The Fed Makes Its Move

The Fed Makes Its Move

Wall Street rallies as interest rates rise for the first time since 2006.

Provided by Michael Fassi CLU, ChFC

 

U.S. monetary policy officially changed course Wednesday. Federal Reserve officials voted to raise the federal funds rate by a quarter of a percentage point, ending an unprecedented 7-year period in which it was held near zero. Nearly ten years had passed since the central bank had adjusted interest rates upward.1

The Federal Open Market Committee voted 10-0 in favor of the rate hike. It also raised the discount rate by a quarter-point to 1.0%.1

Addressing the media after the FOMC announcement, Federal Reserve chair Janet Yellen shared the central bank’s viewpoint:With the economy performing well, and expected to continue to do so, the committee judged that a modest increase in the federal funds rate target is now appropriate, recognizing that even after this increase, monetary policy remains accommodative.”2

Equities started the day with minor gains, then advanced further. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite respectively advanced 1.28%, 1.45%, and 1.52% Wednesday. The yield on the 2-year Treasury hit a 5-year high of 1.021%. Gold rose $15.20 to close at $1,076.80 on the COMEX.3,4

As a December rate increase was widely expected, the real curiosity concerned the following press conference. Would Janet Yellen offer any hints about monetary policy in 2016?

She offered one: she said she doubted that any interest rate hikes in 2016 would be “equally spaced.” Aside from that remark, no new insights emerged; Yellen reemphasized that the Fed does not plan to raise rates aggressively.2

Investors gained more insight from the Fed’s latest dot-plot chart, which expresses the Federal Open Market Committee’s opinion on where the benchmark interest rate will be at near-term intervals. The new dot-plot forecasts four rate hikes during 2016, with the federal funds rate climbing toward 1.5% by the end of next year (the median projection is 1.4%).5

The dot-plot revealed benchmark interest rate targets of 2.4% for the end of 2017 and 3.3% for the end of 2018, slightly lower than the previously stated targets of 2.6% and 3.4%.5

That corresponds with the consensus of analysts surveyed by CNBC. Their expectation was for three quarter-point rate hikes across 2016, taking the federal funds rate toward 1%.6

Some analysts wonder if the next rate hike might occur at the FOMC’s March meeting. Nothing could be gleaned about that from Yellen’s press conference or the new FOMC announcement.6

With more tightening seemingly ahead, what is in store for the bull market? Bears may want to wait before making any gloomy pronouncements. While rising interest rates are commonly assumed to impede a bull market, this is not always the case. In fact, the S&P 500 advanced 15% during the last round of tightening (2004-06).7

Could higher interest rates decrease inflation pressure? That is a distinct possibility, and that would hurt wage growth and business growth. The Fed would like to see inflation in the vicinity of 2%, yet the Consumer Price Index is up only 0.5% in the past 12 months, held in check by a 14.7% annualized retreat in energy prices and a 24.1% annualized fall in gas prices. On the other hand, the Core CPI (minus food and energy prices) is up 2.0% in the past year.6

The Fed may have made just the right move at the right time. If it had waited until 2016 to tighten, a collective “uh-oh” might have been heard from pundits and analysts, with comments along the lines of “Does the Fed know something about the economy that we do not?”

As JPMorgan Private Bank chief U.S. investment strategist Kate Moore told CNNMoney this week, “Keeping interest rates at zero is enforcing the idea that the U.S. economy is fragile.” Years of easing certainly helped the bull market, though: Wednesday morning, the S&P 500 was 202% above its March 9, 2009 bear market low.2,7

Ultimately, the central bank felt the time had come for tightening. At Wednesday’s press conference, Yellen commented that data had led the Fed to raise rates – it had not made its move in response to any shifts in public opinion. “Consumers are in much healthier financial condition” than they once were, she remarked. The rate hike certainly expresses confidence in the economy, which could strengthen further in 2016.2

 

