Fact #1:  Our life expectancies are increasing and we’re living longer as a society.

Fact #2:  Fact #1 means we likely need to accumulate more to achieve our goals.

A trend we are seeing among baby boomers (as well as the generation after them) is that they are no longer planning for retirement (in the traditional sense of the word) but more for their transition to the next phase in life.  That new phase may mean a more flexible work schedule, less hours worked and less stress, more enjoyment in the work performed, and more time to do other things like fish, hunt, golf, travel, volunteer, etc.

Continuing to work means less stress on your portfolio as you could be keeping health insurance coverage in place as well as cash flow coming in.  With an adjustment likely coming in the Social Security system at some point, working helps to hedge against a benefit that many feel will be adjusted downwards.

Continuing to work also keeps one sharp mentally, as well as physically.  The days of retiring to the club to play cards and golf are quickly being replaced by a 60% work schedule coupled with charitable work and leisure travel.  This activity helps to you to remain young as you continue to be challenged by the tasks you are involved in.

At SWA, we have replaced the term “retirement” with “financial independence” as we feel this label is more in line with what folks are actually determined to achieve.  We feel it’s important that our clients begin living the life of their choosing as soon as possible as it can certainly be more rewarding both mentally and physically (as well as economically in many cases).  If you’d like to discuss how you can achieve financial independence, please reach out to us and set an appointment.

For most couples, the federal estate tax is a thing of the past.  The “fiscal cliff” legislation raised the federal estate exemption to $10.5 million per couple and made the exemption portable between spouses.  Given this big win at the federal level, you may be asking if estate planning is still critical for your family.  We say it is for the following reasons:

• Who:  You still need to designate whether your children, family and / or charity should be the recipient of your wealth.  You also need to tell the courts who should be in charge of distributing your estate should something happen to you.
• What:  You need to be specific as to who you want to receive what; otherwise, everything could be up for grabs.
• When:  In the case of your children, you may not want them to get all of your wealth at once (we typically counsel clients to spread it out over 3 to 4 payments, in case the children blow what they received).  You need to outline when they are to receive your estate.
• State Estate Tax:  Just because your estate is below the current federal exemption amount doesn’t mean you don’t have state estate tax to deal with.  Proper planning can help minimize or eliminate state estate tax.

We help our wealth management clients to determine the type of estate plan they need as well as how it should be structured.  We meet and gather the data, prior to retaining the attorney.  This way, we keep the client’s legal costs to a minimum.  Please let us know if you’d like some help with your estate planning questions.

I just read an article by Mark Miller that seems to confirm some thoughts we’ve been having about how Baby Boomers are rethinking retirement / financial independence.  Here are some of the high points of that article:

·         They are leaving the U.S.:  21% of boomers polled say they are interested in retiring abroad where they can reduce lifestyle needs and enjoy warmer climates.

·         They are starting new companies:  21% of new U.S. businesses started in 2011 were launched by entrepreneurs age 55 to 64 (up 14% from 2007).  Entrepreneurs age 45 to 54 accounted for another 28% of the 2011 startups.  Add them together and boomers started almost 50% of all new businesses in 2011.

·         They are borrowing more:  40% of homeowners over age 65 had mortgage debt in 2010, compared with only 18% in 1992.  One of the reasons is the extremely low interest rates available.  No sense paying down / off a 3% mortgage if you can earn 6% to 9% in a broadly diversified, balanced investment portfolio over time.

·         They are outliving their expectations:  Life expectancy for men has jumped an average of almost 2 years in each of the last 5 decades to 75.7 years in 2010.  For women, life expectancy has risen by 1.5 years on average to 80.8 years.  For a couple with above- average health, there’s a 60% chance one of them will live to age 90.

·         They are providing financial support:  58% of boomers are providing financial assistance to aging parents while 93% of those polled say they have given their children financial assistance as well.

·         They aren’t running to Florida:  Boomers aren’t embracing the Florida / Arizona retirement homes as they once were.  The reason they’re not relocating?  The pull of being near their children & grandchildren.

How are you rethinking your eventual financial independence?  We will have more discussion on this topic in our next blog.

According to a recent report by the Commerce Department, nearly 67% of Americans between the ages of 45 and 60 say they plan to delay retirement.  This percentage is a steep increase from just two years ago, when the Commerce Department found that 42% of those polled expected to delay retirement. 

Why the large increase?  This rise was driven by financial losses, layoffs and income stagnation sustained during the last few years.  These are issues many of us faced or are still dealing with.

Based on the above statistics, two out of every three of your friends, family members and co-workers (in this age group) need to reassess their financial game plan and make adjustments that can have a positive impact.  This may be easier said than done since we have a tendency to get very comfortable in our spending habits.  However, it certainly doesn’t have to mean working longer as there are trade-offs that one can consider that don’t involve more time at work.

For example, re-examining one’s household budget and discovering some belt-tightening opportunities is an excellent way to trim discretionary spending and increase contributions towards retirement.  Another is to take a “trial run” and begin living as if you were in retirement.  You may be surprised at what you actually need to live on.

If you know people struggling with their financial independence, please send them our way.  We’d be glad to help.

While reading the newspaper recently, I found that for the 48^th Sunday Journal Investment Dartboard Contest someone throwing darts at a listing of stocks was able to outperform specific stock picks of Wall Street Journal readers for the six months ended 12/31/12.  The readers’ picks lost about 11% while the stocks chosen by darts thrown at stock pages gained 7.2%.

