Nov 20, 2009

Burying Gold in the Back Yard

Folks are nervous, I would go as far as saying that they are freaking out. I don't think a week goes by without someone asking if they should sell everything, and buy gold and a shovel. Here are a few charts that I found that I thought were telling:

Source: Reuters

Source: The Big Picture

The charts are a reminder that it is all relative, but it doesn't change the fact that folks have major concerns.

Burying gold in the backyard is probably not the best response to the current economy. It would be best to determine what your concerns are. Some buy gold to hedge against inflation, some are afraid the world is coming to and end, others are just trying to time the market. I would suggest that in any case, there would be better ways to protect. For inflation, perhaps a more balanced approach including TIPS, precious metals, currency hedging... The folks expecting the end of the world are already diversifying, buying Gold and lead. I went into the local sporting goods store to buy shells the other day and they were sold out...SOLD OUT OF BULLETS. If you are one of the folks trying to time the market, good luck. They say that you know you are a seasoned market timer when you have lost everything.

As Americans, it is healthy that we get a bit concerned. We should be concerned over our debt and spending. If you haven't seen it, check out this article: Desperate Times Call For Conventional Measures.

Nov 10, 2009

The Vultures Circling Your Nest Egg

Our changing economy has affected nearly every aspect of retirement. Household names in investment and insurance companies were turned upside down. Workers looking forward to early retirement have realized tremendous setbacks. Individuals who disregarded social security as an income stream worth counting on are now reconsidering. Retirees that have relied on social security for years are concerned about growing national debt and the safety of this income. 

Now is the time to ensure that your retirement assets are accounted for and managed efficiently. Unfortunately, there are costs associated with retirement today that may creep in and destroy your nest egg. 
  • Are you leaving a 10% tip when you purchase investments? Many investors pay large commissions to investment brokers and insurance salespeople. These commissions are often hard to decipher and in many products, the fees are not transparent. When you work with a financial company, make sure that you understand what fees are associated and how they are paid. Good investment decisions are the ones that are focused on making money for you, not the investment company. 
  • Ignoring your tax situation can erode your savings. Currently the highest marginal tax rate for an individual is 35%, historic highs exceed 90%. That means that, at high tax rates, on the next dollar you earn you can keep a dime. In the next few years we can count on increased taxes, not only on the marginal tax rate but in many areas. In order to pay for government programs Americans will be required to pony up. There are many strategies that can be used to minimize taxes including conversion to a Roth IRA and tax deferred investments. 
  • Last year Bernie Madoff destroyed investor’s nest eggs to the tune of more than $50 billion dollars in his Ponzi scheme. Investors across the nation are now looking to ensure that everyone involved in the management of their retirement assets is on the same team. It is important that your investments are protected by a series of checks and balances. If you are working with a financial planner with fiduciary responsibility, the firm is legally obligated to do what is in your best interest. If your investment advisor is fee-only and not commission based, the billing structure at that firm allows the advisor to focus on your needs and not on sales. The discount broker your advisor works with is also interested in making sure accounts are secure. Mutual fund companies also account for client assets to ensure safety. These three entities work to keep each other in check. Clients hit by the Madoff scheme saw no transparency and understood that there were no checks and balances. These investors heard of substantial returns and this was enough to entice them into investing without proper research. Like your parents always said, “If it seems too good to be true, it probably is.”
  • $1 for you $1 for them, $1 for you $1 for them. During the life of your loan on a thirty year mortgage you pay nearly double the original purchase price of the home.  For every dollar used to pay principal individuals are putting a dollar toward the bottom line of their mortgage company. Paying the minimum payment on a credit card can be even worse. Folks that get serious about paying down debt and staying out of debt will reduce stress and increase their chances of success in every other area. If you have not built a house of cards out of debt, good for you. If you have found yourself in a hole, STOP DIGGING!
  •  Sometimes the biggest thief is you. Individuals often get in the habit of spending as much as they make and getting accustomed to living on more and more money. Emergency savings accounts go unfunded and when life doesn’t go quite the way we expect, the only money available is debt or assets set aside for retirement or education. It is crucial to get in the habit of saving and creating systems to force ourselves to save. Consider earmarking a certain amount of money to draw from a checking account into savings. Pay yourself first.

