The Monty Hall Paradox & More Nuggets from Denver

You remember Monty Hall and “Let’s Make a Deal” a popular game show in the 60’s and 70’s? He’d present contestants with a common scenario. There are three closed doors – you win the prize behind the door you choose. A shiny new car is behind one door. Two smelly goats are behind the others. However, you don’t know what’s behind door one, two or three. You choose door number one. Monty opens one of the other doors – one which he knows holds a goat – and asks if you want to switch your choice to the unopened door you didn’t choose. Do you switch or stay?

Many people think that once one door is eliminated, then switching does not matter – they think the probability between the remaining two doors is 50-50. But this is incorrect statistically. And psychologists point to the behavioral phenomena behind the dilemma of “choice” – people prefer to stick with the choice they’ve already made. The pain of sticking to your original choice, even if it turns out to be wrong, is a lot less than the risk of switching a winning hand for a loser.

The math says you should switch because the probability of winning is two out of three; and sticking with your first choice remains at one out of three. Suppose you play this game 600 times. You will correctly pick the right door at the outset about 200 times. But 400 times you’d bring home a goat if you didn’t switch. Monty won’t open the door with the car. So in 400 times, the car will be behind the door you didn’t originally pick. This is similar to the street scam of “three-card monte.” What we intuitively think is a 50-50 probability, is not.

Recently I attended a national conference with some 2,000 fellow advisors in Denver. The four day event was rich with half a dozen keynote speakers, a choice of five dozen education sessions, and conversations with peers and service providers. I’ll share two.

Jay Mooreland, a financial planner and host of website, discussed how advisors can help their clients achieve their financial goals by preventing behavioral biases from sabotaging long-term objectives. He opened with “let’s play a game” and presented two questions. How would you answer?

• A bat and ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?
• It takes five machines five minutes to make five widgets. How long would it take a hundred machines to make a hundred widgets?

Moreland’s “game” focused on the human temptation to make mental shortcuts when faced with uncertain situations that often result in foolish decisions. Often, we trade intuition for analysis – the later takes time and effort. Behavioral experts expand the human challenge of making rational decisions in an irrational world in books including MIT professor Dan Ariely’s “Predictably Irrational” and Nobel Laureate and Princeton professor Daniel Kahneman’s “Thinking, Fast and Slow.”

The correct answers to the two questions? They’re five cents, and five minutes. The vast majority of people respond quickly and confidently… and are wrong. And education doesn’t necessarily help. More than half of Harvard, Princeton and MIT students routinely answer incorrectly.

International economist Dambisa Moyo warned us of the risks of being blindsided by unaddressed negative trends. You may have heard of Ms. Moyo from her book “Dead Aid, Why Aid is Not Working and How There is Another Way for Africa,” Bill Gates’ criticism, and her fiery response last year. Nevertheless, Ms. Moyo, a Zambian national and former economist for the World Bank, said not to be overly optimistic of some short-term advancements such as US job gains (are they “good” jobs?) and the temporary fixes from quantitative easing. Rather she had a less sanguine view longer term from four trends – technological advancements (putting unskilled out of work), changing demographics (aging populations), income inequality, and resource scarcity.

I share these two nuggets from Denver for a couple of reasons:

• Recognize that we’re human. Emotions and biases can hinder rational decision making.
• Have a process and plan with updated assumptions.
• Stay focused on the things we can control and make adjustments – short term results can be misleading when judging long-term success.
• Life’s a lot more interesting than a simple choice of “Door number one, two or three?”

Good luck!

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Need a nudge, or kick in the pants – Changes to Social Security

Johnny Depp movies romanticize life on the high seas and naval warfare of the 18th century. But war is hell and dangerous duties abound on the square-rigged frigates. One of the jobs was to quickly and efficiently supply the canon gun crews with gun powder. Mere boys, some as young as eight, were “recruited” for their size and agility to make the trip from the ship’s magazine, upstairs to the main deck, and back, as the carnage of another broadside battle continued. Those lads carried the ridiculous title of “powder monkeys,” had one of the most dangerous jobs on board, and many didn’t see their homes again.

I hope your life expectancy is longer than that of a powder monkey. Three decades of retirement deserve careful planning. Here are three planning insights about recent changes in Social Security retirement benefits.

Yay, a 1.7% raise!

