Categories for Blog
March 5, 2013 8:39 am
Published by dylan
Women often find themselves at a disadvantage when it comes to providing for their retirement years. Data shows women tend to live longer than men do, to earn and save less, to bear the financial brunt of divorce and widowhood, and to spend more time and money taking care of family members.
Life expectancy is increasing for both men and women. But women outlive men by an average of five years, according to the Centers for Disease Control and Prevention. Once a U.S. woman reaches age 65 she is likely to live to the age of 85. That makes women far more likely to outlive their assets.
Advocates debate the reasons behind income disparity, but the fact is that women earn 77 cents for every dollar men earn, according to the U.S. Census Bureau. That means women have fewer dollars to put toward retirement savings, and earn less in Social Security benefits.
Historically, women save less money than men. They usually make less, first of all, and thus are more likely to depend on their spouse’s earnings for savings. Women also spend more time and money helping ill family members than do men.
For all of these reasons, losing a spouse, whether through divorce or death, can have a more drastic impact for a woman than a man.
The message is clear: Retirement planning is a vital necessity for women. We recognize the challenges you may face, and we can help you overcome them.
March 1, 2013 8:47 am
Published by dylan
When was the last time you reviewed your life insurance policies? If you’re like most people, you’ve probably stashed your policies in a drawer, filing cabinet, or safe deposit box where they’ve been gathering dust. But you should review your policies periodically to see whether they still meet your needs. Depending on the outcome, you might adjust your coverage.
In particular, you should examine your policy if you’ve experienced one or more major “life events” during the past year. What sort of events are we talking about?
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There may have been a birth, death, or disability in the family.
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You got married, divorced, or separated.
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You bought or sold a principal residence, vacation home, or other real estate property.
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Your child completed college or graduate school.
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You acquired property as a joint tenant.
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You have switched jobs, retired, or started up a new business.
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There was a significant economic change affecting your business operation.
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You need to revise the beneficiaries of your insurance policies due to a change in circumstances.
Note that other changes that might trigger a life insurance review could be less obvious. For instance, you may need additional coverage if you’re now taking on financial responsibilities for an elderly or disabled relative. Conversely, your financial responsibilities may decrease somewhat if you have finished paying off a home.
Furthermore, you should try to view your family’s needs as if you were buying life insurance for the first time. It’s your current and future circumstances that are the critical factors—not how things were last year or several years before. And don’t forget to review all of your life insurance policies, including any group coverage that your employer (and your spouse’s employer) might be providing.
Needless to say, this is an on-going process. A main function of life insurance is to replace lost income that your family relies on if you should die prematurely. When your financial obligations are small, the amount of life insurance coverage you require is also small. However, as those obligations grow, so does your need to acquire more coverage.
Typically, your life insurance needs will be at their greatest when your children are relatively young and you’re in the midst of your career. Once your children have flown the coop, or you have retired, your insurance needs will likely not be as great.
Best approach: Assess your life insurance needs at regular intervals. You may want to do so at the start of a new year or on some other “anniversary” date. In any event, don’t let too much time go by without a regular check-up.
February 10, 2013 9:43 am
Published by dylan
A Section 529 college savings plan can be a tax-smart way to help your children pay for their higher education. But you should also be aware of several potential pitfalls of this planning device. Here’s a brief rundown on the main pros and cons.
The Pros
The account can make money.
A Section 529 plan works much like a mutual fund, with account assets typically invested in equities by professional money managers. They do the hard work while you sit back and watch the account grow.
Count on the tax benefits.
Contributions to the plan are gift-tax-free, the earnings within the plan are income-tax-free and any distributions that are used for qualified education expenses are also income-tax-free. That’s a hard combination to beat.
Funds may be invested automatically.
Frequently, a plan will let you have funds automatically withdrawn from your checking or savings account. Not only is this convenient, it also takes some of the guesswork out of saving for college.
Contribution limits are generous.
State law effectively controls the amount you can sock away in a Section 529 plan, but the limits are favorable. In some states, you can contribute as much as $200,000 to your child’s account, which should be sufficient to cover tuition for four years at most schools.
Account assets are portable.
Although 529 plans are sponsored by individual states, the money can be used to pay for college wherever your child attends. Also, if funds are left over when your son or daughter completes school, you can use the excess to pay college expenses for another child. You don’t have to close the account until the youngest child reaches age 30.
