DOWNTRENDS IN AN UP WORLD

By most objective measures, the world is a better place to live today than it was in, say, the 1950s. We have color television and a zillion more channels. The Internet provides access to more information than was ever available in an encyclopedia (and it's updated). Refrigerators don't need to be manually defrosted. Cars are more fuel-efficient, and our phones are more powerful computing devices than the vacuum tube-driven processors that were used to send the first people into space. Think about that the next time you play Angry Birds.

But a recent list first published in the Chicago Tribune offers one person's inventory of things that have NOT improved in the past 60 years. It includes the cost (way up) and quality (way down) of higher education, the lower cleaning ability of dishwasher soap, and the fact that we don't get full service--including washed windows and a check of the tire pressure--at the gas station anymore. Air travel used to feel like a special experience; now, at best the experience is more like what you get at the bus terminal; at worst, it can feel like herding cattle. Professional athletes are paid a lot more and, perhaps in a total coincidence, tickets to sporting events are dramatically higher than they used to be.

You can see the full list here:

http://www.chicagonow.com/lists-that-actually-matter/2012/05/26-things-that-used-to-be-better-according-to-my-old-man-thanks-pop/), and decide for yourself whether canned corn does or doesn't taste as good as it used to, or whether the ever-shorter racing careers of the top thoroughbred race horses makes for lower fan loyalty and interest. Perhaps the most interesting aspect of the whole exercise is that the author (who was actually compiling a list made by his father) could only come up with 26 things that are not as good as they used to be. I'll bet you'd have no trouble thinking of twice that many things that have improved dramatically since the 1950s.

Sincerely,

William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

LOOKING AT THE NEW ESTATE TAX LAWS

What has happened since 2010 & what could happen in 2013.

With 2013 approaching, many families and their financial, tax and legal consultants are weighing major estate planning decisions. A short-term window of opportunity may be closing. The relatively low estate tax rates we have now may soon disappear, along with one of the largest federal tax breaks available in decades.

Estate taxes are at 80-year lows. At the end of 2010, Congress reset the estate, gift and generation-skipping tax (GST) rates at 35% and raised the lifetime federal gift, estate and GST tax exemptions to $5,120,000 until January 1, 2013. Some Capitol Hill legislators want to see these rates retained, even made permanent. Two other scenarios may be more likely.1,2

In the first scenario, the Bush-era tax cuts expire at the end of 2012 and it becomes 2001 all over again: the lifetime estate and gift tax exemptions fall to $1 million and estate taxes are reset to 55% (60% for some households).3

In the second scenario, Congress makes good on President Obama’s request to turn the clock back to 2009: estate taxes reset to a top rate of 45% with a $3.5 million personal exemption. (The lifetime gift tax exemption would still fall to $1 million.)3

The current $5.12 million personal exemption is portable between spouses. This represents a major tax break for wealthy families – an opportunity to transfer significantly greater amounts of wealth without triggering transfer taxes.

Currently, executors have an option to transfer an unused portion of a deceased spouse’s $5.12 million lifetime unified gift/estate/GST exemption to a surviving spouse. So with this new portability, a married couple can potentially transfer up to $10.24 million of assets without incurring any federal estate tax. In 2013, this portability is scheduled to disappear.3,4

Portability is not automatic. When the first spouse passes away, the executor of his or her estate must file a federal estate tax return even if no estate tax is owed. That move formally notifies the IRS that you are transferring the unused or partially used personal exemption to the surviving spouse. This estate tax return is due nine months after the death of the first spouse, with a six-month extension permissible.5,6

If some planning needs to be done to bring the value of your taxable estate under $5.12 million (or $10.24 million), your executor could make donations to qualified charities or non-profits on your behalf to lower the taxable value of your estate, although your heirs would consequently be left with less.4

You can shrink your taxable estate without reducing the lifetime exemption. In 2012, the annual federal gift tax exclusion is set at $13,000. So you (and your spouse) may gift up to $13,000 each to an unlimited number of individuals in 2012 without reducing your lifetime $5.12 million gift/estate tax exemption. Those gifts can even be made as payments for school expenses (except housing costs) or medical bills.4