Retirees can expect a bump in their monthly SS retirement checks starting in January. The average retired worker will see a $22 cost of living adjustment (COLA) to $1,328, and $36 for the average retired couple to $2,176. The maximum SS for a retiree reaching full retirement (age 66) in 2015 will be $2,663. The “taxable earnings” – workers and employers will each continue to contribute 6.2% of every paycheck – tops out at $118,500. Medicare B premiums remain unchanged ($105 per month). High income seniors will continue to be charged an additional Medicare Part B premium (based on income) and tops out about $231 a month – plus they may be subject to the 0.9% Medicare surcharge tax (under Obamacare) on excess earnings.

Since 1975, the COLA has been linked to the Consumer Price Index for Urban Wage Earners (CPI-W). It is set each October based on the prior 12 months’ data. Some advocates argue the CPI-W understates the rising costs seniors face. Others suggest the COLA should be linked to a lower measure of inflation – “chained CPI.” Nevertheless, the COLA adjustments have averaged about 3.8% annually since 1975 (a high of 14.3% in 1980, and zeros in 2010 and 2011). And they’ve averaged 1.7% for the past five years.

Planning Implications

Fill the gap – Even if you earn the maximum SS retirement benefit, it may only account for half of a $5,000 per month retirement lifestyle – and a lot less if future SS benefits get reduced or “full retirement age” is extended to preserve the sustainability of an entitlement program threatened to go bust. You may have a gap to fill, either by necessity or planning conservatively.

• Current investments (after tax-savings, retirement accounts – IRA, 401k, Thrift Savings, Deferred Comp, etc. – rental real estate, etc.)

• Future savings, business sales proceeds, and windfalls (inheritances, insurance benefits, lottery, etc.)

Protect from the secret menace, inflation – What can you do to put things better in your favor so that the total of all your retirement paychecks (SS, pensions, annuities, account distributions, etc.) keep pace with rising living costs and you don’t run out of money? Inflation is like another tax. Say your retirement income rises 3% annually, but inflation averages 4%… your income will be worth 83% of what it is today in twenty years. And God forbid you’ve locked yourself into a fixed payout – $100 a month, and every month until you leave this Earth. That $100 bill will be worth about half as much as it is today in twenty years if inflation taxes you at 3% a year.

• Heed one of the “Five Rules of Gold” in the George S. Clason classic, The Richest Man in Babylon, which was “don’t kill your slaves.” Don’t spend all your investment returns… reinvest some for the future to multiply (compound).

• Have some “growth” in your portfolios… don’t invest solely for “income” (which is close as a gnat’s bottom to the ground these days, unless you “reach” for riskier investments).

• Downsize your debt, living costs (including taxes), and your house (and your knees might appreciate fewer stairs).

Double check those Social Security Statements – Miss those green statements containing estimated benefit forecasts? They’re back! SSA bowed to public pressure after they stopped mailing them in 2011 in a cost-cutting move. Workers were advised to set up online accounts at, but apparently only 14 million logged on. Watch your mailbox for statements in those milestone years (age 25, 30, 35… to age 60), and register online.

• Check your benefit estimates, descriptions of the Windfall Elimination Provision and Government Offset rules that can reduce benefits for the so-called “double dippers,” and your earnings history.

I read an interesting survey by American Century that asked workers participating in their company’s retirement plan “what intervention, if any, do they want from their employers?” Forty percent wanted “a slight nudge” to encourage them to save for retirement. Another two in five wanted something a bit stronger – “a strong nudge” or a “kick in the pants.” So I suggest “Please sir, may I have another?” and chat with your advisors. Good luck.

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Who Will Benefit from Your Retirement Account?

Good work! You’ve saved hard for retirement and now you’re paying closer attention to an often over-looked area – beneficiary designations.

Who gets the remaining treasure when you die? Are you sure those transfers are going to happen? Not to be cynical, consider this scenario…

You’re married and have three adult kids. You name your beloved spouse as the primary beneficiary. However, you fret over the contingent beneficiary designations. You feel confident with two of your kids – they were raised well and leading productive and responsible lives. You worry about the third – maybe unsettled, still “finding his or her way,” legal issues, or a ne’er-do-well mate – and your intuition suggests that sudden wealth would quickly vanish through their fingers.

