Cash Flow Management

An underappreciated fundamental in financial planning.

You’ve probably heard the saying that “cash is king,” and whether you own a business or not, it is a truth that applies. Most discussions of business and personal “financial planning” involve tomorrow’s goals, but those goals may not be realized without attention to cash flow today.  

Management of available cash flow is a key in any kind of financial planning. Ignore it, and you may inadvertently sabotage your efforts to grow your company or build personal wealth.

Cash flow statements are important for any small business. They can reveal so much to the owner(s) and/or CFO, because as they track inflows and outflows, they bring non-cash items and expenditures to light. They denote your sources and uses of cash, per month and per year. Income statements and P&L statements may provide inadequate clues about that, even though they help you forecast cash flow trends.  

Cash flow statements can tell you what P&L statements won’t. Are you profitable, but cash-poor? If your company is growing by leaps and bounds, that can happen. Are you personally taking too much cash out of the business and unintentionally letting your growth company morph into a lifestyle company? Are your receivables getting out of hand? Is inventory growth a concern? If you’ve arranged a loan, how much is your principal payment each month and to what degree is that eating up cash in your business? How much money are you spending on capital equipment?

A good CFS tracks your operating, investing and financing activities. Hopefully, the sum of these activities results in a positive number at the bottom of the CFS. If not, the business may need to change to survive.

In what ways can a small business improve cash flow management? There are some fairly simple ways to do it, and your CFS can typically identify the factors that may be sapping your cash flow. You may find that your suppliers or vendors are too costly; maybe you can negotiate (or even barter) with them. Like many companies, you may find your cash flow surges during some quarters or seasons of the year and wanes during others. What steps could you take to improve it outside of the peak season or quarter?

What kind of recurring, predictable sales can your business generate? You might want to work on the art of continuity sales – turning your customers into something like subscribers to your services. Perhaps price points need adjusting. As for lingering receivables, swiftly preparing and delivering invoices tends to speed up cash collection. Another way to get clients to pay faster: offer a slight discount if they pay up, say, within a week (and/or a slight penalty to those that don’t). Think about asking for some cash up front, before you go to work for a client or customer (if you don’t do this already).

While the Small Business Association states that only about 10% of entrepreneurs draw entirely on their credit cards for startup capital, there is still a temptation for an owner of a new venture to go out and get a high-limit business credit card. It might be better to shop for one with cash back possibilities or business rewards in mind. If your business isn’t set up to receive credit card payments, consider it – the potential for added cash flow could render the processing fees utterly trivial.¹

How can a household better its cash flow? One quick way to do it is to lessen or reduce your fixed expenses, specifically loan and rent payments. Another step is to impose a ceiling on your variable expenses (ranging from food to entertainment), and you may also save some money in separating some or all those expenses from credit card use. Refinancing – if you can do it – and downsizing can certainly help. There are many, many free cash flow statement tools online where you can track family inflows and outflows. (Your outflows may include bugaboos like long-term service contracts and installment payment plans.) Selling things you don’t want can make you money in the short term; converting a hobby into an income source or business venture could help in the long term.  

Better cash flow boosts your potential to reach your financial goals. A positive cash flow can contribute to investment, compounding, savings – all the good things that tend to happen when you pay yourself first.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – smallbusinesscomputing.com/tipsforsmallbusiness/5-tips-for-a-smoother-small-business-cash-flow.html [11/19/12]

Patrick Badiuk is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Badiuk and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, Qwest, ING Retirement, Alcatel-Lucent, GlaxoSmithKline, Verizon, Pfizer, Raytheon, Merck, Northrop Grumman, Hughes, AT&T, Bank of America, ExxonMobil, Chevron, or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

 

 

It Isn’t Too Late to Save for Retirement

If you’re 40 or 50 and haven’t begun, you must make the effort.

Some people start saving for retirement at 20, 25, or 30. Others start later, and while their accumulated assets will have fewer years of compounding to benefit from, that shouldn’t discourage them to the point of doing nothing.

If you need to play catch-up, here are some retirement savings principles to keep in mind. First of all, keep a positive outlook. Believe in the validity of your effort. Know that you are doing something good for yourself and your future, and keep at it.

Starting later means saving more – much more. That’s reality; that’s math. When you have 15 or 20 years until your envisioned retirement instead of 30 or 40, you’ve got to sock away money for retirement in comparatively greater proportions. The good news is that you won’t be retiring strictly on those contributions; in large part, you will be retiring on the earnings generated by that pool of invested assets.

