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American Taxpayer Relief Act of 2012

On January 2, 2013, the President signed the American Taxpayer Relief Act, thus ending the nation’s brief stint over the “fiscal cliff”—a confluence of expiring Bush-era tax cuts and the imposition of scheduled spending cuts—but not the national debate over revenue and spending issues.

The Act increases taxes for high-earners as well as trusts, and defers for two months significant automatic sequestration cuts that had been set to take effect on January 1, 2013. The cuts are now scheduled to begin on March 1, 2013.

Importantly, the Act also creates two time-limited opportunities for IRA rollovers that older taxpayers may wish to consider taking advantage of this month (see “Time-sensitive opportunity for IRA rollovers,” below).

Individual taxpayers will be most impacted by some of the tax provisions of the Act, which are permanent in that they are not set to automatically expire, and which:

· Extend income tax relief for taxpayers with taxable income below $400,000 (single) or $450,000 (married filing jointly [MFJ]). For taxpayers with income above this level, the top marginal tax rate will return to 39.6%. As anticipated, this income threshold is higher than the $200,000–$250,000 originally proposed by the President, but it is still lower than the $1 million proposed by a number of legislators.

· Raise the top long-term capital gain (LTCG) and qualified dividend rates to 20%. Capital gain and dividend rates will return to 20% for taxpayers above the $400,000/$450,000 income threshold. Qualified dividends will continue to be taxed at LTCG rates, but both gains and dividends will be subject to the new 3.8% Medicare surtax (explained below), effectively subjecting both to a 23.8% rate.

· Restore the personal exemption phase-out (PEP). The personal exemption phase-out is restored for taxpayers with adjusted gross incomes (AGIs) higher than $250,000 (single) or $300,000 (MFJ).

· Restore the Pease limitations. The Pease limitations (the so-called “3% haircut”) on itemized deductions that existed in prior law are restored for taxpayers with adjusted gross incomes (AGIs) higher than $250,000 (single) or $300,000 (MFJ). This limitation reduces allowable itemized deductions by 3% of the amount by which a taxpayer’s AGI exceeds the $250,000/$300,000 thresholds, but not by more than 80%. Not included are select items, such as medical expenses, casualty losses and investment interest expenses. For most high-income taxpayers, especially those in states with high income tax rates, this provision effectively results in a tax increase of roughly 1.2%. Despite much discussion, the Act did not impose any new limitations on key itemized deductions, such as the mortgage interest and charitable deduction.

· Index the AMT exemption to inflation. Prior to this legislation, lawmakers annually had to “patch” the AMT exemption amount to increase the exemption. From now on, the exemption will be indexed to inflation. The provision is effective as of December 31, 2011.

· Set estate/gift/generation-skipping transfer (GST) tax rates at 40%. Significantly lower than the 55% rate that had been set to go into effect on January 1, 2013, the new rate of 40% splits the difference between last year’s 35% rate and 2009’s 45% rate. It also ensures that top transfer tax rates remain above top income tax rates. All three taxes (estate, gift and GST) remain “unified” in their rates.

Set estate/gift/GST tax exemptions at $5 million, adjusted for inflation. These exemptions are indexed for inflation, and all transfer taxes have the same exemption. The 2013 inflation-indexed exemption amount is expected to be $5.25 million, which is $130,000 higher than last year’s $5.12 million. The inflation-adjustment provision may offer significant additional gifting opportunities over time.

· Extend portability of unused transfer tax exemptions. Portability allows surviving spouses (of couples married under federal law) to continue using their deceased spouses’ unused gift and estate exemptions if certain estate tax informational filing requirements are met, thus ensuring the gift and estate tax exemptions are really $10 million (indexed for inflation). The GST exemption is not portable. It is still worthwhile to consider using the lifetime exemptions.

· Extend the deduction for state death taxes. The Act replaced the scheduled estate tax credit with a deduction for state estate taxes paid. Effective estate tax rates may vary by state; for example, the effective estate tax rates (federal and state) of New York, Connecticut and Texas are 49.6%, 47.2% and 40%, respectively.

· Do not extend the payroll tax cut. The Act does not extend the 2% cut in payroll and self-employment taxes.

· Allow in-plan Roth conversions. This provision, which was included in the Act as a revenue raiser, expands the in-plan Roth rollover provisions to permit vested, otherwise undistributable amounts (e.g., 401(k) deferrals, employer matching or non-elective contributions, or earnings) from 401(k), 403(b) or 457(b) plans to be transferred to designated Roth accounts in the same plan. Previously, participants could only convert to Roth accounts money they could take out of the plan as a result of reaching age 59½ or separating from service. This conversion is only possible if plan documents provide for it.