Keep the $13,000 annual exclusion limit in mind: in 2012, gifts in excess of $13,000 per individual do cut into the $5.12 million lifetime exemption dollar-for-dollar.4

Even so, you still might want to make large gifts of appreciating assets this year. Why? Here’s an illustration: if you gift shares valued at $52,000 to a relative, you will draw down your $5.12 million lifetime gift/estate tax exemption by $39,000 ($52,000-$13,000). Yet the future appreciation of these shares will not be included within your taxable estate. This year, you and your spouse can each give away up to $5.12 million worth of appreciating assets without incurring federal gift taxes.4

An ILIT may be worth a look. Death benefits from life insurance policies are rarely subject to federal tax. However, if you have any “incidents of ownership” (i.e., have or have had the ability to make beneficiary, payment, loan or cancellation decisions), the policy proceeds may end up in your taxable estate.4

This problem tends to affect unmarried taxpayers most, though married couples may also face it. One response is to create an irrevocable life insurance trust (ILIT) – a trust that owns an individual or couple’s life insurance policy/policies. Upon the death of the insured, the policy proceeds go into the trust rather than the insured’s taxable estate. The proceeds can subsequently be directed to the named beneficiaries of the ILIT. Two asterisks here: you have to stay alive for at least three years after moving any existing life insurance policies into the ILIT to keep the insurance proceeds out of your estate, and you don’t want to name the trust as the policy beneficiary as that negates the whole purpose of the ILIT.4

It is time to carefully review your estate planning strategy in light of the potential changes ahead and the window of opportunity that may soon close.

Citations.
1 - businessweek.com/investor/content/dec2010/pi20101223_554594.htm [12/23/10]
2 - www.ppglc.com/CYETG11_2B.pdf [2011]
3 - online.wsj.com/article/SB10001424052970204059804577227450551030364.html [2/18/12]
4 - www.smartmoney.com/retirement/estate-planning/estate-tax-tips-for-married-couples-1300466869017/ [1/30/12]
5 - www.fa-mag.com/online-extras/6827-new-estate-tax-law-poses-dilemma-for-the-rich.html [2/14/10]
6 - www.forbes.com/2010/12/23/married-couples-guide-new-estate-tax-personal-finance-deborah-jacobs.html [12/23/10]

Sincerely,

William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

SAFE SAVINGS RATES

Here's a deceptively simple question: how much of your income should you save during your working years if you want to enjoy a comfortable retirement?

To answer the question definitively, you have to know how long you'll be working (and saving), how long you'll live in retirement, and what the investment returns will be both during the accumulation period and also throughout your retirement years.

Wade Pfau, a researcher who is currently director of macroeconomic policy program at the National Graduate Institute for Policy Studies (based in Tokyo, Japan), conducted an interesting study that tries to help us sort out the possibilities. To start with, Pfau assumed that a hypothetical person (let's call him Fred) would work for 30 years at a salary that goes up with the inflation rate, and then retire for 30 years. Each year, Fred would save the same percentage of his salary. Pfau also assumed that Fred would need 50% of his final year's income--on top of Social Security and any pension resources--to pay for retirement living expenses out of his portfolio.

In the first year of retirement, Fred would draw out 4% of his portfolio. After that, to maintain buying power, he would take out ever-higher amounts based on the inflation rate in each of the subsequent 29 years. For the entire 60 years, Fred's money is invested in an unsophisticated (but easy to calculate) portfolio consisting of 60% stocks and 40% bonds with a six-month maturity.

Then Pfau considered what would have happened for every rolling 60-year period from 1871 to the present and, looking backwards, calculated the percentage that Fred would have had to save to reach his goal.

The results? Pfau found that if Fred struggled to save and accumulate during a relentless bear market, he would often have a better-than-average chance of catching a bull market in retirement, and vice versa. The highest required yearly savings rate when he took into account the full 60 year period came to 16.62% for the unlucky person who entered the workforce in 1918. The more normal scenarios require Fred to save anywhere from 12% to 15% a year.