How much more do you need to save? A ballpark example: Marisa, a pre-retiree, has zero retirement savings at age 45 and dedicates herself to doing something about it. She decides to save $500 each month for retirement. After 20 years of doing that month after month, and with her retirement account yielding 6% a year, Marisa winds up with about $225,000 at age 65.¹

After 65, Marisa would probably realize about $10,000 a year in inflation-adjusted retirement income from that $225,000 in invested retirement savings. Would that and Social Security be enough? Probably not. Admittedly, this is better than nothing. Moreover, her retirement account(s) might average better than a 6% return across 20 years.¹

The math doesn’t lie, and the message is clear: Marisa needs to save more than $6,000 a year for retirement. Practically speaking, that means she should also exploit vehicles which allow her to do that. In 2014, you can put up to $5,500 in an IRA, $6,500 if you are 50 or older – but you can sock away up to $17,500 next year in a 401(k), 403(b), Thrift Savings Plan and most 457 plans, which all have a maximum contribution limit of $23,000 for those 50 and older.²

If Marisa is self-employed (and a sole proprietor), she can establish a solo 401(k) or a SEP-IRA. The yearly contribution limits are much higher for these plans. If Marisa’s 2013 net earnings from self-employment (after earnings are reduced by one-half of self-employment tax) work out to $50,000, she can put an employer contribution of up to $10,000 in a SEP-IRA. (She must also make similar percentage contributions for all “covered” employees, excepting her spouse, under the SEP IRA plan.) As a sole proprietor, Marisa may also make a combined employer-employee contribution of up to $33,000 to a solo 401(k) this year, and if she combines a defined benefit plan with a solo 401(k), the limit rises to $47,400. If her 2013 net earnings from self-employment come out to $150,000, she can make an employer contribution of as much as $30,000 to a SEP-IRA, a combined employee salary deferral contribution and employer profit sharing contribution of up to $53,000 to a solo 401(k), and contribute up to $96,300 toward her retirement through via the combination of the solo 401(k) and defined benefit plan.³

How do you save more? As you are likely nearing your peak earnings years, it may be easier than you initially assume. One helpful step is to reduce some of the lifestyle costs you incur: cable TV, lease payments, and so forth. Reducing debt helps: every reduced credit card balance or paid-off loan frees up more cash. Selling things helps – a car, a boat, a house, collectibles. Whatever money they generate for you can be assigned to your retirement savings effort.

Consistency is more important than yield. When you get a late start on retirement saving, you naturally want solid returns on your investments every year – yet you shouldn’t become fixated on the return alone. A dogged pursuit of double-digit returns may expose you to considerable market risk (and the potential for big losses in a downturn). Diversification is always important, increasingly so when you can’t afford to lose a big portion of what you have saved. So is tax efficiency. You will also want to watch account fees.

If you start saving for retirement at 50, your retirement savings will likely double (at least) by age 65 thanks to consistent inflows of new money, decent yields and compounding.⁴

What if you amass a big nest egg & still face a shortfall? Maybe you can reduce expenses in retirement by moving to another city or state (or even another country). Maybe you can broaden your skill set and make yourself employable in another way (which also might help you before you reach traditional retirement age if you find yourself in a declining industry).

If you haven’t begun to save for retirement by your mid-40s, you have probably heard a few warnings and wake-up calls. Unless you are independently wealthy or anticipate being so someday, the truth of the matter is…

If you haven’t started saving for retirement, you need to do something to save your retirement.

That may sound harsh or scary, but without a nest egg, your vision of a comfortable future is in jeopardy. You can’t retire on hope and you don’t want to rely on Social Security, relatives or social services agencies for your well-being when you are elderly.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – money.cnn.com/2012/08/15/pf/expert/late-start-retirement.moneymag/ [8/15/13]

2 – irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [11/4/13]

3 – forbes.com/sites/ashleaebeling/2013/11/01/retirement-savings-for-the-self-employed/ [11/1/13]

4 – forbes.com/sites/mitchelltuchman/2013/11/21/financial-planning-for-late-starters-in-five-steps/ [11/21/13]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, Verizon, AT&T, access.att.com, Hughes, Northrop Grumman,  Merck, Bank of America, ING Retirement, Pfizer, Qwest, Chevron, Raytheon, ExxonMobil, Glaxosmithkline, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Badiuk, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Badiuk is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Financial Planning: Helping You See the Big Picture

Do you picture yourself owning a new home, starting a business, or retiring comfortably? These are a few of the financial goals that may be important to you, and each comes with a price tag attached.

That’s where financial planning comes in. Financial planning is a process that can help you target your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources.

Why is financial planning important?

A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you’ll be better able to focus on your goals and understand what it will take to reach them.

One of the main benefits of having a financial plan is that it can help you balance competing financial priorities. A financial plan will clearly show you how your financial goals are related–for example, how saving for your children’s college education might impact your ability to save for retirement. Then you can use the information you’ve gleaned to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you’ll know that your financial life is headed in the right direction.

The financial planning process

Creating and implementing a comprehensive financial plan generally involves working with financial professionals to:

• Develop a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, your investment portfolio, your tax exposure, and your estate plan
• Establish and prioritize financial goals and time frames for achieving these goals
• Implement strategies that address your current financial weaknesses and build on your financial strengths
• Choose specific products and services that are tailored to meet your financial objectives
• Monitor your plan, making adjustments as your goals, time frames, or circumstances change

Some members of the team

The financial planning process can involve a number of professionals.

Financial planners typically play a central role in the process, focusing on your overall financial plan, and often coordinating the activities of other professionals who have expertise in specific areas.

Accountants or tax attorneys provide advice on federal and state tax issues.

