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First Financial Steps for Widows and Widowers

January 22nd, 2012

Jane M. Young

If you are recently widowed, you probably don’t have the energy or the interest to take care of all the legal and financial issues that need to be dealt with. You may be emotionally exhausted from the loss of what really matters in your live.  It is probably difficult to focus on all of the paperwork and the financial issues confronting you.  At the same time, there is a nagging fear that important issues aren’t being addressed and this is creating more stress. You aren’t yourself and won’t be for quite some time. You need a way to simplify, organize and prioritize those activities that must be addressed immediately and postpone those that can wait until the fog has cleared. Be easy on yourself, this is normal, you will start to feel more like yourself in about a year but you may still feel a little fuzzy for up to three years. Most importantly, remember to take your time and avoid making any major decisions for a couple of years. Focus on what must be dealt with immediately and work through these issues in a methodical manner. Getting organized and taking care of the necessities should provide you with some peace of mind and help ease the stress you are feeling. Here are some activities that need to be addressed right away. Most other decisions and changes can be addressed a little later.

 

First Financial Steps:


Get organized – Establish in-boxes or a simple filing system for all of your incoming correspondence. Separate your mail by bills and urgent, long term or non-urgent and personal correspondence. You may need to wait a few days or weeks to address the urgent paperwork but you want to be sure nothing is lost. Be very observant of correspondence regarding assets and liabilities that you may not have known about.

Get about 20 copies of the Death Certificate

Cover your immediate cash flow needs – Review all or your bills, credit card statements and checking accounts to determine what your monthly expenses have been. Review your current cash position and income sources to make sure you will have enough to cover your expenses for the next six months. At this time you should focus on short term liquidity needs. You may need to move some money around to cover your short term expenses.

 
Pay your current bills – Pay current bills that you know are legitimate. Be cautious not to pay bills that seem suspicious or may have already been paid.

 
Pull together all of your important documents – You will need this to determine what you have to deal with and what paperwork needs to be processed. Below is a list of the documents you may need.
Death Certificate
Marriage Certificate
Wills, Powers of Attorney and Trusts
Pre and Post Nuptial Documents
Bank Statements
Investment Statements
Home, Auto, Health and Life Insurance Policies
Tax Returns
Business and Partnership Agreements
Deeds on home and property
Credit Card Statements
Employee Benefits
Veteran’s Benefits
Mortgage Statement and loan document
Titles and loan information on vehicles
Safe Deposit Boxes

Do a full inventory of your assets and liabilities – This will be needed to settle the estate and to determine what paperwork needs to be processed. It will also provide you with information on your overall, long term financial situation. You may want to consult or hire a financial planner to assist you with this process. Be sure to work with someone who has experience working with widows and widowers, preferably a CFP who works on a fee-only basis (not compensated for the sale of products).

Notify spouse’s employer and apply for employee/survivor benefits

Apply for Social Security, Veterans and Pension Benefits

Select and hire an attorney to help you settle the estate – An attorney can help with your appointment as the personal representative and to walk you through the activities required to settle the estate. Ask trusted friends, family and colleagues for referrals and perform your own due diligence to select the right attorney for your situation.

Collect on Life Insurance or Annuity death benefits – Don’t be in a rush to invest this money. Initially place it in a money market or somewhere safe until you have more energy and interest in making longer term investment decisions.

Contact Home, Auto, Health and Long Term Care Insurance Companies – Make sure you are still adequately covered

Do not make any major decisions – Avoid making any major decisions, especially financial decisions regarding investments, insurance or real estate for at least a year. Be very apprehensive of anyone pressuring you to make a quick decision. Opportunities will still be out there when you are ready to make a decision. If it sounds too good to be true, it probably is. Be especially cautious about unscrupulous sales people who target widows.

Update your will, beneficiaries and powers of attorney

File tax returns

 

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10 Financial Planning Tips to Start 2012

January 11th, 2012

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Jane M. Young, CFP, EA

 

1. Dream – Take a few minutes to look at the big picture and think about what you want from life. How do you want to live, what do you want to do and how do you want to spend your time. Successful businesses have vision statements and strategic plans. Create your own personal vision statement and strategic plan.

2. Set Goals – What are your goals for the coming year? Start by brainstorming – fill a page by listing all the goals that come to mind. Think about different facets of your life such as family, career, education, finance, health and so forth. Review your list and prioritize three or four goals to focus on in the coming year.

3. Evaluate Your Current Situation – What did you spend and what did you earn last year? What was necessary and what was discretionary? Did you spend in a purposeful manner and do your expenses support your goals and strategic plan. How much did you save or invest in a retirement plan? Can you increase this in 2012? If you are like most of us, a category is needed for “I have no clue”.

4. Track Spending and Address Problem Areas – If you aren’t sure where you spent all that discretionary cash, track your expenses for a month or two. It can be very enlightening – Yikes! Identify a few problem areas where you can cut spending and really place some focus. Identify the actions you will take to cut spending in these areas. Set weekly limits and come up with creative alternatives to save you money.

5. Evaluate Your Career – Are you doing what you really want? Are you being paid what you are worth? Have you become too comfortable that you are settling for safe and familiar? Could you earn more or work in a more rewarding position if you took the time to look? Are you current in your field or do you need to take some refresher courses? Do you know what it will take to get a promotion or a better job? In this volatile job market you need to keep your skills current, to nurture your network and to maintain a current resume.

6. Maintain an Emergency Fund – Start or maintain an emergency fund equal to at least four months of expenses, including the current month. This should be completely liquid in a checking, savings or money market account.

7. Pay Off Debt – Establish a plan to pay off all of your credit card debt. Once this is paid off establish a plan to start paying off personal debt and student loans.

