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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]

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Yes, Young Growing Families Can Save & Invest

It may seem like a tall order, but it can be accomplished.

Plan to put yourself steps ahead of your peers. If you have a young, growing family, no doubt your to-do list is pretty long on any given day. Beyond today, you are probably working on another kind of to-do list for the long term. Where does “saving and investing” rank on that list?

For some families, it never quite ranks high enough – and it never becomes the priority it should become. Assorted financial pressures, sudden shifts in household needs, bad luck – they can all move “saving and investing” down the list. Even so, young families have planned to build wealth in the face of such stresses. You can follow their example. It is less an option than a necessity.

First step: put it into numbers. Most people have invested a little by the time they reach 30 or 35, and some have invested avidly. A plan is not always in place, however. The mission is simply to “make money” or “build wealth” for “the future.”

This is good, but also vague. How much money will you need to save by 65 to promote enough retirement income and to live comfortably? Are you on pace to build a retirement nest egg that large? How much risk do you feel comfortable tolerating as you invest? What kind of impact are investment fees and taxes having on your efforts?

A financial professional can help you arrive at answers to these questions, and others. He or she can help you define long-range retirement savings goals and project the amount of savings and income you may need to sustain your lifestyle as retirees. At that point, “the future” will seem more tangible and your wealth-building effort even more purposeful.

Second step: start today & never stop. If you have already started, congratulations! In getting an early start, you have taken advantage of a young investor’s greatest financial asset: time.

If you haven’t started saving and investing, you can do so now. It doesn’t take a huge lump sum to begin. Even if you defer $100 worth of salary into a retirement plan a month, you are putting a foot forward. See if you can allocate much more.

If you begin when you are young and keep at it, you will witness the awesome power of compounding as you build your retirement savings and net worth through the years.

Just how awesome is it? An example: let’s say you save $100 per month in an investment account for 20 years and the account returns a (hypothetical) 5% for you over those two decades. In 20 years under such conditions, your $100-a-month nest egg will not amount to $24,000 – it will work out to $41,011, which is 71% more! If you put in $200 a month, you wind up with a projected $82,022 off of the $24,000 in contributions! We aren’t factoring in account fees or market fluctuations, of course – but you get the picture. Stretched out to 30 years, a consistent $100-per-month contribution and a consistent 5% return project to $82,302; raise the monthly contribution to $200 and you get $164,604. These numbers factor in annual compounding; use daily compounding as the variable, and they grow a bit larger. So even if you set aside and invest a few twenties each month, you may still end up with appreciable retirement savings – and these are numbers for one retirement saver, there are two of you.1

What’s that? You say you can’t retire on $164,000 or less? You’re absolutely right. You have to devote more than that to your effort. You may need a million or two – and if you plan ahead, you may very well generate it. Ownership of equity investments, real property, business or professional success – this can all help to position you and your family for a comfortable future, provided you keep good financial habits along the way and pay attention to taxes.

How do you find the balance? This is worth addressing – how do you balance saving and investing with attending to your family’s immediate financial needs?

Bottom line, you have to find money to save and invest for your family’s near-term and long-term goals. If it isn’t on hand, you may find it by reducing certain household costs. Are you spending a lot of money on goods and services you want rather than need? Cut back on that kind of spending. Is credit card debt siphoning away dollars you should assign to saving and investing? Fix that financial leak and avoid paying with plastic whenever you can. Other young families are doing it, and yours can as well.

Vow to keep “paying yourself first” – maintain the consistency of your saving and investing effort. What is more important, saving for your child’s college education or buying those season tickets? Who comes first in your life, your family or your gardener? You know the answer.

It has been done; it should be done. Stories abound of families that have built wealth out of comparative poverty. There are people who came to this country with little more than the clothes on their backs who have found prosperity; there are families (including single-parent households) who have been dealt a bad hand yet overcame long financial odds to gain affluence.

It all starts with belief – the belief that you can do it. Complement that belief with a plan and regular saving and investing, and you may find yourself much better off much sooner than you think.

Warmest Regards,

april-signature

Citations.

