If It Ain't Broke - Don't 'BREXIT'!

By Allen Ostrofe
This article first appeared in The Union on July 26, 2016. Click to view PDF

Rob and Lynn, from Palos Verdes, California, contacted a financial advisor, expressing nervousness about their current investment allocation, particularly as they near retirement. Their current portfolio is approximately 60 percent in bonds and 40 percent in a low-cost mutual fund replicating the performance of the Standard & Poor’s 500 Index.

After experiencing significant volatility in August/September (2015) and again only three months later, a similar reaction in January/February (2016) was cause for concern for Rob and Lynn.

Most recently, in June, we had the British European Union Exit (BREXIT) vote that pushed their concerns over the edge and decided it was time to take action. Their objective?

They wish to have less volatility going into retirement and are considering two scenarios:

  1. Make a drastic strategic change. Sell all of their stocks and bonds. In this case, pay the potential taxes, and invest where they have little to no markets’ exposure.
  2. Make a minor tactical change. Sell only 10>20% of their stocks and bonds, and invest in ETFs and other alternative asset classes. Doing so may provide broader diversification and potentially help reduce their volatility.

Some short definitions of the asset classes we are describing above:

  • Certificates of Deposit. CDs are FDIC insured and offer a fixed rate of return, whereas both principal and yield of investment securities do have risk and may fluctuate with changes in market conditions.
  • Treasury Bonds. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer‐ term securities). Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
  • Fixed Annuities. Annuity guarantees are based on the claims-paying ability of the issuer.
  • Exchange Traded Funds. ”ETFs” are readily marketable securities. There is no time commitment, and they can reflect different specific market sectors. “ETFs” are not suitable for all investors and they will fluctuate with changes in market condition.

Rob and Lynn summarized what they understood to be the differences:

  • SELL ALL (strategic change) — and place all assets into CD’s, Treasuries or Fixed Annuities. Some analysts might argue that this could potentially reduce volatility. Although in today’s interest rate environment this strategy carries the risk that it could leave Rob & Lynn with an ongoing return less than inflation, resulting in a reduction in purchasing power (lower risk portfolio).
  • SELL 10>20 percent (tactical change) — ”weed out” some of the lackluster stock and bond performers, and purchase “alternatives.” This diversification can help them spread risk throughout their portfolio, so that investments that do poorly may be balanced by others that do relatively better. While this may provide an opportunity for growth, diversification cannot ensure a profit or prevention of loss in times of declining values (higher risk portfolio).

Rob and Lynn made their decision, and now feel their investments better reflect their risk/emotional tolerance to current and future markets’ climate. Clients should not be “boxed” into investment strategies where one size fits all. Sometimes small periodic changes are better than big emotional ones. Why not check your portfolio with a Certified Financial Planner® TODAY?

Rob and Lynn are a fictitious couple. Example used as a hypothetical illustration only, not indicative of any particular investment experience and may not be representative of the experience of clients. Actual results will vary. NPC does not render tax advice.

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Allen Ostrofe, MBA, CFP®, Accredited Investment Fiduciary® is President of Ostrofe Financial Consultants, Inc., a S.E.C. Fee-based Registered Investment Advisor. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, visit ostrofefinancial.com. Bra nch address: 565 Brunswick Road, Ste. 15, Grass Valley.

Five Key Decisions When Putting Together Your Estate Plan

By Frederick "Rick" Fisher
Originally published in The Union on April 24, 2016. Download the PDF.

Over the last 26 years, I have settled three estates — and in my 18 years of financial planning, I have seen the effects of good planning and of poor planning. 

Having an effective estate plan is crucial, however having a poorly thought out plan can be as harmful as having no plan at all. 

Our firm routinely advises our clients who have yet to address their estate planning to do so. We provide referrals to competent estate planning attorneys. However, having a good estate planning attorney who will guide you through the process and prepare the appropriate documents, is not necessarily going to give you a proper estate plan. A crucial ingredient to the process has little to do with the attorney or the documents. It has to do with the choices the trustors make regarding who will administer the estate upon the death of the trustors, and how the estate will be distributed. 