Time-sensitive opportunity for IRA rollovers

In addition to the provisions described above, some other provisions afford taxpayers a time-sensitive opportunity to make IRA rollovers to charity. The Act restores and extends for two years a provision allowing direct rollovers of up to $100,000 per taxpayer, per year, from IRAs to qualified public charities (note that this does not include donations to private foundations or donor-advised funds). Taxpayers can fulfill both their RMD requirements and charitable intentions without generating any income. The provision is effective from December 31, 2011, to December 31, 2013. Due to this retroactive timeframe, the Act includes two special relief provisions that expire on January 31, 2013:

1) Individuals making a qualified direct distribution in January 2013 are permitted to deem the distribution as though it had been made on December 31, 2012.

2) Individuals who took a distribution in December of 2012 can contribute that amount in cash to a qualified charitable organization before February 1, 2013, and have it count as an eligible charitable rollover to the extent it otherwise meets applicable requirements.

In both cases, such qualified distributions would count toward minimum distribution requirements, but not toward AGI (potentially keeping the taxpayer in a lower tax bracket). Such charitable contributions also would not be subject to the Pease limitations on itemized deductions. (Please note that only taxpayers over the age of 70½, whether original IRA owners or IRA beneficiaries over the age of 70½ prior to the distribution, can take advantage of these provisions.)

Medicare tax

Although not part of the American Taxpayer Relief Act, the Supreme Court’s decision to uphold the Affordable Care Act last summer means that the Medicare tax is in effect for 2013 for high-income taxpayers (defined as single filers whose AGI is over $200,000 or joint filers whose AGI exceeds $250,000). This translates to an additional surtax of 90 bps on earned income and 3.8% on unearned income in excess of the threshold. This 3.8% tax also applies to trusts and estates on the lesser of undistributed net investment income1 or AGI over the threshold at which the highest trust and estate bracket begins. It looks unlikely that the President would sign (or that Congress would override a veto of) any new law changing the Medicare tax. The new 3.8% tax on unearned income does not apply to nonresident aliens or fully charitable trusts.

Trusts and estates

Generally, for non-grantor irrevocable trusts or estates with undistributed net income, the top 39.6% tax rate applies to all fiduciary income over the presently projected $11,950 threshold, with no fiduciary income taxed at a 35% rate. As a result, the brackets for estates and non-grantor trusts will jump from 33% for income between $8,750 and $11,950, and 39.6% for income above $11,950. Furthermore, as noted above, the new Medicare 3.8% surtax applies to estates and non-grantor trusts and is imposed on the lesser of: (i) undistributed net investment income, or (ii) the excess of adjusted gross income over the dollar amount at which the highest bracket begins (in other words, undistributed trust income above $11,950 is also subject to the new Medicare surtax). Pease limitations on itemized deductions will not apply to fiduciary income of non-grantor trusts and estates.

Not addressed

Various proposals to restrict use of grantor retained annuity trusts (GRATs), grantor trusts, valuation discounts and dynasty trusts, were not included in the Act. Furthermore, despite much discussion, the taxation of carried interest as ordinary income was not addressed by the Act. These issues may be revisited in the next couple of months in the context of debt ceiling and deficit reduction discussions. To that point, although many provisions discussed above are supposedly “permanent,” that just indicates they are not scheduled to expire automatically, so keep in mind that any of the above provisions can be amended by further legislation.

Strategies to follow

We have appended the chart below showing the highest tax rates resulting from both the American Taxpayer Relief Act of 2012, as well as the Medicare tax provisions from the Affordable Care Act. The Advice Lab will be issuing an In Your Interest later in the month describing planning opportunities and considerations arising from this new legislation.

1 Net investment income includes interest, dividends, royalties, rental income, gross income from a trade or business involving passive activities and net gain from disposition of property (other than property held in a trade or business) reduced by deductions connected to that income.

Reverse Mortgages—As the Market Tanks, More Seniors Are Considering This Option

This Blog Is Sponsored By Soundview Financial’s Reverse Mortgage Guide. For more information on Reverse Mortgages, please visit the Reverse Mortgage Guide by clicking here.

As the value of retirment accounts have been dramatically reduced, seniors are looking at alternative strategies to fund ongoing living expenses in retirement.  A reverse mortgage allows you to tap the equity in your home without having to sell or take out another type of loan.  The proceeds of a  reverse mortgage allow you to pay your bills and stay in your home.

Here’s a basic overview on reverse mortgages.  Remember, to consult with your financial advisor before taking out a reverse mortgage since this type of mortgage may not be right for you and always remember to read the fine print.

Until recently, there were two main ways to get cash from your home:
• you could sell your home, but then you would have to move; or
• you could borrow against your home, but then you would have to make monthly loan repayments.

Now reverse mortgages give you a third way of getting money from your home. And you don’t have to leave your home or make regular loan repayments.

A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. It can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose. You pay the money back plus interest when you die, sell your home, or permanently move out of your home.

Who’s Eligible

All owners of the home must apply for the reverse mortgage and sign the loan papers. All borrowers must be at least 62 years of age for most reverse mortgages. Owners generally must occupy the home as a principal residence (where they live the majority of the year).