8. Save 10-15% of your income (take advantage of employee Benefits) – You need to save at least 10-15% of your income to provide a buffer against tough financial times and to invest for retirement. At a very minimum, you need to contribute up to the amount your employer will match. Additionally, be sure to take advantage of flex benefits or employee stock purchase plans that may be offered by your employer.

9. Maintain a Well Diversified Portfolio – Maintain a well-diversified portfolio that provides you with the best return for your risk tolerance, your investment goals and your investment time horizon. Be sure to re-balance your portfolio on an annual basis. Avoid over reacting to short term swings in the market with money that is invested for the long term.

10. Don’t Pay Too Much Income Tax – Avoid paying too much income tax. Get organized and keep good records to be sure you are maximizing your deductions. Make tax wise investment decisions, harvest tax losses and maximize the use of tax deferred investment vehicles. Donate unwanted items to charity – be sure to document your donations with a receipt.

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Retirement Guidelines, Pointers and Pitfalls

September 7th, 2011

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Jane Young, CFP, EA

 

Below are some general guidelines and rules of thumb for retirement planning.  While general guidelines can be useful, I recommend that you do the work to run retirement calculations with well thought out figures that represent your unique situation. These should be revisited on an annual basis to be sure you are on track.  Guidelines and rules of thumb can be misleading and may not fit every situation.

 

  • Always save between 10% and 15% of your annual income.  If you are starting late this needs to be much higher.

 

  • A rule of thumb is that you will spend 60-80% of your pre-retirement expenses in retirement.  However, I recommend doing the detailed work to determine what your unique situation may look like.

 

  • Over a long period of time inflation has averaged about 3%.  In retirement some of your expenses may not be subject to inflation such as your house payment. Other expenses, such as healthcare, will be higher.  Health care is projected to increase at a rate of 7% annually.

 

  • You will probably spend more during your first few years of retirement and much less during your last years in retirement.  Due to compounding, money spent early in retirement has a more dramatic impact on reducing your nest egg than money spent later in life.  You may want to consider working a part time or seasonal job to help cover large travel expenses during the first few years of retirement.

 

  • One guideline to determine the size of retirement nest egg required is to assume you will need $15 – $20 in savings for every dollar of shortfall between your projected income from pensions and social security and your expenses.

 

  • A guideline on how much you can pull from your retirement savings without running out is 3-4% if you have a conservative portfolio and 4-5% if you have a moderate or more aggressive portfolio.  Most retirement guidelines assume 30 years in retirement.  I recommend running numbers that represent your specific situation to get a better understanding of what you can spend.

 

 

 

 

  • Avoid taking Social Security before your normal retirement age if you plan to work between 62 and your normal retirement age.  In 2011, Social Security will withhold $1 for every $2 earned above $14,160 between the time you are 62 and   your normal retirement age.  Additionally, working while taking Social Security may result in more income tax on your benefit.

 

  • If you are planning to retire before 65, be ready to pay a hefty bill for health insurance until Medicare kicks in at 65.

 

  • Avoid pulling money from your retirement funds to meet short term, pre-retirement living expenses. 

 

  • Don’t sacrifice your retirement to put your children through college.

 

  • Don’t automatically transfer your entire portfolio into CD’s or other extremely conservative investments upon retirement.  You may spend more than 30 years in retirement.  Some of your money should be invested in the stock market to stay ahead of inflation. 

 

  • You don’t need an “income” producing investment to cover your retirement distribution needs.  You can make systematic withdrawals from your portfolio to meet your living expenses.  However, you should maintain at least 5-10 years of expenses in fixed income investments.  This will prevent the need to sell equities when the stock market is down.  A significant portion of your annual return will come from capital appreciation on the stock portion of your portfolio.

 

  • Maintain a diversified portfolio and don’t keep too much in your company’s stock or in the stock of any one company.

 

  • Monitor your situation on an annual basis to stay on track.

 

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Planning for Retirement is More Than Picking a Date

September 7th, 2011

Jane M. Young, CFP, EA

Below are some questions you may want to consider when you start planning for retirement.

What does retirement look like?
When do you want to start cutting back on your work hours? Do you want to stop working altogether or try something new?

Do you want to take a break for a few years and return to work part time? What are the opportunities for someone of retirement age in your chosen field?

How will you feel in retirement? How much of your personal identity and self esteem is associated with what you do? How will you feed your need for a sense of accomplishment, friendships, social interaction and status? Are you ready for retirement? Maybe a gradual transition will be more comfortable.

Where and how will you live? Do you plan to move to a less expensive city or country? Are you going to stay in your home or downsize to something with less maintenance?

How will you spend your time and money? Do you plan to travel, write a book or play tennis?

How will your expenses change in retirement? (Downsize or pay-off house, travel, no kids and no 401k contribution)

Where are you today?
What are your current expenses and what are you earning? How will this change in the coming years? Do you need to make some improvements in your career/earning situation?

How much are you saving for retirement? Could you squeeze out just a little more? Most people need to be saving between 10 – 15%. If you are getting started late you should be saving more.

What can you expect from a pension or social security?

Are you maximizing your ability to contribute to retirement plans such as 401ks, 403bs and Roth IRAs? Are you taking advantage of opportunities for matching contributions from your employer?

How much do you have put away for retirement?

Is your portfolio well diversified to meet your retirement needs? Avoid being too conservation or too aggressive.

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Stay The Course! Ten Steps to Help You Through Uncertain Financial Times

August 8th, 2011

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Jane M. Young, CFP, EA

1. Don’t react emotionally! This will result in a constant cycle of buying high and selling low. Once you sell, you lock in your losses. Stay the course and focus on what you can control.

