TaxWise Advisor

Why You Shouldn't Withdraw From Your 401(k)

2010-09-27T08:22:00.000-07:00

Resist the temptation. Fight the urge. Fight for your future.
Recently, you may have heard about a spike in 401(k) withdrawals. The evidence is not merely anecdotal. Fidelity Investments recently issued its 2010 overview of the 401(k) accounts it administers and found that 22% of participants had outstanding loans from these retirement savings plans, with the average loan at $8,650. In 2Q 2010, a record 62,000 of Fidelity’s 401(k) participants had taken hardship withdrawals – a jump from 45,000 in the preceding quarter.

If at all possible, you should avoid joining their ranks.

The persuasive argument against a 401(k) loan. If you borrow from your 401(k), you are opening the door to some big risks (perhaps not immediately evident to you) and you may pay some severe opportunity costs.
• What if you lose your job? That’s an all-too-common occurrence right now. If you get laid off or leave your job and you have an outstanding 401(k) loan, guess what – you usually have just 60 days to pay it all back, 60 days without income from work. Well, what if you don’t pay it all back? The outstanding loan balance may be recharacterized as a 401(k) withdrawal. If you are younger than 59½, you may be assessed a 10% federal tax penalty on the “withdrawal amount”, which by the way would be taxed as ordinary income.
• What will you do with the money? Will it be invested in anything? If not, it won’t grow. When you take a 401(k) loan and use the money for an expense, you are forfeiting its potential for growth and compounding. (Think: how much could that lump sum grow over 20 or 30 years if your account returns 5% or 8% a year? Do the math, look at the potential.)
• The terms of a 401(k) loan are less than ideal. You can’t deduct interest on a 401(k) loan, and that interest is typically one or two points above the prime rate. Here’s another thing few people realize about 401(k) loans: when you pay the money back, you pay it back with after-tax dollars. Ultimately, those dollars will be taxed again when you take a 401(k) distribution someday.

The compelling case against hardship withdrawals. Sometimes these are made in worst-case scenarios – someone is being evicted or foreclosed on, or needs money to pay medical bills. Sometimes people think hardship withdrawals are “good debt” – they make these withdrawals in order to pay college costs or buy a house. Well, here are the reasons that you might want to look elsewhere for the money.
• You may not be able to get a hardship withdrawal. Some 401(k) plans don’t allow them. Many do, but you will have to satisfy some IRS rules. Hardship withdrawals can only be made to pay medical expenses that are more than 7.5% of your adjusted gross income, to pay qualified tuition expenses, to pay funeral/burial costs, to buy a home, to make home repairs, or to stop eviction or foreclosure on a primary residence. Beyond those IRS requirements, the company you work for might have its own stipulations. Some firms won’t give an employee a hardship withdrawal unless the employee can demonstrate that no other source can provide the needed funds.
• You may not be able to withdraw as much as you want. Okay, let’s say you are able to take a hardship withdrawal. The money is considered a retirement plan distribution. By law, your employer has to withhold 20% of it because you aren’t making a trustee-to-trustee transfer with the funds. Are you younger than 59½? If so, you may be hit with an additional 10% tax penalty for early withdrawal. Regardless of your age, the amount you withdraw will be taxed as ordinary income. So besides the potential subtractions above, you’ll lose even more of the lump sum you pull out to income taxes. Only in very rare cases can you get a hardship withdrawal without penalty (court order, total disability). Even in those circumstances, the money is still taxable.
• You can’t pay the money back. It would be nice if you could, but you can’t. To add insult to injury, after you reduce your retirement savings through the hardship withdrawal, you typically can’t contribute to your 401(k) for the next six months.

Knowing all this, would you still consider these moves? Is it worth it to possibly do harm to your retirement savings potential? There are alternatives. Talk to a financial services professional – you may be pleasantly surprised to learn what other options might be available.

OBAMA'S MIDTERM TAX PROPOSALS

2010-09-13T08:59:00.000-07:00

The President recommends what amounts to a second stimulus package.

Many Americans are frustrated with the pace of the economic recovery; many Democrats are worried that their party will lose its majority in the House and Senate. As elections loom, President Obama has offered a new platform of tax initiatives for Congress to consider and potentially approve.

Extending the Bush-era tax cuts (for the middle class). President Obama wants to extend the EGTRRA and JGTRRA cuts of the last decade – but not to what Treasury Secretary Timothy Geithner referred to as the “most fortunate 2% of Americans.” Taxpayers who earn more than $250,000 would see those tax breaks disappear in 2011, while others would still benefit from them.

Why not extend the Bush-era tax breaks for the demographic that is probably the most economically influential? “We don’t think that’s responsible economic policy,” Geithner commented during an interview on the FOX Business Network. He felt that preserving the cuts for the highest-earning Americans would be analogous to “borrowing hundreds of billions of dollars from our children.”

Some contend that EGTRRA and JGTRRA have had broader impact. The Tax Foundation (a non-partisan Washington D.C. think tank which often criticizes tax policy) claims that the Bush-era tax cuts have saved the median U.S. family of four about $2,200 per year.

However, an August Gallup poll indicated that only 37% of Americans wanted to keep the 2001 and 2003 tax cuts in place for all taxpayers. A plurality (44%) wanted to end them for those earning above $250,000, and 15% wanted them gone altogether. In partisan terms, 60% of the Democrats polled favored extending the cuts for all but the wealthiest Americans; 54% of Republicans polled wanted them retained for everyone.

Offering tax breaks for capital spending and R&D. President Obama wants to allow businesses to write off 100% of their investment costs through 2011. He also wants to bring back the research tax credit for businesses – it would be expanded and made permanent.

What would a 100% expensing credit do for the business sector? On the right, Harvard economist Greg Mankiw calls it a “good idea” yet feels “the impact will be relatively modest.” In his view, this tax break amounts to “a zero-interest loan if [companies] invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.” On the left, UC Berkeley economist (and former Labor Secretary) Robert Reich thinks that “the economy needs two whopping corporate tax cuts right now as much as someone with a serious heart condition needs Botox. The reason businesses aren’t investing in new plant and equipment has nothing to do with the cost of capital. It’s because they don’t need the additional capacity.”

Historically, the R&D tax credit has favored larger companies with long track records in research rather than smaller firms. Since 1981, Congress has allowed the R&D credit to sunset 13 times – it expired again at the end of last year. In the Obama proposal, the most popular R&D tax credit offered to businesses would rise to 17% from 14%. Many Silicon Valley firms and biomedical firms would love any break they can get – R&D credits in India, China and Brazil are all greater than in the U.S., and France's R&D tax credit is six times more generous than ours.

Infrastructure projects to provide added stimulus. The President also wants to devote another $50 billion to infrastructure spending on roads, railroads and airports. The money would be used to repair 150,000 miles of highways and 4,000 miles of railways, among other uses. Some transportation industry analysts see it as merely a drop in the bucket – but also possibly a step toward the creation of a national infrastructural fund.

What might the effect be? Moody’s Analytics chief economist Mark Zandi thinks the proposed tax breaks would be “helpful but they're not going to jump start the economy, at least not in the next six to twelve months.” Interviewed by CNN, Zandi noted that “Investment spending has picked up very nicely, that's not the problem. The problem is a lack of hiring.”

David Rosenberg, chief economist at investment bank Gluskin Sheff, is one voice more skeptical about the business tax breaks. He notes that “We already have business spending running at its fastest rate in three decades … how ridiculous is it for the government to be targeting tax relief to the one part of the economy that needs it the least?”

Standard & Poor’s chief economist David Wyss feels that any new government stimulus is better than none, saying that “going cold turkey” in 2010 would severely damage growth. The debate on Capitol Hill over these tax initiatives will likely amplify as we head into fall.

How LTC Insurance Can Help Protect Your Assets

2010-07-16T12:25:00.000-07:00

Create a pool of healthcare dollars that will grow in any market.

How will you pay for long term care? The sad fact is that most people don’t know the answer to that question. But a solution is available.

As baby boomers leave their careers behind, long term care insurance will become very important in their financial strategies. The reasons to get an LTC policy after age 50 are very compelling.

Your premium payments buy you access to a large pool of money which can be used to pay for long term care costs. By paying for LTC out of that pool of money, you can preserve your retirement savings and income.

The cost of assisted living or nursing home care alone could motivate you to pay the premiums. Genworth Financial conducts a respected annual Cost of Care Survey to gauge the price of long term care in the U.S. The 2010 report found that
• In 2010, the median annual cost of a private room in a nursing home is $75,190 or $206 per day – $14,965 more than it was in 2005.
• A private one-bedroom unit in an assisted living facility has a median cost of $3,185 a month – which is 12% higher than it was in 2009.
• The median payment to a non-Medicare certified, state-licensed home health aide is $19 in 2010, up 2.7% from 2009.

Can you imagine spending an extra $30-80K out of your retirement savings in a year? What if you had to do it for more than one year?

AARP notes that approximately 60% of people over age 65 will require some kind of long term care during their lifetimes.

Why procrastinate? The earlier you opt for LTC coverage, the cheaper the premiums. This is why many people purchase it before they retire. Those in poor health or over the age of 80 are frequently ineligible for coverage.

What it pays for. Some people think LTC coverage just pays for nursing home care. That’s inaccurate. It can pay for a wide variety of nursing, social, and rehabilitative services at home and away from home, for people with a chronic illness or disability or people who just need assistance bathing, eating or dressing.

Choosing a DBA. That stands for Daily Benefit Amount - the maximum amount that your LTC plan will pay per day for care in a nursing home facility. You can choose a Daily Benefit Amount when you pay for your LTC coverage, and you can also choose the length of time that you may receive the full DBA on a daily basis. The DBA typically ranges from a few dozen dollars to hundreds of dollars. Some of these plans offer you “inflation protection” at enrollment, meaning that every few years, you will have the chance to buy additional coverage and get compounding - so your pool of money can grow.

The Medicare misconception. Too many people think Medicare will pick up the cost of long term care. Medicare is not long term care insurance. Medicare will only pay for the first 100 days of nursing home care, and only if 1) you are getting skilled care and 2) you go into the nursing home right after a hospital stay of at least 3 days. Medicare also covers limited home visits for skilled care, and some hospice services for the terminally ill. That’s all.

Now, Medicaid can actually pay for long term care – if you are destitute. Are you willing to wait until you are broke for a way to fund long term care? Of course not. LTC insurance provides a way to do it.

Why not look into this? You may have heard that LTC insurance is expensive compared with some other forms of policies. But the annual premiums (about as much as you’d spend on a used car from the late 1990s) are nothing compared to real-world LTC costs. Ask your insurance advisor or financial advisor about some of the LTC choices you can explore – while many Americans have life, health and disability insurance, that’s not the same thing as long term care coverage.

Should You Downsize For Retirement?

2010-07-13T08:31:00.000-07:00

It may be better to sell that big home rather than keep it.

You want to retire, and you own a large home that is nearly or fully paid off. The kids are gone, but the upkeep costs haven’t fallen. Should you retire and keep your home? Or sell your home and retire? Maybe it’s time to downsize.

Lower expenses could put more cash in your pocket. If your home isn’t paid off yet, have you considered how much money is going toward the home loan? The typical mortgage payment in the U.S. represents about 30% of gross income and about 50% of after-tax income. When you move to a smaller home, your mortgage expenses may diminish and your cash flow may greatly increase – and don’t forget about interest savings over the life of the loan.

You might even be able to buy a smaller home with cash (if finances permit) and cut your tax liability. Optionally, that smaller home could also be in a region with lower income taxes and a lower cost of living.

You could capitalize on some home equity. Why not convert some home equity into retirement income? If you were forced into early retirement by some corporate downsizing, you might have a sudden and pressing need for retirement capital – another reason to sell that home you bought decades ago and head for a smaller one.

The lifestyle reasons to downsize (or not). Maybe your home is too much to keep up, or maybe you don’t want to climb stairs anymore. Maybe a condo or an over-55 community appeals to you. Maybe you want to be where it seldom snows. On the other hand, you may want and need the familiarity of your current home and your immediate neighborhood (not to mention the friends attached).

If you decide to downsize, it may not pay to wait. Anyone who wants to retire in the current economy needs all the financial resources that can be mustered. Of course, the real estate market will eventually improve; it depends on how long you want to wait for improvement. Some people want to retire and then sell their home, but it may be wiser to sell a home and then retire since homes tend to sit on the market these days. If you sell sooner instead of later, you can always rent until you find a smaller house that could save you thousands (or tens of thousands) of dollars.

What Exactly is Wealth Management?

2010-07-09T15:21:00.000-07:00

The two words signify a far-reaching kind of financial care.

There’s financial planning, and then there’s wealth management. Think of wealth management as a step up from garden-variety financial planning. One office (rather than one person) provides a range of services for a client: personal financial planning and investment management, tax reduction and estate planning strategies, and occasionally in-house legal resources. Business continuation planning, tax preparation and even budgeting and bill paying are sometimes added to the menu.

The difference is really big-picture. Financial planning usually means creating a strategy for accumulating wealth for retirement and personal goals. Investment management focuses on managing financial assets with a performance level in mind. Wealth management, in comparison, considers the total net worth of a family, a couple or an individual. It weighs financial decisions in light of an investment portfolio and additional components of the financial picture such as real estate, insurance, a business, charitable gifting and more.

Yet it is also about paying attention to detail. Every successful professional or business owner reaches a point of delegation – there comes a point at which you can’t do it all yourself. Indeed, it can be hazardous to try and keep track of every detail without help. The same goes for your finances – your taxes, your investments, your various accounts.

Good wealth management helps you stay on top of things. A skilled wealth management firm pays attention to many of the financial details in your life for you. You can free up your mind. You feel confident because the wealth management firm has an ongoing relationship with you, with regular reviews and communication.

Wealth management unites advisors from different disciplines as a team. The team looks at your goals, needs and priorities to determine the right, individualized strategy for guiding your invested assets and enhancing your net worth.

When is it time for wealth management? If you have too many financial concerns, issues or priorities to address by yourself, then it is certainly time for this kind of financial care. And even if your financial life is less complex, significant wealth calls for a vigilant, ongoing management approach.

Why Four Percent For Retirement?

2010-06-22T16:59:00.000-07:00

Why are retirement plans often created assuming a 4% withdrawal rate?

When retirement planners try to estimate just how much money a couple or individual should take out of their savings annually, their model scenarios often assume a 4% annual withdrawal rate. Why is 4% used so frequently? Was that percentage plucked out of thin air? No, it actually became popular back in the 1990s.

The “Trinity Study” helped popularize the 4% guideline. In 1998, a trio of professors at San Antonio’s Trinity University analyzed historical market data between 1925 and 1995 in search of a “sustainable” withdrawal rate. They used five different portfolio compositions - 100% stocks, 100% bonds, and 25/75, 50/50 and 75/25 mixes. (For purposes of the study, “stocks” equaled the S&P 500 and “bonds” equaled long-term, high-grade domestic debt instruments.) They tried to see which withdrawal rates would leave these portfolios with positive values at the end of 15, 20, 25 and 30 years.

Their conclusion? If you are retired and withdraw more than 5% annually, you increase the chances of depleting your portfolio during your lifetime.

Subsequently, another such study was conducted by RetireEarly.com using financial market data from 1871 to 1998 – and that report reached the same conclusion.

However, that wasn’t all the study had to say. The “Trinity Study” made some other conclusions that were not entirely in agreement. The professors maintained that most retirees should have 50% or more of their portfolios in stocks. But they also noted that retirees withdrawing just 3-4% a year from stock-dominated portfolios may end up helping their heirs get rich while hurting their own standard of living.

Perhaps most interestingly, the study concluded that an 8-9% withdrawal rate from a stock-heavy portfolio was sustainable for a period of 15 years or less – but not for longer periods. In other words, while our parents and grandparents could confidently withdraw 8-9%, we who might easily live to age 90 or 100 probably can’t.

Another 4% advocate: Bill Bengen. In 1994, CERTIFIED FINANCIAL PLANNER™ practitioner William P. Bengen published a landmark article in the Journal of Financial Planning presenting his own research findings on withdrawal rates from retirement savings. While Bengen published this article in the middle of a long bull market, he factored in the possibility of extended bear markets, minimal annual stock market gains and sustained high inflation.

Looking at 75 years worth of stock market returns and retirement scenarios, Bengen concluded that a retiree who was 50-75% invested in stocks should draw down a portfolio by 4% or less per year. He felt that retirees who did this had a great chance of making their retirement money last a lifetime. In contrast, he felt that retirees taking 5% annual withdrawals had about a 30% possibility of eventually outliving their money. He put that risk at better than 50% for retirees withdrawing 6-7% per year.

Over time, people began to call Bengen’s dictum the “4% drawdown rule”. The model 4% income distribution could be inflation-adjusted – in year one, 4% of a portfolio could be withdrawn, in year two that 4% withdrawal amount could be sweetened by .03% for 3% inflation, and so on.

A dissenting view. In 2009, William Sharpe (one of the Nobel Prize-winning principals of Modern Portfolio Theory) published an article in the Journal of Investment Management contending that “it is time to replace the 4% rule with approaches better grounded in fundamental economic analysis.” Sharpe thinks that “the 4% rule's approach to spending and investing wastes a significant portion of a retiree's savings and is thus prima facie inefficient.” If a portfolio underperforms, he notes, you have a spending shortfall; and if it surpasses performance expectations, you end up with a “wasted surplus”.