Single family one-unit dwellings are eligible properties for all reverse mortgages. Some programs also accept 2-4 unit owner-occupied dwellings, along with some condominiums, cooperatives, planned unit developments, and manufactured homes. Mobile homes are generally not eligible.

How They Work

Reverse mortgage loans typically require no repayment for as long as you live in your home. But they must be repaid in full, including all interest and other charges, when the last living borrower dies, sells the home, or permanently moves away.

Because you make no monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your “equity”) generally grows smaller. But you generally cannot owe more than your home’s value at the time the loan is repaid.

Reverse mortgage borrowers continue to own their homes. So you are still responsible for property taxes, insurance, and repairs. If you fail to carry out these responsibilities, your loan could become due and payable in full.

What You Get

These loans can be paid to you all at once in a single lump sum of cash, as a regular monthly loan advance or as a creditline that lets you decide how much cash to use and when to use it. Or you may choose any combination of these payment plans.

Some reverse mortgages are offered by state and local governments. These “public sector” loans generally must be used for specific purposes, such as paying for home repairs or property taxes. Other reverse mortgages are offered by banks, mortgage companies, and savings associations. These “private sector” loans can be used for any purpose.

The amount of cash you can get from a private sector reverse mortgage generally depends on your age, your home’s value and location, and the cost of the loan. The greatest cash amounts typically go to the oldest borrowers living in the most expensive homes on loans with the lowest costs.

The amount of cash you can get also depends on the specific reverse mortgage plan or program you select. The differences in available loan amounts can vary greatly from one plan to another. Most homeowners get the largest cash advances from the federally insured Home Equity Conversion Mortgage (HECM). HECM loans often provide much greater loan advances than other reverse mortgages.

What You Pay

The lowest cost reverse mortgages are offered by state and local governments. They generally have low or no loan fees, and the interest rates are typically low or moderate as well. Private sector reverse mortgages are very expensive, and include a variety of costs. An application fee usually includes the cost of an appraisal and a credit report. Other loan costs typically include an origination fee, closing costs, insurance, and a monthly servicing fee. These costs generally can be paid with loan advances, which mean they are added to your loan balance (the amount you owe). Interest is charged on all loan advances.

Reverse mortgages are most expensive in the early years of the loan, and then become less costly over time. The cost can be very high in the short term, and is least costly if you live longer than your life expectancy. The federally insured Home Equity Conversion Mortgage (HECM) is generally less expensive than other private sector reverse mortgages.

Consumers considering a private sector reverse mortgage other than a HECM should carefully consider how much more it may cost before applying. Other articles in The Basics section of this web site’s Reverse Mortgages information provide more details on measuring and comparing the total cost of these loans.

Taxes, Estates, and Public Benefits

Reverse mortgages may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner.

An American Bar Association guide states that generally “the IRS does not consider loan advances to be income.” The guide explains that if you receive SSI, Medicaid, or other public benefits loan advances are counted as “liquid assets” if you keep them in an account past the end of the calendar month in which you receive them. If you do, you could lose your eligibility for these programs if your total liquid assets (for example, money you have in savings and checking accounts) are greater than these programs allow.

Visit Soundview Financial’s Reverse Mortgage Guide for helpful links and tips on reverse mortgages by clicking here.

Making The Best of a Bad Year- Consider Taking Tax Lossess

This Blog is sponsored by Soundview Financial’s Tax Preparation Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for tax preparation and tax planning.


Great article in today’s Wall Street Journal on year-end tax planning strategies.  Basically, suggesting making some lemonade out of the series of lemons that were thrown our way in 2008.  Here goes:

With New Year’s Day less than a month away, it’s time to consider converting investment lemons into lemonade.

For most investors, this has been an abysmal year. But if you’re stuck with hefty losses, here’s a way to help soften the blow: Take a fresh look at what’s left of your wounded portfolio, dump losers you were thinking of ditching anyway and use your losses to cut your taxes for this year.

Tax professionals refer to this as “tax-loss harvesting.” While it may not make you feel much better about those ill-starred investments, it certainly can help fatten your wallet at tax time next year — and possibly in future years, too. “It’s a great year to tax-loss-harvest,” says Lawrence Glazer, managing partner of Mayflower Advisors, an investment advisory firm based in Boston.

The basic tax rules are fairly simple. But in your haste to save taxes, try to avoid wrong turns. For example, steer clear of a painful pothole known as the wash-sale rule, says Bob D. Scharin, a senior tax analyst at the tax and accounting business of Thomson Reuters in New York.

Here is a summary of the basic rules of the road, a few twists and turns to watch out for, and advice from investment and tax professionals.

THE BASICS: Although losing money is painful, you can use capital losses to soak up an unlimited amount of capital gains. If your capital losses are bigger than your gains or you don’t have any gains at all, you typically can deduct as much as $3,000 of net losses from wages and other income. The limit is $1,500 if you’re married and filing separately from your spouse, says Mr. Scharin.