2. Make sure you have an emergency fund of three to six months of expenses.

3. Evaluate your asset allocation to be sure it is consistent with the timeframe in which you need to withdraw money. The stock market is a long term investment; you should never have short term money in the stock market. Make adjustments to your allocation based on your long term goals and need for liquidity not on fear.

4. Maintain a well diversified portfolio.

5. Pay-off credit cards and high interest consumer debt. Be wary of variable rate loans, lines of credit and mortgages. The downgrade in the U.S. credit rating could hasten an increase in interest rates.

6. Get your personal finances in order. It’s always a good idea to understand your spending and keep expenses in line with your income and financial goals. This is a good time to tighten your belt to be prepared for unexpected emergencies.

7. Use dollar cost averaging to invest new money into the stock market. Volatility in the stock market creates great buying opportunities.

8. Don’t get caught up in the media hype. They are in the business to sell newspapers, magazines and television commercials. Avoid the new hot asset class they are trying to promote this week. Sound investment advice is boring and doesn’t sell newspapers.

9. Take steps to secure or improve your income stream. Are you performing up to speed at work? Are you getting along with co-workers? Should you take some classes to keep your skills current? Are you underemployed or under paid for your education and experience? Consider a second job to pay down excess debt.

10. Stay calm, be patient and focus on making sure your financial plan meets your long term goals and objectives. Stay the course, this too shall pass.

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O’Connor: Investors urged not to panic as U.S. default looms

July 29th, 2011

Last Updated: July 27. 2011 1:00AM

Brian J. O’Connor

O’Connor: Investors urged not to panic as U.S. default looms

Many doubt leaders, in the end, will fail to act, trigger default

With the deadline to raise the federal debt ceiling drawing closer by the day — and the risk that the U.S. could default on its sovereign debt growing — individual financial planners are fielding lots of calls from worried investors.

A failure to raise the debt ceiling that prompts a U.S. default would cause stock and bond prices to plummet, interest rates to rise, credit for mortgages, cars and other debt to pucker up, and knock the wobbly economic recovery flat on its face. Federal Reserve Chairman Ben Bernanke himself has warned that letting the federal government run out of money would be “catastrophic.”

Nonetheless, advisers say individual investors should stick to their investment strategies for three good reasons:

First, most planners doubt that even the kinds of people who get elected to Congress these days will really allow the U.S. to default on its debt.

Second, in the case of a cataclysmic financial disaster, the traditional safe havens, such as U.S. Treasuries and even greenbacks, would take a hit.

And third, most individual investors just bungle it when they try to time when to enter and exit the stock market. “You’ve got to know when to sell but when to buy back in, too,” says Lyle Wolberg, a certified financial planner with Telemus Capital Partners in Southfield. “So you’ve got to be right twice. And that’s hard to do.”

Financial experts all agree that a U.S. debt default would be a serious, serious issue. But would it be as big as the worst global crash since the Great Depression? After all, the Dow Jones index has recovered nearly 90 percent of its record high from late 2007, at the peak of the real estate bubble. So unless you’re sure a possible U.S. default would create another great recession, it may not be worth the cost and worry to start rearranging your investments.

And even if it is, a well-structured investment portfolio already is positioned to ride out those kinds of losses.

“The diversification we’ve had in place is to address all these issues, so there really are no moves to make,” says Bill Mack, a certified financial planner who runs William Mack & Associates in Troy. “If you’re in inappropriate investments now, especially if you’re too heavy into equities, I’d be concerned. But this is a short-term event and your portfolio should be geared toward long-term objectives.”

With bonds, stocks and even U.S. Treasuries taking a hit in a default, investors really don’t have many places to run. Some analysts have suggested Swiss francs, an investment that’s well beyond the means and expertise of most folks trying to protect a 401(k) or Individual Retirement Account. Other strategies — from the popular but very risky choice of gold, to moving from long-term to short-term bonds or switching to high-dividend-yielding blue-chip stocks — are common suggestions.

But those strategies have been in place for more than year now, as investors anticipated rising interest rates, more inflation or looked for safe income to replace low-yield Treasuries.

“There isn’t a whole lot you can do that hasn’t been covered by the markets,” says Karen Norman, a certified financial planner with Norman Financial Planning in Troy. “Positioning yourself other than running for cash is tremendously difficult.”

Even cash would lose some value as the dollar would decline after a default, making it more expensive to buy imported goods, including gasoline. The advantage would be that a switch to cash now would leave an investor positioned to go bargain-hunting when stocks slide after a default. But individual investors who make regular contributions to a 401(k) or IRA already buy more shares with every deduction from their paychecks or automated payment from the checking accounts, so they’re already positioned to buy low once stocks hit the skids, just as they’ve done throughout the entire downturn.

The reason to go to cash now, says Nina Preston, a certified financial planner with the Society for Lifetime Planning in Troy, is if you need a stable stash to cover your short-term income requirements, such as retirees who are counseled to hold three to five years worth of needed income in cash or equivalents. But if you need to do that, you’re already holding too much stock.

“If you need to flee to cash,” Preston says, “you should have been in cash to start with.”

The final drawback to moving your money around — even to cash — is that you’ll probably do the wrong thing, warns Mack.

“If people are adamant about going to cash, if they feel it in their bones that the world is coming to an end, at what point do they say, ‘It’s time to get back in?’” he asks. “Don’t tell me its when you feel better because that’s too late. It just doesn’t work to follow your gut feelings.”

The bottom line is that investors need a strategy that lets them ride out short-term economic woes, even if they’re self-inflicted by our own leaders.

“We’ve looked ahead and positioned ourselves the best way we can,” Norman says. “Now we need these folks in Washington to do their duty. That’s what we’re paying them to do.”

