Sorting out Maximization versus Optimization

Financial Planning is often thought of as a quantitative field. Planning is done to answer questions such as how much should I be saving, how should I invest or how can I reduce my tax liability. Numbers are collected, plugged into a formula and out comes a result. When questions are answered individually, solutions can be maximized to seek the best result. For example, maximizing portfolio returns might be done by gathering facts about time horizon (period of time funds will be invested), risk tolerance (how much risk you are willing to take), and investment choices (what choices are available in your investment plan). The problem with maximizing is you are often constrained to looking at a single piece of a larger financial picture. Are your choices about investing impacting your tax situation? Are immediate financial goals competing with longer term goals? Taking a comprehensive approach to planning can help here by taking time to understand the bigger financial picture. Where are the trade offs between decisions? How will one decision affect another? How do you balance a series of choices that all impact each other?

This is how I would define Comprehensive Financial Planning. Working with an advisor knowledgeable in multiple areas of finances; taxes, insurance, investing, retirement, and so on. The advisor working with you to create a plan considering how each area will impact the other. Comprehensive Planning can achieve good results, but can it achieve the Optimal Results?

Sometimes planning hits a wall where the best recommendation conflicts with what you are willing to change. The best answer is not always the most acceptable answer. To reach a goal under current circumstances, perhaps the best answer is to work longer, work more, spend less, delay satisfaction and save more. In reality, finances are really just a tool used to achieve life goals. Sometimes, it is better to adjust the goal than to adjust the financial situation.

The following is an illustration we often use with clients. It shows many values one might hold in their life. In each area, we ask them to rank how satisfied they are, by placing a dot to represent the level. The innermost circle represents low satisfaction and the outermost represents complete satisfaction. The ultimate goal is to balance each area out so that when you connect the dots, they form a truer circle.

In Example 1, the person is very out of balance. A lot of time and energy might be focused on career, giving a lot of satisfaction in that area plus leading to financial security, but leaving insufficient time for family and social activities. In the planning realm, decisions might need to be made to correct this imbalance. With this illustration, it might become clear that some financial goals can be sacrificed in exchange for other life goals.  To reach Example 2, it would be more acceptable to cut work hours, save less, but have more time to devote in the areas of social and family activities. 

It is not uncommon for our clients to begin to see these trade offs. When you reach financial independence, choices becomes less about accumulating more. Instead, focus shifts to using money to do things like buy time (outsourcing housekeeping or yard work to free up time to be spent with family). Or, maybe the career becomes less important as salary or advancement opportunities are forgone in exchange for time to focus on social endeavors.

To me, this is the process of Optimizing a financial plan. Taking the time to step back and see the big life picture. Not only making the right financial choice, but making the best use of financial resources to achieve all of life’s goals. If you are ready to optimize your life, contact us today.

Supreme Court Rules Illinois Pension Reforms Unconstitutional

The Illinois Supreme Court ruled today that Illinois State Pension Reform signed into law in 2013 is unconstitutional.  This ruling does not come as a surprise.  Previous rulings on healthcare indicated the court would interpret constitutional protection in favor of participants and strike the reform down. What does this mean to me?

Immediately, participants will not notice any major changes.  With court challenges to the original reforms, implementation of reforms had already halted in 2014.  This means none of the changes designed to reduce benefits or change contributions had been implemented.  This applies to both those who are active participants and retirees.

Longer term, it is still unclear what will happen.  Reforms were enacted to plug massive state budget deficits.  The fiscal situation of the state is still dire.  Current Governor, Bruce Rauner, has stated he intends to move forward with new reforms.  It is unclear exactly what these changes look like, but proposals have included:

• Shifting future pension costs to local governments and universities
• Changing the way in which future pension benefits accrue
• Moving from defined benefit type (pension) plans to defined contribution (401k style) plans

Since a majority of Bluestem's clients are current participants or retirees of the State University Retirement System (SURS) or other Illinois Pension Systems, we will continue to monitor this situation.  Planning during this time will continue to be a challenge as proposals will be a moving target until passed into law.  As always, contact us if you would like an individual review of your retirement plan.

