Spotlight on Fraud
At
the very least, the current financial crisis is shining a very bright
light on investment fraud. With more Ponzi schemes surfacing and the
list of advisers on the lam growing, Warren Buffett’s comment in his
2002 shareholder letter is coming true “…you only find out who is
swimming naked when the tide goes out.”
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2009 Distributions NOT Required
The
2008 Worker, Retiree and Employer Recovery Act provides a one-year
suspension of retirement account Required Minimum Distribution (RMD)
rules in 2009. This allows people 70½ or older to skip taking
distributions from IRAs and defined contribution retirement plans (such
as 401(k) and 457(b) plans). It also applies to after-death
distributions to beneficiaries.
Waiving
the 50% excise tax penalty imposed if minimum withdrawals are not taken
after age 70½ is designed to ease requirements for pension plans that
are having problems meeting funding requirements in the current
economic crisis. But it can work to the advantage of individuals as
well.
The main reason to
skip a minimum distribution in 2009 is to give your retirement account
more time to recover from the ravages of the past 18 months. If you
want to be able to pass retirement assets on to your beneficiaries,
minimizing withdrawals from retirement accounts is a good strategy.
Because distributions from tax-deferred accounts are taxed as personal
income, withdrawals may be subject to higher tax rates than other
income sources and could impact your tax bracket.
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Time for a Reality Check
Put
aside the newspaper, turn off the television and take a moment to get
the current financial situation back into perspective. Yes, the crisis
is real and yes, it’s global. That alone makes it very different
from prior financial meltdowns. This isn’t just a tech stock
slide, or an Asian crisis. It’s worldwide and it is going to change our
lives. But it isn’t the end.
There
is cyclicality to everything - from life with its inescapable move from
birth to death, to the financial markets with their unending cycles of
bull and bear, to economies and business cycles. It seems we need those
cycles to advance and to change. The good news is that if you look back
throughout history, periodic crises catalyze a whole new epoch for
society. And by and large those catalysts bring positive changes.
In
the U.S., despite the erosion of net worth from declining values in
homes and investments, we have tremendous resources to pull us through
this crisis. Indeed, our greatest worry isn’t what happens here at
home, but what happens around the world where safety nets are thinner,
or perhaps don’t exist at all.
What
should you do personally to get through this period? It sounds
trite, but just do your best. Decide what matters the most to you and
focus on keeping those elements whole and healthy. Personal
relationships should be a priority. This is not the time to let
stress destroy families, friendships or working relationships. In fact,
these relationships are typically your greatest source of support and
happiness.
This is a good
time to be financially conservative, but remember that crises create
opportunities. Rather than acquiring the latest, greatest toys,
look for possessions with lasting value and ways you may be able to
create wealth in the future with your spending. Try to set as much
money aside as you can so you are positioned to take advantage of
opportunities.
Like it or
not, we are all being jolted out of the comfortable ruts we’ve traveled
for the last 20-30 years. And the change can be very good if you
take the time to rethink your life. We welcome the opportunity to talk
with you, to explain our view of the future and where the financial
markets might be headed. If your circumstances have changed, it may be
time to change your investment approach. Perhaps there are ideas you
would like to bounce off of us, or investment opportunities you would
like to consider. As always, please feel free to call us with
questions or concerns.
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Wealth Distribution on Your Terms
The
current administration and Congress have made it pretty clear that
wealth needs a bit of redistribution. The exemption for estate taxes is
to be frozen for now at $3.5 million. Effective 2011, taxes will rise
for single individuals earning $200,000 and more and couples earning
$250,000 and over. The Wall Street Journal reports this will generate $656 billion over 10 years.
The
problem is that isn’t enough. The current economic stimulus plan
exceeds $780 billion in less than three years. And that’s before we
start talking financial bailouts. President Obama’s plan to
finance increased deficits with increased taxes on the wealthy is going
to fall short even if the tax rate is raised to 100% according to many
analysts. There just aren’t enough people earning above $200,000
(or $250,000 for couples), and their numbers are falling with the
economy.
Payoff plans under
the proposed federal budget also rely on some fairly rosy economic
forecasts. The White House budget assumes that the economy will decline
only 1.2% this year, growing 3.2% next year. By 2010 to 2013, budget
expectations are that the economy will average 4% a year. That’s
optimistic even within the federal government. In mid-February, the
U.S. Energy Information Administration reported that the U.S. real
gross domestic product (GDP) is expected to decline 2.7% this year.
