Author: Emily Rose

At the end of last year CFSI hosted an in-the-field activity designed to put participants in the shoes of underserved consumers as they attempt to complete several financial transactions. This particular FinX event shared the focus area of the Financial Solutions Lab first innovation challenge which will be launching next month, household cash flow management.

One of the day’s participants, Paul Breloff, Managing Director at the Accion Venture Lab, shared his FinX reflections with his team, and ultimately, CFSI. (Ariel Schwartz, Senior Editor at Co.Exist, also wrote about this experience in her piece “What It’s Like to Live Without A Bank Account For a Day.”) In short, Paul’s comments were powerful and confirmation that FinX is a positive learning experience for participants. He highlighted just a few of the many challenge areas that are ripe for technology solutions. Below are Paul’s notes…

On November 18, 2014 a group of about 25-30 financial service folks (a handful each of bankers, startup executives, investors, tech company reps, journalists, and nonprofit leaders) gathered in the Mission to put ourselves in the shoes of underbanked customers in the U.S. Part scavenger hunt, part ethnography, FinX was a great chance to see the bewildering array of frustrating financial options available to underbanked customers in the US who are short on liquidity, short on time, and short on attention. Here’s the limited description I got before showing up: “This experience is not your traditional workshop or walking tour of a local neighborhood. It’s an actual step into the shoes of consumers making real-time decisions about fees, expediency, time, and convenience. The 2-hour in-the-field challenge is a rare opportunity for executives of financial institutions, FinTech innovators, and nonprofit leaders to go beyond simply hearing about the challenges that consumers face, and experience the real-life constraints and options they have. With your team, you will attempt to complete financial transactions such as cashing a check, acquiring and using a prepaid card, or seeking out a small loan.”

Once we arrived, we were split into about nine teams of three, and were given a packet of materials describing our situation. We were to pretend we were on a two hour break between shifts and had to get done a variety of things before our 12:00 p.m. shift started again. We were to assume we didn’t have a bank account, and had to cash a check, get a money order, pay rent and electricity, load a prepaid card, purchase a gift for our niece, and grab a snack—this was, after all, our hypothetical lunch hour. We also had to figure out the best rate we could get on a $500 loan from anywhere we wanted, and we had to haggle with a pawn shop owner about the value of my watch (we ultimately settled that it was worth $30, which I was quite pleased with).

I was on a team with Ariel Schwartz, Senior Editor at Co.Exist/Fast Company and Ethan Bloch, CEO of a fintech startup called Digit. We got off to what we thought was a fast start, finding a pawn shop and quickly negotiating a $30 value on my watch – which I was pleased with, given the fact that it was 15 years old and not worth much to begin with. We were also in high spirits when we located a shop called Ria (a chain across the U.S.) to cash our check. It seemed like it would be quick and easy and we could get everything done at once with only a $0.99 check cashing fee – our customer service representative, safely hidden behind a plexiglass wall, encouraged us politely that this would only take a couple minutes. But alas, they couldn’t get ahold of the payer of the check to verify by phone, and AML/CFT checks on me got tripped up. (Apparently they couldn’t figure out why I lived in DC but was cashing a check in San Francisco.) We lost 40 minutes hanging around being told it would only be “three more minutes.” We were all a bit (politely) pissed off. So that didn’t work.

Next we went to an Ace Cash Express. We waited in line about twenty-five minutes (precious lunch hour minutes ticking away), but once it was our turn, we were thrilled to learn we could indeed getmost of our tasks done, but at a cost: $6 to get the $90 check cashed, a one-time membership fee with Ace, and other fees to get money onto a prepaid. Unfortunately, we couldn’t pay our rent check because their system “couldn’t find the payee.” They said this “happens all the time” and that we should “come back later.” A not-so-fantastic option if you’re working two shifts a day and still want to eat, sleep, and see your family.

