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A Monthly Newsletter Source of Financial Sources INVESTMENT MANAGEMENT & RETIREMENT New Roth 401(k) May Be Better Choice for Far More People Than Even Anticipated Charitable Remainder Trusts: The Do-It-Yourself Annuity. It is Critical To Hang On To Your Money After You Retire: NEW BOOK: "The Ultimate Parenting Map to Money Smart Kids." Money Smart Kids Will Understand the Consequences of Spending. There are Multiple Financial Challenges When Affluent Seniors Decide to Remarry: Changes in the Financial Services Industry and the Economy Means One Planner Makes Many Phone Calls to Clients. Selective Filters Increase Surfing Fun and INVESTMENT MANAGEMENT & RETIREMENT New Roth 401(k) May Be Better Choice for Far More People Than Even Anticipated In the new Roth 401(k), starting January 1, 2006, contributions can be made on an after-tax basis and will be included in the investor's earned income. However, only the contributions are taxed. All of the earnings escape taxation forever. In a traditional 401(k), both the contributions and all of the earnings on these contributions are taxed. This translates to a powerful advantage to investors who choose the Roth 401(k), regardless of age, during the upcoming benefits election periods at their companies. Let's look at these examples: Two workers, both age 45 pay taxes on ordinary income at a 30% rate both before and after retirement. Both earn a flat 7.5% rate of return on all investments, and pay taxes on all gains in taxable accounts at a 20% rate. Assume also that upon retirement at age 65, each then withdraws from their savings evenly over a 25-year retirement period. Finally, let's assume that as each worker reaches age 50, they contribute an extra $5000 as a catch-up contribution to their regular or Roth 401(k) account. Both workers will continue to make these contributions annually during their working years. In 2006, the maximum contribution to a 401(k) will increase to $15,000 a year. Worker A chooses to utilize a regular 401(k), placing $15,000 into the regular 401(k) in year one and placing the tax savings of $4500 in a parallel taxable account ($15,000 x 30% ordinary income tax rate they are not paying.) Worker B chooses to utilize a Roth 401(k) for her retirement savings. Then $15,000 is placed into this account in year one, and is included in her taxable income. She pays $4500 in taxes on the $15,000 contribution from her take home pay or other accounts. Who will have more after-tax income in retirement? In this case, it's Worker B who could then withdraw $67,547 annually during retirement, while worker A would net only $62,520, or $5,028 less annually and $125,688 less cumulatively over the 25-year retirement period. This amounts to an 8% increase in after-tax retirement income by using the Roth 401(k) rather than the regular 401(k) account. Whether Roth 401(k) really benefits only the higher-paid workers may also be misleading. Time plays a big factor in who benefits from the Roth 401(k). Take our same two workers, but start them at age 25 giving them double the previous time to save of 40 years. Worker B would receive $306,449 annually during retirement, while worker A would net $270,106, or $36,343 less annually and $908,583 less cumulatively over the 25-year retirement period.
Since workers can change their allocation decisions between the Roth 401(k) and traditional 401(k) at least annually, they could weight their contributions more heavily to the currently taxable Roth if they anticipate an unusually low income year, and lower marginal tax rates, or the traditional 401(K) if they expect an unusually high income and higher marginal tax rate. The Roth 401(K) should be on your list of issues to discuss with your financial advisor this year. David Campbell is a principal of Bingham, Osborn & Scarborough LLC (BOS) 415-781-8535 a San Francisco and Menlo Park, California-based registered investment advisor with $1.4 billion in assets under management. BOS has provided investment management and comprehensive financial planning for individuals and endowments since 1985. All revenues are fee only. BOS has eight principals and a total staff of 26 working on behalf of their clients, plus an administration, finance and systems staff with direct client contact and responsibilities related to client accounts. Charitable Remainder Trusts: The Do-It-Yourself Annuity Want to find a way, on the heels of a red-hot real estate market, to unlock the value in highly appreciated property in your portfolio while sharing precious little of the spoils with Uncle Sam — and create an annuity exempt from the high annual expenses, sub par investment options, and surrender charges characterizing the current stable of annuity products? Welcome to the Charitable Remainder Trust, a vehicle for the tax-free sale of appreciated real estate, with proceeds flowing into a lifetime annuity for the beneficiary. ] Here’s how it works: the waterfront parcel that you purchased some years ago for $100,000, with a second home in mind, turns out to have landed on one of those “top ten places to live” list, vaulting its value into the $1,000,000 range. An outright sale of the land, for folks in the 35% tax bracket, places $135,000 of your windfall in the hands of Uncle Sam and another $47,700 in the tax coffers of a state like Massachusetts. The bottom line: a total take of $182,700 or 20.3% of your return. A CRT, on the other hand, retains 100% of the windfall, provided that you leave 10% of the initial value of the transferred asset in the trust for a charitable distribution upon your (or another designated beneficiary’s) demise. The time value of money tells us that a dollar today is worth more than a dollar tomorrow — 182,700 of those dollars, compounded in the market over 30 years, can be worth more than $1.8 million in extra value (assuming 8% annual market return), covering many times over the $100,000 due upon the beneficiary’s death (initial value of transferred asset X 10% residual). And where does the annuity feature come into play? By law, the CRT must distribute a minimum of 5% of the initial value of trust assets annually (in our example, $50,000). Want more? You can raise the annual draw to a ceiling of 50% of the