Overconfidence with Finances and Sailing

Helping GenX parents plan for college and retirement.

317-805-0840, ncarmany@thewatermarkgrp.com


Overconfidence With Finances and Sailing
1. How we get ourselves into trouble
2. Common financial moves
3. Get help

This post compares a day out on the water sailing to common experiences people encounter with their financial lives.  The root for many of these difficulties reflect behavioral.

Year-End Permanent Tax Savings

2016 will be closing quickly.  Like the Cubs, you can finish strong and put your finances in order for 2017.  One way to carry out this task involves a few simple techniques outlined by Sheryl Rowling in her article, “Permanent Tax Savings and Techniques (1.)”

Why is this important?

Every year taxpayers tell the Internal Revenue Service (IRS) a story.  A story about how their income originated and about important financial activities, like how much they saved in retirement accounts (found on the W2 for an employee’s work-sponsored plans), charitable giving, and business deductions.  Beyond these basic categories, your tax return reveals more information about your family.  Here are a few examples: that you may have student loan debt because you take a student loan deduction or that you may have a child in college.  Your tax return may suggest that you have a large portfolio; think about how much you report in dividends and interest.  For itemized filers, your tax return may reveal that you have a large home based on your mortgage deduction.

The aggregation of your tax data gives the IRS a good idea of your financial situation.

The Big Bad Wolf

Now imagine the IRS as the Big Bad Wolf in a financial story about the Three Little Pigs.  In this version, the wolf has the capability to rewrite parts of the story he doesn’t like.  big-bad-wolfWhich part will he likely retell?  Of course, it will be the part where he visits the third pig’s house.  Our nemesis will likely choose a way to blow down the house.  Now, not only will the wolf destroy all the homes, he will be able to gobble up not one but all three little pigs.

In the same way that our Big Bad Wolf will retell the story to his advantage, the IRS has the ability to influence your annual income story.  Think about how laws change and the interpretation taking place if you receive an audit.

Like the Big Bad Wolf, we can rewrite the story, this time introducing a cousin piggy who has built an underground bunker.  Here, the wolf has no building to blow down.  If properly stocked, all the little pigs will be safe for a long time.  Here is where you get to be the cousin piggy who built the bunker.

How to build your bunker

First, the cousin focuses on understanding a few basics about the wolf, specifically that thebunker strength of the wolf comes from his lung capacity.  So your objective will be to take away his breath.

Sheryl outlines tactics for knocking the wind out of the IRS by knowing that the “goal is to decrease taxes so that some or all of the reduction is never paid back to the government.”  Better yet, permanent tax savings may be realized by moving income from higher tax brackets to lower tax brackets or recognizing income without paying any tax.

Ideas for consideration (from the article.)

  1. Avoid short-term capital gains: Because ordinary rates are typically two times higher than long-term rates, review your trading and the turnover rates of your active mutual funds in retail brokerage accounts.
  2. Defer income to years subject to a lower tax bracket: This is where year-end planning may pay off. What will your income be for 2016?  What will it be for 2017?  Is there income you may defer into 2017 that may be taxed at a lower rate?
  3. idea-lightbulbRecognize zero-capital-gain tax opportunities: If you are in the 15 percent bracket or less, capital gains are not taxed up to a certain point. You may need to balance this opportunity with the chance to take money from your tax-deferred accounts and convert them to Roth at a rate of 10 percent or 15 percent, never paying tax again.
  4. Hold appreciated investments until death: The beneficiary receives a step-up in basis, thus avoiding any capital gains tax. However, Sheryl does address the possible volatility of the investment and the chance that it may go down, offsetting the potential tax benefit.
  5. Use the asset location theory: The author suggests that “moving appreciating investments to taxable accounts has the potential to permanently save the difference between ordinary and capital-gains rates on the appreciation.”
  6. Convert to Roth IRAs: Moving money, during a low-income year, from a tax-deferred account like an IRA to a tax-free account such as a Roth may help save in taxes paid over your lifetime.

As always, check with your tax advisor for specific advice about your situation.  Should you have questions or concerns, you can contact me at 317-805-0840 or ncarmany@thewatermarkgrp.com.