Next we had to send money to a family member, so we had to find a Western Union. Thank god for our smartphones and Google maps. We were able to do it, but again, were shocked by the cost: a flat-fee of $5 to send $30 to our friend in the US, who was going to pick it up later that day. That’s the going flat rate for a domestic remittance under $50: the equivalent of nearly 17 percent! This in an era where most of us can send value via PayPal or SquareCash or Venmo for no or little cost – IF you have a bank account which can be linked for ACH transfers. Unfortunately, our family member was told when she went to pick up the money that “the systems were down” and that she should “try coming back in two hours.” Simply ridiculous; I’m really rooting for these startups to motivate some improvements in pricing and service.

On the hustle back to our 12:00 p.m. shift we had to pick up a gift for our niece. We chose a beautiful yellow hula hoop and Brazil soccer ball from the dollar store, where, thank goodness, they accepted our MasterCard prepaid card. We were running short on time so only had time to grab a coconut water and banana on the trek back to our second shift.

None of this was rigged; these were all real stores, processing real transactions with real checks and GPR prepaid cards, treating us like real customers. And it was a great experience. It made me think quite differently about the tradeoffs between fees, convenience, and dignity. As the clock was ticking, considerations of cost, quite frankly, went out the door as we desperately tried to just get things done and not show up late for our shift. In some ways, perhaps, “done is better than cheap.” Also, it was just amazing to confront the bewildering array of choices. Walking down Mission Street, there are quite literally dozens of check-cashing spots, pawn shops, big signs promising fast cash, each with its own confusing set of matrices outlining prices based on a ton of variables. Who has time for that, who really cares at some point?

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For low-income employees who lack access to bank accounts, payday often comes in the form of cash or a paper check. But cash can easily be lost or stolen and checks often require a costly or time-consuming visit to a check casher. Payroll cards can be a good alternative.

A payroll card is a reloadable prepaid card offered by employers. Each payday an employee’s wages are deposited into the payroll card account via direct deposit. The employee can then use the card to make purchases in stores or online, or they can withdraw cash from ATMs or at retail locations.

Today, this option is increasingly popular for both underbanked and mainstream Americans. In 2013, employers loaded $30.6 billion onto more than 5 million payroll cards[1].

While payroll cards are fundamentally high-quality products, their design and delivery is not uniform across the industry. For example, some cards carry high fees. And certain employers have been accused of requiring employees to receive their wages on a payroll card, rather than offering them multiple options to receive their pay—a practice that runs afoul of federal and state laws. In the wake of recent lawsuits, state legislators from Hawaii to New York have introduced legislation that would further regulate and, in some cases, eliminate providers’ ability to offer the cards period.

But maybe there is a better way to respond, a way that doesn’t risk limiting employees’ access to the high-quality cards the industry has to offer. Instead, we should encourage the industry to work together to ensure that high-quality programs and services are available to all employees.

To help with this, CFSI has published the Compass Guide to Payroll Cards. The Guide outlines what a quality payroll card should look like by providing recommendations across a range of practices including: Choice, Safety, Affordability, Transparency, and Convenience.

The Guide’s recommendations are based on CFSI’s Compass Principles—Embrace Inclusion, Build Trust, Promote Success, and Create Opportunity—standards of excellence for the design and delivery of financial services. At the heart of the Compass Principles is a belief that the financial services industry can actively contribute to improving the financial health of Americans.

Some in the industry have already begun. For example, MasterCard and Visa have announced commitments to implement recommended practices from the Guide. MasterCard has committed to incorporating CFSI’s recommendations into the company’s existing Payroll Card Standards to promote Choice, Transparency and Education. Visa has committed to developing an educational course for employers, incorporating recommendations from the Guide to ensure they offer payroll card programs in a high-quality way.

The Compass Guide to Payroll Cards sets a high bar. But we believe payroll cards can be a force for good in the lives of America’s workers.

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Crowdsourcing is reshaping the way we think about the marketplace. Why? Because it simulates an open market environment very well. It allows providers to swarm into a market space and sell products and services to consumers, tailoring what they offer to consumer preferences. The swarm of consumers and providers grows, and affordability and quality improve as competition increases. All it takes is a well-designed technology platform which provides the necessary tools for products and services to be traded with reliable and sufficient information.