Identity Theft Actions

In a previous Blog post, Protecting Your Financial Life in the Digital Age, we discussed ways to protect yourself against identity theft. While it is important to take all the precautions you can to protect yourself it is also important to know what to do if you should fall victim to identity theft. Below are several actions to take if you find your identity has been compromised. Action 1: At a minimum, you should place a fraud alert with the three Credit Reporting Agencies.  This should limit a potential thief’s ability to establish new credit in your name.  Complete instructions can be found with this link.

For added protection, consider freezing your credit. This will limit any new credit from being established under your name while the freeze is in effect.

To freeze your credit, contact each of the nationwide credit reporting agencies:

• Equifax — 1‑800‑525‑6285
• Experian —1‑888‑397‑3742
• TransUnion — 1‑800‑680‑7289

You'll need to supply your name, address, date of birth, Social Security number and other personal information. Fees vary based on where you live, but commonly range from $5 to $10. This fee may be waived with a verification that you are a victim of identity theft.

After receiving your freeze request, each credit reporting agency will send you a confirmation letter containing a unique PIN (personal identification number) or password. Keep the PIN or password in a safe place. You will need it if you choose to lift the freeze.

Action 2: Request credit reports from at least one of the three Credit Reporting Agencies.  Review your report for any lines of credit that you don’t recognize.  The report will have instructions on disputing your account if needed.  Reports may be accessed for free at www.AnnualCreditReport.com.

Action 3: Contact custodians of your bank and investment accounts to inform them of your identity theft.  Banks may assign new account or credit card numbers.  Investment custodians may flag your account to avoid distributions of funds without additional steps to authenticate requests.

Action 4: Consider filing a Police Report and an Identity Theft Complaint with the Federal Trade Commission (link here).  Document all communication with banks and financial institutions.  Keep dated notes of phone calls and copies of all correspondence.  Official disputes should be in writing and sent with tracking (such as certified mail with a return receipt).

Action 5: If you are victim of Tax related fraud, also consider these steps.

Generally you will need to file a paper tax return.  Along with the return, Form 14039 – Identity Theft Affidavit will need to be attached to alert the IRS of the fraudulent activity.  For subsequent years once your identity has been authenticated, the IRS will provide you a PIN Number to file future returns electronically.

Consider requesting a tax transcript to see what return was filed under your social security number.  This can be done at http://www.irs.gov/Individuals/Get-Transcript.

Consider reviewing your Social Security statement to ensure that your earnings history is reported correctly.  This can be done at http://www.ssa.gov/.

Update on State Employee Retiree Health Insurance Premiums

The following is an update to previous postings regarding State of Illinois Pension Reform and Insurance for retirees. You can read those prior posts here. Following a court ruling that the State of Illinois wrongly withheld premiums for health insurance from retiree pension payments, members of the State’s five pension systems, including the State University Retirement System (SURS), are set to receive a refund. Refunds will be based on health insurance premiums paid from members’ pensions from July 1, 2013 through September 1, 2014. The premium refunds must be sent to members by June 14, 2015.

If you are affected, you should have received this State issued written notice informing you of options regarding the premium refund. The following is a summary of those options:

1. Do Nothing Members who do nothing will receive their full premium refund (and possibly interest) less their proportionate share of legal fees for the class action lawsuit, Kanerva v. Weems, whose settlement resulted in the premium refund.
2. Request to Opt-Out Members may notarize and submit an Opt-Out Notice. Members who opt-out would NOT be eligible to receive a refund of premiums as part of the class action settlement, their premium payments would be placed back in the Health Insurance Revolving Fund, and the member would be responsible for the legal expenses of any separate legal action. The Opt-Out Notice must be submitted by March 11, 2015.
3. Members who do NOT opt-out, may object to the Legal Fees Members may send a written objection to the legal fees that are deducted from their pension refund. Members who object to the legal fees can be heard by the Sangamon County Court on April 1, 2015. Any objection must be submitted by March 11, 2015.

