psewealth No Comments

Retirement Planning With Health Care Expenses in Mind

It is only wise to consider what Medicare won’t cover in the future.

As you save for retirement, you also recognize the possibility of having to pay major health care costs in the future. Is there some way to plan for these expenses years in advance?

Just how great might those expenses be? There’s no rote answer, of course, but recent surveys from AARP and Fidelity Investments reveal that too many baby boomers might be taking this subject too lightly.

For the last eight years, Fidelity has projected average retirement health care expenses for a couple (assuming that retirement begins at age 65 and that one spouse or partner lives about seven years longer than the other). In 2013, Fidelity estimated that a couple retiring at age 65 would require about $220,000 to absorb those future costs.1

When it asked Americans aged 55-64 how much money they thought they would spend on health care in retirement, 48% of the respondents figured they would need about $50,000 apiece, or about $100,000 per couple. That pales next to Fidelity’s projection and it also falls short of the estimates made back in 2010 by the Employee Benefit Research Institute. EBRI figured that a couple with median prescription drug expenses would pay $151,000 of their own retirement health care costs.1

AARP posed this question to Americans aged 50-64 in the fall of 2013. The results: 16% of those polled thought their out-of-pocket retirement health care expenses would run less than $50,000 and 42% figured needing less than $100,000. Another 15% admitted they had no idea how much they might eventually spend for health care. Unsurprisingly, just 52% of those surveyed felt confident that they could financially handle such expenses.1

Prescription drugs may be your #1 cost. In fact, EBRI currently says that a 65-year-old couple with median drug costs would need $227,000 to have a 75% probability of paying off 100% of their medical bills in retirement. That figure is in line with Fidelity’s big-picture estimate.2

What might happen if you don’t save enough for these expenses? As Medicare premiums come out of Social Security benefits, your monthly Social Security payments could grow smaller. The greater your reliance on Social Security, the bigger the ensuing financial strain.2

A positive note: EBRI and Fidelity both reduced their estimates of total average retirement health care expenses from 2012 to 2013. (Who knows, maybe they will do so again this year.)1

The main message: save more, save now. Do you have about $200,000 (after tax) saved up for the future? If you don’t, you have another compelling reason to save more money for retirement.

Medicare, after all, will not pay for everything. In 2010, EBRI analyzed how much it did pay for, and it found that Medicare covered about 62% of retiree health care expenses. While private insurance picked up another 13% and military benefits or similar programs another 13%, that still left retirees on the hook for 12% out of pocket.1

Consider what Medicare doesn’t cover, and budget accordingly. Medicare pays for much, but it doesn’t cover things like glasses and contacts, dentures and hearing aids – and it certainly doesn’t pay for extended long term care.2

Medicare’s yearly Part B deductible is $147 for 2014. Once you exceed it, you will have to pick up 20% of the Medicare-approved amount for most medical services. That’s a good argument for a Medigap or Medicare Advantage plan, even considering the potentially high premiums. The standard monthly Part B premium is at $104.90 this year, which comes out of your Social Security. If you are retired and earn income of more than $85,000, your monthly Part B premium will be larger (the threshold for a couple is $170,000). Part D premiums (drug coverage) can also vary greatly; the greater your income, the larger they get. Reviewing your Part D coverage vis-à-vis your premiums is only wise each year.2,3

Underlying message: stay healthy. It may save you a good deal of money. EBRI projects that someone retiring from an $80,000 job in poor health may need to live on as much as 96% of that end salary annually, or roughly $76,800. If that retiree is in excellent health instead, EBRI estimates that he or she may need only 77% of that end salary – about $61,600 – to cover 100% of annual retirement expenses.1

Warmest Regards,

 april-signature

Citations.

1 – washingtonpost.com/news/to-your-health/wp/2014/03/31/guess-how-much-you-need-to-save-for-health-care-in-retirement-wrong-its-much-more/ [3/31/14]

2 – money.usnews.com/money/retirement/articles/2013/06/17/how-to-budget-for-health-costs-in-retirement [6/17/13]

3 – medicare.gov/your-medicare-costs/costs-at-a-glance/costs-at-glance.html [4/30/14]

 

psewealth No Comments

The Right Beneficiary

Who should inherit your IRA or 401(k)? See that they do.

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or annuity? You may be able to answer such a question quickly and easily. Or you may be saying, “You know … I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit – perhaps more than a bit?

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

Beneficiary designations commonly take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she is in line to receive the death benefit when you die, regardless of what your will states. Beneficiary designations allow life insurance proceeds to transfer automatically to heirs; these assets do not have go through probate.1,2

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)

How your choices affect your estate. Virtually any inheritance carries a tax consequence. (Of course, through careful estate planning, you can try to defer or even eliminate that consequence.)

