Should my financial advisor and attorney discuss my Will?

by Michelle Ash, CFP®, CDFA™

Imagine this:  a husband and wife learn that the wife is probably going to pass away in the next few months due to a terminal illness.  While dealing with their grief and trying to enjoy their remaining time together, they also try to prioritize putting financial affairs in order so that the husband has less to deal with after her death.  He will be busy learning to be a single dad to their young children, and helping them cope with the loss of their mother.  Avoiding the hassles of probate and any other avoidable financial issue is a high priority to them.  They meet with their financial advisor, discuss their situation, and ask him to help them make sure everything is in order.  He takes a brief look at things and assures them that all of the accounts he handles will be transferred with no problems.   Unfortunately, the advisor overlooked the fact that the two taxable accounts he manages were not in joint name of husband and wife, but rather were only in the wife’s name.  The couple took the advisor at his word, only to find out later that he was incorrect and assets that should have just simply transferred to the husband would now be tied up in the legal process of probate.  Months later, the husband still awaits the process to be complete.  Adding insult to injury, probate assets are not available to any heirs until probate is finished, so the husband has to go without this money that would otherwise be very helpful to him until probate is done.

A recent blog reader posed the topic of this particular post:  “Should my financial advisor meet with my will lawyer to make sure everything is okay when I die?”

After reading the story I just shared, which is unfortunately true and was told to me by a recent new client to our firm, I have to say that my general answer to this question is – YES, there should be coordination between your financial professionals and your estate planning attorney.

Does this mean that every financial planner should be going with every client to every discussion about a will, trust, power of attorney or any other estate planning document?  Not necessarily.  But it is important to realize that when you spend the time and money making your estate plan, you might as well take the next step and make sure that the estate plan is going to actually be effective once it needs to be.

Components of a basic estate plan

Let’s stop for a moment and define what I mean by an estate plan.  Generally, every adult’s estate plan should consist of a Last Will & Testament which documents what happens to your possessions when you die.  Your estate plan should also probably include ancillary documents such as a health care power of attorney, living will, and durable power of attorney.  These ancillary documents are things that come into effect in the event of your incapacity, not your death.  You might think that incapacity would be pretty rare, but what if you were in a bad car accident and unable to make health care decisions for yourself for a few days?  Who has the authority to do that for you?  A health care proxy (also called health care powers of attorney) can direct who has that authority.  A durable power of attorney indicates who you authorize to make financial decisions for you.  A living will indicates the conditions under which you want to be kept alive if you are either in a persistent vegetative state or end stage of a terminal illness.

Many people hear the term “estate planning” and may think “I’m not wealthy enough to need estate planning.”  True estate planning, however, is about a broad range of issues, including health care (and spending of assets for it), children fighting over money, second marriages, caring for elderly parents, and multigenerational relationships, among other things.  Consequently, these are issues that can affect all of us, not just those one might deem as “wealthy”.

Having the documents isn’t enough

Clearly in my example the couple did make the effort to ensure their estate plan would be carried out as they wished.  Perhaps involving the estate planning attorney, however, could have helped the couple know for certain what items needed to be addressed prior to the wife’s passing.  Perhaps the financial planner and the attorney could have worked together to make sure the planner was clear on what changes needed to be made.

Estate planning work is often extremely complex.  Many individuals develop one or more trust documents to go along with their will.  Some people own businesses and have buy/sell agreements and other contractual arrangements that will take effect in the event of their death.  Every professional has a specialty and while many financial planners have some degree of experience or expertise in the area of estate planning, the ultimate authority on how to carry out the client’s legal wishes after death is the attorney.

Recommended action plan 

My suggestion and full answer, then, would be as follows:

1) Hire an attorney who specializes in the area of estate planning in your state.  Just like a general practitioner doctor is not a brain surgeon, a general attorney is not necessarily a specialist in knowing all of the in’s and out’s of estate laws in your state.

2) Work with that attorney to develop an estate plan that addresses your needs.  It may be very simple; it may be complex.  Ultimately the design is up to the both of you.

3) Tell the attorney up front that you will want their help ensuring that all of the pieces of your estate plan are coordinated after they draft it for you.  It may cost you extra for this assistance, but what’s the point of paying for estate plan documents if they aren’t going to work?

4) Tell your financial professionals that you are updating your estate plan and want their help coordinating the pieces with your attorney.  Be sure to tell ALL of your financial professionals:  investment advisors, accountants, insurance professionals, even your bank, because each of them may play a role in proper coordination.

5) Many attorneys will draft instructions for you that you can take to the financial professionals, telling them what needs to happen.  If your attorney gives you these instructions, provide them to your financial professionals.  If the financial professionals don’t understand the instructions, disagree with them, or have something else that needs to be discussed, give all of the professionals and attorney permission to talk to one another.  You will likely have to sign disclosure forms allowing them to do so, but at least then you won’t have to be the go-between, trying to interpret what each is saying when there may be terminology you are unfamiliar with.

6) When you believe that all of the coordinations are done, let the attorney know what actions have been taken and ask them to check that everything is in good order.  You will likely need to provide the attorney with updated financial statements so they can verify the actions that were taken.  They may charge you extra, but here again, an ounce of prevention is worth a pound of cure.

In person meetings required?

