Matthew Trujillo earns CFP®

 

He’s put in a lot of hard work and we are now excited to announce Associate Financial Planner Matt Trujillo’s diligence has paid off. Matt passed his certification exam and has earned the designation of a Certified Financial Planner®. According to the CFP® Board, the designation is for individuals who meet rigorous professional standards and agree to adhere to the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence when dealing with clients. We have no doubt he will do all that and more!

In typical Matt fashion, he put all the hard work into perspective.

Two years of classes, 3 months of intense study, a 2 day/10 hour exam, and all I get is three letters on my business card? Seriously, I’m very happy and excited to join the ranks of those that proudly carry the marks and call themselves Certified Financial Planners®.”

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Sandy Adams attends Sudden Money Workshop

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Each Center client is unique, but some face similar life transitions. Dealing with the loss of a spouse, major health challenges, job changes, wealth transfers or sudden money windfalls … all can put you in the position of making important decisions about your financial plan. To help our clients through these transitions, some of our team members are going through a special training course called Sudden Money(R).

Center partner Sandy Adams, CFP(R) recently made a whirlwind trip to Miami to attend the Sudden Money(R) Institute's mid-year coaching workshop. She joined more than a dozen financial planners and founder Susan Bradley, CFP(R). "I have worked with several clients that have experienced unexpected transitions in their lives -- like the death of a spouse or a major illness.  This training is invaluable in assisting clients during these times of transition because it is providing me with tools and strategies to help them navigate the obstacles they face."

The workshop was a first step in the two-year quest to become a Certified Financial Transitionist(TM).  Sandy joins Center partner Melissa Joy in pursuit of this designation. Continuous education and personal growth are core Center values and these educational opportunities not only help us deepen our skills, but further assist our clients.

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What should I do with bonds if interest rates go up?

 Lately the bond markets have been making headlines.  It’s no secret that we, as a country, are in a historically low interest rate environment and, as a result, a lot of so-called “experts” are talking about rising interest rates in the near future.  These experts usually go on to state that if interest rates begin to rise and you have bonds you could face substantial losses.  Unfortunately, like many things in finance, this type of blanket statement is misleading because not all bonds are created equal! 

Traditional Bonds

First, let’s dissect their argument to understand why an investor might lose money in a rising interest rate environment. Bonds are typically issued by a government, a municipality, or a corporation.  These entities need money for a variety of purposes and one way they can get that money is by taking a loan from investors.   In exchange for an investor loaning that money to these entities, there is a promise to pay back the original loan amount (principal) as well as an interest rate paid on that principal over the life of the loan.  The challenge and the risk to current bond investors is that if interest rates begin to rise, the traditional bonds they hold might not look as attractive to new potential investors.  If you think about it, why would I, as a new potential investor, want your bond paying an interest rate of 3.5% when I can buy a new bond from the same company (or government/municipality) paying 4.5% today?  Assuming all else is equal except the rate of interest, then I think the answer is pretty clear. It would be silly for me to purchase a bond paying 1% less. 

So how does the bond holder with the unwanted 3.5% bond get rid of it?  The answer is he has to sell it at a reduced price.  This reduction in price is the big risk that experts keep referring to.  It’s important for investors to remember that if you hold individual bonds you will get your principal back at maturity as long as the company stays in business and doesn’t default.  Regardless of what your statement says the bond is worth at any given time, that value or number only applies if you choose to liquidate the bond at that exact point in time.  

Hopefully, this very simplistic example helps you understand the inherent risks involved with more “traditional” bonds and a rising interest rate environment.  As I said, not all bonds are created equal, and some types will probably benefit from a rising interest rate environment. 

Floating Rate Bonds

It’s probably clear by now that the biggest issue, in a rising interest rate environment, is the fixed rate of interest that “traditional” bonds pay.  If rates started to rise, and the interest rate on your bond rose along with it, then you probably wouldn’t have to discount your bond much, if at all. 

So are there bonds out there that can rise as overall market rates rise?  Yes! They are called floating rate bonds.  A floating rate bond typically “resets” its interest rate annually, although some will reset more frequently.   Because of this “reset” floating rate bonds can be a very attractive investment option when overall interest rates are projected to rise in the near term.  Please keep in mind that floating rate bonds aren’t without risk of loss…the point is just that they typically maintain their secondary market value even when interest rates rise.