Michael Fassi, CLU, CHFC is a Representative with Centaurus Financial Inc. and may be reached at Financial Educators Network, 800-320-3012 or mike@financialeducatorsnetwork.org

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – marketwatch.com/story/federal-reserve-lifts-interest-rates-for-first-time-since-2006-2015-12-16 [12/16/15]

2 – blogs.marketwatch.com/capitolreport/2015/12/16/live-blog-and-video-of-the-fed-interest-rate-decision-and-janet-yellen-press-conference/ [12/16/15]

3 – cnbc.com/2015/12/16/us-markets-fed.html [12/16/15]

4 – reuters.com/article/usa-bonds-idUSL1N1452HC20151216 [12/16/15]

5 – marketwatch.com/story/federal-reserve-dot-plot-still-signals-4-interest-rate-hikes-in-2016-2015-12-16 [12/16/15]

6 – latimes.com/business/la-fi-federal-reserve-rate-hike-20151216-story.html [12/16/15]

7 – money.cnn.com/2015/12/15/investing/stocks-markets-fed-rate-hike/ [12/15/15]

 

Posted in Finance

A Primer for Estate Planning

A Primer for Estate Planning

Things to check and double-check before you leave this world.

Provided by Michael Fassi CLU, ChFC

                                                                                            

Estate planning is a task that people tend to put off, as any discussion of “the end” tends to be off-putting. However, those who leave this world without their financial affairs in good order risk leaving their heirs some significant problems along with their legacies.

No matter what your age, here are some things you may want to accomplish this year with regard to estate planning.

Create a will if you don’t have one. Many people never get around to creating a will, even to the point of buying a will-in-a-box at a stationery store or setting one up online.

A solid will drafted with the guidance of an estate planning attorney may cost you more than a will-in-a-box, and it may prove to be some of the best money you ever spend. A valid will may save your heirs from some expensive headaches linked to probate and ambiguity.

Complement your will with related documents. Depending on your estate planning needs, this could include some kind of trust (or multiple trusts), durable financial and medical powers of attorney, a living will and other items.

You should know that a living will is not the same thing as a durable medical power of attorney. A living will makes your wishes known when it comes to life-prolonging medical treatments, and it takes the form of a directive. A durable medical power of attorney authorizes another party to make medical decisions for you (including end-of-life decisions) if you become incapacitated or otherwise unable to make these decisions.

Review your beneficiary designations. Who is the beneficiary of your IRA? How about your 401(k)? How about your annuity or life insurance policy? If your answer is along the lines of “Mm … you know … I’m pretty sure it’s…” or “It’s been a while since …”, then be sure to check the documents and verify who the designated beneficiary is.

When it comes to retirement accounts and life insurance, many people don’t know that beneficiary designations take priority over bequests made in wills and living trusts. If you long ago named a child now estranged from you as the beneficiary of your life insurance policy, he or she will receive the death benefit when you die – regardless of what your will states.1

Time has a way of altering our beneficiary decisions. This is why some estate planners recommend that you review your beneficiaries every two years.

In some states, you can authorize transfer-on-death designations. This is a tactic against probate: TOD designations may permit the ownership transfer of securities (and in a few states, forms of real property, vehicles and other assets) immediately at your death to the person designated. TOD designations are sometimes referred to as “will substitutes” but they usually pertain only to securities.2

Create asset and debt lists. Does this sound like a lot of work? It may not be. You should provide your heirs with an asset and debt “map” they can follow should you pass away, so that they will be aware of the little details of your wealth.

* One list should detail your real property and personal property assets. It should list any real estate you own, and its worth; it should also list personal property items in your home, garage, backyard, warehouse, storage unit or small business that have notable monetary worth.

* Another list should detail your bank and brokerage accounts, your retirement accounts, and any other forms of investment plus any insurance policies.

* A third list should detail your credit card debts, your mortgage and/or HELOC, and any other outstanding consumer loans.

Think about consolidating your “stray” IRAs and bank accounts. This could make one of your lists a little shorter. Consolidation means fewer account statements, less paperwork for your heirs and fewer administrative fees to bear.

