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29 Dec
Ken Himmler

Balancing Your Investment Choices with Asset Allocation

Posted by: Ken Himmler /  Category: Investment Psycology, Investment Strategies

A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s right for you.

Getting the right mix
The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash equivalents, accounts for most of the ups and downs of a portfolio’s returns.
 
There’s another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types.
 
Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation. It doesn’t guarantee a profit or insure against a loss, but it does help you manage the level and type of risks you face.
 
Balancing risk and return
 
Ideally, you should strive for an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let’s say you want to get a 7.5% return on your money. Your financial professional tells you that in the past, stock market returns have averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out that way, of course. This is only a hypothetical illustration, not a real portfolio, and there’s no guarantee that either stocks or bonds will perform as they have in the past. But asset allocation gives you a place to start.
 
Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor’s age. These can help jump-start your thinking about how to divide up your investments. However, because they’re based on averages and hypothetical situations, they shouldn’t be seen as definitive. Your asset allocation is–or should be–as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.
 
Many ways to diversify
When financial professionals refer to asset allocation, they’re usually talking about overall classes: stocks, bonds, and cash or cash equivalents. However, there are others that also can be used to complement the major asset classes once you’ve got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don’t necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio.
 
Even within an asset class, consider how your assets are allocated. For example, if you’re investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.
 
Asset allocation strategies
There are various approaches to calculating an asset allocation that makes the most sense for you.
The most popular approach is to look at what you’re investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to achieve your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example.  Or you might be in the opposite situation. If you’re stretched financially and would have to tap your investments in an emergency, you’ll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, you may need to invest more conservatively than you might otherwise want to.
 
Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called "market timing," is extremely difficult even for experienced investors. If you’re determined to try this, you should probably get some expert advice–and recognize that no one really knows where markets are headed.
 
Some people try to match market returns with an overall "core" strategy for most of their portfolio.  They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification.  These often are asset classes that an investor thinks could benefit from more active management.
 
Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal.  For example, you might have one asset allocation for retirement savings and another for college tuition bills.  A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild’s inheritance.  Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.
 
Things to think about
  • Don’t forget about the impact of inflation on your savings.  As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate.  Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.
  • Your asset allocation should balance your financial goals with your emotional needs.  If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep.
  • Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns.
Even if your asset allocation was right for you when you chose it, it may not be right for you now.  It should change as your circumstances do and as new ways to invest are introduced.   A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.
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22 Dec
Ken Himmler

Charitable Giving

Posted by: Ken Himmler /  Category: Estate Planning

Tis the season for giving and charitable giving can play an important role in many estate plans.  Philanthropy cannot only give you great personal satisfaction, it can also give you a current income tax deduction, let you avoid capital gains tax, and reduce the amount of taxes your estate may owe when you die.

 
There are many ways to give to charity.   You can make gifts during your lifetime or at your death.   You can make gifts outright or use a trust.  You can name a charity as a beneficiary in your will, or designate a charity as a beneficiary of your retirement plan or life insurance policy.  Or, if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund.
 
Making outright gifts
An outright gift is one that benefits the charity immediately and exclusively.  With an outright gift you get an immediate income and gift tax deduction.
 
Tip: Make sure the charity is a qualified charity according to the IRS. Get a written receipt or keep a bank record (cancelled check) for any cash donations, and get a written receipt for any property other than money.
 
Will or trust bequests and beneficiary designations
These gifts are made by including a provision in your will or trust document, or by using a beneficiary designation form.   The charity receives the gift at your death, at which time your estate can take the income and estate tax deductions.
 
Charitable trusts
Another way for you to make charitable gifts is to create a charitable trust.  You can name the charity as the sole beneficiary, or you can name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust.
 
Charitable lead trust
A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members, or other heirs.   The trust is known as a charitable lead trust because the charity gets the first, or lead, interest.
A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value.  If created properly, a charitable lead trust allows you to keep an asset in the family and still enjoy some tax benefits.
 
