Time Isn’t On Baby Boomers’ Side

Nearly 80 million baby boomers[1] are rapidly approaching retirement age and many of them have a problem, a very BIG problem. The problem stares them in the face every month when they look at their retirement plans, savings accounts, and brokerage statements. That problem is money, or more precisely, the lack of it.

Unlike most of their parents, who earned guaranteed pensions that promised a fixed monthly check when they retired, many baby boomers are responsible for managing their own retirement accounts[2]. And the markets have been particularly unkind over the past decade leaving millions of baby boomers woefully short of the retirement funds they hoped to have at this stage in life.[3]

To illustrate this point, let’s go back to the fall of 1999. We’ll use a hypothetical 52 year-old that wants to retire at age 62 and has $500,000 in a 401(k). A free computer program is used to estimate the future value of the 401(k) in 10 years assuming ongoing contributions equal $15,000 annually and the employer match is $3,000 annually. The program uses what some used to consider a “reasonable” 10% annual return, which is much less than what stocks had averaged for the 20 years prior to 1999.[4]

The program calculates the 401(k) will grow to almost $1,600,000 in 10 years if everything goes according to plan.[5] Let’s assume the funds earned the average of the S&P 500 Index over the previous 10 years. This hypothetical investor would probably have been very disappointed to learn that the plan had much less money than the program projected 10 years earlier. In this example, it would have less than $700,000 compared to the original estimate of almost $1,600,000.[6]

And, while this is a hypothetical example, it’s clear that in light of the worst decade for stocks in a generation, many baby boomers may need help managing their finances.[7] Hiring a professional financial advisor doesn’t guarantee baby boomers will be able to make up for years of poor investment performance in their retirement plans.

But, a growing number of forward thinking advisors are utilizing a variety of resources that may help their clients’ retirement funds better withstand stock market volatility.

Targeted Diversification. Up until this most recent bear market, many people thought diversifying among stocks and bonds was enough to cushion the blow from large market declines. That turned out to be a false sense of security as stocks plunged around the world. Today, financial innovation has opened up new investing opportunities that may allow a more targeted approach to diversification. These new opportunities may enable advisors to develop portfolios that are not as closely aligned with the ups and downs of the stock market. Prudent use of these new opportunities may improve long-term performance, or at least help reduce volatility.

Advance and Protect Strategies. It’s impossible to precisely “time” the stock market’s often nonsensical ups and downs. However, some trading strategies have managed to provide “clues” as to the general expected direction of stocks based on a variety of data. The goal is to take advantage of the “Advances” in market prices while “Protecting” those gains from precipitous declines. And, while no such system can guarantee success, most investors like knowing a strategy is in place that may reduce their exposure to sharp market declines in the future.

Risk and uncertainty are facts of life. But there may be ways to reduce exposure to those risks by utilizing appropriate tools and resources. And that’s where a professional financial advisor can potentially add value to their clients. By helping them understand their options, and implementing the ones that make sense, advisors may help their clients avoid the worst of future financial storms.

[1] http://www.prb.org/Articles/2002/JustHowManyBabyBoomersAreThere.aspx [2] http://www.ifebp.org/PDF/webexclusive/06feb.pdf [3] http://www.cbsnews.com/video/watch/?id=4952855n [4] Thomson-Reuters Investment Software
[5] Ibid
[6] Thomson-Reuters Investment Software
[7] http://www.aarpfinancial.com/content/Learning/retPerspectives_hinden_0708.cfm PEAK. December 2009.

Coping with Financial Anxiety

If the financial news has your blood pressure up, you may be suffering from financial anxiety. Anxiety is part of nature’s “fight or flight” mechanism for self-preservation, exhibited physically by increased pulse, faster breathing, increased adrenalin and sweating.

But prolonged states of anxiety can cause physical as well as emotional problems. In short, your mother was right – you can make yourself sick with worry.

With the wounds from the market downturn of the late 1990s still fresh, those worries may seem abundant. Here are a few tips for reducing your financial anxiety:

1. Recognize what you can and cannot control. For the most part, world events like war, terrorism or changes in government or leadership are out of your hands. The same is true for issues like corporate malfeasance; you couldn’t have known, because those involved didn’t want you – or anyone else – to know. Hindsight is 20/20 but not particularly useful.

 

2. Know that not every decision you make will, in the end, be the best decision. We all make mistakes. If you use your best judgment at the time, that’s all you can do. The only other option is to do nothing – and you may regret that decision even more. Don’t chastise yourself for missing the latest “big thing.” By the time most people knew about it, the opportunity had passed. Remember, past performance is not a guarantee of future results!

 

3. Stick to your plan. Many investors make wrong decisions at the wrong time based solely on emotion. When uncertainty and anxiety run high, that’s the time to get professional, trusted and objective advice. Often trends that seem poised to change the face of investing as we know it wind up being just another blip in history.

 

4. Modify your plan as needed. Okay, that seems contrary to No. 3 above, but even the best plan should be periodically re-evaluated. Your life may change.  Your cash flow may change.  The fundamentals that led to your initial investment choices may change. Modifications should be thought out with the same care you took in devising your initial plan.

 

5. Separate your financial situation from your self-esteem. Your value as a person doesn’t depend on the success of your portfolio. Your portfolio provides the means for you to become the person you want to be, whether that’s more time with your family, donations to charities or having new experiences.  But even without more time, donations or new experiences, your family and peers will love and value you just the same.

 

The flip side of fear, of course, is that sometimes it actually means something. Fear that your investments won’t provide adequate income in your retirement years may signal the need for a more conservative approach. A well thought-out investment plan put together and executed with the help of a professional can alleviate some of that anxiety.

What Should You Do With Your Old 401(k)?

A Rollover IRA Has Its Advantages
April 2009

If you have changed jobs several times during the course of your career, you probably have an interesting collection of retirement savings accounts from your previous employers. In fact, according to the Department of Labor, Americans move to a new employer once every four years and our collective trail of old 401(k) and 403(b) plans totals in the trillions of dollars.

While leaving your retirement account with a former employer is a better decision than cashing out your account and splurging on a boat, it may be more beneficial to consolidate your retirement savings by rolling your old 401(k) or similar employer sponsored retirement plan into an IRA.
A Rollover IRA offers you four major benefits:

1. Increased Investment Options. 
The biggest advantage of rolling over your 401(k) into an IRA is the wider universe of investment choices, including alternative investments not correlated to the stock market, a benefit that’s more valuable to you if the choices in your old 401(k) plan are limited or performing poorly. Most employer-sponsored retirement savings plans offer a choice of several mutual funds and/or company stock. However, with an IRA you can invest in mutual funds, stocks, bonds, and even non-traditional retirement investing options such as real estate, energy programs, and venture capital.

What’s more, if you keep your rollover IRA separate from other IRAs you may own, and if you qualify to open a Roth IRA, you can decide to convert the traditional rollover IRA to a Roth IRA where future earnings on the account are income tax free. Note that whether you qualify for the Roth IRA conversion depends upon your annual modified adjusted gross income.

2. Easier Record Keeping and Account Maintenance. 
There’s no question receiving 401(k) statements from various employers’ makes it difficult to monitor what you own and ensure each investment is playing the role you intended in your portfolio. It’s also more challenging to guard against harmful portfolio overlap where, for example, two funds from different investment companies could own many of the same securities. By consolidating your retirement accounts into a Rollover IRA, you facilitate the process of reviewing and rebalancing your portfolio. And, of course, you gain this greater convenience and control without tax consequences or other penalties.

