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Retirement Planning Can Start with an IRA

These accounts make a good “first step” in retirement saving.

Sooner or later, people decide to start saving and investing for retirement. When that starting point arrives, taking that “first step” can seem like a big deal. Opening an Individual Retirement Account (IRA) amounts to an easy “first step” in retirement saving for many.

When you invest through a traditional or Roth IRA, you give those invested assets the potential to grow with compounding and you also position yourself for present or future tax savings.

How does an IRA work? An IRA is not an investment in itself, but an account into which various investments can be placed. It is yours; you control it. In that way, it differs from an employer-sponsored retirement account that you lose immediate control over when you leave a job.1

IRAs are tax-advantaged. In both Roth and traditional IRAs, account earnings compound with tax deferral until withdrawn – that is, they grow without being taxed.

With a traditional IRA, contributions are usually tax-deductible, based on your income, but withdrawals are taxed as ordinary income after age 59½ (a 10% penalty often applies to withdrawals made before that). With a Roth IRA, tax-deductible contributions are not permitted, but your earnings can be withdrawn tax-free. (Contributions will not be taxed when you withdraw them either, as long as you are the original IRA owner and have had the Roth IRA for more than five years.)1

So there you have the main difference between a traditional IRA and Roth IRA: while both give you a chance to build retirement savings with tax advantages, the traditional IRA offers you a sizable tax break today while the Roth IRA offers you a big tax break tomorrow. Or to put it another way (as some have), a traditional IRA lets you amass tax-deferred savings while a Roth IRA lets you amass tax-exempt savings.1,2

Should you open a traditional IRA or Roth IRA? Several variables should be considered as you make your choice, and a chat with a financial professional can help you weigh them. One key question to consider: do you think you will be in a lower tax bracket when you retire? If you do, a traditional IRA might be the better choice. If you have decades to go until retirement and think you will retire to a higher tax bracket than you are in today, the Roth IRA may be the better choice. Some savers “hedge their bets” and open Roth and traditional IRAs.3

Given compounding, the future tax break offered by a Roth IRA may be profound indeed. Roth IRAs also have two other compelling features. One, you never have to make mandatory withdrawals from them starting in your seventies (as with traditional IRAs). Two, you can keep contributing to them all your life, whereas contributions to a traditional IRA are prohibited after the year in which you turn 70½. Certain couples and individuals cannot have Roth IRAs, however, as they have incomes well over $100,000 (the precise thresholds are periodically adjusted upward for inflation).1

Some traditional IRA owners convert their accounts to Roth IRAs. That is a taxable event, and if the traditional IRA is large, a Roth conversion may not be worth the effort: the resulting income tax bill may be too large to handle and even offset the potential long-range benefits.3

How do you open an IRA? Just about any financial professional can help you do that; you can even do it online and at many bank and credit union branches. You should try to open one with low annual fees, as even a 1% annual account fee subtly eats into your IRA balance. Quite often, opening an IRA is just a matter of filling out an application (and a beneficiary form) and writing a check. Alternately, you may be able to transfer money from a bank account to start an IRA.4

What are the drawbacks of IRAs? First, their annual contribution limits. Right now, you can only contribute a maximum of $5,500 a year to a traditional or Roth IRA ($6,500 if you are 50 or older). If you have multiple IRAs, your total yearly contributions to all of them must not exceed that limit or you will incur an IRS penalty. This annual contribution ceiling is low compared to common workplace retirement plans such as 401(k)s and 403(b)s.5

Many Americans would like a retirement account that never loses money. A Roth or traditional IRA is not that account. IRA assets are not usually allocated to riskless investments, and when you have investment risk, you have potential for investment losses. IRAs are not insured by the FDIC or any other federal agency.1

In response to the desire for riskless retirement saving, the federal government recently created the myRA, a Roth IRA whose value is guaranteed to increase. Its return is pegged to the return of the government securities fund for federal employees, which averaged 3.39% a year from 2003-2013. The myRA yearly contribution limits are exactly the same as yearly Roth IRA contribution limits. After 30 years or when its balance hits $15,000, a myRA converts to a private-sector Roth IRA. A myRA is basically a vehicle to help Americans who have few or no avenues to save for retirement due to their line of work or income levels.6,7

Warmest Regards,

april-signature   

 

Citations.

1 – us.hsbc.com/1/2/home/invest-retire/retirement/ira [2/16/15]

2 – fool.com/money/allaboutiras/allaboutiras03.htm [2/16/15]

3 – schwab.com/public/schwab/nn/articles/Roth-IRA-Conversion-Look-Before-You-Leap [5/1/14]

4 – fool.com/money/allaboutiras/allaboutiras14.htm [2/16/15]

5 – fool.com/retirement/iras/2015/01/11/ira-contribution-limits-in-2014-and-2015-and-how-t.aspx [1/11/15]

6 – money.usnews.com/money/retirement/articles/2014/11/24/how-retirement-benefits-will-change-in-2015 [11/24/14]

7 – myra.treasury.gov/about/ [11/24/14]

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Long-Term Investment Truths

Key lessons for retirement savers.