Should these meetings and coordinations happen in person between the professionals?  Maybe; much of that depends on the complexity of your estate situation.  A large majority of what needs to happen can probably be coordinated by email or phone.  But if you have a large estate which will have a lot of complexity, it may be best to put all of the professionals in the same room.  This will allow them to brainstorm the possible solutions, pros and cons of each, and share them with you so that you can determine the solution that fits you best.

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your attorney and/or financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.

Current Debt Crisis – A high stakes game of “Chicken”?

by Michael Carignan, CFP^®, CRPC^®

Do you remember watching the old classic movies where two guys get in a  fight over a girl and they head out to the quarry for a game of chicken?  If you do, you might see some similarities to what’s going on in Washington right now.  The difference this time, however,  are the consequences for all of us if neither one of them blinks.  The controversy in Washington is loud and filling the airwaves with political rhetoric and scare tactics.  And, if you listen to the media, there might be some potentially disastrous consequences if our elected officials don’t come to an agreement soon.  So we thought it would be helpful to analyze this issue, try to understand what is going on, then turn to the history books to see if something like this has happened before and how it turned out.

While the current situation certainly can be frustrating, it actually is the result of the checks and balances built into our constitution.  While the President can authorize actions and spending bills,  it is up to the Congress to actually finance them.  Right now there is a disagreement between house Republicans – who hold a majority, and the President on how much is reasonable to spend and on what.  Without going into the individual spending priorities for each of them and their merits, let’s just address the most basic elements.  The President would like to spend more and raise taxes to cover the current spending needs – while the house Republicans want to cut spending dramatically (~$2T over 10 years) with no tax increases.  Each side of the argument has valid points, but neither side seems willing to compromise enough to make a deal at this point.

In the press, we are hearing that if the debt ceiling increase is not approved then the US Government is going to default on its obligations.  What does that actually mean?  The most common things we’ve heard are that the government will stop paying soldiers, medicare benefits and/or social security benefits.  What does that make people feel?  “PANIC”!  Even worse, we hear there may be a full default on US treasury debt across the board.  More PANIC!  The news evokes a significant emotional response, with the intent of making the audience watch more of the TV news to see if anything has happened in the last 30 minutes to change the situation!   Can either of these scenarios happen?  Yes, but let’s put it in simpler terms to try to understand the entire issue.

Let’s say a husband and wife are looking at bills coming due over the next few months and realize they are coming up short on money in the bank, because of a combination of things (say, medical costs, car repairs and overspending on luxury items). The wife refuses to let more money go onto the credit cards unless the husband agrees to reduce spending.  He still wants to keep going out to eat and tells her she needs to get a second job.  Neither of them want to relent and they keep getting closer and closer to the date they will have to pay the bills and still no agreement to increase the credit card limit.  What do they do? Do they refuse to pay ALL of their bills across the board and shut down the household? Do they declare bankruptcy?  Or is it more likely they will decide which bills have priority, and which ones, if not paid right away, are least likely to cause permanent damage and delay paying on those?

This appears to be the most likely scenario.  For those who are watching the news and listening to the pundits spin out their theories for what disaster is looming if politicians don’t come to an agreement, you may be asking if this has happened before.   You don’t have to look too far in the past to see another example.  Many in the press will say this is unprecedented, and the particular doomsday scenarios vary from channel to channel,  but the November 1995 government shutdown was quite similar in nature to the situation we face now.  Let’s see if this sounds at all familiar.

1. The Republicans in Congress are unhappy with the President’s desire to spend more money on entitlement programs than they like.

2. The President is unwilling to cut programs to the level that Republicans want and is unwilling to sign a budget and debt ceiling increase that are presented to him.

It seems that in both cases you can substitute Bill Clinton and Barack Obama and voila!  Today’s scenario recreated.  In 1995 the buzzwords were “balanced budget” and now the focus is on “debt reduction”.  The basis for the stalemate may be slightly different and some of the facts are different but it is actually a close parallel to what’s happening today.  So what happened when the government “defaulted” in 1995?  They suspended all “non-essential” government spending until there was an agreement.  Each side played the media to the max – pointing fingers across the aisle and blaming the opposition for the entire flap.   The Federal Government did not default on interest payments, nor did the Government stop paying soldiers, retirees, Social Security, or Medicare.  Instead, they did furlough government employees in the Environmental Protection Agency, Forestry Service and Department of Health.  They closed buildings and public parks but continued to fund the basic services we need to keep the country safe and functioning.

Was it a comfortable time?  Not at all.  Many  people were affected, and for a period of time the populace really wondered how much worse it might get.  Did the US markets crash? No…they were virtually unaffected.  In some opinions, the government shutdown actually had the benefit of bringing spending back under control and getting us to a point of an actual surplus — even if it was only for a brief period of time.

My intent is not to disregard the potential financial impact that a deadlock between Congress and the President could create, but instead to point out that putting the current situation in a historical context can help us have a better appreciation for what might happen, and how it may affect our lives individually.  None of us can have a direct impact on the negotiations in Washington, but there are things we can do to sleep better at night.  First, it is important to be financially prepared for unforeseen and uncontrollable events.  Even government employees can have a problem with a paycheck not showing up on time, so make sure you have adequate short term savings to cover a few months expenses.  Second, make sure your investment philosophy matches your risk tolerance.  If you find yourself overly concerned with the short term market impact of a negative news story, you need to consider whether or not your risk tolerance is appropriate.  “Flip-Flopping” back and forth between an ultra conservative risk tolerance, and a more aggressive one – essentially letting the media yank your strings – is a recipe not only for financial disaster, but will likely cause ulcers and high blood pressure as well.  Having a good understanding of what your particular investment philosophy is and how much of the market fluctuations you are willing to tolerate – and STICKING TO YOUR PLAN –  is especially important for those preparing for, and enjoying retirement.