  •  Whether the kids are out of the house or one is still lingering in the basement, make sure that you are not providing too much support. Retirees find it difficult to say no to children who seem to have a real need, but if it becomes a recurring problem, get your finances in check. If you find it too difficult to turn down requests, get help. You can use your financial advisor, your banker, or someone who is willing to be the go-to person for the kids. Tell the kids that this person is in control and send requests to a trusted advisor. 
In order to make retirement a reality in this day and age it is crucial to make sure that you are in charge of your finances and that the folks assisting you have your best interest at heart.

Lessons from the Garden

Published in the Montrose Monitor June, 2008

Most of us have had experience with a garden. Some people have a green thumb and can grow
anything even in our alkaline clay. A green thumb implies luck or good fortune in the garden, this is hardly the case. These green thumbed folks work diligently to create a hospitable place in the soil by adding compost and fertilizer. They create rows in the soil, plant seeds and water them daily. They remove the harsh Western Colorado weeds that would choke the life out of a fledgling plant. As the
weather changes they take measures to protect what they have worked so hard to create. When the time is right they will have a beautiful garden that will bring joy to the table. 

There are folks with a green thumb in regards to finances. These are the kind of people that leave a career and enjoy retirement without constant worries about finances. They are not necessarily luckier than the rest; they have worked hard to manage their finances well. Here are three useful ideas for pre-retirement and for those who want to make the most of what they have grown. 

1) You can’t grow wealth with bad investments, just like you can’t grow a blue ribbon tomato in
salty soil. It is important to keep an eye on the places you have planted your money. Take the time to keep up with what is happening in the industry and with new trends. Make sure the fees associated with your portfolio are reasonable and that you aren’t giving everything you have grown to someone else. Without the proper groundwork your investments will fail to thrive. Sometimes you need to amend the soil and make changes in your investments.

2) Watch out for weeds that will destroy your wealth. Often we plant things in our garden that take over. A sprig of mint in your garden sure smells nice, but if you’re not careful it can spread like wildfire. Debt has the same affect. When we spend money we don’t have, on wants or desires, it can hinder us from reaching goals. It is said that true wealth is more about what you spend than what you make. Get rid of debt where possible, and make sure that you are being effective in paying off loans. You can really make a big impact by focusing on your smallest loan, pay it off, and then roll the entire
payment into the next loan. Before you know it, all of the weeds are gone and your garden is free to flourish. 

3) Just like the weather, the stock market has hot and cold periods. How you handle adversity can drastically affect your wealth. Back in 1998 and 1999, the weather was great. Folks saw their
friends making lots of money in the stock market and decided they should invest as well. As the storm rolled in the investors that got in late, and didn’t protect against the harsh elements, found their investments wilting away. Those who are successful in growing wealth do not get emotional about the markets. They plant seeds early and watch their investments grow. When the weather turns, they rest easy, knowing they have taken proactive measures to protect what they have. Invest wisely and take measures for solid growth. When the markets go down, keep your emotions in check and look for
buying opportunities.  

For some, gardening is a joy. They find pleasure in turning compost, planting seeds, and staying on top of weeding in anticipation of the harvest. For others, it is not the best use of their time. If you don’t have the time or the desire to take care of your finances, or if you get emotional about your investments, find someone who can help. When you reach retirement you won’t have to worry about money so frequently. Who knows, you may even end up with a few extra bushels to pass along to those you love. 

Expert Opinions on the Economic Crisis

Las Vegas, a city known around the world for the catch phrase, “What Happens in Vegas Stays in Vegas,” was the recent home of the 2008 TD Ameritrade Connect Conference for financial advisors. Many experts shared their opinions and insights into the difficulties and opportunities our country may face in the coming years. Here are a few of the insightful words and ideas that happened in Vegas, but should not “Stay in Vegas.”