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.3

When the beneficiary isn’t your spouse, things get a little more complicated for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of his or her taxable estate, and his or her heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.4

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.5

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give us a call or send us an e-mail – We are happy to help you.

Best Regards,

PSE Wealth Management Team

Citations.

1 – smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]

2 – www.dummies.com/how-to/content/bypassing-probate-with-beneficiary-designations.html [1/30/13]

3 – www.nolo.com/legal-encyclopedia/estate-planning-when-you-re-married-noncitizen.html [1/30/13]

4 – individual.troweprice.com/staticFiles/Retail/Shared/PDFs/beneGuide.pdf [9/10]

5 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes [8/1/12]

psewealth No Comments

IRS Announces New IRA Rollover Limitation

A tax court ruling raises eyebrows & leads to a decision that may affect you.

What was once allowed is now prohibited. In 2008, an affluent New York City couple made a series of withdrawals and transfers among contributory IRAs, rollover IRAs and non-IRA investment accounts, all with the long-established 60-day deadline for tax-free IRA rollovers in mind. As esteemed tax attorney Alvan Bobrow and his wife withdrew and rolled over a series of five-figure sums within a six-month period, they assumed their actions were permissible under the Internal Revenue Code. In January 2014, a U.S. Tax Court judge ruled otherwise.1

This Tax Court opinion has prompted the IRS to tighten the IRA rollover rules. In the past, some clever taxpayers have effectively treated themselves to interest-free loans from their IRA funds by using multiple IRA accounts to sequence multiple 60-day rollover periods. In the court’s view, the Bobrows were exploiting this loophole, and the IRS is closing it.1,2

Starting in 2015, you are allowed one IRA-to-IRA rollover per 365 days – period. A subtle but important change has been made. Publication 590 has long stated that a taxpayer can generally only make one tax-free rollover of any part of a distribution from a single IRA to another IRA during a 12-month period. That didn’t preclude a taxpayer from making multiple IRA-to-IRA rollovers using multiple IRAs during such a timeframe.1,4

In response to Bobrow v. Commissioner, T.C. Memo 2014-21, the IRS issued Announcement 2014-15. Effective January 1, 2015, the once-a-year rollover restriction applies to all IRAs maintained by a taxpayer. So the tactic of making multiple IRA-to-IRA tax-free rollovers during a 12-month period is kaput.3,4

So beginning next year, you can only make a tax-free IRA-to-IRA rollover if you haven’t made one within the past 365 days.3

Don’t grumble just yet. If you want to move money between IRAs more than once next year, there is still a way you can do it. The new IRS rule change doesn’t apply to every type of IRA “rollover.”

The financial media uses the phrase “IRA rollover” pretty loosely. When you read a story about “IRA rollovers,” the term may refer to IRA-to-IRA rollovers, distributions from a workplace retirement plan going into an IRA, or a trustee-to-trustee transfer of IRA assets between financial firms in which the taxpayer never handles the money.

Here’s the good news. IRS Announcement 2014-15 states: “These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation of § 408(d)(3)(B).”3

In other words … the new restriction does not apply to trustee-to-trustee transfers. The IRS has clearly defined in the above language that it does not regard these transfers as rollovers. Some transition relief is also available: the IRS won’t apply the new limitation to any rollover involving an IRA distribution that happens prior to January 1, 2015.4

Some important questions beg for answers. As Bloomberg BNA notes, the new limitation actually muddies the waters a bit. Some taxpayers own both traditional and Roth IRAs; will they be allowed to take one distribution from their traditional IRA with the intention of a tax-free rollover and another distribution from their Roth IRA pursuant to a tax-free rollover within the same 12-month period? Could an IRA owner and his/her tax planner argue that a succession of linked IRA distributions pursuant to a single outcome substantively amount to a single distribution, citing the step transaction doctrine in defense?4

It is possible that further guidance from the IRS may emerge. Regardless of whether it does or not, IRA-to-IRA rollovers are about to be scrutinized more closely.

 Best Regards,

 april-signature

 

Citations.

1 – wealthmanagement.com/retirement-planning/seeing-double [2/4/14]

2 – marketwatch.com/story/new-ira-rollover-rule-coming-in-2015-2014-04-04 [4/4/14]

3 – irs.gov/pub/irs-drop/a-14-15.pdf [4/16/14]

4 – tinyurl.com/lnd86vs [4/24/14]

 

psewealth No Comments

Why Do We Save So Little?