Peer-to-peer (p2p) solutions, enabled by web 2.0 and mobile technologies, are applying the crowdsourcing paradigm and setting the stage for a more efficient method for customer acquisition, service delivery and sourcing of funds. Some see crowdsourcing as a process of ‘disintermediation’, which is limiting reliance on sales agents, middlemen, brokers etc. and reducing transaction costs.

In the consumer lending sphere, ‘crowdfunding’ has emerged and has brought a fresh perspective on how we think about addressing some persistent issues of accessibility and affordability of financial services.

Two Bay Area based companies – Lending Club and Prosper – are the early birds. Both companies are offering crowdfunding services to borrowers and lenders, through which any individual or institution can lend to or borrow from each other, based on the borrower’s pre-assigned credit-risk rating and the lender’s preferences and risk tolerance. The uptake for the service has been strong – the two companies have reported that in 2011, monthly loan originations doubled to $30 million and tripled to $11 million through Lending Club and Prosper respectively. 24,000 new customers signed up on Lending Club and the platform originated a quarter billion dollars worth of new loans in 2011, more than doubling the previous four years combined. These loans were priced with net annualized interest rates ranging between 5.82% and 12.15%.

It is important to note that these two companies are not focusing on providing services which cater directly to the needs of underbanked consumers, who typically borrow in small amounts and have limited or no credit histories. Lending Club originates loans with an average size of $10,945 and rejects 90% of the loan applications it receives. The reason underbanked consumers are not a priority for these two companies is because of regulatory bottlenecks. The Securities and Exchange Commission regulates p2p loans like securities, with pricing based on assigned risk categories using borrower credit reports. This automatically creates a selection bias for consumers with established credit histories and eliminates most underbanked consumers from the pool of potential borrowers.

Structuring p2p lending platforms like auction markets, which allow market players to transact freely based on their preferences and risk tolerance, will help open-up the p2p lending market to underbanked consumers. As a first step, a regulatory framework for a true auction based loan products market needs to be developed and introduced.

Crowdfunding is a frontier market space, which has immense potential to be scaled to improve the availability of high-quality, low-cost credit options for underbanked consumers. Considering the high level of connectivity, visibility and traceability that p2p platforms offer, p2p lending could prove to be a promising solution, particularly for consumers with weak credit histories and limited access to affordable loans.

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Tax time can be stressful for many people, for two reasons – the filing process itself and the knowledge that if you’d made different decisions the year before, you might be facing a smaller tax hit this year. Let’s explore ways to lower the stress level – and the tax burden – at this time of year.

Make the Process Easier

Getting organized and filing your return can be a chore. Even just pulling together your information to get started can be overwhelming. Here are a few tips to ease the process:

Organize Your Paperwork

The first step is to gather your information and receipts. I recommend you keep these in a paper or electronic folder organized by category. Your main categories should include:

– Business income and expenses, which can be exported from financial software such as QuickBooks.
– Personal income, from forms such as W-2s and 1099s.
– Rental and other income.
– Charitable deductions.
– Taxes paid on property, vehicles or purchases.
– 529 plan contributions and distributions.
– Investment income (dividends, interest, sale info).
– Retirement contributions or distributions.

Decide on Your Method

Next, decide whether you want to do your taxes yourself using an online tool or you should seek the help of a tax professional. If you have rental property, real estate investments or a complex investment portfolio, if you own a business, or if you don’t have the desire to take this on, it’s wise to turn to a professional.

Take Your Time

If you’re going to do it yourself, don’t try to rush through the task in one day. I find it’s best to break it up over a few days. Give yourself plenty of time to gather all of the information you need and complete the process.

Some years it takes until mid-February to get the necessary documents for your various investment holdings. For example, Vanguard issues tax documents for mutual funds much earlier than for funds on the brokerage platform. If you rush through your return and file early, you might inadvertently exclude some of your funds, forcing you to amend your return.

You’ll also want to take the time to review your return thoroughly for accuracy before you file.

Finally, save your return and all of the backup documentation in a safe place for at least three years in case you are audited.

