Cut The Clutter

Thank Money Magazine for this.  If you are looking for some quick guidelines for how long you should keep financial documents in your filing cabinets (or stacked on your kitchen table), please look below:

DOCUMENT                                               HOW LONG TO KEEP

Tax returns                                                    Forever

Tax backup (receipts, W-2s, etc.)        Six years (IRS has this long to audit)

Year-end investment statements        Until six years after you sell, for proof of gains and losses for taxes

Pay stubs                                                        Until you get your W-2 in January

Receipts for home improvements       Until six years after you sell the home, for tax purposes

Receipts for big-ticket purchases        As long as you own the item, for warranty and insurance claims

Money Magazine, December 2011.  pull-out insert Money Management for the Time-Pressed

2011 = Volatility; 2012 = Muddling Through?

2011 was remarkable for its volatility, both in worldwide events and in investment markets. Protests and demonstrations took place throughout the middle east and elsewhere. Osama bin Laden, Muammar Qaddafi and Kim Jong Il all met their demises. We have seen the flaws of adopting a common currency (euro) without common cultures and fiscal integration. And also experienced suffering and destruction on a grand scale as the costs of natural disasters were estimated at $350 billion: Earthquake and tsunami in Japan ($210B), Floods in Thailand ($45B), Earthquake in New Zealand ($25B), Hurricane Irene along the east coast ($15B) and Tornadoes and storms in Alabama ($12B).

We know several things that will happen in 2012: a U.S. presidential election in November, Summer Olympic games in London and craziness accompanying the supposed end of the world on 12-21-12. The question for equity investors is which way are stocks headed in what some are terming as the Great Stagnation – where reduced public spending and anemic private sector growth makes it feel like the economy is churning but not really going anywhere.

There is a tug of war happening over the long-term inflationary outlook that could be decided this year. The price of gold has been on an upward trajectory since 2007, an indication that some investors feel that inflation is read to take off. That would normally be very bad news for government bonds because inflation erodes the value of fixed-term investments. However, ten year Treasury bonds are yielding less than 2% which indicates that bond investors are far more concerned about deflation rather than inflation. Either of these divergent outcomes could lead to serious challenges for the economy. The best outcome for stock investors is for both of these camps to be wrong and that the global economy will continue to muddle through, with low interest rates and little inflation.

Also look for an inflection point in 2012 where emerging economies overtake developed economies in the percentage share of world imports. In 2000, they only imported half as much as rich countries so there has been a major shift over the last decade plus. It is anticipated that China will overtake America as the world’s biggest importer by 2012. This rapid growth in developing countries’ buying power will boost the profits of companies in rich economies over the coming years.

Source(s):
Bloomberg Businessweek, December 26, 2011 – January 8, 2012. pages 15-25, 82.
The Economist: The World in 2012. pages 139-140.

Heightened Volatility: The New Normal?

The U.S. economy can’t find its footing — and every piece of bad news, whether at home or abroad, has the potential to send the markets reeling. All that volatility can make it tough on investors to stay the course.

It’s not your imagination: The stock market is bumpier than normal. TheU.S.economy can’t find its footing — and every piece of bad news, whether at home or abroad, has the potential to send the markets reeling. All that volatility can make it tough on investors to stay the course.

Historically speaking, the market today is about three times more volatile than it has been in the past. Specifically, the S&P 500 rose or fell by 2% or more an average of 5 times per year from 1950 until 1999. Since 2000, however, that average jumped to 12.5 times per year for advances and more than 14 times for declines.1 What’s more, 10 of the 20 largest daily upswings and 11 of the 20 largest daily drops since the beginning of 1980 have occurred within the last three years.²

Who or what deserves the blame for heightened market volatility is difficult to say. On the economic side, uncertainty about when and how fully the economy will recover is a major factor. So are factors such as the heightened reliance on government monetary policy, unsustainable fiscal trends, and the apparent lack of collaboration among legislators inWashington. On the investment side, high-frequency trading, hedge funds, and inverse and leveraged ETFs all contribute to the volatility.

What Can You Do?

Regardless of the drivers, heightened volatility requires individual investors and their advisors to exercise specific investment strategies. While many of these strategies are basic investing concepts that can be applied at any time, they are particularly important in a volatile environment.