Let your heirs know the causes and charities that mean the most to you. Have you ever seen the phrase, “In lieu of flowers, donations may be made to …” Well, perhaps you would like to suggest donations to this or that charity when you pass. Write down the associations you belong to and the organizations you support. Some non-profits do offer accidental life insurance benefits to heirs of members.

Select a reliable executor. Who have you chosen to administer your estate when the time comes? The choice may seem obvious, but consider a few factors. Is there a stark possibility that your named executor might die before you do? How well does he or she comprehend financial matters or the basic principles of estate law? What if you change your mind about the way you want your assets distributed – can you easily communicate those wishes to that person?

Your executor should have copies of your will, forms of power of attorney, any kind of healthcare proxy or living will, and any trusts you create. In fact, any of your loved ones referenced in these documents should also receive copies of them.

Talk to the professionals. Do-it-yourself estate planning is not recommended, especially if your estate is complex enough to trigger financial, legal and emotional issues among your heirs upon your passing.

Many people have the idea that they don’t need an estate plan because their net worth is less than X dollars. Keep in mind, money isn’t the only reason for an estate plan. You may not be a multimillionaire yet, but if you own a business, have a blended family, have kids with special needs, worry about dementia, or can’t stand the thought of probate delays plus probate fees whittling away at assets you have amassed … well, these are all good reasons to create and maintain an estate planning strategy.

Michael Fassi, CLU, CHFC is a Representative with Centaurus Financial Inc. and may be reached at Financial Educators Network, 800-320-3012 or mike@financialeducatorsnetwork.org

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.knoxnews.com/news/2012/may/07/retirement-accounts-not-governed-by-wills/ [5/7/12]

2 – www.investopedia.com/university/estate-planning/estate-planning5.asp#axzz1vjRm6aPe [3/20/13]

 

Posted in estate planning, retirement

Why it is Wise to Diversify

WHY IT IS WISE TO DIVERSIFY

A varied portfolio is a hallmark of a savvy investor.

Provided by Michael Fassi CLU, ChFC

You may be amused by the efforts of some of your friends and neighbors as they try to “chase the return” in the stock market. We all seem to know a day trader or two: someone constantly hunting for the next hot stock, endlessly refreshing browser windows for breaking news and tips from assorted gurus.

Is that the path to making money in stocks? Some people have made money that way, but others do not. Many people eventually tire of the stress involved, and come to regret the emotional decisions that a) invite financial losses, b) stifle the potential for long-term gains.

We all want a terrific ROI, but risk management matters just as much in investing, perhaps more. That is why diversification is so important. There are two great reasons to invest across a range of asset classes, even when some are clearly outperforming others.

#1: You have the potential to capture gains in different market climates. If you allocate your invested assets across the breadth of asset classes, you will at least have some percentage of your portfolio assigned to the market’s best-performing sectors on any given trading day. If your portfolio is too heavily weighted in one asset class, or in one stock, its return is riding too heavily on its performance.

So is diversification just a synonym for playing not to lose? No. It isn’t about timidity, but wisdom. While thoughtful diversification doesn’t let you “put it all on black” when shares in a particular sector or asset class soar, it guards against the associated risk of doing so. This leads directly to reason number two…

#2: You are in a position to suffer less financial pain if stocks tank. If you have a lot of money in growth stocks and aggressive growth funds (and some people do), what happens to your portfolio in a correction or a bear market? You’ve got a bunch of losers on your hands. Tax loss harvesting can ease the pain only so much.

Diversification gives your portfolio a kind of “buffer” against market volatility and drawdowns. Without it, your exposure to risk is magnified.

