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Wednesday, April 15, 2009
Sunday, January 11, 2009
Keeping Up With Your IRA: A Tax Season Checklist
Year-end is an ideal time to evaluate the role that IRAs could play in your retirement and tax management strategies. This checklist offers information to help you make informed decisions and implement a long-term retirement income strategy. Roth IRA or Traditional IRA?The primary difference between a traditional IRA and a Roth IRA is the tax treatment of contributions and distributions (withdrawals). Traditional IRAs may allow a tax deduction based on the amount of a contribution, depending on your income level. Any account earnings compound on a tax-deferred basis, and distributions are taxable at the time of withdrawal at then-current income tax rates. Roth IRAs do not allow a deduction for contributions, but account earnings and qualified withdrawals are tax free. Read More
Tuesday, December 16, 2008
Crisis on Wall Street - What You Should Do Now!
Brandon, Florida - by Rich Strehl.
The nation's banking system has probably never been through a storm quite like this before. So far, the tempest has swallowed some of the most familiar and enduring names on the financial map, and the crisis has not yet run its course. Many other institutions are exposed to the complex array of mortgage-backed securities. They face further write-downs and losses as the housing slump produces a growing volume of delinquencies and foreclosures.
For investors, it's been particularly unnerving. The S&P 500, an index that represents a broad swath of U.S. companies, has plunged into bear market territory, and financial stocks, which once represented the largest sector in the index, have been especially hard hit. The impact of these declines on individual investment or retirement portfolios will be significant, and many shell-shocked investors have already bailed out or taken refuge in savings accounts or money market funds.
But as history has shown, markets have a way of springing back. Just days after some of the worst news hit, a relief rally sent the market soaring, helping to recoup some of its earlier losses. Since 1982, the S&P 500 has risen at an average rate of nearly 9% per year. This is particularly meaningful since the time span includes four actual bear markets, or periods in which the S&P 500 suffered short-term price declines of 20% or more before rebounding.
Perhaps most important is that, despite the fiscal trauma, the core of the financial system has held. Commitments by even the most injured brokers and insurance companies are being routinely sustained. Trades are being completed on time. Insured bond values are being upheld. Futures, options and swap contracts are being honored. And central banks around the world have agreed to pump whatever liquidity might be necessary into global markets to protect the interests of innocent trade counterparties.
To be sure, the storm is not over. The economy remains weak. And housing - the essential source of the current financial woes - has yet to recover. But at times like these, it is important to maintain a long-term perspective and not to panic. No one can predict where the market will go from here, but if nothing else, the current crisis has shown the resilience of the financial system and the importance of keeping an eye on fundamentals.
Portfolio Strategies
What does this ultimately mean for investors?
You may want to consider the following options:
Avoid panic selling or other emotional decisions. Selling during a market trough could put you in a position of missing out on a subsequent upturn. Historically, stocks have demonstrated an ability to produce strong gains in the months immediately following an economic recession, although past performance is no guarantee of future results. Since 1950, in the first 12 months following the low point of a bear market, the S&P 500 gained an average of 28.66%. If an investor missed the first six months of the recovery, the gain was reduced to 10.28%.
Review your sector allocations for new investments. In volatile times, it is generally considered unwise to make major changes in the balance of a portfolio since the odds of getting hit with unfavorable sales prices are increased. What is more, investors who might sell out of a sector or an asset class at market bottoms may put themselves in the unenviable position of missing the benefits of the market rebounds that often follow drops. However, for long-term investors in regular savings programs such as employer-sponsored retirement plans, it is possible to adjust the allocation for new investments without incurring that risk.
Consider positioning for a prospective rebound. Some experts believe that the financial sector still has some distance to fall, and it will continue to do so until all of the potential losses from the subprime meltdown have been identified. Others believe that the bulk of market damage may have already occurred. They see the potential for a fairly near-term rebound in the sector, one that would be driven by the cumulative effect of current rescue measures and the proposed transfer of bad real estate loans to the U.S. Treasury. If you side with those who believe the bottom is near, you might even want to consider increasing your allocations to this hard-hit sector. Of course, no one can precisely predict future market movements. But some investors have been able to benefit in the past from the judicious use of available information to take carefully measured risks.
A special note for retirement plan participants: As a general rule, IRA holdings and employer-sponsored retirement plan assets are held in special trusts that are designed to keep them safe for participants even if the trustee itself were to fail.
The nation's banking system has probably never been through a storm quite like this before. So far, the tempest has swallowed some of the most familiar and enduring names on the financial map, and the crisis has not yet run its course. Many other institutions are exposed to the complex array of mortgage-backed securities. They face further write-downs and losses as the housing slump produces a growing volume of delinquencies and foreclosures.
For investors, it's been particularly unnerving. The S&P 500, an index that represents a broad swath of U.S. companies, has plunged into bear market territory, and financial stocks, which once represented the largest sector in the index, have been especially hard hit. The impact of these declines on individual investment or retirement portfolios will be significant, and many shell-shocked investors have already bailed out or taken refuge in savings accounts or money market funds.
But as history has shown, markets have a way of springing back. Just days after some of the worst news hit, a relief rally sent the market soaring, helping to recoup some of its earlier losses. Since 1982, the S&P 500 has risen at an average rate of nearly 9% per year. This is particularly meaningful since the time span includes four actual bear markets, or periods in which the S&P 500 suffered short-term price declines of 20% or more before rebounding.