The amount of legal fees to be subtracted from members’ refunds remains undetermined. The State Universities Annuitants’ Association’s (SUAA) attorneys and others are pushing to base the legal fees on the number of attorney hours worked and a reasonable hourly rate, rather than on a flat percentage of the total settlement.

The Sangamon County Court ordered that the SUAA establish a website to provide information about the health insurance premium refund. The website contains a number of court orders and documents related to Kanerva v. Weems. You can access this website here.

Other Pension Updates At this time, implementation of the pension reform bill passed in 2013 is still pending the outcome of legal challenges to its constitutionality. Oral arguments are expected to begin in March 2015. In his recent budget address, Governor Bruce Rauner proposed new reforms as part of his effort to close the State’s budget gap. At this point, proposals are very preliminary. We believe any legislative action on such proposals is unlikely until a ruling by the Illinois’ Supreme Court on the legislation passed in 2013.

Why You Will Never See a Stock Market Ticker on Our Website

My home to office commute averages around 12 minutes, during which I enjoy listening to the news to catch up on current events.  During my commute the day’s stock market figures are also announced.  As a Financial Planner this information may seem useful, but it is not.  Below are some of the reasons why I believe this information can be counterproductive.

Stock Tickers are Confusing

It is no accident that Las Vegas casinos use chips and tokens instead of actual money when playing their games.  It tricks our brains into separating the value of the chips from the cash value the chip represents.  Stock indices and the underlying stock prices have somewhat of the same effect.  Individuals cannot easily mentally calculate a stock market point change into a tangible effect on their wealth.  To do so, they would need to:

1. Convert point change to percentage change
2. Calculate amount of net worth invested in that index, adjust by percentage change
3. Calculate overall net worth change based on proportional amount of wealth

All of this work only to realize these index quotes relate only to a single day.

Stock Tickers are Framed Too Narrowly

Stock tickers only tell you the change in one particular market segment for a particular segment of time, usually that day.  For most people, that information has little relation to daily life.  Even Charles Dow, founder of the Dow Index, did not watch his own index on a daily basis.

When investing in the stock market, you must take an ownership mentality.  A stock is a partial ownership in a company, entitling you to a share of future income.  Any business owner may benchmark her business’ performance on a regular basis.  That process is helpful to evaluate areas of success, weakness and future opportunities.  However, this process would not be repeated daily, weekly or likely even monthly.  It would be too time consuming, confusing and not likely to produce useful information.

Too much time spent on daily monitoring of the stock market takes time away from activities that could be more productive.

Stock Tickers Distract Us from the Real Opportunities

Far too much attention gets placed on the investment component of individual’s personal financial situations.  It is an important component, to be sure.  There are plenty of examples of individuals who struck it rich from the one right pick.  For every case of one lucky decision, there are many more stock picks that only produced average or even below average performance that we don’t hear about.  For most people, long term wealth is built through a series of small decisions.  Spending too much time focusing on investments takes time away from making those good decisions.

Time spent on investing should be focused on selecting an appropriate level of risk for your goals and situation, building a diversified portfolio of low-cost funds, sticking to an investment philosophy and regular review and rebalancing.  Once this foundation is established, annual or biannual investment reviews leave time to focus on other value-added activities such as proactive tax planning, setting and updating goals, and managing behaviors to meet those goals.

For these reasons, you will never see a stock market ticker quote on our website.  I do not look at these figures on a daily basis and for your financial health, I suggest you refrain from checking them daily as well.

#GivingTuesday

There is no doubt that the holiday season is officially upon us. It is difficult to go out and about and not be inundated with signs for holiday shopping deals. Around every corner is another flashy ad encouraging you to be a good consumer and spend spend spend. That said, there is nothing wrong with holiday shopping and gift giving, but what about giving back in a different way? We have all heard about Black Friday, Small Business Saturday and Cyber Monday, but how many of us are familiar with Giving Tuesday? Giving Tuesday is a nationwide initiative that encourages individuals and organizations to spend the Tuesday after Thanksgiving practicing generosity. So, after you have filled up with food on Thanksgiving, loaded your shopping cart on Black Friday and clicked your way to consumer bliss on Cyber Monday, why not spend Tuesday, December 2nd celebrating generosity by donating to your favorite charities? There are many reasons why people give: altruism, gratitude, recognition, compassion, generosity, the list goes on and so do the benefits. However, one benefit we can all appreciate is the ever famous tax deduction. Recently, Jake Kuebler appeared on WCIA’s Current to discuss charitable deductions and budgeting for charitable giving. For some of Jake’s tips on giving be sure to check out the full segment below.

