Kids and Taxes – Substantial Changes in 2018

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Great, Susan has a good summer job and works after school to help save money for her education. In addition, her parents want to help her out by investing money in her name. Along with these paychecks come one of life’s two “guarantees” TAXES! (death and taxes). Depending on the income she received she could be in for a rude awakening!

The 2018 IRS tax rules are substantially different than prior years regarding kids and taxes. First let’s differentiate   “earned income” from “unearned income”. Earned income is from a job, whether it is on a paycheck from a company or cash paid for services rendered. Unearned income is primarily from investments and includes interest and dividends. Other forms include alimony, pensions and social security.

Each of these income types has different rules, even when combined.

1. Susan is a 17 year old dependent child and lives with her parents. She worked over the summer and part time during the school year, in 2018 she will make $13,000 in wages/tips. She does not have any unearned income. Does she have to file and pay federal income tax for 2018?
YES. She must file a tax return because she has earned income only and her total income is more than the standard deduction amount for 2018 of $12,000. If Susan had made $11,999 she would not be required to file or pay any federal taxes.

Starting in 2018, the standard deduction for a dependent child is total earned income plus $350, up to a maximum of $12,000. Thus, a child can earn up to $12,000 without paying income tax. This is a substantial increase over 2017.

Even if your child isn’t required to file a return, there are good reasons to do so anyway. If they had federal income tax withheld from their paycheck, they should file a return to receive a refund of the withholding’s.

2. Susan was paid as a “contractor”, not as a payroll employee? 
Some employers may want to avoid the hassle of tax withholding and other costs by calling a worker an “independent contractor” for tax purposes, or just write them a check every 2 weeks.  Susan might think that is just great, because she won’t have income and payroll taxes withheld from each paycheck. At the end of the year they just send that dreaded 1099-Misc (box 7) form to Susan.

This unfortunately is going to costs Susan some money out of pocket. For tax purposes, Susan would be treated as self-employed, meaning that she would be required to file a tax return and pay a 15.3% self-employment tax when income exceeds just $400. This tax is for Social Security and Medicare. For payroll type workers, the employer pays half of these taxes, but self-employed workers pay them all. Yes, they can deduct ½ of this amount as a deduction to income, but this is not as good a deal as they get from a true employer paying ½.

Susan is now subject to the same tax rules as any other business. If your child earns more than $400 through babysitting, dog walking, lemonade stands, or any of a wide range of similar money-making endeavors, the self-employment tax might be unavoidable. But look at it this way, Susan is learning valuable lessons about the responsibilities of being an “entrepreneur”.

3. Would Susan need to file a return for unearned income from investments in her name? 
If Susan has only unearned income like capital gains or dividends and interest from investments, the threshold for having to file a tax return is $1,050.

4. Susan is a 19 year old college student claimed as a dependent on her parents returns, received $250 taxable interest income (unearned income) and earned $2,500 from a part-time job during 2018 (earned income).
She does not have to file a tax return. Both her unearned and unearned income are below the thresholds, and her total income of $2,750 is less than her total earned income plus $350 ($2,850). The rule is, earned and unearned income together total more than the larger of (1) $1,050, or (2) total earned income (up to $12,000) plus $350.

However, there are different rules if your child has unearned income from savings and investments, plus self-employment income.

There are reasons a parent might want to put a child’s income on their return, you can read more about this, just take a look at Parent’s Election To Report Child’s Interest and Dividends in Part 2 of IRS Publication 929.

5. Is there any tax benefit of having investments in my kid(s) name? 
Keeping a lot of investments in a kids account used to be a popular tax strategy, because it allowed investment income to be taxed at the child’s lower rate. The so-called “kiddie tax” in 1986 was aimed at preventing parents from abusing this strategy, and in 2006 the rules became even more restrictive.

For dependent kids age 18 and younger (or under age 24 if they are a full-time student) in 2017, unearned income above $2,100 (from a taxable account) is taxed at the parents’ highest marginal income tax rate, which is likely to be higher than the capital gains rate that would otherwise apply if the investments were in the parents’ names. Below that threshold, the first $1,050 of a child’s unearned income is not taxed, and the next $1,050 is taxed at the child’s marginal tax rate.