Perhaps most important is that, despite the fiscal trauma, the core of the financial system has held. Commitments by even the most injured brokers and insurance companies are being routinely sustained. Trades are being completed on time. Insured bond values are being upheld. Futures, options and swap contracts are being honored. And central banks around the world have agreed to pump whatever liquidity might be necessary into global markets to protect the interests of innocent trade counterparties.
To be sure, the storm is not over. The economy remains weak. And housing - the essential source of the current financial woes - has yet to recover. But at times like these, it is important to maintain a long-term perspective and not to panic. No one can predict where the market will go from here, but if nothing else, the current crisis has shown the resilience of the financial system and the importance of keeping an eye on fundamentals.
Portfolio Strategies
What does this ultimately mean for investors?
You may want to consider the following options:
Avoid panic selling or other emotional decisions. Selling during a market trough could put you in a position of missing out on a subsequent upturn. Historically, stocks have demonstrated an ability to produce strong gains in the months immediately following an economic recession, although past performance is no guarantee of future results. Since 1950, in the first 12 months following the low point of a bear market, the S&P 500 gained an average of 28.66%. If an investor missed the first six months of the recovery, the gain was reduced to 10.28%.
Review your sector allocations for new investments. In volatile times, it is generally considered unwise to make major changes in the balance of a portfolio since the odds of getting hit with unfavorable sales prices are increased. What is more, investors who might sell out of a sector or an asset class at market bottoms may put themselves in the unenviable position of missing the benefits of the market rebounds that often follow drops. However, for long-term investors in regular savings programs such as employer-sponsored retirement plans, it is possible to adjust the allocation for new investments without incurring that risk.
Consider positioning for a prospective rebound. Some experts believe that the financial sector still has some distance to fall, and it will continue to do so until all of the potential losses from the subprime meltdown have been identified. Others believe that the bulk of market damage may have already occurred. They see the potential for a fairly near-term rebound in the sector, one that would be driven by the cumulative effect of current rescue measures and the proposed transfer of bad real estate loans to the U.S. Treasury. If you side with those who believe the bottom is near, you might even want to consider increasing your allocations to this hard-hit sector. Of course, no one can precisely predict future market movements. But some investors have been able to benefit in the past from the judicious use of available information to take carefully measured risks.
A special note for retirement plan participants: As a general rule, IRA holdings and employer-sponsored retirement plan assets are held in special trusts that are designed to keep them safe for participants even if the trustee itself were to fail.
Wednesday, June 18, 2008
Planning a Long-Term Strategy? Don't Forget About Inflation!
Anyone who has paid for gasoline, health care or college tuition lately knows that even if the overall rate of inflation is modest, there are areas where costs are rising more dramatically. Earning returns that exceed the cost of living is important for all investors, but it is especially critical for those who may depend on their portfolios as a source of income. What Is Inflation?Inflation is the increase in the price of any good or service. The most commonly referenced measure of that increase is the Consumer Price Index (CPI), which is based on a monthly survey by the U.S. Bureau of Labor Statistics. The CPI compares current and past prices of a sample "market basket" of goods from a variety of categories including housing, food and transportation. Inflation has been a consistent fact of life for U.S. consumers. Between 1900 and 1970, inflation was moderate, averaging 2.5% annually. From 1970 to 1990, however, the average rate increased to around 6%, hitting a high of 13.3% in 1979.1 Recently, rates have been closer to the 2% to 4% range, averaging 3.2% in 2006. What It Means to Your FinancesAn inflation rate of 4% might not seem significant until you consider the long-term effect on your purchases and your investments. For example, in 20 years, 4% inflation annually would drive the value of a dollar down to $0.44.
The Cost of the Future:
Item Price in 2006 vs. 2026
Stamp $0.39 $0.85
Refrigerator $1,000 $2,191
Automobile $23,000 $50,396
Inflation also works against your investments. When pursuing long-term financial goals, from college savings for your loved ones to your own retirement, it's important to consider the real rate of return, which is determined by figuring in the effects of inflation. Investing to Beat InflationOver the long run - 10 years or more - stocks may provide the best potential for returns that exceed inflation. While past performance is no guarantee of future results, stocks have historically provided higher returns than other asset classes. A Standard & Poor's analysis of holding periods between 1926 and 2006 found that the annual return for a portfolio comprised exclusively of stocks in the S&P 500 was 10.49% - well above the average inflation rate of 3.04% for the same period.3 The average annual return for long-term government bonds, on the other hand, was only 4.86%. A Balancing ActKeep in mind that stocks do involve greater risk of short-term fluctuations than other types of investments. Unlike a bond, which guarantees a fixed return if you hold it until maturity, a stock can rise or fall in value based on daily events in the stock market, trends in the economy or problems at the issuing company. But if you have a long investment time frame, you may find that stocks offer the best chance to beat inflation. The key is to consider your time frame, your income needs and how much volatility you are willing to accept, and then construct a portfolio with a mix of stocks and other investments. For instance, if you have 30 or 40 years until you plan to retire, a portfolio weighted to stocks or stock funds might be suitable. But even if you are approaching retirement, you may still need to maintain some growth-oriented investments as a hedge against inflation. Your retirement assets may need to last for 30 years or more, and inflation will continue to work against you throughout. There are many ways to include stocks in your long-term plan in whatever proportion you decide is appropriate. You and your financial advisor could create a diversified portfolio of shares from companies you select. Another option is a stock mutual fund, which offers the benefit of professional management. Stock mutual funds have demonstrated the same long-term growth potential as individual stocks. S&P tracked domestic equity mutual funds from 1987 through 2006 and found an average annual return of 11.8%.4 Whether you're a first-time investor or an experienced retiree, you need to keep inflation in your sights. Stocks may be your best weapon, and there are many ways to include them. Your financial advisor can help you determine your best options.