 What’s good for the economy isn’t necessarily good for our future

Our parents & grandparents saved much more than we do. Most people who have read up on the economy for any length of time have heard of the personal saving rate (PSAVERT), which the Commerce Department calculates as the ratio of personal saving to disposable personal income. The January personal spending report released by the Commerce Department in early March showed the PSAVERT at 4.3%.1

As recently as January 2013, households were saving just 2.3% of their disposable incomes – so this can be labeled a short-term improvement. It still pales in comparison to the way Americans used to save.2

The “greatest generation” had a culture of saving. Its thrift was reinforced further by hard times and a call for personal sacrifices as the economy endured the Great Depression and stateside rationing during WWII. The Commerce Department began measuring household saving in 1959, and as unbelievable as it may seem today, households saved 10% or more of their disposable incomes through nearly all of the Sixties. In May 1975, the personal savings rate reached a historic peak of 14.60%.1,2

From 1959 to the present, the PSAVERT average has been 6.84 percent – but the 21st century shows evidence of a significant decline. The savings rate fell into the 1-3% range, dropping to a record low of 0.8% in April 2005.

To some analysts, a declining personal savings rate signals a stronger economy. It implies more spending, and consumer spending has the biggest impact on GDP. You can’t have it all, however; more spending means less saving, and Americans are plagued by insufficient retirement reserves.

Are credit cards the problem? We borrow greatly, but there are other factors in play. You may have heard about America’s “shrinking middle class.” That is no exaggeration.

The most recent Census Bureau data shows the median U.S. household income for 2012 at $51,017. By comparison, median U.S. household income in 1989 – when adjusted for inflation – would work out to $51,681 today. From 1989-2012, annualized consumer inflation was mostly in the 2-4% range. All this illustrates a slow but notable erosion of purchasing power.3,4

During the same time frame, the cost of college went up dramatically, health care costs increased, and real estate values fluctuated. People saved less and borrowed more, and not simply on impulse; they wound up borrowing more to maintain a middle-class standard of living.

Real incomes aside, we are often lured into unnecessary spending. Advertising can convince us that we have unmet needs and desires, and that we must respond to them by buying goods and services. Urges, emotions, ennui, living without a budget – these can all lead us to spend more than we really should, especially given how much money we will need to adequately retire.

Our parents and grandparents really knew how to pay themselves first – and while economic pressures make it harder for many of us to do so today, that doesn’t make it any less of a priority. 

It might be useful to think about future money when you think about making a discretionary purchase. Are those dollars you are spending at a mall or restaurant today better off saved or invested for tomorrow?

Think about your big dreams and goals, the ones you have looked forward to realizing for years. How many dollars are you putting toward them? Is your spending aligned with them, or in conflict with them? Could you spend less here and there and devote more money to those priorities?

Sometimes we have to borrow and spend more than we would like, but often we have a choice – and the choice we make may affect our ability to retire sooner or later.

Warmest Regards,

 april-signature

       

Citations.

1 – research.stlouisfed.org/fred2/series/PSAVERT/ [3/3/14]

2 – tradingeconomics.com/united-states/personal-savings [3/6/14]

3 – billmoyers.com/2013/09/20/by-the-numbers-the-incredibly-shrinking-american-middle-class/ [9/20/13]

4 – tradingeconomics.com/united-states/inflation-cpi [3/7/14]

psewealth No Comments

Wise Decisions with Retirement in Mind

Certain financial & lifestyle choices may lead you toward a better future.

Some retirees succeed at realizing the life they want, others don’t. Fate aside, it isn’t merely a matter of stock market performance or investment selection that makes the difference. There are certain dos and don’ts – some less apparent than others – that tend to encourage retirement happiness and comfort.

Retire financially literate. Some retirees don’t know how much they don’t know. They end their careers with inadequate financial knowledge, and yet feel that they can plan retirement on their own. They mistake retirement income planning for the whole of retirement planning, and gloss over longevity risk, risks to their estate, and potential health care expenses. The more you know, the more your retirement readiness improves.

Retire knowing that you’ll have to assume some risk. Growth investing is increasingly seen as a necessity for retirees who want to keep ahead of inflation.