Keep an Eye on Your Withholding

If your tax liability is too high or you’ll be receiving a large refund, consider adjusting your withholding. Also, try to determine how your income and deductions will change in the coming year so you can adjust further.

Lessen your tax burden

At tax time, it’s easy to see that decisions you made the year before have a major impact. Here are some things you can do that will pay off next tax season:

Max Out Your Retirement Contributions

Contributing the maximum to your retirement savings accounts is the simplest way to reduce your tax burden, but many people are not doing it. For 2015 and 2016, you can contribute 100% of your salary, up to $18,000, to your 401(k), with a $6,000 ‘catch-up’ for people 50 and over.

You can still contribute to a traditional IRA for 2015 up to the tax filing date, which is April 18. Check the IRS website to see if you’re eligible to deduct your IRA contribution based on your income. You can contribute $5,500 to an IRA with an additional catch-up of $1,000 for those 50 and over.

If you’re in a high tax bracket, say 28% or higher, consider increasing your 401(k) contributions, because these pretax contributions will reduce your taxable income. If you are in the 25% tax bracket or lower, consider increasing your contributions to a Roth 401(k) or contributing to a Roth IRA if you are eligible, as those contributions are made after taxes. The deadline for Roth contributions for 2015 is April 18.

With Roth plans, although you will be taxed on the income now, your investment will grow tax-free and you will be able to withdraw it without paying taxes, if you meet certain conditions. This can be a powerful way to avoid paying taxes on future income, especially if you are young and have time on your side.

Document Your Charitable Contributions

Make sure you have documentation for all cash and noncash donations. Make an itemized list for noncash items and their condition before you make the donation. Remember that you can also deduct mileage for your volunteer work.

If you have substantial charitable donations, say $10,000 a year or more, you might want to consider donating appreciated stocks or mutual funds. This can provide a triple tax benefit – you can deduct the amount of the donated securities, you can eliminate future capital gains on the sale of the securities, and you can buy back the same shares at the higher current market value, resulting in a lower tax bill when you sell the securities in the future.

Track College Expenses

Deduct only qualified expenses and make sure that any distributions from your 529 college-savings plans coincide with expenses incurred in the same calendar year. I use an Excel spreadsheet to keep track of this for my son’s education. It itemizes tuition, books, and room and board fees offset by scholarship amounts.

Don’t forget to deduct your annual contributions to your state 529 if you get a state tax break. I often notice that clients forget to tell their CPA about these contributions or forget to include this info when they prepare their own return. Since South Carolina, where I live, provides a dollar-for-dollar tax deduction for contributions to the Future Scholar 529 plan, this results in a 7% instant return on your money, for example. (I recommend the Future Scholar Direct program, which is no-load and includes index funds with low expense ratios.)

Optimize Your Investments

Capital gains: Review the capital gain distributions for your funds to see if you can improve the tax efficiency of your investments. It may make sense to sell one of your funds if it continually throws off high capital gains. Replacing an active high-expense fund with a more tax-efficient index mutual fund or exchange-traded fund will reduce your taxes and will likely perform better over time due to lower expenses.

U.S. bonds: If you have taxable bond funds in your after-tax (non-retirement) accounts, don’t forget to adjust for U.S. government bond income. You can contact the fund, or it may mail you a sheet that breaks down income by source. The interest from Treasury bills and bonds as well as U.S. government agency securities is taxable at the federal level only.

Municipal bonds: Likewise, adjust your municipal bond dividends and interest for ‘in state’ income as you are not taxed on municipal bond income from your state. This should also be provided by the mutual fund or broker where the bonds are held.

Foreign mutual funds: If you invest in foreign mutual funds, you can take a foreign tax credit or deduction for income, such as dividends, that you received from outside the U.S. The tax credit is generally more beneficial than the deduction. Contact the mutual fund company to find out the percentage of the dividends that are from foreign holdings and adjust accordingly.

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Cash is not returning much more than 1% these days and financial markets are volatile and overvalued, portending lower future returns. Many homeowners wonder if they should use their surplus cash to more aggressive pay down their home mortgage. There are qualitative and quantitative factors to consider and the answer really depends on each person’s unique situation and attitudes.