1Source: U.S. Bureau of Labor Statistics.2Based on an average annual inflation rate of 4%.3Source: Standard & Poor's. Performance is for the period December 31, 1926, to December 31, 2006. Stocks are represented by the total return of the S&P 500 Index, bonds by long-term Treasuries (10+ years). Past performance cannot guarantee future results. Individuals cannot invest directly in any index. Results include reinvested dividends. 4Source: Standard & Poor's. Based on average annual returns of all U.S. equity funds, including sector and balanced funds. Does not reflect sales charges or other expenses associated with purchasing mutual fund shares. Past performance is no guarantee of future results. Investing in mutual funds involve risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus. Bonds are subject to market and interest rate risk of sold prior to maturity. Bond values will decline as interest rate rise and are subject to availability and change in price. This article is not intended to provide specific investment or tax advice for any individual. Consult your financial advisor, your tax advisor or me if you have any questions.
The Cost of the Future:
Item Price in 2006 vs. 2026
Stamp $0.39 $0.85
Refrigerator $1,000 $2,191
Automobile $23,000 $50,396
Inflation also works against your investments. When pursuing long-term financial goals, from college savings for your loved ones to your own retirement, it's important to consider the real rate of return, which is determined by figuring in the effects of inflation. Investing to Beat InflationOver the long run - 10 years or more - stocks may provide the best potential for returns that exceed inflation. While past performance is no guarantee of future results, stocks have historically provided higher returns than other asset classes. A Standard & Poor's analysis of holding periods between 1926 and 2006 found that the annual return for a portfolio comprised exclusively of stocks in the S&P 500 was 10.49% - well above the average inflation rate of 3.04% for the same period.3 The average annual return for long-term government bonds, on the other hand, was only 4.86%. A Balancing ActKeep in mind that stocks do involve greater risk of short-term fluctuations than other types of investments. Unlike a bond, which guarantees a fixed return if you hold it until maturity, a stock can rise or fall in value based on daily events in the stock market, trends in the economy or problems at the issuing company. But if you have a long investment time frame, you may find that stocks offer the best chance to beat inflation. The key is to consider your time frame, your income needs and how much volatility you are willing to accept, and then construct a portfolio with a mix of stocks and other investments. For instance, if you have 30 or 40 years until you plan to retire, a portfolio weighted to stocks or stock funds might be suitable. But even if you are approaching retirement, you may still need to maintain some growth-oriented investments as a hedge against inflation. Your retirement assets may need to last for 30 years or more, and inflation will continue to work against you throughout. There are many ways to include stocks in your long-term plan in whatever proportion you decide is appropriate. You and your financial advisor could create a diversified portfolio of shares from companies you select. Another option is a stock mutual fund, which offers the benefit of professional management. Stock mutual funds have demonstrated the same long-term growth potential as individual stocks. S&P tracked domestic equity mutual funds from 1987 through 2006 and found an average annual return of 11.8%.4 Whether you're a first-time investor or an experienced retiree, you need to keep inflation in your sights. Stocks may be your best weapon, and there are many ways to include them. Your financial advisor can help you determine your best options.
1Source: U.S. Bureau of Labor Statistics.2Based on an average annual inflation rate of 4%.3Source: Standard & Poor's. Performance is for the period December 31, 1926, to December 31, 2006. Stocks are represented by the total return of the S&P 500 Index, bonds by long-term Treasuries (10+ years). Past performance cannot guarantee future results. Individuals cannot invest directly in any index. Results include reinvested dividends. 4Source: Standard & Poor's. Based on average annual returns of all U.S. equity funds, including sector and balanced funds. Does not reflect sales charges or other expenses associated with purchasing mutual fund shares. Past performance is no guarantee of future results. Investing in mutual funds involve risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus. Bonds are subject to market and interest rate risk of sold prior to maturity. Bond values will decline as interest rate rise and are subject to availability and change in price. This article is not intended to provide specific investment or tax advice for any individual. Consult your financial advisor, your tax advisor or me if you have any questions.
Monday, June 2, 2008
Long Term Care Insurance: Research the Options Before You Buy
The growing interest in long-term care insurance can be attributed largely to the aging of America. According to the U.S. Census Bureau, the median age in the United States was 35.9 in 2003 - the highest ever. This demographic shift is due to the 76 million Baby Boomers, the last of which will reach age 65 by 2030.
The U.S. Department of Health and Human Services estimates that about 40% of people aged 65 or older have at least a 50% lifetime risk of entering a nursing home. At a time when the average cost of a private room in a nursing home is $192 per day - or about $70,000 annually - long-term care insurance can be viewed as a solid investment for those who have assets to protect or who want to avoid becoming a financial burden to their families.