Bluestem would like to wish you all a very Happy Holiday season!

Kuebler shares insights with Investor's Business Daily

Recently, our own Jake Kuebler spoke with Investor's Business Daily's (IBD) Aparna Narayanan about ways young Advisors are adapting traditional business models by using new technology and social media. Jake’s experience as a young business owner, as well as his leadership on NAPFA Genesis, has given him ample insights into the changing landscape of financial planning. The article hits on several of these new ideas, which you can click here to read.

Kuebler Appears on WCIA's Current to Discuss Couples and Finances

This week, Bluestem’s own Jake Kuebler appeared on the WCIA 3 News program Current, where he sat down with Cynthia Bruno to discuss ways couples can successfully manage their finances. Jake provided tips to help couples be more transparent when it comes to money and their long term financial goals. Jake shared advice on several financial issues including: buying a first home, preparing for children, saving for college and cohabitating vs. marriage. Jake’s biggest advice for couples is to be intentional with their finances. He suggests that planning ahead and making solid decisions early on reduces the need for rushed decisions or limited opportunities in the future. Jake also shared his thoughts on savings, saying that couples should automatically save first and use what is left over for “fun money”. This approach helps couples achieve their goals and worry less about budgeting. We all know that financial issues can be a source of stress for couples, hopefully Jake’s optimism and helpful tips can be a positive influence on your own relationship.

You can watch the full segment below or visit the Current webpage at illinoishomepage.net.

Protecting your Financial Life in the Digital Age

The news of cyber vulnerabilities and retailer hacks seems never ending. This  past week, another major fast food chain, Jimmy Johns, announced a data  breach and possible loss of consumer payment information. Other recent big  breaches include Target and Home Depot. Then came news of another security  bug, “Bash” aka “Shellshock”, endangering the security of many websites. To  help you protect your financial information in the digital age, I compiled a list of  financial best practices and some recommendations for keeping yourself safe:

Credit versus Debit:

To protect yourself from fraud, ditch your debit card and stick with credit. Debit cards do not come with the same consumer protections as credit, even if the debit card carries a Visa or MasterCard logo. If your bank issues a debit card for ATM access, request an ATM only card that cannot be used in stores or do not carry the card unless you plan to make a cash withdrawal from an ATM.

Credit Monitoring and ID Theft Insurance? Generally I do not recommend these products. Credit monitoring only alerts you of suspicious activity. You can do this yourself by checking your credit regularly (a service we provide for our clients). As for insurance, you are not generally liable for fraudulent activity. Therefore, ID theft insurance is covering only out-of-pocket costs for fighting fraud. Insurance does not compensate for the aggravation and your time, only actual costs such as postage.

A more effective way to prevent fraudulent accounts from being established in your name is to freeze your credit with each of the three credit reporting agencies. Here is a guide offered by Financial Radio Personality, Clark Howard: Clark Howard Credit Freeze and Thaw Guide

Keep in mind that freezing your credit has its own downsides. Applying for or opening new credit will require work on your part to “thaw” your file. Also, some identify verification services rely on your credit file. Without access, you may not be able to validate yourself online.

Paper versus Electronic account statements:

Let’s face it, paper statements are just as vulnerable as electronic. Use whichever format you prefer and the one that you will be more likely to review promptly. Reviewing statements is your best defense against unauthorized activity.

Paper Statements can get lost in the mail and potential thieves can steal from your mailbox. Best practice would be to have a locked Post Office box to receive financial mail and never mail anything sensitive except through a locked mail collection box (Blue USPS Mailbox).