  1. http://www.morningstar.com/advisor/t/116935305/permanent-tax-savings-and-techniques.htm

Comprehensive Planners vs Spot Checkers

Here and Now

Get good grades, go to college or trade school, and then land a high-paying job.  That is what we tell and teach our youth.  Have you gone through the same cycle?  How has it worked out? If you are like me, you have encountered many twists and turns along the way.

As I stop now and look back, I realize the disservice I have done my children through whathere-and-now I have told them. Here in this moment, I see that the finish line has been a life filled with the promise of a later, greater life at retirement.  This thinking had led to a personal longtime mantra of “working towards the later, greater version of yourself.” Am I not great now?  If not, what is stopping me from pulling that greatness forward to now, this moment?

How do we define the extent of this greatness?  Culturally, we do it by comparing incomes or net worth (in other words, to share an old favorite saying, “He who dies with the most toys wins,” a saying often heard during my childhood and adolescent years).  After completing thousands of financial plans, I see the reality of this saying. Here is the updated version: He who dies with the most toys usually has much debt, and sometimes leaves his family with an empty bag.

Fearing that they would leave family members with an empty bag while heading towards the finish line of retirement, generations before us completed anecdotal planning—what I like to refer to as Spot-Checking.  Am I saving enough for retirement? Yes, buy this mutual fund, the returns will help. Are you sure?  Ok, save more and protect your family.  Buy this permanent life insurance.  Have more stuff? Here, buy another policy.

After you buy the product, you fall into an advisor black hole, a place where you surface only after the book of business has been cycled through.  Consider the following for a moment. When did you last hear from your insurance agent?  At your policy renewal? If not then, when? How about the last time a significant event took place in your life?  Did you hear from your investment manager?  Has your estate lawyer checked in to inquire about life changes?

Chances are you spoke to one of these professionals when a major event was taking place in your life for which you needed their expertise.  Often, we do not seek this “expert” counsel until the event has already passed, limiting the effectiveness of the help.  It would be similar to watching your house burn halfway down, then deciding to call the fire department.

This planning has been going on for decades, with our parents, grandparents and continuing with most of us today.  The experts come in to address the singular issue or give peripheral solutions. The client does not know what he does not know.  On down the road, we go to the next event.

Change is in the Air

The recent ruling stemming from the Department of Labor and requiring advisors to act as time-for-changea fiduciary will change the way financial “advisors” work with client’s retirement assets.  The client (and not the product, sales agent or company) will be placed at the center of the relationship.

New companies are popping up, like the XY Planning Network, where advisors commit to putting the client first.  The Garrett Planning Network is another example.  The people working in these circles care about your financial picture and do not want to come in for a spot-checking exercise.  As proof of intent, review how your advisor gets paid.  Is it commission based? Could she win a trip for selling large volumes of product (often the case with annuities)?

Next Step

Review the last time you had a major financial event. Did it go the way you planned? What next-stepwould you change?  Could you have prepared ahead of time?  If so, what would the preparation entail?

Addressing these questions is only a small portion of the ways in which a comprehensive advisor helps. Instead of calling after the house has burned halfway to the ground, work with a comprehensive planner and install a sprinkler system in your financial house.  It will not stop a fire from happening, but it will keep the house from burning down.

Here is an example of this in my life.

Recently, I started working with a client who lost her mother. (Her dad passed away a few years ago.) Overwhelmed, she did not know where to turn.  We took care of her immediate needs by consolidating accounts, going through policies, and working with her CPA to file the estate tax returns.  The client was happy with the progress we had made in a short time.  However, she was still overwhelmed by the money, so I turned the conversation to her future.

It took time, but she was eventually able to paint a picture of a desired future, honoring the values of her parents by paying for her children’s college and paying attention to the way she spends money. We accomplished this progress by starting not with products but with what she values and why those values are important.  We even paused to see if her calendar and checkbook currently matched those values.

I went back and started crunching the numbers. As I went through her data, a loan on a 401k was found. We discussed why the loan had been taken out and how we develop behavior biases with our finances.  Since the conversation, she decided to take action by looking for ways to pay off the loan and increase her retirement savings with a recent pay raise.

As the early wrap-up of the plan implementation took place, I found unclaimed property in her name.  She put these funds towards the loan, saving her taxes and tax penalties if her employment ended. Plus, she did not have to take cash flow from her current spending.  She has fortified her plan by building momentum along the way. She is confident and living a life based on her values.