You learn lessons as you invest in pursuit of long-run goals. Some of these lessons are conveyed and reinforced when you begin saving for retirement, and others you glean along the way.

First & foremost, you learn to shut out much of the “noise.” News outlets take the temperature of global markets five days a week (and even on the weekends), and fundamental indicators serve as barometers of the economy each month. The longer you invest, the more you learn to ride through the turbulence caused by all the breaking news alerts and short-term statistical variations. While the day trader sells or buys in reaction to immediate economic or market news, the buy-and-hold investor waits for selloffs, corrections and bear markets to pass.

You learn how much volatility you can stomach. Volatility (also known as market risk) is measured in shorthand as the standard deviation for the S&P 500. Across 1926-2014, the yearly total return for the S&P averaged 10.2%. If you want to be very casual about it, you could simply say that stocks go up about 10% a year – but that discounts some pronounced volatility. The S&P had a standard deviation of 20.2 from its mean total return in this time frame, which means that if you add or subtract 20.2 from 10.2, you get the range of the index’s yearly total return that could be expected 67% of the time. So in any given year from 1926-2014, there was a 67% chance that the yearly total return of the S&P might vary from +30.4% to -10.0%. Some investors dislike putting up with that kind of volatility, others more or less embrace it.1

You learn why liquidity matters. The older you get, the more you appreciate being able to quickly access your money. A family emergency might require you to tap into your investment accounts. An early retirement might prompt you to withdraw from retirement funds sooner than you anticipate. If you have a fair amount of your savings in illiquid investments, you have a problem – those dollars are “locked up” and you cannot access those assets without paying penalties. In a similar vein, there are some investments that are harder to sell than others.

Should you misgauge your need for liquidity, you can end up selling at the wrong time as a consequence. It hurts to let go of an investment when the expected gain is high and the P/E ratio is low.

You learn the merits of rebalancing your portfolio. To the neophyte investor, rebalancing when the market is hot may seem illogical. If your portfolio is disproportionately weighted in equities, is that a problem? It could be.

Across a sustained bull market, it is common to see your level of risk rise parallel to your return. When equities return more than other asset classes, they end up representing an increasingly large percentage of your portfolio’s total assets. Correspondingly, your cash allocation shrinks as well.

The closer you get to retirement, the less risk you will likely want to assume. Even if you are strongly committed to growth investing, approaching retirement while taking on more risk than you feel comfortable with is problematic, as is approaching retirement with an inadequate cash position. Rebalancing a portfolio restores the original asset allocation, realigning it with your long-term risk tolerance and investment strategy. It may seem counterproductive to sell “winners” and buy “losers” as an effect of rebalancing, but as you do so, remember that you are also saying goodbye to some assets that may have peaked while saying hello to others that you may be buying at the right time.

You learn not to get too attached to certain types of investments. Sometimes an investor will succumb to familiarity bias, which is the rejection of diversification for familiar investments. Why does he or she have 13% of the portfolio invested in just two Dow components? The investor just likes what those firms stand for, or has worked for them. The inherent problem is that the performance of those companies exerts a measurable influence on the overall portfolio performance.

Sometimes you see people invest heavily in sectors that include their own industry or career field. An investor works for an oil company, so he or she gets heavily into the energy sector. When energy companies go through a rough patch, that investor’s portfolio may be in for a rough ride. Correspondingly, that investor has less capacity to tolerate stock market risk than a faculty surgeon at a university hospital, a federal prosecutor, or someone else whose career field or industry will be less buffeted by the winds of economic change.

You learn to be patient. Even if you prefer a tactical asset allocation strategy over the standard buy-and-hold approach, time teaches you how quickly the markets rebound from downturns and why you should stay invested even through systemic shocks. The pursuit of your long-term financial objectives should not falter – your future and your quality of life may depend on realizing them.

Warmest Regards,

 april-signature

Citations.

1 – fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088 [6/4/15]

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Investing in Agreement With Your Beliefs

The case for aligning your portfolio with your outlook & worldview.

Do your investment choices reflect your outlook? Are they in agreement with your values? These questions may seem rather deep when it comes to deciding what to buy or sell, but some great investors have built fortunes by investing according to the ethical, moral and spiritual tenets that guide their lives.

Sir John Templeton stands out as an example. Born and raised in a small Tennessee town, he became one of the world’s richest men and most respected philanthropists. Templeton maintained a lifelong curiosity about science, religion, economics and world cultures – and it led him to notice opportunities in emerging industries and emerging markets (like Japan) that other investors missed. Believing that “every successful entrepreneur is a servant,” he invested in companies that did no harm and which reflected his conviction that “success is a process of continually seeking answers to new questions.”1

Among Templeton’s more famous maxims was the comment, “Invest, don’t trade or speculate.” Having endured the Great Depression as a youth, he had a knack for spotting irrational exuberance.2,4

As the 1990s drew to a close, he correctly forecast that 90% of Internet companies would go belly-up within five years. In 2003, he warned investors of a housing bubble that would soon burst; in 2005, he predicted “financial chaos” and a huge stock market downturn. To Templeton, a rally or an investment opportunity had to have sound fundamentals; if it lacked them, it was dangerous.3,4

