Volume 7 | Issue 1 | Jan / Feb 2012
Taking Steps to Safeguard Your Investments...2 Don’t Fall in Love with Your
Employer’s Stock...3 Tax Outlook 2012 and 2013 ...4
When Is the Best Time to Begin Taking
Your Social Security Benefi ts?...5
Getting a Solid Start in 2012
By Kevin Adler, Editor, NAPFA
NAPFA
Planning Perspectives
NAPFA Headquarters3250 N. Arlington Heights Road Suite 109 Arlington Hgts, IL 847.483.5400 847.483.5415 Fax
U
ncertainty continues to rule the day in the fi nancial world.
Our selection of articles for the January-February issue of
“Planning Perspectives” offers ideas about how to stay secure in
an unpredictable environment.
First, we look at investment uncertainty from two angles. The
exposure of the Ponzi schemes of Bernard Madoff and Allen
Stanford does not mean that investors are safe. Mary Baldwin,
CFP
®provides tips about how to select a trustworthy investment
manager.
Then, Kevin Brosius, MBA, CPA/PFS, CFP
®, explains how
even the strongest companies are not sure bets. That’s why
workers should not invest large proportions of their retirement
nest eggs in their company’s stock.
Next, Robert Klosterman discusses one of the biggest
sources of uncertainty in the U.S. economy today: U.S. tax
policy. He previews upcoming tax increases and proposed
increases, and he explores strategies for minimizing their
impact.
Finally, Clarissa Hobson offers a counter-balance to
uncertainty (at least for a decade or two): income from Social
Security. She discusses how spouses can maximize Social
Security.
NAPFA & Divorce Planners Association
Start Educational Exchange
Divorce is not only one of the hardest personal challenges that many people face, but it has immense
fi nancial impacts. Financial advisors are often relied upon to help divorcing couples sort through diffi cult
fi nancial issues and to facilitate communication and fairness during stressful situations.
In order to help its members become better counselors to clients facing divorce, NAPFA has teamed up
with the Association of Divorce Financial Planners (ADFP) to exchange educational programming and build
professional networking ties. “NAPFA members practice comprehensive fi nancial planning, addressing
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Investing
Take Steps to Safeguard Your Investments
By Mary Baldwin, CFP® Baldwin & Associates www.mebaldwin.com
(Reprinted from Florida Today, with permission)
F
inancial fraud made big news in
the early days of the economic
crisis. Many investors, including
highly sophisticated ones, were duped by
unscrupulous investment managers.
Here are steps you can take to check
out investment management fi rms and
see how fi nancially secure they really
are.
Know who will have custody of your
•
money and who will be providing
your account statements. A custodian
is the fi nancial services company
that maintains electronic records of
fi nancial assets.
Never write a check to an individual,
•
including an advisor or sales
representative. When you choose a
company like Fidelity, Schwab, or TD
Ameritrade, they hold the assets, and
your check is written to them. Put
another way, always use a third-party
custodian.
Do background checks. Check
•
out the people who invest for you,
including the fi rms that have custody
of your assets. Try the BrokerCheck
service at fi nra.org, the website of
the Financial Industry Regulatory
Authority. That’s the independent
regulator of U.S. securities fi rms and
a source of trustworthy information
about custodians.
Do your homework. Choose
•
your advisor wisely, understand
the investment risks, and know
the custodian and the level of its
insurance protection. In the event the
custodian fails, the Securities Investor
Protection Corporation protects up
to $500,000 per customer (which
includes a maximum of $250,000
in cash). Most custodians and
brokerage fi rms have supplemental
coverage beyond SIPC’s protection.
Schwab has an additional $150
million, and TD Ameritrade provides
$149.5 million per customer account,
for example. Make sure that your
account is covered.