 

3. Greater access. 
If, for example, your previous employer changes 401(k) providers, your plan assets will be temporarily unavailable to you due to a “blackout” period that occurs as funds are transferred from one plan provider to the other. That time frame can stretch from a few days to a few months. In addition, you can tap your IRA penalty-free before age 59 ½ for the purchase of a first home or college expenses.

 

4. Flexible Estate Planning. 
IRAs also offer more freedom, as well as the potential for tax savings, in the estate planning department. If you want to name multiple beneficiaries or a charitable organization as your beneficiary, which is best done with an IRA. Many employer-sponsored plans do not accommodate sophisticated beneficiary designations.

An IRA also affords your heirs more flexibility. For example, if you have named a non-spouse as the beneficiary of your 401(k) plan, it is likely that your former company’s plan administrator will insist that the account be cashed out immediately, resulting in a potentially larger tax bill and loss of the benefits of ongoing tax deferral. With an IRA, you can designate a younger non-spouse as your beneficiary and that individual can stretch out the minimum withdrawals over his or her lifetime.

Also, when your assets are invested in an IRA, your beneficiaries can get the information they need easily, rather than tracking down your former employers and completing multiple forms.

Ironically, while a Rollover IRA certainly increases your flexibility in terms of investment options and planning for the future, the rules governing the rollover are anything but flexible. And if you don’t play by the rules, you could face an unexpected tax bill.

Generally, when you take a distribution from a 401(k) plan that you intend to rollover, you must contribute it back into another IRA or other tax-deferred retirement plan within 60 days. If you do not rollover the funds within 60 days, the distribution is taxable. Also, in most cases, a 10% penalty for early withdrawal applies if you are younger than 59 ½ years of age.

To keep it simple and avoid careless mistakes, a direct rollover, also referred to as a trustee-to-trustee rollover, is often a better choice than cashing out and receiving a check from your former employer. With a direct rollover, your current plan sends a check not to you, but to the firm that serves as the custodian for your new IRA.

Plan sponsors are required to withhold 20% of the proceeds from your 401(k) as prepayment of federal income taxes if you ask your plan for a check. If you eventually roll over these assets, you will have to make up the 20% that was withheld by your plan sponsor or that amount will be taxed as income and could be subject to an early withdrawal penalty.

Note that it is possible to petition the Internal Revenue Service (IRS) to extend the 60-day re-investment rule in certain circumstances, particularly if you need time to correct errors made by financial institutions or time to deal with health issues or family problems. However, if you first consult with your financial advisor, you can be confident that your IRA rollover will go smoothly -- and that you’ll enjoy the benefits of your Rollover IRA for years to come.

Is Now the Time to Buy Your First Home?

May 2009

For years rapidly rising prices kept many potential first-time home buyers on the sidelines, stuck in the rental market. However, with home values continuing to plummet and interest rates hovering at historic lows, that may be about to change. Yet, while the recession and job uncertainty may cause median home prices to fall even further, general economic uncertainty also prompts the question: Is now a good time to buy a home?

Apparently, many people think so as the housing market is already warming ahead of the usual seasonal uptick of the spring market. According to the National Association of Realtors, February existing home sales rose by 5.1% to an annual rate of 4.72 million, up from 4.49 million units in January. That was the largest sales jump since July 2003. However, the Realtors group points out that about 45% of sales nationwide are foreclosures or other distressed properties that are selling for about 20% less than other homes.

While fire sale prices may be attracting new homebuyers, it’s also worth noting the impact of the $8,000 tax credit for new homebuyers included in the economic stimulus package. While proponents of home ownership traditionally stress the positive tax implications such as deductions for mortgage interest deductions for real estate taxes, this new $8,000 tax credit is available to first-time homebuyers who purchase their home on or after January 1, 2009, but before December 1, 2009, and who close on the sale during this period. A first-time homebuyer is defined as a buyer who has not owned a principal residence during the three-year period prior to the purchase. All U.S. citizens who file taxes are eligible to participate in the program and the credit does not have to be repaid unless the homeowner sells the home within three years of the purchase. 

Homebuyers who file as single or head-of-household taxpayers can claim the full $8,000 credit if their modified adjusted gross income (MAGI) is less than $75,000. For married couples filing a joint return, the income limit doubles to $150,000. Single or head-of-household taxpayers who earn between $75,000 and $95,000 are eligible to receive a partial first-time home buyer tax credit, and married couples who earn between $150,000 and $170,000 are also eligible to receive a partial first-time home buyer tax credit. The credit is not available for single taxpayers whose MAGI is greater than $95,000 and married couples whose MAGI exceeds $170,000.

Bargain basement prices and tax credits are attractive carrots to dangle in front of renters, but before you start on the home house circuit, it’s wise to consider how the recession may have changed the playing field. Big picture, just as “flipping,” where a buyer would purchase a home, invest a little sweat equity, and sell at a tidy profit just months later, has gone out of vogue, so too, has the home financing market transformed. That is, if you are in the market for a mortgage, you’d better have a secure job and be ready to meet lenders' much stricter income and credit requirements. You may also have to come up with a higher down payment than was required just a few years ago. In general, in contrast with the housing boom when lenders were all too ready to allow buyers to take risky loans and max out their home equity lines, staying within budget is the mantra of today’s homebuyers.

If you venture into the real estate market, keep these three pointers in mind:

1. Determine what you can afford.
Typically, you should spend no more than 28% of your gross monthly income on mortgage payments, real estate taxes, and home insurance. Online calculators at RealEstateJournal.com or Bankrate.com make these calculations a snap. Once you know your budget, get preapproved for a loan. Also, be sure to factor in extra cash for moving expenses; closing costs, which typically run between 2% and 3% of the home’s price; and ongoing home maintenance, especially if issues arise in your home inspection. In today’s uncertain economy, you also need to assess your job security. If you lost your job, could you make mortgage payments for six months while you looked for new employment?

 

2. Know your market.
The real estate market is different depending on where you live in the country, so pay close attention to what is happening in your own backyard. Now, more than ever, location is crucial. You can conduct your preliminary research online at websites like Zillow.com, Trulia.com, and GreatSchools.net.

 

3. Be Patient.
If you are looking for a bargain you might consider buying a short-sale property where a homeowner's lender agrees to accept less than is owed on the mortgage. Be aware, however, that these negotiations often progress at a snail’s pace if lenders are considering multiple offers. Most importantly, first-time home buyers don't generally purchase the house of their dreams. However, in todays down market, experts suggest you should buy a home only if you intend to live there for seven to ten years. In fact, even commercials on television combine optimistic assessments such as “Now is a good time to consider buying a home” with sobering disclaimers like “On average, a residential home appreciates in value over 10 years.”

If your finances are solid and you can afford a home you could live in for seven to ten years, the time may be right to jump into the real estate market. However, although your home is the biggest investment you likely will ever make, your decision involves much more than finances. That is, whatever’s going on in the market is secondary to what’s going on in your own life. The fact is, new jobs, a marriage, or the impending arrival of a child are often deciding factors when it comes to deciding when to purchase your first home.

 

Counting Down a Decade to Retirement?
Seven Moves to Make Now

April 2009

Give yourself a pat on the back. You thought the day would never come, but here you are – just a decade away from retirement. Sure, you’ve been saving and planning all along, but there are a number of steps you can take today to help you transition easily and stress-free to the next stage of your life.

Step 1.  Visualize retirement.  

Experts say it is better to “retire to” than to “retire from.” So, prior to checking out from your 9 to 5, spend some time thinking about what you want to do in retirement. Of course there are a few great dream vacations you want to take, but what will your everyday life look like? Is there a hobby you want to pursue? Will you volunteer in your community? Will you work part-time? Some pre-retirees take a vacation week and stay at home and live as if they were retired in order to get a real sense of the rhythm of retirement. Keep in mind that you and your spouse may have conflicting timetables or different definitions of the ideal retirement, so make some time to discuss your dreams and resolve any differences that may arise.