Warren Buffett leaps to mind as another example. The “Oracle of Omaha” is worth $70 billion, and Berkshire Hathaway’s market value has risen 1,826,163% under his guidance – yet he still lives in the same house he bought for $31,500 in 1958, and prefers cheeseburgers and Cherry Coke to champagne or caviar. He was born to an influential family (his father served in Congress), but he has maintained humility through the decades.5

Money manager Guy Spier dined with Buffett in 2008 at one of the billionaire’s annual charity lunches, and in his book The Education of a Value Investor (co-written with TIME correspondent William Green), he shares a key piece of advice Buffett gave him that day: “It’s very important always to live your life by an inner scorecard, not an outer scorecard.” In other words, act and invest in such a way that you can hold your head high, so that you are staying true to your values and not engaging in behavior that conflicts with your morals and beliefs.5

Buffett has also cited the need to be truthful with yourself about your strengths, weaknesses and capabilities – as you invest, you should not be swayed from your core beliefs to embrace something that you find mysterious. “You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t understand. It’s not terribly important how big the circle is. But it’s terribly important that you know where the perimeter is.”5

Speaking to a college class some years ago in Georgia, he cited the real reward for a life well lived: “When you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”5

Values and beliefs helped guide Templeton and Buffett to success in the markets, in business and in life. For all the opportunities they seized, their legacy will be that of humble and value-centered individuals who knew what mattered most.

Today, socially responsible investing looks better than ever. Investors who want to their portfolios to better reflect their beliefs and values often turn to “socially responsible” investments – or alternately, “impact” investments that respond to environmental issues, women’s rights issues and other pressing societal concerns. When they emerged in the late 1980s, people were skeptical about how well such investments would perform; that skepticism is still around, but it appears to be unwarranted. Since 1990, the average annual total return for the S&P 500 has been 9.93%; the Domini 400, considered the prime index tracking socially responsible companies, has an annual total return of 10.46% by comparison. So aligning your portfolio with your outlook and worldview looks like even more like a win-win these days.6

Warmest regards,

april-signature

Citations.

1 – forbes.com/sites/alejandrochafuen/2013/05/07/how-to-invest-think-and-live-like-sir-john-templeton/ [5/7/13]

2 – record-eagle.com/news/local_news/jason-tank-finding-the-right-mindset-is-good-start/article_42c81b99-c7c9-5fa1-83b3-4fa2f9c1c641.html [5/5/15]

3 – csmonitor.com/Commentary/Opinion/2008/0711/p09s01-coop.html [7/11/08]

4 – crossingwallstreet.com/archives/2014/02/sir-john-templeton-the-last-yankee.html [2/10/14]

5 – observer.com/2015/05/ive-followed-warren-buffett-for-decades-and-keep-coming-back-to-these-10-quotes/ [5/4/15]

6 – marketwatch.com/story/socially-responsible-investing-has-beaten-the-sp-500-for-decades-2015-05-21 [5/21/15]

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Estate Planning for Your Digital Assets

Have you addressed this issue?

Social media and email accounts. Creative works, photos and keepsakes kept on home computers, the cloud or external storage drives. E-commerce accounts. Domain names. Bitcoin. These are all examples of digital assets. You will manage them closely as long as you live – but what will happen to them once you die?

Have you talked about it with those you love? In a recent survey of baby boomers, antivirus software provider AVG Technologies found that only 16% of respondents had thought about what would happen to their digital assets after their deaths. A mere 3% had alerted or prepared their loved ones in regard to this issue.1

If you have a will or a revocable trust, you must plan for the transfer and/or administration of digital assets just as you have for tangible assets. Your digital assets may or may not be of great financial value, but they need protection against exploitation as well as abandonment.

Distributing digital assets is part of fiduciary duty. That is what makes articulating your wishes so important. A financial professional or financial firm acting in a fiduciary role on your behalf has an obligation to distribute your digital assets – but many social media and e-commerce websites will not readily allow this without the permission given by the user or his or her heirs.2

How about social media & email accounts? Facebook has a legacy contact feature for its users. You can appoint a custodian for your page after you are gone: your legacy contact will be able to respond to friend requests, change your cover photo and profile picture, and write a notice of your memorial service or funeral; he or she will not be permitted to log in with your password or username, read messages sent to you or modify your account settings. Alternately, you can simply tell Facebook that you would like to have your account immediately deleted at your death. Google has an Inactive Account Manager option that will let you leave instructions for what should be done with your Google Drive docs or Gmail account once you are deceased.3

As for LinkedIn, a loved one fills out an online form on behalf of the deceased, which is reviewed by LinkedIn pursuant to getting in touch with that person. The notifying party will need to supply your name, profile URL, email address and date of death plus information on the company you last worked for and a link to your obituary. Twitter handles accounts of the deceased in similar fashion, and it can also remove images in a person’s account per request; the Twitter account is frozen at death, with access barred even to immediate family.4,5

Computer files. Your executor or trustee should be provided with the location of your computers, tablets or e-readers after your death and the passwords to them if you have set password protection. Locating backups may also become crucial. Remember that annual fees for antivirus programs and website hosting may no longer need to be paid; the executor or trustee will need to be informed about those user agreements.

