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A Monthly Newsletter Source of Financial Sources • The Difference Between Just Getting By and Really Living in Retirement: • Is It Time to Get Back Into the Market? • Take Advantage of the Benefits of Multiple Crummey Trusts: • Make the Financial Advisor Specializing in Work with Unmarried Couples the Team Leader in Estate Planning: • 15 Tips for Saving and Penny-Pinching! • Housing Stimulus Package Offers Positive Changes for First Time Homebuyers or Buyers Who Have Not Owned a Home for Three Years • Niche Markets Continue to Find Real Estate Construction Funding. ---------------------------------------------------------------------------------------------------------------------------- The Difference Between Just Getting By and Really Living in Retirement: A recent Investment News article suggested a maximum 4-5% withdrawal rate to help retired investors protect against the depletion of principal. For many investors, such conservative withdrawals might mean dramatic lifestyle reductions at retirement as they ‘become poor today to avoid becoming poor tomorrow’. Under scrutiny, using the S&P 500 as the equity portfolio suggests that over the last 10 years, we find that even 4% might be too aggressive. The table below shows the year-by-year results for $1,000,000 invested January 1, 1998 to June 30, 2008, with annual withdrawals (plus a yearly 3% inflation increase) beginning at the highest possible rate to insure the principal balance is intact at the end of the period. The problem is that anything greater than a 3.5% initial yearly withdrawal (increasing 0.75% per quarter for inflation) would mean loss of principal.
And it can get worse.
Solving the Problem During the same period, a tactical asset allocation managed strategy used, for example, by PMFM, Inc., Watkinsville, Georgia, would have permitted investors to withdraw 7.5% yearly (increasing 0.75% per quarter for inflation) from January 1998 to June 2008 without sacrificing principal. In fact, as the table below indicates, the principal balance remained greater than the initial investment at the end of each year, despite the market meltdown in 2000-2002.
What does the added 4% per year mean in real terms to a retiree? Using the average annual difference of approximately $47,000 per year, the table below suggests just how meaningful the difference might be. In fact, a PMFM investor may even have trouble spending the excess. Deducting 28% for taxes, here are some ways to spend the extra $34,000:
The numbers may be startling, but the story doesn’t end there. In the investment world, investors expect their advisors to have a crystal ball, anticipating good times and bad times in the market. Crystal balls aren’t really the answer, but a proven tactical asset allocation strategy with professionals watching the market daily, reacting to it as it moves, may very well be the answer. Another Perspective on the Difference Avoiding Volatility Can Make Even this ‘worst-case scenario’ of choosing to retire and begin withdrawals just before the worst bear market period in decades would have been far less devastating to investors enjoying the benefits of PMFM’s win-by-not-losing approach to managing retiree assets. The table below shows the results of starting 3.75% withdrawals in January, 2000 from PMFM’s Managed (Growth) account and from an account mirroring the S&P 500 (increasing 0.75% per quarter for inflation). At PMFM, the account would have preserved a PMFM investor’s original capital and left them with twice as much as the S&P 500 account. Same starting amount, same withdrawals, but very different ending results.