According to data and research compiled by the Social Security Administration, the average 65-year-old man will live to be 84 and the average 65-year-old woman will live to be 86. So that’s a 20-year retirement. The SSA also notes that roughly a quarter of today’s 65-year-olds will live past 90, and about 10% of them will live beyond age 95.1

If these seniors rely on fixed-income investments for the balance of their lives, they may end up with reduced retirement income potential, and in turn a reduced standard of living. Look at the Rule of 72: if an investment is yielding 2%, it will take about 36 years to double your money. Yes, interest rates are rising – but inflation should rise with them.2

A generation ago, mature Americans were urged to gradually shift their portfolio assets out of stocks and into fixed-income investments. One old rule of thumb was to subtract your age from 100, with the resulting number being the percentage of your portfolio you should assign to equities.3

Today, retirees and retirement planners are reconsidering this thinking. As the Wall Street Journal reported recently, one study of retirement money and longevity risk concluded that retirement funds may last longer if a retiree gradually increases the stock allocation within a portfolio about 1% per year from an initial range of between 20-50% to between 40-80%. The concept here is that a retiree’s stock allocation should be lowest when their retirement nest egg is largest.3

Retire debt-free, or close to debt-free.  Who wants to retire with 10 years of mortgage payments ahead or a couple of car loans to pay off? Even if your retirement savings are substantial, what will big debts do to your retirement morale and the possibilities on your retirement horizon? On that note, refrain from loaning money to family members and friends who seem quite capable of standing on their own two feet.

If the thought of using some of your retirement money to pay outstanding debts hits you, set that thought aside. You have dedicated that money to your future, not to bill paying. On second or third thought, other sources for the cash may be apparent.

Retire with purpose. There’s a difference between retiring and quitting. Some people can’t wait to quit their job at 62 or 65 – their work is “killing” them, or boring them senseless.  If only they could escape and just relax and do nothing for a few years – wouldn’t that be a nice reward? Relaxation can lead to inertia, however – and inertia can lead to restlessness, even depression. You want to retire to a dream, not away from a problem.

A retirement dream can become even more captivating when it is shared. Spouses who retire with a shared dream or with utmost respect for each other’s dreams are in a good place.

The bottom line? Retirees who know what they want to do – and go out and do it – are contributing to their mental health and possibly their physical health. If they do something that is not only vital to them but important to others, their community can benefit as well.

Retire healthy. Smoking, drinking, overeating, a dearth of physical activity – all these can take a toll on your capacity to live fully and enjoy retirement. It is never “too late” to quit smoking, quit drinking or slim down.

Retire in a community where you feel at home. It could be where you live now; it could be a place hundreds or thousands of miles away where the scenery and people are uplifting. It could be the place where your children live. If you find yourself lonely in retirement, then “find your tribe” – look for ways to connect with people who share your experiences, interests and passions, and who encourage you and welcome you. This social interaction is one of the great intangible retirement benefits.

Warmest Regards,

april-signature

Citations.

1 – ssa.gov/planners/lifeexpectancy.htm [2/6/14]
2 – investopedia.com/terms/r/ruleof72.asp [2/6/14]
3 – tinyurl.com/m8akefj [2/3/14]

psewealth No Comments

Organizing Your Paperwork for Tax Season

If you haven’t done it, now’s the time.

How prepared are you to prepare your 1040? The earlier you compile and organize the relevant paperwork, the easier things may be for you (or the tax preparer working for you) this winter. Here are some tips to help you get ready:

As a first step, look at your 2012 return. Unless your job, living situation or financial situation has changed notably since you last filed your taxes, chances are you will need the same set of forms, schedules and receipts this year as you did last year. So open that manila folder (or online vault) and make or print a list of the items that accompanied your 2012 return. You should receive the TY 2013 versions of everything you need by early February at the latest.

How much documentation is needed? If you don’t freelance or own a business, your list may be short: W-2(s), 1099-INT(s), perhaps 1099-DIVs or 1099-Bs, a Form 1098 if you pay a mortgage, and maybe not much more. Independent contractors need their 1099-MISCs, and the self-employed need to compile every bit of documentation related to business expenses they can find: store and restaurant receipts, mileage records, utility bills, and so on.1

In totaling receipts, don’t forget charitable donations. The IRS wants all of them to be documented. A taxpayer who donates $250 or more to a qualified charity needs a written acknowledgment of such a donation. If your own documentation is sufficiently detailed, you may deduct $0.14 for each mile driven on behalf of a volunteer effort for a qualified charity.1

Or medical expenses & out-of-pocket expenses. Collect receipts for any expense for which your employer doesn’t reimburse you, and any medical bills that came your way last year.

If you’re turning to a tax preparer, stand out by being considerate. If you present clean, neat and well-organized documentation to a preparer, that diligence and orderliness will matter. You might get better and speedier service as a result: you are telegraphing that you are a step removed from the clients with missing or inadequate paperwork.