Additional net losses get carried over onto your federal returns in future years, which can mean tax savings for years to come. However, capital-loss carryovers survive only as long as you do. You can’t leave them in your will for your heirs.

Naturally, paper losses don’t count. To be able to use your capital losses for tax purposes, you have to actually sell the investments.

These rules aren’t limited to stocks. They also apply to bonds and other securities.

During this year’s presidential campaign, Sen. John McCain proposed increasing the $3,000-a-year limit to $15,000 a year. President-elect Barack Obama hasn’t said whether he favors this idea.

IT’S A WASH: A “wash sale” typically happens when someone sells a stock or some other security at a loss and then buys the same stock, or something “substantially identical,” within 30 days of the sale. That means 30 days before or after the sale — not just 30 days after. Break this rule, and you aren’t allowed to deduct your loss. Instead, you add the disallowed loss to the cost of the new stock; that becomes your basis in that stock.

Thus, if you sell a security at a loss and want to be able to deduct that loss, don’t buy the same security, or something “substantially identical,” within the banned period. What does “substantially identical” mean? It can be a gray area, says Gregory Rosica, tax partner at Ernst & Young LLP in Tampa, Fla. The IRS says it depends on the facts and circumstances of your particular case, and the issue can get surprisingly tricky.

The safest bet: Wait until after the banned period to purchase the security — or buy something completely different. For more details, see IRS Publication 550, or check with a trusted tax expert.

The IRS has finally answered a separate question that lawyers and accountants had debated for years: Could an investor dodge the wash-sale rule by selling a stock at a loss in a taxable account and then buying it back a few minutes later for an IRA or some other tax-advantaged account? The IRS said no: That would violate the wash-sale rule.

TAX RATES: Under current law, the top rate on long-term capital gains on stocks, bonds and other securities is 15%. “Long term” means something you’ve owned for more than a year. If you sell an investment you’ve owned for a year or less, that’s a short-term gain, and it’s usually subject to tax at ordinary income rates. There’s also a capital-gains rate of zero — yes, zero — for people in the lowest brackets, but it’s complicated. To see if you qualify, consider buying inexpensive tax-preparation software programs, such as Intuit Inc.’s TurboTax. For more details, see IRS Publications 550 and 564, available on the IRS Web site (irs.gov).

During the presidential campaign, Sen. Obama called for raising the top long-term capital-gains rate on stocks and other securities to 20% — but only for households making more than $250,000, or individuals making more than $200,000. He also indicated he might delay the idea of raising taxes next year if the economy is weak.

If you sell art, jewelry or other collectibles for a profit, the top long-term capital-gains rate is 28%.

TAX TRAP: With stock prices down sharply, many investors may be looking for opportunities to jump back into the market and scoop up bargains. But if you’re thinking of buying stock mutual funds this month for a regular taxable account, do some homework first. Otherwise, you could get hit with a large tax bill that could easily have been avoided.

This is the time of year when mutual funds typically make their required capital-gains distributions. Those payouts are taxable — unless you’re investing for a tax-advantaged account such as an IRA. Thus, before investing in a fund, be sure to contact the fund and ask whether it’s planning a distribution, how much and when it will be paid, says Mr. Glazer of Mayflower Advisors. If getting a large distribution would have a significant impact on your taxes, consider deferring your investment in that fund until shortly after the date to qualify for the payout — or pick another fund, Mr. Glazer says. Otherwise, you’ll essentially be getting back part of your own investment and owing taxes on it, which would be “adding insult to injury,” he says.

It may seem this couldn’t possibly be an issue this year since most funds have lost money. Logical — but wrong. Not every fund is going to have a distribution, but many will this year despite the decline of your investment, Mr. Glazer says.

STRATEGIES: Don’t ever sell a stock solely for tax reasons. But if you’re considering selling something for solid investment reasons, be sure you at least consider the tax consequences.

Many investors who have ordinary income and who also are stuck with investments that are underwater routinely try to arrange their affairs so that they take full advantage of the net capital-loss rules. That typically means taking enough losses during the year so that they wind up with at least $3,000 in net realized capital losses, which can be used to offset ordinary income. This can be especially helpful for upper-income investors since ordinary income-tax rates range as high as 35%.

Considering giving away stock to charity? If so, don’t donate stocks that are selling for less than you paid for them. Instead, sell the losers so that you can claim a loss that can help you cut your taxes. Then, if you wish, donate the proceeds to charity. If you want to donate stock, donate shares that have gone up significantly in value and that you’ve owned for more than a year.

When making your decisions, take a look at all your investments, not just your deeply depressed stocks. For example, a friend is thinking of selling the New York City apartment that he and his wife have lived in as their primary residence for many years. They expect to make a profit well in excess of $500,000.

