess with Dad's taxes, and I thought I'd talk through it here to make sure I understand it.  Feel free to poke holes in my plan.


Back in 2011 (when I started my fiduciary forensic financial analysis on his files) I learned that for at least 20 years he'd been living on less than half of his income from investment dividends/interest, a small pension, and Social Security.  His AGI was about $65K and he'd generally spend about $25K.  He was Mustachian before it was cool.

During that time he'd invested heavily in Fidelity mutual funds and by 2011 his asset allocation was over 85% equities.  Back then we were all still scared to death of the stock market's recovery and legislation was expiring for the low tax rates on capital gains.  In 2012 it seemed prudent to rebalance to 25% equities, 25% bond funds, and 50% CDs. 

Since then the capital-gains tax rates have been extended, Dad's long-term care insurance payout has finished, and he's slowly drawing down his assets.  His asset allocation has drifted up to 35/15/50 over the last five years, and I could let that continue to drift.

However his investment expenses are higher than they could be.  He's held some of his Fidelity shares since the early 1990s.  They're in actively-managed funds with expense ratios: 
0.86% Value Discovery
0.82% Blue Chip Growth
0.75% Capital & Income Fund
0.68% Contrafund

Meanwhile the Fidelity S&P500 index fund has an expense ratio of about 0.09%. 

Dad's current fund expenses aren't exactly highway robbery... well... among today's choices maybe they are.  Expenses could be reduced.

When Dad was receiving the payout from his long-term care insurance policy, that was considered untaxed reimbursement on his medical expenses.  He was paying the usual federal and Colorado taxes on his usual taxable income.  But now that Dad's long-term care insurance policy has completed its payout, his medical deductions are about $100K/year.  He paid zero taxes in 2016 and might never have a tax bill again.

Dad used to be in the 25% income-tax bracket, but now his medical deductions put him in the 0% bracket.  More significantly, those medical deductions mean that he could take a lot of capital gains at the 0% rate.  When I play around with MoneyChimp's calculator (http://www.moneychimp.com/features/capgain.htm), he could realize up to $37K of long-term capital gains at the 0% capital-gains tax rate and take an additional $34K in deductions & exemptions. 

But not so fast.

In 2012 when I drastically rebalanced Dad's portfolio, my blissful ignorance ran head-first into the Medicare "Income-Related Monthly Adjustment Amounts" rules.  IRMAA premium hikes cost an extra $2000 on that rebalancing, and I haven't sold any shares since then.
https://www.kitces.com/blog/income-thresholds-for-medicare-part-b-and-part-d-premiums-an-indirect-marginal-tax/
I'm going to avoid IRMAA issues this time around by keeping Dad's modified adjusted gross income just below $85,000. 

His mutual funds have a low cost basis, but I could use those AGI constraints to gradually replace the Value Discovery and Blue Chip Growth funds with a simple S&P500 index fund.  That would save about $150/year on expenses for each year that I took about $20K in cap gains.

If the markets continue to go up, Dad wins.  If the markets stall out, Dad wins.  If the markets go down, Dad has an opportunity for tax-loss harvesting of the S&P500 fund while ditching even more of the other funds with their high expense ratios.  I'd call that a win too. 

I'm still going to model this in Turbotax and make sure that I haven't overlooked something.  Has anyone else dealt with this sort of financial management?  Anything else I might be missing?

2
Bloggers Helping Bloggers / Favorite tools for writing
« on: March 23, 2017, 11:56:05 AM »
Keith is a hard-core voracious writer, so I thought I'd use his new forum as an excuse to write about writing.

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I'll keep it simple:  sit on your butt and hammer on a keyboard, or use an old-fashioned pen & paper.

Perhaps the most important tool in writing is having something to say.  Or, as my spouse puts it:  "Can't shut up".  (Followed by "Thank goodness he has readers and doesn't have to focus it all on me.")  If you don't have the urge to write then you're not a writer-- yet. 

When you do have the writing compulsion then write at a particular time of day, every day, for at least a few minutes.  In my case it's 20 minutes each morning with my first cup of green tea (even before breakfast, let alone coffee).  That way I get some writing done and I can go surfing for the rest of the day without feeling compelled to set aside writing time or having an unfilled obligation hanging over my head.  For extra-organized bonus points, every evening you could spend a minute jotting down the things you're going to work on tomorrow morning.  (Hint:  not e-mail or Facebook.) 

My next favorite tool:  a chapter outline. 

When I started blogging, I did it backwards.  I wrote the book, sold the manuscript to a publisher, and started the blog as a marketing tool.  I should've started the blog to market the book as I was writing the manuscript.