To illustrate we will take the case of the fictitious couple Richard and Monica Jones. 

Richard and Monica are in their early 40s with three children under 18, with the youngest being 8. Richard is a banker and Monica is a part-time teacher. 

A few years ago, Richard’s parents asked him if he would be the successor trustee for their trust. They chose him because he was a banker and understood financial concepts. They also felt that he had the proper temperament to take on this huge responsibility. Richard could separate the financial aspect of an estate from the personal considerations of an estate. Richard had seen firsthand in his role as banker, how having a person who struggles with the emotional part of administering an estate can create problems. 

He remembered how a successor trustee refused to sell assets in order to pay estate bills and taxes, because they could not detach the deceased from the business part of estate administration. This led to fines, additional costs and fire sales that ultimately led to angry beneficiaries and lawsuits. Having successor trustees that can handle the job, from a business and emotional standpoint is crucial. Having accepted the role as successor trustee, I reminded Richard that he and Monica, had yet to complete their financial plan. 

They had started, but got stuck on who would be the custodian for their three children; a key decision when creating an estate plan. Another concern for the Jones’ was how to fairly divide their property to their kids. Deciding to split the financial assets three ways was the easy part. The hard part was how to divide the personal items, the artwork, the collectibles, and the family photos. 

This was going to take time and more discussion. To complicate matters, the Jones are wealthy and they want to make sure that their children don’t receive a financial windfall till they are ready. So, the decision is who will monitor the investments, and when should the children have access to the money. Fortunately, once the decisions are made, they are not set in stone. Estate plans can be amended as needed. Once the kids are grown, there is no need for guardians. In addition, they may be able to help trustors fairly divide up those personal items that are hard to assign. 

In the end, Richard and Monica sat down and made the decisions necessary to get the plan in place, and took our advice to review every five years and make changes as needed. 

If you have been putting off estate planning due to these issues, now is the time to set up a partnership with an Estate Planning Attorney and a Certified Financial Planner. 

Frederick Fisher is a Certified Financial Planning Practitioner, and Insurance Agent. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, contact Rick Fisher at (530) 273- 4425, or Frederick.fisher@natplan.com, or visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley

Contribute to a Retirement Plan After Age 70-1/2?

By Allen Ostrofe
Originally published in The Union on March 20, 2016. Download the PDF.

Burt and Alice consider themselves “New Age” business people. 

They were an American success story, having started a business in their garage over 40 years ago. Their now technologically-advanced retail/wholesale firm, dealing with healthcare products, is generating gross revenues well in excess of $1 million a year. 

They have enjoyed stable growth, a stable staff, and have been systematically saving through their 401(k)s and IRAs each year. They saved, believing that our Social Security program might run out sometime during their lifetimes. 

Both turn 70-1/2 this year. They knew they NOW had to start drawing from their 401(k)s and IRAs through something called a “Required Mandatory Distribution.” 

That worried them. 

Would they now lose their best means to save and contribute on a tax-deferred basis, just because they are turning 70-1/2? They thought, we still feel “young” and still enjoy working. That’s not fair! 

Burt and Alice called from Santa Rosa, California, looking for a solution to this dilemma. Their case is not unusual at all. For many, age 70-1/2 is the NEW age 65. Many live longer, healthier lives, and are still interested (and able) to work in a sector where they can share great wisdom. 

Should you find yourself working past age 70-1/2, you are probably either trying to seal a crack in your nest egg, or you are one of those people who will only be ready to retire when they wheel you out in a redwood box. 

In the year you turn 70-1/2, the tax system seals the lid on traditional IRA contributions and opens the spigot on your retirement accounts, in the form of required minimum distributions (RMDs). 

When you continue to earn wages, but pull out RMDs, the tax consequences can result in higher tax rates and an increased percentage of your Social Security benefits being subjected to taxes. Should you stop working? Not necessarily. 