Step 2.  Take field trips.  

If you’re considering a major move in retirement, plan on a little travel to check out potential new homes. Remember, it’s a lot different to live in a location than it is to vacation there. So, if you’re visiting a sun and fun destination, you need to think about more than great restaurants and golf courses. Your checklist for evaluating a new community should include everything from a suitable year-round climate, cost of living, and quality medical facilities to access to cultural and sporting events, outdoor recreation, continuing education programs, and retail services. Most importantly, don’t underestimate the importance of keeping your family and friends within reach.

Step 3.  Save more.  

Although you may have always been a disciplined saver, your peak earning years afford you a valuable opportunity to boost your retirement contributions significantly.  Especially if your children are out of college and living on their own, or if you’re lucky enough to have paid off your mortgage, you may have surplus cash that you could invest.  Remember, if you’re over 50 years of age, there’s a federal catch-up provision that enables you to contribute an extra $5,000 this year into your employer’s retirement savings plan.  Ask about that at work.

Anything extra you sock away in these last few years of your working life could have a positive impact on how you will live for the rest of your life.  Accordingly, if you think you may launch a part-time business in retirement, try to get it off the ground while you are still working.  That way, you may be able to sock away any earnings into one of the many tax-deferred plans for the self-employed where those savings, too, will have more time to compound tax-deferred.

Step 4.  Double-check your retirement funding calculations.   

The traditional rule of thumb has been that you need 70 to 80% of your pre-retirement income to live on during retirement. However, recent studies suggest that people tend to underestimate retirement expenses. Healthcare costs continue to rise dramatically and what’s more, all that leisure time leads to more spending and people are living increasingly longer lives. It’s possible you’ll spend just as much time retired as you did working! With all that as a backdrop, it’s now considered safer to use 100% of your current expenses to figure retirement funding. That way, your nest egg can weather any major curve balls retirement throws your way, such as unexpected medical expenses, changes in the tax law, a period of high inflation, or consecutive years of a down market.

Step 5.  Spend mindfully.   

With your income at a maximum and many of your major expenses such as college tuition and mortgages waning or gone, you may find yourself with a budget surplus. While it’s okay to splurge on occasion, just make sure those one-time special treats don’t become part of your regular routine. Keep in mind that getting too comfortable with a higher pre-retirement lifestyle could pave the road for a tough transition to retirement. On the flip side, if you know you’ll need to scale down your present lifestyle in retirement, now’s a good time to begin the cost-cutting process. Weaning yourself off of those fancy coffee shop lattes or expensive dinners out will be less painful the sooner you start. Also, evaluate your debt. While monthly credit card bills are a noticeable drain during your working years, debt is a real danger come retirement.

Step 6.  Control risk.   

At your age, the negative impact of an investment mistake is magnified because you have less time to recover. That’s why diversification and careful portfolio monitoring become even more important as retirement approaches. In addition to reviewing your total asset allocation picture on an annual basis with an eye toward minimizing risk, you might consider diversifying into real estate or commodities that tend to perform differently than stocks or bonds, or in an asset that could afford your portfolio some protection in a period of inflation. Note, too, that a potentially problematic risk many pre-retirees share is a portfolio that is overexposed to company stock.

Step 7.  Talk to your advisor.   

There’s no substitute for personalized, professional financial advice tailored to your specific situation and concerns. Not only can an advisor steer you clear of investment blunders that are difficult to recover from just a decade away from retirement and help to control overall risk, he or she can lay the foundation for a comprehensive retirement distribution plan that both identifies which sources of retirement income would be best to tap first and factors in the tax consequences of your withdrawals. That way, you’ll keep more of the money you worked so hard to save for retirement.

Women Must Be Proficient With Money

June 2009

Some questions for the ladies:

Do you know where your insurance policies are, how much money you owe on your mortgage, what investments you hold? How about the names and phone numbers of your accountant, lawyer and financial planner?

If you don’t know the answers, there is a pressing need to learn them.

Women frequently face greater financial challenges than men. Eight in 10 women will become the sole financial decision-maker at some point in their lives often because of divorce or widowhood. Women typically live seven years longer than men, but earn, on average, 25 percent less. The average age of widowhood is 56.

Women who are unprepared may not fare well. Older women are more than twice as likely as men to be impoverished in their retirement years. Three in four people older than 65 who receive Social Security income are women. 

Unfortunately, according to Neale Godfrey, author of Making Change, “Women are dis-empowered when it comes to handling money.”

“In fact, 85 percent of women do financial planning in crisis,” she says. “The time to learn the Heimlich maneuver is not when you’re choking at the dinner table; it’s before you sit down and eat.”

Why are so many women financially unprepared?

“We were raised to be dis-empowered with money,” says Godfrey. “We were raised by women from the Donna Reed generation. People didn’t talk about money. There was someone else in our life to handle that part. We weren’t given the tools.”

Every woman can develop the necessary tools. You need to be involved in deciding how money is spent, whether it’s earmarked for retirement, college, kids, the trip or the house.

“Women feel that we have do everything,” says Godfrey. “You don’t have to do it (financial planning), you just have to know about it.”

The goal of becoming financially educated and competent may seem daunting. However, take one step at a time. Learn one aspect of your financial situation each week, and check it off the list when you feel well-versed.

Be proactive, not reactive. The best time to master these skills is before a crisis hits. Responses like, “I always let my husband do that,” or “I have no clue where that information is” will not keep you afloat if you find yourself alone.

Start taking control. Visualize your financial empowerment and work toward it.

Critical Factors to Consider When Retiring

September 2009

Planning a prosperous, fulfilling retirement has become more complicated than ever.

Your income, ideally, should remain at the same level after retirement. Unfortunately, mistakes are often made in calculating the amount needed to maintain one’s life style.

Some basic questions need answering:

Though these calculations seem straightforward, there are some critical factors to consider.

INFLATION

The returns you get on your investment are important. However, you must also correct them for the rate of inflation. This is your real rate of return. It is computed by subtracting the rate of inflation from your return.

For example, if an investment earns 6% and the rate of inflation is 2%, the real rate of return is 4%. If you do not account for inflation, you will underestimate the amount of money you’ll need to retire. You need to consider this when you make difficult decisions about which investments to select and what level of risk to accept.

In 1980, the rate for a certificate of deposit was 13.5%. Sounds great, right? However, if you were in a 25% tax bracket, your return after taxes would be 10.2%. Factor in an inflation rate of 12.4%, and your real rate of return ends up at a -2.2%! And today, with interest rates and inflation at approximately 2%, someone in a 25% tax bracket would have an actual rate of return of -0.50%.

TAXES

If the bulk of your savings is in a 401(k) or Individual Retirement Account (IRA), taxes will have a large impact. Suppose you’re in the 35% tax bracket and want $10,000 in spendable (after-tax) income. How much would you have to withdraw from your retirement plan?

Instinctively, you might say $13,500 to net $10,000. However, you need $15,400 to net $10,000. This means you, as an investor, must accumulate 54% more money to net the desired $10,000. Clearly, the tax burden is an important factor.

LONGER LIFE EXPECTANCY

When a couple plans to retire, financial planners estimate how long the surviving partner is expected to live. This is called the joint life expectancy. However, 50% of individuals will live longer than the life expectancy tables predict. These tables cannot account for new medical breakthroughs that may prolong life for many people. Thus, when planning retirement allocations, it is important not to underestimate our life expectancy

ADDITIONAL EXPENSES

The myth is that you will need 70% of your annual pre-retirement income when you retire. You’ll need more than that in all likelihood. If you’re a business owner, for example, some expenses will no longer be paid by the business. Those added expenses for health insurance, travel and entertainment, and auto expenses can take a substantial chunk out of your income.