Under current law, joint filers who sell their primary residence typically can exclude a gain of as much as $500,000 if they’ve owned it — and lived there — for at least two of the five years prior to the sale. (For most singles, the limit is $250,000.) Gains of more than that are subject to capital-gains taxes.

So how could this New York couple avoid those taxes? They could sell their apartment and also get rid of stocks or other securities at a loss to reduce or even eliminate the excess gains on the apartment sale.

—Mr. Herman is a Wall Street Journal staff reporter in New York.

NOTE FROM EDITOR:  If you’re worried about selling to take advantage of tax loss harvesting because you would potentially lose exposure to the stock market (and therefore miss any potential rebound), consider reinvesting the sale proceeds in a tax efficient ETF until you can reinvest in the stock you sold (31 days).

This Blog is sponsored by Soundview Financial’s Tax Preparation Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for tax preparation and tax planning.

Tips on Social Security

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning

Great article provided by SmartMoney on Yahoo! Finance providing tips maximizing your Social Security payments. Here you go:

While the idea of receiving any sizable Social Security benefits come retirement will likely be a pipe dream for current 20-somethings, it’s still a stark reality for those looking to retire in the next decade or so.

Of course, that’s great news for baby boomers, but it far from guarantees them a worry-free retirement. After all, many soon-to-be retirees will live well into their 80s or even 90s, and their nest eggs need to last along with them. Once that personal savings is gone, they’ll have to depend almost entirely on Social Security for income.

n fact, one out of five elderly married couples (and more than 40% of elderly single retirees) already do, according to the Social Security Administration (SSA). And given that Social Security benefits comprise about 40% of what the average retiree was making when they were working, that means every penny counts.

“People are living so much longer and retirement is lasting 20, 30 years. [Meanwhile,] health plans are disappearing as well as regular pensions,” says Kathryn Hanson, who oversees retirement planning initiatives at financial-services firm SecurePath by Transamerica. “This makes Social Security even more important to plan.”

Here are four ways to get the most out of your Social Security benefits:

Don’t Dip In Too Early

It’s tempting to start taking your Social Security benefits as soon as you can at age 62. Exhibit a little patience, however, and it will really pay off.

Waiting until you hit full retirement age (depending on the year you were born, that can range anywhere from age 65 to 67) can increase your benefits by up to 30%, according to the SSA. And for each year that you delay taking the benefits between your full retirement age and age 70, you can receive an additional 8% in benefits, says Mark Lassiter, spokesman for the Social Security Administration. (This applies to those born in 1943 or later.) While you may end up receiving the same amount in benefits in your lifetime as someone who started collecting earlier, your monthly benefits will be larger.

For example, a 62-year-old who made an average of $60,000 a year and who decides to retire in 2008 will get roughly $13,200 in annual Social Security benefits, according to Clarence Rose, professor of finance in the College of Business and Economics at Radford University. If they wait until age 66, they’ll receive roughly $18,700 per year. Should they hold off until age 70, that amount will grow to $26,100 per year.

Of course, this strategy isn’t right for everyone. Those who are strapped for cash or who don’t expect to live much past their 70s, may be better off taking reduced benefits at an earlier age, says Lisa Featherngill, a Winston-Salem, N.C.-based certified public accountant and director of financial and estate planning at Calibre, a unit of Wachovia.

Make a Little Extra on the Side

Just because you’ve retired doesn’t mean you can’t earn a little cash on the side. Retirees (who have reached their full retirement age) can still collect full Social Security benefits even if they take on a part-time (or for the more ambitious, full-time) job, says Ben Jacoby, a certified financial planner at Morristown, N.J.-based Brinton Eaton Wealth Managers, a fee-only financial planning firm.

Holding down a job gives retirees more flexibility as well as earning power. They can either take their earnings and invest them, or use their earnings for living expenses and hold off on collecting Social Security so they’ll get higher benefits further down the road, says Christine Fahlund, a senior financial planner at T. Rowe Price.

Spread the Wealth Around

Spouses and children up to the age of 19 who are full-time high school students can also take advantage of your Social Security benefits. In fact, each can receive up to half your total benefits (on top of whatever you receive). There are limits, however: the maximum amount a family can receive is typically capped at 150% to 180% of the recipient’s benefits, according to the Social Security Administration. So, say your spouse and two children collect full benefits; collectively, they can receive 150% of your benefits.

Most current spouses are eligible to receive their husband or wife’s Social Security benefits. Typically, a couple may maximize their benefits when the spouse with the smaller amount of benefits takes only from their spouse’s more plentiful benefits and leaves their own Social Security untouched. That way, their Social Security benefits continue to grow, explains Jacoby.

Tap Into an Ex-Spouse’s Benefits

Just because you haven’t seen or spoken to your ex-spouse since the divorce doesn’t mean you’re completely cut off from them. In fact, just like a child and a current spouse, you can also receive a percentage of your ex-spouse’s Social Security benefits.