So in Sharpe’s view, by adhering to a 4% rule, you either risk living too large or short-changing yourself. Therefore, it would be better to constantly fine-tune a withdrawal rate according to time horizon and market conditions.

While not necessarily a rule, 4% is a frequent recommendation. There is some compelling research to support the “4% rule”, and that is why financial advisers often cite it and tell retirees not to withdraw too much.

Would withdrawing 4% of your portfolio annually (with adjustments for inflation) allow you to live well? For some of us, the answer will be yes; others will need to address an income shortfall. As we retire, most of us will want to practice some degree of growth investing. Now may be the right time to talk about it.

Taxing the Rich to Pay for Health Care

2010-06-18T15:38:00.000-07:00

That’s part of the plan. How will you be affected?

In 2013, wealthy Americans will pay extra Medicare taxes. Congress, President Obama and the IRS are putting a surcharge on the wealthy to help fund the health care reforms.

• Beginning in 2013, joint filers with adjusted gross incomes of $250,000 or greater and single filers with AGI of $200,000 or greater will have to pay 0.9% extra in FICA taxes (that is, Social Security and Medicare taxes). The employers of these taxpayers face no such increase.
• Also, joint filers with modified adjusted gross income (MAGI) of $250,000 or more and single filers with MAGI of $200,000 or more will be docked with a 3.8% tax on investment income. (Even estates and trusts will be subject to this new 3.8% levy.)

What might the dollar impact be? The Tax Foundation, a politically conservative watchdog organization, thinks that the richest 1% of American families will pay an average of $52,000 more in federal taxes by 2016.

What are the chances of these tax hikes being repealed? Think slim and none. Basically, you’d have to repeal the health care reforms to make it happen.

How can you avoid the 3.8% tax on dividends, capital gains & interest? It won’t be easy. Real estate investors may luck out the most, because federal law characterizes rental income as “active” rather than “passive”. On the other hand, if you sell a home you’ve owned for decades and see a taxable gain above the home sale exclusion ($250,000 single, $500,000 married), you’ll face the 3.8% tax.

Some forms of unearned income won’t be slapped with the tax. IRA distributions and income distributions from 401(a), 403(b) and 457(b) plans will be exempt. The same goes for pension income and Social Security income. Annuities that are part of a pension plan will be exempt. Any income from a business that you participate in won’t be hit with the 3.8% tax. Veterans’ benefits, life insurance payouts and interest earned by municipal bonds will also be spared.

As a result of this tax, you might start to see subtle shifts in financial strategy. You might see more muni bond purchases, more interest in life insurance, and more installment sales. As qualified Roth IRA distributions don’t boost AGI, you might be looking at another factor promoting Roth IRA conversions. Everybody will think about taking some capital gains prior to 2013.

The richest Americans have paid less tax in recent decades. Wealth for the Common Good (a liberal non-profit looking at this matter) notes that in 1955, the 400 largest incomes in America paid 51.2% of those incomes back in federal taxes. That led to the “tax shelters” of the 1960s and 1970s. In comparison, the top 400 incomes in America in 2007 paid out only an average of 16.6% in federal taxes.

So how can you reduce your taxes in 2013? It is not too early to think about it. You might want to devote a planning session to this topic, or start to read up on your options.

The 2 Biggest Retirement Misconceptions

2010-06-15T15:02:00.000-07:00

While the idea of retirement has changed, certain financial assumptions haven’t.
We’ve all heard about the “new retirement”, the mix of work and play that many of us assume we will have in our lives one day. We do not expect “retirement” to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven’t really changed with the times.

In particular, there are two financial misconceptions that baby boomers can fall prey to – assumptions that could prove financially harmful for their future.

#1) Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is “historically”. When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.

However, some of us may live much longer. The population of centenarians in the U.S. is growing rapidly – the Census Bureau estimated 71,000 of them in 2005 and projects 114,000 for 2010 and 241,000 in 2020. It also believes that 7.3 million Americans will be 85 or older in 2020, up from 5.1 million 15 years earlier.

If you’re reading this article, chances are you might be wealthy or at least “affluent”. And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.

Here’s the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years … or longer. So assuming you’ll only need 10 or 15 years worth of retirement money could be a big mistake.

In 2010, the American Academy of Actuaries says that the average 65-year-old American male can expect to live to 84½, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.

Most people don’t realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 …

#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.

Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation.

Will the minimal inflation we’ve seen at the start of the 2010s continue for years to come? Don’t count on it. Over the last few decades, we have had moderate inflation (and sometimes worse, think 1980). What happens is that over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.

Here’s a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?

This is an extreme example, but that’s what can happen if your income doesn’t keep up with inflation – essentially, you end up living on yesterday’s money.

Taxes will likely be higher in the coming decade. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing – we need to be prepared financially for the cost of acute, chronic and long-term care.

As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live - and how long retirement may last - growth investing is extremely important.

No one wants the “Rip Van Winkle” experience in retirement. No one should “wake up” 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.

How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you’re at, it is vital to avoid the common misconceptions and proceed with clarity.

European Debt & The U.S. Markets

2010-05-10T08:26:00.000-07:00

Why the crisis has Wall Street stressed.

It would be wonderful if the U.S. financial markets could “decouple” themselves from what is going on in Greece, Portugal and Spain. Unfortunately, the debt situation in these countries is like a ripple in a pond. The question is, how strong will the ripple ultimately be and will its full force reach our markets?

The problem. Greece, Spain, Portugal, Italy and Ireland are all carrying enormous debts. On May 1, the New York Times put up a chart breaking this down: Greece owes $236 billion, which believe it or not is the smallest debt among these five countries. Portugal’s debt stands at $286 billion – and it owes roughly a third of that to Spain. Spain carries around $1.1 trillion in debt, and its economy is in horrible shape (20% unemployment). According to the Bank for International Settlements, it owes $220 billion to France and $238 billion to Germany. Ireland has $867 billion in debt, with about 40% of that owed to the U.K. and Germany. Italy owes $1.4 trillion, including $511 billion to France (almost 20% of France’s GDP).

After the euro was launched, Greece had access to a whole bunch of cheap debt - and the country used it nonchalantly. In the years since the establishment of the euro, Greece’s debt-to-GDP ratio has remained repeatedly above 100%.

Europe’s biggest banks are heavily exposed to these debts, and so are some of ours: names like Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley. In fact, these five banks have $2.5 trillion of cross-border exposure in the crisis, with Citigroup the most exposed. So you have potential risk to these banks, the euro, and the European and world economy.

The offer on the table. Fortunately, Greece has the chance to accept a $146.5 million bailout from the International Monetary Fund and the European Union in exchange for austerity measures (less government spending and a lower standard of living). This would help Greece avoid default – that is, having to renegotiate its debt and possibly assume more. (As a sovereign nation, Greece cannot go bankrupt.) Many economists think Greece will go into a deep recession (or depression) which could last most of the decade.

The potential ripple. It looks like the bailout will be accepted by Greece and its EU partners. This means some confidence will return and other Eurozone nations with big debts will be slightly less threatened. However, Greece still has a risk of default.

Should Greece default even with the bailout, some major lenders in France and Germany would be hit very hard. They would have to raise capital ratios and reduce the frequency of loans. That would hamper economic growth in France, Germany and in turn across Europe. In coming months, the U.S. and other nations could feel the pinch from such a slowdown.

Keep in mind, Greece only represents about 2% of the Eurozone economy. In the roughest scenario, Spain or Italy defaults and the shock wave to European banks (and U.S. banks exposed to the debt) is significantly greater. What would happen then? A credit freeze across Europe? Diving stocks? A trashed euro? A flight to gold?

These are merely scenarios, not present realities – but in a nutshell, this is what had Wall Street biting its nails this spring.

So is the bailout truly a solution? It was unpopular throughout the EU, but the right step to take. The move certainly helped defend the stability of the euro; in fact, German Chancellor Angela Merkel and French President Nicholas Sarkozy have jointly pledged to preserve the euro’s value.

The worry is that other bailouts will be needed to preserve the fiscal health of other Eurozone nations. We all hope these countries can effectively manage their debt levels, for the sake of the stock market and the economy in our country.

Could a Roth IRA Conversion Affect a Student's Financial Aid?

2010-04-26T12:22:00.000-07:00

Run the numbers, because the answer could be “yes.”

An underreported story. In 2010, we have a wave of IRA owners converting traditional IRAs to Roths. There are all kinds of compelling reasons to make that move. Yet for some IRA owners, the conversion may have an unintended consequence: it may reduce their son or daughter’s chances for college financial aid.

A Roth conversion will increase your taxable income. As some scholarships, grants and loans are awarded based on income levels, a big jump in AGI could potentially jeopardize them. This can be a problem if you’re a “millionaire next door” who wants your kids to exploit financial aid as much as possible.

That income must be recorded on the FAFSA. Universities commonly use the Free Application for Federal Student Aid (FAFSA) as a test to determine whether a student is eligible for grants, loans and some scholarships. The FAFSA is all about family income – factors like net worth and invested assets don’t come into play. Mom and Dad’s higher AGI could mean lower levels of financial aid, because the income boost from the Roth conversion will make it look like Mom and Dad can now shoulder a greater percentage of education costs.

A New York Times article offered an example. Take a hypothetical family of four with total 2010 income of $75,000 and one college student. For every $10,000 of taxable income stemming from a Roth conversion, the parents’ expected annual contribution to that student’s education would go up by $3,200 in a FAFSA estimate.

In April, Mark Kantrowitz (publisher of FastWeb.com, an online scholarship directory) told Financial Advisor Magazine that the Department of Education had requested universities to recognize the effect of 2010 Roth conversions on family incomes. No evidence suggests colleges are doing this en masse.

Financial aid decisions are often based on multiple years of income. Keep this in mind. IRA owners who go Roth this year are well aware that they may divide taxes on the conversion across the 2011 and 2012 tax years. Well, that decision may affect family incomes for those years, and possibly chances at student loans, grants and scholarships through 2013.

If your kids are young, time is on your side. If your children are a few years or more away from college, you can make a Roth conversion without having to worry about its impact on FAFSA applications.

Any potential Roth IRA conversion should be analyzed for its impact on other aspects of your family’s financial life. The impact on college financial aid is but one factor to consider. The potential long-term benefits of a Roth IRA conversion are considerable. Confer with a financial consultant to see if the decision is appropriate before you elect to make the move.

How Will Obamacare Affect Your Small Business?

2010-03-27T08:23:00.000-07:00

Will health care reform mean headaches … or hidden dividends?

Increased costs or savings in years to come? What do the federal health care reforms mean for your company? Will they lead to thousands of dollars in extra costs and more paperwork? Or will federal subsidies make this a “game changer” for small companies that have struggled to provide insurance plans?

If you employ 50 or more, you will face a major choice. Businesses with 50 or more employees will have a choice beginning in 2014: they can sponsor a health plan for 100% of their workers (even those signed up for government-subsidized health insurance) or pay $750 per worker in penalties to the federal government.

A business might opt to take the penalty and do away with health insurance. Paying the annual penalty might be cheaper. So that would leave the employees uninsured, and they would have to go to state health plan exchanges to buy health coverage that could be more expensive.

Some analysts warn that another macroeconomic effect might result - years of high unemployment. They think that increased insurance costs will discourage business hiring in the next decade.

The new reforms don’t put any caps on health insurance premiums. Insurers have every reason to hike rates before the new insurance markets come around in 2014 with added competition.

If you employ 25-49 people, you won’t face this choice. The government won’t require companies with fewer than 50 employees to offer health insurance starting in 2014, and therefore these companies won’t have to contend with possible fines like their big brothers. But while firms with 50 or fewer workers would be exempt from coverage provisions, they will still have to contend with rising premiums.

A major tax credit for smaller firms and solopreneurs. If you employ less than 25 or are self-employed, you may find that the healthcare reforms bring you tax relief.

Beginning in 2010, companies with less than 25 employees that pay the majority of health care premiums for their workers qualify for a tax credit up to 35% of their premiums. (In 2014, that credit could be as great as 50% of premiums if you arrange insurance via one of the Small Business Health Options Programs, or SHOP Exchanges). The tax break you get will depend on a couple of variables: the number of employees you have and their average salary.

However, this tax break won’t be offered to sole proprietorships. That factor may encourage you to incorporate or become an LLC.

If you own a smaller company, insurance might become cheaper. The idea is that small businesses can pool together in the SHOP Exchanges and negotiate insurance coverage as a group. Greater buying power implies lower premium costs (in theory).

Businesses with 100 or fewer workers can jump into a state SHOP Exchange pool starting in 2014; states may choose to limit the pools to firms with 50 or fewer employees through 2016.

The non-partisan Congressional Budget Office estimates that the SHOP Exchanges would lower annual premiums for these businesses by 1-4% with a 3% increase in the amount of coverage. That could mean a savings of more than $10 billion nationally.

If you work for yourself, you will likely be able to take advantage of government health care subsidies in 2014. If you are self-employed in 2014 and earn less than four times the poverty level, you can qualify for these subsidies. (To give you some idea, in 2010 400% of the poverty level comes to $88,200 for a family of four.)

Some notes for 2011. In 2011 as a result of the new law, a business will have to report the value of an employee's health care coverage on W-2 forms. Many companies provide coverage for employee dependents not enrolled in other employer-based health plans up to age 22 or 23; next year, that age limit will rise to 26. All lifetime caps on insurance policies offered through employer-sponsored plans will be eliminated in 2011. Penalties will increase for the misuse of HSA funds, and workers with FSAs and HSAs will not be reimbursed for money used for over-the-counter drug purchases.

Health Care Changes in America

2010-03-22T16:38:00.000-07:00

But the historic vote hardly means an end to the debate.

The House approves the Senate bill. Not a single Republican voted for it, but 219 Democrats did – and by a vote of 219-212, the House of Representatives sent the Senate’s version of landmark healthcare legislation toward President Obama’s desk. The President could sign the bill into law as early as March 23.1

But the fight is not over. The House of Representatives also passed a collection of amendments to the Senate bill by a 220-211 margin, but the Senate must also approve this reconciliation bill – exactly as it is worded. If that doesn’t happen, then guess what … there will be another vote on the Senate version of the bill in the House.1,2

“If those people think they’re only going to vote on this once, they’re nuts,” Sen. Orrin Hatch (R-UT) said on Bloomberg Television March 20. Hatch claims that Senate Republicans have the votes to force a modification of the bill passed on March 21 and boot it back to the House for a second vote.3

Will the reforms be overturned? Twelve state attorney generals have indicated that they will contest the bill on these grounds the moment President Obama signs it.4 What are the odds the Supreme Court will throw the reforms out? Probably pretty slim. Look at the precedents of Medicare and Medicaid. When both those federal programs were enacted, the Court twice upheld a broad federal role in health care.

The big reforms will take effect in 2014. If you are looking forward to health insurance reform, you will have to wait a while before many of the big changes occur.

• Starting in 2014, individuals will be required to have health insurance coverage or pay an annual penalty which could climb to $750 or 2% of their income (alternately $695 or 2.5% of income), whichever is larger. Inmates, Native Americans, and those with religious objections would be exempted.5,6
• In 2014, if you aren’t enrolled in an employer-sponsored health care plan, you will have to buy coverage yourself. You could shop for it through a state insurance exchange. The federal government will offer $500 billion worth of assistance to help insurance shoppers buy coverage through these state exchanges. Undocumented immigrants would not be able to buy coverage.5,7
• After 2014, businesses with more than 50 employees could be fined as much as $2,000 per worker for failing to provide the option of coverage.5
• In 2014, insurers will be required to provide coverage to all Americans regardless of their health status.7
• Medicare spending will be cut by about $500 billion over the next decade, mostly in reduced government payments to Medicare Advantage plans. Democrats have claimed this will not shortchange Medicare recipients.5
• Federal money coming from the bill could not be used for abortions, with exceptions made in cases of rape, incest, or danger to a woman’s life.8

What changes are about to happen in 2010? These new rules would go into effect presently thanks to the new law.

• Insurers will be barred from revoking existing health insurance coverage on an individual, unless fraud or misrepresentation can be shown.6
• Insurers will not be able to limit the amount of money that can eventually be paid out on a health care policy, and it will be harder to limit the amount of money that can be paid out annually.6
• Seniors will get $250 payments to help them out if they face a coverage gap in the middle of the Medicare Part D prescription drug coverage plan.6
• Children will be able to stay on their parents’ health care policies until age 26, and they won’t be denied coverage because of pre-existing health conditions.6
• Adults with pre-existing health conditions will get a chance to enroll in a national high-risk insurance plan – albeit a temporary one.6
• Small businesses that sponsor health care plans for their workers could qualify for tax credits of up to 50% of the cost of the premiums they pay.6

New taxes? Yes – starting in 2013. Approval of these reforms will also bring a new 3.8% tax on investment income for individuals earning more than $200,000 and households earning more than $250,000, so the effective capital gains rate will be 23.8% for these taxpayers in 2013. Also, these taxpayers will be able to keep 8.8% less of the income resulting from taxable stock investments. The Medicare tax rate on households with income over $250,000 will also rise in 2013, from 1.45% to 2.35%.5,6,9

A huge savings? Maybe. The non-partisan Congressional Budget Office estimates that the health care reforms will reduce the federal deficit by between $65-118 billion over the next decade and by more than $1 trillion in the decade after that.5

These are the views of Montgomery Taylor, CPA, CFP, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations.
1 nytimes.com/2010/03/23/health/policy/23health.html?ref=us [3/23/10]
2 blogs.ajc.com/kyle-wingfield/2010/03/22/obamacare-now-for-the-hard-part/?cxntfid=blogs_kyle_wingfield [3/22/10]
3 bloomberg.com/apps/news?pid=20601087&sid=aghrqNBEBtIc [3/20/10]
4 csmonitor.com/USA/Justice/2010/0322/Attorneys-general-in-12-states-poised-to-challenge-healthcare-bill [3/22/10]
5 cnn.com/2010/POLITICS/03/21/health.care.main/?hpt=Sbin [3/21/10]
6 csmonitor.com/USA/Politics/2010/0319/Health-care-reform-bill-101-Who-must-buy-insurance [3/19/10]
7 latimes.com/features/health/la-na-healthcare-passage22-2010mar22,0,2788293.story?page=2 [3/22/10]
8 whitehouse.gov/blog/2010/03/21/one-more-step-towards-health-insurance-reform [3/21/10]
9 investmentnews.com/article/20100322/FREE/100329992 [3/22/10]

The DB(k)

2010-03-20T12:07:00.000-07:00

In 2010, companies have a whole new retirement plan option.