Estate planning attorneys help you plan your estate and give advice on transferring and managing your assets before and after your death.

Insurance professionals evaluate insurance needs and recommend appropriate products and strategies.

Investment advisors provide advice about investment options and asset allocation, and can help you plan a strategy to manage your investment portfolio.

The most important member of the team, however, is you. Your needs and objectives drive the team, and once you’ve carefully considered any recommendations, all decisions lie in your hands.

Why can’t I do it myself?

You can, if you have enough time and knowledge, but developing a comprehensive financial plan may require expertise in several areas. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered.

Staying on track

The financial planning process doesn’t end once your initial plan has been created. Your plan should generally be reviewed at least once a year to make sure that it’s up-to-date. It’s also possible that you’ll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:

• Your goals or time horizons change
• You experience a life-changing event such as marriage, the birth of a child, health problems, or a job loss
• You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
• Your income or expenses substantially increase or decrease
• Your portfolio hasn’t performed as expected
• You’re affected by changes to the economy or tax laws

Common questions about financial planning

What if I’m too busy?

Don’t wait until you’re in the midst of a financial crisis before beginning the planning process. The sooner you start, the more options you may have.

Is the financial planning process complicated?

Each financial plan is tailored to the needs of the individual, so how complicated the process will be depends on your individual circumstances. But no matter what type of help you need, a financial professional will work hard to make the process as easy as possible, and will gladly answer all of your questions.

What if my spouse and I disagree?

A financial professional is trained to listen to your concerns, identify any underlying issues, and help you find common ground.

Can I still control my own finances?

Financial planning professionals make recommendations, not decisions. You retain control over your finances. Recommendations will be based on your needs, values, goals, and time frames. You decide which recommendations to follow, then work with a financial professional to implement them.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, Raytheon, Pfizer, Chevron, ExxonMobil, AT&T, Verizon, Bank of America, Qwest, access.att.com, Merck, Hughes, ING Retirement, Northrop Grumman, Glaxosmithkline, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Badiuk, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Badiuk is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

 

529 Plans and Estate Planning

As the cost of a college education continues to climb out of reach for many parents, grandparents are stepping in to help. This trend is expected to accelerate in the coming years as the baby boomers start gifting what is expected to be trillions of dollars over the next few decades.

Many grandparents may use a 529 plan to help save for their grandchildren’s college education. Since their creation in 1996, 529 plans have become to college savings what 401(k) plans are to retirement savings—an indispensable tool for helping amass money for college. That’s because 529 plans offer a unique combination of benefits unmatched in the college savings world: availability to people of all income levels, professional money management, high maximum contribution limits, and generous tax advantages.

Yet 529 plans are increasingly being used for another purpose–estate planning. That’s because the special tax rules that govern 529 plans allow grandparents to save for their grandchild’s college education in a way that simultaneously pares down their estate and minimizes potential gift and estate taxes.

Estate planning framework

How does this work? To fully appreciate how the gift and estate tax laws favor 529 plans, it’s helpful to first understand how these laws apply to other assets. For 2015, every individual has a $5,430,000 basic exclusion amount (plus any unused exclusion amount of a deceased spouse) from federal gift and estate tax. This means that if the total amount of your lifetime gifts and the value of your estate is less than $5,430,000 at the time of your death, no federal gift or estate tax will be owed.

In addition to this basic exclusion amount, individuals get an annual exclusion from the federal gift tax, which is currently $14,000. This means you can gift up to $14,000 per recipient per year gift tax free. And, a married couple who elects to “split” gifts can give up to $28,000 per recipient per year gift tax free.

Finally, gifts made to grandchildren (or anyone who is more than one generation below you) have special tax rules. These gifts are subject to both federal gift tax and an additional tax known as the federal generation-skipping transfer tax (GSTT). However, there are exceptions for this tax too: a lifetime exemption of $5,430,000 in 2015 and an annual exclusion that’s the same as for federal gift tax–$14,000 or $28,000 for married couples.

Special gifting feature of 529 plans

Under special rules unique to 529 plans, you can make a lump-sum contribution to a 529 plan in an amount equal to five times the federal annual gift tax exclusion ($70,000 or $140,000 for a married couple) per recipient, as long as you make a special election on your federal gift tax return that effectively spreads the lump-sum gift evenly over five years, and provided you do not make any other gifts to the same recipient during the five-year period.

Example: Mr. and Mrs. Brady make a lump-sum contribution of $140,000 to their grandchild’s 529 plan in Year 1, electing to spread the gift over five years. The result is they are considered to have made annual gifts of $28,000 ($14,000 each) in Years 1 through 5 ($140,000/5 years). Because the amount gifted by each spouse is within the annual gift tax exclusion, the Bradys won’t owe any gift tax (assuming they don’t make any other gifts to their grandchild during the five-year period). In Year 6, they can make another lump-sum contribution and repeat the process. In Year 11, they can do so again.

Thus, 529 plans offer an opportunity for wealthy parents and grandparents to put hundreds of thousands of dollars away gift tax free to help their children and grandchildren with college costs, while paring down their estates and reducing potential estate tax liabilities.