The tax rates on minor’s unearned income were changed by the new 2018 tax law. Starting in 2018, unearned income above $2,100 is taxed at the rates that apply to trusts and estates.

So there is little tax benefit to put these investments in your kid’s name.

Caveat:  All complicated tax situations should be discussed with your tax professional.

 

 

Beware the IRS Fools with 410K Limits for High Compensation Employees!

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I recently wrote about 401K plans and how they have allowed workers to build wealth over the years to cover the costs of “filling the gap” in retirement.

The main advantage of 401K plans is the amount you can contribute. For 2018, that $18,500, up from $18,000 in 2017. You can also make a “catch up” contribution if you’re 50 or older. That adds another $6,000 to the contribution. If your employer has a matching contribution, it turns into a serious wealth accumulation scheme.

Let’s say for example, let’s say you make the full $18,500, plus the over 50 $6,000 catch up, that’s $24,500 coming from you. Your employer has a 50% match, and contributes another $9,250. That brings your total contribution for the full year up to $33,750! In 2008, the overall limit for 401K contributions, which includes money from all sources, including your employer’s matching contributions, is $55,000.

As Great as that looks, there are serious limits in the plan if you fall under the category of highly compensated employee “HCE”. The thresholds defining someone as an HCE are probably lower than you think. If you fall into this category your 401K plan suddenly isn’t as generous.

First of all contributions made by HCE’s can’t be excessive when compared to those of non-HCE employees. For example, if the average plan contribution by non-HCE’s is 4%, then the most an HCE can contribute is 6%. I’ll tell you why below. But if you make $150,000, and you’re planning to max out your contribution at $18,500, you may find that you can only contribute $9,000. That 6% of your $150,000 salary. Here is something else you’ll learn, if you’re determined to be an HCE after the fact, like after you’ve made a full 40K contribution for the year, the contribution will have to be “reclassified”. The excess will be refunded to you, and not retained within the plan. An important tax deduction will be lost.

And, another little quirk, HCE isn’t always obvious. The IRS has what’s known as family attribution, which means you can be determined to be an HCE by blood. An employee whose a husband/wife, child, grandparent or parent of someone who is a 5%, or greater, owner of the business, is automatically considered to be a 5% or greater owner.

See, what happens is that every year the IRS requires a 410K plan test, these are called Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests.  

The bottom line is that lesser compensated employees may be able to contribute MORE to their plan than a HCE can.

I’ve experienced this situation, it was due to the company failing the test, we had too many newer employees who did not opt-in for their 401K plans. They were at the lower end of the compensation scale. So, these days many companies are, by default signing up all new employees into their 401K plans even with minimum contributions. Besides, without most companies offering pension plans the 410K is in all employees interest.

If you are interested in learning more about these HCE test you can check out the IRS site below:

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests

 

 

Does Your Company “True-Up” Your 410K?

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Today employer sponsored 401K accounts are the number one way to both build wealth and supplement your retirement income needs.

It is not unusual to have people retiring today with over a $1M in an IRA, much of this being transferred from an employee sponsored 401K that was converted. While $1M in an IRA might sound like an optimum situation, it may present its own problems when you turn 70 ½ and have to start taking Required Minimum Distributions (RMD), I’ll cover that in a future article. In the meantime let’s make sure you are getting the best deal possible from your current plan. 

Are you sure you are getting the maximum employer matching funds? You might be surprised that you could be leaving money on the table.

True-Up 401K Plans
Sometimes an employee can “contribute too fast” into their employer matching 401K account and thereby NOT get the full employee amount. Here’s how it could happen.

Suppose your employer’s 401K program provides a certain percentage match to each employee contribution “per pay period”. If you max out your 401K contributions early in the year and therefore you would stop making contributions, your employer will also stop making matches, assuming the employer’s plan does not provide for “true up” contributions. There is an annual limit on 401K contributions.

