Retirement Surprises

Costly retirement surprises are neither expected nor pleasant.  It is best to be forewarned so that you can take action when you are faced with them.

1. Taxes...  Up to 85% of social security benefits can be taxed, depending on your annual income.  And all money withdrawn from retirement accounts (exception are Roth IRAs) is taxable.  Even if you do not need the money, Uncle Sam makes you start taking distributions at age 70 and a half.  You can take some steps to lower the tax bill by converting some or all of your retirement accounts to Roth IRAs.  You can also consider taking distributions from IRAs before you need to if you are in a low tax bracket and can get the money out by only paying 15%.  Investing in tax exempt bonds in your taxable accounts will also lower your tax bill.
2. Cost of Living...While some expenses decline in retirement, some increase.  Retirement is usually in phases...the go/go phase for the first 10 years, depending on your health, of course.  The slow/go phase from early 70's to early 80's.  The no/go phase for the rest of your life.  While this is a general assumption, it holds up pretty well.  Naturally, you will spend more in the first half of your retirement as you will be more active. 
3. Medical Costs....check to see if your employer extends health care benefits in retirement.  Stay active and try to maintain a healthy lifestyle.  Shop carefully for a medicare supplemental plan. Make sure some of your portfolio is invested in growth to keep up with ever increasing medical costs.
4. Market shocks...Planning for market volatility is a key to a successful and stress free retirement.  Having a well diversified portfolio comprised of cash, bonds and stocks will help you weather the most severest of storms. 

Don't let these stealth expenses catch you off guard.  Plan now!  And have a worry free rest of your life. 

Falling Off the Fiscal Cliff

On January 1, 2013 the US will experience the biggest tax increase in its history.  Coupled with significant spending cuts, it can easily pull the US back into a recession.  Why do we have this situation?  Because our elected officials cannot get along and have kicked the proverbial can down the road yet another time. 

If you recall, Congress extended the 2001 and 2003 tax cuts in late 2010, a few days before they were due to expire.  This gave us a 2 year reprieve.  And in the summer of 2011, Congress could not agree on a deficit reduction plan that resulted in the US credit rating being downgraded and also set in motion significant spending cuts to take place in early 2013. 

The expiring tax cuts and the spending cuts are now referred to as "Taxmageddon."

Here are the major tax changes that may affect you:

1)  Tax Brackets.   The 10% bracket disappears.  The lowest rate will not be 15%.  The remaining tax brackets (25%, 28%, 33% and 35%) will go back to the rates in effect in 2000 (28%, 31%, 36% and 39.6%). 

2)  Child tax credit is reduced to $500 from current amount of $1000.

3)  Reduced tax benefits for education.

4)  Phaseout of itemized deductions.  Taxpayers with adjusted gross incomes (AGI) over $175,000 will not be able to fully deduct all their itemized deductions on Schedule A. 

5)  Personal Exemption Phaseout.  High income folks will not be able to fully claim the personal exemption for either themselves or their spouse. 

6)  Alternative Minimum Tax.  The increased exemption amount for AMT (called the AMT patch) has already expired.  If Congress does nothing, millions of folks will be subject to AMT in 2012. 

7)  Estate Tax.  The exemption amount ( the amount of money that a person can own when he/she dies and not pay any tax on it) will revert back to $1 million from the present level of $5.12 million.  While a million may sound like a lot of money, when you add up all the assets of a deceased person such as the fair market value of a home, 401ks, life insurance etc... it is very easy to be well over $1 million.

8) Capital gains and dividends.  These take a double hit.  The rate on capital gains will increase to 20%, from current rate of 15%.  Dividends will be taxed at a person's current tax bracket versus the current 15%.

9)  Adoption Credits.  New credit will be $6000 and only for special needs children. 

10)  Lots of other misc tax credits to be eliminated. 

OK, folks, these are the tax changes that will happen unless Congress acts.   The 64 million dollar question is "Will Congress Act?"  The consensus is that nothing will happen before the election.  And after the election there is sure to be an embattled Congress, regardless of who is President. 

This makes it tough to plan ahead.  My advice is to plan for the worst and then be pleasantly surprised if it is not as bad as you planned for! 

Expiring Tax Break on Short Sales

In 2007, Congress did a wonderful thing for folks who were forced to do a short sale (selling the home for less than the mortgage balance, with the lender agreeing to take the loss) or a loan modification.  Congress allowed these borrowers to exclude from taxable income any mortgage debt written off or "forgiven" by the lender.   And many folks have taken advantage of this for the past 5 years. Consider the example of a couple who does a short sale and the bank agrees to an exclusion of $100,000 on the sale of the home.  That translates to approximately $30,000 of forgiven taxes. 