There is a caveat, however. If the donor were to die during the five-year period, then a prorated portion of the contribution would be “recaptured” into the estate for estate tax purposes.

Example: In the previous example, assume Mr. Brady dies in Year 2. The result is that his total Year 1 and 2 contributions ($28,000) are not included in his estate. But the remaining portion attributed to him in Years 3, 4, and 5 ($42,000) would be included in his estate. However, the contributions attributed to Mrs. Brady ($14,000 per year) would not be recaptured into the estate.

529 Plan Basics

Section 529 plans are governed by federal law (section 529 of the Internal Revenue Code) but are sponsored by states and, less commonly, colleges. Each plan may have slightly different features, but each must conform to the federal framework. There are two types of 529 plans–college savings plans and prepaid tuition plans.

Each type of 529 plan has an account owner, who is the person who opens the account, and a beneficiary, who is the person for whom contributions are being made. The account owner has the flexibility to make contributions to the account, request withdrawals from the account, change the investment selections for the account (for college savings plans only), and change the beneficiary of the account.

Grandparents can open a 529 account and name their grandchild as beneficiary (only one person can be listed as account owner), or they can contribute to an already established 529 account.

College savings plans

College savings plans are the more popular type; nearly all states offer one or more of these plans. A college savings plan functions like an individual investment-type account. You select one or more of a plan’s investment portfolios, and you either gain or lose money, depending on how those portfolios perform (similar to a 401(k) plan). College savings plans typically accept over $300,000 in maximum lifetime contributions, and these funds can be used for tuition, fees, room and board, books, and equipment at any accredited college in the United States or abroad.

Prepaid tuition plans

By contrast, a prepaid tuition plan pools your contributions with the contributions of others, and in return you get a predetermined number of units or credits that are guaranteed to be worth a certain percentage of college tuition in the future (in effect, you are paying future tuition with today’s dollars). Funds in a prepaid tuition plan can only be used to cover tuition and fees at the limited group of colleges (typically in-state public colleges) that participate in the plan. Prepaid tuition plans are generally limited to state residents, whereas college savings plans are open to residents of any state.

Grandparent as 529 account owner

A grandparent isn’t required to be the account owner of his or her grandchild’s 529 plan to make contributions to the account. But if the grandparent is the account owner, there are some additional considerations.

First, as account owner, a grandparent can retain some measure of control over his or her contributions by changing investment selections, authorizing account withdrawals for both education and non-education purposes, or even closing the account. A grandparent will have this control over these contributions even though they generally aren’t considered part of his or her estate for tax purposes—a rare advantage in the estate planning world. However, funds in a grandparent-owned 529 plan can still be factored in when determining Medicaid eligibility, unless these funds are specifically exempted by state law.

Second, regarding financial aid, a grandparent-owned 529 account does not need to be listed as an asset on the federal government’s aid application, the FAFSA. However, distributions (withdrawals) from a grandparent-owned 529 plan are reported as untaxed income to the beneficiary (grandchild), and this income is assessed at 50% by the FAFSA. By contrast, a parent-owned 529 plan is reported as a parent asset on the FAFSA (parent assets are assessed at 5.6%) but distributions from a parent-owned 529 plan aren’t counted as student income.

To avoid having a distribution from a grandparent-owned 529 account count as student income, one option is for the grandparent to delay taking a distribution from the 529 plan until anytime after January 1 of the grandchild’s junior year of college (because there will be no more FAFSAs to fill out). Another option is for the grandparent to change the owner of the 529 plan account to

the parent.

Colleges have their own rules when distributing their own financial aid. Most colleges require a student to list any 529 plan for which he or she is the named beneficiary, so grandparent-owned 529 accounts would be treated the same as parent-owned accounts.

Tax Consequences of 529 Plans

The following summarizes the federal tax consequences of gifting to a 529 plan.

Gift Tax

All contributions to a 529 plan qualify for the annual federal gift tax exclusion–$14,000 ($28,000 for joint gifts). A special election for gifts up to $70,000 ($140,000 for joint gifts) can be made where the gift is spread evenly over a five-year period and no gift tax will be owed.

Grandparents are subject to the generation-skipping transfer tax (GSTT) in addition to federal gift tax. Gifts of $14,000 or less ($28,000 for joint gifts) are excluded for purposes of the GSTT. Only the portion of the gift that results in federal gift tax will also result in GSTT.

Estate Tax

Contributions made to a 529 plan generally aren’t considered part of your estate for federal estate tax purposes when you die, even though you might retain control of the funds in the account (as 529 plan account owner) during your lifetime. Instead, the value of the account will be included in the beneficiary’s estate.

The exception to this general rule occurs when you elect to spread a gift over five years and you die during this five-year period. In this case, the portion of the contribution allocated to the years after your death would be included in your gross estate for tax purposes.

Income Tax

Contributions grow tax deferred.