Which means that your best investment option is a very easy one — picking up the phone and placing a call to your congressman or congresswoman.

boconnor@detnews.com

 http://detnews.com/article/20110727/OPINION03/107270346/O-Connor–Investors-urged-not-to-panic-as-U.S.-default-looms#.TjMnDLApgnQ.email

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Watch Out for These Pitfalls with Social Security and IRA Rollovers

July 29th, 2011

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Jane M. Young, CFP, EA

Here are a couple issues on Social Security and IRA Rollovers that frequently catch people by surprise.

Think twice about taking your Social Security at 62 or before your regular retirement age, if you plan to work during this timeframe. In 2011, if you earn more than $14,160, Social Security will withhold $1 for every $2 earned above this amount. However, all is not lost, when you reach full retirement age Social Security will increase your benefits to make up for the benefits withheld. Once you reach your full retirement age there is no reduction in benefits for earning more than $14,160. However, the amount of tax you pay on your Social Security benefits will increase as your taxable income increases. This may be a good reason to wait until your full retirement age or until you stop working to begin taking Social Security.

If you are thinking about moving your IRA from one custodian to another I strongly encourage you to do this as a direct transfer and not as a rollover. We frequently use these terms synonymously but I assure you the IRS does not! A transfer is when you move your IRA directly from one IRA trustee/custodian to another – nothing is paid to you. A rollover is when a check is issued to you and you write a second check to the new IRA Trustee/Custodian. This must be done within 60 days or the transaction is treated as a taxable distribution. You can do as many transfers as you desire in a given year. However, you can only do one rollover per year, on a given IRA. This is a very stringent rule and there are very few exceptions even when the error is out of your control. Whenever possible be sure to use a direct transfer not a rollover to move your IRA Account.

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“What is Modern Retirement and Will You be Ready?” Join us on September 7th for our next Pinnacle Fireside Chat.

July 21st, 2011

Please mark your calendars for our next Pinnacle Financial “Fireside Chat”, to be held on Wednesday, September 7th from 7:30am – 9:00am.

Jane will discuss the characteristics of modern retirement and how to plan for it. She will explore different approaches to retirement and some of the factors to be considered. She will also explain the various plans available to help you save for retirement.

The Fireside Chat sessions are informational only (no sales!) and interactive — a great opportunity to learn new things and ask questions in a relaxed environment. These sessions are open to your family and friends, so please feel free to pass this email along to anyone that you think might be interested in attending.

Please call Judy (719-260-9800) if you would like to attend this session on September 7th, as space is limited.

We hope to see you on September 7th! Coffee and donuts will be served!

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Solve the Deficit Problem by Cutting Government Spending – You Don’t Stop the Spending by Refusing to Increase the Debt Ceiling

July 20th, 2011

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Jane M. Young, CFP, EA

A few clients and friends have asked me if they should be making changes to their investment allocations based on the uncertainty around raising the debt ceiling. While we don’t want to bury our heads in the sand we should not over react to something that probably won’t come to pass. In my opinion the political stakes are way too high for all parties concerned to allow the U.S. to default on its obligations. At the moment everyone is playing chicken but at the end of the day, neither party can afford the political fallout that would result in a failure to raise the debt ceiling. This does present a great opportunity for the media to get attention with sensationalistic, doomsday headlines to help them sell newspapers or television spots. This is also a great opportunity for political posturing on the part of both Democrats and Republicans. It is my projection that on August 2nd we will still have a huge deficit problem and a higher debt ceiling.

The debt ceiling is an indication of a much bigger problem with federal government spending. The problem is not solved by changing the debt ceiling; the problem was created when congress approved spending resulting in the need to raise the debt ceiling. Failure to raise the debt ceiling is like trying to close the barn door after the horse has gotten out. Refusing to raise the debt ceiling is a meaningless gesture, with regard to our deficit. However, it carries a catastrophic impact on the perceived safety of U.S. debt which would ripple down through all aspects of our financial lives. This is clearly not an acceptable course of action. The real issue is getting a handle on government spending and the deficit which will require major reforms to Social Security and Medicare. Our economy and prosperity are being held back by a looming black cloud caused by fear and uncertainty with regard government spending and the federal deficit.

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10 Tips for Financial Success

May 9th, 2011

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Jane M. Young CFP, EA

1. Set Goals –
Review your personal values, develop a personal strategic plan, establish specific goals for the next three years and identify action steps for the coming year.

2. Understand Your Current Situation -
Review your actual expenses over the last year and develop a budget or a cash flow plan for the next 12 months. Compare your expenses and your income to better understand your cash flow situation. Are you’re spending habits aligned with your goals? Can or should you be saving more?

3. Have sufficient Liquidity -
Maintain an emergency fund equal to at least four months of expenses in a fully liquid account. Additionally, I recommend having a secondary emergency fund equal to another three months of expenses in semi-liquid investments. Increase your liquidity if you have above average volatility in your life due to job instability, rental properties or other risk factors.

4. Always save at least 10% of your income -
Regardless of whether you are saving to fund your emergency fund or retirement you should always pay yourself first by saving at least 10% of your income. Most of us need to be saving closer to 15% to meet our retirement needs.

5. Pay-off Credit Cards and Consumer Debt -
Learn the difference between bad debt (credit cards) and good debt (fixed-rate home mortgage). Avoid the bad debt and take advantage of the leveraging power of good debt.

6. Take Advantage of the Leveraging Power of Owning Your Home -
Once you have established an emergency fund and have paid off your bad debt start saving for a down payment to purchase your own home.

7. Fully Fund Your Retirement Accounts be a tax smart investor -
Participate in tax advantaged retirement programs for which you qualify. Maximize your Roth IRA and 401k contribution take full advantage of any company match on your 401k. If you are self-employed consider a SEP or Simple plan. Always select investment vehicles that provide the most beneficial tax solution while meeting your investment objectives.