Let’s say an employer match’s 50% of Mary’s contribution per pay period, up to 6 percent of her earnings. Mary earning $75,000 a year, getting paid $3,125 twice a month. To contribute enough money to reach the IRS’s $18,000 contribution limit, she would need to contribute $750 per pay period, or 24 percent of her salary. In this scenario, the employer would contribute $93.75 in matching funds per pay period, since 6 percent of the employee’s pay would be $187.50, and $93.75 is half of that.

If, however, Mary decided to contribute $818.18 per pay period instead, she would max out her 401K contributions before the end of the year—by the 22nd pay period of the year, to be exact. For the two remaining pay periods of the year, her contribution would be $0— and her employer’s matching contribution would be $0 as well because there would be nothing to match. That would mean she missed out on an extra $187.50 in contributions.

Whether Mary had decided to contribute $750 or the $818.18 per pay period, she would have ended up contributing the same $18,000 total during the year to the retirement plan. That $187.50 in matching funds might not seem like much, but it can add up over the years—particularly when you factor in the returns you are missing on that money.

While Mary’s example is modest, I can tell you that if you are a high earner and say you get a large year-end bonus in the next tax year the consequences of a 401K front-loading could be a substantial loss of extra matching. Sales people who have “lumpy” earnings throughout the year can fall into this category also. 

Some employers include a feature in their 401K plans that allows workers to get the maximum employer match even if they’ve finished contributing to their 401K plans early in the year. This is called a True-Up! They calculate at year end the max amount you should have gotten and contribute this amount to your 401K. 

Does your employer offer you a True-UP?

Traditional VS ROTH IRA Misconceptions

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Planning and saving for retirement is key in all of our lives. The planning part raises a lot of questions and there are a lot of misconceptions floating around today. We’ll try and clear up a few for you.

Common Misconception: Contributing to a ROTH IRA is always better than a traditional IRA!

Although there are a lot of variables involved the above statement is not necessarily true.  By design a traditional IRA contribution is a deduction against taxable income, but taxed when you withdrawal it in retirement. However, with a ROTH IRA you contribute after taxes but withdrawals are tax exempt. 

Here is a real world type model that shows similar contributions to both a traditional IRA and ROTH IRA have different outcomes. 

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Here is the details behind the above calculations:
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As you can see based on the above model, the traditional IRA even with taxes being paid has a better performance than the ROTH IRA. Don’t always take common claims as fitting your situation. Keep in mind that this model is very simple and does not take into consideration such things as Required Minimum Distributions from an IRA at age 70 1/2. You will also not that I included an “effective tax rate” instead of the tax bracket rate to be more precise. 

Spending a little extra time planning can improve your retirement. 

Kids Going to College – Better Have a Tax Plan

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Finally ….. your son or daughter is off to college, a whole new stage of life begins. As the celebration fades and classes begin it’s time to start thinking about the tax planning and taking full advantage of all of your benefits and avoiding unnecessary tax burdens. It’s it just great that your loved one has received a huge scholarship and you have been socking money away in a 529 fund. Well you need to also understand there can be a tax consequence involved if you aren’t careful.

FACT: Scholarship amounts that exceed “qualified education expenses” are taxable as ordinary income and furthermore require the payment of “self-employment” tax to the person receiving the 1098-T, the student.

FACT: If the scholarship amount reduces your out of pocket costs of college it would interfere with you taking advantage of a huge tax break.

During the 2017 tax season (ending in April 2018) I saw a number of 1098-T (tax statements from college) that showed substantially more “Scholarship” income than Qualified Expenses. Somebody is paying tax on this income! Another example is scholarship or fellowship money that represents compensation, say a $20,000 teaching assistant fellowship went primarily to pay for tuition and books, that $20,000 would still be considered taxable income! Even if the scholarship amount is substantial, you could miss out on your tax break.