T. Boone Pickens, founder and Chairman of BP Capital Management, presented to nearly 1500 industry professionals. Pickens shared at the conference the changes in the natural gas drilling process and how new technology has allowed for much more natural gas to be extracted from each location than in the past. This has created a tremendous supply of natural gas. His plan, which can be seen at would drastically reduce our dependence on foreign oil. Pickens mentioned that U.S. citizens make up 4% of the worlds population while using 25% of the world’s oil. He also shared that in 1980 the U.S. imported 28% of the oil we used, today we import 70%. Pickens stated that “the Pickens Plan is for America and for generations to come.” He said that future generations need not be concerned about rising healthcare and failing education, “they won’t have any money left to spend on education and health care. They’ll be spending it all on foreign oil.” The Pickens plan would create more jobs in alternative energy such as wind power and solar, and would build upon the current
natural gas infrastructure here in the U.S. 

After Mr. Pickens’ presentation, I was able to discuss with him how the natural gas industry had changed the face of Colorado’s Western Slope and how the economy here has not been as affected as the rest of the U.S. He said that was the goal of his plan and he mentioned in regards to President Barack Obama, “He may be the right guy.” Mr. Pickens was optimistic about the possibility of reducing our need for foreign oil under the country’s current leadership. 

Dr. William Poole, Former president of the Federal Reserve Bank of St. Louis, spoke to participants about his concerns regarding the federal bailouts. He discussed how bailouts of huge companies could lead to more and more government bailouts. This would eventually change how investors valued companies; they would count on the possibility of government intervention. “Bailouts beget bailouts. We cannot bail out all firms,” Dr. Poole explained. “Firms have to fail as a part of capitalism.” Poole suggests that the current financial stimulus package is “devoid of budgetary discipline.” The government is currently spending money to keep failing companies in business. In essence, this scenario is passing losses on to taxpayers. 

We heard from Karl Rove, former presidential advisor to George W. Bush, and General Wesley Clark, former democratic candidate for President of the United States, in the form of a debate over the current stimulus package. The debate was a heated one where the two men discussed the merits of House Bill HR 1, an $800 billion dollar stimulus package currently being voted on in Washington. Mr. Rove was opposed to the current version of the stimulus package and suggested that the stimulus package was poorly constructed and much of the spending would not create jobs or boost the economy. General Clark was certain that HR 1 was what America needed. The speakers had high hopes for the future of our economy, but suggested a difficult road was ahead.

After the meetings, I made it a point to get out on the Las Vegas Strip and get some exercise and fresh air. I did get some exercise. I noticed a nearly completed casino on the strip that is called the City Center. This is an $8 billion project on Las Vegas Blvd. and is the most expensive private development in history. Just for some scale, Denver International Airport, which was not privately funded, rang up at about $4.8 billion. The City Center is a joint venture by Dubai World, a corporation owned by the Dubai Government and the MGM Mirage. The 18 million-square-foot project is pursuing the Leadership in Energy and Environmental Design Certification (LEED®). The project is slated to be
complete in November of 2009. The massive building efforts on the Las Vegas Strip do not seem to be phased by these tough economic times. 

Circumstance in today’s economy have affected all of us and will continue to create ripples in regulation and taxes for years to come. The overall theme at the conference was optimism regarding our economic future. For every difficult change and added challenge there is also an opportunity to be more efficient and overcome these obstacles. Persistence through hard times, after all, is what has made this country strong.

Take Control

2008 is a year that will make history books. The year began with a $130,000,000,000 stimulus package
passed by President George Bush. He was quoted as saying that our economy was “fundamentally strong”. Since then, we have seen an unprecedented turn of events that has had widespread effects on American companies and American’s pocket books. To date, Washington has committed an additional $7.8 trillion toward a rescue plan for our struggling economy. 