Unlike other types of insurance, in which policies are fairly standardized, long-term care policies are complex and vary widely. Virtually every company's policy differs on such matters as who qualifies for coverage, when the policyholder can begin receiving benefits, premium costs, etc. Therefore, before you begin comparing policies, it is important to understand some of the basics.
What Long-Term Care Insurance Is - And Is Not
Long-term care insurance is not life insurance, disability insurance, or health insurance. Instead, long-term care insurance includes a range of nursing, social, and rehabilitative services for people who need ongoing assistance due to a chronic illness or disability. Long-term care insurance can be used by anyone at any age who suffers an accident or debilitating illness, but it is most frequently used by older adults who need assistance with essential physical needs, such as bathing, dressing, or eating.
Neither Medicare, nor Medicare supplemental coverage, also known as Medigap insurance, nor standard health insurance policies cover long-term care. That leaves most of us with two options when faced with such expenses: pay out-of-pocket or rely on private long-term care insurance.
Most long-term care policies are "expense-incurred," meaning they pay a fixed-dollar amount toward the cost of daily care. Policies tend to cover a variety of care settings, including nursing homes, home health care, assisted living facilities, and adult day care. Premium costs increase depending on your age at the time of enrollment, so the younger you are when you purchase a policy, the lower the premium you're likely to pay.
Shopping for Long-Term Care Insurance: Know What to Look For
When shopping for long-term care insurance make sure you take your time and compare the features of several policies. In general, pay special attention to the following:
· Company Reputation and Legitimacy. Make sure the insurance companies under consideration are licensed in your state and carry favorable financial ratings from well-known ratings agencies such as A.M. Best Company, Duff & Phelps, Inc., Standard & Poor's Insurance Rating Services, and Moody's Investor Services, Inc.
· Coverage Parameters. Policies will differ in the types of services they support. Some cover nursing home care, others cover custodial or personal care in a variety of settings such as assisted living, adult day care, and home health care. Some include a combination of services. Be sure to choose a policy that best meets your potential needs.
· Benefits Payout. How much does the policy pay per day for care in a particular setting (e.g., nursing home or assisted living)? How does the policy pay out services (e.g., a fixed daily amount or as reimbursement for the cost of care up to a daily maximum)? Does the policy have a maximum lifetime limit? If so, what is it for nursing home care? Home health care?
· Eligibility. Does the policy use "benefit triggers" to determine when you will be eligible to receive benefits? Such triggers could include activities of daily living that the insured needs help with, such as bathing, eating, and dressing; cognitive impairment, such as Alzheimer's disease; or a prerequisite hospital stay for nursing home benefits. The number of activities of daily living covered is state specific. Please check with your financial advisor for specific information.
· Benefits Protection. The policy should include an inflation adjustment feature to ensure that benefits stay in line with rising care costs. Additional protections include a "guaranteed renewable" clause, which states that the policy cannot be canceled when you get older or if you suffer physical or mental deterioration, and a "non-forfeiture" benefit, which ensures that some portion of your benefits are still available to you if you cancel your policy or unintentionally let it lapse.
· Tax Implications. Most long-term care policies sold today are federally tax-qualified, which means premiums paid, as well as out-of-pocket expenses for long-term care, can be applied toward the 7.5% medical expense deductions contained in the federal tax code. Additionally, long-term care benefits received are not taxed as income up to certain limits. Consult with a tax advisor to learn more about the tax implications of long-term care insurance.
Because of the many variables involved in determining whether long-term care coverage is right for you, it is important to do your research. Luckily there are many information resources available on long-term care and related health care issues. Your financial advisor can help you obtain reliable information.
This article is not intended to provide specific advice or recommendations for any individual. Consult me or your financial advisor, with questions.
The U.S. Department of Health and Human Services estimates that about 40% of people aged 65 or older have at least a 50% lifetime risk of entering a nursing home. At a time when the average cost of a private room in a nursing home is $192 per day - or about $70,000 annually - long-term care insurance can be viewed as a solid investment for those who have assets to protect or who want to avoid becoming a financial burden to their families.
Unlike other types of insurance, in which policies are fairly standardized, long-term care policies are complex and vary widely. Virtually every company's policy differs on such matters as who qualifies for coverage, when the policyholder can begin receiving benefits, premium costs, etc. Therefore, before you begin comparing policies, it is important to understand some of the basics.
What Long-Term Care Insurance Is - And Is Not
Long-term care insurance is not life insurance, disability insurance, or health insurance. Instead, long-term care insurance includes a range of nursing, social, and rehabilitative services for people who need ongoing assistance due to a chronic illness or disability. Long-term care insurance can be used by anyone at any age who suffers an accident or debilitating illness, but it is most frequently used by older adults who need assistance with essential physical needs, such as bathing, dressing, or eating.
Neither Medicare, nor Medicare supplemental coverage, also known as Medigap insurance, nor standard health insurance policies cover long-term care. That leaves most of us with two options when faced with such expenses: pay out-of-pocket or rely on private long-term care insurance.