Reasons you would want to consider paying off your mortgage

  • You want the sense of freedom obtained from not having a mortgage payment.
  • You want to pay off their home mortgage prior to retirement to reduce your fixed living expenses.
  • You think the stock market will have a lower return than your mortgage interest rate over the balance of your mortgage.
  • You have excess cash sitting in low-yielding money markets or savings accounts. Paying off a mortgage with a 4.5% interest rate, for example, will be a guaranteed higher rate of return than the cash and may even exceed what you could get on your investment portfolio over the next few years.
  • You are already maximizing your savings to your retirement accounts and have paid off other high-interest debt.
  • You have a relatively small balance and few remaining years on your mortgage.
  • You have a hard time saving extra money and adding extra principal payments to your mortgage will be a ‘forced’ savings program.
  • Your payment and or interest rate are high.
  • You anticipate a declining income.

Reasons you may not want to accelerate you mortgage payoff.

  • You have low cash reserves.
  • You have other loans with high-interest rates than need to be paid off.
  • You have a low-interest rate are young and plan on living in the home for the foreseeable future. Over time, your inflation-adjusted mortgage payment will seem extremely affordable.
  • You want to leverage your money. By taking on debt for your home, you can free up money to be invested in the stock market.
  • You expect stock market returns to exceed the interest rate of your mortgage over the remaining term of your mortgage.
  • You need to maximize your liquid assets. Don’t be house rich and cash poor. Those with a high home value relative to their other liquid investments don’t want to pour all of their extra funds into the home as they will have minimal liquid assets to live off of. This is particularly an issue during retirement.
  • Your payment is low and affordable.
  • You plan on moving to another residence in the next few years.

Taxes are also a consideration. But I don’t normally encourage that clients make major debt decisions based solely on taxes. If you are in a higher tax bracket, the mortgage deduction has more value, but note that there is a good chance that future Congressional action may completely eliminate this deduction or limit it to lower income levels.

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The new year brings with it lots of well-intended resolutions, many of them financial. But it can be easy to procrastinate on money matters when you’re unaware of the consequences of inaction or unsure whether you’re making the right decisions.

Even for a financial planner, the process of setting and achieving financial goals can be overwhelming. This past year, although I focused on specific aspects of my finances, I didn’t take the time to identify important life goals for the year. I did not use my money to ensure that I was enriching my life.

So, like many others, I’m rededicating myself to the process as a New Year’s resolution. To organize and improve your finances in the year ahead, dedicate time each week to following these eight steps:

1. Set goals

Discuss your short- and long-term goals with your family, spouse or significant other. If you’re single, create a list for yourself. This is the most important step. Ask yourself what you want to have, to do, and to be over the next six or 12 months. Be as specific as you can and brainstorm as many items as possible. Next, prioritize these items by picking your top four or five. Assign a realistic cost to these goals to see if they are achievable within your budget.

2. Develop a new budget

Review last year’s spending and determine how it aligns with your values and your goals. Then, develop a new budget using last year’s as a benchmark. Shift your expenses where appropriate to reflect your core values while also incorporating the top four or five priorities from Step 1. Some of these goals will have a cost associated with them; others may not.

For example, my 2021 priorities include doing some maintenance on my home, attending a Coldplay concert, taking regular art lessons, vacationing for a week with my family and good friends in Utah, and creating more balance in my life by simplifying work processes. The estimated cost for the first four items was pretty straightforward, and I added those expenses to my household budget.

Not all of your goals have to be associated with money; creating more free time in your schedule is a good example. For busy professionals, time can be more valuable than money.

3. Open multiple savings accounts

Set aside specific, separate savings accounts for some of the goals that you have established. For example, you may want to have a separate savings account for a vacation, the kids’ education, a new car purchase or a special entertainment expense.

Why separate accounts? This helps ensure that you won’t raid savings for one expenditure to use for another, making it easier for you to spend money where it matters. Also, it can be easier to part with money associated with a personal goal or expenditure if there’s an account specifically designated for that money.