What impact can diversification have on your return? Let’s refer to the infamous “lost decade” for stocks, or more specifically, the performance of the S&P 500 during the 2000s. As a USA Today article notes, the S&P’s annual return was averaging only +1.4% between January 1, 2001 and Nov. 30, 2011. Yet an investor with a diversified portfolio featuring a 40% weighting in bonds would have realized a +5.7% average annual return during that stretch.1

If a 5.7% annual gain doesn’t sound that hot, consider the alternatives. As T. Rowe Price vice president Stuart Ritter noted in the USA TODAY piece, an investor who bought the hottest stocks of 2007 would have lost more than 60% on his or her investment in the 2008 market crash. Investments that were merely indexed to the S&P 500 sank 37% in the same time frame.1

Asset management styles can also influence portfolio performance. Passive asset management and active (or tactical) asset management both have their virtues. In the wake of the stock market collapse of late 2008, many investors lost faith in passive asset management, but it still has fans. Other investors see merit in a style that is more responsive to shifting conditions on Wall Street, one that fine-tunes asset allocations in light of current valuation and economic factors with an eye toward exploiting the parts of market that are really performing well. The downside to active portfolio management is the cost; it can prove more expensive for the investor than traditional portfolio management.

Believe the cliché: don’t put all your eggs in one basket. Wall Street is hardly uneventful and the behavior of the market sometimes leaves even seasoned analysts scratching their heads. We can’t predict how the market will perform; we can diversify to address the challenges presented by its ups and downs. 

Michael Fassi, CLU, CHFC is a Representative with Centaurus Financial Inc. and may be reached at Financial Educators Network, 800-320-3012 or mike@financialeducatorsnetwork.org

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – usatoday30.usatoday.com/money/perfi/retirement/story/2011-12-08/investment-diversification/51749298/1 [12/8/11]

 

Posted in Finance, retirement

Have You Considered Charitable Gifting

Have you considered Charitable Gifting?

Could it make the world a better place? Could it make sense financially?

Provided by Michael Fassi CLU, ChFC

A gift to charity may prove to be a great financial favor to you. Some charitable gifting methods offer you notable tax advantages. Here’s a brief look at some popular options.

Charitable remainder trusts (CRTs). These trusts can be useful estate planning tools. People with highly appreciated assets – such as stocks or real estate – are often hesitant to sell those assets and reinvest the proceeds because of the capital gains taxes that could result from the sale. Could the CRT offer a solution to this problem?

CRTs are tax-exempt trusts. In transferring highly appreciated assets into a CRT, you may get: a) a tax deduction for the present value of your future charitable gift, b) income payments from the CRT for up to 20 years, and c) tax-free compounding of the assets within the CRT. Generally, you avoid paying capital gains taxes on the amount of your gift, and you may exclude an otherwise taxable asset from your estate.1

After you die, some or all of the assets in the CRT will go to the charity (or charities) of your choice. (What about your heirs? You can structure a CRT in conjunction with an irrevocable life insurance trust so that they are not disinherited as a result.)1

A charitable remainder annuity trust (CRAT) pays out a fixed income based on a percentage of the initial fair market value of the asset(s) placed in the trust. In a charitable remainder unitrust (CRUT), income from the trust can increase as the trust assets grow with time.2

Charitable lead trusts (CLTs). This is the inverse of a CRT. You transfer assets to the CLT, and it periodically pays a percentage of the value of the trust assets to the charity. At the end of the trust term, your heirs receive the assets within the trust. You don’t get an income tax deduction by creating a CLT, but your gift or estate tax could be markedly reduced.3

Charitable gift annuities. Universities commonly suggest these investment vehicles to alumni and donors. (The concept has been around since the mid-1800s.) Basically, you donate money to a university or charity in exchange for a flow of income. You (and optionally, your spouse) receive lifelong annuity payments. After you pass away, the balance of the money you have donated goes to the charity. You may also claim a charitable deduction on your income tax return in the year you make the gift.4

Pooled income funds. In this variation on the charitable gift annuity, the assets you donate are unitized and “pooled” with the assets of other donors. So essentially, you are buying “units” in an investment pool, like an investor in a mutual fund. The rate of return on your investment varies from year to year.

