12/24/12

Unfortunately, financial planning not a high priority New Year’s resolution for most Americans

As my practice grows, both in number of clients and the ages of new clients at both ends of the spectrum, I am consistently amazed at how many say that they never thought about using the services of a Certified Financial Planner™.  In a survey by Allianz Life Insurance Company, 84% of Americans will not include financial Planning in their New Year’s resolutions.

The #1 reason why people did not include financial planning in their resolutions was their belief that they don’t make enough money to worry about it.

“It’s alarming that Americans’ willingness to ignore financial planning in their New Year’s Resolutions continues to go up year after year,” said Katie Libbe, vice president of Consumer Insights for Allianz Life. “With the responsibility for retirement security shifting from employers to individuals, people need to become more, not less, active with financial planning to ensure they have enough money to fund a retirement that could last up to 30 years.”

Unfortunately, when respondents were asked how likely they are to seek advice from a financial professional in 2013, more than a third (36 percent) responded “less likely,” up 5 percent from 2011. Only 20 percent said they were “more likely,” matching 2011, while 44 percent noted they were “unsure,” down 5 percent from the 2011 survey.

In typical American fashion, we have big desires for health and wealth, but do little to do the work necessary to achieve these goals.  It’s easier to dream about the great abs but don’t do the sit-ups required.

For the second straight year, “health/wellness” topped Allianz Life’s survey as the most important focus area for the upcoming year. Forty-four percent of respondents made it their top selection followed by “financial stability” (31 percent), “employment” (15 percent) and “education” (6 percent).

If you know of someone who truly needs to establish good financial habits, which include working with a Certified Financial Planner™, please pass on this week’s email which includes links to articles about working with financial advisors.

I want to wish you a wonderful holiday season and a prosperous New Year.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

 

11/26/12

Retirement Timetable for Baby Boomers

Last week I read an article written by Mary Beth Franklin in the magazine, Investment News.  It did such a great job summarizing the key ages related to Retirement Planning, I have republish it in this weeks blog message for your benefit.

 

Milestones and markers

These days, the road to retirement can be a bumpy ride. And soon it’s going to look like rush hour as Baby Boomers turn 65 at the rate of 10,000 people per day, every day, for the next 17 years. Yet an astonishing 17% of transition Boomers — those 55 to 65 years old — have yet to start saving for retirement, according to a 2012 survey by Allianz Life. Therefore, we’ve created a set of signposts to help these stragglers boost their savings, take advantage of tax breaks and watch out for the curves ahead.

 

 

Age 50

Catch-up contributions
In the year you hit the big 5-0, you can start stashing more money into your tax-deferred IRA and 401(k) or Roth accounts. In 2012, those 50 and older can add an extra $5,500 to their employer-based retirement plans on top of the $17,000 allowed for younger workers for a total of $22,500. Next year, the catch-up amount remains the same but the maximum contribution increases to $23,000. Those 50 and older can also contribute an extra $1,000 into the traditional or Roth IRA for a total of $6,000 in 2012 and $6,500 in 2013.

 

Age 55

Penalty-fee 401(k) distributions for early retirees
If you leave your job at age 55 or older, you can tap your 401(k) or other employer-sponsored retirement account penalty free, avoiding the normal 10% federal tax penalty on early withdrawals. But you’ll still owe income taxes on distributions. The early-out exception does not apply to IRAs which penalize distributions before age 59 ½.

It’s also the age when individuals with a high-deductible health insurance plan can contribute an extra $1,000 to a tax-deferred H S A in both 2012 and 2013 to pay out-of-pocket medical costs tax-free. You can roll over unused H S A funds from year-to-year, making it an ideal way to supplement retirement savings.

 

Age 59 ½

IRA pay day
Begins the eligibility for penalty-free distributions from IRAs and other qualified retirement plans. But some employers don’t allow distributions from workplace-base plans while you’re still on the job.

 

 

 

Age 60

Early claiming for survivors
Widows and widowers can collect Social Security survivor benefits as early as age 60, but the amount will be reduced by as much as 28.5% compared to claiming benefits at their normal retirement age and benefits. Survivor benefits may be reduced or even eliminated if they continue to work.

 

 

Age 62

Early access to Social Security benefits
You can collect retirement and spousal benefits as early as age 62, but benefits will be permanently reduced by up to 25%.

 

 

 

Age 65

Medicare kicks in
If you are already collecting Social Security benefits, you will automatically be enrolled in Medicare. Part A, which covers hospital costs, is free. Part B charges a monthly premium, currently about $100 per month for most beneficiaries, If you’re not yet collecting Social Security benefits, you’ll have to apply for Medicare.

Once you turn 65, you can no longer contribute to a Health Savings Account, but you can spend the money on anything, penalty free. However, you’ll owe income taxes on any non-medical distributions.