If I was starting a blog all over again, I'd begin with an outline for a book (and a shorter outline for a shorter version of the book).  Then I'd write the blog's posts for each topic in the outline.  (The first blog post would be the outline... and you'd ask for reader comments.)  It would be pleasing to write the blog posts in the order of the outline, or you could skip around to your favorite parts and fill in the details later. 

When you finish working that outline then you have the first draft of a manuscript.  You also have a free chapter (or the book's shorter version) to give away to people who sign up for your e-mail list.  Your e-mail list helps you create your book launch team.

Favorite writing software?  LibreOffice-- mainly because it's simple (and free).  Use whatever makes life easier for you.  If Shelby Foote and J.K. Rowling used pencils and legal pads and notebooks, and George R.R. Martin still uses WordStar (Google it, Millennials) then I'm not going to pretend that I need a particular writing tool to help me hone my craft.

Scrivener is also an intriguing and very powerful tool, although I haven't caught the bug yet.  Some (like Michael Hyatt) swear by its ease of reorganizing an outline, but I'm still stuck in the mode of "edit a printout with a pen".  I haven't screwed that up yet.

Favorite blogging tool?  WordPress.  Sure, Weebly & Wix will do it for free (or cheap) but a year later you'll be moving to WordPress anyway.  (If you're really a writer then a decade later you'll still be writing.)  If you're cheap now then start with WordPress.com's free sandbox.  (A year later you'll be doing the next step-->)  I recommend you invest the money to start with Bluehost hosting, install WordPress.ORG software, and then relax in the security that you're optimized for future growth.  Pick just about any ol' blog theme and run with it.  (You can always change it later.)  Pick just about any ol' site format (I recommend the defaults).  Jump in the muck with both feet and splash around-- just about everything has an "Undo" button.  As long as you stick to the WordPress dashboard and stay out of the hosting cpanel then you'll be fine.

If it bothers you to spend a few bucks on a website, then maybe that's all the incentive you'll need to keep writing.  I intensely dislike deadlines (especially self-imposed ones) but you could think of the blog's expenses as an advance on your royalties.  Eventually you'll monetize the blog, but that's a whole 'nother topic for a different post.

Now quit screwing around with your blog's page titles or layouts and get back to work on your posts.  You can write your "About me!" anytime.  (You'll revise it every 3-6 months anyway.)  Don't worry about how stuff looks for your audience-- you don't have one yet (not even search bots).  You're going to publish content on this site for a year before you feel as though you have traffic.  Maybe two years.

As far as the rest of the publishing process goes... outsource it.  Seriously. 

Crowdsource the manuscript's editing and copy editing.  We call these people "your future readers and reviewers".  (Some of them might even ask you to reciprocate by reading their manuscript.)  This crowdsourcing is by far the best product-validation tool I know of.  If you're writing about something and nobody cares, then you should write about something else.  If you write about something and everyone hates it-- or at least argues about making it better-- then their emotion is a signal that you have a best-seller on your hands. 

The beta readers who have angry stories of their own, or advice on a particular topic about which you're clearly ignorant:  we call those people "contributors", and their words make great sidebars to break up your text.  Today I'm still friends with the people who contributed stories & advice to my first book.

Outsource the rest of the publishing, too.  Ask for volunteer artists (or pay a freelancer), and pay someone to format the manuscript in a MOBI or ePub format.  (The tools are almost there to give you a LibreOffice button that says "Format MOBI".  Maybe for your second book.)  You could sell your manuscript to a publisher, but you're going to end up doing the marketing anyway so you might as well self-publish and have better marketing analytics.  Oh, and self-publishing means you'll usually end up with more money, too.

I've even sold my blog and all its revenue goes to a guy who runs the site-- he's totally motivated to keep it up and to attract more eyeballs (my future readers) for its advertising.  Part of our sales agreement is letting me market my book on the blog, but he also uses an Amazon affiliate link for his share of my sales.  (He's practically doing my marketing for me.)  He always needs more content so he's happy to have me putting up a post or two a month while I'm writing about the topics for my next book. 

You could take the more common approach of hiring someone to run your site for a monthly payment or a revenue share.  Frankly, I'm happy to have the entire site be somebody else's challenge.

Why outsource?  Because you're a writer.  Writing is more fun, and it's probably a better use of your time than tweaking blog plugins. 

Note that most of those outsourcing recommendations are one-time tasks that you'll earn back as soon as you stop fiddling with your manuscript and self-publish it. 

Because writers... write.

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The above text is my outline of the talk (or the e-mail) I give to writers & new bloggers.  Please let me know what else you'd like to see up there-- especially the things you wish you'd known before your first blog or book.

See what I did there?

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