Pooled income funds often appeal to wealthier donors who don’t have a pressing need for fixed annuity payments. As just interest and dividends are paid out of a pooled income fund, it is possible to shield the whole gain from, say, a highly appreciated stock through such a fund. You get an immediate income tax deduction for a portion of the gift, which may be spread over a few consecutive tax years. Also, the balance of the assets left to the charity at your death may be greater than if a charitable gift annuity is used. Another nice option: you can put more assets in the fund over time, whereas a charitable gift annuity is based on one lump sum gift.5

Donor advised funds. A DAF is a variation on the “family foundation” concept. Unlike a private foundation, it is not subject to excise taxes, and it does not require employees and lawyers to implement and administer. You establish a DAF with a lump sum gift to a public charity. The gift becomes property of the charity, which manages the assets. (You can continue to contribute to the fund.) Each year, the charity determines the percentage of the value of the fund which will become available for grants or other programs. You advise the charity how to spend the money. DAF contributions are tax-deductible in the year that they are made. You may avoid capital gains taxes and estate taxes on the gift, and the assets may grow tax-free.6

Scholarships. These can be created at a school in your own name or in memory of a loved one, and you can set the criteria. Commonly, you and your advisor can work directly with a school to create one.

Life insurance and life estate gifts. Some people have unwanted or inadequate life insurance policies that may end up increasing the size of their taxable estates. In such cases, a policyholder may elect to donate their policy to charity. By doing this, the donor reduces the size of his or her taxable estate and enjoys a current tax deduction for the amount of the cash value in the policy. The charity can receive a large gift at the donor’s death, or they can tap into the cash value of the policy to meet current needs.7

Life estate gifts are an interesting option allowing you to gift real estate to a charity, university, or other non-profit – even while you live there. You may take a tax deduction based on the value of property, avoid capital gains tax, and live on the property for the rest of your life.8 (If somehow you can’t remain at that residence, the charity may opt to lease or sell it. You can gift all of a property or just some of a property as appropriate.)9

Give carefully. Charitable gifting is a complicated estate planning tool and is not suitable for all clients. If you are thinking about making a charitable gift, remember that the amount of your tax deduction will ultimately depend on the kind of assets you contribute, and the variables of your individual tax situation. Remember also that some charitable gifts are irrevocable. Trusts are drafted by licensed attorneys who will charge a fee for the service. Be sure to consult qualified financial, legal and tax professionals for more information before you decide if, when and how to give.

Michael Fassi, CLU, CHFC is a Representative with Centaurus Financial Inc. and may be reached at Financial Educators Network, 800-320-3012 or mike@financialeducatorsnetwork.org

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 library.findlaw.com/1997/Dec/1/128372.html

2 giving.mit.edu/ways/planning/trusts/index.html

3 360financialliteracy.org/Life+Stages/Retirement/Articles/Charitable+giving/Charitable+giving.htm

4 plan.gs/CategoryDetailList.do?orgId=327&categoryId=228

5 cmu.edu/giving/planned/pooled.shtml

6 worldlawdirect.com/article/570/What_are_donor_advised_funds.html

7 younglife.org/Giving/LifeIns.htm

8 purdue.edu/udo/planned_giving/life_estate_gift.shtml

9 ucsf.edu/support/trustsandbequests/realEstate.html

Posted in charity, estate planning

Getting Your Household Cash Flow Back Under Control

Getting Your Household Cash Flow Back Under Control

Developing a better budgeting process may be the biggest step toward that goal.

Provided by Michael Fassi CLU, ChFC

 

Where does your money go? If you find yourself asking that question from time to time, it may relate to cash flow within your household. Having a cash flow management system may be instrumental in restoring some financial control.

It is harder for a middle-class household to maintain financial control these days. If you find yourself too often living on margin (i.e., charging everything) and too infrequently with adequate cash in hand, you aren’t the only household feeling that way. Some major economic trends really have made it more challenging for households with mid-five-figure incomes.