 

Age 66

The magic number
66 is the magic age for Social Security benefits. You qualify for your full benefits, you are no longer subject to the earnings cap restrictions if you continue to collect a paycheck and you can engage in some creative claiming strategies to maximize benefits.

 

 

 

Age 70

Maximum Social Security benefits
If you haven’t started collecting retirement benefits, now is the time to start even if you keep working. Delayed retirement credits, worth 8% per year starting at age 66, end once you turn 70.

 

 

 

Age 70 ½

Mandatory draw-downs
After all those years of tax-deferred retirement savings, Uncle Sam wants his cut. You must start taking annual minimum distributions from your IRA and other retirement accounts (except Roths) based on your life expectancy. If you don’t, you’ll owe a 50% penalty on any amount you fail to withdraw.

 

 

11/19/12

Post-Election Update Part 2 – A Few Suggested Investment Strategies

Last week I received the most comments of any of my blog posts to date.  Many of the responses asked for more comments and suggestions related to the type of investments and strategies which should be implemented moving forward.  I will use this week’s blog to provide some suggestions as well as links to articles which go into greater detail about different investment strategies.

Most of the suggestions deal with financial planning surrounding the increases expected in tax rates.  Therefore I suggest you may want to consider the following:

  1. Increase in Capital Gains Tax – Since the long-term capital gains rate is set to increase from 15% to 20% you may want to consider selling highly appreciated assets.  If you have any holdings which are in a loss position you could offset some of the gain by selling them.  If you still like the appreciated investment, you can immediately repurchase the investment and obtain a new higher tax basis for the future.  Usually I recommend the opposite which is called tax harvesting.  Meaning you sell the asset which has a loss, capture that tax loss and then wait 31 days before you repurchase, this is called the “Wash Sale Rule.”  But in a gain scenario you don’t need to wait for the holding period.  Feel free to call me with questions about this strategy.  Please read this article for further suggestions about tax loss harvesting, tax gain harvesting as well as other strategies you may want to consider.
  2. Tax Preferred Retirement Accounts – Fully funding your retirement accounts makes great sense if taxes are going up in the future, especially if you are able to contribute to a Roth IRA or Roth 401k at work.  (As a side note, fully funding your retirement accounts makes sense to do even if tax planning was not involved, BECAUSE IF YOU DON’T PLAN FOR YOUR RETIREMENT, WHO WILL?)  By fully funding your tax deferred retirement accounts you are able to defer current taxes and enjoy the benefit of compounded growth.  Now may also be a good year to consider doing a full or partial Roth Conversion.  Here are some articles on the subject:
  3. Favorable Tax Planning Investments REITS – Generally I recommend placing anywhere from 10% to 20% of a client’s holdings in non-publically traded Real Estate Investment Trusts or REITs.  The reason I use them is to generate bond like returns which smooth out the volatility of a client’s portfolio.  The REITs I recommend are currently paying a dividend rate of approximately 7% before any potential appreciation caused by the exit strategy.  The types of non-publicly traded REITs I recommend offer low management costs, they purchase Class A shopping centers or medical related properties at below market and new construction costs, have income which more than covers the monthly dividend paid to investors and offers a timely exit strategy of 3 to 5 years.  In addition when some of these non-publicly traded REITs are held in taxable accounts they offer great tax benefits as well.  They may offer up to 100% tax sheltering of all monthly income paid out and when the investment is actually sold, the gain is taxed at lower long-term rates instead of ordinary income rates.  For more information to see if these types of investments are suitable for you, please call or email me.

If you would like to meet and discuss your situation further, please feel free to call or email me.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

11/12/12

Post Election Update

Even after the candidates, unions, business groups and other special interest groups spent billions of dollars on the campaign, the end result is that we still have the same divided government that we had last week.  President Obama was reelected the Republicans will control the house with a 41 vote majority and the Democrats will control the senate with a 10 vote majority.  The bottom line is that any piece of major legislation will require bi-partisan support, something the Democrats did not have to do with the stimulus, healthcare or financial industry reform measures.  They had super majorities during the first half of President Obama’s presidency and never worked in a bi-partisan manner.

Generally, re-elected Presidents start to think about their legacy, and President Obama privately conceded during an off the record interview that if he was re-elected he will need to tackle the deficit and entitlement spending issues.  Unfortunately, his actions so far appear that he will continue to outsource major legislation to Congress just like he did with the stimulus and health care laws and not take a hands-on approach.  After his re-election Instead of calling congressional leaders back to Washington in order to deal with the “fiscal cliff,” he gave a campaign style speech and went off to play golf.

Most Washington Economists believe that there will be movement towards dealing with the deficit issues.  The major drivers of the deficit are Social Security and Medicare.  These experts believe that it will be possible to push changes through which include means testing of benefits, higher income levels on which social security and Medicare taxes are paid on and pushing the retirement age out.  It is also generally agreed that these changes will only affect those under age 55.