Withdrawals from a 529 plan used to pay the beneficiary’s qualified education expenses are completely tax free at the federal level. Withdrawals from a 529 plan that aren’t used to pay the beneficiary’s qualified education expenses (called a nonqualified distribution) face a double consequence–the earnings portion is subject to a 10% penalty and is taxed at the recipient’s rate (in other words, the person who receives the distribution–either the account owner or the beneficiary–is taxed on it).

Estate Tax Rates

The following summarizes federal estate tax rates and exemptions for 2014 and 2015.

2014

Top gift and estate tax rate – 40%

Gift and estate tax basic exclusion amount – $5,340,000 DSUEA¹

Generation-skipping transfer tax (GSTT) exemption – $5,340,000

2015

Top gift and estate tax rate – 40%

Gift and estate tax basic exclusion amount – $5,340,000 DSUEA¹

Generation-skipping transfer tax (GSTT) exemption – $5,340,000

1 Basic exclusion amount plus deceased spousal unused exclusion amount (DSUEA)

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, Chevron, Hughes, ING Retirement, Merck, Pfizer, AT&T, Qwest, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline,Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Badiuk, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Badiuk is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Should You Pay Off Your Mortgage or Invest?

Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child’s college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

 Evaluating the opportunity cost

Deciding between prepaying your mortgage and investing your extra cash isn’t easy, because each option has advantages and disadvantages. But you can start by weighing what you’ll gain financially by choosing one option against what you’ll give up. In economic terms, this is known as evaluating the opportunity cost.

Here’s an example. Let’s assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you’re paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.

By making extra payments and saving all of that interest, you’ll clearly be gaining a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so–the opportunity to potentially profit even more from investing.

To determine if you would come out ahead if you invested your extra cash, start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you’re paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest. Once you’ve calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.

For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?

Keep in mind that the rate of return you’ll receive is directly related to the investments you choose. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.

Other points to consider

While evaluating the opportunity cost is important, you’ll also need to weigh many other factors. The following list of questions may help you decide which option is best for you.

• What’s your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.
• Does your mortgage have a prepayment penalty? Most mortgages don’t, but check before making extra payments.
• How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there’s less value in putting more money toward your mortgage.
• Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.
• Do you have an emergency account to cover unexpected expenses? It doesn’t make sense to make extra mortgage payments now if you’ll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change–if you lose your job or suffer a disability, for example–you may have more trouble borrowing against your home equity.
• How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.
• Are you saddled with high balances on credit cards or personal loans? If so, it’s often better to pay off those debts first. The interest rate on consumer debt isn’t tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you’re likely to receive on your investments
• Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you’ve gained at least 20% equity in your home may make sense.
• How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you’re likely to be paying more in interest).
• Have you saved enough for retirement? If you haven’t, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.
• How much time do you have before you reach retirement or until your children go off to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.

The middle ground

If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there’s no reason you can’t do both. It’s as simple as allocating part of your available cash toward one goal, and putting the rest toward the other. Even small adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.

And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Badiuk, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, Raytheon, ExxonMobil, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Badiuk is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

 

The Right Beneficiary (Updated 2014). Who should inherit your IRA or 401(k)? See that they do.

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or savings account? You may be able to answer such a question quickly and easily. Or you may be saying, “You know… I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit since then – perhaps more than a bit?

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

Beneficiary designations commonly take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she is in line to receive the death benefit when you die, regardless of what your will states. Beneficiary designations allow life insurance proceeds to transfer automatically to heirs; these assets do not have go through probate.^1,2

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)

How your choices affect your estate. Virtually any inheritance carries a tax consequence. Of course, through careful estate planning, you can try to defer or even eliminate that consequence.

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets inherited from a spouse aren’t hit with estate tax, as long the surviving spouse who inherits them is a U.S. citizen.³

When the beneficiary isn’t your spouse, things get a little more complicated for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem can persist: if your non-spouse beneficiary inherits assets from a 403(b) or a traditional IRA, for example, those assets will usually become part of his or her taxable estate, and his or her heirs might face higher estate taxes down the line. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.⁴

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.⁵

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give me a call or send me an e-mail – I’m happy to help you.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – individual.troweprice.com/public/Retail/Planning-&-Research/Estate-Planning/Transferring-Assets/Assets-With-Beneficiary-Designations [9/3/14]

2 – dummies.com/how-to/content/bypassing-probate-with-beneficiary-designations.html [1/30/13]

3 – nolo.com/legal-encyclopedia/estate-planning-when-you-re-married-noncitizen.html [9/3/14]

4 – individual.troweprice.com/staticFiles/Retail/Shared/PDFs/beneGuide.pdf [9/3/14]

5 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes [7/3/14]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, Verizon, AT&T, hewitt.com, resources.hewitt.com, access.att.com, Raytheon, ExxonMobil, ING Retirement, Northrop Grumman, Bank of America, Glaxosmithkline, Qwest, Chevron, Hughes, Merck, Pfizer, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Badiuk, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Badiuk is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

 

Four Words You Shouldn’t Believe

These are the words that make investors irrational.

“This time is different.” Beware those four little words. They are perhaps the most dangerous words an investor can believe in. If you believe “this time is different,” you are mentally positioning yourself to exit the stock market and make impulsive, short-sighted decisions with your money. This is the belief that has made too many investors miss out on the best market days and scramble to catch up with Wall Street recoveries.

