Now’s the Time to Trim Your Account and Reduce Your Taxes

With Thanksgiving out of the way and Christmas not far away, many are thinking of buying and trimming a tree for the holidays.  New Year’s is just around the corner, however, and once the new year starts, your income will be largely set for the year.  Now is the time to make some last-minute adjustments and do some trimming of your portfolio to save some money on your taxes.  Here’s how:

1) Sell some of your losers.  If you’ve taken some gains for the year, you’ll need to pay taxes on those gains unless you offset the gains with some losses before the end of the year.  If you have a stock or two that has done poorly, now is the time to accept the loss, sell the shares, and use the loss to offset your gains.  You can deduct your losses 1-for-1 against capital gains (depending on the time frame – check with an accountant for details).  You can also deduct $3000 against regular income.

Note that you need to be careful here.  It is usually best to sell positions that you know aren’t going to work out and use the money elsewhere.  If you have stocks that you still have faith in, meaning the company is still doing well and the stock has sold off for technical reasons, it is usually best to just hold onto the shares.  If you try to do something cute, like sell the shares and then buy them back immediately, or buy some additional shares and then sell the ones you held for the loss, you may end up doing a “wash sale.”  This happens when you buy additional shares within 30 days of taking a loss (either before or after you sell the shares), establishing essentially the same position.  If this happens, you will not be able to deduct the loss.

2) Contribute to your Kids Educational IRA Accounts.  You’ll need to make contributions to your kid’s college accounts before the end of the year.  Hopefully for each child you have an educational IRA and are contributing the max $2000 each year, because college costs are coming when they turn 18 whether you have the money or not.  You should also be saving outside of the educational IRA because costs will likely exceed what you build up in the educational IRA.

3.  Make your IRA contributions.  OK, technically you have until April 15th to make contributions to your IRA, but why not go ahead and make the contribution now while you are thinking about it.  Ideally you will make the contribution each January so that you can enjoy the tax deferred or tax-free investing all year long.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How Much Return Can You Get from Your Savings/Investments?

After saving and investing for a long time, naturally you would like to start using your investments for income.  This might be at retirement, when your investment portfolio will be your main source of income unless you have a large pension.  It might also be earlier in life when you’re looking to start supplementing your income from your job with investment income, or even using investment income for life expenses while you start a business.  The question is, how much can you draw from a savings/investment account without seriously depleting the account?  If it is a retirement account that you want to last through your retirement, how much can you draw without outliving the money?

One way to start to estimate how much you can draw is using a payment calculator, for example this one here.  For example, let’s say that you have saved $1 Million and you want the money to last at least 30 years.  You would plug-in $1,000,000 to “loan amount” and “30 years or 360 months” into the loan term blanks in the calculator.  If you are investing in stocks, you might choose 8% or 10% as the interest rate.  The lower the rate you choose, the more conservative you are being.

So, assuming an interest rate of 8%, the calculator shows a monthly payment of $7,338.  This means that if you received a steady return of 8% per year, you could withdraw about $7300 per month and have the money last 30 years.  The issue though is that with stocks and bonds, the return will not be steady.  It will be up 20% one year and down 10% the next.  The account will also decline in value due to inflation, so that $7300 you receive the first year might only be worth $4000 by the time you withdraw the last payment in 30 years.

For this reason you therefore don’t want to withdraw the whole amount each month.  You want to withdraw some of your gains and leave part to grow and makeup for the losses to inflation.  You might therefore only withdraw $5000 per month, or even $4000, instead of the full $7300.

Another factor to consider is that the more money you have, the more risk you can take and therefore the higher the rate of return you could assume.  If you could survive on $5000 per month, but had $3 million in investments, you might choose to invest $1 million conservatively, to ensure that you could meet your minimum income needs of $5,000 per month, but then invest the other $2 million in more aggressive growth stocks.  You might therefore be able to assume a higher return, of say 12%.  Putting $3 Million at 12% for 30 years into the calculator, you get a monthly payment of almost $31,000 because of the higher return.  (Note, this is the reason you should save and invest to have a lot of money at retirement.  In addition to providing a higher return in general, it allows you to generate higher returns on your money.)