This year’s financial turmoil was much more than anyone could have expected. Investors are left
wondering what happened and how they could have been so wrong. Investor panic has driven the stock

The good news is that not everything is beyond our control. Losses in the stock market have created a few opportunities that the savvy investor should consider carefully. 

1. Roth IRA Conversion: With account balances down, investors with Individual Retirement Accounts (IRAs) who meet certain requirements can convert their account to a Roth IRA by paying taxes on the account today. You may ask yourself, “Why would anyone do that?” 

Imagine that your IRA is down 25% from $100,000 to $75,000. If you convert to a Roth IRA now, you pay ordinary income tax on the lower account balance and you can withdraw that money tax-free at retirement. With likely tax increases in the future, this can be a wise decision for many investors. 

A conversion can also be a powerful estate planning tool. Your heirs will receive the Roth IRA tax free as well. Another benefit of the Roth IRA is that investors are not required to take minimum distributions from the account after 70.5. The fact that you don’t pay tax on the growth or on distributions and you are not required to deplete the account can create an excellent tool for passing tax-free income to
your heirs. 

Many employers in Montrose offer qualified plans such as 401(k)s that have a Roth option. 

2. Offsetting Capital Gains: When markets go up and investors sell securities, they pay tax on the money they make above their initial investment. These capital gains taxes can be substantial. You can offset capital gains with capital losses. In years like this, an investor can “harvest” taxable losses to offset current gains, or an investor can carry-forward losses to offset future gains. If an investor does not take advantage of losses and the investments end up being sold at a gain, the entire gain is
taxable. Capturing losses in down markets and carrying them forward can ease tax burdens in future years and make a big difference to an investor’s bottom line.

3. IRA Rollover: Western Colorado has not seen as many challenges as the rest of the country. Still, many have been subject to downsizing and have lost jobs. Often qualified plans through employers such as 401(k)s and 403(b)s, pensions and profit sharing plans have few investments to choose from. These investments often see large losses when the markets are down and have a hard time gaining ground during rallies. In many cases these accounts are not monitored and investments within these plans may be poor performers. If you are no longer employed by the sponsor company this is an excellent time to roll-over these accounts to an IRA which allows many more investment options. At Elderado Financial we offer a complimentary initial consultation to discuss whether a roll-over is right for you. 

The markets are filled with uncertainty and investors are worried about events they can’t control. During this time there are many opportunities to take control and implement strategies that will save you money in the future. This year was beyond what most of us expected but the savvy investor is working to plan for his or her future. Making small changes and planning now will put you miles ahead in the future. 

Jack of All Trades or Master of One

Getting donors more involved in your non-profit.

Everyone knows a true Renaissance man or woman, a Jack of all trades. These are the folks that are not afraid to tackle any problem. They will jump right in and fix the car instead of taking it to the shop or repair the broken water heater on their own. It is so easy for the executive director of a non-profit to
become the Jack of all trades. The responsibility of overseeing management and fundraising is no small task.  No matter how supportive your donor base, at times it can feel like your hand is constantly out asking for more. This becomes a vicious cycle that leads a director to ask less and to take on more of the work themselves. 

Donors are feeling the pinch in this economy and it is more important today than ever before to rethink your role. The role of an executive director is not to do all of the work but to direct and to connect with key individuals within the community that can help. So, get up, get out of the office, and get folks excited about helping the organization without having to ask for money. 

Here are a few ideas to get you started: 

  • Find that donor who is on every social network and who knows how to update her blog and Facebook account from her mobile phone. Perhaps, she would set up a social network for your organization. Have her create profiles on the internet and spread the message for you. Let this person use her skills to upload the good news of your organization to the world. 

  • Think of the best hosts or hostesses you know. Ask them to get involved with planning your next fundraiser banquet, or even an intimate donor appreciation night. Your guests will leave feeling welcome and your event planners will find joy in the whole process. 

  •  Get the local youth involved. The kids in your community know how to upload videos, pictures, and commentary to the internet. In fact, most of them can probably do the job from their cell phones without looking. Have a key donor give $10 for every YouTube® video posted about your organization and let the youth have fun making silly videos while raising money. 