initial value of trust assets. All the while retaining full flexibility vis-à-vis the investment of trust assets, avoiding the high fees associated with annuities and the sub par investment results borne of a limited universe of allowable investments and the often weak performers that get pre-packaged into annuity products. Not a bad option for do-it-yourself annuitants! Paula Chauncey, CFA, Managing Partner, être llc, 617-716-0257 works with individuals, and their closely held businesses, to develop and execute wealth-building strategies. pchauncey@etrellc.com. When 401k plans came into existence in the late 70’s they were primarily intended to be a supplement to traditional defined benefit plans. Over the last decade, defined benefit plans have gone the way of the dinosaur and now, in most cases, an employee’s 401k plan is their only retirement asset. That is why many Baby Boomer retirees are no longer focusing only on accumulation but are also considering how they can make their retirement savings generate the income needed for the rest of their lives. This “income for life” challenge is causing many 401k participants to rethink their investment strategy and consider money managers that offer a winning by not losing approach. They understand that many traditional approaches are great for markets going up, but offer no protection when it goes down. There are different strategies at hand in every investment management company. The most common investment strategy is buy and hold. That theory says to stay invested in a diversified group of investment sectors and ride out the ups and down. Buy and hold can be great in an up market, but bear markets will come along and can cause severe losses. The Boomer retirees, however, cannot afford the down periods when they are drawing from their investments because any loss translates to an absolute loss in their retirement portfolio. Portfolio losses cannot be made up with current income. Here is a worst case scenario of what could have happened to an 2000 retiree with a $100,000 rollover invested in the S&P500, using a buy-and-hold strategy. His goal was to use only 6% a year $6000 (or 1.5 percent a quarter) of the portfolio for retirement income. At the end of five years, the buy-and-hold portfolio was valued at $48,140, less than half of the $100,000 original savings. By the end of the five year period, the $6000 per year withdrawal was more than 12% of the remaining balance – a percentage that almost certainly could not be sustained long term. By contrast, a tactical asset allocation portfolio using a winning by not losing strategy, was worth $83,333, and had provided the same amount of income over that time period. The $6000 annual withdrawal is only 7.2% of the remaining balance. Tactical Asset Allocation will under perform in up markets and must endure frustrating whipsaw trades in order to have downside protection. However, during the critical five years after 2000 retirement of our example, this portfolio protected assets in a very volatile market, allowing an investor in retirement to keep most of his portfolio intact, and in a position to continue to provide income for life. It is a challenge for retirees to make their investment withdrawals last for life, and a good tactical approach might be the best way to do that.. PMFM, Inc. manages $680 million as of June 30, 2005. The firm has increased its assets under management by nearly 40% in each of the last three years. Principals Tim Chapman and Don Beasley, experienced investment advisors with offices just outside Athens, Georgia, have worked with thousands of clients and now offer their services to plan sponsors through 401k Toolbox. Jud Doherty, CFA, is the chief financial officer for the firm, and Tim McCabe is national marketing director. Tim Chapman -- 800-222-7636. Tim.Chapman@pmfm.com NEW BOOK "The Ultimate Parenting Map to Money Smart Kids” by Linda Leitz, CFP The Media may receive copies of the book by sending an e-mail to beth_chapman@inkair.com with “Media review copy” in the subject line. Please provide your mailing information. See below for a story idea from book. Money Smart Kids Will Understand the Consequences of Spending. There is a struggle every time you and your grade school child go shopping she asks for every toy and snack. As the money gatekeeper, you want your child to have a treat, but each time you buy something, more is requested. Your junior high student begs for more clothes, but every outfit you buy is passé within a month. You refuse to buy your son a muscle car. He gets a job, his grades decline, and then his transmission goes out. He can’t get to his job, but his monthly bills for car insurance continue. Sound familiar? Kids and money --sometimes the financial demands from your children make you feel like money flows through your fingers like water. Most young people graduate from high school knowing nothing about budgeting and they cannot balance a checkbook. Most recent college graduates find that their first major adult challenge is digging out of debt. Educating your family about money management can help you and them. Your children’s comfort handling money and the role it plays in life can make a huge difference in someone’s outlook. Basic financial concepts help children get a sense of their own financial priorities. This does not mean that there will not be learning curves. Far better as a young person than as a person in their 60’s who suddenly realizes they won’t ever be able to retire. There are building blocks in learning financial responsibilities. Children are capable of learning at an early age that if they spend money on something now, they won’t have money to spend on something else later. Over time, your children can learn to save money for a goal. Access to money of the child’s own will give the child the satisfaction of making her own purchasing decisions. Setting guidelines of what your kids may buy and giving praise --- or sympathy – for decisions made will be the lion’s share of your job relative to the children’s monetary decisions. The focus will shift from you as money gatekeeper – because you don’t let them have something – to the consequences of the decisions your children have made themselves. You can help your child begin to be a savvy