The definition of a failed retirement is running out of money before you run out of time. The definition of a prosperous retirement is maintaining a life style similar to that of your working years.

By addressing the above issues and continuing to educate yourself about potential pitfalls, you’ll be on the way to a fulfilling retirement.

Estate Planning for Everybody

February 2009

Taxes certainly are higher for large estates but they are not the only reason for estate planning. Here are seven more, some which may be just as important to you:

If you do not have a plan, state laws will determine who inherits your assets and when they receive them. The court will appoint a guardian for your children and the administrator for your estate. Your estate could wind up paying substantial – and unnecessary – taxes and administrative costs.

Most people feel strongly about who should inherit their assets and when. However, they are often less sure about what to consider as they select an executor and trustees. Your executor is your personal representative after your death and is responsible for such functions as:

In short, your executor administers your will. When these duties are met, the job ends. However, if your will creates trusts to accomplish more long-term goals, you need a trustee. Your trustee is responsible for managing the trust’s assets and ensuring the beneficiaries are provided for in accordance with provisions of the trust. Individuals are often torn between choosing an individual as the executor or trustee and naming a corporate entity, such as a bank. Many people name both as executors or co-trustees. Here are the advantages and disadvantages of each.

Corporate executor and/or trustee

 

Individual executor and/or trustee

Consider a living trust.

A living trust (also known as a self-declaration or revocable trust) is a legal document that resembles a will. It contains instructions for managing your assets should you become disabled and directions for the distribution of your assets upon death.

Living trusts have two major benefits. Assets in a living trust do not go through probate, which is the process of proving and administering a will under the jurisdiction of a court. It can be a time-consuming and potentially expensive process. It also subjects your private financial affairs to public scrutiny. All probate records are public documents!

A living trust provides a perfect vehicle for managing your assets in the event of a disability. While you are alive and well, you can act as your own trustee. In the event of disability or death, the successor trustee that you selected takes over.

Estate planning may include establishing a lifetime gifting program, making the most of the unified credit or considering charitable trusts.

Before you sit down with an estate planning attorney, take the time to get educated. One book that you will find very helpful is J.K. Lasser’s "New Rules for Estate and Tax Planning."

If you are not confident all is in order, seek professional advice to alleviate potential problems down the road.

 

Estate Planning Strategies for IRAs and Qualified Plans

September 2009

Qualified retirement plans and IRAs are popular vehicles for accumulating retirement wealth. Congress, recognizing the need to encourage taxpayers to save for retirement, has extended favorable treatment to qualified plans and IRAs. While tax benefits are granted for contributions to retirement plans and also for accumulations inside these plans, these funds will eventually be taxed when distributed. This means that income taxation is merely delayed, not eliminated. Additionally, Congress has created penalty taxes if distributions are not made in accordance with the intended use of the retirement plan, namely providing income during the retirement years. Examples of these penalty taxes include the 10% penalty for distributions prior to age 59½ and the 50% penalty for distributions of less than the required minimum amount starting at age 70½.

Often, a sizeable amount of wealth is accumulated in a retirement plan and may end up comprising a significant portion of your estate, particularly when the retirement plan will not be needed during retirement. Since the retirement plan may be subject to both income and estate taxation at death, as much as 70% to 80% of the retirement plan could be lost in taxes. Therefore, estate planning for IRAs and qualified plans becomes critical.

The following is a summary of three estate planning strategies for IRAs and qualified plans:

Fund an Irrevocable Life Insurance Trust (ILIT) with a Life Insurance Policy.
Create an ILIT and fund it with enough life insurance to pay the taxes on the IRA or qualified plan. The ILIT proceeds are not subject to federal estate taxes, so they can be fully used to pay all estate and income taxes on the IRA or qualified plan.

Name Charity as Beneficiary.
If you have charitable inclinations your IRA or qualified plan may be an ideal asset to leave to a charity. If you are married, you, as the owner of an IRA or qualified plan could name your spouse (or revocable living trust) as the primary beneficiary of your IRA or qualified plan. After the death of your spouse, you could name your favorite charity or charities as fund beneficiaries. By naming a charity as the beneficiary, the dollars pass directly to the charity without payment of taxes. Otherwise, much of it could pass to the government. This allows you to at least control how the proceeds will be used.

Rollover Your IRA to a Roth IRA.
Rollover your IRA to a Roth IRA, which can pass to your heirs income tax free. A rollover to a Roth IRA can be accomplished only under the following conditions: (1) the rollover must be from an IRA (qualified plans are not eligible for rollover to a Roth IRA), (2) the amount of the rollover will be taxed to you in the year of the rollover, (you may deploy parallel strategies to offset this tax), (3) you must have a modified adjusted gross income of less than $100,000.00 and (4) you cannot file your tax return as married filing separately.

If you have accumulated wealth in an IRA or qualified plan that will not be needed, proper estate planning is essential to maximize wealth transfer.

How the Federal Reserve Buying Treasury
Securities May Help the Economy

Although the Federal Reserve’s recent decision to buy $300 billion in Treasuries in 2009 was greeted with some surprise, Fed watchers know the Federal Open Market Committee (FOMC) has mulled the move for months. Federal Reserve Chairman Ben Bernanke first suggested the move in December 2008 in a speech discussing the Fed’s expanding toolbox. The Chairman later noted, “Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver -- the provision of liquidity -- remains effective.” His goal with the significant purchase of longer-term Treasury securities is to “influence the yields on these securities, thus helping to spur aggregate demand."

The Fed’s purchases may help lower mortgage rates and may also help reduce rates for other loans that are based on Treasuries – including company borrowings, auto and other consumer loans. Naturally, as interest rates drop and demand increases, there will be more money in supply. Specifically, savings from a wave of refinancing could serve as a powerful stimulus for the household sector of the economy. But, will homeowners spend or stash their mortgage savings? And, on a larger scale, will the bank’s loan out or hoard the cash they raise from selling Treasuries?

Of course, if the Fed adds too much money into the system, that could trigger inflation. However, the FOMC expects inflation to remain subdued and, in fact, noted in its March 2009  statement the risk that “inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” Accordingly, Bernanke’s laser focus remains on loosening up credit conditions.

As the Fed continues to respond to the credit crisis, it will be important for the FOMC to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments. Eventually, that balance sheet will have to be unwound – and that may prove a real chore in a recovering economy. For now, however, the Fed remains focused on improving credit markets to facilitate the business and consumer demand that's essential for economic growth. In fact, the planned purchase of $300 billion of Treasuries is dwarfed by the Fed’s ownership of $1.25 trillion of mortgage-backed securities (up from $500 billion) and $200 billion of agency debt (up from $100 billion) – and the door’s open for additional Treasury purchases if the Term Asset-backed Securities Lending Facility (TALF) (a major joint program with the Treasury Department to boost consumer lending) falters or if the economic news continues to deteriorate.

How to Manage an Inheritance

February 2009

According to the Center on Wealth and Philanthropy (CWP) at Boston College, an estimated $41 trillion will pass between generations by the year 2055.  For many people who have never given any thought to what they might do with an inheritance, even if it’s a modest amount of cash, the gift will seem like a burden, rather than a blessing.  Often, anxiety and guilt increase in proportion to the amount of money involved.  In fact, substantial inheritances that can truly be considered life-changing sums of wealth can spark financial and emotional reactions that make it difficult to set goals and make financial decisions.

