Echo Blog

Echo Blog

Don’t Put it Off: A User-friendly Guide to Organizing Your Estate Plan

It is an unpleasant thing to think about but having your estate in order before something happens to you is critical.

By Echo Huang, CFA, CFP®, CPA

Nobody likes thinking about the end, or picking a guardian to raise your children, or having to pick which of your children would best at managing your money in your absence. But the thing about estate planning is, if you don’t do it, you lose your say in how things are handled when you pass away or if you are incapacitated and unable to speak on your own behalf. Without a will, your estate may end up in court, divvied up based on a judge’s decision—not your own. Without specific terms set in place, you may not get the medical care you would prefer, or the preferred custodial caretaker for your children. For those reasons, it is better to face the discomfort of our mortality and make sure everything is up to date and in order. With your estate planning checked off your list, you can rest assured that in an unthinkable situation, you and your family will be covered.

Retiring at the Same Time as Your Spouse? You Might be Selling Yourself Short…

By Echo Huang, CFA, CFP®, CPA

It sounds great! Retiring with your spouse at the same time would mean you could travel together, take up some hobbies together, have more time to spend as a couple. And how long has it been? Often, by the time we are nearing retirement we have only recently said goodbyes to our youngest child. Which means that over the last 20 or more years, spouses have seen little of each other as day-to-day obligations eat up alone time. It is for these reasons that simultaneous retirement has its appeal. But it is important, especially for women, to know where the pitfalls lie.

4 Ways Outsourcing Can Make You More Productive

By Echo Huang, CFA, CFP®, CPA

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do.” --Mark Twain

We all know the classic saying, “Time is Money”, right? We also know that time and money are the two things we often wish we had more of. The key to time management and overall life quality will always be finding that balance between what you have to do, what you want to do, and how to afford it all. Outsourcing some of your daily tasks may be a more efficient use of resources than taking the valuable time to do it all yourself. Sure, we could all learn to change our oil or fix a leaky toilet, but by paying a professional to handle these tasks, we free ourselves up to focus on more important tasks, like our work, which in the long run may make us more money rather than lose it. This is called "Opportunity Cost"-- the next highest valued alternative use of a resource.[i]  An example: If you make $100 an hour at your job and it takes you 3 hours to do a deep clean of your house, that’s essentially costing you $300 to clean your house. If you can have a service clean it for $150 in 3 hours, you’re actually saving money outsourcing the labor.

The Organization for Economic Cooperation and Development (OECD) ranked the United States 29th out of 34 countries in work-life balance.[ii]

What You Need to Know about Non-Qualified Stock Options

By Echo Huang, CFA, CFP®, CPA

Do you have any non-qualified stock options (NSOs) granted to you by your employer?  NSOs are a common equity compensation feature provided to management level employees as part of a compensation package.  They give you the opportunity to potentially profit from the price increase in your employer’s stock.  An employee stock option gives you the right to purchase a specific number of shares of your company’s stock at a specific price – the grant or strike price – within a specific time period.  The grant price is typically the market value of the stock at the time your company granted you the options. Here are some of the essential things you ought to know about your NSOs.

  • Vesting Period.  Vesting is the time at which you have met the required service period and may exercise the option to purchase the time.  You are not required, however, to exercise your options as soon as they vest.  Your vesting schedule is contained in your grant agreement.  For example, if it is four years cliff vesting, the entire grant will vest after four years from the date you receive this grant. 
  • Expiration Date.  After your NSOs are vested and the current market price is greater than the grant price, it has in-the-money value, then you can decide when to exercise the options to capture the profit.  Note that if you don’t exercise your stock options before the expiration date, they will expire with no value.  For example, the grant may have four years cliff vesting period and the expiration date is ten years from the date of grant.  In this case, you have six years to monitor the stock price to determine the best time to exercise this option.  I recommend watching the price closely in the last two to three years before the expiration date.

A Man is Not a Plan

By Echo Huang, CFA, CFP®, CPA

Recently I heard a story from a 67-year old woman who had gotten divorced after twenty years of marriage. She had raised her daughter at home while she was younger and she didn't get much at all from the divorce. She is now collecting about $900 per month from Social Security income and working part-time to get by while sharing an apartment with others. She is fearful about her financial future because she has never managed money before and it's hard for her to find a job at her age. This month, I also heard another story about a woman who confided to her granddaughter in college that she had stayed in an abusive marriage for many years because she didn't have any control of money. Later, this woman's death resulted from falling down the stairs and was later confirmed not to be an accident. In fact, her abusive husband pushed her down the stairs. Staying because of money had literally cost her her life.

There are many stories like these that made me feel sad, but they have also made me more certain than ever that a man is not a plan.