E-commerce accounts. Most of us have eBay, iTunes or PayPal accounts, all with monetary value (with a PayPal account, the value may reach into the five-figure range). Moreover, these accounts can serve as pathways toward our banking and credit card information.

What if your idle e-commerce account is hacked after your death? What if the account balance is drained or the cybercriminal uses the account to go on a shopping spree? What if your username and password could be stolen and used at other websites you have accessed? These what-ifs need to be considered – and addressed during your lifetime and in your estate plan.

Domain names. How can you keep a website going after you die? One way is to pay for a decade (or more) of hosting or domain name ownership with such URL longevity in mind, and letting your trustee or executor know just how to renew the agreement. Only that trustee or executor should have access to that knowledge – unless you want business partners or a future owner to know how the arrangements work.

Bitcoin. You can create a copy of your Bitcoin wallet file for a trusted beneficiary, or arrange Bitcoin transfer to your beneficiary dependent on multiple signatures or the signature of an oracle server, or at a specific date. Or, a wallet file may be divided into component pieces for different heirs, with the heirs having to unite the components to form the Bitcoin wallet.6

Does your will or trust need amending? Language regarding your digital assets is essential. At the very least, you want to tell your executor or trustee where digital assets are stored. Even better, the amendment should give your executor or trustee the authority to administer, archive, alter or destroy digital assets in addition to the power to direct them to heirs or other named beneficiaries. That means turning over your online passwords to your executor or trustee at your death, or having them access password management software used to create them.

Warmest Regards,

april-signature

Citations.

1 – globalnews.ca/news/1940177/digital-wills-should-we-start-including-a-digital-legacy-clause-in-our-wills/ [4/15/15]

2 – tinyurl.com/kbno2wu [5/11/15]

3 – cnet.com/news/facebook-to-allow-legacy-contacts-for-when-you-die/ [2/12/15]

4 – help.linkedin.com/app/answers/detail/a_id/2842/~/deceased-linkedin-member—removing-profile [11/3/14]

5 – support.twitter.com/articles/87894-contacting-twitter-about-a-deceased-user-or-media-concerning-a-deceased-family-member [5/18/15]

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Are Your Kids Delaying Your Retirement?

Some baby boomers are supporting their “boomerang” children.

Are you providing some financial support to your adult children? Has that hurt your retirement prospects?

It seems that the wealthier you are, the greater your chances of lending a helping hand to your kids. Pew Research Center data compiled in late 2014 revealed that 38% of American parents had given financial assistance to their grown children in the past 12 months, including 73% of higher-income parents.1

The latest Bank of America/USA Today Better Money Habits Millennial Report shows that 22% of 30- to 34-year-olds get financial help from their moms and dads. Twenty percent of married or cohabiting millennials receive such help as well.2

Do these households feel burdened? According to the Pew survey, no: 89% of parents who had helped their grown children financially said it was emotionally rewarding to do so. Just 30% said it was stressful.1

Other surveys paint a different picture. Earlier this year, the financial research firm Hearts & Wallets presented a poll of 5,500 U.S. households headed by baby boomers. The major finding: boomers who were not supporting their adult children were nearly 2½ times more likely to be fully retired than their peers (52% versus 21%).3

In TD Ameritrade’s 2015 Financial Disruptions Survey, 66% of Americans said their long-term saving and retirement plans had been disrupted by external circumstances; 24% cited “supporting others” as the reason. In addition, the Hearts & Wallets researchers told MarketWatch that boomers who lent financial assistance to their grown children were 25% more likely to report “heightened financial anxiety” than other boomers; 52% were ill at ease about assuming investment risk.3,4

Economic factors pressure young adults to turn to the bank of Mom & Dad. Thirty or forty years ago, it was entirely possible in many areas of the U.S. for a young couple to buy a home, raise a couple of kids and save 5-10% percent of their incomes. For millennials, that is sheer fantasy. In fact, the savings rate for Americans younger than 35 now stands at -1.8%.5

Housing costs are impossibly high; so are tuition costs. The jobs they accept frequently pay too little and lack the kind of employee benefits preceding generations could count on. The Bank of America/USA Today survey found that 20% of millennials carrying education debt had put off starting a family because of it; 20% had taken jobs for which they were overqualified. The average monthly student loan payment for a millennial was $201.2

Since 2007, the inflation-adjusted median wage for Americans aged 25-34 has declined in nearly every major industry (health care being the exception). Wage growth for younger workers is 60% of what it is for older workers. The real shocker, according to Federal Reserve Bank of San Francisco data: while overall U.S. wages rose 15% between 2007-14, wages for entry-level business and finance jobs only rose 2.6% in that period.5,6

It is wonderful to help, but not if it hurts your retirement. When a couple in their fifties or sixties assumes additional household expenses, the risk to their retirement savings increases. Additionally, their retirement vision risks being amended and compromised.