As long as you are still working past the age of 70-1/2, and have enough taxable compensation (e.g., self-employment wages, salaries, fees, tips, bonuses, commissions, taxable alimony) to cover your retirement contributions, you may still contribute to a Roth IRA (not a traditional IRA). 

Note, for married couple filing jointly, you start to lose your ability to contribute to a ROTH when you reach a “modified adjusted gross income” (MAGI) of $184k, and you may no longer contribute to a ROTH when your MAGI exceeds $194k. 

You may also still contribute to a 401(k) plan. And, as long as you own less than 5 percent of the business you are working for, you are not even required to take RMDs (n.b. ownership above 5 percent requires taking the RMDs, but the tax-deferred contributions still make good sense since they will not be taxed until a later date). 

Burt and Alice could each lower their taxable income by contributing $24,000 to their 401(k)s, and get further taxfree growth by each contributing $6,500 to a ROTH: a double tax benefit they never expected! 

Now that we were able to resolve the after 70-1/2 contribution’s issue, we moved on to the next important issue for Burt and Alice. 

They’d spent years in building a successful business, but hadn’t taken the time to design a succession plan to ensure the continuity of that business. Should any of these subjects touch your circumstances, see your Certified Financial Planner® immediately.

The information provided is general in nature and should not be construed as comprehensive financial advice. As with any financial matter, please consult with your qualified financial professional before taking any action. Allen Ostrofe, MBA, CFP®, Accredited Investment Fiduciary® is President of Ostrofe Financial Consultants, Inc., a S.E.C. Fee-based Registered Investment Advisor. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.

Long-Term Care Insurance: Don't Grow Old Without It

By Frederick "Rick" A. Fisher
This article first appeared in The Union on Feb 21, 2016. Click to view as PDF.

“Medicare And You 2015” reported that 70 percent of Americans 65 or older will need long-term care in their lifetime. With the average cost of a private room at a nursing home at $240 per day, and the average stay for non-Alzheimer’s patients at just over two years, many of us will have to come up with over $200K for care. For patients with Alzheimer’s, that cost could easily double.

Unlike auto and home insurance which are pretty much mandatory, LTCi is still optional. However, if you look at it from a risk-reward standpoint, it should be the most desired insurance for Americans 50 to 70 years old.

In the 20-plus years that we have been offering LTCi, the biggest hurdle to purchasing this valuable insurance is the cost. Fortunately, in the last few years, the numbers of options to purchasing long-term care has increased. There are now products to fit almost any budget — to at least cover part of the risk.

Let’s consider the situation for two fictional couples.

The Thomases and Smiths are both in their mid-50s and in good health. The Thomases have a substantial net worth and a large number of liquid investments. Their parents both lived long, healthy lives without needing any long-term care. Their biggest concern is to pass on assets to their heirs.

A universal life insurance policy with a long-term care rider provided the Thomases with protection against an early death and a long-term care financial burden. By using a portion of their liquid investments, the Thomases converted $100,000 into $250,000 of death benefit and $400,000 of long-term care benefit.

The Smiths’ perspective regarding long-term care is different than the Thomases. Mrs. Smith’s father needed skilled nursing care in a long-term facility. With no insurance in place, the financial burden became overwhelming.

The Smiths could not plan to rely on their savings to cover any potential long-term care costs, so we focused on finding the right insurance product to fit their budget — and reduce their risk as much as possible.

By utilizing a traditional term LTCi policy with a reasonable annual premium, the Smiths successfully protected nearly all of the $240 average daily cost.

The moral of the story — get current information on the pros and cons of Long Term Care insurance relative to your specific circumstances. Research all the new options available. Long-Term Care insurance might be expensive. Being without long-term care can be devastating.

Call us for a consultation and let’s check your needs before it is too late!

Frederick Fisher is a Certified Financial Planning Practitioner and Insurance Agent. Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered through Ostrofe Financial Consultants, a Registered Investment Adviser. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, contact Rick Fisher at (530) 273-4425, or rick.fisher@natplan.com; branch address: 565 Brunswick Road, Ste. 15, Grass Valley, CA 95945.