Of course, people who delay setting aside retirement money to later in life--if, for example, they start saving in their 40s and expect to retire at age 60--will see this savings percentage go up accordingly. Toward the end of his research report, Pfau discovered that if Fred only saved for 20 years, and expected a 30-year retirement, he should be prepared to set aside at least 30% of his annual income during this truncated savings period. On the other hand, if Fred set aside money for 40 years, his minimum savings rate drops dramatically, to between 6% and 14% percent.

It is important to recognize that this is a model, not a prediction of what will happen in the future. We don't know what future returns will be, either while people are putting money aside or during their golden years. Beyond that, we know that some people will spend more in their retirement years than their pre-retirement income, simply because they have more free time to enjoy.

Each person, and each sequence of years, is different, and requires more precise individual planning than any researcher can do in a broad study. But this study offers us a pretty good look at how the different variables can play out in the long lifespans we are enjoying today, a window into how easy, or hard, it can be to save for the third stage of our lives.

Article link: http://www.fpanet.org/journal/CurrentIssue/TableofContents/SafeSavingsRates/

Sincerely,

William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.

CAN WE AVERT THE "FISCAL CLIFF"?

2013 isn’t far off, yet both sides of Congress could end up far apart.

Recently, you may have heard about the “looming fiscal cliff”, the “coming fiscal cliff” and so forth. What exactly is it?

Briefly stated, the “fiscal cliff” is a potential $7 trillion dilemma facing Congress this fall – a Congress not known for ready cooperation. If America goes over it, our economy could stumble.1

Will Congress act before 2013? Federal Reserve Chairman Ben Bernanke introduced the phrase, referring to an economic downfall he fears will result from a potential 2013 combination of federal budget cuts, the expiration of the Bush-era tax cuts, the end of the payroll tax holiday and extended jobless benefits and other recent stimulus measures. Bernanke told Congress that together, these changes could send the U.S. over a “fiscal cliff” and into another recession.2

How bad might the potential downturn be? Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, thinks the U.S. could see a recession “immediately”. Moody’s economist Mark Zandi thinks it could shave 3% of off America’s inflation-adjusted GDP next year (read: zero growth).1

The hope is that Congress will come together and help the economy avoid the cliff. It won’t be easy. Remember the big fight over the debt ceiling in Congress? Imagine it expanded to other issues, its magnitude amplified to a new level.

What happens after the election? It will likely be November before Congress really starts to knuckle down and address this dilemma. Legislators have some options:

*They could punt again. The punt wouldn’t be as embarrassing as the one chosen by the ill-fated “super committee” that couldn’t agree how to reduce the deficit in 2011. It would be more like a handoff: the outgoing Congress could simply extend certain tax cuts or stimulus measures and leave the big and painful decisions for the new Congress. Many journalists and analysts believe that this is exactly what will happen in Washington. Some think a credit downgrade could result.2,3

*They could extend the Bush-era tax cuts again. If any political change in November is momentous, the stage could be set for another EGTRRA/JGTRRA extension and the planned cuts to defense spending and other key programs might be undone. That would certainly boost the morale of Wall Street and the taxpayer. The consequence? The nation could really pay for it later. Extending the Bush-era cuts would cost the federal government anywhere from $5.35 trillion to over $7 trillion over the next decade, the Congressional Budget Office believes.1,3

*They could do nothing. Even if the waning days of the 112th Congress aren’t as fractious as feared, some analysts think that lawmakers will likely let the Bush-era tax cuts, the 2% payroll tax cut and long-term unemployment benefits sunset, as the need for revenue on Capitol Hill has simply become too great.2

What can the Fed do? In Ben Bernanke’s assessment: basically nothing. In fact, that is more or less what he told Congress this spring: “If no action were to be taken, the size of the fiscal cliff is such that there's, I think, absolutely no chance that the Federal Reserve ... could or would have any ability whatsoever to offset ... that effect on the economy.”3

What could happen economically before we get to the edge? A June report from analysts at Bank of America expressed some fears: “As the cliff approaches, we expect first firms and then households to start postponing decisions, weakening the economy in advance of the cliff. When you are approaching a cliff, in a deep fog of uncertainty, you slow down.” This spring, Bernanke reminded Congress that “the brinkmanship last summer over the debt limit had very significant adverse effects for financial markets and for our economy” and “knocked down consumer confidence quite noticeably.” He urged lawmakers not to “push us to the 12th hour.”2