8. Be an Investor, Not a Trader. Don’t time the market and don’t let emotions drive your investment decisions -
Investing in the stock market is a long term endeavor, forecasting the short-term movement of the stock market is fruitless. Avoid emotional reactions to headlines and short-term events. Don’t overreact to sensationalistic journalists or chase the latest investment trends. You can establish a defensive position by maintaining a well diversified portfolio custom tailored to your unique situation. Slow and steady wins the race!
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”  -Peter Lynch, author and former mutual fund manager with Fidelity Investments

9. Don’t Invest in anything you don’t understand and be aware of high fees and penalties –
If it sounds too good to be true and you just can’t get your head around it, don’t invest in it! If you want to invest in complicated products, read the fine print. Be aware of commissions, fees and surrender charges. Be especially wary of products with a contingent deferred sales charge. There is no free lunch, if you are being promised above market returns there is probably a catch. Keep in mind that contracts are written to protect the insurance or investment company not the investor.

10. Diversify, Diversify, Diversify – rebalance annually -
It is impossible to predict fluctuations in the market or to select the next great stock. However, you can hedge your bets by maintaining a well diversified portfolio. Establish an asset allocation that is aligned with your goals, investment timeframe and risk tolerance. You should have a good mix of fixed income and equity based investments. Your equity investments should be spread over a wide variety of large, small, domestic and international companies and industries. Re-balance your portfolio on an annual basis to stay diversified and weed out any underperforming investments.

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Join us on May 12th for our next Fireside Chat “Ten Tips for Financial Success”

May 4th, 2011

Please join us at our next Fireside Chat on “Ten Tips for Financial Success” on Thursday, May 12th from 7:30 am – 9:00 am at our Pinnacle Financial Concepts, Rockrimmon offices. This is a great opportunity to broaden your financial knowledge in a relaxed group setting. Please RSVP with Judy at 260-9800. Coffee and donuts will be served.

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New Normal

February 24th, 2011

By Bert Whitehead, MBA, JD

A number of clients have expressed alarm at the recent clamor of commentators who have been predicting a cataclysmic economic change worldwide. These pundits claim that we are facing an economic “New Normal” and express concern that the ‘old’ economic rules on which we rely no longer operate.

Their conclusions? Drastic changes are needed in our lives and investments to accommodate the “New Normal!”

Usually they question the viability of the U.S. dollar and offer the possibility that China, or perhaps a block of other nations, are somehow positioned to ‘take over’ the U.S. because they hold so many U.S. bonds. Another variation of this calamity centers on the recent collapse of the real estate market, the precipitous drop in the stock market, and extraordinarily low interest rates. Taken together, these developments presage the end of American prosperity for our children and ourselves.

Of course these apocalyptic pronouncements are more effective if they are tied to some political viewpoint, the more extreme the better. More often than not, far right political viewpoints proclaim that doomsday is the certain result of left-wing politics. Leftist views generally emphasize the inevitable revolution that suppression of the masses will cause.

(Note to “Investment Advice” file: Never let your politics drive your investments!)

It’s time to confront these ridiculous assertions. Yes, it is true that the investment and economic travails of the past decade have been severe and have impacted many people worldwide. Some of these changes have not occurred before during many of our lifetimes. It is enticing to point the finger of blame and shame at our financial, economic, investment and political leadership. But that is not the whole story
The power of momentum in democratic economies is easily underestimated. Although dramatic from time to time, the impact of severe financial shifts must be kept in proportion and viewed within a broader historical perspective. We need to recognize that most extreme economic shifts are self-correcting.

Even with unemployment at over 9%, over 90% of our citizens are employed. Real estate crashes, weather-related disasters, stock market crashes, low interest rates, etc. have all happened before. Indeed the damage done by seismic economic shifts during the Great Depression, the severe stagflation in the 1970’s, and the collapse of S. & L.’s in the 1980’s were all worse than we have seen today…and all of these are relatively minor when compared to the disruption of the financial markets in the 19th century. And whatever happened to the “New Economy” theory that gave rise to the ‘dot-com’ frenzy of the 1990’s?

It is folly to fret about how much of our debt is owned by the China (interestingly, Japan owns nearly as much U.S. debt as China, even though that fact is not usually noted). What can the Chinese do with our debt? They can’t dump it on the White House lawn and demand to be paid off with gold. They can’t go on the world markets and exchange dollars for Euros or Yen, or even buy gold. Any of these moves would be self-defeating because dumping huge amounts of money in any market would decrease the value of their remaining dollars. Actually, their only realistic option is to spend it in the U.S.!

There is a concern that the U.S. dollar is at a “tipping point” and will soon lose its status as the world’s reserve currency. But no other currency is in a position to take its place. The Euro’s stability is much too questionable. The Yuan doesn’t have a long enough history to be relied upon, especially when a dictatorial government can arbitrarily determine its value. Neither these nor other ‘respectable’ currencies such as the Yen, the British Pound, the Swiss Franc, etc. have enough depth to support a global economy.

Those who espouse extreme economic outcomes are invariably selling something. Usually it is their newsletter or book, or some strategy to beat the market, or gold itself. The most eminent economists in the world have never been able to predict any economic cycle with a meaningful consensus. Why should you believe the extreme voices of charlatans who use their advanced marketing techniques to dupe the fearful?

What can you do? I suggest that you sit back and follow sensible advice. The Functional Asset Allocation model, which is used by nearly 200 fee-only members of ACA (Alliance of Cambridge Advisors), focuses on the basics.

Consider this…there are only three possible economic scenarios: we can have inflation, deflation, or prosperity. It is a waste of time to try to determine which is coming next. The prudent approach is to be prepared for all three possibilities. As the ancient wisdom of the Torah exhorts: “Invest a third in land, a third in business, and a third in reserves!”