If you are the beneficiary of an inheritance, no matter what the size, these three strategies can help guide you to integrate your new wealth successfully into your life.

1. Stop and take a deep breath.
Amazingly, a 2000 study by Oppenheimer Funds found that about 40% of individuals who received an inheritance of $50,000 or more spent less than a week deciding what to do with it. Stop and think. Is that how you’ve made other financial decisions in your life? If not, rather than embark on an emotionally fueled, reckless spending spree, step back and take some time before making major financial decisions. Sure, you may have always dreamed of driving a particular car or living in the most exclusive neighborhood, but it’s important to consider how those decisions might impact the rest of your life.

Before you go shopping, make a list of potential purchases with dollar figures attached. Then, put the cash in a money market account for six months to a year. That will give you time to grieve, research purchases and investments, and ensure that the decisions you make about how you want to use your legacy match your own values.

Of course, before making new purchases, you should take care of credit card debt. Also, if you don’t have an emergency fund of 4 to 6 months of living expenses stashed in liquid investments, you might consider using part of your inheritance to begin one.

2. Consider professional advice.

Do-it-yourself investing may have worked just fine for you pre-inheritance, but now it may be worth paying for investment advice, if only to put all of your well-meaning friends’ advice into perspective. Of course, the value of good financial, legal and tax advice increases with the amount you inherit. What should you look for in an inheritance plan? In Sudden Money: Managing a Financial Windfall, certified financial planner Susan Bradley suggests the following three steps for developing a successful long-term plan: chart your goals after a reflective period; select investments according to your desired results; and establish systems to keep everything on track. This approach should be at the heart of any financial plan.

Additionally, there’s a growing niche in the financial advisory market that could be helpful to you. A growing number of wealth counselors conduct weekend retreats, seminars, and workshops that address the variety of problems that wealthy people wrestle with. Their goal is to help you resolve any nagging emotional issues, so you’ll be able to make good financial decisions and use your wealth to fulfill your goals.

If, however, you would rather explore your feelings on your own, there are plenty of useful resources online. You might start with a visit to the Inheritance Project at www.inheritance-project.comIt was founded in 1992 by Barbara Blouin, Katherine Gibson, and Margaret Kiersted, heirs interested in exploring the emotional aspects to wealth. The Project’s Trio Press is the world’s largest publisher of educational materials on inherited wealth.

And if you’re looking for a support group, many philanthropic organizations, in addition to their primary work of raising funds, offer helpful workshops and seminars for inheritors. Among them are The Wealth Conversancy, Inc. at www.wealthconservancy.com and The Gallo Institute at www.galloinstitute.org

3. Keep your eye on the big picture.

Just as any financial professional will encourage you to take a long-term view when it comes to investing, you should adopt the same philosophy when it comes to integrating inherited wealth into your family. In particular, if you have a large inheritance, it is important to recognize that your wealth may change not only your life, but the lives of your children. Accordingly, it is essential to prepare your children as best you can to be good stewards of the wealth they will one day inherit. Barbara Blouin’s booklet Coming into Money: Preparing Your Children for an Inheritance, available from Trio Pressis an important resource for parents considering giving substantial money to their children as young adults. It discusses the perils of inheriting early and suggests how some advance financial planning can help empower your children financially.

Sources: http://www.bc.edu/research/cwp/features/goldenage.html

http://www.protectassets.com/news/art/2000/challenge1000.html

http://www.usatoday.com/money/wealth/saving/msw109.htm

http://www.amazon.com/Sudden-Money-Managing-Financial-Windfall/dp/0471380865/ref=sr_1_1/102-2286261-8564105?ie=UTF8&s=books&qid=1188833328&sr=8-1

 

How to Protect Your Home’s Value in a Down Real Estate Market

January 2009

For most of us, our home is our biggest asset.  So, when the “For Sale” sign lingers a little too long on a neighbor’s lawn or a home in your neighborhood is foreclosed upon, it’s natural to worry whether your home’s value might be impacted.  However, there are several steps you can take to ensure your property retains its value, even in a down real estate market.

Stay up-to-date on changes in your local market. 

According to the Center for Responsible Lending, 2.2 million families with subprime loans issued from 1998 through 2006 have lost or will lose their homes to foreclosure in the next few years.  That represents a projected maximum equity loss of $164 billion

Source: http://www.responsiblelending.org/issues/mortgage/quick-references/a-snapshot-of-the-subprime.html

While foreclosure rates are highest in California and Florida, a general weakness in the housing market is evident just about everywhere – and even one foreclosed upon home in your area can make buyers skittish about your neighborhood.  Foreclosures may prompt some potential buyers to float you a lowball offer because they figure that you, too, are dealing with financial difficulties.  A foreclosure in the area can also impact how real estate agents price your home.

You can educate yourself about the subprime lending crisis by visiting the Center for Responsible Lending’s web site at www.responsiblelending.org Of course, the easiest way to keep on top of the local real estate market is to read the real estate section in your newspaper each week.  Additionally, make it a habit to walk or drive around your neighborhood to take note of “For Sale” and “Sold” signs and attend a few open houses each month.  To figure out your home’s estimated value, log on to www.ofheo.gov and click on “House Price Calculator.”

Form a neighborhood watch team. 

It doesn’t take long for an abandoned, foreclosed upon house to start looking like it belongs in the opening scene of a bad horror movie.  To protect your real estate investment, get together with neighbors and form a group to watch the house, ensure there’s no vandalism, and take care of routine maintenance such as mowing the lawn or shoveling the walk.  Better yet, if the house has been on the market for awhile, pull some weeds or plant flowers to boost its curb appeal.  Finally, if other people in your area are having trouble paying their mortgage, suggest they contact the Home for Ownership Preservation Foundation at 888-995-HOPE.  The Department of Housing and Urban Development also can provide counseling.  Call 800-569-4287.

Scale back home improvement projects. 

Now may not be the time to do major home renovations.  According to the recent “Cost vs. Value” report from Remodeling magazine, this year’s industrious homeowner won’t be recovering as much of the costs for remodeling as renovators did in past years.  For example, although in 2005, most projects returned at least 85 cents on the dollar, today, less than a quarter of home renovation projects return the same amount.  In particular, high-end renovations may be viewed as over-improvements

Source: http://www.remodelingmagazine.com./industry-news.asp?sectionID=194&articleID=607228

Keep up with routine maintenance. 

Sure, major or trendy overhauls are out of the question, but routine maintenance, like cleaning out the gutters and downspouts, is always a must.  Think of the old cliché, “An ounce of prevention is worth a pound of cure.”  That is, the tree limbs you prune today won’t crash through your picture window in an ice storm and thoroughly inspecting your pool before opening it for the season can help prevent accidents.

Review your insurance. 

Uncertainty is a fact of life in any market, and homeowner’s, mortgage, and term life insurance policies can ensure your home is paid off if something happens that impacts your ability to pay your mortgage.  To completely protect your investment, however, make sure that your home is insured for at least 100% of its estimated replacement cost.  That means you should review your homeowner’s policy annually to make sure that your coverage matches your needs.  You might answer these questions: Have you recently remodeled or improved your home?  Has the rate of inflation risen since your last appraisal?

Rethink your strategy if buying or selling. 

Forget the bidding wars of recent years where homes sold for more than the asking price.  If you are looking to buy during this down cycle, you may be able to drive a harder bargain.  A larger inventory of new homes on the market is fueling buyers’ ability to cajole builders into including extras like granite countertops.  However, to temper the risk that, in the short-term, the home you purchase today may fail to increase in value or may even decrease, take a conservative approach to financing.  This may not be the best time for an interest-only mortgage.