The Cons
Funds must be used to pay qualified expenses.
If you make a withdrawal and use the cash for any other reason—say, to pay emergency medical expenses—the distribution attributable to earnings is taxed on both federal and state levels, and you’ll owe a 10% penalty. You’ll also be taxed on any leftover amount you receive after closing the account.
The investments are out of your hands.
This is the flip side of having professional money management. If you’re a savvy investor, you may prefer to have greater control over the funds. Should you be inclined to use a different investment option outside of a 529 you’ve established, you’ll be taxed and penalized if you withdraw funds and invest them elsewhere.
It might affect financial aid eligibility.
The impact of a Section 529 plan is usually negligible if held by a parent. Nevertheless, it must be factored into the equation to determine the “expected family contribution” (EFC) for college costs.
For most families, Section 529 plans are a good deal, but they’re not for everyone. We can provide the necessary guidance.
February 6, 2013 9:50 am
Published by dylan
A survey from the Luxury Institute shows that high-net-worth investors (with $5 million or more in assets) prefer boutique wealth management firms over Wall Street giants. Those who opt for boutique firms cite quality, exclusivity, and other factors. But what about investors of more limited means? What’s the best choice for them—smaller independent firms or big-name companies?
The Wealth Management Luxury Brand Status Index (LBSI) survey from the independent Luxury Institute in New York scores respondents’ answers based on each firm’s quality, exclusivity, social status, and ability to deliver special client experiences. The average respondent reported $15 million in net worth and income of $720,000.
“Reputations for honesty and superior client service are what make the smaller firms standouts in this survey,” says Luxury Institute CEO Milton Pedraza.
Investors have been shifting toward independent advisors for years. The number of independent Registered Investment Advisors, for instance, surged 31% between 2004 and 2010, according to Cerulli Associates Inc. A report by Charles Schwab, the 2012 RIA Benchmarking Study, shows RIAs enjoyed an 8.2% increase in new clients in 2011 (subtracting departing clients cuts the increase to 4.7%), along with a 12% gain in revenue.
The trend is partially due to technology, as smaller firms are now able to offer access to many of the specialized investment vehicles and services that were once the province only of larger corporations with more resources. Declining trust in larger firms in the wake of the 2008 financial crisis is another factor.
Smaller firms enjoy a reputation of being more likely to put clients’ needs first, while large firms are believed more likely to push in-house products. Another widespread belief is that smaller firms offer more in-depth, personalized service.
Many investors remain with big-name firms, however, especially if they are primarily looking for investment services that include access to high-end alternative investments. Even though access has become more widespread through technology, many of the larger firms still have an edge in terms of cost.
Some investors have even more specific reasons for sticking with the larger companies. For instance, an executive at a big, publicly traded company who has stock options may want to work directly with the financial services firm that handles that company’s options.
Still, many investors have shifted to smaller, independent firms, which tend to offer more comprehensive wealth management services and more coordination among investment, tax, legal, and other advisors.
If you are looking for a financial advisor, consider interviewing advisors from both large and small firms, then compare them in relation to your own needs and goals.
January 15, 2013 8:55 am
Published by dylan
Have you ever dreamed of owning a 1965 Aston Martin like the one driven by James Bond in the movies? Or a 17th century Stradivarius? A piece of your favorite sports team? It may not be as far-fetched as it once seemed. Increasingly, well-heeled investors are diversifying by adding a special kind of alternative investment—known as “treasure assets”—to their holdings.
Although you probably can’t afford the top items on your wish list, you may still be able to indulge your inner fantasies. In fact, some private funds allow investors to pool their money to buy treasure assets. A firm will typically charge a 2% administrative fee in addition to taking a healthy cut of any profits, but the cost may be well worth it to aficionados.
Realize, however, that these undertakings are highly speculative and not for the faint-hearted. Frequently, items are illiquid and have no real intrinsic value. And commissions and other fees can eat into any gains you might eventually realize.
Still, for some investors, pride and joy trumps other factors. In any event, treasure assets should represent only a small part of your overall portfolio. Keeping that in mind, here are three hot buttons.