The criteria for eligibility is a little more strict, however. You have to have been married to your ex for at least 10 years and you can’t currently be married to someone else. Still fit the bill? You could be eligible for up to 50% of your ex’s benefits. Even better, your ex will never know — they will continue to receive their full benefits — and it won’t impact their current spouse’s benefits either, says Fahlund. “There’s no exchange of information, and you don’t have to go back to the life you’ve left behind, but you can maybe get more money from it,” she says.

Copyrighted, SmartMoney.com. All Rights Reserved.
For more information on Social Security, visit Soundview Financial’s Retirement Savings Guide by clicking here.

Is A $1million Nest Egg Enough To Fund Retirement?

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning

Great article provided by US News on Yahoo! Finance discussing whether a $1 million nest egg is sufficienct to fund your retirement. Here you go:

Becoming a millionaire once conjured up images of wealth and luxury, or at the very least financial security. But is a million bucks enough to retire comfortably on anymore? Many baby boomer millionaires don’t think so, at least for the lifestyle they want to lead.

If you drew down 4 percent of your $1 million nest egg every year, a share many financial advisers recommend as prudent, you would receive about $40,000 annually, before adjusting for inflation–a pretty comfortable salary outside major metropolitan areas, especially if your house is paid off. Of course, how far that $3,333 a month goes depends on your lifestyle, health, and inflation. Here are three viewpoints on the $1 million question:

It’s probably not enough. Even at a faster rate of tapping a million-dollar nest egg, Michael Farr, president of the Washington, D.C., investment firm Farr, Miller, & Washington and author of A Million Is Not Enough: How to Retire With the Money You’ll Need, thinks it’s insufficient for most retirees. “A million dollars in liquid reserves like stocks, bonds, and real estate investments you are not living in will generate $50,000 a year [according to Farr's calculations]. After you adjust for inflation it will be entirely gone after about 30 years,” Farr says. “Most people tell me it takes them more than $50,000 a year to cover their expenses. If $50,000 a year will cover your expenses, it is enough.” To increase your capital, Farr recommends budgeting, cost cutting, and saving–and investing the spoils in the stock market to guard against inflation. “Take a look at what your current expenses are, and that is what you need to live,” he says.

For security, try an annuity. The answer to the million-dollar question seems to depend upon who is asking it. “One million dollars should be enough to maintain living standards for the majority of households, including healthcare expenditures,” says Mauricio Soto of Boston College’s Center for Retirement Research. “But more might be needed for households that make over $120,000.”

If you’ve got a million-dollar nest egg, Soto recommends that you set aside $200,000 off the top for medical expenses in retirement and use the remaining $800,000 to purchase an inflation-protected annuity that would pay out $45,000 a year. This amount plus Social Security (typically about $25,000 for the maximum earner, plus $12,500 for the spouse) will generate an income of about $82,500 for a couple. Many financial advisers tell you to try to replace 80 percent of the income needed while working. By this conservative standard, $1 million would maintain the standard of living of a household making $103,000.

Stop worrying so much, and get out your golf shoes. Most workers aren’t even striving to become millionaires. Nearly two thirds of employees think they’ll be perfectly fine retiring with less than $1 million, according to the nonprofit Employee Benefit Research Institute. “The financial services industry has made a good living for themselves scaring people,” says Jonathan Pond, a financial planner and author of You Can Do It! The Boomer’s Guide to a Great Retirement. “For many people, $100,000 to $200,000 is enough to retire on.”

Pond argues that you need only to replace 65 percent of your working income to have a comfortable retirement if your house is paid off. He adds that Social Security will replace 45 percent of income for middle-income Americans. So, he concludes that most employees need only save enough to generate 20 percent of what they made while working.

The key is choosing a lifestyle that fits your budget. A million bucks will no longer finance a lavish retirement, but it could certainly provide a reasonably comfortable one.

When $1 Million Isn’t Enough

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning

Great article provided by US News on Yahoo! Finance confirming the need to develop a diversified investment portfolio. Here you go:

Is a million dollars enough to retire comfortably on? Many baby boomer millionaires don’t think so, especially once recession fears come into play. Almost 30 percent of 60-year-old baby boomers with investable assets of $1 million or more say they feel more financial stress now than six months ago, according to a new survey from Bell Investment Advisors and Opinion Research Corp.

The admittedly small survey of 500 boomers born in 1948 found that 40 percent are “downsizing” their lifestyles this year by contributing less to charity (22 percent), canceling, shortening, or postponing vacation plans (21 percent), reducing retirement savings (18 percent), or putting off retirement altogether (11 percent).

Of course, a millionaire also has the luxury of rejiggering investments to try to come out ahead. And 54 percent of affluent boomers cited chasing higher returns on investments as a primary goal for the next five years.

But even millionaires aren’t immune to making irrational investment choices as the media endlessly report a looming recession. Some 23 percent of affluent boomers say they are planning to change their investment strategy in response to a potential recession, with 69 percent seeking more conservative investments like money market funds and bonds. Only 21 percent said they would invest more in stocks or stock mutual funds.