The bottom line is that a couple should not offer long-run financial help. That will not do a young college graduate any favors. Setting expectations is only reasonable: establishing a deadline when the support ends is another step toward instilling financial responsibility in your son or daughter. A contract, a rental agreement, an encouragement to find a place with a good friend – these are not harsh measures, just rational ones.

With no ground rules and the bank of Mom and Dad providing financial assistance without end, a “boomerang” son or daughter may stay in the bedroom or basement for years and a boomer couple may end up retiring years later than they previously imagined. Putting a foot down is not mean – younger and older adults face economic challenges alike, and couples in their fifties and sixties need to stand up for their retirement dreams.

Warmest regards,

april-signature

Citations.

1 – pewsocialtrends.org/2015/05/21/5-helping-adult-children/ [5/21/15]

2 – newsroom.bankofamerica.com/press-releases/consumer-banking/parents-great-recession-influence-millennial-money-views-and-habits/ [4/21/15]

3 – marketwatch.com/story/are-your-kids-ruining-your-retirement-2015-05-05 [5/5/15]

4 – amtd.com/newsroom/press-releases/press-release-details/2015/Financial-Disruptions-Cost-Americans-25-Trillion-in-Lost-Retirement-Savings/default.aspx [2/17/15]

5 – theatlantic.com/business/archive/2014/12/millennials-arent-saving-money-because-theyre-not-making-money/383338/ [12/3/14]

6 – theatlantic.com/business/archive/2014/07/millennial-entry-level-wages-terrible-horrible-just-really-bad/374884/ [7/23/14]

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Major Risks to Family Wealth

Will your accumulated assets be threatened by them?

All too often, family wealth fails to last. One generation builds a business – or even a fortune – and it is lost in ensuing decades. Why does it happen, again and again?

It is because families fall prey to serious money blunders – old and new. Classic mistakes are made, and changing times aren’t recognized.

Procrastination. This isn’t simply a matter of failing to plan, but also of failing to respond to acknowledged financial weaknesses.

For example, let’s say we have a multimillionaire named Alan. The named beneficiary of Alan’s six-figure savings account is no longer alive. While Alan knows about this financial flaw, knowledge is one thing and action is another. He realizes he should name another beneficiary, but he never gets around to it. His schedule is busy, and it is an inconvenience.

Sadly, procrastination wins out in the end and as the account lacks a POD beneficiary, those assets end up subject to probate. Then his heirs find out about other lingering financial matters that should have been taken care of regarding his IRA … his real estate holdings … and more.1

Minimal or absent estate planning. Every year, multimillionaires die without any leaving any instructions for the distribution of their wealth – not just rock stars and actors, but also small business owners and entrepreneurs. A 2015 Caring.com survey found that only 56% of American parents have a will or living trust.2

A will may not be enough. Anyone reliant on a will alone risks handing the destiny of their wealth over to a probate judge. The multimillionaire who has a child with special needs, a family history of Alzheimer’s or Parkinson’s, or a former spouse or estranged children may need more rigorous estate planning. The same is true if he or she wants to endow charities or give grandkids a nice start in life. Is this person a business owner? That factor alone calls for coordinated estate and succession planning.

A finely crafted estate plan has the potential to perpetuate and enhance family wealth for decades, perhaps generations. Without it, heirs may have to deal with probate and a painful opportunity cost – the lost potential for tax-advantaged growth and compounding of those assets.

The lack of a “family office.” Decades ago, the wealthiest American households included offices: a staff of handpicked financial professionals worked within the mansion, supervising a family’s entire financial life. While the traditional “family office” has disappeared, the concept is as relevant as ever. Today, select wealth management firms emulate this model: in an ongoing relationship distinguished by personal and responsive service, they consult families about investments, provide reports and assist in decision-making. If your financial picture has become too complex to address on your own, this could be a wise choice for your family.

Technological flaws. Hackers can hijack email accounts and send phony messages to banks, brokerages and financial advisors greenlighting asset transfers. Social media can help you build your business, but it can also lend personal information to identity thieves who want access to digital and tangible assets.

Sometimes a business or family installs a security system that proves problematic – so much so that it is turned off half the time. Unscrupulous people have ways of learning about that. Maybe they are only one or two degrees separated from you.

No long-term strategy in place. When a family wants to sustain wealth for decades to come, heirs have to understand the how and why. All family members have to be on the same page, or at least read that page. If family communication about wealth tends to be more opaque than transparent, the mechanics and purpose of the strategy may never be adequately conveyed.

No decision-making process. In the typical high net worth family, financial decision-making is vertical and top-down. Parents or grandparents may make a decision in private, and it may be years before heirs learn about it or fully understand it. When heirs do become decision makers, it is usually upon the death of the elders.

Horizontal decision-making can help multiple generations understand and participate in the guidance of family wealth. Estate and succession planning professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate planners recognize that silence does not necessarily mean agreement.

You may plan to reduce these risks (and others) in collaboration with financial and legal professionals who focus on estate planning and wealth transfer. It is never too early to begin.

Warmest Regards,

 april-signature

Citations.