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Don’t Fall in Love with Your Employer’s Stock
By Kevin Brosius, MBA, CPA/PFS, CFP® Wealth Management, Inc. www.wealthmanagement1.com
Investing
L
ast month, I was a volunteer on the Jumpstart Your Retirement Hotline, sponsored by NAPFA and Kiplinger’s magazine. A caller asked for advice about his portfolio. He had saved diligently for retirement and had a considerable portfolio to show for his efforts. However, half of his money was invested in the stock of the company where he worked. I asked him why he invested so heavily in the company stock, and he told me he really trusted and admired the management team. Really? Are you willing to bet half of your retirement funds on them?Unfortunately, in meeting with prospective clients, I often fi nd this situation when employees have accumulated their
employer’s stock through ESOPs, restricted stock, and/or company matches to employee contributions inside 401(k) plans.
In 1999, a friend who worked for a high-tech company asked me for investment advice. His investable assets were about $1 million, which was pretty good for someone who was only 48. But most of his money was in his company’s 401(k) plan, which was 100% invested in the company’s stock.
I explained to him the additional risk he was assuming by having his total portfolio invested in one company, and I recommended a more diversifi ed, less volatile portfolio. He agreed with my recommendation but said he wanted to wait for one more split of the company stock...and he’s still waiting.
bottomed at $0.55. Adding insult to injury, he was laid off and never returned to work there. Regrettably, this lesson has to be relearned over and over again. It was reported that WorldCom employees lost over $1.1 billion in 401(k) assets when the company declared bankruptcy in 2002. Just a year earlier,
Fortune ranked WorldCom 60th on the
list of “Most Admired Companies.” Enron employees held 62% of their 401(k) assets in company stock and lost an estimated $1.3 billion when the company collapsed in 2001. As late as 2000, Enron ranked 25th on the “Most Admired Companies” list and
among the top fi ve in “Quality of Management.” Same stories at Lehman Brothers and Bear Stearns in 2008.
Do you think the company you work for is well run and immune to a signifi cant change of fortune? So did many employees at Eastern Air Lines, Orion Pictures, Schwinn Bicycle Company, Wang Laboratories, Bethlehem Steel, Bradlees, Converse, Montgomery Ward, Polaroid, Sunbeam, Pan Am, Adelphia, Global Crossing, Spiegel, Bennigan’s, Circuit City, Countrywide, Washington Mutual, Lenox, Vivitar, Reader’s Digest, Blockbuster, Hollywood Video, and Borders. Each
company declared bankruptcy. The average life expectancy of a multinational corporation is 40-50 years, according to Arie De Geus, author of The
Living Company. Considering that your work
life and retirement are likely to be more than 50 years, do you really want to risk your
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Tax Outlook 2012 and 2013
By Robert Klosterman, CFP
®White Oaks Wealth Advisors www.whiteoakswealth.com
Taxes
I
t’s clear that 2012 will be a year to watch tax policies carefully and to take actions based on legislative and political developments.If the so-called “Bush tax cuts” expire at the end of 2012, the federal long-term capital gains tax would rise from 15 percent to 20 percent. Also, a 3.8-percent surtax on investment income and gains for taxable incomes above $200,000 single and $250,000 joint returns has been proposed as a way to fund surging costs in Medicare.
It doesn’t stop there: income from interest, dividends, annuities, rents, royalties, income from passive activities, gains from securities and commodities trading, and gains from certain dispositions of business property could be included. (Items not included for the calculation are retirement income from pensions, IRA distributions, Social Security, life insurance proceeds, municipal bond interest, and income from a business you materially participate in.)
While pensions, IRAs, and company-provided annuities are not covered by the surtax, they do count toward the income threshold that would trigger the tax liability. For example, if $250,000 of family income comes from pensions and/or IRA distributions, all investment income would be subject to the Medicare tax on a joint return. If $50,000 comes from pensions and IRAs and $250,000 from interest, dividends and capital gains, then $50,000 is subject to the Medicare tax.