1 – bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx [12/26/14]

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Your Year-End Financial Checklist

Seven aspects of your financial life to review as the year draws to a close.

The end of a year makes us think about last-minute things we need to address and good habits we want to start keeping. To that end, here are seven aspects of your financial life to think about as this year leads into the next…

Your investments. Review your approach to investing and make sure it suits your objectives. Look over your portfolio positions and revisit your asset allocation.

Your retirement planning strategy. Does it seem as practical as it did a few years ago? Are you able to max out contributions to IRAs and workplace retirement plans like 401(k)s? Is it time to make catch-up contributions? Finally, consider Roth IRA conversion scenarios, and whether the potential tax-free retirement distributions tomorrow seem worth the taxes you may incur today. Be sure to take your Required Minimum Distribution (RMD) from your traditional IRA(s) by December 31. If you don’t, the IRS will assess a penalty of 50% of the RMD amount on top of the taxes you will already pay on that income. (While you can postpone your very first IRA RMD until April 1, 2015, that forces you into taking two RMDs next year, both taxable events.)1

Your tax situation. How many potential credits and/or deductions can you and your accountant find before the year ends? Have your CPA craft a year-end projection including Alternative Minimum Tax (AMT). The rise in the top marginal tax bracket for 2014 made fewer high-earning executives and business owners subject to the AMT, as their ordinary income tax liabilities grew. That calls for a fresh look at accelerated depreciation, R&D credits, the Work Opportunity Tax Credit, incentive stock options and certain types of tax-advantaged investments.2

Review any sales of appreciated property and both realized and unrealized losses and gains. Take a look back at last year’s loss carry-forwards. If you’ve sold securities, gather up cost-basis information. Look for any transactions that could potentially enhance your circumstances.

Your charitable gifting goals. Plan charitable contributions or contributions to education accounts, and make any desired cash gifts to family members. The annual federal gift tax exclusion is $14,000 per individual for 2014 and 2015, meaning a taxpayer can gift as much as $14,000 to as many individuals as you like in each year without tax consequences. A married couple can gift up to $28,000 tax-free to as many individuals as they prefer. The gifts do count against the lifetime estate tax exemption amount, which climbs to $5.43 million per individual and $10.86 per married couple for 2015.3

You could also gift appreciated stocks to a charity. If you have owned them for more than a year, you can deduct 100% of their fair market value and legally avoid capital gains tax you would normally incur from selling them.4

Besides outright gifts, you can plan other financial moves on behalf of your family – you can create and fund trusts, for example. The end of the year is a good time to review any trusts you have in place.

Your life insurance coverage. Are your policies and beneficiaries up-to-date? Review premium costs, beneficiaries, and any and all life events that may have altered your coverage needs.

Speaking of life events…did you happen to get married or divorced in 2014? Did you move or change jobs? Buy a home or business? Did you lose a family member, or see a severe illness or ailment affect a loved one? Did you reach the point at which Mom or Dad needed assisted living? Was there a new addition to your family this year? Did you receive an inheritance or a gift? All of these circumstances can have a financial impact on your life, and even the way you invest and plan for retirement and wind down your career or business. They are worth discussing with the financial or tax professional you know and trust.

Lastly, did you reach any of these financially important ages in 2014? If so, act accordingly.

Did you turn 70½ this year? If so, you must now take Required Minimum Distributions (RMDs) from your IRA(s).

Did you turn 62 this year? If so, you’re now eligible to apply for Social Security benefits.

Did you turn 59½ this year? If so, you may take IRA distributions without a 10% penalty.

Did you turn 55 this year? If so, and you retired during this year, you may now take distributions from your 401(k) account without penalty.

Did you turn 50 this year? If so, “catch-up” contributions may now be made to IRAs (and certain qualified retirement plans).1,5,6

The end of the year is a key time to review your financial well-being. If you feel you need to address any of the items above, please feel free to give me a call.

Warmest Regards,

april-signature 

Citations.