However, this exclusion expires on 12/31/12 unless Congress extends it.  So, if you are thinking about a short sale and don't want to miss out on this most generous exclusion, you better act FAST.

Short sales take time....lots of time.  An average of 3 or 4 months.  Start NOW. 

Land Mines Ahead for Retirees

Retirement is a wonderful time of life.  You get to do the stuff you want to do...live the life you want to live...stay as busy or as idle as you want to be.  Just be forewarned that there are some hidden financial traps that can sabotage the idealized retirement.  Here are 5 retirement traps to navigate:

1)  Health care Costs--most folks totally underestimate this large expense item.  According to Fidelity investments, the average 65 year old couple will spend about $400,000 out of pocket through retirement until age 92.  Medicare can be expensive.  While Part A is free, you will pay a premium for Part Band a premium for Part D.  You will also need a medigap policy to pay for the costs that Medicare doesn't cover.  If your income is high in retirement, you will pay a surcharge on your annual medicare premiums.  And remember that Medicare does not cover long term care costs. That can run upwards of $6000 per month. 

2)  Distributions from your IRA and 401k accounts (not Roth IRAs) are taxed at ordinary income tax rates, depending on your tax bracket.  I think it is safe to assume that taxes will be higher in the future.  For example, if you need $30,000 to buy a new car and you are in a 25% tax bracket, you will need to withdraw $40,000 and pay the tax bill if $10,000. 
You can leave money in these accounts until age 70 1/2 and then you must start taking prescribed withdrawals. 

3)  Retirement spending comes in stages.  In the initial stage (the go go years) you will most likely spend more money on travel, upgrades to the house, grand kids etc...  Also, if you were previously self employed, many of your personal expenses may have been picked up by your company. 
In the next phase (the slow go years) spending will slow down and in the final phase (the no go years) spending will really slow down.  Depending on your health and activity level, the goo go years may last for a long time. 

4)  Depending on your income level, you may end up paying taxes on your social security income.  This comes as a big surprise to many folks as they assume this money is exempt from taxes.  Benefits lost their 100% tax free status in 1984.  Now, up to 85% of Social Security benefits can be taxable.  And remember, if you start taking early Social Security benefits prior to your full retirement age (for most folks that is age 66 or 67) and you continue to earn more than $14,640 per year, you will be required to pay back $1 for every $2 in benefits received over that amount. 

5)  Surviving spouses can dramatically see their income reduced.  If both spouses are receiving Social Security benefits, then the surviving spouse will only receive either his/her own benefits or will receive the benefits of the deceased spouse but not both!  The same thing can happen if the deceased spouse was receiving a pension and did not make any provisions for his/her death by selecting a reduced pension that has a benefit going to the surviving spouse.  Surviving spouses often see their income drop by over 50%.  It is important o plan ahead and make sure that a surviving spouse is provided for. 

Bottom Line:  Get your financial house in order NOW before your retirement. 

Recession? NO WAY!

"Did she say the economy is actually getting better!?!?"
(Photo by Greencolander of Flickr)

Yes, I know what you're thinking. That my title is crazy, right? May’s stock market performance was dismal and these last couple weeks have been sad, to say the least. However, I do not feel that we are moving anywhere close to a recession.  The US economy is sluggish, that’s for sure, but folks, we are improving little by little. 

Want to hear my proof? Let’s go then!

• The GDP (gross domestic production) growth rate is still forecast to be approx. 2.5% for 2012 and 3.0% for 2013 compared to negative 3.5% in 2009, +3.0 in 2010, +1.7% in 2011. The historical annual average growth rate from 1947-2012 is 3.25%.  
• New housing starts are on a slightly upward projectile since bottoming out in March of last year.  And projections for the rest of 2012 and 2013 show strong improvement.  Remember that the US creates 1.5 million NEW households every year.  The foreclosures and short sales have flooded the market since 2008 but that product is starting to dry up.  New households will need someplace to live!  So, we should start seeing housing prices start to rise by 2013. A sidenote: I have a few friends who have recently sold houses in the San Diego North County market and the houses have sold very fast with back up offers to boot.  One house in Oceanside sold in 1 day for $25,000 more than the comps indicated. Good news!
• Banks are lending again.  Big uptick in commercial and industrial loans as well as consumer loans in 2012.  
• Unemployment remains high at 8%, there is no one disputing that.  However, we are still losing vast numbers of jobs in the public sector—government, states, schools, cities, municipalities, etc…  Which may not be a bad thing since we all know that government carries a lot of bloat.  The private sector is doing well. Over the last 6 months, the household survey (The household survey, in contrast, estimates the nation's employment based on responses from interviews with approximately 60,000 households) has registered 1.7million net new jobs created compared to 1.0 million on the establishment survey (The payroll survey estimates the nation's employment based on responses from a sample of about 400,000 business establishments).  That is a difference of over 600,000.  
• April savings rate was 3.4% compared to over 8% a couple years ago.  This indicates that consumers are indeed spending again as they are more confident.  Remember that 70% of the GDP growth is driven by consumer spending!  
• Retail sales are very strong and very far from recession levels.  
• The U.S. is still the world’s largest manufacturer.   
• While China is indeed catching up, there is no other country close to our manufacturing production.  The U.S. has done a remarkably good job of holding global manufacturing against the onslaught of China.The stock market is projecting a lot of gloom and doom out there in the marketplace.   