That could be a mistake, says Jim Bell, founder and president of Bell Investment Advisors. In many cases, these conservative investments barely keep pace with inflation, especially as interest rates on consumer products like certificates of deposit have dropped with each Federal Reserve cut in interest rates.

“Bonds and cash have the false allure of safety since their principal fluctuates less than that of equities, but equities along with commodities will better allow boomers to maintain their standard of living over decades,” Bell says. “Boomers must learn to live with the volatility of equities if they want to keep their purchasing power intact.”

Most financial advisers will tell you that a sound investment strategy and diversified portfolio will create regular returns if you don’t mess with it too much, which Bell reiterates: “The key to navigating the slowdown is to remain rational and stick to a plan, rather than letting emotions steer you off track.”

For more information on retirement planning and strategies, visit Soundview Financial’s Retirement Savings Guide by clicking here.

Common Mistakes in Retirement Planning

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

I read a recent article on the common mistakes people make when approaching retirement. Here goes:

1. No current will. Even if you created a will when you were younger, it may be out of date as you approach retirement and no longer consistent with your state of affairs or assets. Update it.

2. Out-of-date beneficiary designations. Beneficiaries named in life insurance policies and retirement accounts (such as IRAs and 401(k)s) must be up to date to avoid misunderstandings and possibly adverse tax consequences for your heirs.

3. Concentrated stock holdings.  Whether through long association with a single employer or as owner of your own business, you may have a significant portion of your wealth tied up in a single stock.  Nearing retirement, it’s too risky to keep so many eggs in one basket.  Diversify.

4. No excess liability insurance.  Auto and homeowners’ insurance policies offer liability protection if someone comes to harm on your property or in an accident involving your car.  If claims exceed your policy limits, plaintiffs could come after your personal assets.  Carry an excess or “umbrella” policy for added protection.

5. No estate or tax planning.  Many retirees craft an investment plan but overlook estate and tax planning.  Start the process now if you haven’t already, both to minimize tax bills for you and your heirs and ensure that your estate is distributed according to your wishes.

6. No planning for health care or long term care. Costs associated with ill health can overwhelm an otherwise sound investment and retirement income strategy. Learn hothe federal Medicare health insurance program for people 65 an older works, how private insurance can plug gaps in Medicare, and whether long term care insurance might be right for you.

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

Nine Critical Retirement Planning Mistakes

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

Our friends at Yahoo! Finance have a great article on nine critical retirement planning mistakes. Here goes:

  1. Cracking your nest egg before retirement. A study by Hewitt Associates found that 45% of workers cash in their 401(k)s when they switch jobs. In other words, they take the money — paying income taxes and a 10% penalty if they’re not yet 59 1/2 years old — rather than leave it in a retirement account. That’s no way to build the retirement of your dreams. When you change jobs, you can transfer the money in your employer-sponsored retirement plan to an IRA, which will allow the money to continue growing tax-deferred. You might also be able to leave the money in your old plan or transfer it to the plan at your new job, depending on the plans’ rules. But your best bet is the IRA. You’ll have many, many more investment choices, usually at far lower costs.

 

2. Spending your retirement money way too early. Cashing in your 401(k) at a young age isn’t the only way for your retirement to meet an early demise. Not saving enough in the first place will guarantee that your retirement will be DOA. Of course, no one wants to be told to “save” — it’s so boring, so ungratifying, almost Puritanical.

But this is what low-savers (and non-savers) are really doing: They’re spending their retirement now — which may mean they won’t be able to retire at all. Buy that Coach purse now, or buy time in retirement tomorrow. Take a Carnival cruise this year, or take time off several years from now. Those are the choices you have to make. Building a nest egg isn’t a decision of whether to consume, but when to consume. Do it now, and you won’t be able to do it later without having to work for a paycheck.

3. Having no clue about how much to save. According to the 2007 Retirement Confidence Survey from the Employee Benefits Research Institute, only 43% of workers have calculated how much they need to retire. But you can’t get to where you want to go if you don’t know how to get there. You need a plan.

4. Spending your retirement savings too fast. If you’ve made it to retirement, congrats! You’ve amassed enough money to create your own portfolio-generated paycheck. Excellent work.

But you can’t take it too easy, because you’ll receive a severe pay cut if you deplete your portfolio too fast. How much can you take out each year and be almost certain that you won’t outlive your savings? Just 4% a year. That’s the withdrawal rate that would have sustained a mix of stocks and bonds over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more. However, if you quit working right before the next bear market, then taking out more than 4% a year could have your portfolio beating you to the grave.

5. Not giving a hoot about asset allocation. And speaking of mixing stocks and bonds, nothing can wound a retirement like bad investment decisions, whether it’s owning too much of one stock, letting emotions take over, chasing the latest fad, or letting short-term events affect your long-term strategy.