Now that you have read this, the next time you see the headlines that claim bonds are bad and to avoid them like the plague, you should have a good sense of what type of bonds they are referring to.  Also, know that it is still possible to make money in bonds in a rising interest rate environment!  Floating rate bonds may or may not be suitable for your portfolio.  In order to make that determination you would need to perform a total portfolio analysis in coordination with your financial professional.

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

As with any fixed income investment, there is a risk that the issuer of a floating rate investment will be unable to meet its payment obligations. In addition to the risk, floating rate bonds also face the following risks:

Reference rate risk: While the market value of a floating rate bond under normal circumstances is relatively insensitive to changes in interest rates, the income received is, of course, highly dependent upon the level of the reference rate over the life of the investment. Total return may be less than anticipated if future interest rate or reference rate expectations are not met. It is also important to note that since short-term rates are usually lower than long-term rates, the initial coupon of a floating rate bond is typically lower than that of a fixed-rate bond of the same maturity.

Call risk: A floating rate bond may be issued as either non-callable or callable. If a callable floating rate bond is called by the issuer prior to maturity, the investor may be unable to reinvest funds in another floating rate bond with comparable terms. If the floating rate bond is not called, the investor should be prepared to hold it until maturity.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. 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. C14-013999

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A Timely Reminder About 529 College Savings Plans

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With school now out for most universities, who would want to talk about college planning?  But I couldn’t pass up 5/29 without discussing 529 plans!  All corny jokes aside, a 529 college savings plan is a fantastic vehicle to utilize for higher educational costs and something that all parents that plan on sending kids to school should at least consider.   

A 529 is a state sponsored educational savings account where the money in the account grows tax-deferred.  One of the major benefits of the account is that the funds are not taxed upon withdrawal (even growth), as long as they are used for qualified educational expenses (tuition, room & board, books, etc.)  A 10% penalty and ordinary income taxes would apply to any earnings portion of non-qualified distributions.  Many states (including Michigan) also offer a state tax deduction on contributions, up to a certain limit, which is an added bonus for the owner of the account.    

To maximize the benefits of a 529 plan, young parents can establish the account early for their children to allow for many years of potential growth. Typically, as the child approaches the first year of college, the plan becomes more conservative.  If other family members would like to assist with college expenses, they too can open an account for the child.  The child is the beneficiary of the account and the account owner or “custodian” is the person in charge of the account.  Unlike an UGMA or UTMA (which used to be a very popular savings account for school), the child does not automatically have access to the account at age 18 or 21. The custodian has complete control.  The beneficiary can also be changed on the account at any time, but typically this occurs if the child gets a scholarship or decides to not attend college.  This provides flexibility so the money can still be utilized for educational expenses for another child or family member.

As with any financial planning decision, a 529 may or may not make sense for your personal situation.  However, it is a great tool and resource to consider when taking on the challenge of saving for college.  If you ever have any questions about college planning or would like to dig a little deeper, don’t hesitate to contact us. That’s why we’re here!

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement. The official statement is available through your financial advisor, and should be ready carefully before investing. Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Investors should consult a tax advisor about any state tax considerations of any investment in a 529 plan before investing. C14-015839

Should anyone under 40 be counting on Social Security?

 Younger professionals often ask, “Should I even bother including social security benefits in my retirement plan projections?”  Unfortunately, it’s hard to give a direct answer.  There is certainly a valid reason for concern and a strong argument to be made for not including social security retirement income in your overall plan if you are under the age of 40.  Let’s dig deeper into social security to look for some possibilities about the future of the program itself.

According to the Simpson Bowles bi-partisan report of 2010, when social security was first enacted back in 1935, the average life expectancy was 64 and the earliest you could collect benefits was 65.  If most people die before they are eligible to collect benefits, then the program is fairly easy to maintain. In today’s America, people are living longer (average life expectancy of 78) and they are eligible to collect benefits at 62 (three years earlier).   Not to mention that in 1950 there were 16 people working for every 1 person collecting whereas today the ratio is 3 people working for every 1 person collecting benefits.  Is it any wonder the social security trust fund is projected to be fully depleted by 2037? 