• Don’t follow the herd. Don’t sell into a rapidly declining market and don’t buy into a rapidly rising market. You’ll just be following the herd and locking in losses. Panic selling also runs the risk of missing the market’s best-performing days. For example, missing just the 5 top-performing days of the 20 years ended December 31, 2010, would have cost you more than $19,000 based on an original investment of $10,000 in the S&P 500. Missing the top 20 days would have reduced your average annual return from 9.14% to 3.00%.2
• Keep a long-term perspective. It is all too easy to get caught up in the stock market’s daily roller-coaster ride. This type of behavior is natural, but can easily lead to bad decisions. Instead, focus on whether your long-term performance objectives, i.e., your average returns over time, are meeting your goals.
• Take advantage of asset allocation. During volatile times, more risky asset classes such as stocks tend to fluctuate more, while lower-risk assets such as bonds or cash tend to be more stable. By allocating your investments among these different asset classes, you can help smooth out the short-term ups and downs.
• Consider buying opportunities. Although you may be rightfully gun shy in the wake of the recent market turmoil, one strategy you should seriously consider is selectively adding to your portfolio. This is especially true when prices are low versus historical averages. 

###

Source/Disclaimer

¹Source: Standard & Poor’s Equity Research Services, “Shaken and Stirred,” August 29, 2011.
²Source: The New York Times, “Market Swings Are Becoming New Standard,” September 11, 2011.
³Source: Standard & Poor’s. For the period indicated. Stocks are represented by the S&P 500, an unmanaged index that is generally considered representative of theU.S. stock market. Past performance is not a guarantee of future results.

This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by  Jeff McClenning, a local member of FPA.

Capital Markets Outlook

What in the world is going on with the market?  I get this question posed frequently to me and it presents both a challenge and an opportunity.   The challenge stems from the fact that there is typically no context, such as timeframe, and no clear reference to which market is under consideration (stock, bond, commody, currency, U.S., foreign, etc.).  So I typically will find a way to reverse that initial question in order to get more information from the asker before answering.  The opportunity arises because we have access to what the top investment managers in the country are thinking, from boutique firms that most people have never heard of all the way to world-reknowned firms that have come under misguided scorn of late.  So we have decided to put a representation of the most easily comprehendable current market commentaries on our website on the Capital Markets Outlook page.  Bob Jerkovic CFA, portfolio manager for CLS Investments puts out a weekly market commentary along with a video preview.  He has just recorded and published their CLS 3rd Quarter 2011 Review videowhich discusses the following, among other things: Range-Bound Markets Headline Driven Trading Obession with European Union Sovereign Debt Risk How Diversification hurt Portfolio Performance in the 3rd Quarter U.S. Stocks Lost Less, and  U.S. Treasuries Outperformed despite the Downgrade Investor Risk Appettite at All-Time Low Market Bubble in Risk-Free Assets So one section of the Capital Markets Outlook page focuses on current market commentary while the other is used to highlight some of the important philosophies and research that our investment management partners utilize when constructing portfolios.  The information on the website is not meant to be a replacement or a substitute for speaking to us.  It is also only a small representation of the hundreds of managers that are available and who typically have divergent views from each other.

Gwinnett County Safety Festival Pics

The kids had a blast at the Gwinnett County safety festival at Coolray Field on Saturday.  Chase enjoyed seeing himself dance on the police command center security camera while Blake liked the firetrucks and free ice cream.  Beating the padded swat team bad guys with batons was a big hit as well.  A couple of pictures:

10 things Smart Money won’t tell you about Social Security

You know Smart Money’s regular feature “10 Things ____ Won’t Tell You”— the sometimes informative but mostly cynical column that implies that everyone, from economists to your parents, is out to scam you? Well, the latest is “10 Things Social Security Won’t Tell You”. As a retort, here’s my “10 Things Smart Money Won’t Tell You About Social Security.”