Most long-term care policies are "expense-incurred," meaning they pay a fixed-dollar amount toward the cost of daily care. Policies tend to cover a variety of care settings, including nursing homes, home health care, assisted living facilities, and adult day care. Premium costs increase depending on your age at the time of enrollment, so the younger you are when you purchase a policy, the lower the premium you're likely to pay.
Shopping for Long-Term Care Insurance: Know What to Look For
When shopping for long-term care insurance make sure you take your time and compare the features of several policies. In general, pay special attention to the following:
· Company Reputation and Legitimacy. Make sure the insurance companies under consideration are licensed in your state and carry favorable financial ratings from well-known ratings agencies such as A.M. Best Company, Duff & Phelps, Inc., Standard & Poor's Insurance Rating Services, and Moody's Investor Services, Inc.
· Coverage Parameters. Policies will differ in the types of services they support. Some cover nursing home care, others cover custodial or personal care in a variety of settings such as assisted living, adult day care, and home health care. Some include a combination of services. Be sure to choose a policy that best meets your potential needs.
· Benefits Payout. How much does the policy pay per day for care in a particular setting (e.g., nursing home or assisted living)? How does the policy pay out services (e.g., a fixed daily amount or as reimbursement for the cost of care up to a daily maximum)? Does the policy have a maximum lifetime limit? If so, what is it for nursing home care? Home health care?
· Eligibility. Does the policy use "benefit triggers" to determine when you will be eligible to receive benefits? Such triggers could include activities of daily living that the insured needs help with, such as bathing, eating, and dressing; cognitive impairment, such as Alzheimer's disease; or a prerequisite hospital stay for nursing home benefits. The number of activities of daily living covered is state specific. Please check with your financial advisor for specific information.
· Benefits Protection. The policy should include an inflation adjustment feature to ensure that benefits stay in line with rising care costs. Additional protections include a "guaranteed renewable" clause, which states that the policy cannot be canceled when you get older or if you suffer physical or mental deterioration, and a "non-forfeiture" benefit, which ensures that some portion of your benefits are still available to you if you cancel your policy or unintentionally let it lapse.
· Tax Implications. Most long-term care policies sold today are federally tax-qualified, which means premiums paid, as well as out-of-pocket expenses for long-term care, can be applied toward the 7.5% medical expense deductions contained in the federal tax code. Additionally, long-term care benefits received are not taxed as income up to certain limits. Consult with a tax advisor to learn more about the tax implications of long-term care insurance.
Because of the many variables involved in determining whether long-term care coverage is right for you, it is important to do your research. Luckily there are many information resources available on long-term care and related health care issues. Your financial advisor can help you obtain reliable information.
This article is not intended to provide specific advice or recommendations for any individual. Consult me or your financial advisor, with questions.
Tuesday, May 27, 2008
It's 2008: Are Your Beneficiary Designations Up-to-Date?
Regardless of their level of personal wealth, there is one estate planning concern that is shared by people from all walks of life - the decision of who gets what when you are gone. While many people logically assume that a will is the official forum for expressing such decisions, that's not always the case. For instance, did you know that the proceeds from workplace retirement plans, IRAs and life insurance policies are passed on independent of what may be spelled out in a will?
Naming beneficiaries to these types of accounts is one of those planning activities that is typically given too little thought, however those named to inherit such assets often face unique tax and legal consequences.
Employer-Sponsored Retirement Plans and Individual Retirement Accounts (IRAs)
Regarding employer-sponsored plans, such as 401(k)s, an individual who is not married can name whomever they like as beneficiary. If you are married, however, federal law states that your spouse is automatically the beneficiary of a 401(k) or profit-sharing plan. If you wish to name someone else as beneficiary, then your spouse must sign a written waiver.
For example, someone who has been separated from his or her spouse may wish to name a domestic partner as the intended beneficiary. The spouse still has a legal claim to the 401(k) assets, and the domestic partner will not be able to receive the funds unless the spouse signs a written waiver. A waiver may be appropriate in other situations, such as a second marriage in which children from the first marriage need the money more than the new spouse.
Until recently, one drawback was that nonspouse beneficiaries were not eligible for tax-deferred transfers to IRAs. Instead, these beneficiaries would have to begin taking distributions, on which they would be required to pay income tax. However, rules signed into law in 2006 allow nonspousal beneficiaries to have qualified plan proceeds rolled over into a special type of IRA called a "Decedent IRA" set up on behalf of the beneficiary via a trustee-to-trustee transfer.
The IRS has also issued regulations that dramatically simplify the way certain withdrawals affect IRA owners and their beneficiaries. Consult your tax advisor on how these rule changes may affect your situation.
IRS regulations do allow nonspousal beneficiaries to annuitize retirement plan distributions over the life of the beneficiary. Check with your employer or policy issuer to find out if this is an option under your arrangements prior to naming a child as a beneficiary. A competent financial professional and tax advisor can also offer guidance as to whether this action may be appropriate for you.
Life Insurance
No matter who is designated as beneficiary of a life insurance policy, he or she will receive the death benefit proceeds income tax free. Unlike property disposed of in a will, if the beneficiary designation form is properly completed, insurance proceeds do not go through probate.
For many married people, a spouse will be the most logical beneficiary. A trust may be a better beneficiary choice, however, if a surviving spouse was not capable of (or comfortable with) managing a large sum of money. In this case, the trustee (often a legal entity rather than an individual) would take charge of managing, investing and disbursing the policy proceeds for the benefit of the surviving spouse.
