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Another thought on tax planning too: It seems to me that most people who are saving for their retirement are doing so through tax qualified vehicles…meaning, that at some point in the future, when they start to draw down the funds, they or their heirs will have to pay taxes, or worse yet, if they die young, their heirs will in fact get nothing but the other participants in the plan will get a bonus…

As much as many of you know about diversification in your portfolio, tax diversification is also important, no matter where you live. If taxes are a certainty in life, then so too are changes to the tax codes. And, unfortunately the direction is often, and thankfully not always, up….

So, what are some of the risks of putting all of your retirment savings into tax deferred accounts:

- You may feel a lot wealthier than you are ($1 million tax deffered and $1million after tax  are two different numbers, very different)

- Taxes often go up, you may pay more in the future

- After tax is often more flexibile in terms of spending (both a good and a bad thing)

- If your pre-tax pension is pooled with others, depending on the country and the plan, your heirs may not benefit if you (and your spouse) die early….but late enough for the kids to be out of the house…

- Not all income is taxed the same in each country: Interest, dividends, and capital gains may all have different rates….

- The notion of making money on the government’s money through tax deferral can be smoke and mirrors; sometimes, not always. If you get no tax deduction for the initial contribution and your income tax rates are the same at the beginning and the end, you have scenarios where tax deferral can actually be worse….a good planner can show you the calculations and see what makes sense for your

-AT the risk of repetition: tax laws will change…tax laws will change…you will never have perfect information and so you need to make educated guesses, again diversification will serve you well…

And finally, the most important thing about saving for retirement, is SAVING….the investing and tax planning are important, but the first and most important step is actually setting aside money from current income to be able to spend later…getting into that habit, young, and consistently, will be the best advice that any retirement planning professional can give you…

Best of luck

J

Thanks to my Dad for the constant repitition of this cliche, and now to my experiences in 2006 and 2007; I really see what this means and am still amazed at how many people I know and meet spend a large part of their time, energy trying to avoid taxes and the expense of living well. As a financial planner, I am totally in support of aiming to keep a significant amount of money out of the tax collectors hands, now matter what country they are in, I am talking legally of course, and even into the grey area is ok too….There is enough government waste in enough countries that pushing into the grey is ok, and it keeps the government employees on their toes….As for tax systems, and the mess that has become the US tax and AMT codes, I will save for another time, what I want to address here is:

Are you spending too much time and energy trying to avoid taxes to the extent that you are paying for it in other parts of your life? Do you complain more than once a week about paying too much in taxes, have you ever considered moving away from a place you truly like because of the local tax regime? Do you argue with your spouse or other family members based on the decisions you make around your tax situation? Have the tax authorities in any jurisdiction brought suit against you for your actions? Do you lose sleep at night over decisions you have made, that are a result of “tax planning?  If you answered yes to too many of these questions, you may need some help; and not just from a team of competent tax advisors….

 Ok, not all taxes are fair, and the more you make the more it seems that you are supporting someone else. Then, if you start looking at inheritance taxes, you feel like this is the ultimate insult…You feel that you pay so much in taxes, that you may not even be willing to pay for a competent tax advisor to help “solve your problems”….well here are a few steps to start you down the path of dis-allowing the tax man to penalize you far more than any taxes levied, in the way they are allowed to play too big a role in dictating your life….

- Try to find a good financial life planner who will help extract from you and your spouse your true passions, goals and how it is that you want to be living your life…if you don’t want to hire someone, try reading the following book “Financial Planning - The Next Step: Merging your Clients Money’ with Their Lives” by Roy Diliberto….and figuring it out on your own…

- Next, odds are avoiding taxes is not your reason for being…and if it is….step 2…look for a really good psychologist…for the rest of you…the next step is to have you or your planner figure out how much you are actually paying in taxes, as a percent of your income or wealth, and then determine at what level you would be consider taxes to be “fair”….Another set of calculations or estimations.., find a reasonable estimate as to what your “time” is worth, and how much it is costing you in lost time worrying or complaining about taxes….are you not living the way you want to because of the tax man?…

- Your financial planner should be able to put you in touch with several tax advisors who can advise you on what your alternatives are when it comes to tax planning: Now, if you have been around all of the tax planners in town, and you don’t like the answers from any of them, then perhaps your expectations are unreasonable: Also, know that tax planners talk to each other too…you don’t want to be blacklisted…either by being the biggest pain in the %^&#$%! to your advisor (they did not make the tax laws) and all reputable advisors want to keep their good name, so trying to force one to help you go over the line, is not a good idea….again, this does not mean you should not challenge your advisors to help you pay as little tax as legally possible, but you want to be clear about that line…after all, for most of you, your freedom is worth a lot more than any tax bill…