Spot On

Spot checkers who come in only to sell a product or help make an isolated investment change or portfolio tweak usually do not go the extra mile to check the unclaimed property, walk through the process of paying down a 401k loan, or having debt conversations about matching a calendar and assets to personal values. This is how a comprehensive planner helps. This is how financial wisdom is built.  The best part will be seen as her children learn from Mom’s money wisdom.

Questions or comments?  Use the contact me link to send us a message.


As a parent, I often remind my children to behave when I leave them with friends or relatives, and most of the time they do.  However, many children, including my own, pass through extended periods during which they transform from cute, lovable beings into gremlins (often in the presence of parents) that spread toys, food, and clothes all over the house, leaving a wake of mental stress and making parents question their sanity.  It is during these moments that parents continually provide feedback and coach their children on proper etiquette, thereby developing citizenship.  Without this oversight, bad events can happen, like the teenage parties we have seen in movies – or, worse yet, someone becoming injured.

As a financial planner who has been through two major market swings, I have met parents who did not have proper oversight of their financial lives, resulting in the same destructive consequences of a teenage party.  One large difference does exist: The parents who move quickly to correct a minor’s behavior often do not have someone holding them accountable for bad financial behavior.  In fact, most do not even realize that a bad habit exists.  Here are a few of the most common investing behaviors to correct.


confidenceJay Mooreland points out in his article “The Cost of Ignoring Behavioral Biases,” that overconfidence is the belief that we always make correct decisions in our best interest.  Often, a case of overconfidence surfaces during the NCAA college basketball tournament when a fifteen seed upsets a second seed.  It is part of what makes March exciting, but it leaves the normally disciplined basketball team wondering what happened.


Past performance is not a guarantee of future returns.  Investors see this and understand its meaning, yet they look at what has performed the best over the previous year or quarter and put investment dollars in the hot arena.  This is a form of anchoring; we look to the past to predict the future with anecdotal data to help us “justify decisions.”  Need proof? Watch retail investor dollars over an extended time.  Money flows into areas that have done well and out of underperforming areas.


Think about the last time gas prices rose.  We saw a decline in travel, and we started carpooling or riding our bikes to work.  What happens when an item goes on sale?  People wait to see a price decline in desired items before completing a purchase.

Yet in the stock market, the opposite normally happens.  People rush to buy at times when the market has done well out of fear of missing out or out of greed for money.   Warren Buffet has a famous quote: “Be fearful when others are greedy and greedy when others are fearful.”


Fear and greed are powerful emotions.  Fear, the stronger emotion, can paralyze a person, Frown .jpgpreventing him or her from taking action or causing him or her to run away.  We do not like being wrong, as regret makes us lose confidence.  Instead of facing the effects of a bad decision, no decision is made.

I still encounter people who moved to cash after the 2008 crisis and who will not reinvest even if their circumstances require it.  I ask why, only to hear, “What if the market goes down again?”


In my post, Risk Characteristics, the importance of perceived risk was discussed.  If the perceived risk does not match the real risk, normal behavior may not be pursued.  For example, over the past five years, many US investors have overweight US stocks.  Why?  Because performance is compared to the S&P 500.  There are two main effects: 1. Risk increases by reducing diversification, and 2. Buying at or near a top happens.  The cure is simple.   Keep a globally diversified portfolio and rebalance to lower risk and to buy asset classes while they are down.


How many of these behaviors do you exhibit?  Who is holding you accountable for achieving your vision?  If you do not have answers to either of these questions, perhaps it is time to consider discussing your details with a professional. If you do have the answers, are you learning from the mistakes?  A good planner will be there to coach you toward the correct behaviors while not passing judgment or making you feel like a failure.

Here are two parting quotes:

“The risk is in the behavior of the investors.” Howard Marks

“That truth is that human behavior is a better predictor of whether or not we’ll reach our financial goals than anything else.”  Dr. Daniel Crosby


  1. http://www.theemotionalinvestor.org/wp-content/uploads/2013/10/Cost-of-Ignoring-Behavioral-Biases.pdf
  2. http://www.morningstar.com/cover/videocenter.aspx?id=690334
  3. http://www.theemotionalinvestor.org/behavioral-investing-insights-featuring-psychologist-dr-daniel-crosby-incblot/

Working in Higher Ed and Planning for Retirement

Leveraging higher education retirement plans yields great value if done correctly. However, many complicated questions need answers. Should you save in a 403(b), 457, or IRA? Do the plans have different features? What about Roth choices? What if I lose my job?