1. Classic cars.
It’s well-known that most cars lose value as soon as you drive them off the lot. But vintage automobiles can be an exception to that rule. According to the Historic Automobile Group International (HAGI), vintage Ferraris rose 28% in price during the first 10 months of 2012, while Porsches climbed 15% in value. The HAGI index of the top 50 classic cars shows prices increasing almost 64% since 2008.
2. String instruments.
An auction house sold a 1721 Stradivarius violin for almost $16 million in 2011. Maybe you will have to lower your sights, but investments in other string instruments, including vintage electric guitars, are available. A 2011 study tracking violin sales showed an average annual return of about 3.5% between 1850 and 2008 after inflation adjustments, and concluded that the instruments have a slight negative correlation with stocks and bonds (in other words, violin prices tend to rise when the value of those other assets falls).
3. Wine.
This category is attracting attention as an inflation hedge with potential for growth. But investing in wine is risky enough to drive you to drink. The Liv-ex 100 Fine Wine Index, which tracks prices of 100 top wines worldwide, says it has produced an annualized return of 10% since 2002. However, the index is down nearly 10% for the first 10 months of 2012.
Other treasure assets, such as interests in major and minor league sports franchises, may strike your fancy. But be aware that glamorous investments are more likely to produce personal enjoyment than a steady return. View these offerings with your eyes wide open.
January 14, 2013 9:05 am
Published by dylan
Do you tend to put off certain chores—maybe cleaning the gutters, organizing your files, or changing batteries in smoke detectors? Most people can add another item to their to-do list: rebalancing a portfolio. However, unlike neglecting some of the others, failing to rebalance could result in significant financial losses.
Why do you have to rebalance in the first place? If you keep your holdings intact without making any changes, your preferred asset allocation will eventually get out of kilter. As a result, you could be exposing yourself to considerably more risk than you expect or consider acceptable.
Let’s say you’ve determined the optional approach for your current needs is to maintain a portfolio with 50% allocated to stocks, 30% to bonds, and 20% to cash and other vehicles. (This is a purely hypothetical example and not indicative of any specific portfolio.) If the value of your stocks has increased during the past year, your portfolio might now have 75% in stocks, 15% in bonds, and 10% in cash and other investments. Stocks are historically more volatile than other assets, and with that heavier concentration, you may not feel comfortable with your risk exposure. To get back to your previous allocation, you could sell some shares and put the proceeds into bonds and cash.
Similarly, if the value of your stocks has declined so that they represent only 35% of your portfolio, you may want to convert some of your other holdings into stocks.
There are several other direct and indirect reasons for rebalancing. Consider these three:
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It encourages you to cash in profits from investments that have done well and shift those funds to other investments that have merit but have yet to increase in value.
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It gives you the opportunity to review the mutual funds in your portfolio to see whether they’re still performing up to your expectations.
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It can smooth out investment returns. All asset classes are cyclical, so rebalancing removes some of the inherent volatility associated with investing.
How often should you rebalance? For many investors, it makes sense to do it twice a year to keep a portfolio on track. Certainly, you should rebalance at least once a year. Another approach is to rebalance whenever an asset class deviates from its target percentage by a specific amount—perhaps five percentage points. For example, a portfolio with a 50% target allocation in stocks would be rebalanced any time the value rises to 55% or sinks to 45%.
Rebalancing is an important part of long-term investment management. It ensures that you are buying asset classes when they drop in value and don’t overweight investments that have appreciated. Over a long period, it can make a major difference in a portfolio’s performance and risk exposure. In addition, rebalancing can be managed for tax efficiency. Our firm handles rebalancing for clients we work with.
December 10, 2012 9:13 am
Published by dylan
The IRS allows you to build up a sizeable nest egg for retirement inside your traditional IRAs. But then the other shoe drops: Whether you want to or not, you must begin taking “required minimum distributions” (RMDs) once you reach a certain age. Otherwise, you could be socked with a hefty tax penalty.
But the tax law does provide some flexibility. Depending on your situation, you might decide to withdraw funds from one of your IRAs, all of your IRAs, or any combination you prefer.
You have to start taking RMDs from your IRAs by April 1st of the year after the year in which you turn age 70½. In other words, if your 70th birthday was on June 1, 2012, you must take an RMD for the 2012 tax year by April 1, 2013. Then you still have to take another RMD for the 2013 tax year by December 31, 2013.
