What Does a Social Security Raise Mean to You?

You may have heard that the Social Security Administration recently announced a 3.6% cost of living increase for Social Security recipients starting in 2012. This is good news for those receiving Social Security benefits, as the last increase came two years ago (5.8% in 2009).  If you are not yet drawing Social Security, you may be wondering what this raise means for you. 

While a PhD in Social Security benefits might be needed to calculate how, a fact that is less known is that those aged 62 or older who are not receiving benefits just yet also receive benefit of the 3.6% increase.  Essentially, Social Security benefits before age 60 are based on wage increases, but at age 62 they are based on price increases, i.e. the 3.6% cost of living adjustment. 

Other Social Security related changes courtesy of Horsesmouth.com include:

• The maximum taxable wage base rises to $110,100 in 2012, up from $106,800 in 2011.  This means that you do not pay Social Security tax on any wages over $110,100 next year.
• The earnings test before full retirement age rises to $14,640 in 2012, up from $14,160 in 2011.  If you are drawing Social Security before your full retirement age, you can earn $14,640 next year before your Social Security benefits will be reduced.
• The maximum Social Security benefit for a maximum earner retiring in 2012 will be $2,513/month, up from 2,366/month in 2011.

The bottom line is that Social Security benefits can have a meaningful impact during retirement and it is important to maximize those benefits to the extent possible.  Careful analysis based on your particular situation is therefore critical to your financial health.  Consult your financial advisor about maximizing your Social Security benefits.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

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The Gift that Keeps on Giving

As the holiday shopping season approaches, many of us struggle to make our gift lists.  This can be a frustrating exercise, particularly when it comes to you adult children and grandchildren.  What can we possibly give them that will be appreciated and not be sitting on the dresser in a week when the next new gadget comes along?  Why not consider a gift that will keep on giving long after your gone?

If your children or grandchild had earned income from employment during 2011, you can contribute up to $5,000 or 100% of their total earnings (whichever is less) in a ROTH IRA in the child’s name.  [Remember that what you put in to the ROTH IRA counts toward the $13,000 annual gift exclusion; $26k if your spouse contributes to the gift].

Why is the ROTH IRA such a great gift?

• It grows tax-free over time.  A $5k contribution to a 16 year-old’s ROTH IRA earning 8% each year will grow to $217,000 by age 65*.  If the child works summers during high school and college and contributes each year, the future balance in the account will likely be significantly larger.
• ROTH IRAs provide tax-free withdrawals after age 59 ½**.
• In some specific situations, the child can pull out contributions (not earnings) free of tax (i.e. for the purchase of a first home).

A Roth IRA can be one of the best gifts you can give…one that will be giving for years to come.

*This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security.  Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.

**Unless certain criteria are met, ROTH IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

Laurie Renchik Embarks on Leadership Oakland Cornerstone Program

Since 1990, the Leadership Oakland Cornerstone Program has brought together over 900 leaders from corporate, civic and non-profit organizations.

As one of class of 50 leaders for 2011-12, Laurie’s membership in this program provides exposure to an exclusive organization with a mission to develop leadership skills, expose individuals to key issues impacting the region, and enable participants to reach their full potential personally, professionally, and through public service to their communities.

Laurie recently attended the Kick-Off Retreat, a three-day, two-night retreat, where participants were provided an overview of the region and its challenges, insights into their own leadership style, and an opportunity to get to know their fellow Leadership Oakland classmates.  They will also set goals for their year in the Leadership Oakland Cornerstone program.

Laurie commented, "Over time community leaders armed with knowledge, collective creativity and innovation can change the course of our region to a stronger more vibrant future.”

By building a shared understanding and partnership, Cornerstone graduates develop purpose and commitment to the community for the organizations they represent and the communities they live and work in.

Taking IRA Distributions Before You Need Them?

My wife truly enjoys talking to our two dogs – not that she expects them to talk back (I don’t think so at least) – but who doesn’t enjoy seeing their heads turn as if that will really help them understand what she has to say.  I had a client give me a similar look a few years back when I suggested taking money from his IRA even though he didn’t need it for current spending.  (The client was past age 59.5 but younger than age 70.5 so he didn’t have to take a distribution quite yet.) 

While, like my dogs, he didn’t say anything his look suggested that he was thinking “why would I take a distribution that I don’t need and accelerate income taxes?”  His head started to turn straight again when I illustrated that he might want to maximize the lower tax brackets.  A married couple filing jointly can have taxable income up to $69,000 in 2011 and still remain in the 15% marginal income tax bracket (remember taxable income is adjusted gross income minus exemptions and deductions). For this client, they could take out roughly $25,000 from their IRA and still be within the 15% marginal bracket.  While no one knows what income tax rates will be for sure in the future –locking in a 15% rate seemed attractive. 

2011 IRS Tax Brackets

To find out if accelerating IRA distributions is the right move for you, work with your financial planner and tax preparer to run “what if” scenarios.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Timothy W. Wyman, CFP®, JD, and Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters.

Building Your Foundation

Contributed by: Angela Palacios, CFP®

Asset allocation is like the foundation of your house. It is the most important structural part of your investment process. Without it, your home or your financial plans could become extremely unstable. 

Many investors either become paralyzed and unable to make decisions, or make decisions by constantly chasing the recent past and, thus, earning dismal returns.  To avoid those mistakes, one of the first and most important steps in investing is determining your Asset Allocation. 