1 – nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter1-5.html [5/5/15]

2 – caring.com/about/news-room/american-parents-wills.html [4/22/15]

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The Psychology of Saving

How many households have the right outlook to build wealth?

Why do some households save more than others? Building household savings may depend not only on cash flow, but also on psychology. With the right outlook, saving becomes a commitment. With a less positive outlook, it becomes a task – and tasks and chores are often postponed.

Financially speaking, saving is winning. Sometimes that lesson is lost, however. To some people, saving feels like losing – “losing” money that could be spent. So assert Ellen Rogin and Lisa Kueng, authors of a recently published book entitled Picture Your Prosperity: Smart Money Moves to Turn Your Vision into Reality. They cite a perceptual difference. If people are asked if they can save 20% of their income, the answer may be a resounding “no” – but if they are asked if they can live on 80% of their income, that may seem reasonable.1

There may be a gap between perception & behavior. Since 2001, Gallup has asked Americans a poll question: “Thinking about money for a moment, are you the type of person who more enjoys spending money or more enjoys saving money?”2

While more respondents have chosen “saving money” over “spending money” in every year the poll has been conducted, the difference in the responses never exceeded 5% from 2001-06. It hit 9% in 2009, and has been 18% or greater ever since. In 2014, 62% of respondents indicated they preferred to save instead of spend, with only 34% of respondents preferring spending.2

So are we a nation of good savers? Not to the degree that these poll results might suggest. The most recently available Commerce Department data (January 2015) shows the average personal savings rate at 5.5% – a percentage point higher than two years ago, but subpar historically. During the 1970s, the personal savings rate averaged 11.8%; in the 1990s, it averaged 6.7%.2,3

What reminders or actions might help people save more? Automated retirement plan contributions can assist the growth of savings, and are a means of paying oneself first. There is the envelope system, wherein a household divides its paycheck into figurative (or literal) envelopes, assigning X dollars per month to different packets representing different budget categories. When the envelopes are empty, you can spend no more. The psychology is never to empty the envelopes, of course – leaving a little aside each month that can be saved. Households take an incremental approach: they start by saving one or two cents of every dollar they make, then gradually increase that percentage, household expenses permitting.

Frugality may help as well. A decision to live on 70% or 80% of household income frees up some dollars for saving. Another route to building a nest egg is to invest (or at least save) the accumulated consumer savings you realize at the mall, the supermarket, the recycling center – even pocket change amassed over time.

How many households budget like businesses? Perhaps more should. A business owner, manager, or executive may realize savings through this approach. Take it line item by line item: spending $20 less each week at the supermarket translates to $1,040 saved annually.

Working with financial professionals may encourage greater savings. A 2014 study on workplace retirement plan participation from Natixis Global Asset Management had a couple of details affirming this. While employees who chose to go without input from a financial professional contributed an average of 7.8% of their incomes to their retirement plan accounts, employees who sought such input contributed an average of 9.5%. The study also learned that 74% of the employees who had turned to financial professionals understood how much money their accounts needed to amass for retirement, compared to 54% of employees not seeking such help.4

Saving money should make anyone feel great. It means effectively “paying yourself” or at least building up cash on hand. A household with a save-first financial approach may find itself making progress toward near-term and long-term money goals.

Warmest Regards,

 april-signature

 

  

Citations.

1 – businessinsider.com/mental-trick-save-money-2015-1 [1/27/15]

2 – gallup.com/poll/168587/americans-continue-enjoy-saving-spending.aspx [4/21/14]

3 – bea.gov/newsreleases/national/pi/pinewsrelease.htm [3/2/15]

4 – bostonglobe.com/business/2014/09/06/advice-seekers-save-more-study-finds/dJmUUXz78twO9OxLcRTqdN/story.html [9/6/14]

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The Top 12 Tax Frauds

A look at the IRS “dirty dozen” list.

Have you heard of the “dirty dozen?” Each year, the IRS lists the top 12 recurring federal tax offenses – frauds, cheats, feints and schemes that ethically challenged taxpayers, tax preparers and crooks try to perpetrate. Watch for these scams in all seasons, not just tax season.

Identity theft. Casually discarded or displayed personal information is an open invitation to criminals. Even when we are vigilant, multiple firewalls and strong passwords can fail to protect us. The Government Accountability Office says fraudsters stole $5.8 billion in false refunds in 2013 and the Treasury Inspector General Tax Administration thinks the losses will hit $21 billion next year. The IRS says it is “making progress” fighting this problem.