If you are selling, prepare to work harder.  You might start with the little things, like sprucing up the yard, that increase curb appeal.  Remember, too, that in a slow market buyers won’t overlook leaky roofs and wet basements, so make these repairs before putting your home up for sale.  Finally, follow the lead of homebuilders and consider throwing in extras, such as your appliances or yard tools, to attract buyers.

Keep a long-term view. 

Don’t panic.  It’s important to think of homeownership as a long-term investment.  Of course, in a hot real estate market, it’s possible to make a quick buck, but remember that you don’t lose money on a home until you sell at a discount of your purchase price.  Unlike the darlings of the dotcom bubble, the price of real estate will never drop to zero.  At some point the housing market will rebound but, unfortunately, as is the case with stocks, it is impossible to time the market.

 

It’s Good Advice to Create an
Annual Review Checklist Jan 2009

January 2009

The beginning of the year is a great time to think about what you want to accomplish and to set specific goals. A good way to start is to create your own annual review checklist. 

Things change ... interest rates, tax laws and your personal situation. Many events may require you to revise your financial and estate plans, including:

 

Plan for the unexpected.  Along with your estate plan and testamentary arrangements, consider writing down your objectives, ideas and wishes in a letter to your family that will guide them in handling estate and investment matters, and in making other important decisions, in your absence. Consider including a note of caution not to consider your thoughts rigid or binding, but to temper them by careful consideration of facts and circumstances existing when a decision must be made. Things change, and we can’t foresee every eventuality.

Here are other things you may want to include in your letter:

Your letter should be signed and dated, and may be sealed. The envelope should be marked "To be opened in the event of my serious illness, incapacitation, or death."

It is important to address these and related issues now. Set goals and determine a time frame for accomplishing them.Remember the adage that if you fail to plan, you can plan to fail.

>Make a Plan Today for Tomorrow

July 2009

The 2008/09 financial meltdown is a stern reminder that failing to plan for low probability events may lead to very detrimental consequences. The large decline in the stock market coupled with crippling job losses was a double whammy that took many households by surprise. For the unprepared, it was a very rude shock from which it may take them years to recover. The best way to avoid a similar fate in the future is to create a flexible and comprehensive plan today. 

Most Americans lack a formal financial plan, according to the Certified Financial Planner Board of Standards' 2004 Consumer Survey. Yet the same survey finds those with a written financial plan are more satisfied with how their finances are managed, more confident about their financial decisions, and less worried about being financially secure at retirement.

Deciding where to invest your money is only one of many parts of a comprehensive financial plan. You also need to consider asset protection strategies, liability management, cash flow analysis, and tax minimization strategies.

A good plan will address questions such as:

 

And, don’t forget, this is not a static document. As your life changes so should your plan. Here are several examples of life changes that may cause a revision to your plan:

Of course, there are many other transitions, both expected and unexpected, that could occur. The best way to deal with them is to have a plan that covers the expected while being flexible enough to deal with the unexpected.

Like a compass, your financial plan keeps you pointed in the right direction even as your life inevitably changes. What’s more, the comprehensive nature of financial planning should help you avoid major mistakes – from choosing a high-flying stock with no regard for its risk, to overestimating how much you can safely withdraw from your nest egg.

By presenting a broad view, your financial plan helps you understand how each financial decision affects other areas of your finances. For example, suppose you receive an inheritance and use it to pay off your mortgage. That frees up more of your earnings to put into your retirement plan. But, your taxes rise because you’ve lost your mortgage interest deduction, and your expanding net worth means estate taxes could become a problem.

Yes, developing a plan takes time, but the end result may help put you at ease and enhance your quality of life.

As Yogi Berra once said, “If you don’t know where you are going, chances are you will end up somewhere else.” Better to live your life by design, not default.

Pay Yourself First

June 2009

You already pay your bills on time. So, why not treat retirement savings as a regular monthly bill rather than seeing it as optional?

We know we should save, but there are competing priorities so funding the retirement account often comes last. The kids want to go to college, and you would like a new boat. But treating your retirement savings as another bill that you must pay will keep it at the front of your mind. You won’t miss payments if you realize that ─ just like with the mortgage or electric bill ─ getting behind has consequences.

This simple sounding solution comes from the sophisticated world of institutional investing. Pension fund managers, for example, have to treat future obligations ─ payments to pensioners ─ as liabilities. That forces them to deal now with something that may be years or decades away. Using actuarial tables, they calculate the cost of future obligations to determine what return they require on their investments and whether the pension fund is adequate.

While you may not use actuarial tables, you can manage your retirement account like a pension fund. First, determine the savings you need to support the lifestyle you want during retirement. Keep in mind that you probably want to fund retirement through age 90 or 95.

Next, determine how many years you have to reach your savings goal. If you are 45 and plan to retire at 62, for example, you have 17 years to fund your retirement account. Finally, determine how much you must save each year and make projections about returns on your investments.

If you’re already funding your retirement goal by contributing to a 401(k) or other plan at work, treating that money along with all of your other retirement savings as a liability may provide you with a more realistic picture about how much you need to put away. It may also help you envision the quality of retirement you should expect and spur you to save more.

A simple way to establish a monthly liability for your retirement obligation is to divide your goal into equal installments. So, if you have 17 years to save $500,000, divide that obligation into 204 monthly payments of just over $2,450 per month. Given the expected growth of your investments, you’re likely to “over-fund” your retirement obligation. If you want to calculate your payments more precisely, include estimates for the impact of inflation, investment returns, and taxes.

By treating your retirement account as a liability, you’ll be paying yourself along with your other debts. Of course, making calculations about how much you need to save today to fund a debt in the future, while also making judgments about inflation, taxes, and selecting the right investments, may require professional help. Create a disciplined system for planning your retirement now and paying yourself first so you can enjoy your leisure years later.

Responding to the Recession

March 2009

Do you barricade yourself in your home when it rains, to emerge only on a beautifully sunny, 70 degree day? Of course not. Think of what you’d miss. Similarly, while everyone wants to invest in a bull market, in a downturn, it’s a different story. Just as you prepare for bad weather by wearing a raincoat or carrying an umbrella, investing wisely for retirement in a recession requires a little more planning.

According to a recent study by the Washington, DC-based Employee Benefit Research Institute (EBRI), Americans are, in fact, planning carefully in the wake of the recession. Although EBRI’s annual Retirement Confidence Survey (RCS) measured a decline in confidence about the security of retirement (a record-low 13% this year say they are very confident of having enough money to live comfortably in retirement), investors are taking action to gain control. For example, 81% say they have reduced their expenses. Others are changing the way they invest their money (43%), working more hours or a second job (38%), saving more money (25%), and seeking advice from a financial professional (25%). Most notably, among all workers, 75%, one of the highest levels ever measured by the RCS, say they and/or their spouse have saved money for retirement.

The RCS also recorded some lifestyle shifts. For example, 28% of workers say the age at which they expect to retire has changed in the past year, with the vast majority (89%) noting their expected retirement age has increased. Additionally, 72% of workers say they plan to work for pay after they retire an increase from 66% in 2007.

To position your portfolio to survive the recession:

• Review your investment strategy with an emphasis on risk.

You know your investment strategy is a function of your time horizon, goals, and tolerance for risk. While your goals and time horizon are fairly straightforward, risk is often difficult to ascertain in theory. In fact, now facing real portfolio declines, many investors feel the need to make some adjustments.