How a Charitable Lead Trust Works
 
Example: John, who often donates to charity, creates and funds a $2 million charitable lead trust.   The trust provides for fixed annual payments of $100,000 (or 5% of the initial $2 million value) to ABC Charity for 20 years.  At the end of the 20-year period, the entire trust principal will go outright to John’s children. Using IRS tables, the charity’s lead interest is valued at $1,267,630, and the remainder interest is valued at $732,370.   Assuming the trust assets appreciate in value, John’s children will receive any amount in excess of the remainder interest ($732,370) unreduced by estate taxes.
 
Charitable remainder trust
A charitable remainder trust is the mirror image of the charitable lead trust.   Trust income is payable to you, your family members, or other heirs for a period of years, and then the principal goes to your favorite charity.
A charitable remainder trust can be beneficial because it provides you with a stream of current income–a desirable feature if there won’t be enough income from other sources.
 
Example: Jane, an 80-year-old widow, creates and funds a charitable remainder trust with real estate currently valued at $1 million, and with a cost basis of $250,000.   The trust provides that fixed quarterly payments be paid to her for 20 years.   At the end of that period, the entire trust principal will go outright to her husband’s alma mater.  Using IRS tables, Jane receives $50,000 each year, avoids capital gains tax on $750,000, and receives an immediate income tax charitable deduction of $1,138,384, which can be carried forward for five years.  Further, Jane has removed $1 million, plus any future appreciation, from her gross estate.
 
Private family foundation
A private family foundation is a separate legal entity that can endure for many generations after your death.   You create the foundation, and then transfer assets to the foundation, which in turn makes grants to public charities.  You and your descendants have complete control over which charities receive grants.  But, unless you can contribute enough capital to generate funds for grants, the costs and complexities of a private foundation may not be worth it.
 
Tip: One rule of thumb is that you should be able to donate enough assets to generate at least $25,000 a year for grants.
 
Community foundation
 
If you want your dollars to be spent on improving the quality of life in a particular community, consider giving to a community foundation.  Similar to a private foundation, a community foundation accepts donations from many sources, and is overseen by individuals familiar with the community’s particular needs, and professionals skilled at running a charitable organization.
 
Donor-advised fund
Similar in some respects to a private foundation, a donor-advised fund offers an easier way for you to make a significant gift to charity over a long period of time.   A donor-advised fund actually refers to an account that is held within a charitable organization.  The charitable organization is a separate legal entity, but your account is not–it is merely a component of the charitable organization that holds the account.   Once you transfer assets to the account, the charitable organization becomes the legal owner of the assets and has ultimate control over them.   You can only advise–not direct–the charitable organization on how your contributions will be distributed to other charities.
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13 Dec
Ken Himmler

Social Security Buybacks Suspended

Posted by: Ken Himmler /  Category: Article Only

Why is it that the Government moves like molasses when trying to improve but they move at lightning speed to take things away? 

As of yesterday the Department of Social Security has formally suspended Social Security Buybacks.  In looking at how fast our Government has been in getting anything done they have really surprised me. It was only a few months ago that they submitted the request to the OMB.
 
Here is the link to read more about this:
 
 
 
 
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08 Dec
Ken Himmler

Are You Ready to Retire?