  •  Do you have an outgoing board member who is a great speaker? Ask him to get on the service club circuit and present the benefits of your organization to the community. Make sure to follow up with a letter to the service clubs requesting support. 
  •  My wife is the official thank you card writer for our favorite non-profit. She has beautiful handwriting and loves to keep top donors feeling appreciated. Next time you get a card from a donor or board member, make sure to ask if they would consider sending a few thank you cards each month for your organization. 
  •  Is anyone you know highly connected to the community? Look for financial professionals, politicians, etc. These are the serial extroverts that can’t go anywhere in the community without saying hello, the ones who aren’t allowed to shop with their spouse because they have to talk to everyone they know. Get these folks to wear your mission on their sleeve. Literally, buy them a golf shirt or a nice ski vest and keep them updated. Give them the latest news and ask them to be intentional about spreading the word. They will see more people in a day than you could see in a week. 

Think about every task you do during the day, especially the ones that leave you feeling exhausted, and ask yourself, “Is there someone that cares about our organization that would have fun doing this?” 

During this difficult economy, supporters might be decreasing their giving but it doesn’t mean they don’t care. Find creative ways to put these folks to work. This isn’t a task to think about just for today. This is your primary role as the leader within your organization.

Desperate Times Call For Conventional Measures

Life is so busy. It seems like we never have enough time for the important things like taking care of
the people and organizations we care about. There is the house payment, the second mortgage, a
car payment and repairs. Money is tight and credit cards help us make it month to month. Many Americans feel like they are being stretched from both sides; the bank and credit card company on
one end, and a job that doesn’t pay enough on the other. We take out a loan and treat ourselves to that ATV, or that vacation; after all, we deserve it as hard as we work. We will pay for it later. 

Sound familiar? This has become standard operating procedure for too many families. The savings rate in America has been in the negative for the last 14 years.   As a country we spend more than we make, we don’t save and we buy what we want on credit. This is the reason our economy is in this mess. 

Folks are beginning to change. I was in the back yard grilling some chicken and I noticed my neighbor was grilling as well. “I’ve got chicken, what have you got?” I asked him. My neighbor, who is a butcher, said he was having chicken. He mentioned at the meat counter he had been cutting quite a bit more chicken lately and that he hadn’t seen beef in a while. 

Consumers are changing their spending habits. The 14 years of negative savings rates was broken this year. Americans have started tightening their belts. Folks that grew up during the dirty 30’s remember what that feels like. They learned from their parents how to buckle down. As a country we have lost that skill. The vast majority have not been forced to be frugal to the extent that we see today. The economy has been a catalyst for change. Americans are being forced to make prudent financial decisions and it is a painful process. 

We need to use this ‘opportunity’ to create a permanent change in our lives. Here are a few ideas that we must cling to if we want to avoid this mess in the future.  

Don’t blow every dime. We have gotten accustomed to spending every penny that comes in. When the
paycheck hits the bank, it is already gone. Thank you credit cards! We need to get serious about being frugal, planning meals, clipping coupons, and resisting the urge to spend, spend, spend. 

Stop digging! Who knew that you could dig your own grave with a tiny plastic shovel? Now is the time to cut up the credit cards and stop paying with plastic. Stop the debt fiesta. Be systematic and put everything extra you can toward your smallest credit card. Pay it off and move on to the next line of credit with a vengeance. 

There is no easy road out of debt, no quick fix. Filing bankruptcy or pulling out of the 401k to pay debt off doesn’t fix the problem. Folks that do this destroy their retirement assets and don’t learn the lesson of being diligent. This is like posting your own bail and returning as a repeat offender. 

It is said that if you aim at nothing you will hit it every time. Put a plan on paper describing how you will get out of credit card debt and pick a date you hope to be debt free. Make it a priority and work at it with a passion. Once you slay the plastic beast, begin saving. Save enough that if the unexpected were to happen you would have a nice cushion to carry you. Once you have a savings get serious about getting closer to retirement. Pay off the house and save a hefty portion of your paycheck. 