Yet you painfully write “my living issue, equally” on the beneficiary form, and hope for the best. But don’t worry. You pass away, your beloved spouse rolls the distribution of your retirement into her IRA. And she’s named her two kids from a prior marriage, or her new partner, as beneficiaries, thereby disinheriting your kin.
Retirement planning is more than budgeting savings and picking aggressive, moderate, or conservative. Most planning issues are multi-dimensional involving financial, tax, legal, family, business, and behavioral issues. We’ll discuss major beneficiary planning considerations.

One of the reasons to rollover your retirement plan account to your IRA is to retain the residual value upon your death. Certainly, you could have elected to receive monthly benefits from your former retirement plan, including continuation of benefits to your spouse. However, upon the surviving spouse’s death, benefits generally cease. Prudent investment of the rollover might leave additional wealth. You can name various beneficiaries of your IRA – your spouse, children, charity, or trust; and each is subject to unique tax ramifications.

However, second marriages – either the current one, or your spouse remarries after your death – can create an interesting dilemma. Assuming your spouse is named as primary beneficiary, he or she can roll the IRA to their IRA and designate their specific beneficiaries. As illustrated in the example above, it didn’t matter that you had named your kids as the contingent beneficiaries.

Three possible solutions

Split your IRA into two or more with different beneficiaries – You might name your spouse as primary beneficiary of one IRA, and your kids as primary beneficiaries of the other. A disadvantage would be that your surviving spouse blows his or her IRA and they then depend upon the generosity of your children.

Modify your life insurance beneficiaries.

Prudently use trusts – Control, management and protection are the potential benefits of using trusts in your estate plan. Some situations to consider naming a trust, not individuals, as IRA beneficiaries:

• Want your kids to inherit wealth upon the surviving spouse’s death;
• One of your beneficiaries has “special needs.” Direct receipt of IRA proceeds may jeopardize qualification for disability or government benefits;
• You have minor aged children, and want to avoid the costs of court appointed/supervised conservators until they reach the age of majority;
• Situations of financially irresponsible beneficiaries and/or their protection is desired.

However, beware the tax hazards of blindly naming any type of trust as IRA beneficiary. Generally, the Tax Code doesn’t recognize a trust as an “individual” for purposes of “stretching” the tax-deferral/distributions of IRAs. Instead, the IRA proceeds may be required to be distributed within 5 years following death of the IRA owner, and the distributions may be taxed at higher rates than an individual.

Trust compliance with specific rules may accomplish two key benefits – “stretching” the IRA and keeping control out of the beneficiary’s hands. Qualifying trusts may include “IRA Look Through” or “Retirement Benefit” trusts. If a group of trust beneficiaries is named (e.g. 75 year old spouse, 50 year old son, and 20 year old granddaughter), then the life expectancy of the eldest beneficiary is used for purposes of calculating future required minimum distributions , and hence, the efficiency (or not) of the “stretch.”

Major conclusions

Find the right balance between “ruling from the grave” and “I don’t care… I’ll be dead.”

Adding sophistication has costs, including tax and legal expense, and potential burdens and strains among family members.

The payoffs can be huge including your successful retirement, tax reduction, strong family relationships and smooth wealth transfers. Get the right chiefs at the fire including your family, estate attorney, CPA, and financial advisors. The issues are complex, require special expertise, and deserve “thinking things through.”

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Some Overlooked Rollover Rules

A recent story in Bloomberg titled “Retirees suffer as $300 billion 401k rollover boom enriches brokers” highlighted the fears of many investors – the potential for conflicts of interest between you and your broker. Are the future pictures on the wall going to be you enjoying a comfortable retirement, living with dignity, and your grandkids graduating from college or vocational school? Or instead, are they going to be those of your broker’s future? Shouldn’t they be both?

What’s in your best interest with your retirement plan when you leave one job for another, or exit the workforce permanently? The issues are numerous, and your situation unique. There’s a big push for the retirement readiness of our nation’s population through financial literacy and saving incentives. Regulators have pushed for greater industry transparency and disclosure. And debates continue over a new fiduciary standard (brokers and advisors to act in the client’s best interests during rollovers).

This is the first of a series of articles intended to help you continue to make smart financial decisions. Future articles will discuss the pros and cons of rollovers (should you do a rollover), and the issue of suitability (how do you invest).

The basic rules on retirement plan distributions are that they’re generally taxable as ordinary income, may trigger early withdrawal penalties, and the potential for tax deferral by rolling the funds over to another eligible retirement account. Here are some of the lesser known rules about rollovers.

Five Options

Say you leave an employer and have $100,000 in their 401k-style retirement plan. Many automatically think of an IRA rollover. However, some don’t consider the other options with those retirement plan dollars.

• IRA rollover
• Leave it in the company plan
• Roll it to the new company plan
• Take a lump sum distribution
• Make a Roth conversion

Inertia can be a tough thing to overcome. Some plans allow you to stay put. Perhaps you’re comfortable with the current plan reporting, expenses and investment options, and you don’t want to do your homework and explore the broader universe. However, other plans may want you out when you end your employment for a host of reasons including administration, cost and liability issues.

Does your new employer’s plan accept rollovers? If the plan’s investment options are best for you, then rollover to that plan can simplify your life (less accounts to manage). However, some plans don’t accept rollovers, largely due to the same reasons your former plan wants you out.

The lump sum distributions and Roth conversions share a common result – you’re going to write a check or two for income taxes. The lump sum option provides you liquidity and bolsters the “after-tax” side of your balance sheet. A risk is you use the funds for a joy ride (especially when you’re switching jobs) and not preserve the funds for what they were intended (retirement). And the Roth conversion provides the benefits of future tax-free withdrawals, and might avoid future required minimum distributions.

Net Unrealized Appreciation (NUA) Strategy

This might be advantageous if your plan includes company stock that has significant gains, you’re in a high income tax bracket, and expect to be in a high bracket throughout retirement. By taking the distribution of employer stock, you might pay taxes as low as 15% (capital gains) rather than doing a rollover (and even repositioning the shares into other investments), and down the road, taking retirement plan distribution as ordinary income. This strategy is complex and you should consult your CPA for the specifics. Generally, taking distribution of the employer stock to a taxable account triggers ordinary income on the cost basis of the shares, but the NUA (difference between market value at distribution and cost basis) isn’t taxable until you later sell the shares (potentially at long-term capital gains rate if held for a year or more from time of distribution). A risk of this strategy, like many transactions focused primarily on tax savings vs economic merit, is you’ve got a dog of a stock.

Don’t put the IRA rollover decision on autopilot. Good luck!

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Easy Money or Bad Idea?

A number one concern of retirees is running out of money in retirement. Say you’re strapped for cash flow, or worried about depleting your retirement savings. What do you do?

Home equity might be your most significant asset and a tempting solution. Early on, I was drilled “Don’t consider your residence as an investment asset. It’s a personal asset – you need a roof over your head. Consider it an ‘idle’ asset. Accessing that equity is via selling the home, or borrowing against it.” The first one – downsizing – may make sense for retirees (less lawn to mow). The second one… well we learned the harsh lessons of using our homes as ATMs. But a third option emerged – reverse mortgages.

Easy money? Perhaps. They offer homeowners the benefits of staying in their home, and, withdrawing some of the equity. But their popularity suggests otherwise. HUD’s reverse mortgages (Home Equity Conversion Mortgages or HECMs) number about 60,000 in the US in late 2013, representing a decline of almost half from their high in 2008-09. Some call reverse mortgages “loans of last resort.”

There are many types of reverse mortgages including those government or agency backed, and proprietary or privately insured. We’ll focus on FHA-insured HECMs.

I’ll summarize what they are, and more importantly, several planning considerations which are relevant to other issues in your personal finances.

They’re a type of home loan where homeowners convert a portion of the equity into cash – a lump sum, line of credit, monthly cash payment, or some combination. But you don’t make payments. There are many requirements, variations and loan calculators which you can read online (e.g. Generally you must be 62 or older, the homeowner, and live in the home. The accessible cash is based on age, interest rates, and property value. Per a hypothetical estimate on, a couple age 65 with a $300,000 home debt free might qualify for a monthly check of about $847 for life, or a principal limit of about $153,000. Homeowner retains title to the property, and the responsibilities of taxes, insurance, utilities and maintenance. Mirroring traditional mortgages, these generally involve rising debt (mortgage balance) and falling equity. The loan generally comes due when you sell the home, move out, or the surviving borrower passes. And mortgage insurance helps protect the borrower.

Planning Considerations

Know the costs – Reverse mortgages are generally more expensive than traditional mortgages – both up front and on-going – primarily due to the cost of mortgage insurance and servicing fees. Read and understand the documents.

Inflation – Two impacts. First, perhaps you’re procrastinating – “We’ll downsize or reverse mortgage later.” Higher inflation implies higher interest rates. If you’re going to downsize and finance part of the purchase, why not make the transition before mortgage rates significantly rise? And, if you’re going to reverse mortgage, higher rates may mean a lower amount of accessible cash. Second, inflation can decimate the value of electing a lifetime of fixed payments. Using the example above, if you reversed today, an $847 monthly check may be sufficient to augment your retirement income today. Will that same $847 check be enough in 20 or 30 years?

Non-borrowing spouse – What if you’ve remarried… the pool boy (or gal) – i.e. you were 62 or older and qualified for the HELC, but not your partner – or your partner wasn’t listed on the title (or didn’t want to sign the loan papers)? And what if you died? He or she likely needs to find another roof, and the reverse monthly checks cease. Spousal protection cases are currently in the courts. What steps should you do today in planning for the future?

A piece of pyrite sits in my office. It’s heavy, multi-faceted and shiny. As “fool’s gold,” it’s a reminder to me that things aren’t always what they appear to be. Talk to your advisors. Get legal counsel. Think things through.

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Going for the Gold

They’re soaring, flying, gliding and scoring. Men and women from across the globe are competing in Sochi for the gold. My athletic glory days may be past, yet I’ll root the youngsters on. However, I’ve got gold to pass on to my heirs.

Baby Boomers are projected to transfer between 12 and 40 trillion in wealth to Gen X and Y. The 40 trillion reflects many pre-2008 Financial Crisis estimates. The 12 trillion reflects potential revisions for lost wealth or joblessness. Nevertheless, two take aways are (a) younger generations stand to be prudent and conservative accumulators of wealth – skeptical of fast and easy money, and (b) it’s still a ton of money.

So what do you do with your inheritance? And on a parallel course, what fine-tuning is appropriate for you Boomers?

Settle the estate. Your parents may have designated you and your siblings to help steer their ship and settle their estate – executor, trustee, and guardian. I remember sitting in my father’s garage as one of the three Loy boys a little over two decades ago. Our father had passed and we had the jobs of settling and distributing his estate. It involved legal and accounting responsibilities, and the personal issues of fairly and equitably slicing the pie. Fortunately, we got along and the jobs were well done. Others aren’t as fortunate. Some say blood’s thicker than water until it comes to money. How well do you work with your brothers and sisters? Will you seek the advice of professional advisors in dotting “I’s” and crossing “T’s?” And how can those third parties help you foster strong family bonds, rather than suffer division?

Outright distribution of assets. Will your inheritance be outright (receipt of assets or a check) or in trust? Some assets transfer outright by the will (e.g. family heirlooms), ownership (e.g. joint banking accounts), or beneficiary designations (e.g. retirement accounts). Are you prepared to take on complex assets (e.g. a business), what if Mom and Dad named sibling #2 as joint owner on all their bank accounts because he or she lived the closest, and do you liquidate your share of your father’s IRA (and pay the taxes) or rollover to an inherited IRA account (tax deferral) and take required minimum distributions over your lifetime? Do you keep the investments “as is” (they were good enough for my folks, or refuse to generate taxable capital gains – remember investment markets are indifferent to your ‘cost basis’… the future performance of an investment, good or bad, is going to be the same whether you own it at $1 or your neighbor at $100 per share), or reposition according to your situation? In lieu of writing a check to your favorite charity, how about gifting an appreciated asset?

Distribution in trust. You may receive car keys and a check, yet the bulk of your inheritance may come in trust. There will be strings attached. Perhaps you’ll receive the income from the trust assets each year, however, the principal might be parsed out periodically (e.g. a third at age 35, half at 40 and the balance 5 years later) or it’s reserved for your future kids. It isn’t necessarily because they don’t trust you, rather they’re concerned what might happen to you – a marriage gone wrong or litigation from a car accident. Situations arise from the definitions of “income” and “reasonable expenses for health, education and welfare” (what’s “reasonable”). Competing interests may arise if there are multiple trust beneficiaries – income beneficiaries want maximum income generation yet the residual beneficiaries say heck with income, we want maximum growth. Fiduciaries (trustees, investment advisors, etc.) negotiate these minefields. Get legal and tax advice from experts.

Bottom line, be a good steward of the treasure you’ve inherited. Likely your folks worked hard and sacrificed for that money. The fire red headed Olympic racer Katie Uhlaender currently stands in skeleton medal contention. Whether or not she stands on the medal podium, she wears her deceased father’s 1972 National League championship ring around her neck. She doesn’t ride alone.

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New Year Brings Financial Renewal

He was the youngest President at age 42 following McKinley’s assignation, led an uncanny regiment of cowboys and Ivy League polo players at San Juan Hill, and was a renowned reformer rooting out corruption, cronyism and slackers. He was called Theodore, Teddy, or TR. And I’ve gained a deeper respect for Theodore Roosevelt from reading David McCullough’s historical narrative “Mornings on Horseback.” I better understand the background and family that helped mold the gregarious, boisterous, and interesting TR.

During TR’s lifetime, the US had grown to the world’s greatest economic power largely due to innovation. At the time TR was born, a farmer needed about sixty hours to grow and harvest a single acre of wheat. Four decades later, in the late 1880’s, a farmer needed only five. The threshing machine had greatly improved agricultural productivity.

Technology, discovery and innovation are engines of economic growth and enhance our lives. Consider a handful of advancements or breakthroughs that happened this past year:

Bioengineering – Doctors implanted the first synthesized blood vessels into a patient potentially leading to development of bioengineered veins for heart disease, and whole organs or body parts. Controversial stem cell research continues to shorten paths to      cloning, organ generation, and new treatments for Parkinson’s and diabetes.

Medical technology – New technique in cardiac MRI (T1 MRI) advances the detection of early childhood heart diseases. Researchers are attempting to integrate MRI and PET imaging to improve organ evaluation without less radiation exposure. And others explore the benefits of using silver in antibiotics.

Technology – Scientists created the equivalent of a lithium-ion battery, a nano battery, thousands of times smaller than a human hair that could be used in tiny machines (e.g. cardiovascular study). German scientists harnessed brain signals via EEG to brake a moving car quicker. 3D printers are creating jet parts. Artificial intelligence is expanding with advanced voice and image recognition.

These and future advancements have significant impact in wealth and financial planning. They provide us more efficient tools. They offer potential business and investment opportunities. And we plan to save more so our retirement monies cover longer life expectancies, the costs associated with aging, and inflation protection.

And with the dawn of a New Year, it’s time to refresh your personal financial plan. Here are some things to review:

How much is enough – Make sure you’re on track with your saving and spending plans and that you’re well-funded for retirement.

When  should you tell your heirs – The best time to have that conversation varies. Some feel they should be well-prepared. Some think secrecy is best. And others are a bit too young.

Any issues – There’s a growing trend to keep assets in trust for your heir’s protection. This includes upping the age when assets are freely available to them. Factors may include broken relationships, their financial issues, and a litigious society.

How to split the Mars bar – Situations where all heirs might not be treated the same include equalizing prior wealth sharing (e.g. financial support, college costs, etc.), second marriages, or skipping to grandchildren.

Best person for the job – Designating successor executors and trustees are important decisions. Some issues include longevity, capability, and maintaining positive relationships.

May you be blessed with peace, the reality of hope, and the joys of health and opportunities in the New Year.

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Preparing for Your Holiday Feast

Life can resemble flour in the Kitchenaid. Often it blends in smoothly. At other times, you’ve got a powdery mess. You clean it up and keep going.

Hopefully the year’s been good to you. If not, a new one is dawning. Here are some reminders as you look to the future… where you and your family will spend the rest of your lives.

Save more – Socking away sufficient savings, plus smart investment strategies put you well on the road for living with dignity and independence in retirement. Prudent savers build nests with both after-tax, and retirement accounts – plus real estate and business investments. Retirement accounts are convenient (forced savings) and there are a couple of barriers from dipping into them before you retire (taxes, and potential early withdrawal penalties). But build your after tax savings as well and build that into your budget – you’ll be happier when a portion of your future withdrawals aren’t fully taxable.

Pre-tax savings go to your IRA, 401k, or deferred compensation plans. The contribution limits aren’t changing dramatically for 2014. And if saving has been challenging (e.g. job cutbacks or kids moving back home), consider increasing your deferrals starting January. Saving $100 per month will accumulate to about $46,200 in 20 years if you’re averaging 6% returns; 30 years of savings grows to about $100,400. If you increase that savings by $20 more a month, it could mean an additional $9,200 and $20,100 over the same periods, respectively.

Watch your debt – Consumer debt rose to $11.3 trillion during the third quarter according to a Federal Reserve Bank of NY report. It was the biggest increase ($127 billion) since 2008. Components included mortgages (up $56 billion), student loans (up $33 billion), auto loans (up $31 billion), and credit cards (up $4 billion). Factors could be the sluggish but growing US economy, the need for increased skills and training, and rising confidence by some households buoyed by rising home prices and retirement account balances. The Commerce Department reported home construction grew to a five year high in November to an annualized rate of 1.09 million units. Locally, the Reno/Sparks Association of Realtors reported that sales prices have remained stable the past five months; however, the October median home price ($215,000) is up 19.4% compared to a year ago.

Rising consumer debt is a double-edged sword. Consumer spending is the largest driver of our economy. However, more debt, and/or higher costs to service that debt (from rising interest rates or fees) risks your ability to adequately save for retirement. Meet with your lenders and “fix” adjustable rate debt (ARM mortgages, equity lines, lines of credit, etc.) where possible – a 2% rise in interest rates on $100,000 will increase your monthly payments by about $167. And homebuyers are likely to see higher borrowing costs from increased fees on government-backed loans. The hike in guarantee fees by Fannie Mae and Freddie Mac take effect in March and the rates are based on creditworthiness – borrowers with low credit scores or down payments under 20% will likely pay more).

Celebrate your accomplishments and check your course – Many businesses have completed their annual budget and strategic and marketing plans for 2014. Households are advised to run their finances like a business as well. Uncertainty will always persist (economic, political, markets, your longevity, etc.). However, the stakes are high – your goals and your future – and best you get all stakeholders at the planning table (your spouse and advisors) to help you think things through, set priorities, and adjust contingency plans.

Financial planning and a preparing for a scrumptious holiday celebration with your family share a common thread. You expect the best, plan for the worst and brace for surprises. Happy holidays and may you have a healthy and peaceful New Year.

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Build Arks in the Sunshine

He was six hundred years old when the he and his family boarded the vessel which would save their lives and protect their precious cargo from the ravaging floods. You and I might not have Noah’s longevity. Hopefully, we each command commitment, competence and courage, and build our arks while the sun’s shining.

Protect your wealth and liquidity – Investors tend to be more complacent and less risk adverse when their monthly account statements continue to post gains – largely from US stock market advances. It’s not a question of if the stock market will correct, it’s when. Stay alert, maintain disciplined diversification strategies, and don’t put short-term need money at risk (e.g. your tax bill in April, daughter’s wedding in June, or planned expenses 1-3 years out).

Here’s an example. Some employees in the Nevada PERS retirement system are eligible to increase their pension benefit by purchasing up to five years of service credit. The cost is based on your age and current average compensation – if the cost to buy one year is $30,000, then the cost for five years is $150,000. Sources to fund the purchase can be tax-deferred accounts – 401k, IRA, 457 plan, etc. (Consult with your tax advisor and benefits manager). Say you’re considering using your 457 plan, it’s diversified with equity mutual funds, and you’re going to make the purchase soon to avoid higher future costs. Consider selling plan assets now and park the $150,000 in the money market to reduce market risk. Until you actually transfer the 457 funds to PERS, you’re forgoing the opportunity for market gains for the benefit of not losing money. Most investors hate to lose.

Revisit your savings and spending plans – Tax deferred limits to retirement plans (IRAs, 401k’s, etc.) generally remain unchanged for 2014. That may encourage investors to save more (and balance their nest eggs) into after-tax vehicles (e.g. individual, joint or trust accounts). On the other side, expenses tend to rise – e.g. inflation and rising interest rates. There may be other areas. My medical insurance costs are increasing under Obamacare. I’m grateful I didn’t receive an immediate cancellation notice. Instead, I was informed my coverage would be cancelled in 12 months, I’d pay a 16% premium increase for the interim, and per the State’s exchange site, the cheapest replacement coverage costs 59% more. No, I’m not happy. I’ll grouse. And while I’ll “hope” for changes with ACA, I’ll search alternatives and make adjustments to stay on track with my savings plan, and spend less to balance my budget.

