Making Cents: Why financial education is Important

We live in the age of information and big data. As a result, there is no shortage of ways to obtain information about any matter of personal finance.

Sometimes the information that you find is relevant and useful, and other times it is outdated and not germane to your topic or need. The problem is recognizing whether the information that you are digesting or acting on is completely applicable to you. An appreciation and understanding for all of the moving parts in your financial life will give better context to all financial decisions.

One of my fondest memories about money as a child was when the local banker actually came into the classroom. Each week, the students who could bring in a dollar and give it to the banker would have that dollar added to their account. Every now and then, we’d also bring our passbooks to school for updating and learn about the concept of interest. (Sorry to those of you who are too young to know about passbook savings accounts.)

I can’t say that this early ritual made me the best saver in the world, but it definitely engrained deeply in my subconscious that saving was fun. Somehow make it fun for your kids, and teach them some early lessons to last a lifetime.

Everyone has dreams. When the reality wears off that you may not be the next bonus baby to the NBA, you begin to realize that for many dreams there is a financial connection. In addition to Blondie telling rock fans that “Dreaming is Free”, I can tell you that it is also healthy. Without a clear vision of what your dream looks like, you’ll never find it.

In the pursuit of dreams, we’ve all done something stupid. Whether it was not buying insurance, betting too much on an investment or tanking a business, stuff happens.

Not even the smartest person alive will be flawless in their financial decision making. The best laid plans get derailed and changed by reality -- life, interest rates, economies, markets, employment, health to name a few.

A lesson in needs and wants is valuable at any age. This lesson is also best learned at a young age. The most creative program that I’ve seen for youngsters comes from a local savings bank that has created a Broadway style play for grade school children about good financial habits. It is entertaining, informative and memorable.

If you think that it’s too late for you to learn a few new tricks about anything financial, guess again. I learn something new nearly every day and I’ve been doing this for over 30 years. Financial education is for everyone, and making its way into your neighborhood schools. Ask your school superintendent what you can do to help.

Have a happy, healthy and fiscally savvy New Year.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Evaluating your team of advisers

Communication seems to be the single most important issue. Are the professionals working for you good at returning calls or email? Do they offer timely and insightful advice, or is it always you who must reach out to get their attention regarding something you overheard at a conference or read in a trade publication? If any one of your advisers is hard to reach and never proactive at reaching out to you with ideas or planning suggestions, it may be time to get a second opinion.

When you are communicating with a professional, do you understand what’s being said to you? Although technical talk is sometimes needed, I find advisers who speak in jargon and technical terms very difficult to work with. Working with professionals who can bring some of these highly technical topics to an understandable level makes informed decision making more efficient.

Do the various members of your professional team ever talk with one another or do they compete for your attention?

At least annually, have a meeting with as many of your advisers as may be needed and let the discussions begin about getting or keeping your personal and business financial house in order. An agenda that covers everything from business growth, risk management, investments, and tax and estate planning is recommended.

In addition to group meetings, take the time to meet with your advisers one-on-one. Getting to know them, and a little about their business can be a helpful part of the process. You want to learn about their succession plans. What happens to your company if one of your advice givers retires or fails to wake up for breakfast?

Learn about the other clients they serve. Do they have many like you? Are the clients that they serve in your industry or age group and about the same size as you or much larger or smaller? A professional with deep knowledge of your specific demographics can be a positive factor based on all that’s seen when serving other clients.

Mistakes are a sign that you may not be dealing with the most qualified professional for the job. Everyone makes mistakes, but consistent mistakes or omissions should give you cause to pause.

Switching from one professional to another is never easy. But suffering, or not realizing that you are getting inferior service, is even worse.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Celebrate what is going right in your world

I don’t know if it’s the turkey or the non-sectarian nature of this U.S. holiday, but Thanksgiving is my very favorite. Seeing loved ones that we encounter too infrequently, and hanging around to do nothing but catch up and enjoy each other’s company should happen more often.

But how many actually celebrate and give thanks for what is working well? In this column, we try to address issues frequently misunderstood or ignored by savers, investors, taxpayers and insurers. But today we are going to ask you to list the things that are going right in your world, and keep that list with you this Thanksgiving week to remind yourself that we all have something to celebrate.

Because we are social creatures, let’s start with people. Who are the people that enable you to be who you are? Family ranks high on the list here for many. Be grateful for what you have, and what you do not have. Accepting children for who they are and who they want to be is healthy, but making sure that your kids don’t grow up as entitled over nurtured brats is just as important to many. Celebrate your children’s being when you see them, and find the courage to address issues that may be bringing them down at some private moment before the next holiday.

Outside the family, friends and neighbors will probably make the list. Maybe this is a good time to re-kindle an old friendship. Celebrate the professionals in your life. Look at the time it gives you back to pursue other interests and the polish that it puts on those areas of expertise.