What is a DB(k)? Basically, a DB(k) combines a pension plan with a matching 401(k) plan. As the name implies, it is a defined benefit retirement plan with some of the features of a 401(k).

DB(k)s could become great recruiting tools. These hybrid retirement plans will be very attractive to employees looking to restore pre-bear market retirement savings levels – not to mention workers who want to retire with a pension-style income like the one Mom and Dad had. In the coming years, firms in especially competitive industries may be prompted to offer DB(k)s as perks.

Won’t it cost a lot for a company to fund one? Not necessarily. It is likely that the companies that do create them will have sizable cash reserves and profit margins. However, it isn’t as if a business is funding two retirement plans at once. In fact, any businesses that offer both defined benefit plans and 401(k) plans may unite them in this new option.

A DB(k) could save a business paperwork & money. These plans are exempt from “top-heavy” rules, and a company can put one in place with just one Form 5500 and one plan document. Principal Financial Group vice-president Chris Mayer, whose firm helped to develop the DB(k), told the Washington Post that the cost of providing a DB(k) will probably work out to 6-8% percent of payroll for most companies. This is certainly beneath the administrative costs of having both a 401(k) and a pension plan. Companies with 2-500 employees are eligible to have DB(k)s.

What do employees get? An income stream, an employer match and a really neat tool to save for retirement. In brief, the DB(k) has four compelling attributes:

• An arrangement for lifelong monthly income. The income stream won’t replace an employee’s end salary, but it certainly will help. Loyalty is rewarded: the pension income equals either a) 1% of final average pay times the number of years of service, or b) 20% of that worker's average salary during his or her five consecutive highest-earning years.
• Employees are automatically enrolled in the 401(k) portion. (They can choose to opt out.)
• The company automatically directs 4% of a worker's salary into his or her 401(k) account. The company also has to match 50% of that amount, which is vested upon the match. (Employees do have the choice to alter the contribution level up or down from 4%.)
• It only takes three years for an employee to become fully vested in a DB(k) pension plan. So even if they leave the company, the money is theirs.

The best of both worlds? Maybe. The DB(k) is shaping up as an intriguing 401(k) alternative, a new IRS-sanctioned way to offer valued employees something more than the usual voluntary retirement savings program. If you are saving for retirement, ask your company about it. If you own a business in a very competitive field, it may help you recruit, impress and retain the caliber of employees you really want.

New Tax Perks for Nonqualified Annuity Owners

2010-03-17T09:04:00.000-07:00

You can thank the Pension Protection Act.

More options. On January 1, 2010, owners of nonqualified annuities were allowed some new tax benefits. On that date, the Pension Protection Act (PPA) of 2006 was fully implemented and brought about dramatic and interesting changes for those who had started annuities with after-tax dollars. At the start of 2010:

• Non-qualified deferred annuities with added long term care insurance riders were now characterized as tax-qualified LTC insurance plans.
• As a result, all withdrawals from these “hybrid annuities” are income tax free so long as they are used for qualified long term care. So you can use the cash value of the annuity to cover the cost of LTC insurance premiums without triggering a taxable event.
• Annuity owners were now allowed to make tax-free 1035 exchanges into appropriate hybrid annuities with long term care riders.
• Additionally, an annuity owner can do a 1035 exchange for the cash value from any annuity into a single-premium qualified LTC insurance policy without incurring any gains.

Now these annuities are even more attractive. Hybrid annuities with LTC insurance riders already offer their owners tax-deferred growth - and sometimes, a return-of-premium option that gives back the investment to an owner’s estate if no LTC claim is made. These linked-benefit annuities (and linked-benefit life insurance policies) can provide something like a “money-back guarantee”, as well as the capability to multiply the benefit value of idle cash sitting on the sidelines. The new allowance of what could be sizable tax-free withdrawals makes them look even better.

In addition, the new freedom to make a tax-free exchange means that an annuity owner can now leave a current contract for a hybrid annuity that may provide a much greater pool of money someday to cover LTC costs.

Are they for you? These hybrid annuities are certainly worth a look. If you can’t qualify medically for LTC insurance but still need to be protected, a hybrid annuity may be an excellent option. Many people fund these annuities by redirecting cash from a bank CD or an annuity they already own. You might want to talk to your insurance or financial consultant about the possibility.

Where were you on the night of April 15, 2007?

2010-03-12T17:54:00.000-08:00

If you didn’t collect your refund for the 2006 tax year,
time is running out to claim it!

$1.3 Billion Dollars.

That’s the amount of unclaimed refund money the IRS is holding in their account. From the original filing deadline, each taxpayer has a window of just three years to claim refunds they are owed. Miss the window, and that’s it … no money.

Why is so much money sitting there?

According to the IRS, unclaimed refunds are fairly commonplace. Generally this is due to individuals simply not filing in a given year because they don’t owe taxes. But of course, by not filing, they can’t get any refund due either. In 2006 the number of individuals who decided, for some reason, not to file their taxes was over 1.4 million.

What could you do with $604?

That’s the median outstanding refund amount, according to IRS estimates. The most unclaimed refunds come from the state of California, where almost 160,000 taxpayers did not file their 2006 returns. Texas and Florida are next in line, with over 100,000 unfiled returns in each of those states.

How about an additional $30 or $60 on top of that?

Based on the number of exemptions filed on 2006 tax returns, most taxpayers received $30 or up to $60, thanks to the repealed Telephone Excise Tax Refund. For some who did not file, that money, too, is sitting in an IRS account waiting for them. The only way to get that money is to file a 2006 return.

If you didn’t file your 2006 return, you have until April 15, 2010.

If the IRS owes you a refund on your 2006 return, you only have until April 15, 2010 to claim it. Otherwise, that money goes to Uncle Sam. You might want to double-check your 2007 and 2008 returns as well (though, you have a little more time on those). To file a return for a previous year, visit www.irs.gov and download the appropriate documents from their index of forms from past years.

Life Insurance

2010-03-12T17:48:00.000-08:00

Is it time to review your policy?

Life insurance is hard.

It’s hard to know if you have the right kind.

It’s hard to know if you have enough.

And it’s hard to know if you need any at all.

The insurance companies have made it even harder by coming up with bewildering names: whole life, term life, universal life. Some life insurance policies have a cash value while others don’t. Some invest that cash value in the stock market while others pay a fixed rate of interest. Some insurance policies combine all of these ideas.

This may be one reason why a recent study by the National Association of Insurance Commissioners found that about 40% of people don’t review their life insurance annually. In my experience, that number seems to be even higher. But no matter what the exact number, a large portion of Americans may simply be paying for insurance that’s not right for them.

That is why it’s important for you to sit down annually with an insurance professional to review how your policy works and how it will help you to protect your family.

When you’re young, a certain type of policy is needed. As you raise a family and take on more responsibilities, your needs change again. At some point - when the nest is empty or other life changes occur - there may come a time where you don’t need life insurance at all or you may desperately need it to protect your estate. Reviewing your life insurance policies is one way to make sure you have the coverage that is right for you and your family now, today – not when you bought it.

When is the last time you thought about your life insurance?

Is it time to take another look?

What's Going on With the Estate Tax?

2010-03-12T17:42:00.000-08:00

Good question. Congress has elected to keep us in suspense.

0% estate taxes in 2010 … for now, anyway. On January 1, the federal estate tax went away – at least for the time being and perhaps for all of 2010 as envisioned back in 2001. President Obama and Congressional leaders wanted the estate tax to stick around in 2010 at 2009 levels (estate taxes up to 45% with a $3.5 million exemption), but lawmakers were preoccupied with other matters.

Will Washington really give families million-dollar tax breaks? If no estate tax is imposed in 2010, it could mean a savings of millions for wealthy families. There is talk of bringing the tax back retroactively – after all, the federal government could really use the money. Yet the further we get from January 1, the more difficult reinstating the estate tax for 2010 may become.

As American Institute of Certified Public Accountants vice-president for taxation Tom Ochsenschlager told MarketWatch, "They're still talking (in Congress) about making something retroactive, but at some point they can't do that … is it even constitutional? There’s a real question about that."

The unconstitutional argument goes like this: if Congress moves to retroactively apply the estate tax for 2010, an estate could take the matter to court and point out that Congress had all year to reinstate it but failed to do so.

That argument aside, some estate planners think Congress will get around to a retroactive measure – one that would put the 2009 estate tax levels back into place for 2010.

What taxes are in place now? Some taxes still apply to estates in 2010 even if the estate tax doesn’t. People who give away more than $1 million during their life still face federal gift taxes – though in 2010, they max out at 35% instead of 45%.
Also, all assets with capital gains are to be taxed at 15% above a $1.3 million federal exemption when sold by heirs in 2010. The big news here is that heirs don’t get to use a step-up this year. When they compute the value of an inherited asset, they have to use the basis (the original price paid for the asset) instead of how much that asset was worth when the original owner died. (In addition to the $1.3 million exemption per estate just mentioned, there is another $3 million exemption available for assets inherited from a spouse.)

What precautions may be wise this year? As a potential heir, you’ll want to document the cost basis of any assets you might receive in 2010. Good recordkeeping is in order.

Additionally, you may want to search a trust or a will for so-called formula clauses anchored by words such as “that portion”, “that amount” or “that fraction”, especially if the will or trust was created some years ago with the presumption of a constantly increasing federal estate tax exemption.

These formula clauses are fundamental to bypass trusts created to defend estate tax exemptions for a couple. However, these clauses assume that there is an estate tax. With no estate tax in place, there is the possibility (depending on how the formula clause is worded) that a deceased spouse’s assets would not be inherited by the surviving spouse, but instead go directly into the family trust – not the most useful result for the surviving spouse.

What will 2011 bring? Well – if there are no changes – the estate tax and the generation-skipping tax would come back in 2011. Only the first $1 million of an estate would be exempt from estate taxes. Assets above the exemption would be hit with a 55% federal penalty.3 However, the Obama administration had talked of keeping the 2009 estate tax levels in place for 2010 and beyond, which would be better than returning to the pre-EGGTRA levels in 2011.

Financial Planning for Divorced Women

2010-02-22T17:50:00.000-08:00

A Post-Divorce Action Plan

You have just gone through one of the most challenging and difficult periods that a woman can experience in her life – a divorce. While many things may still be in up in the air, one aspect of your life that you should make sure you’re in control is your finances.

Financial planning for divorced women is not that much different than financial planning for married couples. Several basic elements are the same. However, the differences offer both good news and bad news. The good news: you can make plans and decisions based solely on your needs and goals. There won’t be miscommunication or conflicting ideas. The bad news: it’s all in your hands. Any mistakes will be your own and a poor decision can’t be salvaged by the income or assets of a partner.

The following post-divorce action plan offers a few things worth considering:

One way to counter the bad news is to find a trusted professional to seek advice from.

After a divorce, friends are often spit between spouses. Financial representatives can be the same way. If you lost yours in the divorce or never had one to begin with, it’s a good time to consider finding a professional who can help you make sound financial decisions for your new life.

To find one, start simply. Ask friends or acquaintances who it was that helped them when they went through a divorce. The attorney who handled your divorce may also be a good source for a referral. It’s important to have someone help you who has previously assisted or - best of all - who specializes in helping divorced women.

Selecting the right financial professional for you is a critical step. After all, this person will be helping you with the important financial decisions you now have to face.

Long-term care insurance may become even more important post-divorce.

Long-term care policies are designed to cover the costs of care if you are unable to care for yourself because of age or if you become ill or disabled. Long-term care is especially important for women because they typically pay more for it than men do. The reason is simple: women typically live longer than men and usually require longer care during those additional years.

A woman’s retirement is usually more expensive than a man’s.

The reason that women usually need long-term care insurance more than men is the same reason that retirement income planning for women may be more important. Women live – on average - 5 to 10 years longer than men. Eighty-five percent of people over 100 are women. This means a woman’s retirement savings must, on average, be stretched out over a larger number of years.

While, in general, retirement planning for a single person is easier in many ways than for a couple, remember … you can no longer rely on a spouse's financial resources if a mistake is made. It’s important to review your social security estimates, any pensions you have and your retirement assets. You can then compare that to the kind of lifestyle you would like to have during retirement.

Because retirement may be more expensive, you may want to make an employer-sponsored retirement plan a larger deciding factor in any job search. Also, you may decide that you must retire at a later date than you had originally planned.

Update your beneficiaries and consider using a trust to help manage your assets. People often forget to update the beneficiaries of their life insurance and retirement accounts after a divorce. If not changed, your ex-husband may stand to inherit a large portion of your assets. Also, the estate laws give certain breaks to married couples that are not available to a single person. Establishing the proper type of legal trust may be a way to pass along more of your assets to your heirs, rather than to the IRS.

Finally, after you have moved on from your divorce there may come a time when you consider remarriage. It’s important that you understand the financial effects this may have. If you were married longer than 10 years you may be collecting or entitled to 50% of your ex-husband’s social security benefit. If you remarry you will no longer have that right. While you will become entitled to your new husband’s benefit, you must know if your new husband’s benefit will be lower or higher, and how that will affect your retirement.

Remarriage can also lead to blended families, blended assets and blended income. Your new husband may have his own family from a previous relationship. A financial professional can help the two of you prepare for this blending that satisfies the financial needs of each of you, as well as your new family.

While it’s all in your hands, partnering with a financial professional can help you move on to the next phase of your life with a more solid plan for your financial future.

Recovering From Unemployment

2010-02-22T08:41:00.000-08:00

Four tips for recovering from unemployment.

Any period of unemployment is fraught with stress – both personal and financial. While landing that formerly-elusive new job can be a relief, it is only the first step on the road to recovery from unemployment. This transition time is akin to breaking the surface after being underwater for several minutes. It’s a relief to be breathing again and feel the sun on your face, but it’s no time to relax. You must start swimming right away to get back to a healthy financial shore.

Here are four steps you can take to help make sure your recent unemployment doesn’t cast a long shadow across your future financial health.

Continue to live lean. More likely than not, you weren’t buying $4 coffees while unemployed. Five star restaurants were out too. Hamburger may have replaced steak. You may want to continue to follow that pattern. We tend to grow into our incomes, our budgets bloating along with our salaries. Fighting that urge will help with the rest of the steps to unemployment recovery.

Protect yourself ASAP. The longer your unemployment lasts the more important basic survival becomes. Someone who is unemployed may let life insurance, disability insurance or health insurance policies lapse as they try to keep current on the mortgage, pay utilities and put groceries in the pantry. Sometime during the first few days of your employment you should enroll in whatever benefits you need that your company offers. If the new firm does not offer the coverage you need, make an appointment with an insurance professional and use part of your first paycheck to protect you and your family. Remember, the income from your new job won’t benefit anyone if a catastrophic illness, disability or death suddenly takes it away.

Develop a plan to pay down your debts. When you have a job, debts are a nuisance. When you don’t have a job, they may become a threat to your future financial well-being. While it’s normal to hope that you never have to go through unemployment again, you must start preparing for the possibility.

If you are behind on your mortgage, call your lender to let them know of your new job and to work with them on a plan to catch up on your payments. If they are unwilling to work with you, consider using a Federal resource such as those offered by the U.S. Housing and Urban Development Administration.

While there are fewer similar programs for car loans, calling your lender and trying to develop a plan for a loan you’re behind on should be your first step.

All too often during unemployment, credit cards may be used to get by when cash is low. While your interest rates may have been low when you initially signed up for the card, new legislation has caused a spike in credit card rates. Rates of 20% - 30% are not uncommon as banks react to new rules. Paying down these balances should also be a primary goal.

Remember to start paying yourself. Whether you call it a rainy day fund, a nest egg or emergency cash, slowly, paycheck by paycheck, begin paying yourself a fraction of your salary. Some experts will argue that a family should keep six months to one year’s worth of expenses in the bank for unexpected events such as a blown car engine, the roof caving in, or another round of unemployment. For many families, that may feel like an insurmountable sum. But as the old joke goes “How do you eat an elephant?” The answer: “One bite at a time”. Paying yourself has to be done paycheck-to-paycheck, little by little.