Stock market investing is a long-term proposition – which is true for most forms of investing. Any form of long-range investing demands a certain temperament. You must be patient, you must be dedicated to realizing your objectives, and you can’t let short-term headlines deter you from your long-term quest.

If stocks correct or the bulls run away, keep some perspective and remember how things have played out through some of the roughest stretches in recent market history.

In 2008, many people believed the market would never recover. The Dow dropped 33.84% that year, the third-worst year in its history. That fall, it lost 500 points or more on seven different trading days. Some prominent talking heads and financial prognosticators saw the sky falling: they urged investors to pull every dollar out of stocks, and some said the only sensible move was to put all your money in gold. It wasn’t unusual to visit your favorite financial website and see a “Dow 3,000!” pay-per-click doomsday ad in the margin.¹

The message being shouted was: “This time is different.” Forget a lost decade, it would be a lost generation – it would take the Dow 10 or maybe 20 years to get back to where it was again, the naysayers warned. Instead it took less than six: the index closed at 14,253.77 on March 5, 2013 to top the 2007 peak and went north from there. The bear market everyone thought was “the end” for Wall Street lasted but 17 months.^2,3

Where is the Dow today compared to fall 2008? Where are the S&P 500, the Nasdaq, the Russell 2000 compared to back then? And how has gold fared in the last few years? While the Federal Reserve has played a significant role in this long bull run, record corporate profits have played a major role as well.

The stock market has seen remarkable ascents through the years. From 1982-87, the S&P 500 gained more than 300%. The 1990s brought a 9½-year stretch in which the S&P rose more than 500%.²

A recovery from a Wall Street downturn usually doesn’t take that long. The bear market of 1987 – the one that came with Black Monday, the worst trading day in modern Wall Street history – was over in three months.  The bursting of the dot-com bubble set off another bear market in 2000 that lasted a comparatively long 30 months – definitely endurable for an investor focused on long-term goals.³

What happens when investors believe those four little words? They panic. They sell. If they are mostly or wholly out of equities when the bulls come storming back, they run the risk of missing the best market days.

We’re looking at a turbulent stock market right now. This is the time for patience. Withdrawing money from a retirement savings account (and the investment funds within it) might feel rational in the short term, but it can be hazardous for the long term – especially since many Americans haven’t saved enough for retirement to start with. A recession is a few quarters long, not the length of your retirement; a bear market may right itself faster than presumed, and you want to be invested in equities when it happens. If you have questions about your money when jitters hit the market, turn to the financial advisor you count on as a resource.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – djaverages.com/?go=industrial-milestones [10/7/14]

2 – nj.com/business/index.ssf/2013/03/dow_hits_new_record_regaining.html [3/5/13]

3 – nbcnews.com/id/37740147/ns/business-stocks_and_economy/t/historic-bear-markets/#.VDSESBbgVUI [10/7/14]

The Retirement Group is not affiliated with nor endorsed by AT&T, Qwest, fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, Pfizer, Glaxosmithkline, Merck, Verizon, Chevron, Hughes, access.att.com, ING Retirement, Northrop Grumman, Raytheon, ExxonMobil, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Badiuk, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Badiuk is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Fall Financial Reminders

Fall Financial Reminders

The year is coming to a close. Have you thought about these financial ideas yet?

As every calendar year ends, the window slowly closes on a set of financial opportunities. Here are several you might want to explore before 2015 arrives.

Don’t forget that IRA RMD. If you own one or more traditional IRAs, you have to take your annual required minimum distribution (RMD) from one or more of those IRAs by December 31. If you are being asked to take your very first RMD, you actually have until April 15, 2015 to take it – but your 2015 income taxes may be substantially greater as a result. (Note: original owners of Roth IRAs never have to take RMDs from those accounts.)¹

Did you recently inherit an IRA? If you have and you weren’t married to the person who started that IRA, you must take the first RMD from that IRA by December 31 of the year after the death of that original IRA owner. You have to do it whether the account is a traditional IRA or a Roth IRA.¹

Here’s another thing you might want to do with that newly inherited IRA before New Year’s Eve, though: you might want to divide it into multiple inherited IRAs, thereby promoting a lengthier payout schedule for younger inheritors of those assets. Otherwise, any co-beneficiaries receive distributions per the life expectancy of the oldest beneficiary. If you want to make this move, it must be done by the end of the year that follows the year in which the original IRA owner died.¹

Can you max out your contribution to your workplace retirement plan? Your employer likely sponsors a 401(k) or 403(b) plan, and you have until December 31 to boost your 2014 contribution. This year, the contribution limit on both plans is $17,500 for those under 50, $23,000 for those 50 and older.^2,3

Can you do the same with your IRA?  This year, the traditional and Roth IRA contribution limit is $5,500 for those under 50, $6,500 for those 50 and older. High earners may face a lower Roth IRA contribution ceiling per their adjusted gross income level – above $129,000 AGI, an individual filing as single or head of household can’t make a Roth contribution for 2014, and neither can joint filers with AGI exceeding $191,000.³