For investors absorbing the risks associated with equities investing, these numbers tell the story. Portfolio managers efficiently employing a tactical asset allocation managed strategy can make the difference between a difficult and scary retirement or one that offers the possibility of retirement on your own terms. PMFM offers separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox, one of the leading 401(k) managed account and investment advisory services in the nation. As of 12/31/07, PMFM manages more than $1 billion. The firm has increased its assets under management by nearly 25 percent in the last year. The management team at PMFM includes experienced investment advisors with offices in Watkinsville, Georgia. PMFM offers 401k Toolbox, it’s investment advice and managed account service, via vendor partnerships with 401k providers and direct to large plan sponsors. You can reach Founder, Tim Chapman, at 800-222-7636 or tim.chapman@pmfm.com. Is It Time to Get Back Into the Market? As of mid-August, the S&P500 is up almost 7% from its low in mid-July. Is the market beginning a recovery? Or is this a bounce in the middle of a bear market – with more downside yet to come? If you’re an investor with cash you’ve been waiting to invest, these are critical questions. It needs to be said first that history has proven repeatedly that efforts to time the market are generally unsuccessful. No one is able to spot the ideal time to invest – the bottom of the market downturn that marks the beginning of a recovery – until the opportunity has already passed. But for investors who have cash that they’re waiting to invest, the question of when to invest it can be a difficult one. If you get back into the market too soon, you risk seeing the value of your assets drop further. If you get back into the market too late, you risk losing out on some of the recovery’s best returns, since the early stages of a recovery usually offer the highest rates of return. What’s an investor to do? You have three options: dollar-cost averaging, value averaging, or lump sum investment. The first two approaches allow an investor to hedge risk by investing that cash in steps. With dollar-cost averaging, you invest a set amount every month. With value averaging, you set a dollar target for your investments, and invest more when the market is down and less when the market is up. Both of these strategies help the investor avoid trying to time the market. But the implementation of either approach requires planning, discipline and consistency. Since stocks have risen over the long term, lump sum investing has yielded the best returns over the long term. Using your cash to rebalance to a target asset allocation allows you to buy low and sell high in the long run. In the short term, the market is volatile and the investor may or may not get the timing right. But in the long term, consistent investing and rebalancing to an asset allocation strategy increases the chances of success. The approach an investor uses depends on several things: your skill in evaluating economic and market data, your ability to exercise discipline in implementing your strategy, how much you have to invest, and how well your current asset allocation matches your target allocation mix. Of these, the last is the most important. Susan Moore, CFP®, Moore Financial Advisors, Ltd., Watertown, MA, (www.mooreadvisors.com) provides fee-only financial planning and investment management services for individuals and families. She can be reached at moore@mooreadvisors.com or 617-393-9999. Take Advantage of the Benefits of Multiple Crummey Trusts: Pearson Financial Services, Dennis, MA, is the author of "The Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients' families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925, seth.pearson@verizon.net. Make the Financial Advisor Specializing in Work with Unmarried Couples the Team Leader in Estate Planning Work: Financial advisors who specialize in working with unmarried couples have seen a trend in estate planning documents lacking the necessary details regarding the couple’s unmarried status. This is critical when kids are involved. Miscommunication or lack of communication around estate planning issues happens when clients create independent relationships with a financial planner, estate planning attorney, and CPA, with no coordination between the three disciplines. The result can be estate planning documents that must be redrafted when the financial advisor who specializes in working with unmarried couples reads them and finds them inadequate for meeting the expectations and needs of the couple. This requires expense and time as they sit down with their financial advisor and then their estate planning attorney to correct items neglected. Several problem areas in estate planning for unmarried couples include the following: 1. Watch the flow of assets. Check how each asset will pass at death. Some items will go through probate; others bypass it. Ensure that each asset is taking advantage of the transfer process in the most efficient way. If an unmarried partner adds his partner to the house title (changing the titling to JT/WROS) in an effort to bypass probate, he may be creating two additional challenges. First, there might be an immediate gift that could create a gift tax or use of his unified credit ($1 million for a lifetime), or second, they might be creating an additional estate tax because states, for example, like Maryland, impose an immediate 10% inheritance tax on dollar one that is distributed to a non-lineal descendent. Depending on the client’s goals, changes in the asset titling may or may not make sense. 