For electronic statements, do not count on your financial institution to retain digital records forever. Download them to a local (secure) computer and back them up regularly. Consider automating your computer backups with a system such as Mozy, Carbonite, or Box.com.

Passwords:

Use a secure, unique password for each financial website. Make your password long (12 or more characters) with combinations of upper and lowercase, numbers and symbols. When possible, enable two-step verification. This will require a separate authentication when a website is accessed from an unrecognized or new device. The two-step verification works because an access code is sent in a text message to your phone or in an email. The code is required to access your account in addition to the usual password, and thieves don’t have access to your phone or email from their device.

Consider a password manager system to generate and store your passwords. I use a system called LastPass. I only need to memorize one password, and LastPass can store all the rest. However, make sure your master password is very secure and change it often.

Shopping and Banking Online:

Only access financial information from your own devices and only if you have up-to-date security software with real time protection. Public computers or those used by others (e.g. in hotels or internet cafes) may have spyware or key loggers trying to capture passwords and other secure data.

Avoiding Scams:

Reputable institutions will not call you to request verification of non-public information (Social Security Numbers, Account Numbers, etc). Calls such as these are most likely scams. If you get a call requesting this type of information, hang up and call back the institution with a number you know to be real such as the phone number on the back of a credit card or website. In addition, the IRS almost never calls taxpayers, especially as first contact. Any notices regarding your returns will be by a letter sent through the US Postal Service.

Have any more tips? Leave a comment with your thoughts or suggestions.

Update on Illinois Pension Reform

For updated information on this subject please read our latest blog post. This year has seen a flurry of lawsuits related to Illinois Pension Reform, including previous changes made to the State Retiree Health Insurance.  Many of the cases are still in process, but here is an update on what we know:

Pension Reform

In late 2013, Illinois General Assembly passed a bill aimed at reforming the pension systems for most Illinois public employees and Governor Pat Quinn signed the bill into law.  This bill reduced future benefit increases for current retirees and decreased expected benefits for those not yet retired.  Lawsuits quickly followed questioning the constitutionality of this law.  The law was slated to go into effect as of June 1, 2014, but was suspended pending resolution of these lawsuits.  This means that SURS and other State Retirement Systems are operating under the rules as they existed before pension reform was passed.

You can see my summary of the pension reform in two prior blog posts from December 6th and December 23rd.  You can also view a SURS press release regarding the halting of pension reform here.

Health Insurance

Before the pension reform discussed above, changes were made in 2012 requiring State Retirees to contribute towards the cost of their health insurance by a  2% deduction from their pension (1% for retirees enrolled in Medicare).  Like pension reform, lawsuits were filed challenging this law.  The opinion of many experts at the time of passage was that Retiree Health insurance was a separate benefit from pension benefits and therefore not constitutionally guaranteed.  This was further backed by an initial court ruling.  Since that time, there has been more action by the courts.

First, the Illinois Supreme Court overturned the lower court's decision by ruling that Retiree Health insurance is in fact protected by the same constitutional provisions that protect pensions.  Then, shortly after, another ruling halted the July 2014 planned increase in premium contributions to be made by pensioners.  Finally, a ruling this week determined that the state may no longer deduct health insurance premiums from retirees' pensions.

You can read more about this change here.

Implications

It is still too early to make substantial planning decisions.  Immediately, retirees can expect their pension benefit to increase in the next month or two as health care deductions are halted.  It is also possible that previously deducted premiums will be refunded.  For retirees who previously deducted premiums paid as an Medical Expenses under their Itemized Deductions on their tax returns, they may have to claim refunds as income.

Additionally, some retirees opted out of state insurance in favor of alternative Medicare Supplemental, Medicare Advantage or other policies.  This might sway those retirees to return to the state plan during open enrollment for 2015.

Longer term the State's position on pension reform looks more weak, but this is a complex legal matter.  I expect we are a long way from any final resolution.