1 – irs.gov/Retirement-Plans/RMD-Comparison-Chart-%28IRAs-vs.-Defined-Contribution-Plans%29 [4/30/14]

2 – tinyurl.com/o7wqk7z [3/27/14]

3 – forbes.com/sites/ashleaebeling/2014/10/30/irs-announces-2015-estate-and-gift-tax-limits/ [10/30/14]

4 – philanthropy.com/article/Donors-Often-Overlook-Benefits/148561/ [8/29/14]

5 – nolo.com/legal-encyclopedia/getting-retirement-money-early-without-30168.html [12/2/14]

6 – turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/Tax-Tips-After-January-1–2015/INF12070.html [12/2/14]

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Keeping Holiday Spending Under Control

What little steps can you take to keep from getting carried away?

You’ve seen the footage on the news. You’ve been in the middle of it. You’ve stood in the vexing lines. You’ve circled for the elusive parking spots. Holiday shopping can be downright frenzied – and impulsive.

You don’t necessarily need to go to the mall to feel the pressure and the urges – a half-hour with your laptop or tablet can put you in the same frame of mind.

But how do you keep your spending under control, whether in a brick and mortar store or at home? Here are some tips.

Make a plan. Most people do their holiday shopping without one. Set a dollar limit that you can spend per week – and try to spend less than that. As you plan your financial life – and check on your plan every few days – you may feel a little less stressed this holiday season. In fact, you might want to make two budgets – one for shopping, the other for entertaining.

Recognize the hidden costs. Holiday shopping isn’t just a matter of price tags. When you don’t visit brick-and-mortar retailers, you don’t eat at the food court or coffee shop and you don’t spend money for gas. Carpooling to the mall or taking public transit can help you save some cash.

On the other hand, when you shop online, there’s always shipping to consider. It can make what is seemingly a bargain less so. Free or discounted shipping feels like you’re getting a gift.  Online retailers can also be very finicky about returns. Miss a deadline to return something to an online retailer (who hasn’t?) and you may end up paying sizable return fees or just getting stuck with what you purchased.

Counteract those holiday expenses elsewhere in your budget. Maybe you spent a couple hundred more than you anticipated on that flat-screen. To offset that extra spending, pinpoint some areas where you can save elsewhere in your budget. Could you find cheaper auto insurance? Could you eat in more this month? Could you drive less or cancel that gym membership or premium cable subscription?

If you do go overboard, strategize to attack that excess debt. You may want to pay off the smallest debt first, then the next smallest and so forth onto the largest. That’s the debt snowball approach advocated by Dave Ramsey. Or you may want to take the debt stacking approach favored by Suze Orman, whereby you pay down the debt with the highest interest rate first, then the one with the second highest interest rate, and so on.

With the latter method, you can potentially realize greater savings on interest charges, but you lose the accomplishment of quickly erasing a debt. In the debt snowball strategy, you make minimum payments on all your debts (just as in the debt stacking approach), but you devote all your extra cash to the debt with the smallest balance. The upside there is the psychological high of (quickly) paying off a debt; the downside is the lingering, larger interest charges that come with the larger debts.

If you aren’t vigilant, the holiday season could leave you with a “debt hangover,” or contribute to a severe debt load you may be burdened with. According to the Federal Reserve, the average indebted U.S. household suffered with $15,593 in credit card debt in August. That was a 2.36% increase from a year before.1

If you feel like indulging yourself, indulge sensibly. Some people do give themselves holiday gifts, and the same logic applies – whether it is a meal, a motorcycle, or a spa package, don’t break the bank with it.

Lastly, think about setting aside some “holiday money” for 2015. If your finances allow, how about putting $100 or $200 aside for next season? Invested in interest-bearing accounts (or elsewhere), that sum could even grow larger.

 Warmest Regards,

 april-signature

Citations.

1 – nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/ [11/26/14]

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Fall Financial Reminders

The year is coming to a close. Have you thought about these financial ideas yet?

As every calendar year ends, the window slowly closes on a set of financial opportunities. Here are several you might want to explore before 2015 arrives.