4. Create a summary sheet of your net worth

This should include the value of all assets you own, such as real estate, cash, investments, the cash value of life insurance, art, jewelry and cars. Then list the amounts you owe, such as for car loans, mortgages, credit card debts and student loans. The difference between what you own and what you owe is your net worth. Ideally, your net worth is growing each year as you increase your savings for retirement and reduce your debt.

5. Summarize your insurance

Create another summary sheet for your health, life, disability, liability and long-term care insurance policies. Know when these policies expire and the basics for each one:

  • How much will you spend out of pocket in a year with your health insurance before the insurer pays in full?
  • How much would you receive in life insurance proceeds if someone in your family were to pass away?
  • How much would you receive in after-tax dollars if you were to become disabled?

You may also want to evaluate the cost of life insurance through your employer compared with the cost of an individual policy. Group life insurance plans tend to be more costly once you reach age 45.

6. Review your investments

See if your total exposure to the stock market makes sense given your risk tolerance and personality and your proximity to retirement. In general, it’s wise to reduce your risk five to seven years prior to and after retirement to avoid sharp losses during this critical time period.

7. Do an estate plan checkup

This includes checking the titling of your accounts, your beneficiary designations and your estate planning documents to see whether they still apply or whether any changes are necessary. If it’s been five or more years since your last estate-planning documents were prepared, you’ll probably need to schedule a visit with your estate-planning attorney for some revisions. If you don’t have a will, get one drafted as soon as possible. Dying without a will can create some nasty consequences for those you leave behind.

8. Organize your financial documents

Create a file for all of your financial documents, including investment accounts, wills and other estate-planning files and personal records. This should include a list of all current credit cards, your driver’s license, a list of bills and monthly debits, the location of your safe deposit box and keys, marriage and birth certificates, passports, social media and electronic passwords and accounts, and a video recording of your home contents. Any personally identifiable information should be in a secure, encrypted electronic file or in a safe deposit box.

The bottom line

Each item on this list is important, but you don’t have to everything all at once. Schedule time each week to work on your financial to-do list so it’s not so overwhelming. A certified financial planner can help you organize and optimize your financial life and work with you as your accountability partner.

Whether you work with a planner or tackle these steps on your own, it’s important to set yearly goals and do the work to simplify and improve your financial picture.

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The Centers for Medicare & Medicaid Services (CMS) announced the 2016 premiums and deductibles for the Medicare hospital (Part A) and physician and outpatient hospital services (Part B) programs.  Since there was no cost of living increase to Social Security  due to a hold harmless clause in the legislation, most current Medicare recipients will not experience an increase in their Part B premiums.  Those who don’t fall under the hold harmless provision were expected to have had a 52% raise in premiums. Congress acted to avoid that large increase.

Instead, premiums for those people increased 16%.  Note that those recipients not subject to the hold-harmless include people who are not yet collecting their Social Security benefits, those who are enrolling in Medicare for the first time in 2016, and recipients who have higher incomes. Here are the new premiums based on income.

Modified Adjusted Gross IncomeMonthly Part B Premiums per personChange
SingleJointCurrent 2015Starting 2016Income related adjustment (versus the standard premium)Percent Change from 2015
Up to $85,000 and already enrolledUp to $170,000 and already enrolled$104.90$104.90$0.000.0%
Up to $85,000 who are new enrolleesUp to $170,000 who are new enrolleesNA$121.80NANA
Above $214,000Above $428,000$335.70$389.90$268.0016%
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The SEC Commission has approved rules that require institutional money market funds to implement floating share values and other restrictions, such as restricting withdrawals and imposing redemption fees of up to 2% if fund assets drop below prescribed levels.  The shares would float based on changes to NAV (changes to the underlying market value of the fund’s assets).  Currently, these funds have a fixed price of $1 per share.

The rules were crafted in response to the 2008 financial crisis, when corporate lending markets seized up in response to a lack of liquidity.  The new restrictions will hopefully help maintain capital levels and keep markets operating smoothly during times of stress.