The results of this contest seem to confirm the Dalbar Study finding that the average investor achieved an annual return of 3.49% for the 20 years ended 12/31/10 while the S&P 500 returned 7.81% per year during the same time frame.  Much of the significant underperformance of investors can be attributed to emotional investing and attempting to time the markets (something no one has been able to perfect, to my knowledge).

We feel it’s all about a low-cost, broadly-diversified, passive investment approach and methodically investing over time.  This is why DFA is such a great fit for our client portfolios.  Reduce your risk and take what the market has to offer (in terms of returns) over time–a winning long-term combination!

Deciding when to begin collecting your Social Security benefits can be a difficult decision.  Many want to begin collecting benefits ASAP as they feel this strategy is the way to ensure they receive the most benefits as quickly as possible.  Others that anticipate a lengthy retirement want to wait to begin collecting benefits as they’ve been told this is the best way to maximize benefits over the long haul.

I’ve read that married couples have 567 options for deciding when and how to file for their Social Security benefits while single people have 9 options.  We help our clients to review and narrow those options by making some assumptions about life expectancy and discussing other financial goals. We counsel clients on the potentially best strategies to consider.  The decision you make could cost you tens of thousands of dollars over your life time so be sure to work with someone that can provide you the advice you need.

I recently read that the US personal savings rate increased to 3.60% in November 2012, up from 3.40% in October but well below the long-term average of 6.91%.

I also recently read about a study conducted by PBS.org that states that 40% of all workers are currently not saving for retirement.  Given the struggles the US is having with the Social Security System, this 40% figure is certainly a huge concern.  Who will take care of these folks when they cannot take care of themselves?

One strategy I suggested to a client recently was to encourage their children to begin saving for retirement by offering to match their savings (50 cents on the dollar, up to a certain maximum) by making contributions to a Roth IRA for them.  By doing this, your children learn the power of saving at a young age and see how adding a matching contribution to that savings rate can really add up quickly.  Try this with your kids (or nieces and nephews) for a few years and you’ll likely be amazed at the results.

Well, the recent news that the Federal Reserve reduced the estimated US Gross Domestic Product (GDP) estimates for 2012 caused some pull back in the US stock market. That said, there has been some good news that has caused the markets to rebound somewhat. That news included:

• Sales of newly built single-family homes rose to their highest levels in more than two years in May. Sales of new single-family homes rose 7.6% compared with April 2012 and 19.8% from May 2011.

• In speaking with some real estate professionals we know, they have indicated that inventory of previously owned homes is low, they are receiving multiple offers on homes and many are selling for more than asking price.

• Many have said that the US economy simply cannot rebound without participation by the housing market. Real estate helped to stoke the US economy out of previous recessions as interest rates declined, home sales increased and construction jobs rebounded.

As fee-only financial advisors, we look at this news as a positive long-term indicator that the US economy may finally begin to benefit from some assistance from the housing market.

Unfortunately, we are still in the midst of an election year and, given the uncertainty in health care and taxes for 2013 (and beyond), we may still not see much movement, up or down, from here until we get past the November elections.

Stay tuned!!

Bruce

• Federal income tax
• State income tax
• Social Security tax
• Medicare tax
• State sales tax
• Property tax
• Fuel tax
• Liquor tax

By no means is this list meant to be inclusive of all taxes; it merely serves as an example of the laundry list of taxes each of us pays every day.

And the argument continuously being presented is that the taxes we are currently paying just aren’t enough to cover the expenditures we are making.  I feel it is well beyond the time to take a hard look at the entitlement programs this country is paying for each year (both inside and outside the US) and make some hard decisions on how we can adjust or eliminate some of them.  Hard choices need to be made and its time they stop asking for a larger “allowance” when all they’re doing is blowing it in an inefficient manner.  Every dollar we can keep in our own pockets means we are that much closer to a comfortable retirement we have worked so hard for.

As we near the year-end, there are a number of financial planning and tax related items that you should consider.   One such item, for those age 70 1/2 and older, is IRA (SEP, SIMPLE IRA, qualified plans and 403b) account Required Minimum Distributions (RMD).  At age 70 1/2 IRA owners must begin taking minimum distributions from their IRA, according to IRS guidelines, and pay tax on those distributions.  If you are over age 70 1/2, you should verify with your financial advisor that you hve satisfied distribution requirements.  There is an excise tax for not taking a required distribution, and it can be severe, 50% of the amount of shortfall from what you should have taken.    

At this time of year, we receive telephone calls from folks that are not working with a financial advisor (and some that are), wondering if they are required to take a distribution; and occasionally, if a distribution is required, how can they satisfy the distribution requirement if they don’t have cash in their account.  These calls can be a bit frantic, especially as we near year-end, with no cash in their account, and the caller realizes they may have a rather substantial excise tax if they do not take a distribution.  

What many people do not realize is the distribution can be taken either as cash or in-kind (e.g. as stock or mutual fund).  The in-kind distribution is still taxable, as a distribution, even though the in-kind asset has not been sold.  In-kind distributions are handy, especially if liquidation of the holding means a waiting period (known as settlement) before distribution of cash.  Another advantage to an in-kind distribution is there is no change to your asset allocation. 

Contact a Summit Wealth Advocates advisor if you have any questions regarding distributions from your IRA.