A Medigap Update

2010-02-22T08:39:00.000-08:00

New changes are taking effect. New policies may have lower premiums.

Lower premiums ahead? Back in 2005, Congress voted to make major changes to Medigap plans effective June 1, 2010. While these changes are a bother, they could indirectly result in reduced premiums for these policies.

As the “modernized” Medigap plans sold after June 1 will have some differences from previous plans, insurers will be allowed to reset rates. Competition may drive premiums lower.

Please note: we’re talking about new Medigap policies that will be sold after June 1. If you already have a Medigap policy or buy one before June 1, these new changes won’t affect your plan, and you don’t need to replace your existing plan unless you feel the need.

Just to clarify things further, Medigap plans are Medicare supplement plans, not Medicare Advantage plans.
The changes in brief. In June, three Medigap plans are going away, another is being modified, and two new plans are being introduced. Also, a new benefit will be included in all plans.
• Plan E, Plan H, Plan I and Plan J will no longer be sold beginning June 1. (If you have one of these plans, you can continue to renew it as long as you keep paying premiums.)
• Two new lower-cost options will be available: Plan M and Plan N. Both come with some unique cost-sharing.
o Plan M looks like Plan D with a couple of alterations. It covers just 50% of Medicare’s Part A deductible; 100% of Part B co-insurance is covered, plus skilled nursing facility care and emergency care in foreign countries.
o Plan N also resembles Plan D, but there are differences. Plan N will pay the full Part A deductible, but it asks you for co-payments of up to $20 for each covered healthcare provider office visit (including specialists) and up to $50 for each covered emergency room visit (you don’t pay that $50 if you end up being admitted to a hospital).
• Plans D and G will not come with preventative care and at-home recovery benefits after June 1, 2010. After June 1, Plan G coverage of Part B excess charges will be raised from 80% to 100%.
• A hospice care benefit will be added to basic benefits of Plans A-G.

How easy would it be to switch to a lower-premium plan? If you’re going to celebrate your 65th birthday in the next few months, you can enroll in a Medicare supplement plan now and switch to a lower-premium plan in June, as you’ll be in the six-month open enrollment period. If you are older than 65, of course, you’ll have to go through underwriting to switch to a lower-premium plan – but if you’re healthy, making the switch to a cheaper plan may not be difficult at all.

Could you save on prescription drugs as well? If you find yourself hard-pressed to pay for prescription drugs, see if you qualify for Medicare’s new Extra Help program, which is worth an average of about $3,900 a year to Medicare recipients.
As of January 1, 2010, Medicare no longer counts money contributed by others to pay your household expenses as income. It also no longer counts your life insurance policy as an income resource. This means that more people can qualify for prescription drug savings.

Basically, a married couple living together qualifies for Extra Help if it has less than $25,010 in resources (savings and investments) and less than $21,855 in annual income. For individuals, the limits are $12,510 in resources and $16,245 in annual income. However, you still may qualify even if you have earnings from work.

How and When to Sign Up for Medicare

2010-01-25T13:11:00.000-08:00

Breaking down the enrollment periods and eligibility.

Medicare enrollment is automatic for some of us. In fact, anyone who has received a Social Security check or 24 months worth of Social Security Disability Insurance (SSDI) is automatically enrolled in Medicare Part A and Part B. Part A is hospital insurance; Part B is medical insurance.

If you’re getting Social Security checks and approaching age 65, you’ll get a Medicare card in the mail three months before your 65th birthday. Medicare benefits begin on the first day of the month in which you turn 65. If you are getting SSDI (regardless of your age), the card will arrive coincidental with your 22nd monthly payment and you are entitled to Medicare coverage with your 25th monthly payment.

Oh yes, there is another important criterion: you must be a U.S. citizen or a legal resident of this country for five years or longer to be eligible for Medicare.

Some of us have to contact the SSA. If you’re coming up on 65 and not receiving Social Security benefits, SSDI or benefits from the Railroad Retirement Board, you can still apply for Medicare coverage. You can visit your local Social Security Administration office or dial (800) 772-1213 or go to www.ssa.gov to determine your eligibility. (If you’re going online, don’t just type in ssa.gov; you need the www. to get to the site.)

In this case, if you are eligible you have the choice of accepting or rejecting Part B coverage. If you want Medicare Part A and Medicare Part B, then you should sign your Medicare card and keep it in your wallet. If you don’t want Part B, you put an "X" in the refusal box on the back of the Medicare card form, and send the form to the address shown right below where your signature goes. About four weeks later, you will get a new Medicare card indicating that you only have Part A coverage.
When can you add or drop forms of Medicare coverage? Medicare has enrollment periods that allow you to do this.

• The initial enrollment period is seven months long. It starts three months before the month in which you turn 65 and ends three months after that month. You can enroll in any type of Medicare coverage within this seven-month window – Part A, Part B, Part C (Medicare Advantage Plan), and Part D (prescription drug coverage). AS it happens, if you don’t sign up for some of this coverage during the initial enrollment period, it may cost you more to add it later.

• Once you are enrolled in Medicare, you can only make changes in coverage during certain periods of time. For example, the annual enrollment period for Part D is November 15-December 31, with Part D coverage starting January 1. (You can also select a health plan for the next year or drop or change Part D coverage in this period.)

• Additionally, there are also open enrollment periods between January 1 and March 31. These dates frame an open enrollment period for Part D; if you enroll in Part D in this window, coverage starts on the first day of the month after the plan receives your enrollment form. There is also an open enrollment period for Part B coverage from January 1 to March 31; if you sign up for such coverage within that period, it begins in July of that year.

Special situations. Individuals with end-stage kidney failure who need dialysis or a transplant may qualify for Medicare regardless of age. Upon diagnosis, they can contact the SSA. Medicare coverage usually takes effect three months after a patient begins dialysis. People with Lou Gehrig’s Disease (ALS) are automatically enrolled in Medicare as soon as they begin receiving SSDI payments.
Do you have questions about eligibility, or the eligibility of your parents? Your first stop should be the Social Security Administration (see the contact information in the fourth paragraph above). You can also visit www.medicare.gov and www.cms.hhs.gov.

The Decade in Review

2010-01-18T08:29:00.000-08:00

A look at stocks, commodities and memories (good and bad).

A turbulent ten years. The 2000s gave us remarkable opportunity and remarkable volatility. They tested our patience, and many investment strategies. They taught us to hold on, hang in there and diversify.

Stocks. Was it really a “lost decade”? It depends on how you were invested. Yes, the Dow ended the 1990s at 11,497.12 and ended the 2000s at 10,428.05, amounting to a 9.30% slip. The S&P 500 lost 24.10% in the same interval. If you had invested a lump sum into an index fund tracking the S&P 500 on December 31, 1999 and left those assets untouched for ten years, you would have ended up with a sizable loss.

Well, that sounds dismal - but how many of us actually invest this way? Very few of us make one lump sum investment and just watch it for ten years. Thanks to diversification, rebalancing and constant inflows of new money, quite a few investors were able to grow their assets and/or outperform the S&P 500 in the past decade.

The fact is, five sectors of the S&P 500 gained 10% or more across the 2000s – health care (+10.85%), utilities (+10.92%), materials (+24.91%), consumer staples (+31.84%) and energy (+102.12%).

Few articles about the “lost decade” mention this notable factoid: the Russell 2000 advanced 23.90% during the 2000s. Mutual funds that focused on buying undervalued small-company stocks gained an average of 8.3% annually in the 2000s.

Outside America, developing stock markets shattered all expectations while the developed markets mirrored American performance. Look at the decade-long gains in key indices in some of the BRIC nations, as measured by CNBC.com: China, +72%; India, +249%; Brazil, +301%; Russia, +863%. Compare all that with the benchmark indices in Japan (-44%), France (-34%), Great Britain (-22%) and Germany (-14%) in the past decade. Emerging market mutual funds gained an average of 9.3% per year in the last ten years.

Commodities. It was a decade of amazing gains in the broad commodities market. From the end of 1999 to the end of 2009, gold advanced 278.52%. How about silver and copper? Silver gained 208.91% and king copper rose 287.78%. Crude oil rose 210.00% during the 2000s.

How great a decade was it for the commodities sector? Only one notable commodity posted a ten-year loss from 12/31/1999 to 12/31/2009. That was palladium, which retreated 8.98%. On the other hand, we know that 16 commodities gained 100% or more across the decade.

The two biggest gainers during the 2000s were a pair of crops: sugar (+340.36%) and cocoa (+293.31%).

Highs and lows. We are 10 years past the bursting of the tech bubble – March 10 will mark the 10th anniversary of the NASDAQ’s all-time high of 5,132.50. And of course, a decade-defining geopolitical event rocked the markets 18 months later.

General Motors and Chrysler filed for bankruptcy protection in 2009; at the start of the decade, so did Enron - the company that Fortune Magazine ranked as “most innovative” each year from 1995-2000. In 2008, Lehman Brothers, Morgan Stanley, Goldman Sachs, Merrill Lynch, and Washington Mutual either folded, mutated, or were bought up while AIG, Freddie Mac and Fannie Mae were bailed out.

The Dow hit a new high of 11,723 in January 2000, a post-9/11 closing low of 7,286 in October 2002, and then ended 2003 at 10,453 (as the DJIA gained 25.32% that year while the dollar lost 14.67%). The Dow hit new peaks of 11,727 on October 3, 2006 and 14,164 on October 9, 2007. A close of 11,215 on July 2, 2008 officially marked the start of a bear market.

From March 9, 2009 closing lows to the end of the year, the Dow shot up 59.28% and the S&P 500 advanced 64.83%. This led to some to entertain tantalizing thoughts about the birth of a new bull market. Or it is simply a cyclical bull in a secular bear? The jury is still out, as the saying goes; we can hope for the best.

What did we learn? The 2000s taught us lessons about irrational exuberance (companies that had never made a dime were probably not worth billions) and lessons about the value of diversifying your portfolio. We also learned the importance of having an exit strategy for our investment portfolio.

The 2000s put investors through some seemingly unimaginable financial headlines. It was a rare decade, an aberrant one in stock market history – for example, the Dow hadn’t had a negative decade since the 1930s, and it had advanced 228.25% over the 1980s and 317.59% for the 1990s. Will we see it make a double- or triple-digit advance in the next ten years? We don’t know. Past performance is no indicator of future success. Yet the awesome potential of the stock market and commodities markets should not be dismissed – and with economies healing the world over, it is clearly time to look forward and stay invested.

Tax Alert: Plan to Take Advantage of 2010

2009-12-31T09:19:00.000-08:00

The Bush tax cuts are set to expire – and other big changes are poised to occur.

Do you see a warning light flashing? Americans with high net worth and high incomes are preparing for the likelihood of higher taxes in 2011 and subsequent years. High earners are almost certainly going to take the hit if the EGTRRA and JGTRRA cuts fade away at the end of 2010. Here’s a summary of what’s happening – and a look at what might happen. There are some developments you will want to remember, and some tax breaks you might very well want to exploit.

No phaseouts on itemized deductions and personal exemptions in 2010. This may provide you with an opportunity for some notable tax savings. Historically, high-income taxpayers have been subject to a reduction in the value of itemized deductions and personal exemptions. That has gradually decreased in this decade. In 2010, the phaseouts are gone entirely. In 2011, they are poised to return.

As IRS standard deduction and personal exemption amounts are indexed to inflation, you’ll see very little change there for 2010. The standard deduction for heads of household will rise by $50 to $8,400 for the 2010 tax year. Other standard deductions will stay put, and the personal exemption amount will remain at $3,650 for 2010.

Lower long-term capital gains rates through 2010. Unless Congress decides to extend these Bush-era cuts, capital gains tax rates will revert to pre-2003 levels in 2011. For 2010, the long-term capital gains rate for those in the 10% and 15% tax brackets is 0%. In 2011, it is set to go to 10%. If you fall into the 25%, 28%, 33% or 35% tax brackets, the capital gains rate is 15% in 2010 and 20% in 2011.

The Tax Extenders Act of 2009. The House passed this legislation on December 9, and the Senate is likely to follow suit. The final version of this bill would likely extend the additional standard deduction for real property taxes, the deduction for state and local sales tax, and deductions for tuition/education expenses and teachers' classroom expenses into 2010.

The estate tax. 0% estate taxes in 2010? That was the plan … but the reality is that estate taxes are likely to remain at current levels in 2010 with some retroactive lawmaking. In early December, the House voted to restore the estate tax for 2010; a week later, the Senate voted against temporarily extending 2009 estate tax levels into the coming year. The Senate will almost certainly take up the issue again in January. However, to prevent a complete repeal of the estate tax next year, any new legislation is expected to contain a retroactive provision. So instead of taking effect upon passage, any new estate tax law would likely be made retroactive to January 1, 2010.

The AMT. You know how it works – Congress comes up with another AMT patch at the stroke of midnight and middle-class taxpayers are saved once more. Well, just to make things interesting, the Tax Extenders Act of 2009 doesn’t include an AMT patch for 2010. Many tax professionals think the 2010 patch issue will be addressed early next year, with the patch for the 2010 tax year made retroactive.

How will marginal tax rates rise in 2011? Does anyone think taxes won’t increase in the near future? At present, the marginal tax rates are 10%, 15%, 25%, 28%, 33% and 35%. If Congress doesn’t act by the end of 2010, the tax brackets will reset to 15%, 28%, 31%, 36% and 39.6%. By the way, President Obama and some Democrats have proposed future tax brackets of 10%, 15%, 25%, 28%, 36% and 39.6% for 2011 (that is, only the highest two brackets would revert to pre-EGGTRA levels).

A healthcare surtax? If the healthcare reforms pass in 2010, taxpayers in the highest brackets might pay even more to the IRS. For example, the legislation that the House passed would require couples with MAGI of $1,000,000 or more or individuals with MAGI of $500,000 or more to pay an additional 5.4% surtax.

And finally, a dilemma for Congress. Congress would like to extend the Bush-era tax cuts further to protect lower-income and middle-income taxpayers. However, some analysts say it would cost the federal government more than $1 trillion over the next decade to do so.

Have you talked to your financial or tax advisor lately? If you have, good for you. If you haven’t, do so now. Prepare for change, and plan to take advantage of extended and potentially expiring tax breaks.

MEDIGAP: WHY IT MATTERS

2009-12-03T15:41:00.000-08:00

Medicare may not cover as much as you think.

Will you be 65 soon? If you’re turning 65 in the next few months, you might consider getting a Medigap policy to supplement your Medicare coverage. Most people think Medicare covers more than it actually does.

For 2009, Medicare Part A gives you a $1,068 hospital deductible per stay; Medicare Part B asks you to pay 20% of physician, outpatient and home healthcare costs after a $135.00 deductible. With numbers like these, it’s easy to see the value of Medigap coverage.

Are you in the GAP (guaranteed acceptance period)? The easiest time to qualify for Medigap coverage is right around 65 – specifically, the window of time starting three months before and ending six months after your 65th birthday. This is the “guaranteed acceptance” period, in which anybody with Medicare can get into a Medigap plan. Outside of this window of time, you need to be reasonably healthy to get Medigap coverage.

In most states, there are 12 Medigap plans offered - Medigap A through L. Plans A through J are the “traditional” plans; K and L are high-deductible plans and far less popular.

The A-J plans all offer you the same set of core benefits: 20% coinsurance after you pass the $135 Part B deductible, all Part A Hospital coinsurance for hospital stays between 61-150 days, 3 pints of blood (Parts A & B), and 365 more lifetime hospital days. While these basic benefits stay the same among Medigap plans offered through different companies, premiums differ quite a bit among insurance providers.

Medicare Advantage plans. These private insurance plans are also called Part C plans, and they exist in different varieties - HMOs, PPOs, PFFSs (Private Fee-for-Service Plans), and MSAs (Medicare Savings Accounts). Plan members pay a percentage of the costs for medical services they receive, which means relatively low premiums.

By law, all Medicare Advantage plans are at least as wide-ranging as original Medicare, and many also provide coverage for drug costs. Most of these plans cap member payments at a certain level annually.

Unfortunately, federal government subsidies on MA plans will shrink by as much as 5% in 2010, which will likely mean higher premiums and/or fewer benefits.

Read the fine print and shop around. Medigap coverage is not all the same, so be sure to compare and contrast Medigap plans with the input of an experienced insurance professional who understands the medical and lifestyle issues common to mature Americans.

Are You Prepared to Pay For Long Term Care?

2009-11-02T08:34:00.000-08:00

In the coming years, many Americans will face the challenge.

70% of people currently over age 65 will require some long term care someday. That is the estimate of the U.S. Administration on Aging, a division of the U.S. Department of Health & Human Services. Will Medicare or private health insurance pay for it? The short answer is “no”.
In the decades ahead, baby boomers will reach their seventies, eighties and nineties. With aging parents of their own, some are learning how much long term care really costs. Some are still unaware.

How many of us are financially prepared for the possibility? Here are a couple of “averages” to consider from MetLife’s 2009 survey of LTC costs. The average annual cost of nursing home care is now $79,935 or $219 per day. That’s up 3.3% from 2008. The average nursing home stay is about 2.5 years, which means you would need roughly $200,000 to pay those bills.

Can you imagine paying it out of pocket? Taking out a reverse mortgage to do it? Using Medicaid because you have nothing left? No one wants these financial circumstances. The clear answer is long term care insurance coverage.

How expensive is LTC coverage? Annually, it typically costs about as much as a cheap used car. MarketWatch cited an example from the MetLife survey: in 2009, a 52-year-old federal employee could pay $1,524 annually for an LTC policy with a $200-per-day benefit for three years and a maximum lifetime benefit of about $200,000.

Does $1,500 or $1,800 or $2,100 annually (just to throw out a few numbers) sound expensive? These premiums are certainly inexpensive compared to the staggering bills you may face if the need for LTC enters your life. Yes, there is a chance that you may never need LTC coverage. However, with advances in medicine and healthcare, we may live much longer than we anticipate before we leave this world. Factor in diseases such as Alzheimer’s and Parkinson’s and other gradually disabling disorders, consider the population wave of baby boomers maturing, and you see why this coverage makes so much sense for so many.

Partnerships to make paying for it easier. Many states have created partnership programs to encourage people to buy LTC coverage. Essentially, these plans provide dollar-for-dollar asset protection when you buy an LTC policy. So for every dollar the policy pays out in benefits, you get an equal dollar amount in asset protection under a state’s Medicaid spend-down regulations.

For example, let’s look at Ohio. Let’s presume a couple have a $100,000 LTC policy. If they use up the whole $100,000 to pay for LTC, they would have to spend down their assets to $2,250 to qualify for state Medicaid benefits. But … if they exhaust a $100,000 partnership policy, they can potentially qualify for Medicaid coverage and still retain $101,500 of their assets. State governments are increasingly offering to partner with LTC policyholders with inflation-adjusted policies.

A new option (and a nice tax break). There are now whole life insurance policies and annuities structured to provide either a long-term care benefit or a death benefit – and thanks to the Pension Protection Act, starting on 1/1/10 the interest deducted to pay premiums and benefits from tax-qualified LTC coverage will no longer be taxed. (This applies to combination whole life/LTC policy plans and combination annuity/LTC policy plans; premiums for traditional LTC insurance policies will still be paid with after-tax dollars. So with these new combination whole life/LTC and annuity/LTC policies, you will now have tax-free premiums and tax-free benefits.)
59% of Americans are wrong when it comes to long term care. AARP conducted a survey in 2006 and found that 59% of respondents believed Medicare would pay for extended nursing home care. Another 52% incorrectly thought that Medicare would cover assisted living costs. In 2009, AARP found that 44% of Americans were “not very prepared” or “not at all prepared” to bear sudden long term care expenses.

I urge you to join the ranks of the prepared. November is Long Term Care Awareness Month – a good time to look at ways to plan for long term care needs. Now is the time to confer with an insurance advisor or financial advisor to learn more about your options.

Choices in Assisted Living

2009-09-30T08:24:00.000-07:00

If you can’t live on your own, what are your options?

When you need help with daily living, what choices do you have? You have three choices: home sweet home, a retirement community, or a nursing home as your health and preferences permit. While we’re speaking of choices, long term care insurance has proven to be another wise choice for many Americans – and with longevity increasing, it may be prove even more valuable to families in the future.

Assisted living. Some “assisted living communities” are small, some are huge, but regardless of size, they have common characteristics. Assisted living facilities are socially oriented, typically offering rooms or even distinct housing units for rent, with housekeeping and transportation and meals usually provided. They may or may not be licensed care facilities, and most don’t offer anything more than limited medical care onsite.

Residents really enjoy many of these facilities, but there are some caveats. Some elders really like their privacy, and assisted living facilities encourage a great deal of group activity. Also, sometimes these facilities do ask elders to pack up and leave. The classic example is when Alzheimer’s Disease progresses to a point where it motivates violent or socially disruptive behavior. The amount of personal care in one of these facilities may not be as much as desired. To enter one of these communities, you often have to pay about as much as you would for a luxury sedan (or two), and there is often monthly rent besides.

The nursing home. Of course, there are some elders who need frequent access to medical care – perhaps around the clock. This is the advantage of the nursing home. The disadvantages include a distinct lack of privacy, a borderline hospital environment, and of course the potential for mistreatment of the residents. Nursing homes are often perceived as the last residence of many Americans, but the reality is that some people do return home or transfer to an assisted living facility when their conditions improve.

Through a licensed nursing home, an elder can opt for three types of care. Skilled care is any daily treatment program prescribed according to a doctor’s orders and designed to improve a patient’s health; it is administered by a licensed nurse or therapist. Intermediate care is essentially skilled care delivered on a less frequent basis. Custodial care is care that helps people with daily living activities like eating and bathing, though it can also include things like catheter or colostomy draining. Long term care insurance commonly pays for all three types of care.

Just how expensive is nursing home care now? One national provider of long term care insurance put out a survey in early 2008 and found that the average annual cost of nursing home care nationwide is $76,460. It can be notably higher in big cities.
How about staying home? With demographic trends, the average suburban house may soon become a common kind of American retirement home. LTC insurance can pay for forms of skilled and non-skilled care administered in the home, such as rehabilitative care and therapeutic care. The problem is that the typical suburban home may need to be modified to accommodate a wheelchair, or to make bathroom visits easier, or to guard against falls and other mishaps. The typical suburban home is also some distance from a hospital, a mall, and friends, and public transportation in most of America’s suburbs is frustrating and inconvenient for many elders. But just being around family can help to counteract that isolation from community.

While welcoming an elderly parent into a home is a preferred choice for many baby boomers, talking openly about some of the financial and healthcare matters involved can make the lifestyle transition a bit smoother. Sharing a living space after a period of independence may not be easy, and it is wise to talk about who will pay for what, from medical expenses to food and gasoline.

Who can help you understand your choices? Speak with a qualified financial or insurance advisor who understands long term care insurance and assisted living options. What you learn may help you make better choices.

IRS Grants Relief for Taxpayers Who Took 2009 RMD

2009-09-28T14:58:00.000-07:00

New deadline is November 30, 2009. Did any of you withdraw required minimum distribution in 2009 without realizing that the 2009 RMD had been waived by the Worker, Retiree, and Employer Recovery Act of 2008? If so, you can put the money back so that you don’t pay tax on an unnecessary withdrawal.

Notice 2009-82 provides relief for those who have already received a 2009 required minimum distribution. With this new ruling, individuals generally have until November 30, 2009, or 60 days after the date the distribution was received (whichever is later), to roll over the distribution.

Example: Karen took her 2009 required minimum distribution of $27,000 in January 2009. When Karen met with her tax professional in April to have her 2008 taxes prepared, she learned that the 2009 RMD was waived. Because 60 days had passed, she was unable to put the money back into her IRA. The IRS now allows Karen to return all or any part of the $27,000 by November 30, 2009, as a qualifying rollover.

Don't Forget These 2009 Tax Breaks!

2009-09-18T15:56:00.000-07:00

Plan to exploit them before they expire.

The year goes by, you get busy … and tax-saving opportunities slip away. So as a reminder, this article is here to reacquaint you with some of the notable federal tax breaks offered this year.

The first-time homebuyer credit. This is the up-to-$8,000 credit available in 2009 to anyone who hasn’t owned a home during the previous three years. (It is subject to phase-outs at certain income levels.) The home you buy has to be your principal residence, and you have to buy it before December 1, 2009. The credit does not have to be paid back.

The IRA charitable rollover. This is the move that lets your IRA trustee make a tax-free direct transfer of up to $100,000 from your IRA to a charitable organization. This option is scheduled to go away in 2010. You must be age 70½ or older to do this.

3 don’t-miss deductions for businesses. When it comes to new cars and light trucks used for business means, the maximum first-year depreciation deduction has been increased by $8,000 for cars placed in service before 2010. The Section 179 deduction (that’s the one that lets you write off the costs of certain new and used business assets during their first year of use) is still at $250,000 for 2009, instead of the prior $133,000. The first-year bonus depreciation break of $50,000 is still in place for 2009, and even the biggest businesses can take advantage of it.
The new car sales tax deduction. Okay, “cash for clunkers” is over, but you still may be able to deduct state and local sales and excise taxes if you buy a car, motorhome, motorbike or light truck. You can itemize the deduction or just add it to the amount of your standard deduction.

A major tuition tax break. In 2009, you can claim an above-the-line deduction for “qualified tuition and related expenses” relating to the enrollment or attendance of you, your spouse or your dependent at an eligible college or university. While it is subject to phase-outs at higher income levels, the deduction can be as large as $4,000.

The classroom teacher credit. Are you a primary or secondary school teacher? If you were an educator who worked more than 900 hours on campus in 2009, you can claim an above-the-line deduction for up to $250 of personal expenses for schoolbooks and school supplies that see classroom use. You don’t even have to itemize.

COBRA continuation. Did you get laid off this year? Were you insured under an employer-sponsored health plan? Well, you may qualify for up to nine months of (COBRA) coverage. As for the company where you worked, it can claim a credit for the COBRA subsidy it extends to you.

$2,400 in unemployment income tax-free. That’s right: this year, the first $2,400 of federal unemployment compensation benefits you receive are excluded from gross income.

An extra deduction for state and local property taxes. Do you usually claim the standard federal deduction? If that’s your plan, this year you can take an additional deduction for state and local property taxes. The ceiling is $500, $1,000 if you are filing jointly.

The capital gains tax break. If you are in the 10% or 15% tax bracket, note that the current tax rate for long-term capital gains is 0% - and it is slated to stay at 0% through 2010.

The homebuilder tax credit. Do you build homes? If so, you may claim a credit of up to $2,000 for each qualified energy-efficient home constructed and acquired from you for use as a residence. This credit is set to expire December 31, 2009; President Bush’s signature extended it into this year.

And of course, the exemption from required IRA distributions. The federal tax mandate requiring IRA owners age 70½ to take Required Minimum Distributions (RMDs) was suspended for 2009, but it will be reinstated for 2010. Worth noting: in 2010, anyone will be able to convert a traditional IRA into a Roth IRA.

This is just a sampling. There are other tax breaks out there during this unusual year for the federal tax code, and it is worth asking your accountant or advisor to do some research and/or collaborate to find you as many as possible.

What to Look for in a Financial Advisor

2009-09-18T09:48:00.000-07:00

A framework for finding someone you can trust.

How do you avoid the Bernie Madoffs and the Allen Stanfords? Recently, we’ve seen two supposed financial wizards revealed as charlatans. Given recent headlines about Ponzi schemes and fraud, you may be wondering - how can you avoid getting duped by an unscrupulous financial advisor?

Do a little legwork (online, that is). If you want to check out an investment advisory firm, visit adviserinfo.sec.gov/IAPD/Content/IapdMain/iapd_SiteMap.aspx. That is the website at which the Securities and Exchange Commission keeps Form ADVs – the forms which reveal disciplinary actions taken against that advisory firm and/or its key employees. You can also make sure a firm is properly registered there.

If you want to check up on a specific investment advisor, go to the FINRA BrokerCheck website tool (finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm). Here you can learn about the professional backgrounds of advisors and firms through the Financial Industry Regulatory Authority.

Now that we’ve mentioned that, let’s accentuate the positive. Visit the websites of the Financial Planning Association (fpanet.org) and the National Association of Personal Financial Advisors (napfa.org). Search functions on both sites will allow you to find a respected independent financial advisor near you.

Why look for an independent financial advisor? Well, when you search for an independent advisor, you have a better chance of finding someone who gets paid for their advice and/or their fee-based asset management, instead of deriving the bulk of their income from trades or product sales. Many of these independent advisors set flat or hourly fees for specific services. Some earn a fee that corresponds to a small percentage of the invested assets they manage for you. If your portfolio does well, they do well.

Look for meaningful professional designations. In fact, this article is a good starting point: investopedia.com/articles/01/101001.asp. This explains the most respected financial services industry credentials and what it takes to earn them. These designations signify advisors committed to upholding ethical as well as professional standards.

In the summer of 2009, there were more than 60,000 CERTIFIED FINANCIAL PLANNER™ certificants. In an average year, the Certified Financial Planner Board of Standards, Inc. conducts about 80 ethics code investigations. This means 99.9% of CFP® practitioners are abiding by the Board’s ethical and behavioral standards. You can visit cfp.net to check that a financial planner has maintained the designation (and you can also learn if they have been publicly disciplined).

Look for a communicator who wants to establish a true relationship. A good and conscientious financial advisor will meet with you at regular intervals and assist you to adjust your financial strategy in response to life changes and changing objectives. He or she will communicate with you in a forthright, open way – and that includes returning your calls or e-mails within 24 hours.

Your advisor should not communicate with you once every six or seven years, or “disappear” six months or a year after helping you invest. (No one wants to call their advisor only to find out that their IRA or portfolio has become a “house account”.)

Look for someone who respects your preferred investment style. If you want to invest conservatively, a good financial advisor should respect that and offer suggestions that correspond to your wishes. If your advisor maintains that you need to invest more aggressively, you should receive a reasoned and considerate explanation why, supported by a detailed model scenario. Beware the advisor who seems to want to arm-wrestle you into investing they way they would invest, irrespective of your preferences.

Look at what your advisor is doing. If you are pressured to invest in a way you don’t want to, or if you happen to notice a lot of unwarranted buying and selling with regard to your portfolio, ask why. If you don’t get a straight answer in response, ask why you’re not getting one. Or simply take your investable assets elsewhere.

Lastly, ask around. There are financial advisors who have grown their businesses entirely by referral. The best advisors tend to get referred – and whether the referral comes from a professional, a business owner, a golf partner, or a relative, it signifies real trust in that advisor. If a friend or colleague refers a name to you, press him or her for more information and ask what the relationship has been like. Ask what qualities about that financial advisor have inspired the referral.

There are so many trusted financial advisors in this country – hardworking, ethical and compassionate financial services professionals who work for their clients assiduously. It is easier – much easier - to find one than the skeptics would have you believe.

It's Time to Review Your Insurance

2009-09-08T11:31:00.000-07:00

September is National Life Insurance Awareness Month.

When was the last time you looked at your life insurance coverage? Why not do it now? September is as good a time as any – in fact, this is National Life Insurance Awareness Month. The non-profit Life and Health Insurance Foundation for Education (LIFE) wants to awaken Americans to the need for life insurance, and its remarkable utility as an estate planning and tax-saving tool.

What? You don’t have insurance? You’re not alone. According to LIFE, 68 million adult Americans have no life insurance coverage. (That means about 30% of us.) In September 2008, a LIFE poll found that 27% of adult Americans would be willing to cancel their life insurance coverage to save money in hard times.

Watch a life insurance commercial, and you’re likely to see a young or maturing family. However, this is hardly the only context in which life insurance matters.

It can be a vital part of a financial strategy for empty-nesters who want to retire to a comfortable lifestyle.
A buy-sell agreement funded with life insurance allows a surviving business owner to buy the company interest of a deceased owner at a previously established price. Key-person insurance can aid a business if a core employee passes away. (It is possible for a business to fund a buy-sell agreement and key-person insurance with pre-tax dollars, making these moves truly tax-efficient.)

Your only way to send money to the future on a tax-free basis. Some people buy a life insurance policy and name a son or daughter as a beneficiary. This thoughtful decision has one little downside. If you own the policy, the death benefit is included in your taxable estate.

You have an alternative here. You don’t have to own your life insurance policy. Your children (or other beneficiaries) can own it. If they do, they will receive a large payout free from federal estate and income taxes when you pass away.

You can make gifts to your kids to acquire the insurance, and your kids can pool their money and buy policies on Mom and Dad. The more kids you have, the less the premium burden. Not only that, some policies can build up cash value (tax-free growth within the policy).

Here’s another way to remove life insurance proceeds from your taxable estate: an irrevocable life insurance trust. You can have the trust own the policy, and you can periodically fund the policy through gifts made to the trust. The trust will get the proceeds from your policy when you die, and those proceeds can be distributed according to your wishes – they can go to your loved ones or charity, they can be used to pay estate taxes.

A way to help you as you plan to build wealth. There are cash-rich life insurance policies with tax-advantaged savings features that offer you the potential to earn interest based on the gains of an equity index. Others permit you to direct a percentage of your premiums to investment sub-accounts which may generate tax-free earnings. These policies can be useful when it comes to business continuation and employee benefits, retirement planning, education planning and estate planning.

Insuring yourself may be cheaper than you think. Let’s say you just want term life, just basic life insurance without the capability to accumulate cash value. Well, good news: the Insurance Information Institute found that premiums for standard-risk term life insurance fell 50% between 1994 and 2007, corresponding to reduced mortality rates. Not only that, the Institute says term insurance premiums have fallen by more than 4% per year since 2000. (For the record, premiums on cash value policies are about 5% lower today compared to a decade ago.)

Are you adequately insured? Are you using life insurance smartly? Life insurance is like the Swiss Army knife of estate planning: there are so many ways you can use it as you plan to pursue your goals. Whether you simply need to insure yourself or need to protect your estate through sophisticated planning, September is the month to think about life insurance – and all the ways it can potentially help you financially.

Corporate Profits Improve

2009-08-24T08:51:00.000-07:00

Summer brings fresh optimism to Wall Street.

Corporations are making money again. Earnings reports amount to some of the most powerful indicators on Wall Street, so it has been great to see some of the headlines in the news this month. On August 6, with 80% of S&P 500 firms having shared 2Q 2009 earnings, CNBC.com rounded up data and found that 74% of S&P 500 companies had beaten estimates - a seismic shift from the first quarter.