"Too worried! Need more treats!"

Worries about Europe, not enough job growth, stagnant housing, fear that Congress will keep kicking the can down the road in terms of the deficit, etc… These are rightful concerns and I think the market is imagining the worst possible outcomes.  But there is definitely room for optimism as based on the numbers above.  Personally, I feel that the biggest boost to the US economy and a way out of this malaise is for Congress to come to an agreement and adopt the Simpson Bowles report that was presented to our President and Congress last summer.  It is a 6 point program to restore our economy and get us back on the right road:

1. Achieve $4 trillion deficit reduction by 2020.
2. Reduce the deficit to 2.3% of GDP by 2015
3. Sharply reduce tax rates, abolish the AMT and cut backdoor spending in the tax code
4. Cap revenue at 21% of GDP and get spending below 22% and eventually to 21%
5. Ensure lasting social security solvency
6. Reduce debt to 60% of GDP by 2023 and 40% by 2035. 

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

If you have not read this report, here is a link.  I encourage you to read it thoroughly and to lobby your representatives to follow these principles.  This is a bipartisan study and report—it is neither Democrat nor Republican.  It is what is good for America.  Congress appears incapable of acting so we the people need to start calling and lobbying our elected officials! 

Why H.R. 4624, the Investment Adviser Oversight Act of 2012 is BAD

On Wednesday, June 6th, the House Financial Services Committee will conduct hearings on a bill called “H.R. 4624, the Investment Adviser Oversight Act of 2012”. This legislation was proposed by both Representatives Spencer Bachus and Carolyn McCarthy. The plan is to have all small firms like me regulated by one agency called FINRA.  These are the folks who currently regulate  Wall Street--get the picture! 

This is not a good bill! 

As an independent financial planner, I work with all kinds of "regular folks" helping them with all aspects of their financial life.  I sell "peace of mind."  I am compensated by a fixed retainer or fee. I sell no products, receive no commissions, finders fees, kickbacks etc...  I am regulated by the State of California. 

For many years, Registered Investment Advisers (like me) have been trying to differentiate ourselves from the bankers and brokers who sell products. We have tried the following:
Fiduciary vs. Suitability - I must always put my clients’ interests ahead of my own and disclose any potential conflicts of interest. This is called a “fiduciary standard”. Advisers overseen by FINRA are governed by a “suitability standard” – her or she must have a reasonable basis for believing that their recommendations are suitable for you.
Fee Only versus Fee Based (Commissions) – As a fee only advisor, I only make money when you are willing to pay me out of your own pocket. Fee based advisors can also charge you directly, or earn a commission based on the product that you buy. Most times, you – the client – don’t know the amount of that commission. Some people think the advice they receive is “free”. They don’t know that the cost of their financial advisor is likely reducing their investment returns.


The Bachus/McCarthy bill will require that  Financial advisors who work with consumers will be supervised by one Self Regulatory Organization (SRO) and that SRO will be FINRA. The stated intent is to eliminate confusion and offer greater consumer protection. One of their arguments is that FINRA registered financial advisors are audited on a regular basis, whereas small state registered advisors may never be audited. (This is true.) They want to water down the fiduciary standard to align more closely with the suitability standard. Rumor has it that the cost to join this SRO will be in the $50,000 range.  This fee would literally put many of us out of business! 

While I am totally in favor of increased regulation for all financial firms, we need to find a better way. 

Social Security made a little bit easier

The Social Security Adminstration (SSA) has just announced that it will resume sending annual earning statements on a limited basis. This is an important tool for many people who are currently planning their retirement and those who may think about it in the future. (You should always be planning, though, right?)

Letters will resume in February to some workers, and information should be available to all workers by the end of the fiscal year.

Since 1999, Social Security Act has required that SSA provide a statement each year to eligible individuals—people 25 and older with a social security number and wage or self-employment income—who are not receiving social security benefits. The statement must inform each individual of wages paid to, and self-employment income derived by, the eligible individual as shown by SSA records and, for individuals who have attained age 50, estimates of monthly retirement benefits to which they will be entitled. 

However, in March 2011, SSA suspended providing statements for the remainder of the fiscal year, citing budgetary concerns. 