Hold yourself together man! Make sure that you are keeping your emotions in check. As Americans we like to do three things; keep up with the Jones’s, buy high and sell low, and live for today without planning ahead. Make it a point to avoid doing any of these things. 

We see infomercials on television and advertisements showing beautiful, rich people drinking margaritas telling us how they bought a DVD set and now they make up to $100k per month. Someone in these ads is making money; it is the company selling the DVD set. Building wealth is not a get rich quick scheme. It is about doing the right thing consistently. It is about saving money where others wouldn’t think to. It is about communicating and working together with family and friends to save
money together. It is about making small, seemingly unimportant decisions every day to save instead of spending, to look for cheaper alternatives, and to stop owing the bank. 

We see people every day that have made the decision to spend and rely on debt. They are retired and they have nice houses and nice cars, but they often have bags under their eyes because they are up at night worrying about their finances. On the other hand, we see clients who learned early on to make good decisions every day. They have debt paid off and they are living a great retirement, enjoying the fruits of their labor. 

As we move out of the recession and there is no longer a catalyst pushing us to be frugal, some families will forget. They will go back to their old habits and spend until their wallet hurts. Others will remember these times and prepare. They will save and they will build a sustainable future for themselves and for our nation.

A Looming Cloud Over Colorado’s Retirement

Colorado PERA and a long road to recovery.

Once upon a time, Americans worked diligently for forty plus years in a job and in exchange, companies counted on their workers and rewarded them with the promise of a good retirement.
The current working generation has hardly heard the word pension or the term, “defined benefit plan.” Although not extinct, they are becoming a rare breed. Across the U.S., state pension plans are struggling and the State of Colorado is no exception. 

Many government employees still rely on a pension as part of their retirement. Public employees in the State of Colorado are counting on the Public Employees Retirement Association, also known as Colorado PERA. PERA is the largest public pension plan in the state, and is a large piece of the retirement pie for over 400,000 individuals in the state. Folks counting on PERA come from many walks of life; from school teachers, to fire fighters, judges, law enforcement officers and many
other public employees. 

Colorado PERA is the 23rd largest public pension plan in the United States and the fund saw a drop in assets of 29% during the 2008 market crash. As a defined benefit plan, PERA promises to pay a certain amount of money to retirees in a lump sum or in the form of a monthly payment during retirement. The plan also provides healthcare, long-term care and other benefits. After the staggering loss in 2008, the fund now has $29.5 billion in assets and roughly $27 billion in unfunded liabilities. This means that the promises that were made to Colorado Employees to provide retirement benefits are a distant reality. 

The entities that provide PERA for employees pay a fixed percentage into PERA on behalf of employees, while a slightly smaller percentage, deducted from the employee’s pay, funds the rest of the plan. This funding is in lieu of Social Security Payments. The folks relying on PERA do not put into the Social Security system and thus their Social Security benefit ends up being very little, or nothing at all, for life-long public employees. 

Last year, the Social Security Trust saw little effect from the negative economy, while the PERA Trust saw sizable losses. Without a fix, this could drastically affect many employees who fully rely on the Public Employees Retirement. 

So what can be done? On a state level, a number of Band-Aids are being slapped on the PERA system but we have yet to see a real fix. Legislators are forced to manage the situation without stepping on toes. On one end of the scale are the public employees who were promised a sustainable retirement and on the other end are tax payers who refuse to be handed the burden. Finding a real solution is no easy task but circumstances have forced discussion on the topic.  

Former Governor Bill Owens suggests that we swap the ragged old Defined Benefit system, which promises an ongoing, consistent benefit in retirement for a Defined Contribution Plan model. States such as Alaska, Michigan, and Oregon have adopted this model which takes the obligation away from the employer and places it on the employee. This would create a ‘fend for yourself’ mentality and would force Coloradans to manage their retirement more efficiently. 