The amount of the RMD is based on the value in your accounts on December 31st of the tax year and is calculated according to IRS-approved life expectancy tables. For example, if you have a total balance of $1 million in your IRAs and your age is 76, the distribution period under the life expectancy table is 22 years. Divide $1 million by 22, and you arrive at an RMD of $45,454.55 for the current tax year.
The penalty for failing to take a timely RMD is equal to 50% of the required amount of the distribution (minus any distribution you actually received). Going back to our example, suppose you’ve taken an RMD for 2012 of $20,454.55, or $25,000 less than the required amount. In this case, you would owe a penalty of $12,500 (50% of $25,000) on top of the regular income tax. If you’re in the 35% tax bracket in 2012, that’s a whopping total of $28,409 ($15,909 + $12,500)!
Comparable rules apply to tax-deferred earnings within a tax-qualified retirement plan such as a 401(k). But you may postpone RMDs from qualified plans (not IRAs) if you continue working past age 70½ as long as you don’t own more than 5% of the company that employs you.
The amount of your annual RMD reflects the value of all your IRAs, but you can actually withdraw the funds from one or more of the IRAs. If you’re maintaining separate IRAs with different beneficiaries, you might want to keep the balances in all of them equal—and they may have gotten out of whack because of withdrawals, contributions, fees, and investment performance. So, for instance, if you have three IRAs and you’ve designated a different beneficiary for each one, you could withdraw the entire RMD amount from the IRA with the highest balance. Or you could get rid of underperforming assets in one of your accounts by liquidating those to provide cash for the RMD.
Keep in mind that you must give explicit instructions about your RMDs to each IRA custodian, and please call us if you have any questions.
November 18, 2012 9:18 am
Published by dylan
People who work with a financial advisor are far more likely to understand the situation they will face after they retire, according to a recent survey by Franklin Templeton Investments.
Two out of three people who work with a financial advisor know the amount of retirement funds they will withdraw each year after they retire. That’s almost twice the proportion of those who’ve never worked with an advisor who have that knowledge, according to the Franklin Templeton Retirement Income Strategies and Expectations (RISE) survey, taken in September 2011.
Volatile world markets and changes in the way people build retirement assets make it more important than ever for pre-retirees to understand their retirement picture, says Michael Doshier, vice president of retirement marketing for Franklin Templeton.
“Sixty-seven percent of respondents were more concerned about investment volatility than they were prior to the recession that began in 2008,” Doshier said. “People’s worries varied by age, gender, and income level, but from a general standpoint, some of their specific worries related to health expenses, Social Security, and simply running out of money.
“Our survey also showed, however, that working with a financial advisor can make a clear difference in how Americans think about retirement planning. By sitting down with a financial advisor, identifying and prioritizing one’s retirement goals and concerns, and writing down a simple plan to address them, people can take meaningful steps toward confident action.”
The RISE survey was conducted online among 1,020 men and 1,026 women. Here are other findings:
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38% of respondents who never have worked with a financial advisor said Social Security will provide the most income during their retirement, compared with 19% of people who work with an advisor.
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Just 4% of people who never have worked with a financial advisor said IRA funds will provide the most income during their retirement, compared with 13% of people who work with an advisor.
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35% of people who never have worked with an advisor said they do not think about how they will approach different sources of retirement income.
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Running out of money in retirement is the top concern of 35% of people who never have worked with an advisor, while 24% of those who work with an advisor cited it as their top concern.
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Of those respondents who never have worked with an advisor, 41% said they don’t think they have enough money to need one, and 30% said they prefer to handle their finances on their own.
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79% of Americans currently do not work with a financial advisor, but 47% of respondents said they would consider going to a financial advisor or switching their current advisor if the advisor prepared a written retirement income plan.
September 28, 2012 8:20 am
Published by dylan
Shifting taxable income to other family members—usually children or grandchildren—who are in lower tax brackets is a time-tested tax planning technique. It may enable you to reduce overall taxes for your family. But this strategy could be especially valuable now. Due to the new American Taxpayer Relief Act (ATRA), a new top tax rate applies to ordinary income, while favorable tax breaks for capital gains and dividends are scaled back for upper-income investors.
If you own income-producing property, such as securities or real estate, you’re taxed on the income from those assets in your own higher tax bracket. But your children and grandchildren are likely to be taxed at lower rates, and if you can shift tax liability for the property to the younger generations, your family will pay less in taxes.