Individual Money Market Funds Not Affected

While the new floating share rules apply to institutional funds (both prime and tax exempt), they will not impact government and retail funds that are sold to individual investors. (Note that they will apply to institutional municipal money markets.)  However, provisions for liquidity fees and redemption gates do apply to all funds, both institutional and retail.

For a definition of government and retail money market funds, the SEC provides this detail via a press release on their website:

Government and Retail Money Market Funds Government and retail money market funds would be allowed to continue using the amortized cost method and/or penny rounding method of pricing to seek to maintain a stable share price.  A government money market fund would be defined as any money market fund that invests 99.5 percent (formerly 80 percent) or more of its total assets in cash, government securities and/or repurchase agreements that are collateralized solely by government securities or cash.  A retail money market fund would be defined as a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the money market fund to natural persons.  A municipal (or tax-exempt) fund would be required to transact at a floating NAV unless the fund meets the definition of a retail money market fund, in which case it would be allowed to use the amortized cost method and/or penny rounding method of pricing to seek to maintain a stable share price.

One way this might affect individuals, is if they invest in institutional money market funds through their 401K.  It is likely that most retirement plans will choose retail money market funds as a plan option for this reason.  This will affect small and large businesses that use these accounts as short term funding for their day to day and week to week operations.  For a related article on this subject read more here.

The new rules will not go into effect immediately.  Fund companies have two years to comply with the new restrictions.

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I loved this article by Robert Laura as it reflects what I continue to see in my financial planning practice.  The idea of retirement can seem very enticing.  We long for an unstructured day with plenty of time for hobbies,  relaxation, and travel.   But many of us take for granted the social and intellectual stimulation we gain from being employed.  As Mr. Laura states in the article:

“Too often, retirement is portrayed as the ultimate goal and sign of freedom, but when people get there, it can feel very empty or hollow. In some cases, it causes people to feel isolated or unimportant because they are being sold on only part of retirement’s true meaning and needs.”

So many of us derive our “relevance” from our career achievements and work environment.  When people retire and lose that “connectedness” and sense of being, they often fall prey to depression, substance abuse, and marital discord.   Mr. Laura tells the story of a friend who retired and feels a loss of purpose:

I said to my buddy, “It must be great being retired … to have the time, money, and freedom to come and help your son like this.”  He paused for a moment, looked me square in the eye, and said, “Bob, don’t ever retire, because the minute you do, you won’t mean anything to anyone anymore.” Those were his exact words, “You won’t mean anything to anyone anymore!”

Furthermore, a decision to retire, especially if it is early, can create other financial planning issues.  In this article from Fox News, 50 is the new 30, the author discusses how how longevity is complicating retirement planning.   To account for the fact that people are living longer they will need to assume that their money needs to last longer, perhaps 10 years longer than they anticipated, and also plan for long term care.  According to the article, statistics show that, “Only a lucky 30 percent of the population is estimated not to need long-term care after age 65”.

Focusing on these long term qualitative and quantitative issues is the essence of successful retirement planning.

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If you are over 70 1/2 and have retirement accounts or you have an inherited IRA, you will likely need to take RMDs, or Required Minimum Distributions, by the end of the year.  Failure to do so would result in a penalty of 50% of the amount not taken.

Post 70 ½ RMDs

Once you reach age 70½, you must withdraw at least a minimum amount each year from your tax-deferred retirement savings accounts. This includes your IRAs and any qualified retirement accounts such as 403bs, 401ks, etc. Your annual RMD for 2015 is equal to your retirement account balances as of December 31, 2014 divided by your life expectancy factor according to the Uniform Lifetime Table. (If your spouse, however, is more than ten years younger than you, you will need to use the Joint Life and Last Survivor Table.

Note that if you are still working full time at age 70 ½ you can delay your RMDs for your current workplace retirement accounts until April 1 of the calendar year following the year you retire.  Click here for more information and assistance with your calculation.

Inherited IRAs

You must take RMDs by Dec 31st of the year after funds were inherited.  To determine your RMD for this year you will need to take the balance from December 31st, 2014 and divide by the factor (which is age based) on the single life expectancy table.

Here is the table for RMDs for inherited IRAs and here is a calculator to aid with the calculation

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