In the past, we have seen governments take on debt to fund retirement benefits. We even see this in the private sector as automakers work with unions to manage staggering pension liabilities. It seems in some cases that automakers are no longer in the auto industry, but are in business solely to fund the retirement of employees. This creates a difficult situation on a state level when the legislators choose to rob Peter, the tax-payer to pay Paul, the retired public employees. Citizens of the state who do not benefit from PERA may be a bit irritated when their tax dollars are funding their neighbors retirement, civil servants or not. 

Another question arises when we ask who is on the hook for the whole thing. It is possible that PERA will try to declare an emergency and pass the whole thing on to the state. The legislators will have quite a task on their hands with the balancing act. If they force the problem back on PERA, they are turning their back on public employees, while if they take it on, taxpayers may deal with the burden. 

More than likely we will see quite a show as the state edges out on a tightrope, trying to create a balance; the audience is sure to cringe at the sight. PERA will be forced to cut benefits and go back on promises that should not have been made, struggling to come up with a way to pay the difference. More than likely, mandatory contribution rates from employers and employees will shoot upward to help bridge the gap. 

If we brush the problem under the rug long enough, will it disappear? Within the pension system there is a smoothing process that protects the fund from being destroyed by one year’s staggering losses. As the economy looks up, the $27 billion in unfunded liabilities, a chasm that today seems too deep to span, may be reduced by market forces. Even a strong recovery would not fix the problem completely, but may ease the strain on PERA and keep legislators from eying your pocketbook.

According to a Colorado State Review released by Standard & Poor’s on July 15, 2009 Colorado has “a broad and diverse state economy that is dealing with a national recession, but continues to exhibit better-than-average income, employment, and population trends.” The unfunded PERA liabilities were mentioned as a concern in the report. 

As for the individuals counting on PERA for their retirement, now is a great time to look ahead and begin planning for a future that is secure. Make sure you understand your PERA benefits, or find someone that can help you. Pay down debt, maximize savings, and understand how your assets, including Colorado PERA will affect your retirement.

Fiduciary – The New Industry Standard

We still hear horror stories about folks who have diligently saved for years and company who locks them into a bad product and receives a large commission. Unfortunately, in the financial industry there are still individuals and companies that are working to line their pockets and to make sure the company meets sales quotas.

This is unacceptable. Thankfully, many professionals including doctors and lawyers are held to certain standards within their industries requiring that they put the interest of their clients first. Professionals legally obligated to put their client’s interest first are known as Fiduciaries. This standard does not apply to all industries.

Over the past few years there has been more and more news regarding this topic. The financial industry is currently suffering growing pains as organizations such as the Financial Planning Association and the Certified Financial Planner Board work tirelessly to bring this industry standard to financial professionals.

Within the financial industry you will find professionals who are fiduciaries, those who are legally obligated to do what is right for clients. In the same industry you will find individuals who do not act in a fiduciary capacity. Organizations that represent broker dealers and financial sales-people have been working to oppose the fiduciary standard.

It is important to make sure that your financial professional is interested in your well being instead of his own. Is he a broker, or is he an advisor? Does she get paid when she sells you a product or when she gives you advice that fits your needs? Does he receive commissions that are hidden within the product, or is he a fee-only financial planner that offers transparent fees? Does your advisor offer advice on making your entire financial picture more efficient (such as tax strategies, retirement planning, investment management and estate planning) or do you rarely hear from him?

Now is the time to ask if your financial professional is truly a fiduciary - working for your best interests.

Here are a few questions to consider asking your financial professional:

1) When you are dealing with me and my finances are you held to a fiduciary standard?
2) Does your company disclose all conflicts of interest that could affect my relationship with you?
3) Do you receive compensation on a fee-only basis and offer full disclosure of these fees, or do you accept commissions for selling products?
4) Do your services include financial planning to meet my needs as well as investment advisory services?

Don't Put All Your Eggs in One BRACKET

I always liked the television show MacGyver. Throughout the ‘80s and early ‘90s MacGyver could be found putting his Boy Scout skills to good use. Trouble always seemed to find him but he was resourceful. He would take in his surroundings and using items he found, along with the paperclip from his wallet, he could overcome any obstacle. The story line was often far-fetched, but by using his brain, not his brawn, MacGyver was ready for any situation.