The “fiscal cliff” has been called the “mother of all lame duck session issues.”  If congress can’t agree to soften the tax increases and spending cuts tied to the “fiscal cliff” package of issues, most economists believe that there will be a 3.5% decrease in GDP.  Since the GDP is currently only growing by 1.25%, this means that there will be a drop in GDP, resulting in a recession starting in the 1st half of 2013.

So what are some strategies to prepare for higher taxes and slower economic growth?

  • If you were thinking about selling or diversifying assets with significant gains, you should sell them this year.
  • Be prepared for greater market volatility.  This is due to the high degree of uncertainty along with greater number of assets being sold to avoid the increase in capital gains rates.
  • Consider municipal bonds and tax deferred investments.
  • Consider Roth IRA Conversions.  Even if you convert this year, you can always revert back by October 2013 if positive changes or decreases in market value don’t benefit the conversion.
  • Take advantage of higher gifting this year.

If you would like to meet and discuss your situation further, please feel free to call or email me.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

10/29/12

Treat your retirement savings as you would any other bill

According to a recent study by Wells Fargo Retirement Services, more than one-third of middle class Americans could end up at or near poverty in retirement.

In a recent survey of 1,000 middle class Americans, conducted by Harris Interactive from July 9-Sept. 4, found that 52 percent of middle class Americans believe their most important day-to-day financial concern is paying the monthly bills, up from 37 percent a year ago. Savings for retirement comes in second with 16 percent of respondents saying it was a key concern.

More than half (53 percent) of those surveyed said they are not confident they will have saved enough for the life they want in retirement, up from 42 percent in 2011.

For this reason it is critical to treat saving for retirement like you would do with any other bill.  What I mean by this is that you need to treat saving for retirement just like any other expense you pay proportionately with each pay period.  If you are paid twice a month, and your goal is to fully fund your IRA or Roth IRA account each year, you should invest $208.33 per pay period.

This type of simple budgeting is essential if you are to avoid the fears and risks identified by this survey.  KEEP IN MIND – IF YOU DON’T PLAN FOR YOUR OWN RETIREMENT, WHO WILL?  THE GOVERNMENT?

I have some clients who reply to this advice with the comment – I will just work until I am in my late 70’s.  WELL… Thirty percent of those surveyed in this survey said they will need to work until they are 80 to live comfortably in retirement, up from 25 percent a year ago. Yet, 73 percent of Americans say their employer would not want them to work in their 80s. Seventy percent said they will try to work in retirement, with 39 percent saying they’ll work out of financial necessity.

So if you are part of the group who thinks that they will work into their 70’s, just look at your current company, how many of your fellow employees are in their 70’s?

With proper focused planning, you can avoid the fears of the people in this survey.  Be part of the group who retires with confidence.  Work and a Retirement Planning Advisor who can keep you on track and can provide you with the tools and guidance you need to succeed.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

10/15/12

“The Fiscal Cliff” – What it means to you and your family

The “Fiscal Cliff” – Coming January 1, 2013!

What is the “fiscal cliff”? It’s the term being used by many to describe the unique combination of tax increases and spending cuts scheduled to go into effect on January 1, 2013. The ominous term reflects the belief by many economists that, taken together, higher taxes and decreased spending at the levels prescribed have the potential to derail the economy. Whether we do indeed step off the cliff at the end of the year, and what exactly that will mean for the economy depends on several factors.

Will expiring tax breaks be extended again?

With the “Bush tax cuts” (extended for an additional two years by legislation passed in 2010) set to sunset at the end of 2012, federal income tax rates will jump up in 2013. We’ll go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). The maximum rate that applies to long-term capital gains will generally increase from 15% to 20%. And while the current lower long-term capital gain tax rates now apply to qualifying dividends, starting in 2013, dividends will once again be taxed as ordinary income.

 

Current and New Federal Tax Rates
2012 As of January 1, 2013
Ordinary income 10%, 15%, 25%, 28%, 33%, 35% 15%, 28%, 31%, 36%, 39.6%
Capital gains (generally) 

 

15% maximum; 0% for those in 10% and 15% income tax brackets 20% maximum; 10% for those in 15% income tax bracket (slightly lower rates will generally apply to a sale or exchange of assets acquired after December 31, 2000 and held for more than five years)
Qualified dividends Taxed at long-term capital gains rate (15% top rate) Taxed as ordinary income (39.6% top rate)
Medicare contribution tax on unearned income 

 

N/A 3.8% on net investment income for individuals with MAGI over $200,000 ($250,000 for married couples filing jointly; $125,000 for married individuals filing separately)

In addition, the following changes will also occur:

  • The temporary 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax, in place for the last two years, also expires at the end of 2012.
  • Lower alternative minimum tax (AMT) exemption amounts (the AMT-related provisions actually expired at the end of 2011) mean that there will be a dramatic increase in the number of individuals subject to AMT when they file their 2012 federal income tax returns in 2013.
  • Estate and gift tax provisions will change significantly (reverting to 2001 rules). For example, the amount that can generally be excluded from estate and gift tax drops from $5.12 million in 2012 to $1 million in 2013, and the top tax rate increases from 35% to 55%.
  • Itemized deductions and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).
  • The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit all revert to old, lower limits and less generous rules.
  • Individuals will no longer be able to deduct student loan interest after the first 60 months of repayment.