Don’t forget that IRA RMD. If you own one or more traditional IRAs, you have to take your annual required minimum distribution (RMD) from one or more of those IRAs by December 31. If you are being asked to take your very first RMD, you actually have until April 15, 2015 to take it – but your 2015 income taxes may be substantially greater as a result. (Note: original owners of Roth IRAs never have to take RMDs from those accounts.)1

Did you recently inherit an IRA? If you have and you weren’t married to the person who started that IRA, you must take the first RMD from that IRA by December 31 of the year after the death of that original IRA owner. You have to do it whether the account is a traditional IRA or a Roth IRA.1

Here’s another thing you might want to do with that newly inherited IRA before New Year’s Eve, though: you might want to divide it into multiple inherited IRAs, thereby promoting a lengthier payout schedule for younger inheritors of those assets. Otherwise, any co-beneficiaries receive distributions per the life expectancy of the oldest beneficiary. If you want to make this move, it must be done by the end of the year that follows the year in which the original IRA owner died.1

Can you max out your contribution to your workplace retirement plan? Your employer likely sponsors a 401(k) or 403(b) plan, and you have until December 31 to boost your 2014 contribution. This year, the contribution limit on both plans is $17,500 for those under 50, $23,000 for those 50 and older.2,3

Can you do the same with your IRA?  This year, the traditional and Roth IRA contribution limit is $5,500 for those under 50, $6,500 for those 50 and older. High earners may face a lower Roth IRA contribution ceiling per their adjusted gross income level – above $129,000 AGI, an individual filing as single or head of household can’t make a Roth contribution for 2014, and neither can joint filers with AGI exceeding $191,000.3

Ever looked into a Solo(k) or a SEP plan? If you have income from self-employment, you can save for the future using a self-directed retirement plan, such as a Simplified Employee Pension (SEP) plan or a one-person 401(k), the so-called Solo(k). You don’t have to be exclusively self-employed to set one of these up – you can work full-time for someone else and contribute to one of these while also deferring some of your salary into the retirement plan sponsored by your employer.2

Contributions to SEPs and Solo(k)s are tax-deductible. December 31 is the deadline to set one up for 2014, and if you meet that deadline, you can make your contributions for 2014 as late as April 15, 2015 (or October 15, 2015 with a federal extension). You can contribute up to $52,000 to SEP for 2014, $57,500 if you are 50 or older. For a Solo(k), the same limits apply but they break down to $17,500 + up to 20% of your net self-employment income and $23,000 + 20% net self-employment income if you are 50 or older. If you contribute to a 401(k) at work, the sum of your employee salary deferrals plus your Solo(k) contributions can’t be greater than the aforementioned $17,500/$23,000 limits – but even so, you can still pour up to 20% of your net self-employment income into a Solo(k).1,2

Do you need to file IRS Form 706? A sad occasion leads to this – the death of a spouse. Form 706, which should be filed no later than nine months after his or her passing, notifies the IRS that some or all of a decedent’s estate tax exemption is being carried over to the surviving spouse per the portability allowance. If your spouse passed in 2011, 2012, or 2013, the IRS is allowing you until December 31, 2014 to file the pertinent Form 706, which will transfer that estate planning portability to your estate if your spouse was a U.S. citizen or resident.1

Are you feeling generous? You may want to donate appreciated securities to charity before the year ends (you may take a deduction amounting to their current market value at the time of the donation, and you can use it to counterbalance up to 30% of your AGI). Or, you may want to gift a child, relative or friend and take advantage of the annual gift tax exclusion. An individual can gift up to $14,000 this year to as many other individuals as he or she desires; a couple may jointly gift up to $28,000 to as many individuals as you wish. Whether you choose to gift singly or jointly, you’ve probably got a long way to go before using up the current $5.34 million/$10.68 million lifetime exemption. Wealthy grandparents often fund 529 plans this way, so it is worth noting that December 31 is the 529 funding deadline for the 2014 tax year.1

Warmest Regards,

 april-signature

Citations.

1 – forbes.com/sites/deborahljacobs/2014/10/08/eight-key-financial-deadlines-to-keep-in-mind-this-fall/ [10/8/14]

2 – tinyurl.com/kjzzbw4 [10/9/14]

3 – irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [10/31/13]