consumer. Linda Leitz, CFP, Pinnacle Financial Concepts, Inc., Colorado Springs, Colorado, is author of “The Ultimate Parenting Map to Money Smart Kids,” available as a book or as a CD. She specializes in helping families and individuals meet their long term financial goals. She also helps those in the midst of divorce resolve financial issues through her company Divorce Solutions, Inc. She can be reached at 719-260-9800 or Linda@brightleitz.com... There are Multiple Financial Challenges When Affluent Seniors Decide to Remarry: There is a reason many senior couples choose to cohabit. It is financially simpler. However, when tying the knot is preferred, both parties to a high net worth senior marriage must face reality about protecting their individual assets. Here are a few scenarios that show the complexities inherent to a late-in-life marriage. If, however, this couple had invested in long term care insurance for both, before marriage as part of their pre-nuptial agreement, portions of the costs of nursing home care would have been covered to the extent of their LTC policies, delaying or eliminating the cash drawdown of the other's retirement assets. Another option, and one that is discussed when nursing home care threatens to decimate the healthy partners lifestyle, is divorce. It is a harsh, but practical, alternative to having retirement income drained for nursing home costs. The LTC policy should be designed to pay nursing home fees for at least the 38 months required by Medicaid, during which time the underlying assets could be re-titled out of the estate. Often, it is property that needs protecting. A wealthy couple marries. It is understood between the husband and wife that her property will go to her children by her former marriage, and his property will go to his children by his former marriage. However, if the couple has not done trust planning and moved their properties out of their estates ahead of the death of either partner, they may not be able to protect their children from paying inheritance taxes. For many women, the property they retained after the death or divorce of a spouse has special meaning. They may want to retain the property as a symbol of independence. In later life, maintaining that property may not be possible financially, and finding money to maintain the property becomes a problem. One solution for accessing some of the equity in a valuable piece of property is a home equity line based on the value of the property. The required payments on the equity line could be made from the loan itself, still leaving a substantial amount of money to provide for maintenance. Another option is to take a formal promissory note from her wealthier husband to fund the costs of maintaining her property. It could be payable by her children from the sale of the property at the time of her death, or from their own resources to her husband or his children if he predeceases her. She maintains her independence and can upgrade her property as required. Every family's situation is different. Adult children often become concerned when newly engaged parents start to talk about changing their financial arrangements. They should be more concerned if the discussions do not come up. Planning ahead can avoid unpleasant outcomes and provide peace of mind that yours, mine and ours are provided for as intended. 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, their 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 Changes in the Financial Services Industry and the Economy Means One Planner Makes Many Phone Calls to Clients. The financial planning industry is in flux and there are now eighty certifications that financial services professionals can earn or buy. This means that one planner who wants his clients to remain loyal makes a lot of calls. With 90 clients, he makes sure every one gets a minimum 17 calls a year. They want to feel comfortable that he cares and he wants to earn their trust by staying in touch regularly. Rarely are the clients jolted into asking for any changes in their portfolios when he calls. More, Nicholson goes to great pains to keep educating them. He gets questions about the economy and he gives his objective opinion. "My clients want to know what is going on in the world besides what they see on TV or in the media in general. They need to know “The Rest of the Story,” he says. Nicholson sees his in-depth, newsletter, sent twice annually, giving his clients the rest of the story. He finds that clients appreciate his views that two major hurricanes, terrorism in London and the rumored real estate bubble have not impacted what is still a strong market. “The really is only way to serve your clients and that is to stay in touch, says Nicholson. “There isn't any substitute.” Nicholson & Associates, Ltd., Wilmington, Delaware, is a fee-based financial planning firm serving the retirement and wealth management needs of professionals and business owners for almost 30 years. His son, Donald W. Nicholson, Jr., is a full partner in the business. Contact them at 302-529-1500. E-mail dwnicholsonsr@verizon.net -- http://www.nicholson-associates.com. Selective Filters Increase Surfing Fun and One of my favorite things about the Internet is the immense amount of information it provides. One of the most annoying things about the Internet is the immense amount of information it provides. Thus the incentive that gave birth to Selective Filters. These filters are any piece of functionality that sorts organizes and displays the information you want customized for you. There are multiple filters – a news reader, an aggregator, a multi-sourced news program, a “customized” home page as well as the heavily used price comparison sites. There are literally thousands of filters out there. I love Google, which has all three major flavors, and they’re all free. News filter: http://www.google.com/ig Really Simple Syndication (RSS): http://www.google.com/reader Shopping: http://www.froogle.com KISS Computing is full-service web strategy firm, providing design, implementation, long term evaluation, and action steps for change that keep web site profitability above $5000 a month for small and mid-size companies. Ross Lasley, KISS Computing, Eastham, Mass., 508-255-9550 x401, ross@kisscomputing.com. |