Posted by: Ken Himmler /  Category: Retirement Distribution Strategies
The question is actually more complicated than it first appears, because it demands consideration on two levels. First, there’s the emotional component: Are you ready to enter a new phase of life? Do you have a plan for what you would like to accomplish or do in retirement? Have you thought through both the good and bad aspects of transitioning into retirement? Second, there’s the financial component: Can you afford to retire? Will your finances support the retirement lifestyle that you want? Do you have a retirement income plan in place?
What does retirement mean to you?
When you close your eyes and think about your retirement, what do you see? Over your career, you may have had a vague concept of retirement as a period of reward for a lifetime of hard work, full of possibility and potential. Now that retirement is approaching, though, you need to be much more specific about what it is that you want and expect in retirement.
Do you see yourself pursuing hobbies? Traveling? Have you considered volunteering your time, taking the opportunity to go back to school, or starting a new career or business? It’s important that you’ve given it some consideration, and have a plan. If you haven’t–for example, if you’ve thought no further than the fact that retirement simply means that you won’t have to go to work anymore–you’re not ready to retire.
Don’t underestimate the emotional aspect of retirement
Many people define themselves by their profession. Affirmation and a sense of worth may have come, in large part, from the success that you’ve had in your career. Giving up that career can be disconcerting on a number of levels. Consider as well the fact that your job provides a certain structure to your life. You may also have work relationships that are important to you. Without something concrete to fill the void, you may find yourself scrambling to address unmet emotional needs.
While many see retirement as a new beginning, there are some for whom retirement is seen as the transition into some "final" life stage, marking the "beginning of the end." Others, even those who have the full financial capacity to live the retirement lifestyle they desire, can’t bear the thought of not receiving a regular paycheck. For these individuals, it’s not necessarily the income that the paychecks represent, but the emotional reassurance of continuing to accumulate funds.
Finally, it’s often not simply a question of whether you are ready to retire. If you’re married, consider whether your spouse is ready for you to retire. Does he or she share your ideas of how you want to spend your retirement? Many married couples find the first few years of one or both spouse’s retirement a period of rough transition. If you haven’t discussed your plans with your spouse, you should do so; think through what the repercussions will be, positive and negative, on your roles and your relationship.
Can you afford the retirement you want?
Separate from the issue of whether you’re emotionally ready to retire is the question of whether you’re financially ready. Simply–can you afford to do everything you want in retirement? Of course, the answer to this question is anything but simple. It depends on your goals in retirement (i.e., how much the lifestyle you want will cost), the amount of income you can count on, and your personal savings. It also depends on how long a retirement you want to plan for and what your assumptions are regarding future inflation and earnings.
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01 Dec
Ken Himmler

Minimize Estate Taxes

Posted by: Ken Himmler /  Category: Estate Planning, Property Taxes, Tax Reduction Strategies

 What is minimizing estate taxes?

The act of giving away your property, either during life or at death, will probably be subject to one or more of several types of taxes (collectively referred to here as estate taxes), either on the federal level, state level, or both. These tax liabilities may be the largest potential expenses you or your estate may have to pay; federal estate tax alone may reach as high as 45 percent of your estate if you die in 2009. This also means that property you intend to go to your loved ones or others when you die may go instead to the IRS or to your state. Therefore, understanding how these taxes can be minimized is vital if you want to preserve your estate for others.

What are estate taxes?

Estate taxes are actually transfer taxes. Transfer taxes are imposed when you give your property to someone else. This can be done during life (this kind of transfer is called a gift) or at death (this kind of transfer is called a bequest or legacy if you leave a will, and intestate succession if you don’t leave a will). There are five transfer taxes that may affect your estate: (1) state gift tax, (2) state death taxes, (3) state generation-skipping transfer tax (GSTT), (4) the federal gift and estate tax, and (5) the federal GSTT.

State gift tax
Currently, Connecticut, Louisiana, North Carolina, Tennessee, and Puerto Rico impose a gift tax. A gift is a transfer of property you (the donor) make during your lifetime. The person or organization you give to is called the donee. When you make a gift, it is in exchange for nothing or in exchange for property of lesser value (in other words, it is not a bona fide sale). Generally, gifts must be reported, and gift tax paid in the year following the year in which the gift is made (e.g., gift tax on a gift made in 2009 would be due in 2010). If your state imposes a gift tax and you intend to make lifetime gifts, you should contact your state’s department of revenue to find out what gifts need to be reported, how to compute the gift tax, and when and how to file a gift tax return.

State death taxes
State death taxes are imposed on property distributed after your death. You should be especially aware of state death taxes because they may affect even the smallest estates. There are three types of state death taxes: inheritance tax, estate tax, and credit estate tax (commonly referred to as a sponge tax or pickup tax). Every state imposes at least one type.