But there is some good news here also, beyond having your kid in college. There are various tax breaks including, if you qualify, the American Opportunity Tax Credit (AOTC). The AOTC can be worth up to $2,500 per undergraduate every year for 4 years, that’s $10,000 over 4 years. There are some income limits and the credit gets phased out as your modified adjusted gross income rises.  Different college-related credits and deductions have different rules, so it pays to look into which will work best for you.

The AOTC is calculated as 100% of the 1st $2,000 in qualified expenses and 25% of the next $2,000. So $4,000 is the maximum “qualified expenses” that apply. 

So, since you as a parent still claim the student as a dependent (you pay more than ½ of his/her total expenses) YOU can claim the AOTC on YOUR taxes! Kids away at college are deemed to be “temporarily gone” but still living with you. 

HOWEVER … if you scholarship income is more than the “qualified expenses”, there are no real “expenses” and therefore you, the parent won’t get the $2,500 American Opportunity Tax Credit.

So, there is a legal way around this that may not be apparent to many taxpayers.

Here is what you do:
Have the parents claim tuition, up to a max of $4,000 to get the full AOTC, then show the scholarship income on the students tax return with the balance of the expenses. The assumption is that the student will be in a much lower tax bracket than the parent. The parent will get the $2,500 tax credit. This credit in a higher tax bracket is much better that the lower taxes paid by the student. You can do this every year. In addition, there is a portion of the AOTC that is “refundable in 2018, up to $1,000. This means that if your tax bill was only say $1,500 and you applied the $2,500 tax credit, you would have a $0 tax bill PLUS get a $1,000 refund.

Also keep in mind that you can’t double-dip if you have a 529 plan. Therefore, before you write that first tuition check: You can’t use the same qualified college expenses to calculate both your tax-free withdrawal from a 529 college savings plan and the AOTC tax break. In other words, if you pay the entire college bill with an untaxed 529 plan withdrawal, you probably won’t be eligible for any college tax credit or deductions.

You can check IRS Publication 970 for qualified education expenses. In addition if you pay qualified expenses from “tax-free” funds like Pell grants etc. you can’t use these expenses in your calculations for the credit.

See what I mean, you may need a tax plan if you have kids in college. You may also need professional tax help to develop a plan.

 

Tax Planning in Retirement is Just as Important as Investment Planning

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Many people either approaching or already in retirement spend a lot of time coming up with an investment strategy as they should but don’t have a tax avoidance strategy. Prior to retirement we are in the “accumulation” phase, we are accumulating wealth to be used later. Once we retire, the paychecks stop and we begin the “decumulate” or draw-down phase of our lives.

Decumulating type investments in a tax-efficient manner is a part of retirement planning that is often overlooked.  That’s probably because a $xx,000 reduction in after-tax wealth over several years due to a poor tax strategy is much less visible than an $xx,000 decline in your investment portfolio.

Here are some suggestions to help

  1. Delaying Social Security benefits (SSB) until the age 70 is a huge investment and tax decision. The delay from age 66 to 70 is a non-taxable 32% gain, 100% safe from any market conditions.
  2. During this delayed benefits time you can take advantage of the new tax rates and doubling of the Standard Deductions. Plan to live off cash and withdraws from a taxable brokerage account. The idea is pay $0 in Federal taxes while taking advantage both the 0% tax rate on up to $77,200 in Capital Gains and Qualified Dividends. Bundle into this “tax loss harvesting” and more cash can be raised.
  3. Beyond this you can look to max out the benefits of being in a low 0%, 10% or 12% tax brackets by converting IRA funds into your ROTH IRA account. Just a broad statement, the very best scenario is to have 100% of all investments in a ROTH account! For example, during this SSB delay period every year convert enough IRA stock/funds into your ROTH to just hit the $77,400 threshold. That’s when every extra dollar is taxed at 22% instead of 12%. Make sure you factor this into your calculations in #3 above.
  4. Keep in mind that the above strategies work best if done BEFORE taking Social Security Benefits at 70 and the need to take Required Minimum Distributions (RMD) at age 70 ½. Up to 85% of SSB benefits can be taxed as ordinary income, all RMD is taxed as ordinary income also.
  5. Once you are getting Social Security and RMD you will already be in a “fixed” tax situation, the question will become what additional income do you need beyond SSB and RMD? This additional income will become the new tax strategy. It is not at all uncommon that your RMD (including SSB) is much more than you need to live on, this is a tax burden, hence the discussion above about conversions from IRA to ROTH’s.
  6. If you need additional income beyond your SSB and RMD look again to the maximizing of the Capital Gains and Qualified Dividends from your taxable account.