Typically, you might give the property to a family member through a direct gift. More sophisticated arrangements may involve the use of a trust. Either way, income from the property is taxed to the family member in a lower tax bracket instead of to you in your higher bracket.
What makes this strategy even more attractive now for upper-income individuals are the tax changes under ATRA. Beginning in 2013, a top tax rate of 39.6% is added for single filers with income above $400,000 and joint filers with income above $450,000 Also, the maximum tax rate for long-term capital gains and dividends of 15% (reduced to 0% for low-income investors) increases to 20% for investors above those same income thresholds.
Suppose you own property that produces annual income of $20,000. If you’re in the top bracket in 2013, you’ll pay $7,920 in tax on the income (39.6% of $20,000). But a child in the 15% tax bracket would owe tax of only $3,000 (15% of $20,000) on the same income—$4,920 less.
There are other tax ramifications to consider, however. A transfer of property is subject to gift tax, although you’re allowed an annual gift tax exclusion ($14,000 per recipient in 2013) as well as a lifetime exemption (for combined lifetime and estate gifts) of $5.25 million in 2013. The biggest impediment to this strategy may be the “kiddie tax,” which applies to investment income above an annual limit ($2,000 in 2013) for a child under age 19 or a full-time student under age 24. In those cases, income that exceeds the threshold will be taxed at the top rate of the child’s parent.
Finally, remember that you’re giving up ownership of property when you transfer it to family members. The best approach is to incorporate income-splitting into an overall plan.
August 1, 2012 8:24 am
Published by dylan
Mortgage interest rates are at historic lows, but does that mean you should refinance an existing mortgage? A “refi” may pay off, but you should consider all of the relevant factors, including these five potential problems:
1. You’re back to square one.
Starting over is hard to do if you’re close to paying off a mortgage. For instance, if you take out a 30-year loan, the monthly payments in the first seven years will reduce your principal by only 5% or so, with the rest going to interest. Instead of beginning to make a dent in their principal debt, homeowners who refinance after seven years are effectively starting from scratch. Figure out how much you’re really saving if you shave only a percentage point or less off your current rate.
2. Closing costs can pile up.
Depending on how long you stay in a home, the expenses of a new loan can outpace the savings. Figure on closing costs equal to about 1.5% of the mortgage amount. Then calculate your monthly savings to see how long it will take you to break even on the cost of the mortgage. For example, if you refinance a $300,000 mortgage, closing costs will run about $4,500. If the new mortgage interest rate is 1 percentage point lower than your current rate, you will save $178 a month and will need just over 25 months to recoup your closing costs. So if you’re not planning to stay in the house for more than two years, you could end up losing money. Reduce these costs by paying the prepaid items out of pocket. You’ll get that money back when the escrow accounts on your old loan are paid back to you.
3. Terms can be confusing.
With refis so popular now, they can take a long time to process, and it may not be clear when you should stop paying your current mortgage. If you inadvertently fall behind, it could throw a monkey wrench into the works. Generally, lenders offer a two-week grace period after a mortgage payment is due and then charge a 5% penalty. Even worse, your credit score might plummet by 100 points or more if you’re 30 days past due—and that change could affect your refi.
4. The appraisal may be too low.
Before the refi is approved, the lender will require an independent appraisal to confirm the home’s value. The numbers now are trending lower than expected for many homeowners, especially those who reside in areas hit by numerous foreclosures. If the appraised value is too low and you don’t have enough equity in the home, the lender could raise the rate or deny the loan altogether.
5. You could pay hidden fees.
Under federal law, lenders must provide a good-faith estimate of the fees needed to complete the refi, and that statement could reveal costs you hadn’t expected. Also, some low-interest mortgages require you to pay “points,” and each point is equal to 1% of the mortgage amount. That could delay your break-even point even longer.
July 9, 2012 8:26 am
Published by dylan
Tax planning isn’t just for the end of the year. This is especially true in 2012, a year in which a national election could affect tax policies, and when several key tax breaks are slated to expire. What should you do in this situation? Here are five midyear tax-planning moves that may improve your financial picture:
1. Harvest tax losses.
If you’ve realized capital gains from securities sales this year, you can use any capital losses before the close of the year to offset those gains, plus up to $3,000 of ordinary income. If now is a favorable time from an investment perspective to sell certain securities, don’t wait until year-end to take action.