A final consideration is the way in which the money is withdrawn for income.  If a good portion of the portfolio is invested in income stocks and bonds, money will be generated throughout the year at a fairly predictable return and can be readily withdrawn.  With a portfolio of growth stocks where the main way of generating income is to sell stocks, however, the returns from one year to the next are far less certain.

If you are just using the account for supplemental income to your day job, you could choose to just withdraw income as you have opportunities.  As one approach, in years when the account has a positive return of 8% or more, you could withdraw one-fourth of the profit.  For example, if you had a million dollar account and it earned 10%, or $100,000 one year, you might take $25,000 out and use it for a trip, a new used car, and home improvements.  On years when it earned less than 8% or even lost money, you could leave the account alone and allow it to grow.  In this way you would be taking profits during the good times and allowing the account to recover during the bad times.

If you are using the account for retirement income, you’ll need cash for expenses even on years when the market is down.  A strategy here is to save up cash when the times are good and then use that cash on years when the times are bad.  For example, you could sell enough shares initially to have 5 years-worth of expenses in cash and put that money in a set of CDs.  On years when the market does well, you could sell some shares (again, maybe 1/4 of the profits when the account returns more than a certain percent) and build up a cash position, perhaps building up as much as 10 years-worth of cash in CDs before just letting the gains run.

On years when the market does poorly, you could just spend the money from the CDs until it reached a minimum threshold, maybe 1 years-worth of expenses, at which point you would sell enough to gather at least 3 years-worth of cash.  Because the market generally recovers within a year or two of declines, it is very likely that you will be able to maintain enough cash for expenses and avoid selling when the market is substantially down this way.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why Capitalism Works, and Other Systems Don’t

People, in general, are self-serving.  Much as we would like to be fully selfless, spending all of our time doing for others, the fact is most people are first concerned with themselves and their families, then extended family and friends, then finally people they don’t know.  This is necessary for survival, since people would be unable to have enough of the necessities – food, water, shelter, clothing, etc… if they spent all of their time doing things solely for others.

And yet that is what many see as good and noble.  Ayn Rand uses a good example of this in her “perfect man,”John Galt’s, speech about two-thirds of the way through her classic work of Objectivism, Atlas Shrugged.  John Galt notes that a mother who gave the food for her own baby to another’s baby would be considered noble.  Yet her baby would starve, so the process is in fact suicidal.

One would think that with this selfish, every-man-for-himself behavior, capitalist societies where the government does not step in to take resources from those who produce a lot and provide for those who do not, we’d have only very wealthy and very poor.  You would also think that the poor would be absolutely destitute since the wealthy would be selfish and keep everything.  And yet, places like America do have a thriving middle class driving SUVs, living in 3000 square foot houses and taking nice vacations.  Even the poor i the United States are rich compared to many other places, most having shelter, at least one car, several televisions, ample food, at least one cell phone, and ample clothing.

Other places like China are also seeing the virtues of Capitalism.  After the Tienimen Square protests and massacre, the Communist Party realized that they could not continue repressing their people through force and also that under Communism they were not able to provide enough resources to their people because few were working.  They therefore began to allow some capitalism, albeit with the understanding that the government was still in charge and could step in and take your business if they felt like it.  As a result, China is seeing a manufacturing boom and an increase in the wealth of its people.  Some of the manufacturing is even shifting to other countries and away from China because the people are doing so well that they are demanding higher wages.  As with America, the way to keep manufacturing in China would be to increase the quality of the goods produced and the skill of the workforce to make the higher wages worth the cost.