 

This blog post is for informational purposes only.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  Past performance is not a guarantee of future performance.  This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.

Why has everyone suddenly become fearful?

Jonathan N. Castle, CFP®, ChFC

The economy was in recovery; the bulls were stampeding through Wall Street, and for a few short months we had a general feeling that maybe – just maybe – all would be well with the economic world.  Then things seemed to fall apart – first we had a Tsunami and a potential nuclear disaster in Japan; then President Mubarek of Egypt was ousted, and then we started dropping bombs on Lybia.  To top it off, Greece will probably go bankrupt – if not soon, then certainly at some point in the future, and everyone in the US is wondering if that will be our own future if our brilliant congressional leaders can’t quit their squabbling and decide one way or another on our own budget deficit.  Do we simply raise our own debt ceiling, allowing our government to put us deeper in debt, do we default on some of our debt, or do we cut deeply into some highly sensitive entitlement programs to try and balance the budget?  QE2 is ending, so the Federal gravy train of free money is coming to an end, right?  To top it off, the market has been floundering around – falling one day and rising the next with no clear direction, reminding us of the ever present danger of a sustained bear market that may push all of our retirements back a few more years.

So what happened?  What should you do?

Well – since everyone’s situation is different, I’ll start off with some assumptions.  In my experience, individuals who are generally successful investors have the following characteristics, so I am going to assume that if you are reading this – then you have met the following criteria.  If not – then disregard anything and everything I say.

1)  You have an investment PHILOSOPHY (i.e., set of guiding beliefs and a repeatable strategy) that you believe in enough to stick to through the long term.  You are aware that events that effect financial markets continually happen and are often unpredictible – therefore, your investment PHILOSOPHY provides you guidance on how you build your investment portfolio, and does not change from day to day.  You are also aware that, contrary to what Wall Street and the mass media (which is in their pocket, by the way) constantly advocate - “buy when the market is going to go up, sell when it is going to go down,” is NOT an investment PHILOSOPHY.  It is an investment FANTASY.

2)  You have carefully measured your risk tolerance.  This means that you know EXACTLY how much your portfolio can drop before you even THINK about making any changes to your overall strategy.

3)  You have carefully designed your portfolio to match your risk tolerance.  In other words – if your risk tolerance is such that you can bear a drop of up to 10% in your portfolio – but no more – then you are aware that the market typically will drop 20% or more every 3.5 years, on average.  Therefore – you have designed your portfolio so that 50% or less of your account would be effected by such a drop.  So- if the overall stock market drops 20% – but only about half of your portfolio is in the stock market – with the rest of the portfolio in cash, CD’s, and perhaps short-term bonds  – then you can reasonably assume that a 10% drop in your portfolio would be a likely outcome of such a correction – and would be bearable.  Keep in mind that during extended recessions or financial crises (such as occurred in 2008) that these parameters are often exceeded.  The 2001 crash, on the other hand – did not effect properly diversified portfolios as much.  Point being – you have structured YOUR portfolio to match YOUR risk tolerance.

Assuming all of the above – then my general advice, assuming that you have some time until you need ALL of your portfolio – would be to do nothing.  Nonthing at all!  Sometimes we have to scream out, “Don’t just DO SOMETHING – Stand there!!”

As far as all the other stuff going on, here is my take on current events.  Granted – I cannot foresee the future – no one can – but from looking into things and trying to keep everything within a historical perspective, here’s what I think is going on.

1)  The market first.  The markets are quite efficient.  With probably more than 100 million investors, analysts, gurus, institutions, etc. all playing in the market and trying to get the most profit for the least amount of risk – the markets as a whole factor in a great deal of information in a short period of time.  I believe that the potential outcomes of both a default by Greece, and the end of QE2 are already factored into the current prices of stocks and bonds – for the most part.  None of this information was kept a secret; markets have known for nearly a year about the end of QE2, and honestly – Greece’s entire economy is about the size of Rhode Island’s.  The threat to the EU is certainly there – but more on a political front than as a potential for a global financial meltdown.  I expect very little response from the overall market to either the end of QE2 or a Greek default.  In fact, I believe that Greece WILL default – but in stages.

2)  Again, on the markets.  The economy is in recovery, but this occurs in stages.  Honestly I don’t understand all the wailing and gnashing of teeth – but I suppose that’s what drives in the revenue to the squawkers in the Media.  Remember those old rocket ships that had multiple stages – first the big rocket engine with all the fire shooting out of it, then a smaller booster rocket, and then another, and finally the little spaceship on the top of the rocket fires its engines and it goes off into outer space or to the moon?  Well, every time the rocket ended one stage, the engine would quit – there would be a pause – and then when the next engine would kick on the rocket would continue on its way.  We didn’t see all the media freaking out at every pause… squawking about how the rocket was going to fall back to the ground just because the first engine quit.  We don’t all jump out of our cars and start worrying that our car is broken everytime we shift from one gear to another… a marathon runner knows he can’t sprint for the full 26 miles… so why all the wailing and chicken littling every time there is a bit of bad news or a new report that wasn’t quite as good as the last one?  Economic recoveries take time.  This was the GREAT RECESSION, after all – over a decade in the making, so it stands to reason that it will likely take a decade or more to fix.