Stay vigilant for more regulation and reform – Retirement planning is but one area. The three main issues being discussed in Washington are fiduciary rules, tax reform and IRAs. Fiduciary issues – the focus on putting clients’ interests first (fiduciary) vs. “suitability” standards (brokers) – are debated at the DOL and SEC. The debt ceiling and budget crises haven’t gone away. Government is hunting for more revenue. And tax incentives for retirement saving are under scrutiny. The President has proposed limiting how much Americans can sock away for retirement, and Representative Camp and Senator Baucus – two leading tax law writers – have stated their intentions for a broad “blank slate” approach to tax reform. And IRAs – representing about $5.1 trillion in retirement assets – are coming under increased pressure for uniform disclosure notices (think about the additional information you receive on self-directed 401k’s).

Boiled down, money issues are emotional, and despite da Vinci’s “Simplicity is the ultimate sophistication,” wealth management is complex. My advice… be financially literate, and seek competent and trusted advice. Have a safe voyage.

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Lessons from the Titanic

The magnificent ship failed to reach her destination. Consider the valuable lessons from the disaster that claimed more than 1,500 lives –

• Moderation versus full speed ahead
• Illusive goal of invincibility
• Challenges may loom larger than what we see on the horizon
• Big issues don’t lie at the surface
• And, icebergs don’t move

I share two discussions. First, we’ll explore some strategies to navigate one of two certainties in life – the ‘icebergs’ of death and taxes – the 3.8% Medicare surtax. And remember the shield of invincibility we carried in our youth? Kids today face a world of uncertainty – career and employment outlooks, accumulation of debt, and aging family members to name a few. So second, I’ll summarize three discussion areas with college students that gave me renewed optimism about young adults – our leaders of tomorrow.

Navigating the 3.8% Medicare Surtax

If you’re having a good year, so is the IRS. Some taxpayers view higher taxes as a cost of doing business. Others seek solutions for tax minimization and healthy wealth transfers. The new surtax is a provision of Obamacare. While it (and the 0.9% Medicare payroll tax) affects higher income taxpayers, tax reduction strategies may apply to taxpayers across the board.

• The surtax is complex. The strategies aren’t. Keep your income below the tax thresholds. Discuss with your tax and legal advisors.

• Net investment income (NII) – dividends, interest, capital gains, rent, passive activities, etc. – is subject to tax if modified adjustable gross income (MAGI) exceeds $250,000 for married filing jointly (or $200,000 for individuals). If a couple has $300,000 MAGI and $75,000 of NII, only $50,000 is subject to the surtax, and the tax is about $1,900 ($50,000 times 3.8%).

• Reduce Income – Contribute to 401k plans (current deferral limit is $23,000 for 50 year olds and over) and non-qualified deferred compensation plans. Look at tax-free (e.g. munis), tax-deferred annuities (not my favorite – potentially converts favorable capital gains to ordinary income, and surrender charges), or cash value life policies. Consider Roth IRA conversions (current tax from conversion versus tax-free withdrawals) if you expect future income to rise (e.g. SS and retirement plan distributions). And possibly spread capital gains over multiple tax years via installment sales.

• Gift Income – Remove income producing assets by gifting to charities or lower taxed family members. Qualified charitable IRA distributions were extended through 2013 for 70-1/2 year olds and over ($100,000 limit). Gifting appreciated stock, CRTs and CLTs are additional options.

Youth Manning Up to Realities

I was eager to lead two college class discussions. What words of wisdom and encouragement, and stories of mistakes made could I share with students? I focused on the financial planning process (case studies), investment strategies, and career opportunities. However, I was most interested in hearing what was on their minds. Here are my take-aways from those bright kids.

Debt and Cash Flow Management – They want to keep their finances in order, establish and maintain credit, and budget for saving and spending. They see the pressures of over-extended households, underwater homes, and national debt.

Investing for the Future – Currently the maximum SS retirement benefit is $2,533 per month, the average benefit is $1,224, and for half of couples 65 and older (and three quarters of singles), more than half of their retirement income comes from SS. But students asked “What if Social Security isn’t there for me?” They recognize a greater burden on their shoulders to invest – for retirement, emergency reserves, and in themselves.

Growing Older – Estate planning serves important roles. Areas of concern include aging family members (care giving, medical and assisted living expenses), talking to parents about their financial future, and inheriting wealth (being good stewards, and keeping peace in the family).

The luxury ship with her magnificent amenities lacked a sufficient number of lifeboats. Continue to put things in your favor and plan ahead.

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