Real Change Happens at the Margin

I recently finished my second half marathon, finishing the race just under my target time of two hours. While pleased with reaching a personal goal, there is nothing really compelling about my story. No overnight success, no major rise to overcome great obstacles. There was a time when running for fun would sound crazy, let alone running for hours on end. I started running 14 years ago to get into shape. I cannot say I really even enjoyed it at the beginning. My first runs were on a basement treadmill, 1 mile at a time. Soon a single mile was easy, so I pushed it to two and then three. For a challenge I decided to run a 5k, which lead to another and then another. Each time I aimed to cut my time by pushing my regular runs just a little faster and a little further. Each time I hit a goal, I moved the target just a little bit further. A little longer distance, a little shorter time.

My evolution has been slow and incremental. My progress from year to year is minimal, barely even noticeable. Review these changes over years, and the results are slightly more impressive. Change happened from minor adjustments made over time and the result of those adjustments compounded over time.

In a post appearing on The Daily Good, author James Clear outlines this same strategy. He describes how marginal changes led Great Britain’s cycling team to win the Tour de France in 2012 and 2013. Then, he shows the following illustration of how small changes, stacked onto one another lead to substantial changes over time.

This is a principle that we use daily with our Financial Planning clients. Big changes may happen at the beginning of our relationship, but planning is a long term process. An incremental series of good decisions and judgment based on an end goal will lead to long term success. As we work together year after year, we provide the long term perspective that keeps decision making on track and also reduces errors in behavior.

How can you apply this to your own financial life? Comment below if you want to share your own story.

Millennials' Guide to Getting Rich

If you read the rest of this post, you will find my title to be a bit flippant.  Had I added the work "Quickly" to the end, it would be downright misleading.  Except for the rare instance where someone inherits a fortune, wins the lottery or marries a multi-millionaire, getting rich is a slow and boring process.  This fact is mostly overlooked by the media.  Boring does not sell newspapers or generate web hits and therefore good financial advice is rarely a media event. That is why I was excited to see some press on a newly released e-Book written by Financial Advisor and author William Bernstein for Millennials (aka Gen Y, born 1980's through early 2000's).  Concisely written, the book summarizes how to actually build financial freedom, aka wealth.  Spoiler alert, the method is simple but the application will take effort on your part.

The book is so short, it is hardly worth summarizing on this post.  You should seriously consider taking 30 minutes to read the ~14 page guide yourself.  Purchase the e-Book for $0.99 on Amazon's Kindle Library or download free in PDF format.

What really resonates about this book is the simplistic method he advocates; live below your means (save 15%), educate yourself on the basics, keep the portfolio simple because you will not beat the market.  These are all key parts of our approach to financial planning.  Success comes not from taking big risks or complex strategies, but by being diligent and making good decisions.

I will not underplay the "making good decisions" factor.  We are all human and we all make errors in judgment.  Some errors are unavoidable, but others come from fear, greed or other emotional roadblocks.  Decisions need to be made objectively in context of your current situation and future goals.  Doing this on your own is incredibly difficult.  Even the most savvy among us regularly make less than objective decisions.  For many, this is the value of having a Financial Planner.  To act as the objective, informed third party and provide a fresh perspective.

Be sure to check out some of the press on this book, including an interview on NPR's Here and Now and a summary by columnist Scott Burns.

Bluestem Featured in Wall Street Journal

Bluestem was recently featured in the Wall Street Journal.  The article focuses on on the challenges of  passing ownership to the next generation in succession planning.  Specifically, it tells the story of the founding of Bluestem and the partnership between our Advisors, Karen Folk and Jake Kuebler. You can learn more about Bluestem's history on our website on the Our Team Page.

You can read the full article on the Wall Street Journal's Website through this link.  Alternatively, you can follow this link for a PDF Copy: WSJ Article; Young Practice Owners Earn Trust Over Time

Kuebler Appears on NewsChannel 15

This past week, NPR's Planet Money released an online tool comparing median income of various cities in relation to how far that income would go.  Based on surveys by the Bureau of Economic Analysis, this tool draws on Regional Price Parity; measuring the variation in cost a basket of consumer goods would have in different locations. Especially of interest, the tool indicated residents of nearby Danville, IL see the biggest jump in "perceived" income due to the low cost of living in that area.  ABC NewsChannel 15's Kim Shine sat down with our own Jacob Kuebler to discuss.  You can see the full news story below.