While some of these profits reflected corporate decisions to downsize into smaller, leaner firms, others were attributable to the power of the global economy. After all, corporations such as Microsoft, Caterpillar, Intel and IBM now earn most of their revenue overseas, with surging/emerging economies in Asia often playing a big role in their profitability.

AIG feels confident it can repay the government. Shares of the insurance titan shot up 21% on August 20. Its newly appointed CEO, ex-Met Life CEO Robert Benmosche, told Bloomberg News that “we believe we will be able to pay back the government and we hope we will be able to do something for our shareholders as well.” Edward Liddy, AIG’s former CEO, again stated this month that it could probably pay the entirety of the federal bailout funds back within 3-5 years.
AIG made money in the second quarter - $1.8 billion, in fact. It still owes the federal government more than $80 billion – but that’s much less than the $182 billion in debt it once faced.

New optimism for Citigroup, other big banks. Although banks are still comparatively hesitant to lend, earnings certainly improved for some big names – Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America combined for $13.6 billion in profit, just two quarters after they posted $20.8 billion in collective losses. Citi’s shares went up almost 9% on August 20 – capping a climb of about 56% during the last month – on growing faith that Citi will sell some of its troubled assets and pay back the federal government in reasonable time. Analysts liked the news that the Swiss government intended to reduce its stake in UBS, musing that the U.S. government might in turn wish to reduce its stake in Citi. Shares of State Street Corp. and SunTrust Banks Inc. also respectively rose 5.4% and 4.1% on August 20.

Speaking of UBS, its analysts recently concluded that the U.S. Treasury is up nearly $10 billion since it converted $25 billion worth of preferred Citi shares in March. They converted at $3.25 per share; as of August 21, they were trading at about $4.70 a share, about 48% north of the March level. It appears risk has brought reward.

Ford Motor Co. made money – and GM & Ford are boosting production. The C.A.R.S. program certainly was a tonic for domestic auto sales. In mid-August, Ford said it would make 10,000 more cars and trucks in 3Q 2009, and 141,000 more in 4Q 2009. General Motors said it would ramp up car/truck production by 60,000 vehicles in the second half of 2009, putting 1,350 employees back on the job and providing almost 10,000 workers with overtime. Ford made $2.3 billion in 2Q 2009 profit and was in the black by $834 million for the year’s first two quarters – largely through accounting gains, but still notable.

Can we see a strong September? As many longtime market watchers know, September is historically the weakest month for stocks. On average, the S&P 500 has lost 1.3% in September and the DJIA 1.2%. Trading volume has been light through the summer rally. It will be interesting to see if the current Wall Street optimism will translate into a September of strong gains.

Clearing Up The Health Care Debate

2009-08-17T11:11:00.001-07:00

Who would fund the reforms? Would there really be a “death list”?
Sorting out the possibilities, facts and misconceptions.

The town hall debates over health care reform have ignited Americans like few recent issues. Discourses have become shouting matches. Away from the noise, here is a roundup of where things currently stand.
Who would pay for all this? Over the next 10 years, the federal government will need (by President Obama’s estimation) $950 billion to fund its health care programs. As planned, roughly a third of the money will be raised through increased revenues (i.e., limiting tax deductions for the wealthiest Americans) and two-thirds of it is supposed to come from reallocations of taxpayer money the federal government is already scheduled to receive. A coalition of pharmaceutical industry CEOs met with the President in July and have since pledged $80 billion in cost savings over the coming decade to help pay for the reform.

Would Medicare be cut? Republicans and Democrats disagree. “Nobody is talking about trying to change Medicare benefits,” President Obama stated during a July AARP teleconference. “What we want to do is to eliminate some of the waste that is being paid for out of the Medicare trust fund.” The non-partisan Congressional Budget Office figures that the House of Representatives version of the bill would trim Medicare spending by $500 billion across the next decade with no impact on Medicare benefits. AARP claims that “none of the health care reform proposals being considered by Congress would cut Medicare benefits or increase your out-of-pocket costs for Medicare services.” However, in an August 15 Republican Party radio address, Sen. Orrin Hatch contended that “hundreds of billions of dollars” will be cut from Medicare and used to “expand a financially-strapped Medicaid program and create another government-run plan.”

Would this run up the deficit further? The Congressional Budget Office says yes. It forecasts that President Obama’s reforms would add $239 billion to the federal deficit. Few on Capitol Hill think the reform effort could pay for itself.

Would health care be rationed? That’s what ex-Alaska Governor Sarah Palin contended in a Facebook post. The potential Republican presidential candidate stated that the reforms would lead to a system that would “refuse to allocate medical resources to the elderly, the infirm, and the disabled who have less economic potential.” Democrats and other supporters of the reforms counter her claim by saying that the current health care system already features “rationed” care dictated by health insurance company bureaucrats.

Would there really be “death panels”? Earlier this month, Palin contended that the President’s health care reform proposals included “death panels” that would decide if seriously ill patients would live or die. In the eyes of many legislators, Palin was wildly misinterpreting a provision in the health care reform bill that would allow doctors to offer voluntary consultations about living wills, hospice care, health care directives and pain medication to patients and loved ones facing end-of-life decisions. (If the reforms pass, Medicare would pay physicians to provide this consulting.) The Senate Finance Committee has dropped this idea from its version of the proposed legislation; it remains in the House version.

Would the government (and taxpayer dollars) pay for abortions? It is uncertain. In one variant of the health care reform bill, abortions would have to be available via at least one insurance plan; however, Democrats say any abortions would be paid through patient premiums.

Would undocumented immigrants get free health care? On the CBS Evening News, Sen. Ben Cardin (D-MD) was heard stating, “Illegal aliens will not be in this bill, period, the end.” As currently written, the legislation states that only those lawfully present in the United States can qualify for health coverage. Yet what if one family member is in America legally, but others aren’t? Could his or her relatives become eligible? Republicans say that the proposed legislation offers no way to effectively stop undocumented immigrants from applying for health care benefits.

The debate rages on. Politically, the health care reform effort seems poised to end up being the story of the year – and the contention and negotiation will certainly last into fall. Stay tuned.

Getting a Mortgage Today

2009-08-07T14:44:00.000-07:00

What can you do to help yourself get pre-approved?

Remember when getting a mortgage was easy? Now, you need pre-approval. So how can you increase your chances of passing that all-important test?
You want a lender in your corner. Sellers and agents don’t want to waste their time working with a buyer who isn’t pre-approved. Why should they contend with uncertainty?
A buyer with a pre-approved loan gets respect when a seller gets multiple offers. A pre-approval shows the seller the size and terms of the loan the bank is ready to greenlight. Commonly, a pre-approval is good for 90-120 days.
Pre-approval is a whole different level than pre-qualification. You can supply very basic financial information to a bank or lender and walk out with an estimate of how much mortgage you might be able to carry. However, that is no promise. Pre-approval is an actual commitment from the lender to you.
So what can you do to earn that commitment?
Test the waters well before you test the housing market. Visit more than one lender, and see what you can borrow, just how much home you can afford, and what kind of mortgage options you have. Keep in mind that a pre-approval is a pledge that a mortgage lender makes to you, not a contract. Should some other bank or mortgage company make you a more attractive pledge, you are free to switch horses.
Make your case. Don’t skimp on the documentation you bring to the appointment. Usually, a mortgage lender will want to see the hard data of your financial life over the last couple of years: the bank statements, the federal tax returns, the W2s, the pay stubs. If you earn investment income, bring paperwork showing that you do. If you deposited any big sums into your bank account recently, you’ll probably be asked what that deposit represents.
The amount you are pre-approved for typically reflects three factors: how much you have saved up for a down payment, your FICO score and your current address. It should only take a few business days for a lender to get back to you and let you know how much mortgage it will pre-approve for you.
Aim to get pre-approved within 30 days. This way, you don’t risk harming your FICO score so much. The majority of credit-scoring paradigms out there don’t penalize your credit rating for home loan, student loan and car loan inquiries made 1-30 days prior to the score calculation.
Don’t expect all the details right away. When you apply for a loan, your lender is using that day’s mortgage rates to calculate costs and payments, and rates move. So the pre-approval may be light on particulars about the interest rate or the loan type.
Avoid fly-by-night lenders. The seller and the seller’s agent want to see that a reliable, “name” lender is issuing its stamp of approval here, not an obscure Johnny-come-lately. Credibility counts.
Can’t get a standard loan? Don’t forget about the Federal Housing Administration, through which you might be able to arrange a mortgage with as little as 3.5% down. Most lenders can process an FHA loan like a standard loan, and commonly the rates are about an eighth of a point higher than a standard mortgage. Also, remember that first-time buyers have until the end of 2009 to qualify for an $8,000 federal tax credit which can be put toward the down payment and closing costs.

Cash for Clunkers

2009-08-04T17:46:00.000-07:00

Junk a clunker, get a credit. The Car Allowance Rebate System (cars.gov) is ready to roll. Friday, July 24 was the day that auto dealers could start registering for the Obama administration’s plan to get gas guzzlers off the highways through new car buyer incentives.

Save $3,500, $4,500, or maybe even $9,000 if your car qualifies. That’s how much you may be able to chop off the sticker price of a new, more fuel-efficient car. Chrysler is offering you another $4,500 through August 31 (in cash or in 0% financing for 72 months through GMAC Financial Services) on top of the $3,500 or $4,500 credit from the government. Other automakers may chime in with supplemental incentives before the program ends.

Think old trucks and SUVs (but not too old). Your clunker has to be from 1984 or newer, and it has to get 18 MPG or less when you combine the highway/city numbers. (How do you find out the MPG of your make and model? You can use the New Combined EPA MPG ratings at either fueleconomy.gov or cars.gov.) So for example, a 1992 Honda Civic or a 1995 Saturn SL is not eligible by that MPG yardstick. However, the prospects sure look promising for a 1989 Chevy Suburban.

Whatever car you buy has to meet federal fuel efficiency requirements and have an MSRP of $45,000 or less. (No Lamborghinis.) If you’re trading in a passenger car, you get the $3,500 credit if you buy a new vehicle that gets 4 MPG more than your old car. The $4,500 credit is yours if your new car gets 10 MPG or better than the old one.

The standards are a little more lenient if you are bringing in a big clunker – a minivan, truck, or SUV. (Even large work trucks weighing 6,000+ lbs. may be traded in under the program.) In the case of these larger vehicles, you get a $3,500 rebate if you buy a new vehicle getting at least 2 MPG better than the trade-in. If the new vehicle will get 5 MPG or more than the trade-in, you can qualify for the $4,500 credit.

Is this really so green? It is possible to use the credit to buy a new truck or SUV with gas mileage just slightly better than the old one. Yet you may not use the credit to buy a used hybrid – or for that matter, a used anything.

Trade-in value, too? No, you don’t get to apply trade-in value toward the purchase of the new car in addition to the government credit. Still, if you’ve got a $1,000 or $2,000 car chugging around, this program could give you the equivalent of real trade-in value.

Your old junker will be destroyed, not resold or parted out. In fact, the dealership will drain the oil out, pour in two quarts of sodium silicate solution, and then run the engine for up to seven minutes according to instructions from the National Highway Traffic Safety Administration. Scrap heap, here we come. The government wants to prevent fraud and flipping of old cars. Your clunker has to be running and drivable when you trade it in, and licensed and insured for at least a year. Dealers must gain the vehicle title, and direct a junkyard to crush the car within six months of submission.

250,000 new car sales? That’s what the federal government would like the cash-for clunkers program to achieve. While the program could stimulate sales at U.S. auto dealers, it could seriously hinder the efforts of charities that routinely rely on vehicle donations.

What about leasing? Yes, you can use the credit to offset the lease price of a new car. However, it will have to be a pretty long lease – five years or longer. Americans typically lease cars for about three years.

Deadline: November 1. Actually, you may not have that much time. If you see a parade of $1,000 cars headed for your local auto center, you might want to hurry. The program will last until November 1 or until the $1 billion of rebates dries up – so think about junking the clunker now rather than later.

America Delays Retirement

2009-08-04T17:34:00.000-07:00

Is 70 the new 65? It may be, for many Americans are electing to postpone retirement as an effect of the recent volatility in the financial markets. If 70 is the new 65, some workplace changes are worth noting – these trends may be affecting you, your employer, and your financial future. Retirement will increasingly be a process, not an event. In the years ahead, more and more people will probably leave the workplace gradually. For baby boomers that want to stay active and engaged, this isn’t necessarily a bad thing. A vice-president who worked 50 hours a week may become a consultant or a coach working three days a week. Or he or she might simply want to work less, for less pay, or make a lateral move within a company that would allow an exit on his or her terms.

Boomers will have the opportunity to shape their exit. If gradual retirement becomes more common (and today’s financial pressures would seem to make it so), expect more and more mature employees to negotiate the terms of their retirement – how many hours they will work on their way out, how accessible they will be, if they will work from home or the office, and who will take the reins in their hands someday. If a boomer offers a personal exit plan of sorts that will help a business to cut labor costs without losing a valued employee, isn’t that a favor to management?

Businesses and non-profits face a tough question. The 2009 Retirement Survey from the Employee Benefit Research Institute found that 51% of Americans age 25 and older now think they will retire at age 66 or older. In June 2009, the Bureau of Labor Statistics estimated that 23% of Americans employed or seeking work were age 55-64.

This is problematic for businesses, who in this economy might want to pay older workers to retire so that they can stay profitable. Universities, state and local governments and public agencies will probably not see the same kind of retirement turnover they did in the past. Should they stop recruiting new managers, new faculty, or new administrators for the near future? Organizationally, what is the economic value of retaining wisdom and experience?

Will we see a wave of “rehirement”? In the EBRI survey, 20% of the roughly 1,200 respondents felt they would never retire, compared to 11% in the 2007 poll.¹ Part of that increase obviously reflects what happened in the stock market, but it also may represent a perception shift in progress. Baby boomers are doers, proud contributors to society who are tearing up the old retirement template. It could be that two distinct phases of American life are emerging – one in which you work for a living, followed by another in which you work for meaning. It may lead to a wave of mature employees, professionals and entrepreneurs – a zeitgeist of sorts, the likes of which this country has never seen.

Reversing a Roth IRA Conversion

2009-06-27T15:36:00.000-07:00

When it comes to retirment planning, it's easy to make mistakes. If you converted a traditional IRA into a Roth IRA last year before the stock market free fall, for instance, you may be especially forlorn -- most likely your Roth IRA is now worth considerably less than it was on the conversion date. Even worst: You're stuck paying 2008 taxes on phantom value that no longer exists.

Thankfully, you can reverse that ill-advised Roth conversion. In fact, you can make it so it's like the conversion never happened, and as a result, that inflated conversion tax bill will also disappear.

Even better, you have until October 15 to accomplish the reversal. (The deadline applies whether or not you extended filing your 2008 Form 1040 to that date.) However, if you plan to hold stocks in your IRA, and you think the market is headed up from here, you may want to get the reversal done ASAP.

Here's how Roth conversions work:

The tax hit. When you converted your traditional IRA into a Roth account, the trasaction was treated as a taxable distribution from the traditional IRA, followed by a contribution of the distributed amount to the Roth account. So the conversion triggered a federal income tax bill (and possibly a state income tax bill) based on the traditional IRA's value on the conversion date, minus any nondeductible contributions made to that account.

(This assumes that the traditional IRA that you converted was the only one that you owned. If you hold multiple IRAs, the taxable percentage of the converted traditional IRA balance is based on the total balance of all your traditional IRAs and the total of all nondeductible contributions to those accounts.)

Now, thanks to the rocky stock market, that Roth IRA is most likely worth a lot less than it was on the conversion date, which means you've paid 2008 taxes on money you no longer have -- unless you reverse the conversion by the October 15 deadline.

Reporting the reversal. Using Internal Revenue Service lingo, you reverse an ill-advised conversion by "recharacterizing" the Roth account back to traditional IRA status. By doing so, it's like the conversion never happened: The tax hit disappears, and you're right back where you started with no tax harm done. To reverse a conversion, you need to fill out the proper form supplied by the brokerage firm or financial institution that serves as your IRA custodian or trustee.

The custodian or trustee should have reported to you, and to the IRS, the deemed distribution that resulted from last year's Roth conversion on a 2008 Form 1099-R.

Amending your 1040. If you have yet to file your 2008 Form 1040 because you extended filing your return, simply enter the Form 1099-R distribution amount on line 15a. Then enter a taxable amount of zero on line 15b. These two entries will show you had a conversion and a subsequent reversal -- with the net result of zero taxable income.

If you've already filed your 2008 Form 1040, you'll need to file an amended return, using Form 1040X, to show the reversal and collect your rightful tax refund. On line 1 of Form 1040X, subtract the amount of taxable income that was triggered by the now-reversed conversion, and calculate the reduced 2008 tax bill on lines 6-10. Then explain on page 2 of Form 1040X that the changes are due to reversing the 2008 conversion.

Of course, by reversing the conversion in 2009, it will trigger a 2009 Form 1099-R from your IRA custodian or trustee, reporting the deemed distribution from reversing the Roth account back to traditional IRA status. So on this year's Form 1040 (which you'll file next year), you'll enter the Form 1099-R distribution amount on line 15a. Then enter a taxable amount of zero on line 15b. These two entries will show that you had a conversion reversal that did not result in any 2009 taxable income.