Women face unique challenges in planning for a secure financial future while going up against these facts:

  1. Women earn less than men even though more women have a college degree than men. According to, in an impressive increase from years past, 35.3 percent of women in the United States had completed four years or more of college in 2018. This figure is up from 3.8 percent of women in 1940. A significant increase can also be seen in males, with 34.6 percent of the U.S. male population having completed four years or more of college, up from 5.5 percent in 1940. More women in the US have a college degree than men, but the average woman's unadjusted annual salary has been cited as 78% to 82% of that of the average man's as of 2015 (and hasn't changed that much today).

Mental Accounting and Other Cognitive Biases

By Echo Huang, CFA, CFP®, CPA

Imagine that you decide to go to see a new movie.  You hand the cashier at the counter a twenty dollar bill. She gives you back a ten dollar bill and a ten dollar ticket. But when you get to the theater door, you realize you don't know where your ticket is. It's just lost. Do you think you'd pay ten dollars for a new ticket, or would you just head home? If you're like most people, you might be tempted to head home. In fact, when the psychologists Kahneman and Tversky presented this problem to college students, fifty-four percent of people said they'd probably just head back home. 

But now imagine a different scenario. This time, you hand the cashier at the counter twenty dollars. This time, she gives you back two ten dollar bills, so that you can easily pay ten dollars at the door to get in. But when you get to the door, you realize that you can only find one of the ten dollar bills. The other one's not in your purse or your pocket. It's just lost. Would you pay ten dollars for the movie or just head home? if you're like most people, you'd probably still go see the movie. In fact, when Kahneman and Tversky presented this problem to college students, eighty-eight percent of people said they'd probably go to the movie anyway. 

The different responses to these cases illustrate a bias known as "mental accounting."  Mental accounting bias is an information-processing bias in which people treat one sum of money differently from another equal-sized sum based on which mental account the money is assigned to.  Mental accounts are based on such arbitrary classifications as the source of the money (salary, bonus, inheritance, gambling or business profit) or the planned use of the money (leisure, necessities).  

Overcoming Six Emotional Biases to Have a Successful Investing Experience

By Echo Huang, CFA, CFP®, CPA

A recent study by DALBAR, a financial research firm, has confirmed that investors who try to time the stock market often dive into the market at the top and flee at the bottom. This fact has actually caused investor results to significantly lag the broader markets over the long haul. 

DALBAR's most recent study shows that over the last 20 years, through December 31, 2017, the S&P 500 has produced an average annual return of 7.20%. However, over that same period, the average equity fund investor has earned only 5.29%. Bloomberg Barclays US Aggregate Bond Index has produced an average annual return of 4.98%.  However, over the same period, the average fixed-income fund investor has earned only 0.44%. 

Most of traditional economic and financial theory is based on the assumption that individuals will act rationally and consider all available information in their decision-making process, and that markets are efficient.  Behavioral finance challenges these assumptions and explores how individuals and markets actually behave.  

Emotional biases are related to feelings, perceptions, or beliefs about elements, objects, or the relations between them, and can be a function of reality or of the imagination.  In the world of investing, emotions sometimes cause investors to make suboptimal decisions.

Cognitive errors, in fact, are more easily corrected than emotional biases.  Cognitive errors stem from faulty reasoning, therefore better information, education and advice can often correct for them.  Most cognitive biases can be “moderated” - to moderate the impact of bias is to recognize it and attempt to reduce or even eliminate it within the individual.

In this post, we'll examine the six key emotional biases, the consequences of the bias, and offer guidance on detecting and overcoming the bias.  The first step is to be aware that these biases exist and then take actions to overcome them in order to have a successful investing experience.

  1. Endowment bias is an emotional bias in which people value an asset more when they hold rights to it than when they do not.  Investors may irrationally hold on to securities they already own, a bias particularly true regarding their inherited investments.  An investor may hold an inherited municipal bond portfolio due to their emotional attachment, when a more aggressive asset mix may be more appropriate.  

Five Tax Saving Strategies for the Affluent

By Echo Huang, CFA, CFP®, CPA

When I worked as a tax CPA for KPMG in the late 90s, I served many corporate executives and wealthy families as their senior tax specialist and prepared many individual income tax returns, trust returns, and gift tax returns.  Now I use that knowledge and expertise to help my affluent and high-income clients plan ahead to keep more money in their pockets by using some smart tax savings strategies.  

Looking at this Historical Tax Rate Chart 1913 - 2019, the current top income rate is relatively low.   Similar to the importance of diversification in investing, I think the thought of tax diversification is relevant as we help people plan for their financial future.  I want to share five tax savings strategies here with some examples:

  1. Diversify Your Taxable Income.  Investors should consider owning investments in all three tax buckets: tax-deferred (such as 401(k), IRA), tax-free (Roth IRA, HSA) and taxable (individual, joint, revocable living trust).  The tax treatments are different in each of the three buckets before withdrawal: you can sell investments with gains or losses inside the tax-deferred bucket and tax-free bucket without reporting them to IRS; you must watch for short-term or long-term capital gains, interest income or dividend income each year inside the taxable bucket.  