Here, information will be shared to help make the complicated world of retirement planning simple.

Retirement plan choices.

Choices403(b) – Scott Dauenhauer notes in his book, “Wild West: Providing Fiduciary Advice to Public School Employees”: “The 403(b) was codified into law with the Technical Amendments Act of 1958 and was more of a pre-tax, tax deferred ‘program’…” (1). This took place before the Revenue Act of 1978, setting up the 401(k) (2) and the Employee Retirement Income Security Act (ERISA) of 1974 establishing the IRA (3). The 403(b), also called a tax-sheltered annuity, is for “certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers” (4). The IRS notes (4):

Individual 403(b) accounts will be opened up as one of the following types.

  • An annuity contract, which is a contract provided through an insurance company.
  • A custodial account, which is an account invested in mutual funds.
  • A retirement income account set up for church employees. Retirement income accounts can invest in either annuities or mutual funds.

As with its cousin, the 401(k), participants may contribute up to $18,000 for 2016, plus another $6000 if over the age of 50.

457 – The 457 is a special plan available to local and state employees (and other 501(c) groups). The 457 has the same contribution limits as the 403(b) and 401(k). A few key differences as noted by 403bwise.com are:

  • Assets in a 403(b) are held directly by employees, while 457(b) assets are held in a trust for the benefit of employees.
  • There is no federal 10 percent premature distribution penalty imposed on withdrawals from a 457(b) plan when separating from service.

Additional catch-up contributions accompany the plan (5).

  1. Two times the current year’s normal retirement contribution limit, or
  2. Underutilized limits from past years. Note: Not all employers make this additional catch-up option available, nor are they required to do so. Check with your employer for details.

401(a) – Investopedia notes, “A 401(a) plan is a retirement savings plan normally offered by government institutions rather than by corporations. These plans are usually custom-designed and are only offered to key government employees as an added incentive to stay with the organization. The contribution amounts are normally set by the employer and are mandatory” (6).

Normally, each of the listed plans allows the participant to save money on a tax-deferred basis, with the tax benefit being realized now by seeing a reduction in income for the contribution amount. However, the new Roth provisions allow participants to put away money which has been taxed now and allow the money to grow tax-free. In this provision, tax diversification may be incorporated into a portfolio where the benefactor creates flexibility by hedging future tax rate changes. (Click here for a better understanding of tax diversification.) The Purdue plans allow for the Roth option on the 403(b) plan (7). Additionally, participants can save in multiple plans.

By creating a tax-diversified and investment-diversified plan, retirement planning will now be flexible.

Next StepsTIme for action

  1. Review your current plan for opportunities to improve your retirement picture by
    creating additional flexibility.
  2. Call me at 317-805-0840 or email me at ncarmany@thewatermarkgrp.com with questions or to review options.



  1. “Traditional IRA.” Wikipedia. Wikimedia Foundation, n.d. Web. 22 June 2016.
  2. “Your 401(k): When It Was Invented-and Why.” LearnVest. N.p., 3 July 2013. Web. 22 June 2016. <https://www.learnvest.com/knowledge-center/your-401k-when-it-was-invented-and-why/>
  3. “Traditional IRA.” Wikipedia. Wikimedia Foundation, n.d. Web. 22 June 2016. <https://en.wikipedia.org/wiki/Traditional_IRA>
  4. “Publication 571 (01/2016), Tax-Sheltered Annuity Plans (403(b) Plans).” Publication 571 (01/2016), Tax-Sheltered Annuity Plans (403(b) Plans). Interna Revenue Service, n.d. Web. 22 June 2016. <https://www.irs.gov/publications/p571/ch01.html>
  5. Otter, Dan. “Wise Information for K‑12 Employees.” Other Plan That May Be Available: 457(b). 403bwise, n.d. Web. 22 June 2016. <http://403bwise.com/k12/content/18>
  6. “What Is the Difference between a 401(a) and a 401(k)? | Investopedia.” Investopedia. N.p., 2015. Web. 22 June 2016. <http://www.investopedia.com/ask/answers/060215/what-difference-between-401a-and-401k.asp>
  7. Snapshot of Purdue University Retirement Programs. West Lafayette: Purdue U, n.d. <http://www.purdue.edu/hr/Benefits/currentEmployees/retirement/pdf/Snapshot_Retirement_programs.pdf>

Brexit Stage Left

Exit stage leftThe financial news scrolling across computers, tablets, and smartphones leaves investors wondering what the UK vote to exit the European Union, “EU”, means. The markets and Prime Minster Cameron seemed very confident the vote would result in the UK staying in the EU. Now, not only do we have UK leaving the EU, but Cameron planning on stepping down as Prime Minister.