-If you can get your tax advisors and your financial planner working together to come up with the best solution for you, you may be amazed at what they can come up with. There are a lot of tools out there to help make a tax efficient financial plan and the more you have, the more options are available…one of the keys is for you, and your advisors to be crystal clear about what it is that you want to accomplish…your non financial goals, and to let the financial plan work for you….not vice-versa…

 - Ok, so you have followed the above and you are still back at square one, unhappy about your tax situation, not wanting to do anything illegal, but unhappy and letting taxes take too much power in your life…now it may be time to work with a licensed therapist, one specializing in financial matters  is even better, to get you focused elsewhere…if you have and make a significant amount of money, perhaps re-directing some money, in a tax efficient way, to the charity of your choice, or better yet joining a charity or setting one up may help you to accomplish much more than you ever thought possible…while at the same time lowering your tax bill…at this point it is going to be largely about re-focusing your efforts and attention, paying zero in taxes is unlikely to happen…and if it does, you may well find something else negative to focus on…the idea is to channel all of that negative energy into something positive; if you are really brave, join your local government and try to make changes to the tax code….to make it a fair system…find out what your government really does with the money, and then make it better…

- What it really boils down to is that  if taxes are taking too much of your energy it is up to you to do something about it, and don’t be afraid to ask for help, professional help; be it tax advisors, legal advisors or a therapist…they all have their place, their value and one of the best things you can do is outsource your tax worries to someone else…don’t allow it to be your big problem….and at some level, you will have to accept that taxes, like death, are unavoidable, at least for now….

Ok

It was back in August of 2007 in a flurry of activity before summer vacation that I first put up my web site and this blog to write about financial planning….and then, as life continued to happen, I found myself in the middle of many streams that had started well before…raising a young family, Dear Emma who just turned 1 year old in December, Julian the joys of a 3 year old son are endless, Saskia my tireless and super supportive and loving wife, and my start-up business, now almost two years old….the time between August and Christmas seemed one big blur, but now, the to do list is shortening, the business has grown like I can never imagined and it is time to be really thankful and recall the reason why I started in this business and as an extension, this blog….to help people. I am now working with over 30 clients on five continents, and consider myself blessed to be in such an important position in so many people’s lives…..Thank you to everyone, family, friends, clients and associates who have helped me along the path of transition into a career that I love and working with a number of truly amazing people….and now as I am back blogging I realized that there we so many hits and comments on the site….so my apologies for being absent, I will will continue to write more again…back to the topics and wishing everyone happy holidays and healthy 2008 with good times and spent with good friends,  for that is really important….

A lot of clients ask me for tips on how to best educate their children to be financially responsible….there a lot of ways and good suggestions, not everything works for everyone but here are a few ideas for starters:

- Be a good role model, kids observe more than you think, so be financially responsible yourseves.

- Start early with an allowance, a bank account and with the principles of saving, spending, interest, investing and charity.  A separate “piggy bank” for spending, saving and charity if you are so inclined is a good starting point

- Explain how interest is paid for leaving your money in a bank (and yes, I know it is not much in Switzerland, so go and set up a custodial account in the US e.g. at a brokerage like Charles Schwab….this can be combined to include savings, checking, investing and a debit card, a credit card may be possible too if you are in the US)

- Teach the concept of saving up for something special and not always acting on impulse

- Gradually expand the allowance to include clothing, school lunches, and other disposable income….the more responsiblity you give, and enforcing of good financial management, the more confident your children will become

- Children should have a credit card when they are young and learn to understand borrowing and debt. It is extreme to imagine that someone will never have debt in their lives, so teach young and with small amounts…mind you while I never encourage credit card debt, having your child pay the minium amount once and see the other side of the interest charge once, may well be enough to cure them of ever having credit card debt…it worked for me…have not paid interest on a credit card more than once in my life….only reason I did it was a I read an article somewhere in college that is “improves” your credit rating to pay some interest….it was not worth it… 

- One great idea my dad had was for his adult children, for the first ten years of their working life, if they put $1000 into a retirement account, he would match it. This idea of incentive based savings can create good habits…

There are lots more ways to teach your kids good finanical habits, but this is good starting point….