Reconverting after a reversal. Converting a traditional IRA into a Roth account can still be a great idea if you get the timing right. Therefore, you might want to reconvert the reversed account from traditional IRA status back into Roth status all over again.

Reconverting makes sense if the account is loaded with assets you believe will appreciate quickly. That way, when all is said and done, you've still converted the same traditional IRA into a Roth, but you've done so at a lower tax cost than when you tried the first time last year.

There is a timing restriction, however. For an account that was originally converted to Roth status in 2008 and then reversed back to traditional IRA status in 2009, you have to wait at least 30 days after the reversal date to reconvert.

Here's an example: Say you orginally converted your traditonal IRA into a Roth in 2008 when the stock market was healthy. Then the account took a big nosedive, so you reverse it back to traditional IRA status on August 1, 2009, to avoid an inflated 2008 tax bill. The earliest you can reconvert the account back into a Roth IRA is August 31, 2009 (30 days after the reversal date.)

Advisors Memorial Day in Jail

2009-05-27T07:56:00.000-07:00

I sent the following email out and received some comments back about identifying crooked advisors. So, here is the original email. Afterward will be my follow-up comments.

If you’ve been following the local news, you probably know that Gary Armitage, Jeff Guidi and James Koenig were arrested last Thursday and have spent the Memorial Day weekend in Jail. This will probably be a very memorable weekend for them, not to mention the next 100 years of prison time they’re facing. According to the Press Democrat, they defrauded about 2,000 people out of about $200 million. These guys were supposedly “financial advisors” helping their clients grow their wealth. Over the last 30 years I’ve occasionally run into advisors like this. I can spot them pretty easily—I’m not quite sure why their 2,000 victims couldn’t.

Sometimes I think back about certain clients of mine that have told me they were thinking of hiring Armitage or Guidi instead of me to help them with their investments. What was it that was so appealing about Armitage or Guidi? Why did they ultimately choose to work with me instead of them? What are they thinking—now that the advisors they almost worked with are in jail?

Anyway, these guys belong behind bars for the devastation they’ve caused in the lives of all their clients. There may have been some parties around town last Friday when the news came out—at least some sighs of relief knowing these guys will now face the music. I join those of you celebrating.

For those of you that asked about identifying crooked advisors, I offer the following comments:

1. Find out how they get paid and watch for hints of how that may be influencing their advice to you. Are they really trying their best to help you out -- or their own pocketbook?

2. When I first got into this business, I worked with a guy that represented two different families of mutual funds. The first time he 'sold' someone an investment, he would put them in a fund from family 'A.' The next time he met with that person, he would recommend moving from fund family 'A' to fund family 'B.' He received a sales commission each time he moved the money. Had he just moved the money to a different fund within the same family of funds--there would have been no sales commission. It's in the prospectus.

3. I knew of a financial advisor that went around putting on 'financial planning' seminars. He taught his class and then would do a followup one-on-one consultation with each of the participants. Interestingly enough, his recommendation to each individual, no matter their different circumstances, is that they needed more life insurance and he would happily sell it to them. Insurance was his main line of work--it probably said that on his business card.

4. I know of another advisor that hosts dinner seminars at a local restaurant. He is quite the carismatic, out-going fellow. He could probably sell ice cubes to eskimos. Part of every client investment portfolio was an Equity Indexed Annuity. Why? He got a big sales commission check as soon as the client signed on the dotted line. Ex-clients of his told me that they really liked the guy, but had to admit that he was like a used car salesman. He was always into the 'big picture' and therefore, never fully answered their questions/concerns and left many HOLES in the 'little picture' of their day-to-day financial lives.

5. Do you remember IDC? In the early '80s when inflation was high, International Diamond Corporation came into being down in San Rafael. I was involved with them --briefly. They would sell you on the concept of buying hard-assets as an inflation hedge. They would regularly inflate the prices and send you statements showing the value of your diamonds skyrocketing. People got so excited that they would buy more and tell all their friends to buy some. If you wanted to sell--no problem, there was lots of new cash coming in the door to pay you with. Well, at least until the whole thing came crashing down. They controlled the market. No third-parties were involved.

Now, Gary Armitage...

6. His deals all involved some form of real estate. Real estate company notes, skilled nurings homes, golf courses, college campus, etc. Where is the diversification? How would you feel about holding a portfolio of only bank stocks... or only auto company stocks?

7. He had conflicts of interest in most all of the deals. He was selling the investment and earning a sales commission--as a financial advisor. He was also a general partner or on the board of directors of the companies that the investors were buying into. He was getting compensated on both ends of the deal. This information was in the offering memorandums.

8. The investments he worked with were mostly all illiquid. The investors couldn't get their money back or sell their interest. And, Armitage was perfectly okay with this!?!

9. There was no disinterested, third-party custodian reporting the transaction activity and current fair market values directly to the investors.

10. There was no quarterly performance reporting -- comparing the performance of the client's investment portfolio to the S&P 500 Index, some other Index, or the client's own performance objective.

Well, that's probably enough on this topic. I do really feel horible for those that lost their hard-earned nest-eggs to Armitage and the other scoundrels. I wish there was a way that I could easily restore their investments back to their pre-Armitage days of glory. That's not possible. You know it and I know it. All I can do, with absolute certainty, is to treat each of my clients' investment portfolios as though it was my Mom's. It works for me, and it works for my investment clients too.

... keep in touch, there will be more to follow.

Amazing New Discovery

2009-04-25T10:38:00.000-07:00

Lawrence Livermore Laboratories has discovered the heaviest element yet known to science. The new element, Governmentium (symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete. Governmentium has a normal half-life of 2 to 6 years. It does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places. In fact, Governmentium’s mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming isodopes. This characteristic of moron promotion leads some scientist to believe that Governmentium is formed whenever morons reach a critical concentration. This hypothetical quantity is referred to as critical morass. When catalyzed with money, Governmentium becomes Administratium (symbol=Ad), an element that radiates just as much energy as Governmentium, since it has half as many peons but twice as many morons.

Funny NEW Financial Terms

2009-04-08T15:28:00.000-07:00

3M: Is now 2M.

401(k): Is now 201(k).

Alimony: Two person mistake paid by one.

Budget: Written proof that you can’t afford the things you want.

Bull: What your broker uses to explain why your mutual funds tanked last quarter.

Cash Flow: The movement your money makes as it disappears down the toilet.

CEO: Chief Embezzlement Officer

CFO: Chief Fraud Officer

Diversification: Putting your money under more than one mattress.

Dow Jones: Is now Down Jones.

EBIT: Earnings before irregularities and tampering.

Income Tax: Capital punishment.

Inheritance: Will-gotten gains.

Institutional Investor: Past year investor who is now locked up in a mental institute.

Liquidity: When you open your investment statement and wet your pants.

Loanation: Money given, typically to a close relative, which the provider considers a loan and which the recipient considers a donation.

Market Correction: The day after you buy stocks.

P/E Ratio: The percentage of investors wetting their pants as the market keeps crashing.

Poverty: Having too much month left at the end of the money.

Quarter: A dollar, after taxes.

Social Security: A federally mandated pyramid scheme.

Standard and Poor (S&P): Your life in a nutshell.

Tax Refund: A tactic devised by politicians to give you back some of your own money in such a way that you are supposed to think it’s a gift.

Taxation: An art which consists of plucking the goose to obtain the largest amount of feathers with the least amount of hiss. (Jean Baptiste Colbert)

Knowing Net Worth is Key to Managing Your Money

2009-03-26T16:19:00.000-07:00

Grab a pen and a piece of paper and jot down off the top of your head your household net worth. Net worth, in case you are not exactly sure, is the total value of your assets minus your total liabilities.

The first thing to know about your net worth estimate is that it probably is wrong—not just by a few dollars, but by a lot of dollars. Numerous studies have found that families either don’t have any idea what they are worth, or their idea is wrong. For example, a study by Jay Zagorsky, a research scientist at the Center for Human Resource Research at Ohio State University and Boston University School of Management, estimated that 70 percent of households underestimate their net worth, and 25 percent overestimate their wealth.

Furthermore, those who underestimate their wealth do so by nearly 40 percent. For every dollar they are really worth, they think they are worth only 62 cents, and for each dollar their wealth rises, they think they are gaining only 27 cents.

Why should you care about your net worth? Net worth is the best measurement of the state of your financial health. Most of our major spending, investing and other financial decisions are made, or should be, based on our net worth, and obviously the more accurate that estimate, the better. For example, if you overestimate your net worth, you may not save as much as you should for your retirement, or you may overspend based on your perceived wealth. Underestimate your net worth, and you may either save more than necessary for your retirement, take on extra investment risk in the belief you need to make up for what you perceive as insufficient wealth, or buy insufficient insurance coverage.

Calculating an accurate picture of your net worth is relatively easy. Computer programs or worksheets are readily available that run you through the process. Generally, start with how much money you have in checking and savings accounts, U.S. savings bonds (current value), and certificates of deposit and money markets. Add in the current market value of your stocks, bonds, home, real estate investments, retirement plan accounts, individual retirement accounts and business interests. Include the surrender value of your annuities and the cash (surrender) value of your life insurance. And add up the value of your personal belongings: jewelry, automobiles, clothing, furnishings, appliances, collectibles, computers, and so on. Their value should be their current market value—what you could get in cash for the items.

On the liability side, include the mortgage on your home, car loans, student loans, credit-card debt, unpaid taxes, insurance premiums, charitable pledges and outstanding bills. Subtract your liabilities from your assets. That’s your net worth.

Take this measurement every year. It provides a benchmark about how well you are doing. Is your net worth positive or negative, and perhaps more important, is it improving or getting worse? Take a freshly-minted college graduate saddled with student loans. Their net worth is probably negative. They land a job that pays well. They buy a new car, loads of consumer items, maybe even a new home or condo. Current income is enough to pay the bills, but that’s about it. Yet what about their net worth? Unless they’ve made a concerted effort to pay extra toward the student loans, they still have a negative net worth. In fact, the car and house have added to that negative picture. If they aren’t salting away much money in savings and investing, their overall financial health isn’t as sound as their regular income would make it appear.

Use Tax? -- You Gotta' Be Kidding!

2009-02-10T17:56:00.000-08:00

You just found a great deal on a new, state-of-the-art computer on the Internet, or you found that big-screen television that you have been searching for day and night. Maybe you are ready for a new book that you plan to purchase by mail order. Possibly you’ve found a new dining table you want to purchase via the telephone. In all of the above situations, California use tax may be due on purchases made from an out-of-state merchant when there is no tax collected by the out-of-state merchant.

The California Board of Equalization administers approximately 30 different tax and fee programs. The best known of these programs involves the sales and use tax. Sales tax applies to purchases made within the state of California. The sales tax counterpart, use tax, applies to purchases made outside the state of California. Sales tax is generally due on the sale of tangible property and is collected by retailers in California at the point of sale. Retailers then remit the sales tax collections directly to the Board of Equalization.

Use tax is sometimes called “sales tax,” but it is actually a separate tax that is generally due on the purchase of tangible property from outside California. If you purchase an item out of state that will be used, consumed, or stored in California, then you owe use tax. If the out-of-state merchant charges you the correct amount of sales or use tax on your purchase, then your use tax requirement has been fulfilled. Out-of-state companies that are “engaged in business” in California must register with the Board of Equalization and collect sales or use tax on their retail sales of personal property to California customers. However, if no sales or use tax was collected on your purchase, you are required to compute and pay the amount of use tax due.

In an effort to assist taxpayers with their use tax reporting requirements, the Franchise Tax Board has included a “use tax” line on the personal income tax return (Form 540). This allows taxpayers the option of reporting their use tax on their individual returns for out-of-state purchases. The other option available for taxpayers is to file a use tax return with the California Board of Equalization (BOE). The use tax return can be obtained online at www.boe.ca.gov and looking for Form BOD 401-DS which is in Publication 79-B.

How do you compute the use tax liability? First, multiply the cost of the property purchased from an out-of-state merchant times the applicable use tax rate. The use tax rate and the sales tax rate are the same. The use tax rate is determined by where the property will be used, consumed, or stored in California. Then, look to determine if any sales or use tax was collected from the out-of-state merchant and subtract this amount from the amount of use tax due.

Here’s a brief example of the calculation: Karen, a Palo Alto resident, bought a TV from computers.com for $1,000. Karen owes $82.20 use fax to California. She may report and pay it on her Form 540 income tax return or on the Form 401 Use Tax Return.

Thank you for being a client—we value your business.

California Tax Refund IOUs

2009-02-04T19:03:00.000-08:00

Due to the state’s persistent cash and budget problems, California State Controller John Chiang announced on January 16, 2009, that he will have to delay refunds for 30 days starting February 1, 2009, for Personal Income Tax and Business Entity taxpayers.

If you were counting on receiving a refund early this year, I can recommend some strategies to assist you. If you have withholding from a paycheck, we can file your 2008 return, apply any refund to your 2009 taxes, and adjust your current withholding downward temporarily. In this way, you can “receive” your refund through increased net paychecks over the next few pay periods.

If you choose to wait to receive your refund when the state can begin making payments, I recommend direct deposit to speed your refund when funds are available. Alternately, if you believe the state budget crisis will extend for a prolonged period, but that the state will begin issuing “IOU” warrants, you might find out if your bank will honor these warrants. In the past, banks have cashed California warrants and then collected the funds from the state when available.

Whatever you choose, I also recommend that you let your state legislators know your thoughts about the current state of California’s finances and budget. In your phone book you’ll find a list of contact information for your local members of the California Assembly, California Senators, and Governor Arnold Schwarzenegger.

Thank you for being a client and for your ongoing support.

President Obama's Economic Options....And It Ain't Gonna' Be Pretty

2009-02-02T07:53:00.000-08:00

President Obama….as we’re just getting use to how that sounds, it will eventually roll off our tongue. But, here’s the big question, how will the Obama presidency affect the way that you manage your assets?

While there’s always a disparity between the promises that a politician makes when running for office and what a politician actually does once in office, this time around the potential for a larger disparity than we might normally expect from a politician looms large.

Why?

Take a look at our current economy and compare where we are financially as a country to where President Obama wants to take us.

During the campaign, candidate Obama promised tax cuts for working families, expanded, affordable, quality healthcare and a speedy withdrawal from Iraq to name a few of the candidate’s promises. Now that he’s in office, these promises, if to be kept, need to be transformed into new policies.

Possible?

The jury is still out, but many analysts agree that we’re currently in a recession that could linger into late 2009. Additionally, many analysts project that the budget deficit could officially reach $1 trillion annually during Obama’s tenure as President.

Bottom line in my view: there’s simply no money for the new programs that Obama wants and promised. (Note: John McCain would have found himself in the same boat—not enough money for his new programs either.)

So what will be Obama’s choices?

He could not deliver on all his promises, a move that would likely upset the left wing of his party. Or, he could cut government spending and implement only programs that we, as a country, could afford. (Not the usual course of action for many politicians.) Or, he could elect to raise taxes in order to pay for his new programs and help reduce the deficit.

My prediction?

Deficit spending will continue. Spending money we don’t have may not hurt us short term as long as investors are willing to line up to buy our debt, also known as US Government Bonds, but what happens if these investors, particularly foreign investors, stand up and say, “Enough is enough. You have more debt than you can service and you’ve seen the last of my money!”

If no one will loan us the money we need to cover our deficit spending, politicians will have no choice but to print money. To a certain extent, this process has already begun. If it intensifies, it will likely spell bad news for the US Dollar and trigger another bull market in commodities.

Before you dismiss such talk as fantasy or as being ‘out there,’ look at the current facts regarding the US Debt. According to the US Government Debt Clock, the current US National Debt is $10,636,555,736,159.91, although it’s gone up about $5 million in the time that it took you to read this short blog. The national debt has continued to grow at a rate of $3.87 billion per day since September 28, 2007.

When you consider that the entire population of the United States is 305,000,000, each citizen’s share of the national debt is between $34,000 and $35,000. Every family of four in the US owes about $140,000 in order to retire the debt—and that’s only if deficit spending stops NOW. It won’t; we’re still spending.

These huge numbers don’t consider the fact that the US taxpayers have now guaranteed the solvency of both Freddie Mac and Fannie Mae. In my view these liabilities alone could increase the national debt another trillion or so at a minimum.

When you look at and ponder these numbers realistically, you quickly come to the conclusion that there are many families of four who couldn’t afford to pay ‘their fair share’ – there are a lot of families of four in this country who have a negative net worth. So, as usual, those who have incomes and assets will likely eventually be called on to ‘ante up.’ If that were to happen, what would your share of this monster debt be?

According to a November 2008 article on Bankrate.com that quoted a Federal Reserve survey, if you have a household income of $40,000, you’re doing better than ½ the households in the US. If your net worth is $86,000, you’re again exactly in the middle; half of the US citizens have a net worth less than you and half have a net worth more than you. The 80th to 89th percentile of Americans relating to net worth have a median net worth of $263,000 according to the same federal reserve survey.

So, for discussion’s sake, let’s assume it takes a net worth of $200,000 or more (including all assets, your home equity, bank accounts and investments combined) to make the top 20% of the population as far as net worth is concerned. It’s this group that has enough in assets to potentially help pay down this massive debt, most of the bottom 80% couldn’t help with this debt even if they wanted.

That means that only 20% of the 305,000,000 folks living in this country have enough in assets to pay down the national debt. A little simple math will tell you that number is 61 million. If you find yourself among that group, your share of the national debt is now about $175,000 (the $35,000 number used earlier times 5; or, for you math geeks, $35,000 divided by 20%).