If
you don’t have a lot of assets, wealth redistribution by the government
probably sounds pretty good. If you do have assets, however, or family
income above $250,000, you might want to start looking at your own
redistribution plan while you still have an 18-month window. Being one
of the “wealthy” in America looks like it will not be a very exclusive
class when the bills come due.
With
values down for many investment classes, this could also be a good
opportunity to transfer assets at a lower value, minimizing tax
implications.
Before you do anything,
identify how much you can afford to transfer. You don’t want to
jeopardize your lifestyle needs. Second, decide how much control you
would like to retain over the assets. If you want to help finance a
child’s education, an outright gift might not be the best way to do so.
There are other ways to transfer assets that give you more control over
the use of those funds.
The Tax-Free Gift
Use tax-free gifts first to transfer wealth. There are three ways to do
so: (1) the annual exclusion gift per recipient – currently $13,000
transferrable to as many beneficiaries as the donor wishes, (2) the $1
million lifetime gift-tax exemption per donor free of gift tax (this
will reduce the amount of your estate that can pass free of taxes) and
(3) certain gifts earmarked for educational and medical expenses.
If
you pay someone’s medical or education expenses directly to the
provider, the gift is not included in your annual exclusion amount.
With a 529 Qualified Tuition Plan, a grantor can elect to use five
years of annual gift-tax exclusions at once as a contribution for a
beneficiary.
Trusts and Other Tools
A number of types of trusts can help transfer wealth free of gift taxes
while avoiding probate and reducing estate taxes. Make certain you work
with a qualified attorney or tax adviser in establishing a trust,
however. You want to know your trust will stand up in court and in the
face of the IRS. Some trusts to consider include:
- Generation Skipping Trust / Dynasty Trust
- Grantor-Retained Annuity Trust
- Charitable Lead Annuity Trust
- Qualified Personal Residence Trust
- Irrevocable Life Insurance Trust
- Uniform Gifts to Minors Act Account
- Section 2503(c) Minor’s Exclusion Trust
Other tools for wealth transfer are:
- Family Limited Partnership
- Private Annuities
- Asset sales/loans to family members.
In
addition to passing through as much value as possible to your
beneficiaries, with little or no tax cost to the grantor, wealth
transfer allows the future income and appreciation of the transferred
assets to escape transfer taxes.
The
big caution we would like to make is that you need to work with
qualified advisers when establishing wealth transfer plans. This is
going to be a topic of increasing concern with wealthier individuals
and unscrupulous advisers are virtually guaranteed to appear promising
the latest and greatest wealth transfer scheme. And, not all will be
legal or stand the test of the courts.
If
you are interested in ways to transfer the wealth you have accumulated
in ways most likely to benefit people and causes you want to help, we
welcome an opportunity to discuss your goals and some of the best ways
they might be accomplished. Just call and let’s talk.
Please consider the investment objectives, risks, charges and expenses
carefully before investing in a 529 college savings plan or annuity.
Request and read the official statement carefully before you invest.
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Questions to Ask Before You Take Early Social Security
With
many retirement portfolios devastated by the market’s continual
decline, individuals considering retirement are facing two conflicting
levels of advice. The first says, postpone your plans for
retirement, keep working a little longer and put as much as you can
aside to rebuild your retirement portfolio. The second says with jobs
scarce, your best option is to take early retirement and start
receiving Social Security. At least that way you will have income
coming in and less need to tap your savings.
A
survey by Fidelity Investments, conducted in August of 2008, found that
nearly half (45%) of 61-year-old Americans expect to tap into Social
Security at age 62, their first year of eligibility. Given rising
unemployment levels since August that number may be even higher today.
But
before you opt to start collecting early Social Security benefits,
there are a few facts you need to understand about the system and some
questions to answer.
Your
Social Security benefit depends on your earnings, or those of your
spouse, on which Social Security taxes have been paid, averaged over
your working lifetime. Generally, the higher your earnings, the higher
your Social Security benefit. If you served in the military after 1956,
you paid Social Security taxes on those earnings. Since 1988, inactive
duty service in the Armed Forces reserves (such as weekend drills) has
also been covered by Social Security.
You
can start your Social Security benefits as early as age 62, but your
benefit amount will be reduced based on the number of months you will
receive checks before you reach full retirement age. This reduction is permanent. Benefits will not go up when you reach full retirement.
Receiving
your full Social Security benefit requires postponing benefits until
your full retirement age. This varies based on the year you were
born, shown in the chart. (Widows and widowers can begin receiving
Social Security benefits at age 60 (or age 50 if disabled) on the
deceased spouse’s account.)