Criminals posing as “tax professionals.” Each year, roughly 60% of taxpayers get help with their 1040s at tax preparation businesses. As the IRS notes, nearly all of these businesses are legitimate. Exceptions do exist, however. Sometimes a fraudster will rent a storefront with a mission of collecting SSNs and other personal information pursuant to claiming phony refunds.2

Unwarranted or excessive refunds. Annually, some taxpayers and tax preparers claim refunds that are embellished or wholly unjustified. A preparer may tout that it will get you a big refund but then claim a percentage of it. Worse yet, they may ask you to sign a blank return.2

Phishing. This is tax fraud via email. A scammer will send a message mimicking communication from the IRS or the Electronic Federal Tax Payment System (EFTPS). If you get an email like that, forward it to phishing@irs.gov. Neither the IRS nor the EFTPS has a policy of initiating contact with taxpayers through email.2

Threatening calls. Crooks will sometimes target elders or immigrants with phone scams, pretending to be the IRS or another federal agency. (Sometimes even the caller ID will suggest this.) They will assert that the other party owes thousands in back taxes. The only solution, they contend, is immediate payment through a pre-loaded debit card or a money order. The caller may even know the last four digits of their Social Security Number or volunteer what is supposedly an IRS employee badge number to make the con more believable. A follow-up call from “the DMV” or “the police” may be next. Such behavior can be reported to the Treasury Inspector General for Tax Administration at (800) 366-4484 or the IRS at (800) 829-1040.3

Sham charities. An old wisecrack says that you can make a lot of money running a non-profit organization. A specious charity may ask you for cash, your SSN, your banking information and more. If anything seems fishy, ask for visual proof of the organization’s tax-exempt status, and check it out further at irs.gov using the Exempt Organizations Select Check search box.2

Tax shelter schemes. Tax evasion is different from legal tax avoidance. Some unprincipled tax and estate “consultants” seem to confuse the two, much to the chagrin of their clients who run afoul of the IRS. Watch out for aggressively marketed “tax shelters” that seem too good to be true or sketchily detailed.2

Hiding taxable income. How many taxpayers file fraudulent 1099s? Enough for this ploy to make the IRS top 12 list for 2015. Any hint of bogus documentation to cut taxes or boost refunds becomes especially egregious when a paid preparer attempts it.2

Inventing income that was never earned to get credits. The IRS notes that some of the shadier tax prep services sometimes convince clients to try this. It is fairly easy to disprove.2

Stashing taxable income or money offshore. In recent years, the IRS has scrutinized taxpayers with undeclared foreign bank accounts and the financial organizations that have offered them. Its Offshore Voluntary Disclosure Program (OVDP) encourages taxpayers to quietly disclose such accounts and become compliant with IRS rules.2

Claiming unwarranted fuel tax credits. Few taxpayers can legitimately claim these, yet some try thanks to urging from third-party preparers. Most taxpayers don’t own farms, mining or fishing businesses or companies whose vehicles operate mostly on local roads.2

Frivolous arguments against income tax. Assorted seminar speakers and books claim that federal taxes are unconstitutional and that Americans have only an implied obligation to pay them. These arguments carry little weight in the courts and before the IRS. The IRS imposes a $5,000 fine for filing a frivolous return, and Section 1 of the Internal Revenue Code imposes income tax on all Americans, specifically 26 U.S.C. § 1 and 26 U.S.C. § 1(a). IRC Section 6072 establishes April 15 as the annual federal tax deadline.2,4

One thing to remember in light of this list: you are legally responsible for the content input into your 1040 form, even if a third party prepares it.2

Warmest Regards,

 april-signature

 

Citations.

1 – blog.credit.com/2015/03/the-solution-to-tax-id-theft-is-an-unpopular-one-slower-refunds-110478/ [3/5/15]

2 – irs.gov/uac/Newsroom/IRS-Completes-the-Dirty-Dozen-Tax-Scams-for-2015 [2/12/15]

3 – cleveland.com/business/index.ssf/2015/01/nearly_3000_people_in_us_have.html [1/23/15]

4 – docs.law.gwu.edu/facweb/jsiegel/Personal/taxes/JustNoLaw.htm [3/13/15]

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Are Americans Growing More Optimistic About Retiring?

Pragmatism seems to be replacing pessimism, at least.

Is it okay to retire today? Many baby boomers shelved notions of retiring during the past few years. Layoffs, the decline in home values, the crushing bear market of 2007-09 – those memories were just too fresh, and their economic effects were still being felt by many households.

In 2015, boomers seem a bit less hesitant to begin their “third acts.” In this year’s CareerBuilder retirement survey, 53% of workers older than 60 indicated they are postponing their retirements. That may not seem a statistic worth celebrating, but five years ago 66% of respondents to the survey said they were putting off leaving work.1

Retirement may not mean a “clean break” from the workplace: 54% of this age group told CareerBuilder that they would try to work at least part-time when retired. In fact, nearly one in five said they planned to continue working 40 hours a week or more. These boomers cited two compelling reasons to keep a foot in the office: household financial pressures and the employer-sponsored health insurance they could count on between ages 60 and 65.1

Two other recent polls echo the findings of the CareerBuilder survey. Last year’s United States of Aging survey (a joint project of the National Council on Aging, USA TODAY, United Healthcare and the National Association for Area Agencies on Aging) found 89% of respondents 60 and older certain that they could enjoy and sustain their quality of life as seniors. While 49% worried that they might outlive their money, this was down from 53% in the 2013 survey.2