Looking at socialist and communist countries, just the opposite is seen.  The USSR was extremely poor under communist rule.  There were chronic shortages of goods with famously long lines for bread and milk.  Corruption ran wild, as it still does today in Russia.  There was also a general atmosphere of hopelessness and despair.  Indeed, event he architecture reflects this with buildings being built during the Soviet period being boxy and grey without ornament; purely functional with no spirit or life.  Conditions in Cuba, North Korea, and Vietnam are similar, if not more desperate.

Monarchies and dictatorships see similar poverty among the people.  The king may live in a palace and have large amounts of wealth, particularly if the United States and other countries provide aid to try to help the poor in the country, but overall the country is far poorer than are Capitalist nations.

Beyond just the level of wealth in capitalist societies is the availability of goods and services.  Rather than having one brand of corn flakes some of the time, there are three or four varieties with different quality levels and different prices.  There are ten brands of toilet paper rather than not even having one.  A socialist may see this as wasteful, to have so many different brands of products, but obviously people are buying the different brands or they would not be there, given the fierce competition for shelf space.  The competition also motivates companies to do things better and find less expensive ways to produce their products.

The difference between capitalist nations and those with central control – communist, socialist, monarchies, oligarchies and dictatorships is three things:

1)  Personal interest is aligned with common interest.  Free enterprise provides motivation for people to identify the needs of others and do something to meet those needs.  Individuals who are willing to get up in the morning, dress appropriately,and spend 8-10 hours a day doing something that helps someone else can easily earn enough to provide for their basic needs.  Those that identify a need and work to provide for that need get rewarded for doing so in proportion to the criticality of the need being met and the number of people they help.  A hotdog vendor on a street with a dozen other vendors makes enough to eek out a living.  One in a crowded place with no other vendors does quite well.  One who sets up a chain of hotdog stands in locations where a lot of people need something to eat gets very wealthy.  One that sets up a hotdog stand where people do not like hotdogs just because he wants to goes out of business.

In the other systems, the incentive to meet the needs of others is quashed by limitations on how much reward you can get.  If you make a lot of money in a socialist society or a monarchy, people from the government will confiscate a lot of it – either for the King or for others who did not make as much money.  In the case of Socialism and Communism, people can also get enough to survive upon without doing anything for anyone.  Indeed, those who have greater need receive more and those who provide for their own needs are taxed to provide for the needs of those who do not.  Both of these factors motivate people to do only as much as they must and in many cases to do less than needed to provide for themselves.

2)  Capitalism involves individuals trying to meet local needs.  Stores in New York City sell different things and sell them in a different way than do stores in El Paso, Texas.   All over the country, individuals are looking at their local communities and determining what is needed and how to best provide for those needs.  This is not out of civic duty but because it brings the most profit.  In large cities, delivery services may be critical so the cost may be included in the price, while in rural areas many will have a truck and would rather save the cost of delivery.

With centrally planned economies a central group must decide what is best for everyone.  Even if they have the best intentions, it is impossible for a small group to decide what is best for so many different people in so many different situations.  For this reason, what ends up happening is that blanket processes and blanket rules are created that fit few people well.  You end up with snow tires in Phoenix and beach chairs in North Dakota because it is easier to create one list than it is to create one for every area.  It is also difficult for a small group to create and control the logistics for getting goods to everyone, causing shortages and surpluses.

3)  Capitalism limits the effect of corruption.  In a Capitalist society, while there can be some bad actors, the effects of corruption are generally limited.  Store owners who cheat their customers generally lose customers and go out of business.  Likewise, employers who mistreat their employees lose the better employees and fail in business.  Because there is choice, both in where to buy things and where to work, corruption is limited.

Corruption is rampant with central management.  Because there is scarcities and because there is generally only one choice, individuals use the system to solicit bribes.  Individuals are also chosen for high positions not because of competence but because of political connections (see the roll-out of Obamacare, as an example).   Finally, the ability for officials to choose who gets what contracts and goods allows them to setup system where those who help them get rewarded and those who don’t get penalized.  In some cases some of the public money ends up coming back to the leader.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.