2. Realize capital gains.
Conversely, any capital gains you recognize now can help you take advantage of earlier losses, making your profits effectively tax-free up to the amount of your losses. Furthermore, the maximum tax rate on long-term capital gain (for securities held longer than a year) in 2012 is only 15% (0% for lower-income investors). The top rate is set to jump to 20% (10% for lower-income investors) in 2013, barring legislative changes.
3. Invest in dividend-paying stocks.
Like the current break on long-term capital gains, a favorable tax provision for “qualified dividends” (paid out by most domestic corporations) is scheduled to expire at the end of the year. Currently, the maximum tax rate for dividend profits also is only 15% (0% for lower-income investors). Beginning in 2013, however, dividends will be taxed at ordinary rates that could reach as high as 39.6% (up from the current top tax rate of 35%). If you invest in stocks now that will pay dividends at year-end, you could reap tax benefits.
4. Dodge the “wash sale” rule.
Under this rule, you can’t deduct a loss from the sale of securities if you acquire “substantially identical” securities within 30 days of the sale transaction. To avoid tax problems, wait at least 31 days before you buy back the same or similar securities. Alternatively, you could “double up,” acquiring the new securities now and waiting at least 31 days before selling the original shares.
5. Contribute to your retirement plan.
It’s easy for employees to contribute to a 401(k) plan during the year through regular payroll deductions. If you’re self-employed, you might set up a comparable plan, such as a Savings Incentive Match Plan for Employees (SIMPLE) or a Simplified Employee Pension (SEP). Caution: Although you have until the 2012 tax-return due date (plus extensions), to get a SEP started, the deadline for setting up a SIMPLE for 2012 is October 1.
Of course, tax laws are ever evolving and you might have to make wholesale changes in your game plan after the election. We’ll keep you up to date on new developments.
July 9, 2012 8:12 am
Published by dylan
Everyone’s financial situation is different, but people at various stages of life often share similar concerns. Here’s a question from a client we encountered under such circumstances:
“I am in my 60s and recently retired from my full-time job. Over the years, I’ve opened several traditional IRAs and a Roth IRA. Also, I have a ‘rollover IRA’ with funds from a 401(k) at a previous job. Should I consolidate all of these IRAs into one for tax purposes, or should I just leave things the way they are?”
While there is no real tax benefit one way or the other, there is a trap to watch out for if you do consolidate. Combining the assets of your traditional IRAs into a single IRA could provide a few advantages, however.
For starters, it may be more flexible and cost-efficient to have just one IRA, as well as relieving you of considerable clutter if you’re still receiving paper statements from all of your IRA custodians. Also, if one IRA has provided better investment returns than the other or offers other advantages, it might make sense to shift more funds to the IRA with those advantages. (Of course, past performance is no guarantee of future results.) And you may find it easier to coordinate your plans for retirement, and focus on your main objectives, with a consolidated IRA.
Moreover, consolidating accounts might help you avoid a complication that can arise when you start taking “required minimum distributions” (RMDs) from your traditional IRAs. The law mandates that you begin taking RMDs no later than Apri1 1 of the year following the year in which you turn age 70½. These withdrawals from your account, the amount of which is based on life expectancy tables, must continue annually for the rest of your life. If you have several IRAs, you’ll have to choose the source of your annual RMD. It can come from one or multiple IRAs. But no matter how you arrange the distribution, the IRS treats it for tax purposes as coming from all of your IRAs on a “pro-rata” basis.
Let’s say you have four IRAs with a combined value of $500,000, and this year you withdraw $20,000 from one of them. The applicable percentage is 4% ($20,000 divided by $500,000), so it’s calculated as if you had withdrawn 4% of the balance in each IRA. Consolidating your IRAs would eliminate any confusion.
Finally, be aware that you can’t commingle the funds in traditional and Roth IRAs. This is the trap we alluded to earlier. Because Roths have an edge over traditional IRAs—qualified Roth distributions are tax-free and you don’t have to take lifetime mandatory distributions—you wouldn’t want to put them together anyway. Should you consolidate all of your Roth IRAs? Many of the same considerations that apply to combining traditional IRAs also are applicable to Roths.