Today, that translates into a balanced portfolio of real estate, equities (i.e. stocks in companies), and cash and bond reserves. Trying to market-time and pick the next ‘hot investment’ is foolhardy. If you allow the vagaries of global economics, i.e. exogenous factors, to be the focus of your attention, you risk making decisions based on emotion rather than rational thought. In truth, it is the ‘endogenous factors’ in your life that determine your financial future.

As Pogo once said, “We have met the enemy, and he is us!” Instead of dithering about what will happen in the Mideast, or where interest rates are headed, or when will real estate level off, look at the things in your life that make a difference. Are you saving at least 10% of your gross income? Are you living within your means? Do you have enough liquidity to ride out a financial setback? Do you have a long-term fixed rate mortgage to protect you from inflation? Do you have government bonds to weather another bout of deflation.

Obsessing about the various complexities and possible outcomes in today’s global economy inevitably leads to rash and unwise leaps. Keep an eye on the issues within your reach! It is the key to a confident journey and a serene financial future.

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.

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You Are Invited to our 1st Fireside Chat of 2011 on Thursday, February 10th

February 4th, 2011

Please join us at Pinnacle Financial Concepts, for our first Fireside Chat of 2011. This is a great opportunity to join us in a very relaxed atmosphere to ask questions, and get prepared for filing your tax return. On Thursday, February 10, from 7:30 to 9:00 a.m. our topic will be “There’s No Such Thing as a Stupid Investment Question” with a bonus (apologies to David Letterman) of “The Top 10 Things to Think About During Tax Season”. We’ll have a basic overview of investment definitions and things to know about investments to spur a discussion on the topic.

Please call 260-9800 x2 to reserve your spot at this chat. There is no charge, but we will limit the number of available seats and schedule an overflow date if needed.   Free coffee and donuts will be served and, as always, this is purely educational, no selling!!

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Almost Whole

February 3rd, 2011

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Jane M. Young

I am continually surprised by questions from financial reporters who are still asking how my clients are faring after losing half of their retirement savings or by individual investors who are still fretting over losing half of their nest egg. If you followed our advice, as about 95% of our clients did, to stay the course and avoid selling during the drop in the market you would be close to break even now. If your risk tolerance precluded you from staying in the market, you may have realized a greater loss. This is a good reminder that we need to avoid acting on emotional reactions to the stock market. The stock market is cyclical and you can’t recover from a loss if you aren’t in the market. The stock market is counter intuitive – generally, the best time to buy is when you feel like selling and the best time to sell is when you feel like buying.

Here are some figures that will illustrate the actual change in the market over the last three or four years. The S&P 500 hit an all time high of around 1561 in October of 2007 and dropped about 56% to around 683 by March of 2009. Since March of 2009 the market increased by about 88% to 1286 on January 31, 2011. While it hasn’t reached the peak of 1561 it has returned to the 1200-1300 level where the market hovered throughout the summer of 2008 – before the significant drop in September 2008. The NASDAQ hit an all time high of around 2810 in October of 2007 and dropped about 54% to around 1293 by March of 2009. Since March of 2009 the NASDAQ has increased by about 109% to 2706 on January 31, 2011.

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Year End Financial Planning Tips

December 3rd, 2010

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Jane M. Young, CFP, EA

Roth Conversion -
The income limitations on converting a traditional IRA to a Roth IRA have been eliminated and taxes due on a Roth conversion, processed in 2010, can be paid in 2011 and 2012.

Required Minimum Distribution –
A required minimum distribution on your IRA and 401k/403b is required every year once you attain 70 ½.

Maximize your retirement contributions –
Be sure to maximize your retirement plan contributions for 2010. Below are the maximum contributions for your 401k and IRA contributions for 2010. You have until April 15th to contribute to your IRA.

401k – $16,500 plus a $5,500 catch-up provision if you are over 50
IRA – $5,000 plus a $1,000 catch-up provision if you are over 50 (income limits apply)
Simple – $11,500 plus a $2,500 catch-up provision if you are over 50

Adjust retirement contributions for 2011 –
There is no change to 401k and IRA contribution limits between 2010 and 2011. However, if you have turned 50 you can make a catch-up contribution. A change in your income may also impact your ability to contribute to an IRA.

Harvest Tax Losses –
If you have been thinking about selling some poor performing stocks or mutual funds, do so before the end of the year to take advantage of tax losses in 2010. However, if capital gains rates increase in 2011 it may be more advantageous to offset gains in 2011.

Charity Contributions –
Go through your closets and garage before the end of the year and donate any unwanted items to get a nice deduction on your tax return. When you drop off your items be sure to get a receipt. When making a charitable contribution, consider donating appreciated stock rather than cash.

Take advantage of the annual gift allowance –
In 2010 you can gift up to $13,000 per person without paying gift tax or impacting your estate tax exemption.

Make 529 Contributions –
Contributions made to the Colorado 529 plan are deductible on your state tax return. Money can be contributed into the Colorado 529 plan for tuition that is payable in 2011.

Review your expenses and draft a new budget –
Everyone should review their expenses and revise their budget at least once a year. December is a good time of year to review historical spending habits and make adjustments to your budget for the coming year. It is difficult to establish saving goals without a good understanding of what is available after your non-discretionary expenses.

Set financial goals for 2011 –
I recommend setting new personal and financial goals at the beginning of every year. Think of it as personal strategic planning. Set some long term goals for 3-5 years then identify some action plans for the next twelve months.

Adjust tax withholdings for 2011 –
Adjust your tax withholdings or estimated taxes for anticipated changes in income and deductions in 2011.

