Retirement Saving Starts with Your Teen

Is your teenager thinking about retirement? Have you ever wondered how to teach your teen about investing?
Whether it's your child or grandchild, a Roth IRA is a great way to start a teen's retirement savings and teach them about investing.

The Advantage of a Roth IRA 

Why a Roth IRA? Teenagers are in a very low tax bracket, so a traditional IRA (where contributions are tax deductible) will be of little value. A Roth IRA does not offer a current tax deduction, but withdrawals in retirement are tax-free, there is no required minimum distribution at age 70½, and there are special provisions for early withdrawals if needed.

You can contribute 100% of your teen's W-2 income to a Roth IRA, up to $5,000 for 2012 or $5,500 for 2013. You can contribute up to $400 of "self-employed" income (such as what they earn from baby-sitting or lawn mowing) to be reported on Schedule C of their tax return; in addition, you'll avoid paying any FICA payroll tax on up to $400 of that income. So, you can even start a Roth IRA for a 12-year-old who does some baby-sitting or lawn mowing. For example, if your 15-year-old makes $1,200 working at a fast food joint or retail store, you can contribute up to $1,200 to a Roth IRA.

"A teen's Roth IRA is typically funded by a parent or grandparent."
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You can continue funding a child's or grandchild's Roth IRA into their early 20s, as they start their first job out of college. The ability to contribute to a Roth IRA is phased out for those who make over roughly $100,000 (which would likely only apply to professional athletes or rock stars). If you fund a Roth IRA from age 15 to age 30 or so, your teen can be well on their way to retirement.

Start Teaching Your Teen About Investing 

The Roth IRA is a great way for your teen to learn about investments and see how the contributions make their Roth IRA account grow.

You can still open a Roth IRA for 2012 income. The deadline is the date you file their 2012 income tax return, prior to or on April 15, 2013.

Your teen may not thank you for many years, but isn't that typical?

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Financial Planning Must Be Inspired by the Heart

With February comes the celebration of St. Valentine's Day, which leads us to highlight a financial planning belief that isn't commonly considered: Successful financial planning must be inspired by the heart. Financial planning takes time and effort and requires the sacrifice of today's pleasures for tomorrow's. Why would we do this? We do it because of our heartfelt desire for financial peace of mind for ourselves and because of our love for those most near and dear to us. Have you ever thought of financial planning this way?

What Does Your Heart Want?

There are many things we "should" do or "want" to do but, in reality, we only get done what we truly commit our hearts to accomplish. Think of the priority you assign to:

• Your relationship with your spouse or significant other
• Your relationship with your family
• Your relationship with your friends
• Your mental well-being
• Your physical well-being
• Your spiritual well-being
• Your career or avocation
• Your financial well-being

It's OK to Ask for Help

Some people can accomplish all they want on their own. Most cannot, due to limitations in expertise or time. Most people need some help from other people.

For example, some people enhance their physical well-being with the benefit of a coach or trainer or by being on a team for support. Since personal financial planning is confidential by nature, it is hard to achieve in a group setting. You can do financial planning on your own, but most people don't have the time or expertise. There are also behavioral finance obstacles that are best managed with help from another person's perspective. In other words, you may need another person's insight before you can see how you need to change your behavior.

A CERTIFIED FINANCIAL PLANNER^TM professional is best qualified to serve your comprehensive personal financial planning needs.

Put your heart into it today. Your financial peace of mind will be greatly improved.

"Successful financial planning must be inspired by the heart."
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About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

High-Income Individuals Must Save Beyond Contribution Caps

Do you let the government set your goals?

It seems that when it comes to retirement savings, many people do.

Many individuals save 3% of their income for retirement because that's what the government recommends to employers as a "safe harbor" contribution. Yet it's important to know that the contribution level considered "safe" for the employer is not necessarily safe for the employee.

Other people save 6% of their income for retirement because that's what their employer will match. This percentage, however, more likely reflects what's required of the employer to remain competitive and attract qualified employees rather than reflecting the actual needs of their employees. So what does 3% or 6% have to do with your retirement security?