Some other updates:

Beginning in February 2012, SSA will resume mailing paper statements to workers 60 and over who are not already receiving social security benefits.

In months to come, SSA will introduce an online statement service as an alternative to provide workers (of all ages) immediate access to their statement information. In addition, workers 60 and over may opt to sign up for the online service in lieu of receiving the annual paper statements.

Later in fiscal year 2012 (which ends September 30), SSA plans to resume a first time mailing to workers at age 25. This one-time statement will include a welcome message providing information about the social security program, where to go for further information, what services SSA offers, and what business can be conducted online, including signing up for access to online statements.

Individuals who cannot access their information through online channels, including victims of domestic violence or identity theft who have blocked electronic access to SSA services, will be able to request a paper statement. In addition, Spanish language versions of the statement will be available on request.

California Probate Changes

Some good news for those of us who live in California and have to deal with the dreadful probate laws and expenses.  California is one of the most expensive probate states in the Union.

Effective January 1, 2012 a beneficiary can collect up to $150,000 (formerly $100,000) as an heir and not have to go thru probate.  As long as these assets are titled in the decedent's name alone.  For example, if I have a savings account with a $150,000 in my name only, my beneficiary can transfer these assets to her name with out having to go thru probate.  It is a much simplified affidavit procedure.

In addition, real estate transfers up to $50,000 (formerly $20,000) can occur at a much simplified procedure in the court without excessive expenses and time to transfer.  This is especially useful for small parcels of land, timeshares etc....

And the last good news is that a surviving spouse or domestic partner can collect via affidavit salary owed to a deceased person up to a maximum of $15,000 (formerly $5,000)

However, if you have a Trust, make sure that you still title all your non retirement assets in the name of the Trust.  After all, why have a Trust in the first place? 

Thanks California for giving our heirs a break! 

Jazzy January Financial Resolutions

OK, folks, 2012 is here and my plan is to give you some financial "must do's" for each month of the year.  By the time December, 2012 rolls around, you will be well on your way to having your financial house in order. 

January is a good time to do the following:

1.  Check your credit score. 
Since 2005, consumers have had the right by law to get a free annual credit report from the credit reporting bureaus. To do this, go to AnnualCreditReport.com. While there are other websites that may promise to provide your credit report, this is the official website, supported by the free credit report law. In other words, it’s been sanctioned by the US government.

When you arrive at AnnualCreditReport.com, you’ll find that you have three options: Equifax, Experian, and TransUnion. Each of these represents a different credit reporting bureau, and each has to give you a free credit report once a year.

If this is your first time checking your credit report, we advise you to check all three now. A 2004 study found that 25% of all credit reports had some mistakes, so it’s critical to make sure that all of your credit reports are accurate

2.  Consider Refinancing
Mortgage interest rates are ridiculously low right now--I can not imagine them descending any lower.  If you have not taken advantage of these low rates, then seriously consider refinancing.  But only if you plan on remaining in your house for at least 4 or more years.  And only if you can refinance for no more than 80% of the value of your home.  Lock into a 30 year fixed and then pat yourself on the back for making a really smart financial move.

3.  Organize Tax Records
Start collecting and organizing all your tax records.  It is amazing the money you can save on taxes if you take the time to organize!  Your tax preparer will LOVE you if you have all your records together. 

4.  Set Realistic Goals
This is a good month to set some financial goals.  Maybe you need to save for a car, or set up an emergency savings fund or more aggressively save for retirement.  Write down your goals and create an action plan.  The best and most effective way to save has always been to "pay yourself first."  This means setting up automatic transfers from either your payroll or your checking account to the savings plan of choice.  There is no other way to do this.  If you wait till the end of the month, you will have more month left than money.

Here's wishing each of my readers a year of financial prosperity and abundance and a heart to share. 

Renting versus Buying

We have all been sold the "American Dream" which is to own our own home.  And while there are some great buying opportunities in the market right now coupled with ridiculously low interest rates, it may not make sense for you to buy but rather to rent.

• If you have substantial credit card debt, you should work towards paying this off first
• Not having the 10-20% for a down payment means that you are not ready to buy
• If you plan on moving in the next 5 years or are unsure that you will remain in the house it makes sense to rent.  Selling a house is expensive with realtor fees and closing costs.
• Run the numbers and sometimes it makes much more sense to rent than buy.  There are online calculators that let you input all the data and make an informed decision.
• If you are unsure about the responsibilities of being a homeowner such as deferred maintenance on the house, landscaping, repairs, upkeep etc...  then just rent! 

The "American Dream: is not for everyone.  Make sure you weigh all the pros and cons before jumping in and buying a house especially when some realtor tells you "it's the steal of the century."