Make sure you give your preparer your federal tax I.D. number (TIN), and remember that joint filers must supply TINs for each spouse. If you claim anyone as a dependent, you will need to supply your preparer with that person’s federal tax I.D. number. Any dependent you claim has to have a TIN, and that goes for newborns, infants and children as well. So if your kids don’t have Social Security numbers yet, apply for them now using Form SS-5 (available online or at your Social Security office). If you claim the Child & Dependent Care Tax Credit, you will need to show the TIN for the person or business that takes care of your kids while you work.1,3

While we’re on the subject of taxes, some other questions are worth examining…

How long should you keep tax returns? The IRS statute of limitations for refunds is 3 years, but if you underreport taxable income, fail to file a return or file a claim for a loss from worthless securities or bad debt deduction, it wants you to keep them longer. You may have heard that keeping your returns for 7 years is wise; some CPAs and tax advisors will tell you to keep them for life. If the tax records are linked to assets, you will want to retain them for when you figure out the depreciation, amortization, or depletion deduction and the gain or loss. Insurers and creditors may want you to keep federal tax returns indefinitely.2

Can you use electronic files as records in audits? Yes. In fact, early in the audit process, the IRS may request accounting software backup files via Form 4564 (the Information Document Request). Form 4564 asks the taxpayer/preparer to supply the file to the IRS on a flash drive, CD or DVD, plus the necessary administrator username and password. Nothing is emailed. The IRS has the ability to read most tax prep software files. For more, search online for “Electronic Accounting Software Records FAQs.” The IRS page should be the top result.4

How do you calculate cost basis for an investment? A whole article could be written about this, and there are many potential variables in the calculation. At the most basic level with regards to stock, the cost basis is original purchase price + any commission on the purchase.

So in simple terms, if you buy 200 shares of the Little Emerging Company @ $20 a share with a $100 commission, your cost basis = $4,100, or $20.50 per share. If you sell all 200 shares for $4,000 and incur another $100 commission linked to the sale, you lose $200 – the $3,900 you wind up with falls $200 short of your $4,100 cost basis.5

Numerous factors affect cost basis: stock splits, dividend reinvestment, how shares of a security are bought or gifted. Cost basis may also be “stepped up” when an asset is inherited. Since 2011, brokerages have been required to keep track of cost basis for stocks and mutual fund shares, and to report cost basis to investors (and the IRS) when such securities are sold.5

P.S.: this tax season is off to a late start. Business filers were able to send in federal tax returns starting January 13, but the start date for processing 1040 and 1041 forms was pushed back to January 31. Per federal law, the April 15 deadline for federal tax returns remains in place, as does the 6-month extension available for those who file IRS Form 4868.6,7

    

Warmest Regards,

 april-signature

 

Citations.

1 – bankrate.com/finance/taxes/7-ways-to-get-organized-for-the-tax-year-1.aspx [1/6/14]

2 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records [8/8/13]

3 – irs.gov/Individuals/International-Taxpayers/Taxpayer-Identification-Numbers-%28TIN%29 [1/17/14]

4 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Use-of-Electronic-Accounting-Software-Records;-Frequently-Asked-Questions-and-Answers [5/22/13]

5 – turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Cost-Basis–Tracking-Your-Tax-Basis/INF12037.html [1/23/14]

6 – irs.gov/uac/Newsroom/Starting-Jan.-13-2014-Business-Tax-Filers-Can-File-2013-Returns [1/9/14]

7 – irs.gov/taxtopics/tc301.html [1/22/14]

psewealth No Comments

Why Does Family Wealth Fade Away?

A lack of vision is often the answer to that question.

Many are the stories of family wealth lost. In the late 19th century, industrial tycoon Cornelius Vanderbilt amassed the equivalent of $100 billion in today’s dollars – but when 120 of his descendants met at a family gathering in 1973, there were no millionaires among them.1

Barbara Woolworth Hutton – daughter of the founder of E.F. Hutton & Company, heiress to the Woolworth’s five-and-dime empire – inherited $900 million in inflation-adjusted dollars but passed away nearly penniless (her reputed net worth at death was $3,500).1,2

Why do stories like these happen? Why, as the Wall Street Journal notes, does an average of  70% of family wealth erode in the hands of the next generation, and an average of 90% of it in the hands of the generation thereafter? And why, as the Family Business Institute notes, do only 3% of family businesses survive past the third generation?1,3

Lost family wealth can be linked to economic, medical and psychological factors, even changes in an industry or simple fate. Yet inherited wealth may slip away due to a far less dramatic reason. 

What’s more valuable, money or knowledge? Having money is one thing; knowing how to make and keep it is another. Business owners naturally value control, but at times they make the mistake of valuing it too much – being in control becomes more of a priority than sharing practical knowledge, ideas or a financial stake with the next generation. Or, maybe there simply isn’t enough time in a business owner’s 60-hour workweek to convey the know-how or determine an outcome that makes sense for two generations.  A good succession planner can help a family business deal with these concerns.