Ever looked into a Solo(k) or a SEP plan? If you have income from self-employment, you can save for the future using a self-directed retirement plan, such as a Simplified Employee Pension (SEP) plan or a one-person 401(k), the so-called Solo(k). You don’t have to be exclusively self-employed to set one of these up – you can work full-time for someone else and contribute to one of these while also deferring some of your salary into the retirement plan sponsored by your employer.²

Contributions to SEPs and Solo(k)s are tax-deductible. December 31 is the deadline to set one up for 2014, and if you meet that deadline, you can make your contributions for 2014 as late as April 15, 2015 (or October 15, 2015 with a federal extension). You can contribute up to $52,000 to SEP for 2014, $57,500 if you are 50 or older. For a Solo(k), the same limits apply but they break down to $17,500 + up to 20% of your net self-employment income and $23,000 + 20% net self-employment income if you are 50 or older. If you contribute to a 401(k) at work, the sum of your employee salary deferrals plus your Solo(k) contributions can’t be greater than the aforementioned $17,500/$23,000 limits – but even so, you can still pour up to 20% of your net self-employment income into a Solo(k).^1,2

Do you need to file IRS Form 706? A sad occasion leads to this – the death of a spouse. Form 706, which should be filed no later than nine months after his or her passing, notifies the IRS that some or all of a decedent’s estate tax exemption is being carried over to the surviving spouse per the portability allowance. If your spouse passed in 2011, 2012, or 2013, the IRS is allowing you until December 31, 2014 to file the pertinent Form 706, which will transfer that estate planning portability to your estate if your spouse was a U.S. citizen or resident.¹

Are you feeling generous? You may want to donate appreciated securities to charity before the year ends (you may take a deduction amounting to their current market value at the time of the donation, and you can use it to counterbalance up to 30% of your AGI). Or, you may want to gift a child, relative or friend and take advantage of the annual gift tax exclusion. An individual can gift up to $14,000 this year to as many other individuals as he or she desires; a couple may jointly gift up to $28,000 to as many individuals as you wish. Whether you choose to gift singly or jointly, you’ve probably got a long way to go before using up the current $5.34 million/$10.68 million lifetime exemption. Wealthy grandparents often fund 529 plans this way, so it is worth noting that December 31 is the 529 funding deadline for the 2014 tax year.¹

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – forbes.com/sites/deborahljacobs/2014/10/08/eight-key-financial-deadlines-to-keep-in-mind-this-fall/ [10/8/14]

2 – tinyurl.com/kjzzbw4 [10/9/14]

3 – irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [10/31/13]

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, AT&T, Merck, hewitt.com,Verizon, ING Retirement, resources.hewitt.com, access.att.com, Glaxosmithkline, Northrop Grumman, Raytheon, Pfizer, Qwest, Chevron, Hughes, ExxonMobil, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Badiuk, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Badiuk is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Should You Buy the Dips? Market retreats & corrections may herald opportunities.

Should You Buy the Dips?

Market retreats & corrections may herald opportunities.

When stocks retreat, should you pick up some shares? If you like to buy and hold, it may turn out to be a great move.

Buying during a downturn or a correction may seem foolish to many, but if major indexes sink and investors lose their appetite for risk, you may find excellent opportunities to purchase shares of quality firms.

Remember what Warren Buffett said back in 2008: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” Even in that terrible bear market, savvy investors like Buffett sensed an eventual upside.¹

Great stocks could go on sale. Corrections and downturns are part of the natural cycle of the equities markets. Wall Street has seen 20 corrections (10% or greater declines in the S&P 500) in the last 70 years, and stocks have weathered all of them.²

A comeback can occur not long after a correction: as S&P Capital IQ chief stock strategist Sam Stovall reminded Kiplinger’s Personal Finance, it usually takes about four months for the market to get back to where it was.²

After a market descent, there is ultimately a point of capitulation – a turning point when investors start buying again. Prior to that moment, you may find some good deals. Why not make a list of stocks you would buy at the right price, and perhaps define that price?

Some downturns & corrections go under the radar. Particular sectors of the market may dip 5%, 10% or more without much fanfare, because the focus is constantly on the movement of the big benchmarks. You might want to keep an eye on a particular slice of the market that has turned sour – it could turn sweet again, and sooner than bears think.

Don’t let the gloom dissuade you. Remember 2008? Stocks were supposedly down for the count. You had people who believed the Dow would fall below 5,000 and stay there. They were wrong. Seasoned investors like Buffett knew that measures would be taken to repair the economy, restore confidence and right the markets.

As he noted in an October 2008 New York Times op-ed piece, “To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”¹

Since the end of World War II, Wall Street has experienced 13 bear markets and 20 corrections. Even so, large-company stocks have returned an average of 11.1% per year since 1945.²

Decline thresholds may be useful. If you practice dollar-cost averaging (i.e., you invest a set amount of money each month in your retirement account), you know that your money will end up buying more shares when prices are lower and fewer when they are higher. You can lift this strategy and apply it in a market dip or downturn. Instead of investing a set amount of funds per time period, you invest a set amount of funds at a decline threshold. So if the balance of your retirement account falls 5%, you put a set amount of funds in. If shares of a particular company fall 5%, you use a set amount of funds to acquire more of them.