All investors need protection from three basic risks. First, there’s market risk, the possibility that events in financial markets may lead to a decrease in the value of your investment. Investors in bonds and bond funds are subject to interest rate risk. Interest rates and bond prices generally move in opposite directions: when interest rates go up, bond prices go down, and when interest rates go down, bond prices go up. Finally, in today’s rollercoaster market, it may seem safest to preserve your money with bank certificates of deposit. However, that exposes you to inflation risk. That is, if the rate of inflation outpaces your interest rate, you’ll have diminished purchasing power.

How much risk you decide to take going forward depends on how much volatility you can tolerate. Think of volatility as a change in value of your account. Generally, while stock portfolios experience greater short-term swings in value than do bonds, there is an important tradeoff. Equities reward you with greater potential for long-term gains. Accordingly, a major factor to consider when thinking about your risk tolerance is how long it will be until you expect to tap into your investment account. If you have three decades until retirement, you may be better able to stomach a market downturn. After all, you have plenty of time to recover. Conversely, if you are in or approaching retirement, you have less time to benefit from the market’s eventual upturn and may worry more about a down market.

• Re-commit to saving.

History shows that market gains can occur in a few strong, but unpredictable, trading days. Sticking with your retirement savings plan ensures you invest a fixed amount at regular intervals. This “dollar cost averaging” can result in a better average share price than trying to time your purchases because your set contributions buy fewer shares when the market is up and more shares when the markets are down, resulting in an optimal average cost per share over time. Such a plan involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through periods of low price levels. Such a plan does not assure a profit and does not protect against loss in declining markets. Also, check that your assets are spread across stocks, bonds, and short-term investments. The best-performing asset classes vary from year to year and combining investments that respond differently to market conditions helps control risk. Rather than focus on a sector you perceive as safe, continue to make broad-based contributions on a regular basis. You also might consider rolling old retirement plans into an IRA to facilitate monitoring your portfolio.

• Work on making rational decisions.

Financial decisions can be difficult even in good times, but the extreme emotions triggered by the recession can impede your ability to think logically. Rather than get upset and react to newspaper headlines or discussions around the water cooler, base your decisions on solid information and careful analysis of your own personal economy. Resist making what you perceive as a quick fix portfolio move, and strive to lengthen your perspective by keeping your long-term goals in mind. When you take the time to run your retirement numbers, you may be surprised. Your diversified portfolio may not have suffered as much as the broader market. What’s more, as with many of the workers responding to the EBRI’s RCS, putting off retirement for a year might not be the worst possible scenario. More importantly, looking at future projections can help you to think more about your current spending, helping you to become a more mindful consumer and make better choices that can further boost your retirement savings. Although there are certainly some positive signs on the economic horizon, there will be plenty of cloudy days ahead. However, as the economy battles its way out of the recession, anything you can do to feel more in control and focused on your long-term goals will enhance your ability to make sound investment decisions and position your portfolio to benefit from the market’s eventual rebound.

Well, instead of writing you a piece about where the markets are headed in the short-term (as nobody knows); I thought I would lay out something that I recently read, called the "Death of Common Sense."

If you throw out all the noise and just pay attention to what common sense leads you to do, most of the time you will be successful. There are also times when common sense either isn't followed or dies completely, which certainly happened in the run-up of tech stocks a few years ago. On the other hand, I think we also don't have common sense to recognize some of the fundamental values that are still out there today. I hope you enjoy the following piece.

The Death of Common Sense

July 2009

Today we mourn the passing of an old friend, Common Sense.

Common Sense lived a long life, but died in the United States from heart failure early in the new millennium.  No one really knows how old he was, since his birth records were lost long ago in beauracratic red tape.   He selflessly devoted his life to service in schools, hospitals, homes and factories, helping folks get jobs done without fanfare and foolishness.  For decades, petty rules, silly laws and frivolous lawsuits held no power over Common Sense.  He was credited with cultivating such valued lessons as knowing when to come in out of the rain, why the early bird gets the worm and that life isn’t always fair.  Common Sense lived by simple, sound policies: don’t spend more than you earn, the adults are in charge (not the kids) and it’s okay to come in second.  A veteran of the Industrial Revolution, the Great Depression and the Technological Revolution, Common Sense survived numerous cultural and educational trends, including body piercing, whole language and new math.  But his health declined when he became infected with the “If-It-Only-Helps-One-Person-It’s-Worth-It-Virus.” 

In recent decades, his waning strength proved no match for the ravages of well-intentioned but overbearing regulations.  He watched in pain as good people became ruled by self-seeking lawyers and his health rapidly deteriorated when schools endlessly implemented zero tolerance policies.  Reports of a six-year-old boy charged with sexual harassment for kissing a classmate, a teen suspended for taking a swig of mouthwash after lunch and a teacher fired for reprimanding an unruly student only worsened his condition.  Common Sense lost his will to live as the Ten Commandments became contraband, churches became businesses, criminals received better treatment than victims and federal judges stuck their noses into everything from the Boy Scouts to professional sports.  When one individual – too stupid to realize that the steaming cup of coffee was hot – was awarded a huge settlement, Common Sense threw in the towel.  Common Sense finally succumbed when, while the United States was fighting a war on terrorism, a federal judge declared the Pledge of Allegiance to be unconstitutional.

Common Sense was preceded in death by his parents, Truth and Trust, his wife, Discretion, his daughter, Responsibility, and his son, Reason.  He is survived by two step-siblings, My Rights and I’m A Whiner.  Not many attended his funeral because so few realized he was gone.

~Source Unknown

What Are We Learning From These Difficult Times?

June 2009

The markets suffered tremendous losses in 2008. Hardly any market based asset class was spared. Even well-designed asset allocation plans, meant to reduce volatility, have not weathered this storm. Many alternative investments not co-related to the stock market fared better.

Still, overall we have reason for cautious optimism. While I believe we have a very difficult recovery and restructuring ahead of us, I also think we will be much more stable in the future. Investing is hard work. It requires a tolerance for discomfort when things seem to be not working, and it requires an ability to avoid overconfidence when things are going well. Risk tolerance means different things to different people. Your definition of acceptable risk from three years ago could be significantly different now.

I believe each of us will be better served by looking carefully at our goals, our circumstances, and our resources, and, as logically as we can, developing or confirming investment and spending strategies that will increase the likelihood of reaching our goals.

The first step is to maintain sufficient cash or cash equivalents to cover your short-term needs. Short-term means anything for which you require funds in the next three years.

One of the more important things you can do for your financial security is to keep your spending within the limits of what your resources can support. Live within your means. Taking on debt makes you vulnerable. Are there any spending categories you can reduce and shift the money into more meaningful expenditures? Long-term damage to retirement plans often results from overspending.

The combination of low interest rates and declining account values might require you to take a closer look at your expenses. If you are retired, a general rule of thumb is that you can withdraw 4% of the value of your account each year. If you are spending more than that, even the good cycles may not sustain your account throughout retirement.

Many people are holding a high percentage of their assets in cash. Just as people were scared to miss out on the frenzied bull market of a few years ago – afraid to be left behind – many will be afraid to get back into the markets near the bottom. That is precisely the time to reinvest. None of us can know, until after the fact, when the market has hit rock bottom. We do know historically that when the market has been oversold by a fearful populace, the long-term result may be excellent.

John Hussman, president of Hussman Investment Trust, says that if the S&P 500 were to decline to between 500 and 550, it would match the worst historical troughs for market valuations. These levels are emphatically not forecasts – they represent extreme outcomes. Unfortunately, they also cannot be ruled out in the context of a de-leveraging cycle plagued by utterly misguided policy responses.