A little bonus: Be very very very very careful when lending money to family and friends…

The same goes for doing business with family and friends and giving financial advice to them…no matter how nice and respectful everyone is in the beginning, things will change, I can guarantee that….

Ok, so you don’t want to think about dying…who does? If you have any one in your life who you care about, children, a spouse, parents, and especially if you live overseas, you want to have a will.

If you are in Switzerland, and you have a foreign passport, then it is likely that you can choose to have the estate laws of your home country or Switzeland apply (you need to get legal advice from a qualified attorney on this, and on your situation)…

For the sake of your spouse, and your children, parents and everyone else who you are close to, invest the time to get this done. It is not as expensive as you think and it may end up saving you a lot in taxes and unexpected consequences.

For example: Many people I know who have children would like their entire inheritance to go to their spouse if they are the first to die, and then after the 2nd to die, they want everything to go to the children equally, this is somewhat typical….If you were to die in Switzerland without any will or planning, then it is likely that 75% of the joint assets would go to the spouse and 25% to the children….and there are taxes involved….again you want to get qualified legal advice for your situation just to make sure that you are taken care of…

If you don’t have “millions”, you may find it difficult to get good advice and you may not think it is worth doing any estate planning. Wrong on both accounts there are people out there who can help, and it may cost less than you think. It pays to do some research first and some planning…especially if you have dependents…

If you are an American or Green Card holder living overseas, you probably realize that you, unlike expatriates from most other countries, have to file a return and pay taxes locally as well as file a return back in the USA, and also potentially pay taxes there too….

A few tips - If you are not filing your tax return in the US, you should, even if you don’t owe any taxes and even if your return is not filled out perfectly. In many many cases, the amounts that you owe, if any, will be worth paying, rather than the prospect of big fines or prison in the US, and yes the issue is that black and white. You may be able to stay on the radar forever, but there are plenty of stories of widows having to deal with the nightmares of the IRS, when their American spouse had been “delaying” dealing with the “issue” of US tax filings….

Here are some of the basics and generalizations: You should seek out qualified tax advice, but it is worth educating yourself beforehand:

- The IRS is generally helpful, call them with your questions, you can ask anonymously and they will do their best to help you (unless you create a company overseas, but we will deal with that can of worms in another post)

- If you pay a higher income tax rate in the country where you are living and working, then you are unlikely to owe any income tax in the US. If you are in Switzerland, your biggest exposure is often capital gains…

- Even if you earn under the $82000 limit for overseas files, you still need to file a tax return

- If you have not filed in while, start filing, it will catch up with you evenetually. There are also some very good tax advisors who work with overseas filers and you don’t have to pay the very high rates charged by the big 4 accounting firms…

- Use a tax advisor who works with overseas filers

- You have to report all of your foreign bank accounts and investment accounts to the Treasury Dept. each year….not to the IRS…do this too…you don’t want to know the trouble you will get into upon re-patriation if they think you are trying to hide income and money…

- Gifting….You are still subject to the same limiations as in the US, if you are a US citizen married to a non US citizen, you have a number of limitations (for both gifting and estate planning) that you should investigate…there is no unlimited annual amount of gift or inhertiance from the US spouse to the non US spouse…

- The above is the tip of the iceberg and things do change every year….if you don’t want to keep up with all of the changes, pay an accountant who you trust to do your return…it is likely that this will cost you less in the long run….

Are you a US citizen living overseas or about to go overseas? This adds another whole dimension to your personal financial planning that did not exist before:

- Taxes, what new forms need to be filed, will I be taxed more or less when I am overseas, what employer benefits (eg schooling for the kids, trips home) will be considered taxable income?

- Insurance - What will happen to my policies at home and the new ones abroad

-Banking - Why don’ t they have checking accounts here? why do they charge so much for basic services, it is so expensive to change money and send money home…what are the alternatives?

- Investing - Should I invest locally, what are the different products, why do a lot of overseas banks have “special” restrictions for Americans? ….

- Estate Planning - Will my will be valid overseas, will I be subject to the laws of another country, is this in best interst of my kids, what I can I do?

- Pension(s) - Government and Company pensions, will I still be eligible for Social Security, Medicare etc.

- Credit Rating - What will happen to my US credit rating when I live overseas, can I keep my US credit card(s)

- Education - Where to send the kids to school, how much will it cost, will it affect their chances of getting into a US college of their choice…

- Misc. - Should I keep my drivers license, how can I get my favorite products, what’s the cheapest way to call home (skype), travel home.. 

