The cook burnt your fries, so I gave you a few extra

     Janet Cowell, the State Treasurer of North Carolina has asked the state legislature for the authority to squander more of North Carolina Retirement System's Pension Fund money on so-called "Alternative Investments."  Cowell doesn't want just a little leeway, but wants to place a whooping 40% of the $80 Billion pension fund into these "Alternative Investments" or roughly $32 Billion (yes, that's Billion - with a capital B).

     Cowell's request reminds me of the fry cook who delivers your food and says, "I burnt your fries, so I gave you a few extra."  There is nothing worse than bad food - except, more of it.  Like a bad fry cook, Cowell wants to give North Carolina more of a bad investment.  And, our state legislature appears willing to give Cowell what she wants.  The proposal passed in the Senate yesterday, so it is up to the House to stop the insanity.

     "Alternative Investments" are essentially anything other than publicly traded stocks and bonds.  This includes real estate, private equity, hedge funds, and commodities just to name a few.  Alternative Investments tend to under-perform traditional stocks and bonds because the investment expenses are outrageously high (this is why Wall Street is so good at selling this trash).

     Take a look at the 10-year returns the various asset classes have earned within the North Carolina Pension Fund and you will easily see

The Retirement Gamble

If you have a 401(k) or IRA or any investments at all, click here for a must-see video "The Retirement Gamble" from last night's FRONTLINE on PBS.  The moral of the story:  When it comes to investing, expenses are your enemy, and index funds are your friends.

During the video, Jack Bogle, the founder of Vanguard and the inventor of the first low-cost index mutual fund, stated that over a lifetime many investors keep roughly one third (1/3) of their investment gains while Wall Street takes two thirds (2/3).  As shocking as it may seem, I wanted to reiterate that Jack Bogle's figures are correct.

Take the following example

In Defense of the Wall Street Bonus

Generally, I think Wall Street bankers get paid too much overall, but this 6 minute video from OnlineMBA.com does convince me that it makes sense that their compensation structure be designed with bonuses being a large portion of their total compensation. Basically the video defends variable compensation, with which I completely agree.  The same website also has an interesting 1 minute video about the business of guns.

North Carolina Retirement System 2012 Investment Returns

Last week, the North Carolina Retirement System (NCRS) announced investment returns as of December 31, 2012 for its $78 billion pension fund.  What the press release did NOT include was information about average pension fund returns.  The table below shows just how terribly the North Carolina Retirement System pension fund is managed.

                                            1-Year     10-Year
North Carolina Pension    11.84%     7.16%
Average Large Pension   13.45%     8.13%
Under-performance            -1.61%    -0.97%

The "Average Large Pension" fund was reported by Wilshire Associates for all Master Trusts larger than $5 Billion in total assets.  At first glance, one might not think that a one-year lag of -1.61% is that big a difference.  However, since the North Carolina pension fund holds $78 billion of investments, the -1.61% under-performance for 2012 translates into a cost of $1.25 billion that will have to be made up by North Carolina tax payers.  

For the 10-year period, the under-performance of -0.97% per year amounts to a cost of approximately $6.8 billion.  In other words, the North Carolina pension fund could be $6.8 billion larger, or nearly $85 billion if North Carolina's investment performance were merely average.

Just imagine all the things the state of North Carolina could do with an extra $6.8 billion right now.  Imagine what we will have to do without over the next 10 years if we continue to under-perform.  

Did you know severance pay is tax deductible in North Carolina?

In North Carolina, if you've been laid off and received severance pay, you likely do not need to pay North Carolina State Income Tax on the severance amount up to $35,000.  The way it works is you enter your severance as a deduction on line 43 on page 3 of your Form D-400. 

 Check out the North Carolina Department of Revenue statement on the subject by clicking here.

Tax Credits for Efficient Air Conditioners, Furnaces and Water Heaters

You can get a US Federal Tax Credit up to $500 if you purchased an energy efficient central air conditioning unit, furnace, or water heater.  You can find the details for what qualifies by clicking here, but here is a quick summary:

• Central Air Conditioning or Heat Pump Systems - $300 for systems with a SEER rating of at least 16 for split systems or 14 for package systems.
• Furnaces - $150 for systems with AFUE of 95 or higher.
• Water Heater - $300 for systems with an energy factor of at least 0.82 or thermal efficiency of 90%.

All these credits are limited to a lifetime total of $500 going back to 2005.  So, if you've received credits in the past, you might not be eligible.  You will need to file IRS Form 5695 for Residential Energy Credits with your 2012 tax return to receive the credit.

AMT = Additional Mandatory Tax

It's that time of year again when we all start calculating out our tax return here in the US.  I've discovered there is some confusion about the AMT.  AMT stands for "Alternative Minimum Tax" but that name can confuse folks.  AMT would be less confusing if it stood for "Additional Mandatory Tax."

AMT is NOT an "alternative" tax in that it is NOT an "option."  The AMT is an "additional" tax added to your federal tax for some tax payers that earn more than a certain threshold and have Itemized Deductions that are deemed too large.  That is when the AMT kicks in to force these unlucky tax payers to pay a higher amount of federal tax.  The threshold where you might be subject to AMT is $78,750 for married couples and $50,600 for individuals.

I've discovered many folks believe the Alternative Minimum Tax is an alternative way to calculate tax and that the tax payer could "choose" to pay either the normal way or the "alternative" method.  AMT is NOT an option.  The AMT is mandatory.  Thus, when you see AMT, think Additional Mandatory Tax.

Click here to learn more about AMT on the Internal Revenue Service website IRS.gov