Evaluating Your Yearly Retirement Savings

The amount you should contribute toward your retirement every year is influenced by many factors:

• Age when you start saving for retirement
• Amount of debt you have
• Stability and predictability of your income
• Future growth in income
• Current marginal income tax bracket
• Standard of living, both now and in retirement
• Total income level (which can be capped)

Limits on Defined Contribution Plans

Congress sets total dollar limits on the amount you can save in tax-deferred qualified retirement plans. For defined contribution plans, in general, these limits in 2013 are:

• $17,500
• $5,500 extra "catch-up" contribution if you are age 50 or older
• $51,000 defined contribution limit for employee and employer total

Here's the kicker: The maximum compensation for defined contributions plans, in general, is $255,000 in 2013. Therefore, if your income is over $255,000, the contribution limits have even less merit as a guideline for adequate retirement savings.

One lesson rings clear: If your income is over $255,000, additional savings and investments beyond the contribution limit of a traditional profit-sharing 401(k) plan may be needed to provide you with a retirement that is in line with your accustomed manner of living.

The time to plan for achieving a comfortable retirement is now.

"A contribution level considered 'safe' for the employer is not necessarily the same for the employee."
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About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Computer Passwords: Heard Any Good Ones Lately?

Computer passwords are no laughing matter.

Add "getting serious about my computer passwords" to your list of 2013 new year's resolutions.

Everyone knows you should floss your teeth often, and a lot of people do.

Everyone also knows you should have complicated passwords (and more than a handful), but few people do.

The Worst Passwords Ever

According to Jennifer Waters in The Wall Street Journal, "The annual compilations of 'worst passwords ever' are numerous but remarkably similar in their results. Moreover, the top 25 or so passwords are held by an alarmingly large number of people." Wondering what some of the worst passwords are? If your password is "password," "football," "qwerty," "11111" or any other common combination of letters or numbers, you should think about changing it.

"Computer hackers don't just sit around typing in passwords to websites at night." [Tweet this]

They have computer software programs that do it 24/7. If they hack passwords from a retailer, for example, they barrage major bank websites like Bank of America, Chase Bank, Citigroup and Wells Fargo to see what their "phishing" can catch.

Think of a Story

The best way to remember large numbers of passwords, according to Markus Jakobsson, a security research expert and advisor to the newly formed Council for Identity Protection, is to think of a story. Then come up with three words to describe the story. Customize it for different websites by adding a different color to the end, like red, white or blue.

Group Your Passwords

Identify different groups for your passwords list (for example, financial accounts, social media and retailers). Use different stories for different groups of accounts. Customize each story with a different ending so no two websites have the same password.

Software to the Rescue

Fight fire with fire. Consider using a password management software program. Popular programs include RoboForm Everywhere, Sticky Password, Kappersky Password Manager, DataVault and Handy Password Manager.

Imagine a few memorable stories and start your new year off right with new passwords!

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Stock Pickers Losing the War

When it comes to investing, the "active" versus "passive" management battle continues. What is it all about?

"Active" management describes investment advisors who think they can buy individual stocks and bonds that will perform better than the stock or bond market as a whole. For example, they buy Coca-Cola but not Pepsi, Apple but not IBM, or Macy's but not Target.

"Passive" management describes investment advisors who buy all of the securities in a market index in the proportion owned by the index. For example, they buy all 500 stocks in the Standard & Poor's 500 Index in the proportion that each stock is weighted in the index. The top five holdings would be Apple, Exxon Mobil, General Electric, Chevron and IBM. (Procter & Gamble is the eighth-largest holding, for those of you with Cincinnati roots.)

Investors Vote with Their Feet

In 2012, according to The Wall Street Journal, investors pulled about $120 billion dollars from actively managed funds, the largest yearly outflow since 2008, while pouring about $155 billion in to passively managed investments, the largest inflow since 2008.

Why Passive Management?

There are two key advantages to passive management.