Be sure to name contingent or secondary beneficiaries. A secondary beneficiary - either an individual or trust - would be next in line to inherit the insurance proceeds if the primary beneficiary predeceases the insured. If there are no surviving beneficiaries, then your beneficiary is generally the "estate of the insured," which means the death benefits end up being probated and ultimately distributed according to the instructions of the decedent's last will and testament. If an individual dies without a valid will (intestate), then the order of legal beneficiaries to whom assets are distributed is specified by state law.
Avoid Naming Minor Children
Naming minor children as beneficiaries may cause unforeseen problems. For example, insurance companies and retirement accounts may not pay death benefits to minors. Instead, these benefits are held until they can be paid to a court-approved guardian and/or trustee of a children's trust or until the child reaches legal age. A guardian, trust or trustee should be named beneficiary to ensure competent management of the proceeds for the children. By naming a children's trust as a beneficiary, the proceeds could be invested and managed by a competent trustee (a person or institution) you choose. A revocable living trust could also be named as a beneficiary, which keeps the proceeds out of probate.
Keep Your Plan Up-to-Date
When completing overall estate plans and wills, it is important to occasionally review and readjust all beneficiary designations so that your estate plan accurately reflects your wishes. Remember, outdated beneficiary designations (e.g., older parents or ex-spouses) could misdirect the intended flow of an entire estate plan unless changed now.
As is always the case with estate planning, consult with qualified professionals concerning your particular situation in order to ensure that your beneficiary designations are in tune with your goals.
Naming beneficiaries to these types of accounts is one of those planning activities that is typically given too little thought, however those named to inherit such assets often face unique tax and legal consequences.
Employer-Sponsored Retirement Plans and Individual Retirement Accounts (IRAs)
Regarding employer-sponsored plans, such as 401(k)s, an individual who is not married can name whomever they like as beneficiary. If you are married, however, federal law states that your spouse is automatically the beneficiary of a 401(k) or profit-sharing plan. If you wish to name someone else as beneficiary, then your spouse must sign a written waiver.
For example, someone who has been separated from his or her spouse may wish to name a domestic partner as the intended beneficiary. The spouse still has a legal claim to the 401(k) assets, and the domestic partner will not be able to receive the funds unless the spouse signs a written waiver. A waiver may be appropriate in other situations, such as a second marriage in which children from the first marriage need the money more than the new spouse.
Until recently, one drawback was that nonspouse beneficiaries were not eligible for tax-deferred transfers to IRAs. Instead, these beneficiaries would have to begin taking distributions, on which they would be required to pay income tax. However, rules signed into law in 2006 allow nonspousal beneficiaries to have qualified plan proceeds rolled over into a special type of IRA called a "Decedent IRA" set up on behalf of the beneficiary via a trustee-to-trustee transfer.
The IRS has also issued regulations that dramatically simplify the way certain withdrawals affect IRA owners and their beneficiaries. Consult your tax advisor on how these rule changes may affect your situation.
IRS regulations do allow nonspousal beneficiaries to annuitize retirement plan distributions over the life of the beneficiary. Check with your employer or policy issuer to find out if this is an option under your arrangements prior to naming a child as a beneficiary. A competent financial professional and tax advisor can also offer guidance as to whether this action may be appropriate for you.
Life Insurance
No matter who is designated as beneficiary of a life insurance policy, he or she will receive the death benefit proceeds income tax free. Unlike property disposed of in a will, if the beneficiary designation form is properly completed, insurance proceeds do not go through probate.
For many married people, a spouse will be the most logical beneficiary. A trust may be a better beneficiary choice, however, if a surviving spouse was not capable of (or comfortable with) managing a large sum of money. In this case, the trustee (often a legal entity rather than an individual) would take charge of managing, investing and disbursing the policy proceeds for the benefit of the surviving spouse.
Be sure to name contingent or secondary beneficiaries. A secondary beneficiary - either an individual or trust - would be next in line to inherit the insurance proceeds if the primary beneficiary predeceases the insured. If there are no surviving beneficiaries, then your beneficiary is generally the "estate of the insured," which means the death benefits end up being probated and ultimately distributed according to the instructions of the decedent's last will and testament. If an individual dies without a valid will (intestate), then the order of legal beneficiaries to whom assets are distributed is specified by state law.
Avoid Naming Minor Children
Naming minor children as beneficiaries may cause unforeseen problems. For example, insurance companies and retirement accounts may not pay death benefits to minors. Instead, these benefits are held until they can be paid to a court-approved guardian and/or trustee of a children's trust or until the child reaches legal age. A guardian, trust or trustee should be named beneficiary to ensure competent management of the proceeds for the children. By naming a children's trust as a beneficiary, the proceeds could be invested and managed by a competent trustee (a person or institution) you choose. A revocable living trust could also be named as a beneficiary, which keeps the proceeds out of probate.
Keep Your Plan Up-to-Date
When completing overall estate plans and wills, it is important to occasionally review and readjust all beneficiary designations so that your estate plan accurately reflects your wishes. Remember, outdated beneficiary designations (e.g., older parents or ex-spouses) could misdirect the intended flow of an entire estate plan unless changed now.