3)  There are a ton of reasons to believe that the stock market – and the economy – will continue to head in the right direction – upward.  First – the general index of leading economic indicators is still positive.  Yes, some of the coincident indicators have slowed down, but generally, they are still well ahead of recession territory.  Secondly, employment is still growing.  Yes, we’ve had a slow month or two of new hiring numbers – but employment is still growing.  And the number of temporary workers that have been hired is up to levels not seen since 2009, and companies typically hire temps before perms.

4)  Economic slowdowns (operational pauses) are absolutely normal after a run-up like we saw since last year.  This “pause” gives corporations time to think about their next moves – expansions, hiring, starting new projects, new marketing campaigns, etc.  Corporations have also been hoarding cash; it is only a matter of time before these corporate reserves are put to work in new growth opportunities and innovations.

5)  Stock buybacks are at an historic high right now.  Based upon P/E ratios, stocks are the cheapest they’ve been in 26 years (this from Bloomberg).  The Bush tax cuts are still in effect, corporate profits are higher than ever – and there is currently approximately 2 trillion dollars sitting in cash and on the sidelines ready to be deployed into the markets.  This all makes for a powder keg of bullish opportunity.

Ultimately, no one can see the future.  But I do believe that we as humans typically worry too much.  Supposedly about 95% of the things that we worry about never happen.  So, in this case – assuming all the above – my suggestion is that we just stand back and see where the markets take us.  I’m betting that place is up significantly from where we are now.

Disclaimers:

This blog post is for informational purposes only.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  Past performance is not a guarantee of future performance.  This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.

Should I wait to retire for bigger Social Security benefits?

by Michelle Ash, CFP®, CDFA™

Along the road of life there are many milestone ages – age 16 to drive, age 18 to vote, age 21 to drink, and so on.  When it comes to thinking about retirement specifically, there are a number of milestone ages there too – at age 50 you get your AARP card (usually without requesting it), at age 55 you can take penalty-free withdrawals from an employer plan like a 401(k) if you are retired or separated from service, and at age 59-1/2 you can take penalty-free withdrawals from an IRA.  The BIG milestone that causes many people to stop and think, though, is the age of 62.  What happens then?  Well, under current laws, age 62 is the first time in which a worker or spouse can draw social security retirement benefits.

However, age 62 is sort of like the minimum entry point to social security retirement benefits.  Think of it in the same way as if you were buying tickets to a sporting event or concert:  you’ve got the base tickets that cost the least and get you in the door but you might be in the nosebleed seating section; and then you’ve got better seats which cost more.  With social security, if you want a “better seat” – meaning a bigger social security check each month – then your additional “cost” is waiting until a later age to draw the benefits.

In fact, for individuals reaching the age of 62 today, their Full Retirement Age (FRA) is age 66.  As it’s name implies, that’s the age at which full benefits have been earned.  For individuals born in years 1955 or later, the FRA age is even higher than 66.  Under current law, the maximum FRA age is presently 67.

You’re not limited to the choices of age 62 or your Full Retirement Age as your only two options, however.  You can choose to draw benefits anytime in between those ages.  There is a sliding scale of reduced benefits that applies.  If you’re mathematically-minded and want to figure it out for yourself, you deduct 5/9th’s of one percent for every month you draw the benefits early.  I’ll give an example of how to calculate it in just a moment, however if you’re not inclined to do the math yourself, you may want to visit the Social Security Administration’s website at www.ssa.gov.  There you will find charts based on your year of birth that give you the exact percentage of benefit you would draw based on your age when you retire.  They break it down by month, so the data is very precise and helpful.

Here’s an example of how to calculate your social security benefit between ages 62 and FRA:

Jane wants to retire now at the age of 63.  Her Full Retirement Age is 66.  Her social security statement tells her that her FRA benefit is $2,000 per month.  If Jane wants to retire now at 63, she will multiply 5/9th’s, or 0.5555, times the number of months she’s retiring early.  In her case, it’s an even 36 months she’s retiring early.  So, Jane multiplies 0.5555 x 36 months = 20% (by rounding).  Jane multiplies that 20% times her FRA benefit of $2,000 and gets a reduction of $400/month.  So, her age 63 benefit will be $1,600 per month.

Factors to Consider

The numbers can give us a very monetarily-based answer, but like many things in life, the decision is often not quite so simple.  Consequently, very frequently we hear the question:  “Should I wait to retire for those bigger social security benefits?”

If Jane in our example knows her exact monthly budget and how much money she needs for her expenses every month, it might be very simple for her to decide whether the $1,600 per month benefit will be enough and whether to go ahead and retire.  But Jane might also look at things and feel like $400 per month of additional dollars, which she could have just by waiting three more years to retire, is an awful lot to sacrifice.  However, she also has to weigh in the fact that, during the three years between age 63 and 66 that she’s not receiving social security, that’s $1,600 per month that she’s not getting.  The question this often leads to is – “What’s my breakeven?”

Your Social Security “Breakeven”

Your breakeven is essentially the age at which the cumulative amount of extra money you got by drawing the benefit at an earlier age is equal to the cumulative amount of money you would have by waiting and getting a bigger benefit.  Generally, the breakeven is between 12 and 14 years after you began drawing early benefits.  What this means is that, if you believe you will live longer than 12-14 years in retirement, then you’ll have received more social security money by waiting to draw your benefit.  If you do NOT believe you’ll live that long and are planning to retire and no longer work, then you are better off drawing the benefit before your Full Retirement Age.