"The advantages of passive investment management are hard to beat." [Tweet this]

1. Cost. Passive funds have significantly lower management fees and expenses. According to The Vanguard Group, one of the largest passive fund companies, its passively managed funds are 82% less expensive than the industry average. This is particularly important for bond funds in a low-interest-rate environment.
2. Diversification. Passive funds own more securities so there is less specific security risk. More important is the performance of stocks an actively managed fund doesn't own. If an actively managed fund doesn't own just a small handful of the top-performing stocks, it will under-perform.

The battle between active and passive management has raged for years and will continue to do so. The advantages of passive management, however, are hard to beat.

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Economic News a Reason for Holiday Cheer!

The media thrives on negative news, especially the financial media. Fortunately, not all of the economic news is doom and gloom. To boost your holiday cheer, here are some fun facts signaling that the economic recovery may be underway.

Pending Home Sales Jump to Nearly Six-Year High

The National Association of Realtors reported that the pending home sales index rose 5.2% in October. Importantly, that number is from when the results of the presidential election were unknown. Pending home sales are defined as a signed sales contract, so actual closing is usually one to two months later.

• This is the highest level of activity since March 2007.
• The Midwest led the country with a 15.6% increase.

In further good news, the excess supply of homes that built up before the housing crises has finally thinned out.

• Previously occupied home sales inventory is at a 10-year low.
• New home sales inventory is near the lowest level since 1963.

U.S. Business Spending Plans Improve

"Planned U.S. business spending increased in October by the most in five months." [Tweet this]

A major gauge of planned U.S. business spending increased in October by the most in five months. While the growth was modest, it may signal a slow recovery.

• Orders for non-defense capital goods excluding aircraft rose 1.7%.

Consumer Confidence Hits a Four-Year High

Consumers are growing increasingly optimistic about the job market and economic recovery.

• The Conference Board Index of Consumer Attitudes rose to 73.7, its highest level since February 2008.

Home Prices Boast Biggest Rise in Over Two Years

A combination of record-low mortgage interest rates, an improving job market, a five-year low in home foreclosures, and a tighter supply of both new and previously owned homes led to home prices posting the biggest percentage gain in more than two years.

• The closely watched S&P/Case-Shiller Index rose 3.6% in the third quarter.
• We recently saw the second straight quarter of year-over-year improvement.
• Single-family home prices rose for the eighth straight month in September, based on an index of 20 major metropolitan areas.

So shake off the doom and gloom and celebrate the holiday cheer. Optimism is an important psychological element in any economic recovery. Now that you know the facts you can do your share and spread the good word. Happy Holidays!

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

What It Takes to Join the 1%

How much do you need to make to be in the top 10% earners in the U.S.? What about the top 1%?

The top 1% is a politically vilified group, but they may not be who you think they are. So, who are the 1%? What is the price of membership in this club? Could you be in the top 10%? Finally, do the rich pay their share of taxes?

Who Is In the Top 10%?

"The top 10% had at least $116,623 of adjusted gross income" [Tweet this]

Let's start with the top 10%, because more people belong to that group than you may expect. Based on 2010 income tax returns using adjusted gross income (basically the number at the bottom of page 1 of your Form 1040, before exemptions and deductions):

• The top 10% had at least $116,623 of adjusted gross income (AGI).
• The top 10% includes 45% of the total AGI.
• The top 10% paid 70.6% of the total income tax burden.

The bottom 90% of taxpayers paid less than 30% of the total national income tax.
The bottom 50% of taxpayers paid 2.36% of the total federal income tax revenues.

• The top 5% had at least $161,579 of AGI.
• The top 5% includes 34% of the total AGI.
• The top 5% paid 59.1% of the total income tax burden.

Now, a drum roll for the top 1%:

• The top 1% had at least $369,691 of AGI.
• The top 1% includes 19% of the total AGI.
• The top 1% paid 37.4% of the total income tax burden.

Now you know what it takes to "join the club."

Income equality and tax fairness are challenging dilemmas. Be well informed and draw your own conclusions as the debate continues over the fiscal cliff and other economic policy issues.

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.