Now, using what I believe are more realistic assumptions and calculations, a family of 4 in the ‘top 20%’ now finds themselves owing $700,000 as their share of the national debt. (If you find what I’m saying to be unrealistic, just research where most of the tax dollars come from; it validates this argument.) $700,000, a staggering number, more than many of these families probably paid for their home and every car they’ve ever driven combined—yet that’s the mess our politicians have left for us and regrettably, our children and grandchildren.

Assuming $700,000 was a mortgage, that’s like giving each of these families another $5,000 per month bill to pay.

So, when you hear this talk about tax cuts and new programs, keep this in mind. If our country was a company, we’d be on the verge of bankruptcy. New programs and new tax cuts will likely only make the problem worse than it already is.

In spite of these facts, I expect politicians will continue their predictable manner, spending and legislating while ignoring the price tag. Eventually, and that day may not be as far off as you think, we’ll reach the ‘enough is enough’ point and foreign investors will shy away from buying US government bonds and then avoid US debt completely. When that day happens, the US politicians will be forced to print money, the US dollar will fall and commodities will soar.

So what does this mean for you? What should you be doing now with your investments?

My strong view is to utilize only investment strategies that incorporate exit strategies allowing you to buy and sell as market conditions dictate. My view is that buying and holding in unstable economic times can lead to losses, often significant losses. ‘Buy and hold’ has become ‘buy and pray.’

To meet this need, I’m working on a report that I’m titling “Prospering in This New Economy” and the design of a new investment portfolio which employs four different assets classes and utilizes exit strategies to gain more and lose less. I’m in the documentation and testing stages of this portfolio design and plan to make it first available to those who step up to the plate and express an interest. (If you are a current client, I can’t just start investing your money in this new portfolio. First, you would have to meet certain criteria and sign a new Investment Policy Statement.)

If you’re interested, let me know and I’ll put you at the top of the list.

The Good Old Days

2008-11-26T17:06:00.000-08:00

In my office, I have some Life, Post and Look magazines from the 1950’s and they get me a little nostalgic and thinking about the good old days. The best of times were during the holidays.

Thanksgiving was a big deal when I was a kid. For us, it was always a big turkey dinner at our ranch in Alexander Valley. Relatives gathered. We ate and ate, and then ate some more. Turkey, stuffing, mashed potatoes & gravy…yum. yum, yum!

In our house you couldn’t mention Christmas until after the Thanksgiving meal. So, you know us kids would yell out “Christmas” as we swallowed our last bite. Then came Christmas.

I vividly recall the day and weekend immediately after Thanksgiving as something really big and special, when I was a kid. That was the official start of the Christmas season. That’s when you drove into the big city (Santa Rosa), to the big department stores (Sears, Montgomery Wards) downtown (no malls back then), and saw Santa Claus, and shopped, and, in my case, got a bag of popcorn from the little candy and counter inside of Sears.

The death of the downtown department store as mecca has destroyed a lot of ‘specialness.’ Now the holiday shopping experience surrounds you and bombards you.

Worse, now Christmas season starts before Halloween. I’m sick of it before Thanksgiving even gets here. I don’t think we’ve done the kids, ourselves or even retail commerce any favors by stretching the season into a calendar quarter.

But the bigger point is how much of “the special” has been taken away, spoiled, diminished and diluted. There’s real opportunity here for us parents to find a way to give our children a truly special event, something to look forward to with anticipation, to experience with awe and wonder and fun.

I may just be getting old, but I think there is more to it than just starting the holiday seasons earlier. I recall shopping for a special little something for each of my family members. The stores were crowded, but they were clean and orderly, the sales clerks were attentive and caring, the music was soft and cheerful. The store windows were all beautifully decorated. Families were shopping together. Then, it all seemed normal. Now, it would seem magical.

It may be my Leave It To Beaver upbringing, but I do miss the good old days. Having neighbors that talked to each other and kids that showed respect to their elders—are from days gone by. For me, I try to hang on to these ideals and propagate them where I can. In my own home, at the very least. I have also found a remnant of this lifestyle in church. It depends on where you go, of course.

That being said, I’m launching into this holiday season by taking my son Joseph out for a special father-son outing. We are going to Colorado together in early November to attend a Christian Conference. We’ll be hearing, talking about and sharing some good old fashion family values. We will, of course, be visiting my two daughters, Luisa and Shannon, while we are out there. I want this to be another one of those memories that Joseph looks back on someday and says, “Those were the good old days!”

Have a wonderful Thanksgiving and a blessed holiday season!

The Bloody Money Trail

2008-10-28T07:50:00.000-07:00

A few Sunday’s back, the Press Democrat ran a front page story called “The Money Trail.” It was subtitled: “How one adviser’s promises of real estate wealth unraveled and investors’ life savings evaporated.” It was about a “financial advisor” here is Santa Rosa, named Gary Armitage and his associate Jeff Guidi. If you didn’t read the article, you should get a hold of it and read it—for your own self-preservation and not falling into such a scam as many Sonoma County residents did.

Armitage was promising people no risk investments in various real estate deals. He placed 100% of a client’s portfolio into private placement real estate partnerships—many of which he had some ‘related-party’ association with. These types of investments pay the salesman (Armitage) a big commission as soon as he gets the client to sign up and fork over the dough. You have to understand, this guy is a salesman, not an advisor.

Many clients of his sat by and watched their retirement nest egg vanish into thin air as the real estate and mortgage markets went in the tank. I suspect that if these clients ever catch up with Armitage, the Press Democrat may run another front page article called “The Bloody Trail.”

Some of his ex-clients are now my clients—so I know the damage which was done. Unfortunately, Armitage is not the only “financial advisor” in town that has a very warped idea of what prudent financial strategies are. Being in the business, I see what these advisors are doing and I just shake my head in disbelief. I suggest you get to know the character of the person you are entrusting with your money.

Another recent story in the news was about a fellow who lost $2 million in the stock market and jumped to his death off some cliff near Mt. Tamalpias. My feeling is this guy was taking this whole thing way too seriously. Markets go up and markets go down—we all know that. Mistakes happen—we know that too. But, sometimes, you just need to stop everything and count your blessings!

The stock market is in shambles—okay, stop, take a deep breath and count your blessings. Life goes on… and what you should be doing now is 1) assessing the damage, 2) considering options for getting your investments stabilized and 3) taking action to implement the best of these options.

This is a perfect time to review The Eight Great Mistakes Investors Make, which I’ve made available to you in the past. Here is a list of them (name only, if you want the full report call Milady and ask for it):1. OVERDIVERSIFICATION. 2. UNDERDIVERSIFICATION. 3. EUPHORIA. 4. PANIC. 5. SPECULATING WHEN YOU THINK YOU’RE STILL INVESTING, AND NOT REALIZING THAT YOU’VE CROSSED THE LINE. 6. INVESTING FOR YIELD INSTEAD OF FOR TOTAL RETURN. 7. LETTING YOUR COST BASIS DICTATE YOUR INVESTMENT DECISIONS. 8. LEVERAGE.

It’s difficult to avoid all investment pitfalls – even for the savviest of investors. That’s because many investors simply don’t have the time to process the vast amount of information available today and apply it to their complex investment needs.

With the money I manage, I began cutting back in my exposure to equities back in August of 2007. As the market has declined further, I’ve cut back further. The cash that I’ve freed up has been put into Conservative Allocation Funds, Money Market Funds and 3-Month Bank CDs. Now, I’m watching, waiting, counting my blessings, and looking for the right moment in the economic cycle to reallocate back to my usual, up-market investment holdings. I suggest you do the same.

My clients know they can call me or come visit me anytime they want to. If they leave me a phone message, I return their calls. We have open and frequent communication. Weekly e-mail update communications. Quarterly investment performance report meetings. My clients also know that I investment my own Mother’s investment portfolio in the same way and style as I do theirs. I take the business of managing my client’s money seriously and professionally. I never want to see my picture on the front page of the Press Democrat for having caused harm to anyone. More importantly, I don’t ever want to face a single client of mine that I have somehow been responsible for their financial ruin. I take this seriously, and earn my financial advisory fees each and every day—in good markets and bad. Hang-in there, I’ll talk to you again soon.

Nightmare on Wall Street

2008-09-29T10:52:00.000-07:00

Nightmare on Elm Street is the name of an old movie, perhaps you’ve heard of it. I’ve heard of it—never seen it. Well, last weeks headline of a weekly paper I subscribe to was “Nightmare on Wall Street.” The U.S. financial crisis is worst than any horror movie and it is having a frightening effect on many. With the S&P 500 stock index down 20.46% in the past 12 months, who hasn’t been affected in some way?

Fortunately, I have very few accounts that have declined anywhere near that of the S&P, and those are limited to clients who chose an aggressive strategy with a small portion of their wealth. My average client is down about 5% over the past year. I feel pretty good about that, considering how brutal the market has been lately—and, also having seen what has happened to some people and their investment accounts this past year—prior to becoming my client.

I use a Tactical Asset Allocation methodology to adjust portfolios for major changes in the market cycle. August of 2007 is when I began reducing exposure to equities. I’ve made a few other changes since than and any new clients coming in have been mostly out of the typical equity positions. Last Friday, and today, I’m making additional reductions in equity positions. I’m protecting your down-side exposure to this market—which I believe will get worst before the year is over.

By the way, I’m making the same type of allocation adjustments in my accounts and my mom’s accounts as I have been making in your accounts. I’ve been through lots of market cycles over the years, but, I’ll have to admit this one has been interesting and I’ve definitely learned a few new things. And, wouldn’t you know it… I’ve added a few more grey hairs to what is left.
Have a great week!

"You have no right to anything you have not pursued."

2008-09-24T08:00:00.000-07:00

From Charlie (a fellow member of a business/marketing group I belong to): “About 18 months ago, I told you about a friend of mine, Jim, who went from being an absolute zero in terms of marketing to being named ‘Marketer of the Year’ at his company after only 8 months. I was glad to assist him, introducing him to the basics of our style of marketing. While Jim’s success story was what we like, the past 12 months’ story may be more instructive if less pleasant. About a year ago, response went down from his mailings and Jim got discouraged. He told me that “this ‘new’ kind of marketing” just wasn’t working anymore. I kew this couldn’t be since this ‘new’ marketing has been working for over 100 years. So I probed, to find how quick success turned to failure:

1. Not watching the results. Jim did so well initially he just assumed it would all keep working as it did at first, and didn’t watch the numbers. The numbers told of the need to tweak things, but…
2. Lazy. He stopped at doing only one or two things. Kept using the same two mail pieces until they got stale. Added no ‘touches’, no fence building, nothing except overt asking for business.
3. Cheap. I told Jim that as a friend I would help him get started but that he MUST do the following: join our business group, read the books, etc. – list provided, and invest in his continuing education. He did none of this. Didn’t even read the books I loaned him. He cited ‘time and costs.’ He has thrown away the ability to keep bringing in 6-figures annually and would up right back where he started from. “

My thoughts: I am thankful I never squandered opportunities as Jim did and so many do. Loaned a book, I read it. Told of one, I went and got it. But beyond that I knocked down doors, made a pest of myself, invested money that—at the beginning—I did not have to get knowledge. Charlie has seen in Jim three of about five or six bad behaviors that keep most people decidedly mediocre. It happens all the time. They have very unrealistic expectations about how successful they ought to be in exchange for doing something once but then not continuing to work on it. As if buying a tractor should itself provide the yearly harvest. Not only do you need to actually use the tractor, you better change its oil now and then, sharpen the blades on its tiller, maintain it. And keep looking for better ways of using it. Sophisticated soil analysis so you fertilize each square yard differently based on need rather than using the same fertilizer over the whole farm, evaluating that harvest, making adjustments to improve the next. You can’t be cheap about maintenance of your own attitudes and aptitudes either. It’s common for people to have some early success, doing SOME thing, maybe two, but then stop there. But lazy is the worst. Reading through a newsletter I got a great line: “You have no right to anything you have not pursued.” Big. Ought to be the answer to every entitlement scheme of government, every request for hand-out or help made of you as it becomes evident you are thriving—by your lazy relative, etc. Amongst the lessons Charlie has hopefully learned from his Jim experience: the futility of dispensing free advice.

There's Drama in the Market, But I'm Rehearsing My Scene

2008-09-08T10:05:00.000-07:00

This last week I went out to the 6th Street Playhouse and saw the “Music Man.” My wife and I, along with another couple, had a wonderful time. This brought back lots of fond memories. When I was in high school, I was in all the school plays. I played Bo Decker in Bus Stop, Murray the Cop in The Odd Couple, Romeo in Romeo and Juliet, I played percussion for the musical You’re a Good Man Charlie Brown. And, in my senior year, I was the President of our Drama Club. I had lots of fun during these years, but upon graduation that was the end of my acting career. My dad told me I had to go out and make a living for myself. Ha, ha. Good advice from my Dad. Well, anyway, great memories and its fun to go out and see a play now and then. It’s much more fun than going to a movie. Have some fun—go see a play.

Talking about drama… the stock market moves this past week were like watching a soap opera. Who would have thought Fannie Mae and Freddie Mac would need to be bailed out by the government? (Who is going to bail out the government someday?) I think the market will continue to decline and therefore, I’m continuing to make conservative adjustments to investment portfolios.

I'm also in the research and development stages on a new portfolio design, I'm calling it the Green Label Portfolio. It's objective will be to achieve positive annual returns in any market conditions. When I was in the pension management business, we had a portion of the portfolio that had a "Tactical Asset Allocation" style to it--this is much different that a market-timing strategy. This TAA strategy makes moves between a few different asset classes based upon broad moves in the stock market cycle, with an attempt to take full advantage of up markets and protection from the down markets. Anyway, I'm still working on it. If you're interested in knowing more about this, send me an e-mail stating your interest.

Personal note from Monty...

2008-09-02T09:43:00.000-07:00

September may always be a month of reflection for me. Not only is it my birthday month, but I lost my dad in September 2005. He lived a good long life (83 years) and then only suffered briefly with cancer. For that, I’m very thankful! Whichever way you want to discuss it or remember it—the passing of your father is a very sad and significant life event. My dad was a good provider, protector and parent—a pretty awesome role-model. And, of course, being a dad myself, I now have a whole new appreciation and perspective of him. I remember going fishing, hunting and hiking with my dad, and of course working with him—most always working. We worked hard together and I’m thankful that he has taught me a good work ethic. I’m sure there were a few “rough” spots over the years where we didn’t necessarily see eye-to-eye, but as I reflect back, all I really see are all the good times. My dad told me that he loved me and I got to tell him I loved him—in words and in actions. As I think back, I think about the significance of the relationship and how I’ll always remember and value him. In the end, what else do we really have than the relationships with those around us and the satisfaction of being a good friend, provider, protector - dad. So why am I saying all this? I’m just saying that I have an increased sense of appreciation for the people in my life, my family, friends and all of you—my clients. There’s no better time than the present to enjoy the people around you.

Better Advice for Your Money

2008-08-14T12:09:00.000-07:00

When I was just about 22 years old a neighbor of mine got me involved in the investment business. He was a very well known businessman in Alexander Valley—where I grew up—and had his busy fingers into lots of different ventures. He would take me around to investment seminars in his big, comfy Cadillac and we would eat together at fine restaurants. I was quite impressed!

I wanted to make money in the investment business and I wanted to help my clients make money. I wanted to really understand this business. I started reading everything about investing. I even read all the mutual fund prospectuses—you know, those things with lots of fine print that no body ever reads. My neighbor/mentor told me I was wasting my time. I didn’t need to know anything—except how to fill out the mutual fund order form and ask the client for their check. That’s it! Anything more was a waste of time—according to him.

Personally, I thought the brokerage model was flawed since it was focused more on selling products than providing advice. The fee-only model didn’t exist back then, but I was an early adopter of it, because I strongly believed that it could serve clients better.

My role is not defined by giving you the hottest stock tip, convincing you to buy this year’s best performing mutual fund, or trying to sell you a product to solve a problem you don’t have. Instead, it’s about helping you clearly envision and define your long-term goals and providing the prudent, comprehensive advice you need to get there.

If you may be interested in the kind of investment management work I do, and the independent advice I give, won’t you consider giving me a call?

There are lots of people out there that are getting “sold” investment products by well-meaning, very friendly guys driving around in Cadillacs. But… they are not getting the best advice for their money!

Five Great Goals

2008-08-13T15:22:00.000-07:00

There are five things that virtually everyone I speak with is trying to achieve with their money. These goals represent the most primal emotional/financial needs of real people; they speak to the deepest yearnings of Americans for their own financial well-being and that of the people they love. And since these five issues are the main financial concerns in my own and my family's life, I have a genuine empathy for my clients and their well-being.

The Five Great Goals of Life Are:

Retirement without compromise in lifestyle, or any real concern about outliving your income.
Meaningful intervention in the financial lives of your children.
The education of your grandchildren.
The ability to care for your parents, if and when they need it.
An important legacy to institutions/charities you believe in.

The central financial planning problem of our time is simply that almost no one is investing enough capital to have a real shot at achieving all their goals. I help my clients face the potentially huge gap between what they're doing now, and what they need to be doing, in order to get where they say they want to go. The critical issue isn't investment performance, but investor behavior. And that's where I partner with you.