As is always the case with estate planning, consult with qualified professionals concerning your particular situation in order to ensure that your beneficiary designations are in tune with your goals.
Tuesday, May 13, 2008
Invest With Passion
You all often hear me talk and write about finances, mutual funds, investment strategies and even occasionally insurance. Well, these topics are all important to me. But, if you really want to get near and dear to my heart you can talk about things like retirement dreams, goal setting, the psychology of success and helping other people. Many of you have read my mission statement that reads:
My purpose for my life is to continually grow as an individual so that I can live financially free and help as many people as possible to set and reach their dreams and goals. With this I will be making God happy and will be doing my part to help make the world a better place.
While knowing what steps to take for your retirement funds is important, it is far more important to have a dream... to have a very detailed picture in your mind of exactly where it is you're going in life. Someone recently asked me in an interview what my ideal client is. I think they were expecting me to say something like high net-worth individuals. While this is a nice ingredient to have, my first desire is to work with someone passionate about their future. You see, if someone is passionate about their future, they're a dreamer, a goal setter and usually an achiever. With this kind of client comes the discipline and desire to take advice that will take them to the next level. A person with passion quickly returns phone calls and can't wait to meet again with me if it means learning new ways to get themselves and their family closer to the financial goals.
I encourage each of you to become a dreamer. Hang those pictures on your refrigerator of the car you want to one day drive, the house in the mountains and the condo on the beach. Adopt a solid goals program and stick to it. Read good books and invest in educational CDs to listen to in your car on your drive to work. Go to the RV shows and the boat shows and go in and sit down on the expensive ones. Don't let yourself say "I could never afford this" but rather say things like "I'll have one of these one day". Stop focusing on where you are and shift your thoughts to where you'd like to be. Develop a plan of self-discipline and fight for your future. One of my favorite authors, Brian Tracy says "Like working a muscle, your ability to discipline yourself to behave in the way you have decided grows stronger each time you exercise it. This is why the happiest, most successful and most respected men and women in our society are all men and women of great self-control, self-mastery and self-discipline. And this is a habit you can learn with practice"
These are the kinds of things I enjoy discussing with clients. I believe the strongest human emotion is gratitude. And while I have my own financial goals, I mostly enjoy making a living by helping those with passion. This gets me to higher and higher levels of gratitude. If what I've said here makes sense to you but you're not sure of exactly where to start please give me a call. I'd love to help you take your life from successful to significant. After all, it's Your Time, Your Money, Your Life!
My purpose for my life is to continually grow as an individual so that I can live financially free and help as many people as possible to set and reach their dreams and goals. With this I will be making God happy and will be doing my part to help make the world a better place.
While knowing what steps to take for your retirement funds is important, it is far more important to have a dream... to have a very detailed picture in your mind of exactly where it is you're going in life. Someone recently asked me in an interview what my ideal client is. I think they were expecting me to say something like high net-worth individuals. While this is a nice ingredient to have, my first desire is to work with someone passionate about their future. You see, if someone is passionate about their future, they're a dreamer, a goal setter and usually an achiever. With this kind of client comes the discipline and desire to take advice that will take them to the next level. A person with passion quickly returns phone calls and can't wait to meet again with me if it means learning new ways to get themselves and their family closer to the financial goals.
I encourage each of you to become a dreamer. Hang those pictures on your refrigerator of the car you want to one day drive, the house in the mountains and the condo on the beach. Adopt a solid goals program and stick to it. Read good books and invest in educational CDs to listen to in your car on your drive to work. Go to the RV shows and the boat shows and go in and sit down on the expensive ones. Don't let yourself say "I could never afford this" but rather say things like "I'll have one of these one day". Stop focusing on where you are and shift your thoughts to where you'd like to be. Develop a plan of self-discipline and fight for your future. One of my favorite authors, Brian Tracy says "Like working a muscle, your ability to discipline yourself to behave in the way you have decided grows stronger each time you exercise it. This is why the happiest, most successful and most respected men and women in our society are all men and women of great self-control, self-mastery and self-discipline. And this is a habit you can learn with practice"
These are the kinds of things I enjoy discussing with clients. I believe the strongest human emotion is gratitude. And while I have my own financial goals, I mostly enjoy making a living by helping those with passion. This gets me to higher and higher levels of gratitude. If what I've said here makes sense to you but you're not sure of exactly where to start please give me a call. I'd love to help you take your life from successful to significant. After all, it's Your Time, Your Money, Your Life!
Thursday, May 1, 2008
Gas Is Cheap In The United States?
Wow, it would cost $300.75 to fill up my 25 gallon tank in Aruba. At 15 miles per gallon it would almost cost one dollar (maybe 80 cents) to go one mile. That's crazy!
Anyone living in Aruba?
Wednesday, April 30, 2008
Is The Worst Behind Us?
From a technical analysis approach, it's smooth sailing from here. We established a very clear and obvious ceiling back around Thanksgiving in 2007 and broke through this ceiling, forming a new floor recently on April 18th. Many technicians will also classify this as an inverted head and shoulders breakout pattern. The Fed has lowered rates seven times since September and hopefully the housing market has plateaued. Even oil has been on the decline.