The House of Representatives have extended all these provisions, but the Senate will not act.  The impasse centers on whether tax breaks get extended for all, or only for individuals earning $200,000 or less (households earning $250,000 or less). Many expect there to be little chance of resolution until after the November election.

New taxes take effect in 2013?

Beginning in 2013, the hospital insurance (HI) portion of the payroll tax–commonly referred to as the Medicare portion–increases by 0.9% for individuals with wages exceeding $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

Also beginning in 2013, a new 3.8% Medicare contribution tax is imposed on the unearned income of high-income individuals. This tax applies to some or all of the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

Both of these new taxes were created by the health-care reform legislation passed in 2010–recently upheld as constitutional by the U.S. Supreme Court–and it would seem unlikely that anything will prevent them from taking effect.

Will mandatory spending cuts be implemented?

The failure of the deficit reduction supercommittee to reach agreement back in November 2011 automatically triggered $1.2 trillion in broad-based spending cuts over a multiyear period beginning in 2013 (the formal term for this is “automatic sequestration”). The cuts are to be split evenly between defense spending and nondefense spending. Although Social Security, Medicaid, and Medicare benefits are exempt, and cuts to Medicare provider payments cannot be more than 2%, most discretionary programs including education, transportation, and energy programs will be subject to the automatic cuts.  The problem is that the defense cuts are real dollars vs. the domestic spending cuts are merely reductions in future increases in spending.  This means that there will be an estimated 1 million jobs lost fairly quickly in the defense and defense related industries.

New legislation is required to avoid the automatic cuts. But while it’s difficult to find anyone who believes the across-the-board cuts are a good idea, there’s no consensus on how to prevent them. Like the expiring tax breaks, the direction the dialogue takes will likely depend on the results of the November election.

What’s the worst-case scenario?

Many fear that the combination of tax increases and spending cuts will have severe negative economic consequences. According to a report issued by the nonpartisan Congressional Budget Office (Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013, May 2012), taken as a whole, the tax increases and spending reductions will reduce the federal budget deficit by 5.1% of gross domestic product (GDP) between calendar years 2012 and 2013. The Congressional Budget Office projects that under these fiscal conditions, the economy would contract during the first half of 2013 (i.e., we would likely experience a recession).

It’s impossible to predict exactly how all of this will play out. One thing is for sure, though: the “fiscal cliff” figures to feature prominently in the national dialogue between now and November.  That is why it is critical to plan for the effect of possible increased taxes by possibly shifting income into 2012 and delaying deductions to 2013.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

09/17/12

New Retirement Math

In a recent article by Offain Gunasekara, of Fox Business News, he highlighted the need to think about new math.  Not the new math which we encountered in elementary school 40 years ago, but the new retirement math.

In the past, most retirement calculators used a growth rate of 7ish percent.  Today, according to Marcus Allan Ingram, chair and associate professor of finance at the University of Tampa, it is necessary to use a more modest growth rate of 5%.  This means that you may need to “do your math all over again.”  Further, since the Fed just announced a concerted effort to keep rates low until 2015, the amount you need for a secure retirement will continue to be a difficult target to not just hit, but to determine in the first place.

In this article, Professor Ingram suggests that investors should “test-drive your retirement assumptions to give you a realistic picture of how much you’ll need to retire — and the steps you need to take to make today’s vision a reality tomorrow.”  In addition he suggests using a “retirement planning coach.”

Professor Ingram explains that a retirement planning coach is not just a financial planner who sells you products, but is an advisor who is an independent and unaffiliated fee-based retirement planner.

What is the ideal amount of savings needed to retire?

That is literally the million dollar question!  The economics of retirement income planning have changed.  This is due to market volatility, inflation, longevity, drop in housing values and ever-increasing health care costs have dramatically altered the planning rules from not only recent generations, but for everyone moving forward as well.  The bottom line is that we are seeing the challenges in retirement planning are not the same from one generation to the next.

By working with an independent fee-based advisor, they should be able to work with you to put together a portfolio which blends both guaranteed/dependable rates of return as well as less volatile investments to help ensure that your portfolio will both generate current income as well as future growth.  This is the only way to ensure that you will not run out of money before you run out of life.

If you need more help with this topic, please feel free to call or email me.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®