These are just a few suggestions and each family has unique situations. However, one this is pretty constant, tax planning runs hand in hand with investment planning. The ideal situation is that you are putting this overall master plan into place while you are in your late 50’s, probably the peak of your “accumulation” phase. However, you can make some of these decisions even while in retirement.

 

 

REIT Investors get a new Tax Break!

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As many of my followers know, I like to invest in real estate as part of my overall investment strategy. Unlike others, I’m just not into buying specific properties and replacing toilets. Instead I invest in REIT’s, Real Estate Investment Trusts, they buy and manage the properties and i just collect the dividends and watch my investments grow in value. My REIT’s are part of my “Cash Machine” portfolio.  

REIT’s are considered “pass through” businesses, they don’t pay Federal income tax themselves, they pass that tax on to us investors (similar to you owning rental property). This is not very complicated at all, prior to the new 2017 Trump Tax Law if you held REIT’s in a taxable account, you paid tax on all dividends as “ordinary income”. 

HOWEVER – REIT investors will pay less tax on their dividends under new tax law. It allows investors to deduct 20% of the dividend income, with the remainder of the income taxed at the tax payers ordinary income rate. It is available even if the taxpayer doesn’t itemize deductions.

Of course if you hold your REIT’s in a tax advantaged account like an IRA or a ROTH IRA you don’t pay taxes on the dividends, until you take money out.

I own the following REIT’s:

American Capital (AGNC) 11.32% yield   – Residential Mortgage’s
ARBOR Rlty (ABR) 9.12% yield  – Commercial
Annaly (NLY) 11.45% yield  –  Residential Mortgage’s
Blackstone Mortgage (BXMT) 7.60% yield – Senior Loans Commercial Mortgages
Iron Mountain (IRM) 6.40% yield – Data storage (not really a REIT?, but it is)
Ladder Capital (LADR) 8.09%   – Fixed & Floating Rate Commercial Mortgages
Realty Income Corp (O) 4.74% yield – Over 5,000 Net Leases, 575 straight monthly dividends paid
Stag Industrial (STAG) 5.14% yield – Industrial Buildings

REIT’s can be a valuable component to your investments, and now you may get a tax savings too!

My Kind of Checklist Guy – Heads New Healthcare Program

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Meet Dr. Atul Gawande, a highly experienced surgeon, writer and Harvard professor, who starts this week as the CEO of a new health-care initiative formed by Amazon, Berkshire Hathaway  and JPMorgan Chase. 

So why do I like Dr. Gawande? Well he wrote one of the very best books I ever read, The Checklist Manifesto: How to Get Things Right.  I have already written on how this book influenced me and Boeing, check out that story here. Over the years I bought copies of this book for dozens of my employees, friends and customers. It will truly change your life, and it’s an easy read!

As I read the announcement of Dr. Gawande, I just know he’ll be successful in his new endeavor. I’ll bet that over time he will revolutionize the way Amazon, Berkshire Hathaway and JPMorgan implement healthcare in their businesses. 

“We said at the outset that the degree of difficulty is high and success is going to require an expert’s knowledge, a beginner’s mind, and a long-term orientation,” Amazon Chief Executive Jeff Bezos said in the press release. “Atul embodies all three, and we’re starting strong as we move forward in this challenging and worthwhile endeavor.”