Continuing our example from before, Jane’s breakeven is exactly fourteen years.  At her age of 77, if she draws social security at age 62 and receives $1,600 per month, she will have received a total of $288,000 in benefits.  By comparison, if she were to wait until age 66 to draw her FRA benefits at $2,000 per month, she will have also received a total of $288,000 in benefits.  The real question then becomes – does Jane believe she’ll live beyond age 77?  If so, and if she wants a bigger paycheck, then she may want to wait.  If not, it may make sense to go ahead and draw benefits.

The Crystal Ball of How Long You’ll Live

I always find it interesting to discuss longevity, or how long you’ll live, with people.  Actually, the first hurdle is sometimes discussing it at all, since some people don’t even want to think about it.  But in my world of financial planning, at least in terms of social security benefits, it often becomes the critical question.  If we all knew exactly how long we’d live, it would be very easy to then figure out when to draw benefits to get the most amount of money from the program.  Most of us, though, don’t really have that crystal ball, or at least not one that’s real accurate.  How can you estimate?  Here are the factors I’d suggest considering:

1. Family Longevity – how long do the people in your family tend to live?  Are their health and circumstances similar to yours?  If so, this might be a good indicator.  If circumstances are substantially different, however, they might not be a good comparison.

2. Statistics – what do the mortality tables say?  Statistically today, according to data from the US Census Bureau (1), a man who is age 60 today can expect to live to the age of 80.9, and a woman to the age of 83.9.  Sadly, younger individuals today actually have a LOWER life expectancy, likely due to childhood obesity and other problems facing our nation.  That’s a topic for a different blog, however.

3.  Personal Circumstances – how’s your own health?  Do you take care of yourself by being physically fit and eating healthfully?  Do you control your stress levels?  Do you have balance to your life?  “Yes” answers to these questions may tend to lead to a longer life.  “No” answers may, though not always, detract from it.

Factoring in Social Security Rule Changes

Everything discussed so far is predicated on the current rules of the social security program.  Whether those rules will remain the same, however, is anyone’s guess at this point.  Certainly we hear about the program needing to change because it’s going broke.  Will it change?  Your guess is as good as mine.  Without knowing the future of social security, all you can do is decide what YOU think will happen, and take action accordingly.

Do you believe benefits may no longer be offered between age 62 and your Full Retirement Age?

Do you think your Full Retirement Age might be raised?

Do you think benefit payouts will be reduced?

If you’ve answered “yes” to any of these questions, then you may want to give serious consideration to drawing early.  On the other hand, if you are not bothered by these possibilities, and prefer to make the decision on your own terms instead of succumbing to fears, then you may prefer to wait and draw social security when you otherwise would.

Two Important Social Security Rules to Be Aware Of Before You Decide

Another factor that is extremely important to consider if you are thinking about taking social security benefits prior to your FRA is this:  are you completely finished working, or are you just retiring from one career and may start working another?  The reason this is important is because, if you draw social security between age 62 and your FRA, then any wages you make over about $14,160 per year cause your social security earnings to have to be given back.  The general rule of thumb is that you lose $1 of benefit for every $2 you earn.  In general, if you earn more than $55,000 in annual wages, you’ll have given back your whole social security benefit.  Since by drawing it early  you’ve already locked in a lower benefit, it makes very little sense to draw it and then give it back.  Don’t think you can hide the information from the Social Security Administration (SSA) either, as they and the IRS do share data.  If the SSA finds out money is owed back to them, they will deduct it from your benefits – in a hurry.

There are caveats to these statements:  you can proactively suspend your social security benefits  if you see this issue coming.  You should also know that social security gives you credit on your earnings record for the continued wages you’re drawing so that it benefits your social security amount.  All of those items are beyond the scope of this particular article.  Generally, it’s easier to avoid the whole issue up front.  However, if you’re already in the middle of such a situation, it may be a good idea to either do some online research on www.ssa.gov, or make an appointment with the folks at the Social Security Administration for individual guidance.

Another important factor to be aware of is that the benefit you draw at your Full Retirement Age is NOT the maximum benefit possible.  Under present laws, if you were to defer your benefits until after your FRA, they could continue to increase until age 70.  Here’s the lucrative part:  the benefit increase is currently a guaranteed 8% per year.  If you’re going to retire late, don’t need the money right away, or think you’ll have really long life span, this may be a great way to grow your benefit with absolutely no market risk.  Age 70 is the maximum age, though.  Beyond age 70 the benefits do not increase by waiting, so it does not make sense to defer benefits beyond that age.

Other Considerations and Where To Go From Here

There are MANY other strategies that financial planners such as myself have discovered and can apply to individual situations.  If you are married, there are factors regarding the age and work status for both you and your spouse that may be important to factor into your situation.  Unfortunately, many of those get too complex to go into here.

What’s my best advice if you’re still uncertain about when to draw benefits after everything you’ve read here?  Seek the help of a qualified retirement specialist like a CERTIFIED FINANCIAL PLANNER™ professional to help you figure it out.  You can research professionals in your area by visiting the CFP Board’s website at www.letsmakeaplan.org.