Organize 2010 tax documents –
Year end is a good time to create a folder for all of the 2010 tax documents you will be receiving and to start organizing your expenses and receipts. You will have everything thing in one place when it comes time to complete your tax return.

Make adjustments for changes in family circumstances – birth, death, marriage, dependents, and retirement –
Major changes in your life circumstances may result in numerous changes in your financial situation. For example a birth, marriage, or death will probably necessitate a change in your will and beneficiary designations. It also may impact your income tax withholdings. The birth of a child may result in significant tax benefits. With the birth of a child you also may want to consider starting a college fund and a change in life or disability insurance.

Spend FSA accounts –
With many companies, flexible savings accounts cannot be carried over into the next year so be sure to spend the money in your FSA account this year, before you lose it.

Consider the impact of possible changes in the tax law –
If the Bush tax cuts are not extended, there is a possibility that the capital gains rate will increase from 15% to 20%, that tax rates will increase, and that some tax deductions will disappear. These possibilities need to be considered in making your year end financial decisions.

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Attend a Financial Fireside Chat with Jane and Linda on December 2nd to discuss “Year End Financial Planning Tips and Money Saving Ideas for the Holidays”

October 26th, 2010

 

You and a guest are invited to a Financial Fireside Chat with Jane and Linda at our office, from 7:30 – 9:00 am on Thursday, December 2nd to discuss “Year End Financial Planning Tips and Money Saving Ideas for the Holidays.”

A Financial Fireside chat is an informal discussion over coffee and donuts, where our clients and guests can learn about various financial topics in a casual non-threatening environment. This is free of charge and purely educational. There will be absolutely no sales of products or services during this session. We will provide plenty of time for informal discussion.

The Fireside Chat will be held at the Pinnacle Financial Concepts, Inc. offices at 7025 Tall Oak Drive, Suite 210. Please RSVP with Judy at 260-9800.

We are looking forward to seeing you on Thursday, December 2nd to learn about and discuss some great year end financial planning ideas.

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A Money Moment with Jane – A Few Financial Planning Suggestions for the Fall

October 14th, 2010

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By Jane M. Young, CFP, EA

 

  • Required Minimum Distributions were not required for 2009.  However, if you are at least 70½ you will be required to take a distribution in 2010.

 

  • If you are planning to convert some of your regular IRA to a Roth IRA, do so in 2010 to spread the taxes over 2011 and 2112.

 

  • Have you maximized your Roth IRA and 401k contribution?  The 2010 contribution limit for the Roth is $5,000 plus a $1,000 catch-up provision if you are 50 or older.  The 2010 contribution limit for 401k plans is $16,500 plus a $5,500 catch-up provision if you are 50 or older.

 

  • This is a good time to do some tax planning to make sure your withholdings or estimates are adequate to cover the taxes you will owe in April. 

 

  • Do you have any underperforming stocks or mutual funds that should be sold to take advantage of a tax loss in 2010?

 

  • Now is the time to go through your home for items to be donated to charity.  These can provide a nice deduction on your 2010 tax return.

 

  • Start planning for Christmas now and save money by working to a plan. 

 

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Living Dangerously in the World of Fixed Income

October 5th, 2010

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Jane M. Young CFP, EA

It is important for us to stay diversified and keep a prudent amount of our portfolio in fixed income investments – but where? We can avoid interest rate risk and default risk with CDs; however, we may sacrifice on return. Currently most short term CDs are paying less than one percent. We can get a slightly better return for a longer term CD but does this make sense in such a low interest rate environment? With CDs, the biggest downfall is the lost opportunity for a higher return.

If you want a higher return and you are willing to take some additional risk, consider short term bond funds. A short term bond fund that invests primarily in treasuries and government agency bonds has a very low default risk. However, there is some interest rate risk. Interest rate risk is due to the cause and effect relationship between bonds and interest rates. When interest rates rise, after the purchase of a bond or a bond fund, the value of the bond will decrease. For example, you purchase a $20,000, 10 year bond that pays 3% interest. A few years later interest rates go up to 5% and you decide to sell your bond that only pays you 3%. When you try to sell your bond you can’t get $20,000 for it because it pays 2% less than the market rate. However, several buyers may be willing to buy your bond for a discounted value to make up for the lower than market interest rate. If you hold your bond until maturity it should sell for the full purchase value of $20,000. The inverse is also true, if interest rates go down your bond will be worth more than what you paid. The degree to which this occurs is magnified by the term or duration of the bond. Short term bonds have less interest rate risk than do long term bonds.

Default risk is the risk that the company or entity issuing the bond will be unable to pay you back. In essence a bond is a loan made to a company or a government entity for a specified interest rate over an agreed upon period of time. US Government bonds and bonds backed by the US Government have an extremely low risk of default. Corporations, Municipalities, and other governmental entities have varying degrees of risk depending on their financial stability. Most bond issuers are assigned a rating to help investors assess the potential default risk of a bond.

A mutual fund has less default risk than an individual bond because you are buying an ownership share in several different bonds. However, you have less control over interest rate risk. If you own an individual bond you can hold it until maturity. If you own a mutual fund, the fund manager may be forced to sell bonds at an inopportune time due to a high rate of withdrawals. If the fund manager could hold all of the bonds to maturity there would not be an actual drop in value. However, bond funds must reflect a share price based on the current value of the bonds held in the portfolio.

If you want a higher return you may want to consider intermediate term bonds but be prepared for a corresponding increase in the level of interest rate risk. If you want to maximize return you could consider high yield or junk bonds. However, be very careful in this arena because high yield bonds are subject to both interest rate risk and default risk. In the current environment, interest rate risk and default risk are very high. Unless you are an expert in high yield bonds, this is a lot of risk to take on the portion of your portfolio that is designed to be less risky and serve as a buffer against the stock market.