The Simpson-Bowles report further goes on to explain that unless changes are made soon, by the year 2037 there will only be enough revenue coming in to pay approximately 75% of the benefits owed.  That could mean either everyone gets their benefits reduced or some people don’t get any benefits at all. 

The Simpson-Bowles Report offered solutions that could impact the sustainability of the program:

  1. Increase the Full Retirement Age from 67 to 68 for those born after 1970, age 69 for those born after 1980, and age 70 for those born after 1990.  Also, increase the early eligibility age along with the full retirement age so that those born after 1970 would have a full retirement age of 69 and the earliest they could collect benefits would be 63.  This approach seems like a very reasonable way to address the increasing life expectancy of Americans. As a young professional I’m certainly not thrilled about the idea of having to wait longer to collect benefits, but I would much rather have to wait than to receive no benefits at all.
  2. Get rid of the wage cap on the social security payroll tax. Currently the social security wage tax is 6.2% on earnings up to $117,000.  Lowering the payroll tax to 4% and lifting the cap would theoretically bring in more revenue because you are taxing a lot more dollars at a lower rate.  This approach may be more politically palatable than just simply lifting the cap and keeping the tax rate the same.

  3. Use the chained CPI approach for cost of living adjustments rather than the standard CPI approach that is now in use. For further discussion on this subject please see the following link:  http://www.advisorperspectives.com/dshort/commentaries/Chained-CPI-Overview.php

Certainly there are other ways to fix the system, and hopefully lawmakers can all agree that it’s a useful program and it is worth fixing. So what’s my answer when a young professional comes to me and says, “Matt, should I or should I not include social security retirement benefits in my retirement projections?” I say that there seem to be strong indications that the program will probably be there in some fashion. It’s unlikely that you will be able to collect a full retirement benefit at age 67, and it’s also unlikely that you will be able to collect at age 62.  To be cautious, it may make sense to plan on collecting a reduced benefit at age 70.  If the program is healthy and you are able to collect sooner, then your plan will work out even better.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C14-010819

Do You Need to Update Your Estate Planning Documents?

 The question should be WHEN do you need to update your estate planning documents, not IF. If you don't have estate planning documents in place yet, and you are over the age of 18, now is the time to get at least Durable Power of Attorney documents for both health care and financial decisions in place. These Durable Power of Attorney documents give someone else the ability to make decisions and take actions on your behalf during your lifetime if you are unable to do so for yourself. A simple Will is also appropriate for most individuals, even if you don't have significant assets or property.

When to Review Documents

If you already have documents in place, the common rule of thumb is to review your documents at least every 5 years. Changes in estate law or significant life changes may warrant a change in the meantime. Examples of these life changes are:

  • Birth of your first child (update will to name guardian(s) in the event that both parents pass away before the child is an adult).
  • Divorce
  • Death of a spouse
  • Second marriage
  • Inability of one or both of your Durable Powers of Attorney, named executor, or Successor Trustee become unable to serve
  • You desire changes to your plan (how you want assets distributed, to whom, by whom)
  • You have a significant health change

It is important to note that if changes to your estate documents are made, there are steps you need to take to ensure that they can be followed at a later date, when/if needed:

  • If you have a trust, make sure that appropriate assets are titled to the trust and that beneficiaries are updated on retirement accounts, life insurances, etc.
  • Make sure that your financial advisor has updated copies of all documents.
  • Most importantly, make sure that key family members/friends know that the documents exist and know where they are kept.

Keeping your legal affairs up-to-date, and making sure that your legal and financial plans are working in tandem, are vital to ensuring that your future desires are met. Work with your financial planner to discuss what documents and changes might be appropriate for you.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012-2014 Sandy has been named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

You should discuss any legal matters with the appropriate professional. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-013670

Catching up with Center co-founder Estelle Wade

 Estelle Wade is an important part of our family here at The Center. She co-founded our firm along with Dan Boyce and Marilyn Gunther in 1985. While she retired from The Center and her financial planning career in 2002, Estelle has continued to be an important presence in our lives.

This month, Estelle returned to Michigan for a visit. She and her husband, Gene, moved to Scottsdale, Arizona shortly after retiring and have been on the go ever since. It’s hard to keep track of all the wonderful places they’ve visited over the last decade. They’ve also spent time watching their five grandsons grow.