The Medicare tax also can apply to the sale of a personal residence. The calculation
of the gain on a primary residence will be the sales price minus the cost basis minus the primary residence exclusion ($250,000 single, $500,000 joint fi ler). No exclusion exists on secondary residences. Any gain over the $200,000 on a single return and $250,000 on a joint return would be subject to the Medicare tax.
Irrevocable trusts and estates do not benefi t from the threshold of $200,000 to $250,000 of adjusted gross income. The tax can be applied with as little as $12,000 of taxable income. It also appears that children’s unearned income reported on a parent’s return will be affected by the tax.
Tax Planning
How can you respond if these new taxes are enacted? One option is to do a Roth conversion so that you can pay taxes now for those retirement funds. This avoids having investment income in 2013 that will put you over the income threshold limits. Another option is buying tax-free municipal bonds for fi xed-income needs. Meanwhile, watch out for the tax rate on qualifi ed dividends, which conceivably could rise from the current 15 percent to as high as 39.6 percent.
The other idea is to accelerate income into 2012, which is possibly the last year when the current rates and rules will be in effect.
As always, remember that the best decision is based on your individual
circumstances. Talk with a fi nancial advisor or CPA.
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When Is the Best Time to Begin Taking
Your Social Security Benefi ts?
Retirement Planning
By Clarissa R. Hobson, CFP
®Carnick & Company www.carnick.com
S
ocial Security benefi ts represent one of the only streams of lifetime income available with built-in cost-of-living adjustments. Benefi ts come with rights of survivorship, so when one spouse dies, the other spouse receives the higher of the two benefi ts.Deciding when to take Social Security benefi ts is critically important to maximizing long-term benefi ts. Benefi ts may be claimed as early as age 62, but if income isn’t needed, or if you’re still working, you can wait up to eight years. Taking benefi ts early results in a permanent reduction; the earlier benefi ts are taken, the greater the reduction.
Postponing benefi ts beyond full benefi ts age results in a credit of 8% per year (up to age 70), plus annual cost-of-living increases (COLIs). So if full retirement age is 67, monthly benefi t amounts will be 24% higher (plus COLIs) if benefi ts are delayed to 70. The COLI will be applied to the higher benefi ts and will apply to survivor benefi ts.
Married couples have many factors to consider prior to fi ling:
Are both individuals eligible for benefi ts •
based on their own working records? What age should each claim benefi ts? •
Can strategies be used to increase •
benefi ts?
If both are eligible for benefi ts, calculate whether each should claim their own benefi t or claim spousal benefi ts. If one spouse earned signifi cantly more, it’s likely the other spouse should claim a spousal benefi t, which
Here are two strategies that help maximize benefi ts. “File and Suspend” is often employed when the couple has a signifi cant wage disparity, and the higher wage earner wants to maximize benefi ts by waiting until 70. The lower-earner, if 62 or older, could claim on his or her own record, or could opt for the higher spousal benefi t. However, the lower-earner cannot claim spousal benefi ts unless the higher-earner has fi led.
Here’s how to solve it: If the higher-earner has reached full benefi ts age, he or she fi les for benefi ts. Then the lower-earner fi les for spousal benefi ts, but the higher-earning spouse suspends the receipt of benefi ts. Thus, the lower-earner claims higher benefi ts, while the higher-earner continues accruing credits. This is particularly benefi cial if the higher-earner dies fi rst because the survivor will have a higher benefi t.
“Restricting an Application” to a
spousal benefi t only is a less-commonly used strategy. Here, the lower-earner claims his or her benefi t, and the higher-earner applies for spousal benefi ts (note: the higher- earner must be eligible to take benefi ts). If the higher-earner has reached full retirement age, he or she is eligible for half of the lower-earner’s full benefi t amount, even if the spouse is receiving a reduced benefi t because he or she started early! Then, the higher-earner can switch to his or her own benefi t amount at age 70, and the lower-earner can switch to a spousal benefi t.