Footnote (1):  Table 103. Life Expectancy, by Sex, Age, and Race: 2007.  Source: U.S. National Center for Health Statistics, National Vital Statistics Reports (NVSR), Deaths: Final Data for 2007, Vol. 58, No. 19, May 2010. See also http://cdc.gov/NCHS/products/nvsr.htm#vol58/.

Disclaimer:  This blog article is not personal financial advice.  Please consult your a financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.

So I’ve Been Saving…Now What?

 Michael Carignan, CFP^®, CRPC^®

Have you ever wondered how to get a clear picture of all of your current financial resources and how much retirement savings you need to provide your vision of retirement, taking into account your potential health or market risks?  This is just one of many questions people ask when thinking about personal retirement planning.  If you find yourself in this boat, there are a number of solutions for you.  First, with some time, research and diligence, spreadsheets and off-the-shelf software, you can create your own retirement plan.  However, it is likely that if you are asking these questions, you probably don’t have one of those key ingredients to success, or you would already know the answer.  A more comforting solution may be to get some professional help.  WebMD can help you diagnose some medical conditions, but most people feel better having a trained medical professional give them their expert opinion and recommend a treatment if warranted.  In a similar fashion, finding the right financial professional to help you can be a key step in the right direction on your path to financial success.

Just like finding the right doctor is important, (you don’t want to go see your dermatologist if you have a cough) finding the right kind of financial professional can be equally important.  There are many financial professionals out there; selecting the right one may be the most important factor in ensuring you have a favorable planning experience.  There are some questions you need to ask when looking for a professional to help you construct a retirement plan.  The first question should be, “are they qualified to provide the answers I’m looking for?”  One good resource in this search is www.letsmakeaplan.org where you can search for a local Certified Financial Planner™.

Most people are more comfortable dealing with a doctor that has the same philosophy on treatment and they personally like.  By “same philosophy on treatment,” I mean, do they recommend a diet and exercise regimen, or do they push a diet pill to help lose weight?  If you and your doctor disagree on the basic philosophy of medical treatment, you probably will have disappointing results, since you won’t follow his or her advice.  In the same way, it is very important to look for a financial professional that has the same general philosophy that you do when it comes to investing and money management.  If you believe that it’s possible to outsmart the financial markets and pick the best performing mutual fund or stock next year, then you need to find a broker who believes that as well.  If you believe that investing involves taking some prudent risks and adhering to a long term plan with a scientifically designed portfolio, you likely should  find a different advisor.  Neither philosophy is necessarily wrong, but making sure you select a financial professional that has the same philosophy as you have is of paramount importance to a successful planning relationship.

Some additional specific questions you should ask are:

• Do you prefer fee based or commission based compensation for your advisor?
• Do they have experience with other clients like you?
• Can they advise you on all aspects of your financial life or will you need several advisors to get the answers you need?
• What is the charge for the plan?  In most cases, you get what you pay for; if it’s free there is going to be a sales agenda you might not know about right away.
• What is included in the service they provide?
• Will they be able to help you implement planning suggestions?  If so, is it a requirement of the planning process?  Be careful of the solutions that can only be done through them.
• Do they make “suitable” recommendations or are they a “fiduciary”?  (For more information on the difference click here)

Finding a professional that you can understand and trust is critical when choosing to have a retirement plan constructed for you and your family.  You are unlikely to follow the advice, good or bad, if you do not trust the person providing the advice.  Once you find your ideal fit of personality and capabilities, be ready and willing to provide answers to all of their questions, since a retirement plan is only as good as the information you provide.  Don’t hesitate to ask them probing questions and provide honest answers if they ask you some difficult questions.  When dealing with the money you have worked so hard to accumulate, stumbling into retirement without a carefully crafted plan can be a dangerous prospect at best. Once your retirement plan is complete, then it becomes time to “work your plan” if you have a few more years, or “live your plan” if you are already retired.

The earlier you start planning for retirement the better, because finding yourself in retirement and unsure if you’ll be able to live it how you’d like is a scary proposition.  It has been my experience that those who are most successful in retirement have taken the time to get the advice that helps them sleep well at night, knowing they have done everything they could to create the retirement they wanted for themselves and their family.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.

High Unemployment… Debt Crisis… Inflation… Tsunami… why does the market keep going up?

By Jon Castle, CFP^®, ChFC^®

Many times, while working with clients, we get the question,  ”WHY are you generally bullish on the market?  All the news I hear is BAD.  How can you possibly think the market is going to keep going up?”

I will get around to answering this question – but bear with me a moment as I wax philosophical.  It has been my experience in working with individual investors saving and working toward retirement – that the most successful investors develop an investment philosophy – a set of guiding principles and beliefs that shape an investor’s decision making process.  This set of principles essentially guides the investor during the darkest times so they can remain disciplined during times of economic and market volatility.

“I think the market is going to go up – so I want to be invested NOW – but not if it goes down,” is NOT an investment philosophy!  An investment philosophy guides an investor’s decisions consistently, based upon their fundamental beliefs about the way markets work.  For example, MY own investment philosophy (not necessarily the right one - just what I happen to believe) can be summed up as follows:

1)  Capitalism – perhaps best described as “Pay Upon Results,” ultimately drives the financial markets.  It creates the impetus for new developments and for entrepreneurs to take risks, to create new businesses or opportunities, to hire people to do work, to think up new goods and services that people will buy.  Without capitalism, there is no opportunity for reward, so no one will take undue risk – and the economy will languish as it did in the old Soviet Union.  Sometimes capitalism gets a little out of control… and can be cruel… thus the need for prudent regulation.  However, it is the best economic system invented so far and is amazingly efficient.