By many economic standards, today’s middle class has it harder than the middle class of generations past. Some telling statistics point to this…

*In 81% of U.S. counties, the median income is lower today than it was in 1999. Even though we are in a recovery, much of the job growth in the past few years has occurred within the service and retail sectors. (The average full-time U.S. retail worker earns less than $25,000 annually.)

*Between 1989 and 2014, the American economy grew by 83% (adjusting for inflation) with no real wage growth for middle-class households.

*In the early 1960s, General Motors was America’s largest employer. Its average full-time worker at that time earned the (inflation-adjusted) equivalent of $50 an hour, plus benefits. Wal-Mart now has America’s largest workforce; it pays its average sales associate less than $10 per hour, sometimes without benefits.1,2

Essentially, the middle class must manage to do more with less – less inflation-adjusted income, that is. The need for budgeting is as essential as ever.

Much has been written about the growing “wealth gap” in the U.S., and that gap is very real. Less covered, but just as real, is an Achilles-heel financial habit injuring middle-class stability: a growing reliance on expensive money. As Money-Zine.com noted not long ago, U.S. consumer debt amounted to 7.3% of average household income in 1980 but 13.4% of average household income in 2013.3

So how can you make life more affordable? Budgeting is an important step. It promotes reliance on cash instead of plastic. It defines expenses, underlining where your money goes (and where it shouldn’t be going). It clears up what is hazy about your finances. It demonstrates that you can be in command of your money, rather than letting your money command you.

Budget for that vacation. Save up for it by spending much less on the “optionals”: coffee, cable, eating out, memberships, movies, outfits.

Buy the right kind of car & do your cash flow a favor. Many middle-class families yearn to buy a new car (a depreciating asset) or lease a new car (because they want to be seen driving a better car than they can actually afford). The better option is to buy a lightly used car and drive it for several years, maybe even a decade. Unglamorous? Maybe, but it should leave you less indebted. It may be a factor that can help you to …

Plan to set some cash aside for an emergency fund. According to a recent Bankrate survey, about a quarter of U.S. households lack one. Imagine how much better you would feel knowing you have the equivalent of a few months of salary in reserve in case of a crisis. Again, you can budget to build it – a little at a time, if necessary. The key is to recognize that a crisis will come someday; none of us are fully shielded from the whims of fate.3

Don’t risk living without medical & dental coverage. You probably have both, but some middle-class households don’t. According to the Department of Health & Human Services, 108 million Americans lack dental insurance. Workers for even the largest firms may find premiums, out-of-pocket costs and coinsurance excessive. This isn’t something you can go without. If your employer gives you the option of buying your own insurance, it could be a cheaper solution. At any rate, some serious household financial changes may need to occur so that you are adequately insured.3

Budgeting for the future is also important. A recent Gallup poll found that about 20% of Americans have no retirement savings. You have to wonder: how many of these people might have accumulated a nest egg over the years by steadily directing just $50 or $100 a month into a retirement plan? Budgeting just a little at a time toward that very important priority could promote profound growth of retirement savings thanks to investment yields and tax deferral.3

Equity investing has helped many middle-class Americans attain wealth. Increasingly, it looks like the long-term difference between being consigned to the middle class and escaping it. Doing it knowledgably is vital.

Turning to the financial professional you know and trust for input may help you to develop a better budgeting process – and beyond the present, the saving and investing you do today and tomorrow may help you to one day become the (multi-)millionaire next door.

Michael Fassi, CLU, CHFC is a Representative with Centaurus Financial Inc. and may be reached at Financial Educators Network, 800-320-3012 or mike@financialeducatorsnetwork.org

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    

Citations.

1 – washingtonpost.com/sf/business/2014/12/12/why-americas-middle-class-is-lost/ [12/12/14]

2 – tinyurl.com/knr3e78 [11/27/12]

3 – wallstcheatsheet.com/personal-finance/7-things-the-middle-class-cant-afford-anymore.html/?a=viewall [12/15/14]

Posted in Finance

Asset Location & Timing to Reduce Taxes in Retirement

Asset Location & Timing to Reduce Taxes in Retirement

Read this if you want to preserve more of your nest egg & lower your tax bill.