2. Take advantage of Transfer On Death (TOD) provisions. Often, unmarried couples do not take advantage of the benefits of TODs. When a TOD is in place, at the death of the individual the asset/account will bypass probate and be distributed directly to the beneficiary. Many couples think that they are secure from an estate point of view by using JT/WROS titling. This does avoid probate at the first death, but if both in the couple pass away together, the asset will than pass through probate. TOD designations may help to alleviate this challenge; be careful, however, to ensure you are cognizant of properly funding Unified Credits. 3. Watch beneficiaries. Beneficiary designations are not properly structured to bypass probate. For couples who have kids, listing a parent’s siblings as beneficiary in hopes they may ultimately provide care for the kids can be detrimental. If funds are left to the kids’ parent's sibling and the sibling passes away shortly after the parent, there is no guarantee that the kids will ever receive the money. 4. Wrong type of trust. Be careful about the type of trust chosen. While a testamentary trust (trust created at death) may save you some money now, if it is not planned properly, assets might unexpectedly find their way into probate or not pass as efficiently as you hoped. Also, ensure testamentary trusts have the required stretch IRA provisions. Without them, you may be creating the opportunity for additional tax hits for beneficiaries of IRA's. Also, unmarried couples will sometimes take the proper steps to cross-own life insurance (thus removing the policy from their Gross Estate); be careful to explore life insurance trusts instead of listing your testamentary trust as the beneficiary as you might be pulling the asset back into your taxable estate. 5. Not taking advantage of exclusions. Couples who set up reciprocal wills or trusts often have the proceeds of homes or larger accounts set up with 50% of the beneficiary designation going to each of their two estates. This might be adding additional estate taxation if they are not maximizing each individual’s unified credits. 6. Tax implications. Be careful that your attorney is not making an assumption that the beneficiaries will be lineal descendants. In the State of Maryland there is a 10% inheritance tax imposed on the first dollar of a decedent's estate unless it is passing to a lineal descendant (then a $1 million dollar exclusion is provided). Special planning should be done to account for this. Unmarried couples can avoid problems with estate planning documents by asking their financial advisor to be the team leader of the estate planning process. Estate Planning attorneys do not always get into the details of current account titling, nor do they specifically review the ownership or titling of life insurance (personal, business or group/employer sponsored). As a result, when documents are drafted, they have not always taken into account all of the nuances. It is typically up to the financial planning professional to sort through the documents for unmarried couples in an attempt to protect assets by avoiding probate while being cognizant of potential tax liabilities not present when a couple is legally married. Minimally, take these two steps if you are in an unmarried couple relationship and beginning estate planning: - Find a financial advisor who specializes in working with unmarried couples. They are usually not attorneys, but they have a strong working knowledge of the issues that confront such couples that require particular attention when the estate planning documents are drawn up. - Ask your financial planner to meet with your estate planning attorney so that an outline of proper documents can be discussed. When an estate planning attorney does not specialize in the nuances of financial and investment planning for unmarried couples, the estate documents can thwart the decisions the couple has made about disposition of their assets. This happens because the attorney does not know the entire picture or the questions to ask or what must be included. Make your financial advisor your team leader for a smooth estate planning process. JT Hatfield Smith, CFP®, CHFC, CLU, CLTC, is the Vice President of Domestic Partner Planning at SPC Financial, Inc., Rockville, Maryland. JT specializes in creating sound strategies for the complex financial issues of same sex and unmarried couples. He can be reached at jhatfieldsmith@spcfinancial.com or 301-770-6800. New Miller Convertible Fund (MCFAX) is Top Performer: The truth is, we don’t always pay attention to the little things we can implement in our financial lives that can save money. Consider implementing one of these tips a week for fifteen weeks and enjoy the savings. 1. Always maximize contributions to your company savings plans (401K). If they match 50% , you have an investment that provides a 50% return even before considering the advantages of tax deferral and that you are investing before-tax dollars. 2. Consider signing up for automatic monthly withdrawals from your checking account to the mutual fund of your choice! If the money is taken out automatically you will not see it and will not spend it. Also when you receive a raise consider devoting half of the amount to the monthly withdrawal. 3. Pay all credit card debt off before investing. If your credit card rate is 18%, paying off the card provides an immediate, return of 18%, with no risk. Most credit card companies will rescind their annual fee if you are persistent in asking! 