An Asset Allocation Model is usually the outcome of the financial plan you complete with your investment professional. Its goals are normally to identify the mix of assets that best balances an investor’s desire for return with the desire not to take undue risk.  Studies have shown that asset allocation decisions account for a significant amount of the variation of total returns, while security selection accounts for a relatively small portion of the variability of total returns.  The most notable study was done in 1986 by Brinson, Hood and Beebower.  The researchers found that the asset allocation policy explained 93.6% of the average funds’ variation over time. 

In its simplest form, Asset Allocation is the percent of stocks, bonds, and cash you would own in a world of normal valuations.  Generally, allocations with more stocks than bonds would be in the “High Risk/High Return” area of the line on the “Efficient Frontier” chart below.

Disclosure:  The “Efficient Frontier” is a concept derived from Modern Portfolio Theory.  According to the theory, it is possible to construct an “efficient frontier” of optimal portfolios offering the maximum possible expected return for a given level of risk.

This chart can change greatly depending on the time period you use to draw it.  The following is how the above chart varies in actuality decade to decade.

© Dorsey Wright & Associates

In the 1960s, 1980s and 1990s stocks significantly outperformed bonds. While the 1970s and the 2000s show a much different story. Not only were stocks an underperforming asset, but the risks involved were very high using standard deviation as our risk scale. (The Weiss Report, Vol. 13)

While careful Asset Allocation can help make your investment portfolio structurally strong, unlike the foundation of your house, shifting investments can be a good thing. In practicality your Asset Allocation, rather than being static, can be changed tactically to reflect current market conditions as shown above.  Watch future posts to find out more about using asset allocation and other investment strategies. 

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Asset allocation does not ensure a profit or protect against a loss.

Financial Fitness is a Family Affair

Improving our health – physical or financial – may mean changing the habits we  learned as children.  What was your family’s attitude about money?  Is yours still the same?  Financial health is so much more than how much money you make or save: it’s about who you are and what you want from life.  The bottom line is that it’s “All About You.” 

As soon as kids begin to handle money, it’s time to start teaching them how to handle it wisely.  Concepts like saving for something valuable, financial goal setting, and basic money management are all important lessons that generations of children have learned from parents and extended family members.   

Here are five fundamental exercises that will develop financial muscles for kids as they move through the various stages of money maturity. 

1. Allowance.  Giving children an allowance is a good way to begin teaching how to save money and budget for things they want.  Allowances can be coupled with opportunities to earn extra money by doing chores that fall outside normal household responsibilities.
2. Saving.  Piggy banks are a great way to introduce the concept of a savings account.  By elementary school the next step is to open a savings account at a bank or credit union. This teachable moment can highlight the value of earning interest on your savings.
3. Critical Thinking.  As kids get older, television commercials and peer pressure are constant temptations to spend money.  Teach them how to compare items by price and quality and encourage care thinking about purchases they make.
4. Part-time Job.  Teens that have part-time jobs begin to experience greater financial independence.  This is an opportunity to show how withholding for FICA and federal and state taxes take a bit out of their paychecks.
5. College bound.  When young adults head off to college a prepaid spending card can offer an opportunity to learn about using credit responsibly without accumulating bad debt. 

In many ways, financial health is like physical health.  Both of them require:  knowledgeable advice, a long-term view and proactive participation.

The Center's Elder Care Planning Resource for Seniors and Professionals

Sandy AdamsSandy Adams' specialized expertise in Elder Planning has generated plenty of speaking opportunities for senior audiences throughout the years.  Recently, professional groups have also turned to Sandy for education in this growing and complex senior market.   

On October 12th, Sandy presented to over 100 local seniors as part of the Elder Law and Financial Planning Panel at the Older Persons’ Commission (OPC) in Rochester. The panel presentation was part of a Caregiving Basics fall workshop series sponsored by the OPC and open to the public

In addition, Sandy Adams presented to the MACPA (Michigan Association of CPAs) on the topic of Financial Gerontology at the group’s Elder Care Planning Forum & Webinar on October 20th. 

The presentation, titled “Financial Gerontology – Everything Changes with Age,” addressed financial issues and strategies for aging clients, as well as practice implications for professionals with clients in this demographic. 

Please contact Sandy, The Center's point person for Elder Care-related issues, with questions or matters for yourself or a family member.

 

Changes to Mutual Fund Cost Basis Reporting

As of January 1, 2011, a new law - part of the Economic Stabilization Act of 2008 - requires Raymond James (along with all broker/dealers, banks, custodians and transfer agents) to capture and report to the IRS detailed information on covered securities sales. 

• This change only affects taxable accounts.
• To select the average cost method, a signed Cost Basis Election form will be submitted to Raymond James on behalf of Center clients.
• Center clients will receive a letter outlining important details and the Cost Basis Election form by email or regular mail in the month of November.

 Please feel free to contact your planner at 248-948-7900 with questions. 

It's Just Math...

Let’s say Samantha invests $100,000 in the stock market and in a gigantic downturn, she loses half. Not great for Samantha, since she was planning on sending her son to college soon and now she has $50,000. Perhaps it’s time to pick a new school, but first let’s do the math. 

Quick question:  How much does she need to gain to get back to even? 

Did you guess 50%? 

Wrong! When you lose 50% and you then gain 50%, you end up at 75%. If Samantha gained 50% after her bad run of luck, she’d be up to $75,000 … not the 100-grand she invested from the get-go. 

To get back to where she started and get her son packed off to college, Samantha’s going to need a whopping 100% return! So remember, the greater the losses … the greater the needed rebound just to get back to even. 

                   If you lose …        You’ll break even with …

                   10%                      11%

                   20%                      25%  

                   50%                      100%

                   80%                      400%