Atul is also well known for a 2009 New Yorker magazine article, “The Cost Conundrum,” that found excessive care was being used in a Texas town, on Medicare’s dime. It’s one of the most influential magazine article of the past decade on the topic of Medicare. Not only was it shocking but Gawande reported, years later that costs had dramatically dropped in the town, saving taxpayers about half a billion dollars! The story goes that Charlie Munger from Berkshire sent $20,000 to him via The New Yorker since he was so impressed by the article. Dr. Gawande donated the money to a charity.

Good luck Dr. Atul Gawande!

The Truth about Social Security & a Simple Fix

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The headlines read that Social Security is going broke and will run out of money. How bad is it really? Do you want the truth, “you can’t handle the truth”!

Summary:

  1. Social Security is going broke and in will be in debt. But so what, the entire country is in DEBT.
  2. Hello! News flash, since 2010 Social Security has paid out more in benefits than collecting in taxes.
  3. Until 2018 the annual Social Security payments were less than the interest on the roughly $3 trillion of “non-marketable” US government bonds held by the SS trust fund. Starting in 2018 payments are exceeding taxes and interest.
  4. No doubt about it, using simple math by some time in the 2030’s the trust fund will be down to $0. So what!
  5. However Social Security benefits paid vs trust and taxes only has a 1.5% of GDP deficit!
  6. The Social Security Trust Fund is an accounting gimmick.
  7. Read below, what does this actually mean and here’s how to fix it.

I won’t bore you with all of the numbers other than to say the entire US economy has been successfully living in a debt environment for many, many years. It works fine so long as you can keep it under control. Social Security trustees calculate that projecting all SS benefit payments less the trust balance, interest and current taxes leaves a running deficit of 1.5% of annual GDP. Of course long range projections of GDP over 20-40 years can be off by a trillion or so. The SS trust uses census calculations, projects births, immigration predictions, GDP, expected interest rates, etc. A lot of black magic!

The general model is that future employees will be paying for the monthly SS benefits for us retirees, and so on and so forth. The SS trust fund is an accounting gimmick. The fund is made up entirely by “special issue” Treasury bonds, with special interest rates. Oh, but wait, the Treasury prints money and sells bonds to investors worldwide. SS however buys “special bonds”. All of this money still resides within the US government. If the Treasury wants to, they can just increase the interest rate they pay to the SS trust on these “special bonds”.

The entire issue has little to do with the Social Security trust fund itself! How solvent is the entire US government, forget about just the Social Security piece! The government finds a way to live in debt to pay for Medicare (it too has a “trust fund” running out of money), Medicaid, defense, and salaries for the jillions of federal workers who produce NOTHING. This is nothing more than a general US economy  and debt situation. 

The real issue is that we should be concerned about our ability to manage the entire US debt, one way is by growing GDP and let taxes rebalance the equation. Here is an analogy, a family of 4 earns $100,000 a year. They have debt, including a mortgage, car payment and a small student loan. If their annual debt payment is say $20,000 a year are they in trouble? No, of course not. But if that debt payment is $60,000 a year, wow, that’s a real problem. Let’s say the same family has set aside an investment account for the kid’s education and add money to it each month (the equivalent of the SS trust). Nobody would consider the education fund as being completely separate from the parents overall spending and debt issues, right! If that same family with $60,000 in debt has a $250,000 annual income, they’d be fine (increase GDP example)!

Simple Fixes for Social Security:

Social Security is just another government funded program, like ALL government programs it runs on tax dollars. The SS trust is only as good and sound as the entire US economy over time. The US economy is only as sound as US businesses and US worker productivity (the definition of GDP).

Here are some simple things to do to completely FIX the problem:
1. Eliminate the taxable earnings cap over say the next 10 years. Right now SS deductions are capped at reaching $128,400.

2. Gradually raise the Social Security “full retirement age” FRA. Take it from the current 67 to 68, maybe a month at a time.

3. Raise SS taxes from 6.2% to 7.2% over a 10 year time frame.

4. Optional additional steps – suspend Social Security payments to any family earning more than say $2-3 million a year. Maybe even eliminate Social Security for families with over $10 million in liquid net worth.

These above items would not only completely fund the Social Security program for the next 50-100 years but it would also provide a surplus to increase payouts to the poor who get minimal Social Security benefits.