Provided by Michael Fassi CLU, ChFC

 

Location, location, location … It matters when it comes to real estate, and it also matters when it comes to the way you hold and invest your retirement savings.

You can’t control what happens with the tax code, but you can control how your savings are held. As various types of investments are taxed at varying rates, some investments are better held in taxable accounts and others in tax-deferred accounts.

*Funds that trade frequently (such as bond funds and money market funds) are better off in tax-deferred accounts, as much of their yields represent taxable income.

*Traditional IRAs are tax-inefficient (relatively speaking), and by holding a traditional IRA within a tax-deferred account, you can delay paying tax on those IRA assets until you withdraw them in retirement (when you will presumably be in a lower tax bracket than you are now).

*What kinds of investments are usually better off in taxable accounts? Think index funds, growth funds, tax-managed funds and ETFs that tend to generate capital gains (growth funds especially are prone to reinvesting profits). In light of long-term capital gains rates, keeping these types of investments in taxable accounts makes sense.1,2

Timing isn’t everything, but … The timing of withdrawals from retirement accounts can have a major impact on your income taxes – and the longevity of your savings.

You don’t want to outlive your money, and you want your income taxes to be as minimal as possible once you are retired. To that end, you want to withdraw from your retirement accounts in a tax-efficient way.

By drawing down taxable accounts first, you’ll face the capital gains tax rate instead of the ordinary income tax rate. Most retirees will see long-term capital gains taxed at 15%; for others, the long-term capital gains tax rate will be 0%.3 In taking money out of the taxable accounts to start, you are not only giving yourself a de facto tax break but also giving the retirement funds in the tax-advantaged accounts more time to grow and compound (and even a year or two of compounding and growth can be significant if you have held a tax-advantaged account for decades). Withdrawals from tax-deferred accounts – such as traditional IRAs and 401(k)s and 403(b)s – can follow, and then lastly withdrawals from Roth accounts.3

Following these asset location and distribution approaches may leave you with more retirement income – in fact, Morningstar estimates that in tandem, they can boost a retiree’s income by about 8%.1

Tax loss harvesting can also help. Selling losers during a given year (i.e., stocks or mutual funds you have held for a year or more that are worth less than what you originally paid for them) will give you capital losses. These can directly lower your taxable income. As much as $3,000 of capital losses in excess of capital gains can be deducted from taxable income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years. Additionally, whenever you sell stocks or funds with capital gains, strive to sell shares or units having the highest basis to reduce the gain.4

If you receive a lump-sum payout, don’t put it in the bank. If you take direct control of that money, you are triggering a taxable event and your income taxes for that year could be staggering. An alternative outcome: make a direct rollover of the lump-sum payout (qualified distribution) into a traditional IRA. That move will exclude that money from your total taxable income for the year, and put you in position to take taxable annual Required Minimum Distributions (RMD), with the taxable RMDs being smaller than the taxable lump sum. (Alternately, you could directly roll the lump sum payout into a Roth IRA, which would leave you paying taxes on the conversion but set you up for tax-free withdrawals in retirement if Roth IRA rules and regulations have been followed).5,6

Incidentally, it is often more advantageous to take an in-kind distribution of company stock rather than rolling shares over to an IRA. The question is whether you want to pay ordinary income tax or capital gains tax. If a lump-sum distribution is taken off the shares, the investor pays income tax on the original cost basis of the stock. If the distribution is in-kind (i.e., the payout is in securities, not cash), the net unrealized appreciation (NUA) remains tax-deferred until the securities are sold. At their sale, the NUA is taxed as a long-term capital gain.5

Lastly, consider living in a state where taxes bite a little less. Not everyone can afford to move, but in the long run, living in Florida, Nevada, Washington, Texas or other states that are relatively tax-friendly for retirees can help. Even moving to another town within your current state might result in some tax savings.6,7