Postpone
receiving Social Security benefits until after your full retirement age
and your benefit will increase by a certain percentage for each
additional year you work until you either start taking your benefits or
reach age 70.
If you work
while receiving early retirement Social Security benefits, your
benefits will be reduced if your earnings exceed the current earnings
limit. In 2009, for every $2 over $12,960, $1 will be withheld from
benefits. This increases to a limit of $34,440 for the year you reach
full retirement age, at which time for every $2 over the limit, $1 is
withheld from benefits.
Once
you are past your first year of full retirement, there is no reduction
in Social Security benefits for working. For more information on
your benefit and rates, visit www.ssa.gov.
Which brings us to the questions you need to answer:
- Is the value of the benefits you receive early worth the tradeoff in lower benefits for the rest of your life?
- Do
you plan to continue working in early retirement? If so, will you earn
enough to trigger a reduction in your current benefits?
Weigh
your alternatives carefully before using Social Security as a stop-gap
source of income between jobs. Cash in hand now may not be worth the
permanent reduction in long-term benefits.
- How long do you anticipate living?
If
your health is such that you don’t anticipate collecting benefits for
the long term, by all means retire early. If your family history
indicates the potential for living into your 80s and 90s, this needs to
be taken into consideration
- Do you expect Social Security to remain viable or become a needs-based system?
This
is the tough one. If you foresee a day when you will not be
eligible for Social Security benefits, now may be the right choice,
allowing you to conserve other assets for later in life. On the other
hand, the more likely you are to need Social Security benefits to meet
daily living requirements in retirement, the more important it may be
to maximize those benefits later in life by waiting to retire.
Remember,
Social Security was never intended as a full retirement plan, but
rather as supplemental income to keep older citizens from abject
poverty in what was assumed to be a relatively short retirement
life. When Social Security was originally passed, few workers
reached the age of 65.
Before
you make any decisions about early retirement, it makes sense to sit
down with a financial adviser and determine exactly what your resources
and financial needs will be in retirement and how you can best enjoy
those years.
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The Fallacy of Index Funds and Fees
Wondering
whether your financial adviser is at a loss and just guessing what you
should do next? If you are being told the best place to invest is
to buy and hold index funds with the lowest expenses, your adviser is
clueless.
Investing solely
in index funds is equivalent to throwing up your hands and saying
there’s no point in trying to think your way into better returns.
Index
funds are a broad representation of the market. Their returns are
completely relative to the industry they represent and the general
economy. If the economy is in the pits and the industry is
reporting losses, the index fund is going down. Having the lowest
fees just means it may go down fractionally less. If the economy
recovers, the index will recover, but only to the extent that the
market segment it represents recovers. If, as many economists project,
the U.S. economy is in for a period of little growth and lots of
problems in sectors such as automotive, an index fund that represents
the broad market is in for the same fate.
Can
you think of any activity in life where passivity is the path to
success? It doesn’t exist. In sports, work, and even relationships,
getting what we want takes action. It takes thinking, planning,
anticipating where the opportunities are, making decisions and being
prepared to change our minds if the results aren’t what we
anticipated. And, it takes preparing for disaster, because
sometimes things go wrong no matter how much we prepare.
Passive
investing in index funds is easy and you can always blame the market if
you fail. But, it’s not good investing. If you are looking for
ways to rebuild your retirement portfolio, to regain financial
security, you need active management. That’s where our firm is
different. We are actively looking for opportunities.
Opportunities to avoid losses and achieve profits regardless of market
circumstances.
We
know that at every point of the business cycle there are segments that
do better than others. The reasons are often obvious. Sometimes it
takes a bit of research. Among businesses doing well in the first half
of 2009, for example, were movie theaters. Escapism? Perhaps.
What matters is that they are reporting profits. With an active
approach, seeking out profitable companies and market segments is part
of the job.
While actively managed accounts pursue strategies that are intended to outperform passive investing, there can be no assurance that the strategies or their pursuant will be successful. Before purchasing an index fund, request a prospectus and read it carefully to understand the fund’s investment objectives, risks, charges and expenses before investing.
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Medical Identity Theft Rising
Identity
theft has taken a new twist with the theft of medical identity numbers
and patient information. Armed with this information, a thief can
get care or make false claims for medical insurance. In addition to the
financial liability, the potential for corrupted medical files presents
a real danger to the insured if treatment is based on the imposter’s
medical history. Victims could also find they hit their insurance caps,
or become uninsurable or unemployable based on someone else’s medical
problems.
Make certain you
carefully review your medical and insurance documents and move quickly
to counter any you think might be fraudulent.
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