4. Evaluate the financial circumstance of raising your deductibles for all of your insurance coverage’s including auto, home and health. We typically recommend $1,000 deductibles for auto and home and possibly $1,000 for health. 5. Carry cash and budget your ATM withdrawals. It is harder to overspend if you have to pay with hard currency rather than a credit card. Establish a reasonable weekly cash budget and hold to it. Too many people lose track of what they actually spend on sometimes-silly items by dipping into the pot at the ATM! 6. Consider a recently new car rather than a new car. Let the other guy take the immediate depreciation loss that occurs as soon as the car leaves the showroom. Such cars may be purchased at 60-80% of the cost of the same car purchased new and may also have low mileage. Try to pay cash for big-ticket items like automobiles and generally you will buy less car. Do not buy service programs for cars or major appliances. That form of insurance is usually a bad deal. 7. Purchase rather than lease vehicles unless there is a business reason (the lease payments are deductible). The cost is high: the car must always be fully insured at the high coverage costs associated with new cars. You may need to purchase gap insurance, and at the end of the lease you own nothing and must purchase or lease another vehicle. 8. Do not buy insurance you do not need. Life insurance is a bad deal (almost always) for people whose death does not impact anyone else financially. If you have a young family, buy term insurance. 9. Try to vacation in the off-season. If the time you choose is only a month or two away from the beginning of the peak season (usually summer months for northern locales and winter months for southern locales) you will find plane fares, hotel charges and other costs may be 20-40% lower than at peak. Everything is far less crowded! For vacations longer than say a week, consider renting a small home instead of staying in hotels. The cost per night may be significantly less and you save on meals Rent a place centrally located to the different areas you want to visit. As an added benefit for overseas vacations, you really experience the country and its people in a home. 10. Try not to buy any new product when it first appears (unless you absolutely need it). Many manufacturers utilize a pricing method known as “skimming.” They price the product at a very high level initially knowing there is always a segment of the market that will pay top dollar for anything. Wait until the product is more “commoditized,” competitive pressures, or the need to expand the market leads to lower prices. Hewlett-Packard uses this approach to price new products. 11. Use technology to compare and shop. Retail trade on the Internet is expanding quickly. You can quickly compare competitors’ pricing. Always hunt for the lowest price for big-ticket items. Start thinking of a sales discount as the equivalent to percentage returns on your money. 12. When buying a home, consider a thirty-year mortgage rather than a fifteen. If you are in a 28% bracket and your mortgage rate is 7.5%, you have use of the banks money at a net interest cost of only 5.4% after taxes. If you invest properly you can average at least 10% return. The net interest spread works to your advantage and will increase your net worth long term. 13. Whenever you save money at the supermarket by using coupons or on a purchase through good research, consider writing a check for an amount equivalent to the savings to your favorite investment. A sure and painless way to increase savings. 14. Save money on clothes and toys for babies and young children by shopping at thrift shops. Babies and children outgrow toys and clothes so fast that in many cases the items never wear out and may be in near new but at a substantially lower cost! Instead of throwing away items that are unnecessary outgrown, or obsolete consider selling them on consignment to thrift shops or donating them to charity and taking a reasonable deduction if you itemize on your taxes. 15. Buy used books not new! These days such web retailers as www.amazon.com have enormous selections of used books (and CD’s). The sellers usually rate the condition of the item. Typical savings ranges from 5-60%. You can sell unwanted books over Amazon also. Stonegate Wealth Management’s highly experienced professionals, including partners Thomas J. Geraghty, Jr., CPA, CFP, Steve Craffen, MBA, CFA, and Craig Marson, JD, CPA, solve complex financial challenges and provide counsel for the pressing financial issues confronting their high net worth clients. They have deep knowledge and experience in taxes, estate planning, investment management and divorce settlement counseling. The firm manages $175 million in assets under management. stevec@stonegatewealth.com, office, 201-791-0085 Housing Stimulus Package Offers Positive Changes for First Time Homebuyers or Buyers Who Have Not Owned a Home for Three Years: On July 30, 2008, President Bush signed H.R. 3221, the Housing and Economic Recovery Act of 2008 (HERA). HERA includes several provisions which may be of interest to homeowners and prospective homeowners. First-time Homebuyer Tax Credit HERA provides a refundable tax “credit” equal to 10 percent of the purchase price of a home (up to $7,500; $3,750 if married filing separately) by first-time home buyers. Though the HERA terms this as a tax credit, it is actually a loan in that it has to be repaid in equal installments