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Scott Neal

Scott Neal, CPA, CFP, is the president of D. Scott Neal, Inc., a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. Reach him at or by calling 1.800.344.9098.

2012 Wrap Up

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In this space last month, we discussed the fiscal cliff. We won’t waste any more ink on that here, at least not for now. This month we focus on how you can take care of yourself and your family no matter which way things go in Washington.

There are really two strategic viewpoints to consider: technical and behavioral. Let’s deal first with the behavioral since that is more likely to be the core constraint toward a desired outcome. It’s also that which we can all do something about.

We all like to believe that we are immune from our own behavioral biases. I submit that these are likely to be so ingrained in the subconscious that unless we intentionally get them out and roll them around, we are prone to succumbing to them. When the news surrounding us is as negative and confusing as it is today, the temptation is to seek cover, or worse yet, to find confirmation of our worst nightmares. Today, I see confirmation bias cropping up regularly among investors. The message that bombards us these days is that we now face the end of the economic world as we know it. That a tax increase will destroy us or that a reduction will save us. If you go looking for confirmation of either point of view, I can guarantee that you will find it. Our economy and the financial markets are certainly challenging and may likely get more so, but they are nowhere near total collapse.

If you believe that your financial world is falling in around you, you will likely take actions that are not in your best interest. So what are some things that you can do right now to prevent that from happening? First and foremost: get a firm grip on where you stand, today and take a look into 2013. That doesn’t mean that you need to watch your investment accounts as they gyrate up and down from day-to-day or hour-to-hour. What it does mean is that you will take a hard and realistic look at your balance sheet as of a given day. The balance sheet reflects the value of your assets and the current payoff of your debts. Repeat after me, “These are my current resources and my current debts. They are what they are.” You will undoubtedly know people who have more, as well as those who have less. That realization is sometimes a moment of pain leading to yet another behavioral issue: avoidance.

You can do the data gathering of your asset and liabilities the hard way by collecting all the yearend statements and entering the data into a spreadsheet or money management program. But is that really the best use of your time? Ask your accountant or financial advisor if they have a way to capture these data electronically and present it to you in a useful format. Our firm uses a program that scrapes the data right from a client’s financial custodians into their balance sheet and updates it every night. We don’t need, nor do we want, passwords to all your accounts. The system is non-transactional so transactions cannot be effected from it, yet over time it creates a nice history of net worth and presents it graphically. Pay attention to what is relevant to your wellbeing.

Next, we suggest that you prepare a flexible projection of your cash flow for 2013. By flexible we mean that you should address a best case, worst case, and most likely case for gross income. We have sorted through what we believe will be the near term effects of the healthcare reform act, but it is likely to be specific to you and your practice. Thus, the makeup of your revenue stream is good information for you and your planner to know. For those with heavy Medicare / Medicaid practices, your outlook is likely to be substantially different from those of you who have a lot of private pay or patients with high quality insurance.

My point is that all good planning begins with a hard look at income and allocating all that income into the following: 1) taxes, 2) debt payments, 3) savings, 4) giving, and 5) consumptive spending. By the way, it is consumptive spending that determines your family’s living standard and a family’s maximum sustainable living standard under competing scenarios can actually be determined using today’s dynamic programming tools, yielding more rational decision making.

It should not come as a shock to anyone that the politicos are primarily dealing with the fiscal cliff by tinkering with the current tax code rather than considering much needed overall tax reform. We will deal with it. In all their discussions they talk about top tax rates (the marginal rate) being increased from 35% to 39.6%. Our temptation then is to add in state, local and FICA taxes and we quickly get to 50% or more. But when most people think about their taxes they think in terms of total taxes divided by total income (the effective rate). If you have read this column for very long, you know that I advocate using marginal rates for decision-making. That is still valid; however, when the tax code is in as much flux as it is today, our planning focus should be on the effective rate and how the extension of tax cuts or the imposition of new taxes will affect it. Modeling alternative scenarios under rapidly changing circumstances then becomes much easier.

Incidentally, we generally see total effective taxes of most physicians around 30%–34% of total gross income. Don’t get me wrong; I want to work for each client to get the amount of taxes paid and therefore the effective rate as low as legally possible. But let’s face it; much of what we hear in the news is not reality, it is pandering to our fears. The real question is how will an increase of 4–5% in marginal rate affect one’s effective rate, and how will that change affect a family’s living standard?

It goes without saying that we live in a world of ever-increasing complexity. Fortunately, for us planners, technology has evolved to enable us to deal with it. Sometimes, good planning begins with getting our own biases out of they way.

Scott Neal is president of D. Scott Neal, Inc. a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. He welcomes questions and comments from readers and can be reached via email at or by calling 1-800-344-9098.