 If you have questions on any of these topics or more, and there are plenty more….this is a forum from which I hope to share information and provide some of the answers….

This is another big questions everyone sees in the press these days…how to retire rich, how to become a millionaire….blah blah blah… A recent article on msnbc said that the wealthiest people in the world, those with over $1 million in investable assets (not including their primary home) was about 9.5 million people with the median net worth around $3.8 million…..

When I ask the participants in some of the classes (mostly middle to upper middle class managers / directors etc.) I teach, how much they need to retire and never work again, the answers range from $3 million to $10 million….

Well, this is not a news flash, that people are not saving anywhere near enough if they want to spend 30+ years not working in “retirment”… Even half of the “wealthiest” people in the world do not have “enough” to stop working….

Perhaps we need a new paradigm of “financial independence” I believe it should be a combination of income and spending savings….not just living off of your fortune….it is also about setting expectations…the whole notion of a mandatory retirement age or expected retirement age is a bit silly….it takes the attitude that people are somehow used up at a certain age or they have finished their prison sentence….

If you want to know how much you need to retire, and are ready to face the big number, then you only need a few variables to get you in the ballpark: A) How much would you like in after tax income b) current retirement savings, c)expected rate of return, d) expected inflation rate e) years until retirement and expected life span f)average tax rate on income and g) % of (A) that will be covered by company and government pension….see the free calculator on the site and run multiple scenarios to give yourself an idea….

The key for most people will be getting to a number that they should save every month, and for many people a realization that their is a gap between reality and their dreams….

I’m working on an article with a similar title and thinking that for all you who are south of 50, in the year 2050, things may have changed a lot….what if the medical community has found not only cures for many of today’s biggest diseases, but also managed to “cure” much of the damage that aging does to our body…..well that poses a few challanges that most of us are not thinking about today….

What if life expectancy takes a big jump, to say, 100 or 120…..if you extrapolate the life expectancy statistics of the 20th century, which saw about a 4% increase per decade, then by 2050, life expectancy could jump to 102…..now this is dependent on a fair amount of medical advancement, but 40+ years is a fair amount of time considering the hundreds of thousands of researchers on the planet today….

That “retirement” next egg you have saved up may have to sliced up as you weigh how to spend your money, on treatments that help to increase the quality and length of your life, or everything else….you may well need more than you are thinking of now…

how about your career…if life expectency jumps to over 100, do you still think retirement at 65 or 66 will be possible? Are you planning to have not only multiple jobs but multiple careers. Possibly getting another degree at 60 or 70 years old…..make sure you are comfortable with your own change management and try to work at something you love….otherwise your career may seem much longer than you expected…

There are a lot of other implications of increased life expectancy….stay tuned….

A lot of people ask me where and when they should get started for “retirement planning”. A traditional answer would start by focusing on the money.  

While the finanical aspects are important, and three of the keys are: a) start as early as you can b) save every month, pay the you of the future like it is a monthly bill and c) invest wisely in a well diversified portfolio with a large percentage of equities (stocks or stock mutual funds), there are other considerations that are equally important the closer you get to retirement.

Location: One of the biggest shocks many people have in leaving the workforce is the big gaping hole in their social lives….if they leave work and the place they are living within a short period of time, there is a lot of adjustment to do. Choosing a location is  a strategic decision…If you have young grandchildren, you may want to try to live close by or choose a home in an area where your kids would like to vacation even if you were not there…my parents figured out this one early and sure enough, they get plenty of visits from their three kids and 6 grandchildren in Puerto Rico in the winter and Martha’s Vineyard the rest of the year…

What: What are you going to do with all of that time you would otherwise have spent working….personally I think most people should have answered this question many times in their lives and much before retirement….much of the retirement planning press today has the attitude work = bad and not working = good….if you feel that way, then why are you still doing the job you do? there are so many choices that enable you to earn a decent salary while also pursuing your passion….a great place to start is a book by Po Bronson called “What Should I do with my Life?”

Health Care: If you are in good health, at any point in your life, consider yourself lucky, it is one of the best and most taken for granted feelings. Planning where to live in retirement, you may want to consider the cost of health care, the proximity to excellent services, the costs and, are you living in a country where you can make yourself understood to the hospital staff if needed?

Lesiure & Entertainment: How do you like to spend your time and what is there to do within reasonable proximity to where you are living…any of you who think you will play golf 7 days week, let me tell you tiger, it gets pretty old pretty fast for 99% of retiree golfers, make sure you have some alternate activities too..