Most of my clients are best served by investing in a combination of CDs, high quality short term bonds, and some high quality intermediate term bond funds. Unfortunately, there are few really good options in the current fixed income market.

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A Money Moment with Jane – What Are You Spending Today?

September 28th, 2010

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By Jane M. Young, CFP, EA

The first step to any solid financial plan is understanding your current situation. How much money is remaining after paying your non-discretionary expenses? If you don’t know, then you need to review your expenses over the last few months to better understand your spending habits. How much do you spend on non-discretionary items and how much do you spend on discretionary items. Are you happy with how you are spending your money? Are you saving as much as you could? Are you spending too much on frivolous items? Do your spending habits align with your goals? Have you set some financial goals?

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Are You Paying Too Much for Financial Planning and Advice? by Jane Bryant Quinn

September 24th, 2010

Here is a great piece by Jane Bryant Quinn.
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Are You Paying Too Much for Financial Planning and Advice?
By Jane Bryant Quinn | Sep 21, 2010 | 5 Comments

How much are you paying for the financial-planning advice you get? Some investors don’t know. Others think they know but don’t. “Fee-only” planners and registered investment advisors state their fees up front. “Fee-based” advisors appear to do the same but might be charging you in other ways. Brokerage house advisory accounts charge the most and can entangle you in costs you didn’t expect.

In short, a stated fee isn’t always what it seems. For that matter, neither is an advisor. I recommend fee-only planners but I’ve found some who are so new to the business or so limited in their skills that I wouldn’t go near them.

So how do you go about assessing what you’re paying for advice and what the potential conflicts or trouble spots might be? Here’s a rundown:

Fee-only advice. This is my choice, always. These advisors give you a price list up front, for work by the hour, by the task, or for ongoing management of your money. They don’t take sales commissions, so they’re not primed to push products. They sell only their planning and investment expertise.

Within this world, however, there’s a lot of variation.

A fee-only planner, with a CFP designation (for Certified Financial Planner) helps you establish your priorities and goals, create budgets, set savings targets, test your insurance safety net, establish retirement savings accounts, project future retirement income, plan for taxes, and make basic investment decisions. By “basic,” I mean simple asset allocation and picking no-load (no sales charge) mutual funds. That’s all that most families need. You can find some of these fee-only planners through the Garrett Planning Network, the Alliance of Cambridge Advisors, or the Financial Planning Association (when you search the FPA site, click on “How Planners Charge” and check the box for “fee-only”).

But some of these advisors — especially people who have been in business for only three or four years — might not have the knowledge or experience to analyze your investments in depth. Those with a brokerage-house background are familiar with securities, but others are still learning. They might be qualified to advise on mutual funds but not individual stocks and bonds. They might be taking clients before they’ve finished their CFP.

On average, you’ll find more experienced planners through the National Association of Personal Financial Advisors. Some NAPFA members deal only with people of higher wealth. Others take middle-class clients, too (see what their websites say).

Even planners with good paper qualifications might not serve you well if they don’t understand your life experience. For example, young planners who don’t own homes are not the best guide through mortgage decisions. Someone in his or her mid-30s will think more aggressively about investments than someone in late middle age. If you’re approaching retirement, you want a planner who can feel the same, cold wind of uncertainty that you do.

Fee-only planners typically charge 1 percent on accounts up to $1 million or so, and less on larger amounts. But fees have been going up, says Tom Orecchio of Modera Wealth Management and former president of NAPFA. Some firms charge 1.5 percent or more for the first $500,000.

“Advisors say they’re working harder, for less money, than at any time in their career,” Orecchio says. Accounts under management have declined in value, clients need more handholding, and more new products are coming to market that need evaluating. So they’re charging people more.

Normally, a percentage fee applies only to money that the planner has directly under management. A few planners assess the fee on your total net worth, including your 401(k) and home equity. “That’s for comprehensive financial planning,” says John Sestina of John E. Sestina and Co. “We advise on everything, including whether to refinance a mortgage and how to allocate a 401(k).” He charges $5,000 for accounts up to $1 million (that’s 0.05 percent, at the top) and larger fees for larger accounts. For younger clients, he offers “financial planning lite”– $1,000 for full planning and investment services on accounts of any size, but only two or three meetings a year.

Fee-based advice. Here, you have wolves in sheep’s clothing. It sounds as if they also give fee-only advice. In fact, they sell products and earn commissions. You might pay fees for some products and commissions for others. The size of the fees might depend on what else you buy. “Fee offset” means that the fee is deducted from the commission you pay. Commissions aren’t always visible, so it’s easy to pay more than you realize.

Brokerage house advisory accounts. You pay fees here, too. The broker provides an investment plan, developed and monitored by the firm’s advisory team. You get periodic reports. Small investors, with $25,000 to $50,000, might be charged in the area of 2 percent a year. These accounts don’t include packaged products such as variable annuities or unit trusts. Your broker might sell them to you on the side, earning a commission on the trade.

Skip these expensive advisory accounts if you’re a long-term investor who holds mutual funds and a few stocks. You’re much better off in a regular brokerage account that doesn’t charge fees–or, for that matter, with a fee-only planner.

Regarding conflicts of interest, I’m always careful about the commissioned-sales world because of its fondness for selling high-cost products. But the fee-only world has potential conflicts, too. Planners who charge on an hourly basis might stretch out the time it takes to complete your job. Planners who work on retainer might pay less attention to your account, because they’ve got the money anyway. Planners who charge a percentage of assets have an incentive to hold on to your money — for example, by recommending that you keep your mortgage rather than paying it off.

Always evaluate the advice, in terms of your advisor’s interest as well as your own. Advice isn’t always worth what you pay for it. You might do better by paying less.

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