You may also wish to see the full NPR story by following this link or the original NewsChannel 15 Story by following this link.

Behave your way to Success

This past week I had the opportunity to visit Salt Lake City for the Spring Conference of the National Association of Personal Financial Advisors (NAPFA). The theme of this year’s conference was Behavioral Finance. A hybrid of psychology and economics, this exciting field aims to explain our behavior and decision making in our personal finances. Some examples of application to our behaviors around money include:

• Tendency of individuals to overestimate their own abilities and believe they are above average. This explains why so many fall for the fallacy of active investment management. They try to beat the market by selecting investment securities based on prior performance or time their purchase of securities to beat the market.
• Focusing too narrowly on frames of references or over-weighting recent events. For instance, a short term fluctuation in the market might cause an individual to perceive higher risk than actual longer-term risk and sell stocks at exactly the wrong time.
• The power of momentum, when we fail to take action that is in our best interest. In other words, procrastinating on actions we know we need to make but simply put off. This may affect getting that life insurance policy, signing our estate documents or rebalancing our portfolio.

The point of Behavioral Finance research is to explain how our past experience and mental processes can get in the way of day to day decisions. Even more importantly, it seeks to understand how to overcome these mental biases. Dr. Meir Statman, Professor and Author of What Investors Really Want, describes these biases as similar to having less than perfect vision. By understanding where our behavior and economics intersect, we can correct that vision and make better decisions.

Understanding behavior and how it can affect reaching financial goals is a top value of hiring a Financial Planner. Value does not come from number crunching, projections, or investment management alone. Value received is your advisor seeing the whole picture of your life, and tempering emotions with appropriate decision making. A trusted advisor encourages you to reach your goals by keeping you accountable and on track through a series of small, incremental decisions.

Jake Guest Stars on National Radio Show

This past week, Bluestem's own Jacob Kuebler guest starred on Your Money.  Nationally broadcast on SiriusXM's Business Radio Channel, this weekly show discusses topics of interest and answers caller's questions regarding their personal finances.  The show is hosted by Professor Kent Smetters of the Wharton Business School at the University of Pennsylvania.   On the show, Jake got the opportunity to introduce Bluestem to the listening audience and assist callers in answering their questions related to an underwater rental property, prioritizing debt payoff versus savings, and more.

You can listen to the show On Demand by following this link.  Show date 5/6/2014.  You must either subscribe to SiriusXM or sign up for a trial.  Program will be available online until June 9th, 2014.

The Hidden Danger of Large Tax Refunds

It is no secret that many taxpayers use payroll tax withholding as a method of forced savings.  Each spring they receive a large refund on their tax return, using the proceeds to fund a vacation, a car down payment, or other large purchase or savings goals.  In doing so, they put themselves at more risk than they realize. You have heard the usual arguments against overpaying on your tax return to receive a large refund.  There is the opportunity cost, which is the forgone interest you could have earned by saving or investing those funds during the year.  Given near zero interest rates on traditional banking products, this loss is small.  Most who rely on the large refund technique would argue that the inaccessibility of these funds promotes savings when self-control is not enough.

If there were a substantial risk your refund could be delayed by months or even years, would you change your mind about this strategy?  The IRS reports that tax fraud related to stolen identities is on the rise.  In one common scam, a thief will file a false return under your social security number and claim a large refund.  Once you attempt to file your actual return, the IRS system rejects your claim.

In most tax fraud cases, it takes time to work through the layers of IRS taxpayer bureaucracy and advocacy to substantiate your claim.  This process is slow and it can take up to 18 months or more to get your refund.  It is not hard to imagine a scenario where a taxpayer who relies on this large annual tax refund is left in a pinch when her refund is delayed.  You may be the one stuck with penalties or interest when your delayed refund results in missed payment deadlines for your real estate taxes, credit card bill or other bill you planned to pay with the refund.