But understanding the upside is essential. At those levels, S&P 500 stocks would be priced to deliver total returns over the following decade in the likely range of 14% to 17% annually, according to Hussman. Lower valuations imply higher long-term returns. Do you think anyone in the midst of the Great Depression would have forecast an increase of almost 150% over the following 10 years and almost 1,300% over the following 20?

My own sense of the world tells me that we tend to lose sight of the important things in life. Compared with ages past, we live a remarkably comfortable existence. In our individual lives, we are often wise enough to see trauma or misfortune as a catalyst to positive change, as motivation to move out of a comfortable rut and take chances that will lead to something better.

Our society will emerge from this trauma with more wisdom about saving and investing, and spending and consuming, and about what is really important. We will no longer take so many things in our economic world for granted.

We are learning a lot from these difficult times.

What Kind of Legacy Do You Want to Leave Your Kids?

January 2009

What kind of legacy do you want to leave your kids?  Should you ever leave more money to one child than another?  Did you treat all of your children the same when they were growing up?  Probably not. Each child is different. Often one child needs more attention and support than the others. So when crafting an estate plan, should you consider treating your children unequally? 

"Do you want your kids to love each other when you're gone?" responds Dr. Lee Hausner, author of the book Children of Paradise. According to Hausner, "Estate planning, the settlement of the estate, is about equality. If it isn't about equality and you don't have a very good reason that the kids understand, you have set the seeds for psychological cancer among your next generation…resentment, disappointment, anger. This is not going to be a wonderful, happy, loving family," says Hausner. 

However, there may be special circumstances.

What about the parent who has three children, only two of whom are successful?

If you believe the will should be set up to provide more benefit to the neediest child, the only way to do it is to get the approval of the other siblings beforehand. Their acceptance will depend on their relationship with their siblings and how secure they are.
However, don't be upset if they say, "No, I really think it should be equal."  From their perspective, Hauser notes they may wonder if "you were going to penalize the accomplished kids and reward the unaccomplished? Why penalize someone because they got successful?"

 

What if you have already given a lot of money to one child for, say, graduate school?

Hausner believes it is fair in this case to equalize the estate and give, for example, $100,000 more to the child who did not pursue higher education.

 

What if you have one child who is physically or mentally challenged and unable to care for him- or herself?

You should explain this beforehand to the other children. However, most siblings are likely to understand the reasons why a handicapped child may need to get a disproportionate share of the inheritance.

Once you’ve set the allocations, in what form should you leave your inheritance to your kids? Consider the following criteria, which rewards fiscal competency.

Set financial goals. If the child does not meet any of these goals, the money remains in the trust with a trustee. If the child achieves a higher degree of financial competency, he or she would become a co-trustee, with a say in the decision making. And, if the child achieves full financial competency, he or she will get all the money outright.

Now it is up to the children to decide how financially sophisticated they want to be. Hopefully, they will be encouraged to be financially independent and competent -- even when you’re gone. That may be the most important legacy that you leave them.

When Should You Start Collecting Social Security?

July 2009

They say good things come to those who wait. So, rather than start collecting Social Security benefits as soon as you’re eligible, you may want to consider the advantages of pushing those payments off for a few years. Under the current Social Security rules you can:

In general, experts say that for every year you defer payments beyond full retirement age, up to age 70, your monthly benefits could increase by 5% to 8%. You can crunch the numbers yourself using the benefit calculator at the Social Security Administration’s web site, www.ssa.gov Click on the “calculate your benefits” link under the “Retirement” heading on the homepage. 

When are Americans deciding to take Social Security? According to a November 2007 study entitled Boomers Ready to Launch from the MetLife Mature Market Institute, there’s a pretty even split between baby boomers set to turn 62 in 2008. Of those surveyed, thirty-one percent said they plan to apply for Social Security when they turn 62 and 32 percent said they will wait until age 66 or beyond when they can receive full benefits.

Survey respondents who said they will take benefits at age 62 reasoned that it’s in their financial interest to take Social Security sooner. Some said they need the money right now; others fear there will be nothing left in the system if they wait, according to the study’s press release.

To decide when to collect your benefits, consider your life expectancy, your current health status, and whether you can afford to live without Social Security for a few extra years. We’ll be happy to discuss your options with you.

Advice for Making Senior Living Decisions

It’s likely that you have bought and sold a number of homes in your lifetime, probably all without the assistance of your financial advisor. However, if you are considering a move to a senior living community, you might benefit from some professional advice. Living choices for seniors are increasing constantly, contracts are exceedingly complicated, and some moves could have serious tax and estate plan repercussions. The bottom line? There are more factors to consider in your evaluation of a senior living community than with your previous moves. 

First and foremost, today, the term senior living encompasses a wide variety of choices from independent senior apartments and luxurious “Over 55” adult communities to living options focused on providing health care that range from Continuing Care Retirement Communities (CCRCs) to Life Care Communities (LCCs).

In short, while seniors who decided they could no longer maintain their homes once contemplated only where to buy their condos, today the senior living industry offers everything from condos with concierge services, health clubs, and restaurants to communities that promise to deliver all the health care services you’ll need for the rest of your life. Accordingly, while seniors once factored only increasing condo fees into their budget, today it’s necessary to explore and understand a wider variety of variables – from extra fees for country club and restaurant services to how one spouse can retain the condo if the other requires onsite full-time nursing care.

Of course, the marketing slogans for these communities don’t make your analysis any easier. When you evaluate CCRCs, for example, you may come across the term “life care,” without a definition of exactly what that means. Does that really guarantee all the medical care you may need for the rest of your life, from skilled nursing care to a surgeon’s services, or is it just an advertising slogan?

In fact, there are many CCRCs that claim in their brochures that they will “take care of your life care” or “provide the care you need for the rest of your life,” but that doesn’t mean they provide the same comprehensive lifetime care offered by facilities that are true “life care communities.” In fact, life care communities are a small subset of CCRCs. And to make your evaluations all the more complicated, the care that life care communities provide depends on each state’s definition of life care. What’s more, many life care facilities, by far the most expensive option on the senior living continuum, offer a number of levels of contracts for you to choose from.

In addition to understanding the specific type of care each community offers,
it’s necessary to review the financial arrangements and regulations of your new community in light of your estate plan. For example, many of the CCRCs where a typical condo could run you anywhere from $300,000 to $500,000 offer a provision that when you leave the condo permanently, you get back 80 to 90% of your original investment. That may sound like a great deal, but it’s worth considering that the developer gets all the appreciation. In a hot real estate market, especially over the course of several decades, this could mean significantly less for your heirs than if you stayed in your home and it continued to appreciate.

And there are bigger picture financial details to consider as well, especially if your home is highly appreciated. For example, if you own and are living in a house valued at $1.8 million, that amount is protected from the Medicaid spend down. However, when you sell that home and buy a $400,000 condo, not only will you pay tax on some of your gains, but all of the sudden you have significant assets that are no longer protected from the Medicaid spend down; assets that must be spent should you or your spouse require long-term nursing care.

If you are considering a move to a senior community, take the advice you gave to your children hundreds of times -- take your time. It’s important to visit a number of communities, even if they are in an area you don’t think you want to live in. Exposure to a variety of communities will trigger questions that you may want to take back to the community you are considering most seriously. Don’t be afraid to ask questions and, most importantly, get professional advice before signing a contract.

If you are considering a move to a senior living community, the American Association of Homes and Services for the Aging (AAHSA) offers a number of helpful publications. The 2005 AAHSA Directory of Members that lists 5,600 not-for-profit nursing homes, retirement communities, and senior housing organizations; 2006 Assisted Living Overview; and 2005 Assisted Living and Continuing Care Retirement Community State Regulatory Handbook are available through AAHSA’s bookstore at www.aahsa.org.