We can take a lesson from MacGyver in preparing for any tax situation. Too often we see folks who think they are adequately diversified heading into retirement. They believe that building a portfolio and selecting different asset classes provides adequate diversification. It may take more than that.

While working, Americans have taken the instant gratification of a reduced tax bill through IRAs and 401k plans. Many retirees have stored up a huge portion of their wealth in tax deferred accounts, but in retirement these individuals may find themselves at the mercy of their tax bracket.

With just a bit of knowledge and a good look at the surrounding tax environment, there may be a few ways to get yourself out of a real pickle.

Retirees can benefit tremendously by understanding how different retirement assets are taxed. Retirement assets may be tax-free, tax-deferred or taxable. Simple tax planning may allow you to save a small fortune in taxes and have some control over when and how you pay.

The talk of the town. With rules changing in 2010 and the $100,000 income limit for Roth conversions being eliminated, the Roth IRA has taken center stage. The new changes will create opportunities for many to convert IRAs into tax free income later by paying taxes today. If your account suffered losses during 2008, it may also benefit you to convert while account values are down. Be careful about converting too much. If you pay all of your taxes now and there are favorable tax breaks in the future you may miss out.

Net Unrealized Appreciation - Use it or lose it! A little known rule in the Internal Revenue Code could create real tax savings for those with highly appreciated company stock in qualified retirement plans. The rule allows individuals to pay ordinary income tax on only the basis of the company stock, instead of the entire amount. The appreciation is then subject to the more favorable capital gains tax. This could potentially reduce the tax liability by up to 20% or more. In the end, you wind up more diversified and you may save some real money. To benefit from NUA, you must take advantage of this favorable treatment before terminating employment.

Planning doesn’t stop at retirement. Throughout retirement your tax brackets will change. Early on, many retirees spend more money traveling and on entertainment. In years that you are in a relatively low tax bracket it might make sense to draw from an IRA and pay ordinary income tax at a favorable rate.

The amount of income that you receive during retirement affects your Social Security benefits. Certain thresholds determine if your Social Security is 0%, 50% or 85% taxable. Strategic distributions from your Roth IRA and taxable account may help you to reduce your overall tax burden by reducing the amount of ordinary income tax that you pay.

When you reach age 70½, assets in IRAs and other tax-deferred accounts are subject to a Required Minimum Distribution (RMD). Roth IRAs and taxable accounts do not have this requirement. If you still have substantial assets in tax-deferred accounts you may be forced to draw more than you would like at high ordinary income rates. If you have worked to diversify your taxes by drawing on each of your accounts, the RMD may not be a burden.

The IRS likes it when you share. For folks that are charitable, there are even more opportunities to manage taxes. The IRS offers a number of tax-advantaged options for charitable giving including the Charitable IRA Rollover, Gifting Stock, and Charitable Trusts. It is always wise to plan ahead and to look at the current tax structure to maximize giving and minimize taxes. Implementing tax strategies may allow you to give more to organizations you care about and less to Uncle Sam.

Leave a legacy. When you leave assets to your beneficiaries they will reap the benefits of your tax planning. Assets within IRAs will continue to be taxed at ordinary income and may be subject to minimum distributions for your heirs. Assets that you leave behind in a Roth will continue to provide tax free income. The appreciated assets within taxable accounts will receive a step-up-in-basis when you pass away. Instead of assuming your basis and owing substantial capital gains, your heirs will receive a clean slate with a new ‘stepped up’ basis.

Managing your tax liability throughout retirement is as important as the investments you make. The tax environment is constantly changing. Always seek the guidance of a tax professional. Understand how your assets are taxed, keep an eye on changes to tax rates, and watch for opportunities provided by the IRS to save money. When you find yourself in a tricky situation, you may have just the tool you need right in your back pocket.
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