Over the years, we’ve often referred to Estelle’s wisdom, particularly in our weekly Monday planning meeting. She coined the phrase “go-go, slow-go, and no-go” in retirement and was using it 15 or 20 years ago – well before it became a catch-phrase concept for financial media like it is today. Estelle and Gene tell us that her “go-go” retirement years have been terrific.

Estelle continues to be a shining example of the power of compassion and caring when it comes to financial planning. Her wisdom has always been matched by her warm personal connections and that is no different today. For any of you who worked with her over the years, Estelle is still asking about how you’re doing and what you’re up to. This is less about the dollars and cents and more about the issues that you’ve faced over the years. It’s so great to catch up with Estelle to be reminded of the critical importance that relationships have to the overall financial planning process.

To mark Estelle’s special visit, we hosted an evening at the Detroit Symphony Orchestra. This was especially appropriate since Gene Wade was principal French horn with the DSO for many years. More than 100 clients and friends of The Center joined us in honoring Estelle. And wouldn’t you know it? Although Estelle had been away from Michigan for twelve years, she knew more people in the room than anyone.

While the faces around here change from time to time, the culture and values cultivated by Estelle and our team partners many years ago continue to prevail. Across the miles we keep in touch with Estelle and Gene, but that can’t replace good old-fashioned hugs that they distributed liberally during their time here.

Estelle Wade is no longer affiliated with Raymond James. C14-01346

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New Rule for IRA Rollovers

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 At some point in your life, you’ll most likely have to complete what’s known as an “IRA rollover”.  It’s a pretty straightforward concept.  If you have a 401k with an old employer or an IRA with a firm and you want to move what you saved to different management, you complete a rollover.  Paperwork is completed and funds are moved over to the new IRA.  Simple enough, right?  Usually.  Rollovers are usually simple to complete, but if the ball is dropped, it can result in substantial taxes and penalties that can lead to a less-than-pleasant situation. Recently, the plot has thickened due to an IRS ruling now limiting the frequency of IRA rollovers.

Trustee-to-Trustee Transfer 

To keep things simple, most rollovers are completed by way of “trustee-to-trustee” transfers.  Meaning funds are sent from one institution to another, without the investor ever “touching” the money.  This may happen electronically or a check might be issued to the investor, made payable to the new financial institution, not the individual.  You are able to complete an unlimited amount of these types of transfers during the year. 

60-Day Redeposit

The other type of rollover allows funds to be sent directly to you in your own name or electronically to a checking or savings account, but you must deposit the money into an IRA or eligible 401(k) within 60 days.  If the funds are not deposited within the 60-day window, the distribution will be deemed as a taxable event, which could cost investors a significant amount in taxes and penalties.  This type of rollover is only permitted once a year. 

Rollover Short-term Loan

As my colleague, Tim Wyman, explained in a recent blog, this 60-day rollover rule could also be used for a short-term loan.  So, if you were closing on a new home and needed some cash because your current home wasn’t sold yet, you could take a distribution from your IRA and, as long as you put the money back into the IRA within 60 days, there would be no tax consequences – essentially, a short-term bridge loan.  Previously, the 60-day rollover was permitted once every 365 days for each IRA you own. 

Stopping the Rollover Merry-Go-Round

Think about this:  If you had multiple IRAs, you could feasibly take a distribution from IRA #1 and use funds from IRA #2 to pay back the first distribution within 60 days.  The 60-day clock would then start over with IRA #2.  If you did this every sixty days, you would only need six different IRA accounts to do the 60-day rollover “merry-go-round” and give yourself an ongoing tax-free loan from your IRA.  However, the US Tax Court recently ruled that you are now only allowed one 60-day rollover every 365 days as an aggregate for ALL of your IRAs.  Meaning no matter how many IRAs you have, only ONE 60 day rollover is permitted in a 365 day time period. 

It seems as if our tax laws change faster than Michigan weather.  There is always something new and it’s important to work with an advisor who is up to speed on the ever changing landscape in financial planning.  If you ever have questions about your personal situation, don’t hesitate to contact us. We are here to help!

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. 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. You should discuss any tax or legal matters with the appropriate professional. C14-013208

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