Some people don’t like the buy-and-hold approach and would contend that tactical asset allocation has the potential to work just as well or better in a downturn. Whether you like to buy and hold or not, the chance to buy low is not easily dismissed. No one is guaranteeing you will sell high, of course – but you might find bargains amid all the bears.

Think about taking the opportunity to add to your portfolio if the market pulls back. A market drop may be your cue to buy shares of quality companies at a cheaper price.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – forbes.com/sites/greatspeculations/2014/02/04/where-to-get-greedy-now-that-others-are-fearful/ [2/4/14]

2 – kiplinger.com/article/investing/T052-C008-S002-how-to-survive-a-stock-market-correction.html [8/14]

The Retirement Group is not affiliated with nor endorsed by Verizon, Bank of America, fidelity.com, Northrop Grumman, Raytheon, ExxonMobil, Pfizer, netbenefits.fidelity.com, hewitt.com, Chevron, Hughes, resources.hewitt.com,access.att.com, Glaxosmithkline, Merck, ING Retirement, AT&T, Qwest, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Badiuk, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Badiuk is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Understanding Your Risk Tolerance

Understanding Your Risk Tolerance

Do you recognize the major factors that may affect it?

How’s your ability to withstand short-term losses? This is the question at the core of any discussion of risk tolerance. Some people are able to ride through turbulence in the financial markets with a shrug while others suffer headaches. Many investment professionals recommend that their clients adopt an investment policy statement (IPS) to do so, and to address matters such as long-range goals and desired returns.

What life factors can shape your risk tolerance? Two come quickly to mind. The first factor is your age. The second is your time horizon.

As you age, you have fewer years to recoup market losses. So gradually reducing the amount of risk in your portfolio over time has merit. Many financial professionals advocate this, and Wall Street firms have even created investments around this premise, commonly featured in employer-sponsored retirement plans.

Your timeline to retirement can also influence your risk tolerance. If you are sure that you will start tapping into your retirement savings in 2021, your appetite for risk may pale compared to someone whose retirement may start at some vague point in the 2030s. Broadly speaking, your time horizon for any financial goal affects your risk tolerance in investing toward it.

What market factors can shape your risk tolerance? Four stand out. The most obvious one is market risk. One common measure of market risk is standard deviation, which tracks the variance of an investment’s return from its mean return during a stated period. Adding and subtracting the standard deviation to a mean return shows the range of returns that may be anticipated 67% of the time. If an investment has a high standard deviation, it means that its returns have varied from the mean to a greater extent than one with a low standard deviation. (You could argue that history means nothing with regard to an investment’s future performance, and that argument is legitimate – but lacking clairvoyance, we study history.) Across 1926-2012, the S&P 500 had a standard deviation of 19.1%.¹

Beta weighs volatility versus the S&P 500, NASDAQ or other broad benchmark. The benchmark is given a value of 1, and an investment with a beta above 1 would show greater volatility than the benchmark. A 1.1 beta indicates an investment that in theory should move 10% more than the benchmark does. The problem with beta is that some investments have low correlation to the benchmark used.¹

The impact of market risk can be magnified when a portfolio lacks diversification. Having more eggs in more baskets promotes more insulation against market shocks.

Liquidity risk can emerge significantly, especially as you age. Sometimes retirees will invest in certain financial vehicles and realize later (with frustration) that those dollars are “locked up;” they can’t get at that money, the investment is illiquid. If they want their money back, they’ll have to pay a penalty. Taking that kind of risk may be more than they can handle.

Marketability risk is the cousin of liquidity risk. It isn’t a measure of liquidity, but of tradability. If you can sell an investment quickly, its marketability risk is lower. If you can’t, its marketability risk is higher. Some people can’t tolerate investments that they can’t get in and out of.

Finally, you have inflation risk. This is the risk of your purchasing power lessening over time. When you invest in such a way that you can’t keep up with inflation, you lose ground economically. Suppose yearly inflation increases to 3% soon. That means that a year from now, you will need $103 to buy what you bought for $100 a year earlier. In ten years, you will actually need $134.39 rather than $130 to buy what you bought a decade back because of compound inflation. Its effect is just like compound interest.²

Look at retirees with conservative portfolios featuring a plethora of fixed-income investments. In a world where stocks are returning 10% a year or better, their returns have been a fraction of that. In addition to the opportunity cost they are currently paying, they risk struggling economically if the pace of inflation quickly accelerates.

What kinds of risks do you feel comfortable assuming? This is the big-picture question, the question for today and tomorrow. A discussion with a financial professional may help you confidently determine your answer.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 Citations.

1 – us.axa.com/investments/evaluating-investment-risk.html [6/13]

2 – inflationdata.com/articles/2013/02/05/impact-inflation-savings/ [2/5/13]

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This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Patrick Badiuk, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

Patrick Badiuk is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.