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By Frederick “Rick” A. Fisher, MS, CFP®
As the holiday season approaches, many of us are planning for all the events that the season brings. This is always a very busy for all of us. In the midst of it all we often do not set aside time for one of the most important tasks of the year. One that if we made a higher priority, could potentially save us hundreds if not thousands of dollars each and every year. What I am referring to is year end tax and investment planning! Now is the time we should be taking a look at where we are year to date in our investment and tax goals.
The items we need to check on are many, but I will focus on three: Retirement Plan Contributions, Charitable Deductions and Payroll Withholding Options.
To illustrate, we will take the hypothetical case of the Smiths. Greg is a self-employed consultant, and his wife Jan is a nurse at the local hospital. Greg and Jan each make around $80k per year. They are both 52 years old, want to minimize their tax liability and maximize their retirement funding.
Greg currently has as SEP IRA that he has funded for many years. However, some years he has not had the cash necessary to fully fund his SEP. Since the limits to fund the SEP are based on his self-employed income, which fluctuates year to year, the amount changes year to year. This year, he decided to track his income each month and then save 20% of that number, put it in savings so he would have enough to fully fund this year and subsequent years till retirement.
In order to prepare for their year-end tax planning meeting with their CPA, they gathered information on year to date retirement plan funding and reviewed what they had given so far to charity. Greg had invested $15k in his SEP so far, and has another $5k in savings that is earmarked for additional investment if possible. Jan has been deferring 5% of her income into the hospital’s 401k in order to receive the full match of 5%. They have a goal of contributing 5-10% of their take home to a list of local charities. Upon review, they had to date donated $3k in cash and approximately $1k in furniture, clothing and books to a local Thrift Store. That calculates to 4%, so they made a list of donations they planned to make before the year end. Finally, Jan reviewed her latest pay stub, to see if her YTD withholding was just right per income projection. Their goal was to have the withholding cover her income, and to avoid having the government holding her money for the year. They reviewed these items with their tax professional and left the meeting confident that they were on track for the year and that they would not have any tax surprises come April. If you are not certain of where you stand regarding your financial and tax goals, contact your financial professionals for a year end planning review.
Frederick Fisher is a Certified Financial Planning Practitioner, and Insurance Agent with Ostrofe Financial Consultants, Inc. managing over $208 million in assets, with clients in 29 states. Advisory services provided by Ostrofe Financial Consultants, Inc., a registered investment advisor. Separate advisory and securities services may be provided by National Planning Corporation (NPC), Member FINRA/SIPC, and a S.E.C registered investment advisor. Ostrofe Financial Consultants, Inc. and NPC are independent and unrelated companies. Please consult with your representative to confirm on which company’s behalf services are being provided. For questions or suggestions, contact Rick Fisher at (530) 273-4425, or firstname.lastname@example.org, or visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.
This item is historical and based on information that was current at the time of initial print. It contains information that has changed. Staff and business names may have changed.
In this episode of Beyond Investments, Seth Leishman talked with Nathan Leishman about his experiences with international investing.
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Bill & Rose recently moved to Nevada County from the Bay Area. They had experienced their share of earthquakes there, and knew they could, someday, be facing a new danger… fire. They had always been “physically” prepared with “go-bags”, home protection techniques, evacuation plans, etc. Should that day come. They asked us what might be the most important steps to take, to be best “financially” prepared. They did not want to be dependent upon the government for their financial security. Our suggestions follow:
Have an emergency fund.
Have, or establish, a 3-6 month “emergency fund”, in liquid (not necessarily cash) investments (have access to by phone, check, or electronic transfer). If you have a significant other, title the accounts so that either of you has access at any time.
Create and maintain a “spending plan” (aka “budget”).
Understand what expenses could be cut in the case of a job loss, or any financial catastrophe. Fully understand the details of your fixed/variable/discretionary/nondiscretionary expenses, and have a plan in place to account for lost wages or unexpected increases in expenditures. Contact a “certified financial planner” (cfp®) to provide you with a personalized “cash flow analysis” to meet specific emergency goals.
“Manage” your insurance protection.
Life/homeowner/long-term care/personal liability/umbrella insurances can be daunting. Ask your insurance agent to provide you an “annual written summary” of your coverages/account numbers/how your premiums are paid. Check whether it may be prudent to add a “building code upgrade rider” to your property insurance. Your home may have been properly insured for the way it was originally built, but not would it have to be re-built with today’s updated building codes. Ask your “certified financial planner” to confirm whether your insurances/coverages are consistent with your overall financial plan.
Review documents regularly.
Have your financial, investment, insurance, and medical history documents reviewed at least annually. Have your estate planning documents reviewed at least every 5 years by an estate planning attorney. Examples of important estate planning documents would be your “durable powers of attorneys for healthcare/directive to physicians”, “financial durable powers of attorneys”, wills (including guardianships for children), trust, etc. Have your “certified financial planner” check that the titling of all of your assets are consistent with your documents. We have seen more money lost to poor estate planning, than any markets’ movements. Make certain that your “cfp®” is teamed with your estate planning attorney and tax preparer and together they have worked to avoid any unnecessary cost or time burden of probate in the case of an unexpected death. Carefully review with your “cfp®” the beneficiaries and contingent beneficiaries on all retirement plans and insurance policies. Set up pod “payable upon death”, or to “transfer upon death” accounts, or “joint tenancy with rights of survivorship” accounts for all others.
Store important documents wisely.
Store all important documents offsite, safety deposit box, or in the “cloud”, not in a fireproof box buried under your home. We had an experience in the Oakland Hills fire, where everything buried under the home in a fireproof box that was either melted or turned to ashes. Start with a video inventory of your home, garage, tools, collectibles, firearms, jewelry, gold/silver, etc. Videotape or photograph all important documents, such as insurance policies/broker name & number, investment/bank statements/broker name & number, credit card account numbers/contact #800 numbers, medical history/medical prescriptions, passports, title to property, driver’s license, most recent income taxes, birth certificate, etc. Place these documents on a flash drive. Place the flash drive in a safety deposit box (maybe itemizable on your tax return). Most important of all is communication. Share this with your spouse, family or significant friend/neighbor and “cfp®” where this information may be found. Discuss a hypothetical catastrophe with them at least once a year, pray it never happens, and thank your fire/law “first responders” every chance you get!
Allen Ostrofe, MBA, CFP®, Accredited Investment Fiduciary® is President of Ostrofe Financial Consultants, Inc., an S.E.C. Fee-Based Registered Investment Advisor, managing over $208 million in assets, with clients in 31 states. Advisory services provided by Ostrofe Financial Consultants, Inc., a Registered Investment Advisor. Separate advisory and securities services may be provided by National Planning Corporation (NPC), member FINRA/SIPC, and an S.E.C. Registered Investment Advisor. Ostrofe Financial Consultants, Inc. and NPC are independent and unrelated companies. Please consult with your representative to confirm on which company’s behalf services are being provided. For questions or suggestions, visit ostrofefinancial.com. Branch Address: 565 Brunswick Road, Ste. 15, Grass Valley. The opinions voiced 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.
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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:
- 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.
- 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.
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.email@example.com, or visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley
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.
“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 firstname.lastname@example.org; branch address: 565 Brunswick Road, Ste. 15, Grass Valley, CA 95945.