Economics of the UK

The UK is roughly 4% of the world GDP and slightly larger than the GDP of California.  Also, the UK has been the fastest growing G7 economy for the past four years. Globally, the UK is the fifth-largest importer and ninth largest exporter.

The current economic strength of the UK suggests leaving the EU may not be a wise move.  British companies may lose important trade advantages that benefit EU members. In addition, the decision to exit the EU may result in London losing its role at the financial center of Europe.

What we do know?

We do know the markets receive periodic and unplanned surprises yet continue to move books and what do we knowforward over time.  People often react and make behavioral mistakes in times of event driven market turmoil with the selling of securities and abandonment of long-term plans and strategy.  The markets will likely put stocks on sale and give some investors the opportunity to buy at a discount. The global and UK economies will adjust over time to the new conditions and prices will reflect the changing conditions.

What to do now?

  1. Does your portfolio need to be rebalanced? If so, make the proper adjustments.
  2. If you were planning on putting large amounts of cash to work, perhaps now is a great opportunity.
  3. Continue your dollar cost averaging your 401k or work retirement plan. During times of large market swings, a dollar cost averaging approach pays off.  This is also true for dividend reinvestment plans.

Financial Recipe


I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
Contact Information: ncarmany@thewatermarkgrp.com, 317-805-0840

Important dates and ages for retirement planning

Planning for retirement takes center stage for most boomers today.  While saving, reducing spending and debt, and planning how you will spend your time are important, knowing what events take place at key ages will help manage expectations.  Here are a few key dates.

Age 55:  If separated from service, participants may access funds in a 401k without a 10% penalty. This is important for people out of work in their early to mid-50s. If a person has already rolled his or her money over to an IRA, he or she could look at completing a 72t distribution, which avoids the penalty, but he may take more than needed.

59.5: Most account holders know about accessing tax-deferred and Roth IRA money without any tax penalty at 59.5.  The Roth needs to have been open for more than five years. If not, the owner has access only to the contributions with no tax or penalty.  Keep in mind that money taken from the deferred tax bucket will still face normal income taxation.

62: Early social security benefits.  What sounds better than hanging up the professional life and getting an income early?  Ah, wait a second, it will cost you.  For most boomers, it is about 8% per year, a nice return for portfolios these days.  Think twice before electing for this alternative.

65: Medicare eligibility; make sure you sign up in advance.  The number for the Social Security Administration is 800-772-1213.  Keep in mind while part A does not cost you, part B premiums are deducted from your Social Security payment if you are drawing Social Security at the time you start receiving a benefit.

66-67: For most of us, this will be full retirement age to start receiving Social Security. Participants who delay benefits until the age of 70 will see an increase in their monthly benefit.

70: The age at which you must start taking Social Security.

70.5 or April 1st of the year in which one reaches 70.5: Welcome to required minimum distributions.  The IRS mandates that qualified account owners take out a required minimum distribution at the age of 70.5 or by April 1st of the year following in which one reaches age 70.5.  Keep in mind that the latter will cause two required minimum distributions in one year.

Here is an interesting observation: note the age of 70.  People start taking Social Security as a requirement, and must take required minimum distributions. As much as 85% of Social Security income may be taxable.  This acts as an annuity for the government.  Coincidence?  I don’t think so.

By understanding these key ages, baby boomers will be able to coordinate income sources to help maximize lifetime benefits and reduce taxation.

Contact me at 317-805-0840 or by email at ncarmany@thewatermarkgrp.com to create a tax-efficient retirement income.

Higher Ed Faculty: How target date mutual funds work.


I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
Contact Information: ncarmany@thewatermarkgrp.com, 317-805-0840

Service Levels
1. Target Date Allocations
2. Importance of Asset Allocation
3. Glide Path for Target Date Funds
4. Benefits and Points of Caution