Expect a pitched battle on Capitol Hill. Alan Simpson, who for many years served Wyoming in the Senate, recently told CNNMoney that this lame-duck session of Congress could wrap up with seven weeks of “chaos”. Yes, just seven weeks; if lawmakers wait to tackle this in earnest after the election, that is all the time they will have to consider what could be some of the most pivotal political decisions they will ever make. 3

Some political theatre seems to be ahead – a drama with an uncertain ending, with the near-term fate of economy parked at the edge of a cliff.

Citations.
1 - money.cnn.com/2012/04/30/news/economy/fiscal_cliff/index.htm [4/30/12]
2 – articles.latimes.com/2012/jun/07/business/la-fi-bernanke-economy-20120608 [6/7/12]
3 – money.cnn.com/2012/05/16/news/economy/fiscal-cliff/index.htm [5/25/12]

Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.

THE RETIREMENT REALITY CHECK

Little things to keep in mind for life after work.

Decades ago, there was a popular book entitled What They Don’t Teach You at Harvard Business School. Perhaps someday, another book will appear to discuss certain aspects of the retirement experience that go unrecognized - the “fine print”, if you will. Here are some little things that can be frequently overlooked.

How will you save in retirement? More and more baby boomers are retiring with the hope that they can become centenarians. That may prove true thanks to healthcare advances and generally healthier lifestyles.

We all save for retirement; with our increasing longevity, we will also need to save in retirement for the (presumed) decades ahead. That means more than budgeting; it means investing with growth and tax efficiency in mind year after year.

Could your cash flow be more important than your savings? While the #1 retirement fear is someday running out of money, your income stream may actually prove more important than your retirement nest egg. How great will the income stream be from your accumulated wealth?

There’s a longstanding belief that retirees should withdraw about 4% of their savings annually. This “4% rule” became popular back in the 1990s, thanks to an influential article written by a financial advisor named Bill Bengen in the Journal of Financial Planning. While the “4% rule” has its followers, the respected economist William Sharpe (one of the minds behind Modern Portfolio Theory) dismissed it as simplistic and an open door to retirement income shortfalls in a widely cited 2009 essay in the Journal of Investment Management.1,2

Volatility is pronounced in today’s financial markets, and the relative calm we knew prior to the last recession may take years to return. Because of this volatility, it is hard to imagine sticking to a hard-and-fast withdrawal rate in retirement – your annual withdrawal percentage may need to vary due to life and market factors.

What will you begin doing in retirement? In the classic retirement dream, every day feels like a Saturday. Your reward for decades of work is 24/7 freedom. But might all that freedom leave you bored?

Impossible, you say? It happens. Some people retire with only a vague idea of “what’s next”. After a few months or years, they find themselves in the doldrums. Shouldn’t they be doing something with all that time on their hands?

A goal-oriented retirement has its virtues. Purpose leads to objectives, objectives lead to plans, and plans can impart some structure and order to your days and weeks – and that can help cure retirement listlessness.

Will your spouse want to live the way that you live? Many couples retire with shared goals, but they find that their ambitions and day-to-day routines differ. Over time, this dissonance can be aggravating. A conversation or two may help you iron out potential conflicts. While your spouse’s “picture” of retirement will not simply be a mental photocopy of your own, the variance in retirement visions may surprise you.

When should you (and your spouse) claim Social Security benefits? “As soon as possible” may not be the wisest answer. An analysis is needed. Talk with the financial professional you trust and run the numbers. If you can wait and apply for Social Security strategically, you might realize as much as hundreds of thousands of dollars more in benefits over your lifetimes.

Citations.
1 – www.forbes.com/forbes/2011/0523/investing-retirement-bill-bengen-savings-spending-solution.html [5/23/11]
2 – articles.marketwatch.com/2010-05-19/finance/30729568_1_retirement-period-retiree-spending [5/19/10]

Sincerely,

William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.