2)  Capital Markets work.  With all of the competition to outdo the other guy – millions upon millions of investors seeking the highest reward for the lowest possible risk creates an environment of extreme efficiency in our Capital Markets.  Just about all known information – and the probabilities of all imagined outcomes- about any particular stock or bond – is very quickly factored into that security’s price.  Any “surprise” information that can significantly give one investor an advantage over another is factored into the price very quickly – usually within seconds of that information becoming public knowledge.  Therefore – most of the time – doing tons of research about any particular stock or bond is a waste of time because the market prices the information faster than you (or a mutual fund manager, hedge fund manager, or other money managers) can do the research.

3)  I do believe that there are those few who have the “gift” and have been able to outperform the general market by some margin.  However, this “gift” is usually fleeting  - numerous studies show if someone has outperformed the market in the past – the odds of them continuing to outperform in the future are miniscule.  More often than not, managers who outperformed merely increased the risk within the portfolio, and pay for that risk later in under-performance.  Picking a money manager (or a mutual fund) who will outperform the market – in advance – is extremely unlikely.

4)  Successful investors focus on what they CAN control instead of what they cannot.  We cannot control fund manager performance.  We cannot control the Fed’s actions, nor can we control the markets.  However, we CAN control costs, the structure of our portfolio, and our own behavior.  So, in general, better and more predictable performance can be achieved by capturing the movement of the entire market and its various sectors – through the use of lower-cost ETF’s, index funds, and institutional “total market” funds – than through individual stock picking, trying to hop in and out of the market based upon tips or media input –  or by using more expensive mutual funds where managers try to beat the market while enduring higher risks, tax inefficiencies, and trading costs.

5)  Above all – manage risk.  If the market gets bumpy and shakes you loose from your philosophy - you have failed.  Likely, you took too much risk and will probably never recoup that risk by reaping the rewards the market has historically given those who structure their portfolios so they can ride out the market’s bumps.  Risk tolerance is best described as the amount of money in your account you can watch disappear (through market fluctuation) without changing your philosophy.  If the market drops 20% – but you freak out if your account drops 10% – then you need to structure your account so it will most likely only drop 9% when the market drops 20%, instead of gambling on when the market will go up and when it won’t.  More often than not your gamble will be wrong.

OK, so that was my investment philosophy in a nutshell.  Now – back to the original question.

With all the bad news – why does the market keep going up?  Aren’t we just setting ourselves up for another disaster?   Personally, I think not.  I could be wrong, but I believe my logic is sound.

First – much of the “bad” news is sensationalized.  Right now, as I write this, the media is just about going bonkers trying to get the Obama administration to release photos of the dead Osama Bin Laden.  Now let’s think about this for a minute.  What real purpose would that serve?  Suppose the photos ARE released:

1)  He isn’t any less dead with the pictures than without.

2)  Pictures can be faked.  People (and countries) who don’t believe he is dead, will believe the pictures are faked.

3)  People who believe he is dead will still believe he is dead.

4)  If the photos are released, the media would get more people either watching their shows, reading their magazines, or logging into their websites to see the pictures.  This would sell more magazines (with the photos), and allow them to charge more money for advertising in those magazines, sell more web banners, and charge higher rates for their commercials!

AHA!  The net worldwide effect of the administration releasing the photos would likely be - the MEDIA MAKES MORE MONEY!!!!  Hmm…

So… let’s apply this logic to the stock market and the economy.  What if the media were absolutely unbiased and did not sensationalize anything?

Responsible Media:  “The preponderance of the data shows that the economy is slowly recovering.  Unemployment is slowly going down.  Generally, economic activity is increasing while housing still continues to lag.  Corporate earnings are healthy and corporations are sitting on mountains of cash which they will likely continue to invest over the next 5 years in new production, jobs, advertising, commerce, or in the stock market.  The Federal Reserve will likely, very slowly, reduce the amount of stimulus in the economy to try to control inflation – but must do it carefully in order not to derail the economic recovery.  (They know this, by the way, since they all have PhD’s in economics and finance).  The dollar is weakening a bit – but a weakening dollar can be good for America because it creates jobs at home (versus being sent overseas) and it allows us to sell American goods overseas more competitively.”  (REPEAT EVERY DAY OVER AND OVER with tiny adjustments… )

BOOOOORRRRRIIINNNNGGGG!  After about the third day, no one would watch that show anymore!  And of course, that show and its network would make no money in advertising.

Now – compare that with OUR MEDIA:

1) “Tsumani causes Nuclear Disaster!!!!  Will this cause a global stock market crash?!?”

2)  “Osama Bin Laden Killed.  EXPECT TERRORIST ATTACKS which may cause a global stock market crash!!!!”

3)  “Initial unemployment claims increased by 0.005% last month!!! Is the economic recovery DOOMED?”

4)  Fed to reduce Quantitative Easing.  Is the economic recovery DOOMED?!?!

5)  Fed did Quantitative Easing which boosted the economy.  Oh, No, we’ve got DEBT!  Is the economic recovery DOOMED?!?!

You get the picture.