State generation-skipping transfer tax (GSTT)
Currently, some states impose a GSTT. The GSTT is imposed on property transferred to a family member who is two or more generations below you (e.g., a grandchild or great-nephew). You can contact your state’s department of revenue to find out what transfers may be subject to state GSTT, and when and how to file a return.

Federal gift and estate tax
Generally speaking, the federal gift and estate tax is imposed on property transferred to others either while you are living or at the time of your death. Unlike the individual states which impose at least one type of death tax, and some of which impose a separate gift tax, the federal tax system is unified. In other words, the IRS adds lifetime and deathtime transfers and treats them the same. This is how the unified tax system works:
Before 1976, the federal tax system worked much like that of the states. Gifts made during life (taxable gifts) were reported, and any gift tax owed was paid on an annual basis. After death, estate tax was imposed only on property owned at death (gross taxable estate). Since 1976, generally, taxable gifts are still reported, and any gift tax owed is paid annually (generally, you must file a gift tax return and pay gift tax due, if any, by April 15 of the year following the year in which you make a taxable gift). But upon death, all taxable gifts are added to your gross taxable estate for estate tax calculation purposes, even though a gift tax return may already be filed and gift tax paid (gift tax paid is deducted from the estate tax owed). The IRS unified the gift tax and estate tax systems so that: (1) you can’t avoid estate tax by giving your wealth away before you die, and (2) you pay tax on the cumulative amount of wealth you give away (this pushes your estate into a higher tax bracket).

The federal generation-skipping transfer tax (GSTT)
Like the state-imposed GSTT, the federal GSTT is a tax imposed on property you transfer to a family member who is two or more generations below you (e.g., a grandchild or great-nephew). The IRS wants to levy a tax on property as it is passed from generation to generation at each and every level. The purpose of the GSTT is to keep families from avoiding estate tax by skipping an intermediate generation. A flat tax rate equal to the highest estate tax rate is imposed on every generation-skipping transfer you make over a certain lifetime amount ($3.5 million in 2009).
Tip: The GSTT rate is the same as the maximum estate tax rate, and the GSTT exemption is the same amount as the estate tax applicable exclusion amount.
You can minimize estate taxes by: (1) taking advantage of certain allowable tax exclusions, deductions, and credits, (2) using an estate freeze technique, or (3) employing post-mortem planning.

Exclusions, deductions, and credits
Under the federal tax system, individuals are generally allowed to make gifts of up to $13,000 (2009 figure, up from $12,000 in 2008) per donee each year gift tax free under the annual gift tax exclusion.
In addition, individuals are allowed to exempt a certain amount of property from the gift and estate tax.
Further, transfers of property between U.S. citizen spouses are fully deductible, as are transfers of property to qualified charitable organizations.
There are many exclusions, deductions, and credits that if effectively used can minimize estate taxes. You need to understand what these exclusions, deductions, and credits are, and how they work in order to take full advantage of them.
Tip: States also have their own exclusions, deductions, and credits, although they may not be the same as the federal system.

Estate freeze
An estate freeze is any planning device that allows you to freeze the present value of your estate and shift any future growth (or potential growth) to your successors.
Example(s): You give land valued at $100,000 to your children. Twenty-five years later, you die. The land is valued at $500,000 on the date of your death, but only $100,000 is included in your taxable estate because the value of the land froze on the date you gave it to your children.
There are many ways you can freeze the value of property. Estate freezing techniques range from relatively simple (e.g., installment sale or private annuity) to the more complex (e.g., gift- or sale-leaseback). You need to know what these techniques are and how they are used in order to know which, if any, is best for you.
Tip: This generally works for state taxes also.

Post-mortem planning
There are many post-mortem (i.e., "after death") techniques that can help keep the value of your property as low as possible in order to minimize federal estate taxes. There are 10 post-mortem techniques in particular that you should know about. Even though these techniques are implemented after your death, you should understand each of them now because if you believe your estate might benefit from them, there may be things you need to do now to ensure that your estate will qualify for these elections after your death.

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