over 15 years and carries a zero percent (0%) interest rate. This additional incentive may give new homeowners a little extra in their pockets to use for furnishings, pay off credit card debts, etc. Note that person is considered a first-time homebuyer if s/he (or spouse) had no ownership interest in a principal residence during the three year period before the new home is purchased. Of interest to unmarried individuals who buy a house together, is that the combined credit is $7,500 not $7,500 per individual. Of course, when the government gives, it also takes. So, here are some details: The provision applies to homes purchased from April 9, 2008 through June 30, 2009. The credit begins to phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). Finally, if a taxpayer sells or no longer uses the home as his/her principal residence before the credit is repaid, the unpaid balance is due in the year in which the taxpayer sells or no longer uses the home as a principal residence. Property Tax Deduction for Non-Itemizers Currently, only those who itemize deductions can deduct property taxes. HERA provides homeowners who claim the standard deduction with an additional standard deduction for state and local real property taxes. For 2008 only, taxpayers who do not itemize can take the real property tax deduction, up to a maximum of $500 ($1,000 if married filing jointly). Limitation on Home Sale Capital Gain Exclusion Under HERA, gains from the sale of a principal residence will not qualify for the $250,000 ($500,000 if married filing jointly) exclusion for periods that the home was not used as the principal residence. In other words, the exclusion is reduced for the amount of time over the past five years that the house was not used as the primary residence. This rule is meant to close the loophole that existed for vacation homes, rental property and other secondary residences. Note that this rule applies to sales after December 31, 2008. Debra A. Neiman, CFP, Neiman & Associates Financial Services, LLC, Arlington, MA, is author of Money Without Matrimony. She helps clients transform complexity into opportunity so they can live rich, rewarding lives. She can be reached at deb@neimanonline.com, or 781-641-5700. www.neimanonline.com or www.moneywithoutmatrimony.com. Niche Markets Continue to find Real Estate Construction Funding: • Niche Markets Continue to find Real Estate Construction Funding Specialty facilities for seniors and students are set to fulfill demand from this under-served market Niche markets such as senior and student housing have been able to find real estate financing for new construction projects despite difficulties others are having finding real estate development funding. There are a number of critical reasons for this, including the following: • Smaller financial institutions, banks, pension funds and insurance firms still need to loan money even though their larger counterparts are mired in the single family mortgage debacle. Mortgages, as a percent of loan to cost, are lower, but interest rates are not up very much at the same time, somewhere in the middle to low 6% interest range for the right deals and the right borrowers. • Specialty developers, with good reputations, are able to build successful senior and student housing developments with loan to cost ratios that are win/win for the lender and the developer. The financial institutions are looking carefully at the elements of cost. High loan to value deals are not making it to the table, but 65 to 70% loan to cost deals are being approved. For a developer with deep pockets able to come up with the 30 or 35% remainder for the project, the loans can make sense. Such reputable companies define costs as tightly as possible so that the institutions loaning the construction dollars are comfortable. • Land that is permitted for multi-family use, originally intended for condo complexes that are often not being built at this time. It can be perfect for senior or student housing facilities and is less expensive than even a year ago. Construction costs, in some categories, are coming down as well. Of course, energy costs are up and the many line items with high energy cost components must be factored into the equation. • Experience wins. Lenders want to make sure that no one can build a first quality finished project less expensively than the companies to whom they will make loans. • There is no price that will make the a prudent lender in this market loan into a forward market where there is no excess demand over current demand. Two presently under-served populations are senior and student housing. Even when the communities where senior and student housing will be located have a surfeit of single family homes, those single family homes do not meet the needs of seniors or students. Parents want their children to have a safe dorm experience, and seniors want to be in a senior community where someone can recommend a druggist who can deliver, and there are pull strings in the bathroom in case they take a fall. Lenders are still though selectively making loans in this market. By the time the project gets completed, the lender will still have a good loan because the property is still rentable. Even if the developer can’t finish the deal at the costs predicted, the lender still has some margin and can afford to complete and rent the project because the demand is there. Niche real estate development is alive and well and providing important new facilities for senior and student housing.
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