Ameriprise Financial recently released the findings from its poll of 1,000 retirees aged 60-73; the respondents had retired within the past five years and possessed $100,000 or more in investable assets. Generally, they were happy about retiring: 76% reported feeling “in control” of their choice to leave work, and 75% indicated they were “very satisfied” with retirement life. For a slight majority of respondents, the transitionwas reasonable: 53% said they had been healthy enough to retire, and 52% said they were emotionally ready when they made the move.3

How many of them had retired by choice? An encouraging 51%; just 15% said they retired as a result of job loss, downsizing or buyouts.3

Remember, retirement may start unexpectedly. No one is invincible, and as the Employee Benefit Research Institute (EBRI) discovered in a 2014 study, health or disability reasons prompt 61% of retirements. Workforce downsizing and eldercare responsibilities were the two other most-cited motivators, but only 18% of respondents cited either of those factors. In surveying 1,500 retirees last year, EBRI also learned that 49% had exited their careers earlier than they had anticipated – in fact, 35% of them had retired prior to age 60. An unexpected retirement may also upend some household financial assumptions – turning to the Ameriprise study, we see that while 28% of those respondents reported spending less in retirement than they thought they would, 22% are spending more than they expected.3,4

If you were to retire two years from now, would you be ready for that transition? Would you hold up financially if events forced you to retire today? If you are within ten years of your envisioned retirement date, it might be prudent to revisit your savings strategy and retirement plan to double-check your retirement readiness.

Warmest Regards,

 april-signature

Citations.

1 – nbcnews.com/business/careers/could-2015-be-year-retirement-party-n308871 [2/19/15]

2 – usatoday.com/story/news/nation/2014/07/15/aging-survey-research/11921043/ [7/15/14]

3 – benefitspro.com/2015/02/03/retired-boomers-in-control-happy [2/3/15]

4 – tinyurl.com/qc67lyd [2/10/15]

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2015: A Time for Patience

Don’t let the market’s jumps rattle your commitment to staying invested.

What the market does today, it may not do tomorrow. That may seem elementary, but there are days, weeks, months, and even years when that investing lesson is ignored.  Wall Street started 2015 with pronounced volatility, and in the opening six weeks of the year, investors were again reminded why patience is so important.

What did investors do in January? Sell. The S&P 500 lost 3.10%. Discouraging news items bred pessimism: deflation was coming to Europe, world demand for oil had peaked and prices would never come near $100 again, the slowdown in Europe and Asia would soon unravel America’s economic comeback. An old market belief dictates that the opening month of a year sets the tone for the rest of the year. Clear implication: 2015 equals bad market year. Sell, sell before it is too late.1

What did investors do at the start of February? Buy. The S&P 500 gained 3.03% in the first trading week of the month (and it had advanced 2.64% in the 30 days ending February 6). Encouraging news items bred optimism: the European Central Bank unveiled an asset-purchase program extending into 2016 to fight deflation with a scope matching QE3, oil prices began to rebound sharply, assorted earnings pleased Wall Street. Clear implication: 2015 might not be so bad. Buy the dip.2,3

What’s the takeaway here? Don’t panic. Don’t let a down January lead you to put off your annual IRA contribution or trim your per-paycheck retirement plan deferrals. What ground stocks lose, they may quickly regain.

For the record, 2014 provided the same lesson in patience. January 2014 saw the S&P 500 fall 3.56%. February 2014 brought a 4.31% gain. The S&P went on to go +11.39% for the year. Perhaps its 2015 performance will mimic this.1,3

History is no barometer of future stock market performance, but it can be illuminating with regard to how stocks have overcome the “January effect” – a bad January does not necessarily lead to a lousy year. In fact, here is the real eye-opener: during 1989-2014, the S&P finished up for the year 75% of the time after a loss of 2% or greater in January, with an average annual gain of nearly 8% in those market years. In fact, only twice in the past quarter-century has a bad January presaged a bad year for the index (2000, 2008). In 2009, it lost 8.57% in January and went +35.02% for the rest of the year. In 2003, it gave up 2.74% for January, then went +29.94% across the next 11 months. This illustrates that on Wall Street, anything can happen – and that includes good things.4

Stay patient & stay invested. The last couple of years have been notably placid for U.S. stocks. Entering February, the S&P had gone more than 1,200 days without a correction. That lulled some investors into a comfort zone, to the point where they overreacted to significant (but in no way aberrant) stock market fluctuations.5

Patience is a virtue for the long-term investor trying to build wealth for retirement and other future objectives. Already, this stock market year has highlighted its value. The Federal Reserve may elect to raise interest rates and the strong dollar may persist for some time, but those factors may not hold back the bulls in 2015 any more than many others have since 2009.

Warmest Regards,

april-signature

Citations.

1 – ycharts.com/indicators/sp_500_monthly_return [2/9/15]

2 – markets.on.nytimes.com/research/markets/usmarkets/usmarkets.asp [2/6/15]

3 – online.wsj.com/mdc/public/page/2_3022-quarterly_gblstkidx.html [12/31/14]

4 – investing.com/analysis/75-of-the-time,-%27down%27-january-good-for-s-p-500%27s-yearly-close-240337 [1/31/15]

5 – tinyurl.com/kw8ue3b [1/31/15]