As a long-term direction is set for the family business, one should also be set for family money. Much has been written about baby boomers being on the receiving end of the greatest generational wealth transfer in history – a total of roughly $7.6 trillion, according to the Wall Street Journal – but so far, young boomers are only saving about $0.50 of each $1 they inherit. If adult children grow up with a lot of money, they may also easily slip into a habit if spending beyond their means, or acting on entrepreneurial whims without the knowledge or boots-on-the-ground business acumen of mom and dad. According to online legal service Rocket Lawyer, 41% of baby boomers (Americans now aged 50-68) have no will. Wills are a necessity, and trusts are useful as well, especially when wealth stands a chance of going to minors.1,4   

Vision matters. When family members agree about the value and purpose of family wealth – what wealth means to them, what it should accomplish, how it should be maintained and grown for the future – that shared vision can be expressed in a coherent legacy plan, which can serve as a kind of compass.

After all, estate planning encompasses much more than strategies for wealth transfer, tax deferral and legal tax avoidance. It is also about conveying knowledge – and values. In the long run, nothing may help family wealth more.

Warmest Regards,

 april-signature

 

Citations.

1 – tinyurl.com/qblyk6v [3/8/13]

2 – investorplace.com/2013/08/woolworths-heiress-outspent-a-near-billion-dollar-fortune-died-penniless/#.Us8-D7SLXs8 [8/2/13]

3 – fa-mag.com/news/why-wealth-disappears-8227.html [9/7/11]

4 – forbes.com/sites/lawrencelight/2013/11/22/how-to-inherit-wealth-without-screwing-up/ [11/22/13]

  

psewealth No Comments

Looking Back at 2013

How good a year was it for the economy? Statistics tell the tale.

Was 2013 a terrific year for stocks? Absolutely. The good news wasn’t limited to Wall Street, however: the employment rate fell, the economy revved up, home prices rose and inflation pressure was minimal.

Bulls triumphed. Christmas Eve brought the Dow’s 49th record close of 2013: 16,357.55. The S&P 500 settled at 1,833.32 on December 24 – a new all-time peak – while the NASDAQ ended the day at 4,155.42. The YTD gains on Christmas Eve were stunning: DJIA, 24.83%; S&P, 28.55%; NASDAQ, 37.62%. As you read this, these indices may have climbed even higher since.1,2

GDP improved. Our economy expanded just 0.1% in the fourth quarter of 2012, but things got better in 2013. The Bureau of Economic Analysis measured GDP at 1.1% for Q1, 2.5% for Q2 and 4.1% for Q3.3

The job market began to turn around. In November, the jobless rate hit a 5-year low of 7.0%. From August through November, non-farm payrolls grew by an average of 204,000 jobs per month, compared to average growth of 159,000 new jobs a month from April to July.4

Homes grew more valuable. In late November, the September edition of the S&P/Case-Shiller Home Price Index showed a 13.3% year-over-year gain. Prices hadn’t risen so dramatically in a 12-month period since February 2006.5

The Consumer Price Index barely rose. It was flat in November, and that put yearly consumer inflation at only 1.2%; the annualized gain in the core CPI was also minor at 1.7%. As recently as the summer of 2011, consumer inflation was approaching 4%.6

The recovery seemed to acquire more momentum. After years of troubling economic developments, 2013 was refreshingly positive. If the economy hasn’t quite healed yet to where it was before the recession, indicators such as these suggest it won’t be long until that day.

Warmest Regards,

 april-signature

 

Citations.

1 – foxbusiness.com/markets/2013/12/24/stock-futures-steady-ahead-durable-goods-data/ [12/24/13]

2 – usatoday.com/money/markets/overview/ [12/24/13]

3 – money.cnn.com/2013/12/20/news/economy/gdp-report/index.html [12/20/13]

4 – cbsnews.com/news/unemployment-rate-dips-to-7-percent/ [12/7/13]

5 – tinyurl.com/jvl25lh [11/26/13]

6 – marketwatch.com/story/consumer-prices-unchanged-in-november-2013-12-17 [12/17/13]

psewealth No Comments

Tax Perks of Year-End Charitable Gifting

Help the causes you care about & help your finances in the process.

An opportunity for you to give & save. As 2013 ends, you may be considering making one or more charitable gifts. In most instances, they are tax-deductible with benefits for the donor as well as the recipient.

As you make any charitable gift, keep three things in mind. One, the organization must be a qualified charity. An Internal Revenue Service letter certifies this status. Some charities post such letters on their websites; others don’t, but will produce one for you if there is any question in your mind. You can check up on a charity yourself at irs.gov, using the IRS Exempt Organizations Select Check. (For the record, the IRS considers churches, mosques, temples and others houses of worship de facto charities; they may not be on the Select Check list, but they are eligible to receive charitable gifts. If there is any question at all, simply ask.) 1,2

Two, remember that charitable contributions are only deductible if itemized on Form 1040, Schedule A (lines 16-19). They are deductible in the tax year that they are made.1,2

Three, you will want a receipt or some form of bank record – a credit card receipt, a canceled check – plainly denoting the name of the charity and the date and amount of the donation. You don’t have to file these receipts with your 1040, but you should have them in case of an audit. The IRS now requires written evidence of cash donations to charities, regardless of amount.1,2

How should you contribute? There are a few popular options.

You could make a cash gift. The potential tax savings depends on your tax bracket. For example, if you write a check for $10,000 to a qualified charity, you could save $3,500 in taxes if you are in the 35% bracket and $1,500 if you are in the 15% bracket.3   

Can you make a “cash” donation with a credit card? Of course – and as long as the charge is captured by the end of 2013, the donation is deductible for 2013. If you write a check dated in 2013 and mail it before January 1, that contribution will be deductible for 2013 even if it isn’t cashed until next year.2

You could donate appreciated stock. In this bull market, many investors hold stocks and funds with major unrealized gains in taxable accounts. If you have owned stock (or other appreciated assets) for more than a year, you can donate that stock to charity and take a deduction equal to its fair market value while avoiding the capital gains tax you would incur by selling it.2,4   

An example: you are in the 33% federal tax bracket, and instead of writing a $10,000 check to a charity, you gift $10,000 in appreciated stock you purchased years ago. Let’s say the fair market value is $10,000 and the cost basis is $2,000. Under this scenario, your gift offers you a route to $3,300 in income tax savings plus an opportunity to avoid $1,200 of capital gains tax and $304 of Medicare surtax on net investment income.3

An important note: if you gift property worth more than $5,000 to a qualified charity, you are required to get a qualified appraisal of that property’s fair market value. This applies to myriad forms of non-cash property, not just appreciated securities. You must also fill out Form 8283. (See irs.gov/taxtopics/tc506.html for additional requirements on non-cash charitable gifts.) 1,2

You could make a charitable IRA gift. To some traditional IRA owners, the annual Required Minimum Distribution is an annual financial nuisance – an unwanted chunk of taxable income. If you feel this way, and have put off your RMD until the last minute (more or less), you may have an alternative.

If you turned 70½ this year (or were already older than 70½ when 2013 started), there may still be time for you to arrange a charitable IRA rollover before the year ends. You may donate up to $100,000 of IRA assets to a qualified charity through a trustee-to-trustee transfer arranged by the IRA custodian. (That is, the money cannot pass through the donor’s hands.) The gifted assets must be transferred before the end of 2013. There is no resulting federal income tax deduction, but the distribution of IRA assets to charity can count toward the annual IRA withdrawal requirement and isn’t included in the donor’s adjusted gross income. Your IRA custodian must send you a 1099-R in January reporting the gift.5

Finally, some fine print. There are some limits to annual charitable gifting, especially if your charitable contributions exceed 20% of your adjusted gross income. Should that occur, you may find that you can only deduct cash contributions up to 50% of your AGI. Similarly, you may also only be able to deduct non-cash assets up to 30% of AGI and appreciated capital gains assets up to 20% of AGI. Should you exceed those limits, you can carry the deduction forward for up to five years. In addition, single filers with AGI above $250,000 and married joint filers with AGI above $300,000 face losing a portion of their itemized deductions in 2013.2,3

 

Warmest Regards,

  april-signature    

 

 

Citations.

1 – irs.gov/taxtopics/tc506.html [4/15/13]

2 – forbes.com/sites/kellyphillipserb/2013/11/01/making-your-gifts-count10-smart-tips-for-charitable-giving/ [11/1/13]

3 – wellsfargoadvisors.com/market-economy/financial-articles/estate-planning/charitable-giving-stock-cash.htm [12/12/13]

4 – cbsnews.com/news/when-making-charitable-donations-give-stock-not-cash/ [11/25/13]

5 – forbes.com/sites/deborahljacobs/2013/11/01/the-dollars-and-sense-of-giving-ira-assets-to-charity/ [11/1/13]

 

psewealth No Comments

It Isn’t Too Late to Save for Retirement

If you’re 40 or 50 and haven’t begun, you must make the effort.

 Some people start saving for retirement at 20, 25, or 30. Others start later, and while their accumulated assets will have fewer years of compounding to benefit from, that shouldn’t discourage them to the point of doing nothing.   

If you need to play catch-up, here are some retirement savings principles to keep in mind. First of all, keep a positive outlook. Believe in the validity of your effort. Know that you are doing something good for yourself and your future, and keep at it.

Starting later means saving more – much more. That’s reality; that’s math. When you have 15 or 20 years until your envisioned retirement instead of 30 or 40, you’ve got to sock away money for retirement in comparatively greater proportions. The good news is that you won’t be retiring strictly on those contributions; in large part, you will be retiring on the earnings generated by that pool of invested assets.      

How much more do you need to save? A ballpark example: Marisa, a pre-retiree, has zero retirement savings at age 45 and dedicates herself to doing something about it. She decides to save $500 each month for retirement. After 20 years of doing that month after month, and with her retirement account yielding 6% a year, Marisa winds up with about $225,000 at age 65.1

After 65, Marisa would probably realize about $10,000 a year in inflation-adjusted retirement income from that $225,000 in invested retirement savings. Would that and Social Security be enough? Probably not. Admittedly, this is better than nothing. Moreover, her retirement account(s) might average better than a 6% return across 20 years.1

The math doesn’t lie, and the message is clear: Marisa needs to save more than $6,000 a year for retirement. Practically speaking, that means she should also exploit vehicles which allow her to do that. In 2014, you can put up to $5,500 in an IRA, $6,500 if you are 50 or older – but you can sock away up to $17,500 next year in a 401(k), 403(b), Thrift Savings Plan and most 457 plans, which all have a maximum contribution limit of $23,000 for those 50 and older.2

If Marisa is self-employed (and a sole proprietor), she can establish a solo 401(k) or a SEP-IRA. The yearly contribution limits are much higher for these plans. If Marisa’s 2013 net earnings from self-employment (after earnings are reduced by one-half of self-employment tax) work out to $50,000, she can put an employer contribution of up to $10,000 in a SEP-IRA. (She must also make similar percentage contributions for all “covered” employees, excepting her spouse, under the SEP IRA plan.) As a sole proprietor, Marisa may also make a combined employer-employee contribution of up to $33,000 to a solo 401(k) this year, and if she combines a defined benefit plan with a solo 401(k), the limit rises to $47,400. If her 2013 net earnings from self-employment come out to $150,000, she can make an employer contribution of as much as $30,000 to a SEP-IRA, a combined employee salary deferral contribution and employer profit sharing contribution of up to $53,000 to a solo 401(k), and contribute up to $96,300 toward her retirement through via the combination of the solo 401(k) and defined benefit plan.3 

How do you save more? As you are likely nearing your peak earnings years, it may be easier than you initially assume. One helpful step is to reduce some of the lifestyle costs you incur: cable TV, lease payments, and so forth. Reducing debt helps: every reduced credit card balance or paid-off loan frees up more cash. Selling things helps – a car, a boat, a house, collectibles. Whatever money they generate for you can be assigned to your retirement savings effort.

Consistency is more important than yield. When you get a late start on retirement saving, you naturally want solid returns on your investments every year – yet you shouldn’t become fixated on the return alone. A dogged pursuit of double-digit returns may expose you to considerable market risk (and the potential for big losses in a downturn). Diversification is always important, increasingly so when you can’t afford to lose a big portion of what you have saved. So is tax efficiency. You will also want to watch account fees.

If you start saving for retirement at 50, your retirement savings will likely double (at least) by age 65 thanks to consistent inflows of new money, decent yields and compounding.4

What if you amass a big nest egg & still face a shortfall? Maybe you can reduce expenses in retirement by moving to another city or state (or even another country). Maybe you can broaden your skill set and make yourself employable in another way (which also might help you before you reach traditional retirement age if you find yourself in a declining industry).

If you haven’t begun to save for retirement by your mid-40s, you have probably heard a few warnings and wake-up calls. Unless you are independently wealthy or anticipate being so someday, the truth of the matter is…

If you haven’t started saving for retirement, you need to do something to save your retirement.

That may sound harsh or scary, but without a nest egg, your vision of a comfortable future is in jeopardy. You can’t retire on hope and you don’t want to rely on Social Security, relatives or social services agencies for your well-being when you are elderly.

Warmest Regards,

april-signature

 

 

 

Citations.

1 – money.cnn.com/2012/08/15/pf/expert/late-start-retirement.moneymag/ [8/15/13]

2 – irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [11/4/13]

3 – forbes.com/sites/ashleaebeling/2013/11/01/retirement-savings-for-the-self-employed/ [11/1/13]

4 – forbes.com/sites/mitchelltuchman/2013/11/21/financial-planning-for-late-starters-in-five-steps/ [11/21/13]