You basically have two choices: You can be a master stock-picker like Warren Buffett or Peter Lynch and try to find the next Wal-Mart. Or you can broadly diversify your assets, mostly via low-cost index funds such as Vanguard Total Stock Market (VTSMX). This way, you enjoy hefty exposure to giants like Apple (Nasdaq: AAPL), CVS Caremark (NYSE: CVS), and Medtronic (NYSE: MDT) as well as to mid- to small-sized growth firms such as Priceline.com (Nasdaq: PCLN) and SanDisk (Nasdaq: SNDK). But until you’ve established your skill at finding great investments, keep the bulk of your assets in a broadly diversified, regularly rebalanced portfolio.

6. Letting Uncle Sam eat your retirement. There are many types of investments and investment accounts, and they all have their own quirks when it comes to taxes. Not knowing all the rules can lead to too much taxation — and less money for retirement.

For example, profits from stocks that are held for at least a year will be taxed as long-term capital gains — a rate no higher than 15%. Interest from corporate bonds, on the other hand, is taxed as ordinary income — a rate as high as 35%. Yet many investors keep their stock investments in their tax-advantaged accounts and their bonds in regular, taxable accounts. That just doesn’t make sense. Asset location can be just as important as asset allocation.

7. Depositing your retirement in your fatty deposits. As Americans’ savings rate has dropped, our obesity rate has risen. Just a coincidence? All I can say is, the more we stuff our faces, the less we can stuff our IRAs. So before you make your next visit to the Olive Garden, find out how much you need to save every month to retire when you want, how you want. Then make sure that amount gets deposited in your retirement accounts. If you get that far, then visit the Olive Garden as a reward. You deserve it.

8. Paying too much for help. There’s nothing wrong with getting financial advice. If we Fools didn’t think investors could use ideas, feedback, and answers, we wouldn’t be here.

But we firmly, strongly, passionately believe that such help should be objective and affordable.

Paying too much for advice (especially if it’s bad or at least conflicted) does a lot for your broker’s retirement, not yours. Paying just 1% a year on a $100,000 portfolio over 20 years could result in your forking over more than that amount in fees. That’s a hundred grand that could have been in your pocket. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it. But if you’re paying 1% or 2% a year to lose to an index fund — as most mutual fund managers do — then you’re better off taking control of your own investments.

9. Retiring permanently when you really just needed a break. If you’re in your 60s, you should plan on living at least another two decades. Can you stand full-time leisure for 20 years? Sure, it may sound good now, but many retirees find they get pretty bored after a while. But by then, they have already severed many of their professional ties. Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and/or business partners. Or the possibility of working on a project basis, allowing you to take several months off each year. Or maybe just a one-year sabbatical. Explore your options before you no longer have them.

Preparing For Retirement-Critical Factors to Consider

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

Here is a great overview of the critical factors to consider when preparing for retirement.

Life expectancy and portfolio performance: Many retirees underestimate how long they will live and overestimate how much their investments will return annually. To be financially safe, you should expect to live to 95 and expect an annualized return on investments of 6%, based on a mix of 60% stocks and 40% bonds and other fixed income securities.

Inflation: Inflation is a big enemy of the retiree since increased costs reduce the value of your assets. Based on historical inflation trends, it is estimated that a person who retires at age 60 is likely to experience an 80% rise in living expenses by age 80. To calculate your income needs, estimate inflation at 3% annually.

Taxes: The only thing certain in life is death and taxes. As you approach retirement, don’t assume that you taxes will decline sharply in retirement. Remember that you will pay income tax on withdrawals from 401(k)s and traditional IRAs. So for retirement planning purposes, advisors suggest that you estimate that your taxes will drop by no more than 10%.

Expenses: Generally, the experts suggest that retirees spend on average 75% as much as they did during their working years; however, this is directly dependent on your lifestyle during retirement. The key question is whether your assets and investment income will be sufficient to fund your living expenses.

Health Insurance: Unless you have healthcare insurance provided by your employer in your retirement, you will need to consider premiums for individual healthcare insurance until you become eligible for Medicare.

Social Security: The earlier you start taking Social Security payments before you qualify for the full monthly base amount–which could be as late as 67 depending on when you were born- the lower your monthly checks will be. Unless you need the money or are in poor health, it’s often better to delay starting benefits until you reach full retirement age.

To help you calculate how much you will need to save for your retirement, we provide this calculator at Soundview Financial’s Retirement Savings Guide by clicking here.

uTango- Lifestage Rewards Program

We found this interesting news story on uTango, the lifestage rewards program for singles, engaged couples and newlyweds. The programs offers long term payouts to members by leveraging their spending through its merchant network. If you achieve certain spending milestones, you can receive payments ranging from $250,000 to $1,000,000 in thirty years. The catch: You need to stay married for that 30 year period. The uTango program is a very innovative approach to offering young couples a way to leverage their current spending to create a plan to supplement their retirement income. You can check out the news story here and visit uTango here.