1. Social Security CAN pay its bills. Don’t confuse the federal budget deficit with Social Security’s self-funded system that has accumulated a $2.6 trillion SURPLUS. Social Security’s only connection to the federal deficit is that the bigger the surplus, the more it lends to the U.S. government. In a twist of logic, the more solvent Social Security is, the more indebted the U.S. government becomes. That’s not Social Security’s problem. Social Security has its own dedicated source of revenues with current projections calling for full benefits to be paid until 2036; after that, revenues will be sufficient to pay 77% of currently promised benefits. The system is likely to be reformed before then.
2. The more you earn, the higher your benefit will be. OK, so there may be diminishing returns for someone who has maxed out Social Security every year for 35 years. But this information by Smart Aleck—I mean Smart Money, is not helpful. What is helpful is for everyone, especially women, to know that if they work a little longer and earn a little more, they can increase their lifetime Social Security income.
3. Social Security is a better deal now than it used to be. The formula used to escalate benefits for each succeeding age cohort is based on average wage growth, which has caused benefits to be higher for baby boomers than for seniors who retired, say, ten or 20 years ago. Smart Money chose to compare today’s retirees with those born in 1915 who were the beneficiaries of a brand new system that paid out more than it took in from those early beneficiaries.
4. Want a bigger check? Delay the start of benefits. Smart Money admonishes: “go back to work.” However, it then goes on to correctly explain that when benefits are withheld before full retirement age due to the earnings test, the benefit is adjusted at FRA to “account for the money you didn’t get while working.” The headline is not inaccurate, but it makes Social Security seem punitive when it’s really quite accommodative by letting people apply for benefits as early as age 62 even though they’re working.
5. If you become disabled, Social Security will be there for you. SM’s “good luck qualifying for disability” focuses on the negative and is again not helpful. More than 8 million people receive Social Security disability benefits—a lifeline if there ever was one.
6. Unemployed at 62? Consider all your options. While it’s true that people in most states can receive Social Security and unemployment benefits at the same time, filing for Social Security at 62 may not be the best move if you’re unemployed. It might be better to take the unemployment and draw from personal assets to avoid taking a permanently reduced Social Security benefit. Again, Smart Money is not inaccurate, but it’s not very helpful.
7. People can’t change their Social Security number, so don’t try to scare them. Back in the day before identity theft, the SSA assigned successive Social Security numbers based on where they lived. So SM astutely points out that identity thieves can figure out your SSN from your Facebook page. Come on. We all need to be aware of identity theft, but this is pandering to fears people already have about cyberspace. Everybody knows to protect their Social Security number and watch for ID theft. If someone wants to figure out your Social Security number based on where and when you were born, there’s not much you can do about it.
8. SSA has a very low error rate. In fiscal year 2009, the SSA error rates for overpayments and underpayments were 0.37 percent and 0.09 percent, respectively. This is very impressive for a bureaucracy that pays over $700 billion in benefits annually to some 60 million people. Yet SM dwells on the fact that sometimes living people are incorrectly added to SSA’s Death Master File. Please.
9. Tax planning never stops. OK, so maybe Smart Money is doing a good thing by alerting people to the fact that their Social Security benefits may be taxable. Apparently 42% of people surveyed by the Financial Literacy Center didn’t know this. But would SM dare send people to their financial advisor to look for ways to lower their taxable income? Not a chance.
10. As long as you live, your Social Security benefit will be adjusted for inflation. Once again, SM takes the negative view, focusing on the method by which COLAs are determined. There has long been controversy over the use of the CPI-W as the inflation index because it may not accurately reflect the spending patterns of Social Security recipients. But this, combined with all the other snide “things Social Security didn’t tell you” just casts Social Security in a negative light when a far better approach would be to help people learn about the system’s nuances in the context of appreciating and maximizing their benefits.

How to Takeover an Aging Parent’s Finances

Like many difficult situations with people we love, planning to take over an older relative’s finances is best done in happier times, when both sides are healthy and various options can be considered.  Unfortunately, events can sometimes intervene – death, illness or natural disasters can make an elder’s need for assistance a critical matter. 

Once stricken, older relatives may be unable to understand questions or express their wishes in proper detail. If there is no plan, family members grasp at responsibilities – or shirk them – without any idea of what the older relative would really want. 

What’s critical to understand is that such talks should go far beyond money. They need to be discussions about independence and basic preferences for the way an individual wants to live or die. Demographers believe that with the rising number of single Americans – those divorced or never married – these conversations will become increasingly complicated as they fall to nieces and nephews, younger friends or designated representatives. 

Want to avoid a worst-case scenario? Start the conversation now. Here are some ideas: 

Decide what’s important to talk about first: Maybe this conversation isn’t just about where the will or health care power of attorney is. Maybe this conversation is about you noticing that a parent or loved one is moving slower, is more forgetful, is clearly looking like their health has taken a turn for the worse – and maybe that’s why you want to know where the will is. Jumping into money issues first is usually a mistake. Deal with immediate health and lifestyle issues first. 

Explain why you want to talk about finances: In some families, having a successful financial discussion means several attempts and some frustration. Don’t let yourself become angry or frustrated – just keep starting the conversation until it catches on. It might make sense to say something like, “You’ve always been so independent, Mom. I just want you to give us the right instructions so we do exactly what you want.” 

Prepare your questions in advance: When a parent or relative is unconscious or unresponsive, the younger relative is immediately in the drivers’ seat. That’s why it’s critical to make a list of questions for the elderly relative to answer in detail. The basics: Where important papers are, how household expenses are paid, who doctors and specialists are, what medicines are being taken and whether there’s a will, an advanced directive and a funeral plan (and money or insurance proceeds to pay for it). There may be dozens more questions beyond these based on your family’s personal circumstances. But in creating this list, ask yourself: “What do I need to know if this person suddenly becomes sick or dies?” 

Offer to get some qualified advice: If you don’t fully understand your relative’s financial affairs, it might make sense for you both to talk to an attorney or a tax or financial adviser. A qualified adviser can offer specific suggestions on critical legal documents that should be in place and ways to make sure accounts to pay medical and household bills are accessible to the older person and the designated friend or relative who will hold power of attorney.

Plan a caregiving strategy together: You should discuss the relative’s preferences and trigger points for various stages of heath care. An individual always wants to stay in his or her home, but you should have an honest discussion about how much you can do at home as a caregiver and whether various services (home health aide, geriatric care manager, assisted living) should be introduced at various stages. Talking through what a parent will be able to live with at various health stages – and putting that information in writing – will save plenty of doubt and bitterness later. 

Discuss what should happen with the home:  If an elderly relative becomes sick and irreversibly incapacitated, the equity in his or her home may come under consideration as a resource to pay uncovered medical or household maintenance. Since the home is both a major asset and an emotional focal point, it’s best to get good advice and spell out specifically what the elderly relative wants done with his property and under what conditions. 

Make sure everyone knows the plan: Once you settle on a strategy, make sure all family and friends understand the plan and their assignments.

A Taxing Situation…Osama Burial at Sea Video

Taking it All still won’t work

To rank in the top 2% of all US taxpayers required an adjusted gross income (AGI) level of at least $253,197 for the 2008 tax year (the last year that tax data is available).  This high-income group paid 46% of all federal income tax paid by individual taxpayers in 2008.  If every individual taxpayer in this group paid federal income taxes equal to 100% of his/her AGI, an additional $1.633 trillion of federal income tax would have been raised.  The Treasury Department estimates a $1.645 trillion budget deficit for fiscal year 2011 (the 12 months ending 9/30/11).

So even if you suspend common sense, that people would choose not to work if income tax rates become too onerous, there are still not enough taxpayers in this high income group to cover one year of the federal budget deficit if they sent every nickel of their earnings toWashingtonD.C.

And finally, buried in all of the headlines, politics and hand-wringing over the debt ceiling debate was the release of the video capturing Osama bin Laden’s actual burial at sea.  You can view it for yourself here:  http://www.military.com/video/operations-and-strategy/terrorism/osamas-sea-burial-caught-on-tape/941551903001/

Remember to stay safe and buckle up on those summer car (and helicopter) trips.

Questions about Saving for College

We tried to beat the mad rush yesterday and purchased school supplies for my oldest son  (Chase starts Kindergarten in August).  If you’re like most Americans with school-age children or grandchildren, you may be wondering how you can ever save enough money to send them to college.  Every year you hear that college costs are rising more than inflation and that, 18 years from now, it will cost a lot more to send a child to college. 

I have condensed the information about some popular ways to save for college into some frequently asked questions listed below:

 Q:  Why start a college savings plan early?

A:  The longer you wait, the more money you’ll need to save to meet your goal.  By the time today’s newborns are set to enroll in college, four years at a public university will cost more than $200,000.  While getting an early start is key, it’s never too late to begin saving for the educational objectives of those you care about.  Doing so can make a meaningful difference – by potentially reducing the amount you or the account beneficiary may need to borrow to pay for school.

Q:  What are some tax-advantaged ways to save for college?

A:  Section 529 savings plans and Coverdell Education Savings Accounts are the two most popular ways to save for college.  Many investors also use custodial accounts such as those authorized under a state-sponsored Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minor Act (UTMA).

Q:  What is a 529 savings plan?

A:  Named after Section 529 of the Internal Revenue Code, 529 savings plans provide a tax-advantaged way to save for qualified higher education expenses.  These plans are generally sponsored by individual states, while plan assets are professionally managed by independent investment firms or state government agencies.  Anyone can open a 529 savings account regardless of income level and contribute up to $13,000 ($26,000 for married couples) a year without gift-tax consequences.

Q:  What are some of the features of Coverdell Education Savings Accounts?

A:  Coverdell Education Savings Accounts have been offering tax-free withdrawals for higher education since 1998.  Unlike 529 savings plans, withdrawals can be used for elementary and secondary education and even for academic tutoring and education-related computer expenses.  There are income restrictions though.  If your income exceeds certain limits, you will not be eligible to contribute to a Coverdell account.  Annual contributions are also limited to $2,000 a year.

Q:  Can I invest in both a 529 and Coverdell account?

A:  Yes, investments in a 529 savings account will not affect your ability to invest in a Coverdell Education Savings Account for the same beneficiary.  Investing in both can be an especially good idea because the two complement one another.

Q:  Are UGMA and UTMA accounts still good choices?

A:  For many years, UGMAs/UTMAs were the only substantial education savings vehicle available, so many investors have built up sizable amounts in these accounts.  UGMA/UTMA accounts do not have income or contribution limits.  And, at least part of your earnings may be exempt from federal income tax.  Some or all will be taxed at the child’s lower rate if the child is under age 18.  Contributions to UGMA/UTMA accounts are irrevocable, meaning that once the money or other property has been given, you cannot change your mind and withdraw the gift.  You can withdraw money anytime for the benefit of the child – not just for education.  The child assumes control of the account upon reaching the age of majority (age 18 in Georgia).

Q:  Do gift-tax rules apply to college savings plans?

A:  Contributions to 529 savings plans, Coverdell Education Savings Accounts and UGMA/UTMA accounts are subject to gift-tax rules.  Under these rules, you can contribute up to $13,000 a year ($26,000 for married couples) without gift-tax consequences.  Under a special election, you can invest up to $65,000 ($130,000 for married couples) to a 529 account at one time by accelerating five years’ worth of investments with no federal gift-tax consequences.

Q:  What if my child does not go to college?

A:  With a 529 savings plan, you can leave the money in the account in case your child decides to attend college at a later time.  Or you can select a new beneficiary, including yourself or anyone who is a member of the current beneficiary’s family.  If you take the money out for anything other than education, you will pay ordinary federal income tax plus a 10% penalty on the earnings.

With a Coverdell account, the recipient must use the assets by the time he or she reaches age 30, or a new beneficiary must be named.

For UGMA/UTMA accounts, you will owe capital gains tax whenever mutual fund shares, stocks or bonds are sold.

Happy Birthday! Rattle…rattle…rattle…

10,000 Americans turned 65 today.  Each day for another 20 years approximately that same number will be having similar celebrations.  For a married couple in their sixties, there is a very high likelihood that at least one person will live another 30 years.  By far the single biggest risk for folks in retirement is an erosion of their purchasing power.  Or, put more simply, the prices you pay for stuff is going to be higher 30 years from now than it is today.  We all know this to be true based upon our own life experiences.

We all remember certain prices for things when we were kids, such as for a movie, soda or candy bar.  And you likely know how much you paid for your first home or car (and the gas used to fill it); how do those prices compare to now?  For that newly-minted 65 year old, the price of a postage stamp was 3 cents on the day they were born, a barrel of crude oil was $1.63, an ounce of gold was $34.71 and the Dow Jones Industrial Average stood at 210.13. 

In 2011, the price of a 1^st classU.S. postage stamp is 44 cents (15 times higher), a barrel of oil is $95.29 (58 times higher), an ounce of gold is $1532.50 (44 times higher) and the DJIA is at 11,897.12 (57 times higher).

Someone was recently describing to me a TV show that they watched on the National Geographic channel about rattlesnakes.  Did you know that a rattlesnake will not attack you without warning you first?  So if you are walking in the desert, hear that rattle announcing “Hey!  I’m a rattlesnake about to bite you” and are dumb enough to ignore it, you are going to get yourself into trouble. 

The rattlesnake of investments right now is Fixed Income.  The name of the asset class is telling you what is going to happen:  your return is fixed; it is never going to go up and is certainly not going to keep pace with the prices of the stuff you will be buying over the next 30 years of retirement.

With all of the fear and scarecasts being spewed by the 24 hour news cycle it is very easy to become deaf to that rattle and go all in to a supposedly safe place.  Sure there are a lot of economic and political challenges right now, there always have been.  The greatest companies ofAmericaand the world are going to continue to provide incredible products and services that everyone needs and enjoys, and also figure out a way to make money along the way.  Are companies like Coca-Cola going to stop selling sugary water to the people of this planet?  Is Apple going to stop making new and improved iProducts?  Why not give yourself at least a chance to stay ahead of the game for the long-term.

Remember, you want to match short-term assets to short-term liabilities and long-term assets to long-term liabilities.  I am not advocating selling all your bonds as they still represent an important piece of a well-diversified portfolio to help absorb the shocks from riskier assets during times of crisis.

Have a 30-year retirement income strategy, stick with it, and allow us to help understand your perspective and your fears.  Most importantly:  turn off the news and shows with multiple scrolling headlines of vital announcements, breaking news pop-ups, overly dramatic sound effects, etc.  Otherwise, you may not hear the rattles.