When it’s time to withdraw, you’ll pay the ordinary tax rate (normally higher than long-term capital gain rate) on the distributions from the tax-deferred bucket.  You won’t need to pay any taxes on distributions from your Roth IRA after age 59.5 or having met the five-year rule after converting some IRA money to Roth IRA.  You use after-tax dollars to fund a Roth IRA, but any distributions including earnings after age 59.5 will be tax-free.  IRS determines the income limit each year for making contributions to a Roth IRA.

Since you cannot predict your future income tax rates, owning investments in all three tax buckets allows you to have the maximum tax planning flexibility during retirement in order to reduce taxes.  For example, if our government’s deficit continues to be large, and during your retirement the tax rates may go up for people earning over $200,000 annual taxable income, you may be able to withdraw some money from your Roth IRA instead of IRA to keep your taxable income below $200,000, therefore paying taxes at a lower rate.  When tax rates go down because of the change of the president or congress, then you can switch to withdrawing from your IRA and taxable account.

Must-Know Facts About Health Savings Account

By Echo Huang, CFA, CFP®, CPA

A Health Savings Account (HSA) can be a powerful tool to help you save and invest, now, to pay for your qualified medical expenses (QMEs) during retirement.  The HSA has become popular as more and more employers move to high deductible health plans (HDHP) in order to reduce insurance premiums.  Employees must choose the HDHPs instead of traditional health insurance plans if they want to use their HSAs to fill the gap.  I have used HSAs personally for about 10 years and I want to share these essential facts with you:

  1. The HSA provides triple tax benefits.  Contributions are made with pre-tax dollars (free of federal, state and FICA taxes) through payroll if your employer offers it.  If you purchase an HDHP on your own in the insurance market, you can set up your own HSA online and make contributions before the tax return filing deadline.  You can choose to invest the balance and the growth is tax-deferred.  Distributions are income-tax free if you use them to pay for qualified medical expenses (QME).  "Typical" retiree expenses on health care are often as high as $500/month (or $1,000/month for a married couple), much of which are HSA-eligible QMEs, including Medicare premiums and out-of-pocket medical costs (although Medigap coverage doesn't count). 
  2. How much can I contribute per year?  For a self-only HDHP, you can contribute up to $3,400 in 2018 ($3,500 in 2019).  For a family HDHP, you can contribute up to $6,900 in 2018 ($7,000 in 2019).  If you are age 55 and older, you can contribute additional $1,000.  
  3. The HSA balance does not expire, unlike the Flexible Spending Account (FSA).  You don't have to spend the balance within the calendar year.  You can keep the receipts of QMEs and get reimbursed from your HSAs many years from now as long as the expenses have not been reported as medical expenses on tax returns and increased your total itemized deductions.  If your income is not low, it is difficult to get tax benefits through reporting medical expenses on Schedule A because total QMEs for the calendar year must exceed 7.5% of adjusted gross income (AGI) to generate tax benefits.  Beginning in January 1, 2019, the 7.5% of AGI will increase to 10% of AGI.  If your AGI is $100,000, you must incur greater than $10,000 QMEs in one year to be worth it to report them on Schedule A.  Therefore, if you don't get tax benefits from your tax returns, then you can save the receipts and file them in a folder called "To Be Reimbursed from My HSA" - you decide the timing of distributions in the future.

Top Three Considerations for Taking Distributions from 529 College Savings Plans

By Echo Huang, CFA, CFP®, CPA

You’ve saved and invested money in a 529 plan for years to pay for your son or daughter’s college education and the college enrollment time frame is coming up in the next year. Now that you’re getting ready to enter the “529 withdrawal phase”, you’ll want to be sure to make the right decisions when taking distributions from your 529 account. Here are your top three considerations:

  1. Learn how to take distributions to help you with financial aid. First, become familiar with the Free Application for Federal Student Aid (FAFSA) form. The way that a 529 plan is reported for dependent students, and counted for financial aid, typically depends on the owner of the 529 plan. Typically, a 529 plan owned by a custodial parent is counted as an investment and it may reduce need-based aid by a maximum of 5.64% of the asset’s value.  Depending on your income, your 529 plan may or may not impact your child’s financial aid package. Withdrawals from 529 plans owned by the custodial parent, when used for qualified higher education expenses, are not typically counted as parent or student income. Typically, parents as owners of 529 plans get the most favorable treatments, so ideally the custodial parent should own the 529 plan.

    If non-custodial, non-married parents, living separately or relatives (such as grandparents) own the 529 plan, then the assets are generally not listed on the FAFSA form. However, once the funds are withdrawn, the funds are considered to be the student’s untaxed income on the FAFSA form. Untaxed income can reduce the student’s eligibility for need-based financial aid by as much as 50% of the distribution amount, a much harsher impact than the 5.64% reduction based on the net worth of the parent assets. There are a couple of choices to consider: A. Before taking distributions, transfer the ownership to the parent or child as they both receive more favorable treatment for the 529 plan. B. Withdraw to pay for the senior year’s expenses and the treatment of income is irrelevant for applying for aid.
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