Michael Fassi, CLU, CHFC is a Representative with Centaurus Financial Inc. and may be reached at Financial Educators Network, 800-320-3012 or mike@financialeducatorsnetwork.org

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – money.cnn.com/2013/02/11/pf/expert/retirement-tax-plans.moneymag/ [2/11/13]

2 – biz.yahoo.com/edu/mf/vra.html [2/13/14]

3 – tinyurl.com/l6lkrfu [2/12/14]

4 – bankrate.com/finance/money-guides/capital-losses-can-help-cut-your-tax-bill-1.aspx [9/19/13]

5 – raymondjames.com/making_right_distribution.htm [2/13/14]

6 – wife.org/minimizing-tax-burden-in-retirement.htm [2/13/14]

7 – money.msn.com/tax-planning/retired-how-to-cut-your-taxes-mark-koba [2/6/12]

Posted in retirement

Coping With an Inheritance

Coping With an Inheritance

A windfall from a loved one can be both rewarding and complicated.

Provided by Michael Fassi

 

Inheriting wealth can be a burden and a blessing. Even if you have an inclination that a family member may remember you in their last will and testament, there are many facets to the process of inheritance that you may not have considered. Here are some things you may want to keep in mind if it comes to pass.

Take your time. If someone cared about you enough to leave you a sizable inheritance, then likely you will need time to grieve and cope with their loss. This is important, and many of the more major decisions about your inheritance can likely wait. And consider, too – when you’re dealing with so much already, you may be too overwhelmed to give your options the careful consideration they need and deserve. You may be able to make more rational decisions once some time has passed.

Don’t go it alone. There are so many laws, options and potential pitfalls – The knowledge an experienced professional can provide on this subject may prove to be vitally important. Unless you happen to have uncommon knowledge on the subject, seek help.

Do you have to accept it? While it may sound ridiculous at first, in some cases refusing an inheritance may be a wise move. Depending on your situation and the amount of your bequest – it may be that estate taxes will drain a large amount. Depending on the amount that remains, disclaiming some (or all) of the gift is worth contemplation.

Think of your own family. When an inheritance is received, it may alter the course of your own estate plan. Be sure to take that into consideration. You may want to think about setting up trusts for your children – to help ensure their wealth is received at an age where the likelihood that they’ll misuse or waste it is decreased. Trust creation may also help you (and your spouse) maximize exemptions on personal estate tax.

The taxman will be visiting. If you’ve inherited an IRA, it is extremely important that you weigh the tax cost of cashing out against the need for instant funds. A cash out can mean you will have to pay (on every dollar you withdraw) full income tax rates. This can greatly reduce the worth of your bequest, whereas allowing the gains of the investment to continue to compound within the account, and continuing to defer taxes, may have the opposite effect and help to increase the value of what you’ve inherited.

Stay informed. The estate laws have seen many changes over the years, so what you thought you knew about them may no longer be correct. This is especially true with regard to the taxation on capital gains. The assistance of a seasoned financial professional may be more important than ever before.

Remember to do what’s right for YOU. All too often an inheritance is left in its original form, which may be a large holding of a single company – perhaps even one started by the relative who bestowed the gift. While it’s natural for emotion to play a part and you may wish to leave your inheritance as it is, out of respect for your relative, what happens if the value of that stock takes a nose dive? The old adage “never put all your eggs in one basket” may be words to live by. Remember that this money is now yours – and the way in which you allocate assets needs to be in line with YOUR needs and goals.

Michael Fassi, CLU, CHFC is a Representative with Centaurus Financial Inc. and may be reached at Financial Educators Network, 800-320-3012 or mike@financialeducatorsnetwork.org

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Posted in estate planning, Finance

Thinking about starting a business in retirement?

Thinking about starting a business in retirement? This Detroit Free Press article has some tips for you: http://tinyurl.com/n6p8yep

Posted in Finance, retirement Tagged with: