Smart Money Blog

June 21 2013

Get Out Your Crystal Ball

Maria Alcoke Smart Money Blog investor planning, market predictions

Many of you who have been to my office know that I have a crystal ball sitting in my conference room. I have been carrying it around for 20 years, ever since I bought it in Puerto Vallarta, Mexico from a mysterious street vendor.

I am sorry to say that all predictions from my crystal ball have never been right – but they have also never been wrong.

Experience has shown that even if you know what the Federal Reserve, Congress, oil prices, etc. will do, it is very difficult or impossible to predict the reaction of the markets.

The “market” is a representation of billions of individual decisions affecting trillions of transactions on a daily basis. These decisions are based on fact, fiction and emotion.

What is an investor/saver to do?

First, do not get emotional. Dalbar, a nationally recognized organization that analyzes investor results, identified three main causes of poor investment performance. Psychological factors accounted for 45% to 55% of the shortfall. In other words, your greatest obstacle for achieving your financial goals is staring at you when you look in the mirror.

Second, have a plan. Unfortunately, the typical conversation when you meet with a broker or advisor goes like this: “How much money do you have?” “What is your rate of return?” “I can do better.”

The higher the rate of return you reach for, the greater the risk of loss and the more likely you won’t achieve your financial goals. Make sure you have a plan that allows you to target what return you need, and then build the most conservative portfolio you can to achieve your goals.

Third, make sure you have enough liquidity. When we talk about liquidity, we’re referring to cash on hand. This is important because you never know when an opportunity may present itself. Again, paraphrasing from the Dalbar study, 35% of investor shortfall was a result of not having enough liquidity to meet obligations or to take advantage of opportunities.

If you would like a copy of the 2013 Dalbar study, please give our office a call at 215-968-1755 or fill out the contact form on this site and we will get back to you.

May 13 2013

Retirement Planning and Social Security

Maria Alcoke Smart Money Blog medicare, retirement planning, social security

It is no secret that the social security trust fund is spending more than it is collecting. While there is no immediate crisis, it is important that investment advisors and financial planners consider the possible impact that this will have on your retirement now and in the future.

After reviewing a number of the many proposals or trial balloons put forth by the President and Congress, there are three that I think you and your advisor should be most worried about. These include:
Retirement Planning

Increased taxes on your social security

Anyone on social security knows that the benefit is taxed up to 85% of your total benefit. But we should all remember that when Social Security started, it was intended to be a tax-free benefit. The money (your money) that you contributed to the social security trust fund was taxed on the way in, and now it is also taxed on the way out.

Financial planners and their clients should consider how easy it is for Congress to adjust the tax schedule – and instead of just 85% of your benefit being taxed, all of your benefit would be taxed.

Reduced Cost of Living Adjustment (COLA)

The COLA is the percentage increase of your social security benefit on an annual basis to keep up with inflation. Your COLA is calculated using something called the CPI consumer price index. There is a lot of talk about changing how the CPI is calculated, which would reduce or eliminate the COLA increase. Some of you might remember in 2008 and 2009 when there was a 0% increase in your social security benefit. It happened once and it can certainly happen again.

Increased charge for Medicare

The cost of Medicare is deducted directly from your social security check. This deduction has steadily increased over the years. A modified version of a means test has also been implemented. This means that the more you make, the more Medicare will cost you.

It is expected that the number of families affected by this increased premium will double over the next 5 years. The increased premiums range from $209 to $334 per month. Who could have imagined that we would be talking about the manipulation of the social security system in order to reduce your benefit?

What can you do about it?

Well from a planning perspective, I believe that it is no longer wise to include the COLA adjustment or use the 85% tax rate when calculating your retirement benefit. At TFG Wealth Management, we have changed our planning strategy to look at what would happen if there was no COLA and 100% of your social security benefit was taxed.

This makes it even more important to choose the right strategy for collecting social security. There are over 700 different strategies for collecting your social security benefit. In order to determine which one is right for you, we use a sophisticated proprietary computer program that analyzes all possible strategies for your situation. After we have identified the top three, it is then time to take into consideration other issues like longevity, how much you need to live on, what tax rate you will pay during retirement, how much of your income will be generated through taxable accounts like an IRA or 401(k) and how much will be generated by tax-free accounts. Combining the science of the computer program and these other factors, we help our clients determine the best strategy for their circumstances.

If you are interested in learning more about your social security options, please give me a call at 215-968-1755 or contact me by filling out the contact form on this site and I will get back to you.

April 3 2013

Are Mutual Funds A Safe Place For People To Have Their Money?

Maria Alcoke Smart Money Blog low risk investments, mutual funds, retirement investing

Here is a recent excerpt from an interview with John Bogle about whether mutual funds are a safe place for people to have their money…

John Bogle: “It is as safe as the stock market, which is to say — to be quite blunt about it — not safe on any short-term basis. But when you look at the long term, look to what investment can I own for a lifetime? We know — as much as we can ever know — that stocks will do better than bonds over half a century, let’s say.”

“If you’re in your 20’s and you’re going to be investing for the next 50 or 60 years, it’s an excellent long-term bet. [But] in any given year? The market can drop 50 percent. I’ve seen now three of those 50 percent drops. They’re all scary. At the bottom, you think they’re going to last forever. But they don’t.”

What is he saying? Is the stock market safe or not safe? What stocks or mutual funds are safer than others? I think that Mr. Bogle is a very smart businessman. So smart that he can say nothing while appearing to say something very insightful (to paraphrase: the stock market is safe as long as you have 50 to 60 years of investing ahead of you).

Are mutual funds safe? If the market can go down 50% in any given year (3 times in his lifetime), then how safe is it? Sure, if you are 20 or 30 then maybe you can ride it out or even take advantage of the lows. But if you are reading this, my guess is that you are somewhere north of 50.

Folks, if you depend on your retirement savings for income now or starting in the next 10 years, can you really afford to have a 50% drop in your account value? Smart investors understand that conservative investing using a balance of safe and low risk investments is the best way to secure their financial future. Combine this strategy with a focus on reducing or eliminating taxes and you have a winning combination.

I believe that this is common sense and so do our clients.

If you agree, please give me a call at 215-968-1755 or contact me by filling out the contact form on this site and I will get back to you.

March 2 2013

A Simple IRA Planning Idea To Benefit Your Spouse

Maria Alcoke Smart Money Blog IRA planning, IRAs, life insurance

We recently worked with a client that had the following challenge: while they were both alive, their annual income tax liability was pretty low, less than $1,500. But upon either one of them dying, the annual income tax liability for the surviving spouse was projected to skyrocket to over $7,500, more than a $6,000 increase!

Why is this the case?

A Simple IRA Planning Idea To Benefit Your Spouse It is because a decent portion of their income comes from their IRAs. While they are both alive, they file tax returns as “married, filing jointly”. These tax brackets are some of the most lenient in the entire tax code.

But, when one of the dies, the surviving spouse files taxes as a “single” taxpayer. These are some of the harshest brackets in the tax code.

And like a lot of people, the clients we are talking about had a large percentage of their assets in retirement plans. IRAs and other retirement plans like 401ks, 403bs, etc. can cause significant tax challenges for surviving spouses, as we see in our little example.

Now you need to brace yourself. The story above is not uncommon. In fact, it is actually a very common issue, and it may very well apply to you.

So what should you do about it? That is the $64,000 question.

First, you need to find out what your tax return would look like for your surviving spouse (or you, if you are the survivor). This analysis will tell you if you have a potential problem.

If you do, then here is a really simple idea that you may want to consider. WARNING: it is an idea that would normally not be on your list of options.

Are you ready?

Why not distribute some extra income out of your IRA (or other retirement plan) today, and each year thereafter, while you and your spouse are both alive and enjoying those lenient tax brackets? Yes, you will owe additional tax on those distributions, but here is the important part – that additional tax does NOT affect your current lifestyle.

Then, what if you took that after-tax amount of the distribution each year and used it to fund a life insurance policy on both your life and the life of your spouse?

I bet you weren’t expecting that one!

Life insurance? At your age? Wouldn’t that be expensive?

Surprisingly, due to increasing life expectancies, life insurance pricing has dropped considerably. As a result, planning like this becomes very effective.

The nice thing is that when the first spouse passes away, the surviving spouse receives a nice big tax-free check from the life insurance company. They can use that check to do a number of things:

They might convert the IRAs to Roth and pay the tax from the life insurance proceeds. Then all income from the IRAs would be 100% tax-free.
They might pull some additional income from the life insurance proceeds, again positively managing their tax return.
If the life insurance policy is large enough, they might go ahead and give the tax toxic IRA money to the kids, and live off of the life insurance proceeds.

As you can see, adding a large tax-free check to the list of assets that a surviving spouse has to work with can make a huge difference for them. And remember, for the surviving spouse, any additional income tax DOES affect their lifestyle.

So why not consider paying some extra tax today when it does NOT affect you so that your surviving spouse (or you!) can avoid taxes later when they DO affect you?

If you would like to discuss IRA planning in more detail, please give me a call at 215-968-1755 or contact me by filling out the contact form on this site and I will get back to you.

February 2 2013

5 Retirement Income Issues

Maria Alcoke Smart Money Blog financial goals, retirement income, retirement planning

Planning your retirement income is a very difficult and challenging task. You can’t afford to mess it up. You need to do it right the first time.

Here are five factors to keep in mind when creating your retirement income plan. Each can endanger your finances during your retirement.

1. You might live a long time
We all know that people are living longer, but what does that mean to you?

If you are 65 years old and single, you can expect to live to 86, according to the Internal Revenue Service. You have a fairly good chance of living even longer. This means that you need to anticipate making your money last a long time. Small mistakes early on can compound into large mistakes over many years.

2. Expect to spend a lot of money on healthcare
Every year, Fidelity Investments projects how much a 65-year-old married couple should expect to spend on their healthcare during their retirement years. They assume that each person is on Medicare, but they also assume that no long-term care is needed.

Even though Medicare covers a ton of medical bills, the average couple spends $240,000 on healthcare during retirement. That’s right, a cool quarter of a million dollars. Over 25 years of retirement, that’s about $10,000 per year. If you need long-term care, it’s a lot worse than that. So make sure that you overestimate how much money you need for healthcare.

3. Watch out for inflation
For the past several years, inflation is almost nonexistent, but don’t expect that to last much longer. Just one trip to the gas station tells us that inflation is back. Remember the late 1970s and early 1980s, when a fixed-income was so disastrous? With prices going up every year, a fixed income buys less and less.

At just 6% inflation, prices double every 12 years. If you spend close to 25 years in retirement you can expect to see prices double twice. That means you need four times the income to buy the same stuff at the end of your retirement compared to the beginning of your retirement. Of course, a 6% annualized rate of inflation is very high. It isn’t likely that such alarming price appreciation continues for decades. But make sure that you factor inflation into your plan.

4. Taxes follow you into retirement, too
While you worked, you probably heard the wisdom about saving money today while you are in a higher tax bracket. The reason: When you take it out later during retirement, you are in a lower tax bracket. That isn’t always the case nowadays.

Many retirees find themselves paying more tax today than they did when they were working because they actually did a good job saving for their retirement.

Imagine you are getting ready to retire. As you shift from working to retirement, do you want to move into a lower standard of living or the same? If you want the same standard of living, your income needs to be about the same (or greater to account for health costs and inflation).

Also, with no kids in the house and the house paid for, your deductions are all gone. So you have about the same income, with no deductions. That’s not good for your tax bill.

Compound that with required minimum distributions from fully taxable retirement accounts – at age 70½ you must start withdrawing money. Then you have an equation that works really well for the Internal Revenue Service and not so well for you. Taxes are a real threat to a retiree’s standard of living.

5. Changing with the times
When you were working, you probably had a retirement plan that provided a menu of mutual funds to invest in. It was easy. You just picked the best performers and didn’t worry about it. Retirement plans are designed for growth and accumulation. You use them to build up your nest egg so you can comfortably retire someday.

The problem is that when you retire, your financial tools are no longer appropriate for the most of your portfolio. Those same mutual funds might be too risky to hold during retirement, for example. You need to learn about different financial tools such as Roth individual retirement accounts, rollovers, conversions, dividend stocks, exchange-traded funds and money market funds that focus on both wealth preservation and income.

Dealing with a long retirement, healthcare costs, taxes, inflation and learning how to invest all over again is a daunting task. TFG Wealth Management provides our clients with the strategies they need to realize their financial goals in challenging times.

If you would like to discuss issues affecting your retirement, please give me a call at 215-968-1755 or contact me by filling out the contact form on this site and I will get back to you.