Whether it’s your CPA who diligently helps you reduce your tax bill or your doctor who works to cure whatever illness you may have, celebrate these people who care about you and want to give you their best.

It’s also healthy to celebrate financial success. Making a note of the financial things that worked well for you this year will serve as motivation to keep the momentum building into the New Year. Don’t get giddy or greedy, and keep your eye on what is important about investing and what can ruin this celebration in future years.

Did you pay down debt in 2013? Calculate how much and put it on the list. Paying off debt is always a wise thing to do.

Celebrate the gaps that you may have plugged in your financial plan. Did you get your estate plan done? Did you beef up your life or long term care insurance plan? Did you finally get that rental property into a protected entity such as an LLC? Accomplishing any financial matter that has been on your to do list for a lengthy period deserves celebration.

Happy Thanksgiving.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Significant gifts come with consequences

AS the year winds down, many think about making gifts to charities or loved ones as a part of shedding assets in their estate. This could be for estate tax planning, the fear of loss through a long term illness or simply for philanthropic purposes. Here we are going to dispel a few myths and highlight a few common misunderstandings surrounding gifts.

Starting with charity; any gifts that you make to a qualified charity are generally tax deductible. I say generally because if you do not itemize deductions on your tax return, there will be no tax benefit. On the other extreme, for those with very large charitable contributions, your deductions could be limited because of the Alternative Minimum Tax. If you are thinking of a big gift, check with your accountant to see if there will be any restrictions on your deduction.

Gifts to family members or friends; are never deductible for income tax purpose, but these gifts may be excluded from your future estate tax return. Under current law, each taxpayer has an exemption whereby any taxpayer may gift up to $14,000 to any recipient. That means a husband and wife can each give $14,000, making a total possible gift of $28,000. To do this properly, there should be two separate checks. If the account is in only one name, then the two checks should come from each donor’s personal account.

There is also a lifetime federal exemption of $5.25 million in 2013. This amount rises to $5.340 million for 2014. Essentially, this means that you can give away or die with up to $5.25 million, and pay no gift or death taxes to the IRS in 2013.

There may, however, be state death taxes to pay. In Massachusetts, the current exemption sits at $1 million.

When a gift is given that exceeds the annual exclusion amount of $14,000, a gift tax return must be filed or technically you owe gift taxes on that gift. This is frequently overlooked with gifts of real estate or college 529 plans. For the 529 plans, there is yet another tax exemption that allows you to contribute up to 5 years of 529 gifts currently, and spread them over a 5 year period. This also requires an annual gift tax return.

Gifts of real estate have a few problems. The first may be the tax cost. If mom gives you her house because she is concerned about losing it to long term health care costs, you’ve just inherited her tax cost. Your cost basis for calculating future gains from a sale will be whatever her cost basis is. If she bought the home five years ago, you probably have a high basis. But if she bought five decades ago, this could be a big tax hit.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Is life insurance a good deal for everyone?

When I hear people refer to life insurance as a bet against themselves, I just cringe. The truth is that life insurance is a bet in favor of your family, one that may help them get through some challenging times following the death of a loved one.

Think of a properly structured and funded life insurance policy as an investment that will someday pay a benefit to your beneficiaries. Not all insurance contracts are guaranteed for life, so perhaps your first order of business is to see whether your policy is on a track to last as long as you do.

The next important criteria would be the internal rate of return (IRR) on death benefit. The IRR tells you what the equivalent annual rate of return you are expected to earn for your heirs because of the continued premium payments and the ultimate death benefit that gets paid out.

Naturally, if one dies sooner into the contract, the internal rate of return is quite high. If one lives to life expectancy, many companies are currently illustrating about a 4 to 5 percent IRR. For those who live well past age 90, that IRR may drop to 2 – 4 percent.

Given today’s low interest rate environment, even the most pessimistic life insurance pundit may agree that the IRR forecast is fairly attractive. It looks even more attractive when you consider that these proceeds are received income tax free, and if structured properly, can also avoid all death and transfer taxes.

The risk of a life insurance policy not meeting expectations lies in the assumptions used in the insurance illustration. Companies assume an ongoing rate of return for the premium dollars that they receive.

Typically premium dollars are invested in very secure fixed income vehicles, and are not earning too much in today’s market. They forecast an interest rate that will be credited to any cash value accumulated in the contract. These rates will change over time.

Similar to the interest crediting rates, some companies build anticipated dividends into the forecasts. These dividend scales have been under pressure during this low interest rate cycle.

The last assumption is the mortality costs of the insurer. Some contracts come with a fixed mortality charge; these are the most costly in the early years. Other contracts continue to raise the mortality costs each year and then have a cushion built into the contract allowing them to increase.

If you are comparing apples to apples in terms of assumptions, your IRR on death benefit is one of the best ways to truly evaluate the cost of a life insurance policy.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.