Ladies and gentlemen...it's time for many of us to start buying. Of course if you practice dollar cost averaging, which I support in many cases, then you never stopped buying. But for those looking for an opportunity to get the ball rolling, now is the time. If you're leery and want to be a little more conservative than you could wait until we have a support bounce off of the 12,700 line.
Monday, April 28, 2008
Everything You Ever Wanted to Know About Retirement Income
After years of saving and investing, you can finally see your retirement on the horizon. But before kicking back, you still have some important planning to do. For instance, it's important to figure out how much retirement income you may need. To do that, you'll need to consider your housing cost, the length of your retirement, whether you have earned income, your retirement lifestyle, health care and insurance costs and the rate of inflation. You'll also need to identify all of your potential retirement income sources and review your asset allocation. Remember, decisions made now could make the difference between your money outlasting you-or vice versa.
The following frequently asked questions about retirement income should help you begin the final stages of retirement planning on the right foot.
When should I begin thinking about tapping my retirement assets and how should I go about doing so?
The answer to this question depends on when you expect to retire. Assuming you expect to retire between the ages of 62 and 67, you may want to begin the planning process in your mid to late 50s. A series of meetings with a financial consultant may help you make important decisions such as how your portfolio should be invested, when you can afford to retire and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier, or enjoying a longer working life, you may need to alter your planning threshold accordingly.
How much annual income am I likely to need?
While studies indicate that many people are likely to need between 60% and 80% of their final working year's income to maintain their lifestyle after retiring, low-income and wealthy retirees may need closer to 90%. Because of the declining availability of traditional pensions and increasing financial stresses on Social Security, future retirees may have to rely more on income generated by personal investments than today's retirees.
How much can I afford to withdraw from my assets for annual living expenses?
As you age, your financial affairs won't remain static: Changes in inflation, investment returns, your desired lifestyle and your life expectancy are important contributing factors. You may want to err on the side of caution and choose an annual withdrawal rate somewhat below 5%; of course, this depends on how much you have in your overall portfolio and how much you will need on a regular basis. The best way to target a withdrawal rate is to meet one-on-one with a qualified financial consultant and review your personal situation.
When planning portfolio withdrawals, is there a preferred strategy for which accounts are tapped first?
You may want to consider tapping taxable accounts first to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you may want to consider liquidating certain assets. Selling losing positions in taxable accounts may allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate overweighted asset classes. Another potential strategy may be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions have been made, such as after-tax contributions to a 401(k) plan.
If you maintain a traditional IRA or a 401(k), 403(b) or 457 plan, in most cases, you must begin required minimum distributions (RMDs) after age 70½. The amount of the annual distribution is determined by your life expectancy and, potentially, the life expectancy of a beneficiary. RMDs don't apply to Roth IRAs.
When crafting a retirement portfolio, you need to make sure it generates enough growth to prevent running out of money during your later years. You may want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation. Dividing your portfolio among stocks, bonds and cash investments may provide adequate exposure to some growth potential while trying to protect against market setbacks.
This article is not intended to provide specific investment or tax advice for any individual. Consult your financial advisor, your tax advisor or me if you have any questions.
The following frequently asked questions about retirement income should help you begin the final stages of retirement planning on the right foot.
When should I begin thinking about tapping my retirement assets and how should I go about doing so?
The answer to this question depends on when you expect to retire. Assuming you expect to retire between the ages of 62 and 67, you may want to begin the planning process in your mid to late 50s. A series of meetings with a financial consultant may help you make important decisions such as how your portfolio should be invested, when you can afford to retire and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier, or enjoying a longer working life, you may need to alter your planning threshold accordingly.
How much annual income am I likely to need?
While studies indicate that many people are likely to need between 60% and 80% of their final working year's income to maintain their lifestyle after retiring, low-income and wealthy retirees may need closer to 90%. Because of the declining availability of traditional pensions and increasing financial stresses on Social Security, future retirees may have to rely more on income generated by personal investments than today's retirees.
How much can I afford to withdraw from my assets for annual living expenses?
As you age, your financial affairs won't remain static: Changes in inflation, investment returns, your desired lifestyle and your life expectancy are important contributing factors. You may want to err on the side of caution and choose an annual withdrawal rate somewhat below 5%; of course, this depends on how much you have in your overall portfolio and how much you will need on a regular basis. The best way to target a withdrawal rate is to meet one-on-one with a qualified financial consultant and review your personal situation.
When planning portfolio withdrawals, is there a preferred strategy for which accounts are tapped first?
You may want to consider tapping taxable accounts first to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you may want to consider liquidating certain assets. Selling losing positions in taxable accounts may allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate overweighted asset classes. Another potential strategy may be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions have been made, such as after-tax contributions to a 401(k) plan.
If you maintain a traditional IRA or a 401(k), 403(b) or 457 plan, in most cases, you must begin required minimum distributions (RMDs) after age 70½. The amount of the annual distribution is determined by your life expectancy and, potentially, the life expectancy of a beneficiary. RMDs don't apply to Roth IRAs.
When crafting a retirement portfolio, you need to make sure it generates enough growth to prevent running out of money during your later years. You may want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation. Dividing your portfolio among stocks, bonds and cash investments may provide adequate exposure to some growth potential while trying to protect against market setbacks.
This article is not intended to provide specific investment or tax advice for any individual. Consult your financial advisor, your tax advisor or me if you have any questions.
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