 

Rules for my Cash Machine Income Plan

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I am retired and 70 years old, my investment goals have changed. I’m now in the “distribution” phase of my financial plan, I no longer have a paycheck. I use my Cash Machine IRA account to “fill the gap” between our Income and Expenses. My goal is a reliable, reasonable monthly cash flow. Our Income includes Social Security (I waited till 70 to build its value) and pensions. My Expenses includes a comfortable life style that my wife and I chose and enjoy, financial help for family members and charitable contributions. It just so happens that my “fill the gap” requirement is almost the same as my IRA Required Minimum Distribution. I withdrawal about half of my Cash Machine dividends to “fill the gap”, the other half or so gets reinvested in more of the same dividend stocks. I will never add any new cash to the Cash Machine account, won’t need to. The final balance of my Cash Machine will go into my Estate Plan when I pass away.

I developed some rules that I continually reference so that I don’t get side tracked by watching CNBC or the “noise” of the days to day stock market. This plan takes a lot of discipline for sure. I want to sleep well at night and not have money worries.

My Cash Machine Rules:

  1. Portfolio value, capital gains and % yield are not my goals, highly predictable monthly income is my goal.
  2. I only look at my monthly cash flow, I don’t watch the portfolio value.
  3. I only buy and hold stocks (minor adjustments are OK), I don’t trim shares for income, only add as I wish.
  4. I only invest in higher yielding stocks or ETF’s that pay 3%+ in dividends. I own equity and debt(bonds, loans).
  5. I diversify to spread my risks.
  6. The principle value of the Cash Machine account should never be much less than it is today in my 25 year plan. It may actually grow substantially.
  7. In an up market or with stocks that outperform, I will add more. Known as the “beat and raise” concept.
  8. In a down market when my portfolio value drops I’ll switch to “buy on the dips”.
  9. I try and remember that market changes do not take away my shares or income, just “perceived value”.
  10. The higher the yield, the lower the growth rate, overall growth is not a goal, monthly income is.

This Cash Machine portfolio and plan has been at least 5 years in the making, it took a complete change in mindset and a lot of patience. It consists of 32 stock, divided up among sectors I’m familiar with. I don’t invest in anything I don’t understand. 

I go with the higher yield investments, 3% or more, and the dividends that do get reinvested are generating more income. This method will generate more overall consistent income than a “dividend growth” strategy where say a 1-2% yielding company  might have 20% dividend growth. If that company can sustain the dividend growth for a number of years then it may work out, but I’ll still be ahead because I will still be adding to higher yielding companies. The math of compounding dividends is quite significant. In recent years the entire value of this portfolio has grown nicely.

I can also sleep at night, knowing that when (not if) we have a market down cycle and my portfolio value decreases, my dividends will be coming my way every month. This  will add balance and actually prevent my portfolio value from dropping as low as the market does. The more dividends you have coming in every month, the more balance that is being added to your account. Some of my stocks have been paying uninterrupted dividends for over 10 years.

So far my experience has been that the longer I’ve owned this Cash Machine the fewer positions I have, 30 or so positions is enough. Over time I have companies that perform very well and some that don’t, and I have found that owning more of what is working is better than owning less and having that money tied up in non-performing companies. So I sell weakness and buy strength. It often takes time to determine strength from weakness. I never feel under pressure to make all my changes at once. I try and stick with my plan and build on it. Patience is difficult.

Further disclosure. In addition to my Cash Machine account I have a taxable account that I view as my legacy account. I started this account in my 20’s and have consistently added to it. In that account I hold high growth stocks, most of which don’t pay dividends. This account is the core of our Estate Plan that will someday pass to my family and charities. In addition, we maintain ROTH accounts and a cash emergency reserve of about 3 years. My goal in retirement is to carefully plan and enjoy my volunteer work. Giving back to the world for all of my blessings is important while I still have my health. 

Building a Cash Machine is not difficult. You might want to try it. 

My Cash Machine investments are shown below.

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