 The simple reason the market keeps going up is this:  Investors seek investments which give the highest reward for every unit of risk.  Currently, cash is paying virtually nothing.  Bonds are trading at the highest prices (and lowest yields) in most of our lifetimes – so very little new money is moving into bonds.  There is a TON of cash sitting on the sidelines – and it has to go somewhere.  Slowly, it is making its way to the stock market.  The stock “Market” is driven by supply and demand.  As demand increases, the prices go up to reflect that demand.  Expect occasional bumps as unforeseen events unfold – but in general, our economy is expanding and is likely to continue to recover over the next several years.  The stock market is a “leading” indicator of the economy (investors invest for the future, not for the now), so it will generally rise BEFORE recoveries and will generally fall BEFORE recessions.  This is not new – it is basic economics.

It can be helpful to remember that the stock market NEEDS some uncertainty to do well.  Only when there is cash sitting on the sidelines (as a result of worry or uncertainty) can the markets continue to go up.  It is this very “worry cash” that gets the fed into the markets over time, which, in turn, drives the markets up.  OF COURSE investing is risky – why in the world would there be any significant reward without any risk??  The problem is – once everyone FEELS great about the market – once the last investor FEELS great about the economy and goes “ALL IN,” - then there is no additional cash left on the sidelines.  Thus – there is no further demand to continue to drive the market up.  THAT is when we need to really worry… that event occurred in March of 2000 – at the very height of the tech bubble… when all was well, the economy was booming… monkeys with dart boards could outperform professional money managers… and we all know what happened next.

Disclaimer:  This blog article is not personal tax advice.  Please consult your tax professional for personal, specific tax information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.

Tax Breaks for IRA Distributions When Donating to Charity

by Michelle Ash,

We’re all looking for legitimate ways we can save money on taxes, right?  Well, if you’re looking to have an extra bang-for-your-buck with a charitable donation, read on.

In a moment, I’ll talk about the specifics of a nice tax break that those over the age of 70.5 (who take Required Minimum Distributions from IRA’s) can use for making charitable donations.  But even if you’re  a) under the age of 70.5, or b) not looking to make a charitable contribution from your IRA, there might still be some helpful information in this article for you.

Charitable Donation Basics:

Anyone can give a charitable donation.  Without citing any particular statistic, I’ll just say that in these difficult economic times, I believe any charity would welcome a donation of any size.

For many Americans, though, a charitable donation can also mean a nice tax break.  Who gets the tax breaks?  The short answer is anyone who itemizes their deductions on Schedule A has the opportunity to take a charitable deduction.  Without getting too detailed, though, it’s important to know that deduction of charitable donations is limited to a maximum of 50% of your adjusted gross income (AGI).  That doesn’t mean you can’t give more away – it just means you don’t get a tax break for it.  Most Americans who give charitable donations don’t make them from their Individual Retirement Arrangements (IRA’s) – after all, those are for use in retirement, right?  Instead, most Americans just make a donation from cash flow, or maybe from an asset they want to give away, like an old car.  Age doesn’t matter with regards to making these types of donations.  The IRS will give you tax deductions for charitable contributions of this sort, regardless of your age.

The Qualified Charitable Distribution (QCD)

But for those who are age 70.5 and above, and who want to use those required IRA distributions for a charitable donation, there’s an extra tax break.  If the RMD is pulled out and sent directly to the charitable institution, amounts up to $100,000 may be excluded from the taxpayer’s gross income.  These distributions are  not subject to the normal 50% of gross income limitation, so potentially they could give higher than 50% of AGI in total and  still receive a tax break.  This provision exists for each taxpayer, so if a husband and wife each want to contribute, they can each do so up to $100,000 each from their own IRA’s – for a total of $200,000 combined.

Important details to follow to make sure the transaction is qualified:

• Contributions must be from traditional or Roth IRAs.  QCDs cannot be made from employer-sponsored IRAs (Simplified Employee Pensions (SEP-IRAs) and Savings Incentive Match Plan for Employees (SIMPLE-IRAs), or from defined contribution retirement plans (for example, 401(k) plans or 403(b) plans).
• Individuals must be older than 70.5 when the QCD is made.
• Charities must be eligible to receive tax-deductible charitable contributions.
• The distribution must be a trustee-to-trustee transfer; that is, a direct transfer from the IRA to the charity.
• The distribution first comes from taxable funds, then from any nondeductible IRA contributions. Previously, distributions would have been allocated proportionately between deductible and nondeductible contributions.

How long are the QCD tax breaks available for?

Under current law, the deadline for using the Qualified Charitable Deduction rules for an IRA RMD  are until December 31, 2011.  Note, too, in the rules above that the RMD money must go directly to the charitable institution.  If you’ve already taken your RMD out of your IRA for the year, and wish you had done it this way,  it’s unfortunately too late, at least according to the current tax laws.  You cannot put the money back in your IRA and remove it again – such an attempt just won’t work.   You can still give that money away to charity, but it won’t be excluded from your gross income and it will be subject to maximum charitable gift deduction limitations.

Will this provision be extended into future years? 

At present I haven’t seen any information on that subject.  The current rules have been extended from previous years of law in 2007 and then 2009, so it seems likely that an extension might be under future consideration.  I would bet if the charities had things their way, they’d probably advocate for an extension, as it’s likely that only Americans who are required to make IRA withdrawals but don’t need the money are the ones using this rule.  Do charities have lobbyists who advocate for this kind of stuff?  I don’t know, but it sure would make sense to me!

Disclaimer:  This blog article is not personal tax advice.  Please consult your tax professional for personal, specific tax information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.