This year I encourage you to avoid over-withholding to gain a large refund.  Instead, adjust your withholding to a lower level sufficient to pay your expected tax bill.  Then, with your larger net paycheck, focus on ways to save out of sight, out of mind.  In today’s digital banking era, direct deposits and automatic transfers from each paycheck can easily be setup to force savings.

Jake featured in Alumni Magazine

Advisor Jacob Kuebler was recently featured in the 2014 Winter ACES Alumni Newsletter. The article, A career in finances about more than just money, highlights Jake's passion for fee-only financial planning and the benefits that come along with it.  See the full article below or click the image to see the full magazine.

Planning for Rising University Tuition

This past week, the University of Illinois Trustees approved a tuition increase.  News outlets immediately began reporting that the 4 year expected cost of attending the university now tops $100,000.  How can parents plan for this? I was recently interviewed by Adam Rife of WICD News Channel 15 regarding how parents can plan for these changes.  I offer a few points to keep in mind regarding this change.  This recent announcement of $100,000 expected cost is as much a psychological barrier as an actual one.  Similar to your car rolling from 99,999 miles to 100,000, the perception changes much more than the actual mechanics.  However, rising costs are a troubling trend for parents planning for college education.  For many years, college costs have been rising at about double the rate of increases in the cost of living.

In order to plan for the rising cost of higher education, my best advice as I told Adam is:

I think the key is always starting early, and unfortunately, starting early for most parents means you have a young child and there are a lot of other expenses coming up.

There are two important factors in saving for the future: Time and Dollars Saved.  The more you have of one factor, the less you need of the other. Start early and you can save less and end up with more.

You should also keep in mind that the "Sticker Price" of college may not actually reflect the actual cost of attending college.  Matching your student's skills and interests with a university or college can help them qualify for higher amounts of financial aid, scholarships and grants.  In some cases, a smaller college with higher tuition may offer a more generous aid package to a desirable student than a larger public institution.  We have found that College Navigator is one excellent resource for researching schools.

You can check out the full story here:

WICD NewsChannel 15 :: News - Top Stories - 4 Years Of UI Tuition To Top $100,000 For 1st Time.

Getting Organized for Taxes

It is that time of the year when ads for tax software and national tax firms are beginning to appear, reminding us that tax filing season is quickly approaching.  Before you get too anxious, remember half the battle is getting organized.  To help those whose records are a little scattered, we have compiled some helpful hints in getting organized:

Record Keeping

• Have trouble hanging on to receipts?  Opt to pay by check or credit card for easy record keeping.  Better yet, if you have lots of deductible expenses, opt for a separate account for deductible versus personal expenses.
• Wonder how long to keep those tax records?  Generally the IRS has three years from the due date of your return to audit and ask for more documentation.  Be safe and keep everything for 5 years.  After that, feel free to toss (or shred) supporting documentation.  Keep the return itself forever as you never know when it might come in handy.

Charitable Donations

• Paid Cash & No Receipt?  Not deductible.  Period.
• Donation of more than $250?  Be sure the organization acknowledges the gift in writing AND states that no goods or services were provided in exchange for the gift.
• Do not undervalue your non-cash gifts (Goodwill, Salvation Army, Etc).  Use an aid such as Deduct It, Deduct It! to properly value your donated items.   

Medical Expenses

• Ask your medical facility and pharmacy for a summary of all expenses incurred during the year.  This is a great way to save time adding up receipts.
• Transportation costs to and from medical care are deductible.  Keep a log of medical miles with the date, # of miles, and facility visited.   

Real Estate

• If you refinanced your home, do not forget mortgage interest for the old loan and the new loan.  Even if they are from the same bank, you may get separate reports on interest paid.
• Many counties provide records of Real Estate Tax paid.  Champaign County has records available here.
• If you bought or sold your home, closing documents may be needed to determine who (buyer/seller) paid how much in taxes.

Reviewing your prior year return might help remind you of items you may need for this year.  If your tax situation is more complicated, such as those with rental properties or consulting income, consider tracking your expenses with programs such as Quicken™ or Mint.com.