THE RETIREMENT MINDGAME

Your outlook may influence your financial outcome.

What kind of retirement do you think you'll have? An outstanding one? A depressing one? What if it all starts with your outlook? Qualitatively speaking, what if the success or failure of your retirement begins with your perception of retirement?

A whole field of study has emerged on the psychology of saving, spending and investing: behavioral finance. Since retirement saving is a behavior (and since other behaviors influence it), it is worth considering ways to adjust behavior and presumptions to encourage a better retirement.

Delayed gratification or instant gratification? Many people close to retirement age would take the latter over the former. Is that a good choice? Often, it isn't. Financially speaking, retiring earlier has its drawbacks and may lead you into the next phase of your life with less income and savings.

If you don't love what you do for a living, you may see only the downside of working longer rather than the potential boost it could provide to your retirement planning (i.e., claiming Social Security later, tapping retirement account balances later and letting them compound more). If you see work as a daily set of unfulfilling tasks and retirement as an endless Saturday, Saturday will win out and your mindset will lead you to retire earlier with less money.

On the other hand, if you change your outlook to associate working longer with retiring more comfortably, you may leave work later with a bigger retirement nest egg - and who wouldn't want that?

If you don't earmark 66 or 70 as your retirement year, you can become that much more susceptible to retiring as soon as possible. You're 62, you can get Social Security; who cares if you get less money than you get at 66 or 70, it's available now!

Resist that temptation if you can. While some retirees claim Social Security at age 62 out of necessity, others do out of inclination, perhaps not realizing that inflation pressures and long term care costs may render that a poor decision in the long run.

The good news is that Americans are waiting longer to claim Social Security than they once did. Increased longevity may be a factor in that trend, but the findings are encouraging nonetheless. The number of men claiming Social Security at age 62 increased 2.3% from 2007-09 to 35.8%, and the number of women claiming Social Security at age 62 increased 2.6% in that span to 38.9%. Still, these percentages fell short of those a generation before. From 1986-97, roughly half of all women claimed Social Security when they turned 62 and nearly half the men did; since 1997, the percentages have never approached those levels.1,2

Setting a target age for retirement - say, 65, 66, or even 70 - before you turn 60 can help mentally encourage you to keep working to that age. Providing your health and employment hold up and you can work longer, patience can lead you to have more Social Security income rather than less.

Take a step back from your own experience. For some perspective on what your retirement might be like, consider the lives of others. You undoubtedly know some retirees; think about how their retirements have gone. Who planned well and who didn't? What happened that was unexpected? Financial professionals and other consultants to retirees can also share input, as they have seen numerous retirements unfold.

Reduce your debt. Rather than assume new consumer debts that advertisers encourage us to take on commensurate with salary and career growth, pay down your debts as best you can with the outlook that you are leaving yourself more money for the future (or for unexpected situations).

Save and invest consistently. See if you can increase your savings rate en route to retirement. Don't look at it as stripping money out of your present. Look at it as paying yourself first, and investing for the comfort of your retirement.

Citations.
1 - ssa.gov/retirementpolicy/research/early-claiming.html [4/13]
2 - fool.com/retirement/general/2014/06/07/social-security-what-percent-of-americans-claim-be.aspx [6/7/14]

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 MARKETING PRO INC.

HIDING PROFITS FROM THE TAX MAN

On July 14, the Foreign Account Tax Compliance Act became effective, and instantly virtually all foreign banks were required to keep track of, and report on, all assets held by U.S. citizens. Individuals who don't report income on those assets and pay taxes to Uncle Sam face draconian penalties in excess of the actual money in the account.

But hiding income abroad is nothing more than business as usual for large American companies. Some are now ducking through a corporate tax loophole by relocating their tax base overseas. These so-called "inversions" hit the mainstream news media when medical device manufacturer Medtronic bought rival Covidien, which is domiciled in Ireland, and then began stripping income out of the U.S., where the top corporate rate is 35%. The merged firm is paying taxes on most of its net income in Ireland, at a 12.5% rate. This will save the company between $3.5 billion and $4.2 billion in overall taxes.

Others are following suit. Walgreens Co. is purchasing a Swiss company it partially owns, and pharmaceutical giant Pfizer Inc. openly pursued an inversion this year when it sought to purchase British drug maker AstraZeneca. Chicago-based pharmaceutical company AbbVie is buying Irish drug maker Shire, and two U.S.-based pharmaceuticals, Muylan Laboratories and Abbot Laboratories are planning to merge and reincorporate in the Netherlands. Overall, nearly 50 U.S. companies have used this tactic over the past decade. The net effect is to reduce U.S. tax revenues by an estimated $17 billion over the next decade.

Still others are assigning their valuable patents to a subsidiary in a more tax-friendly locale. For example, Apple, Inc. now generates 30% of its total net profits through an affiliated firm based in Ireland, saving an estimated $7.7 billion in U.S. taxes in 2011 alone. When the Wall Street Journal examined the books of 60 big U.S. companies, it found that they had shielded more than 40% of their annual profits from Uncle Sam.

An inversion works like this: A U.S. company buys or merges with a smaller company in the same business that happens to be located in a country where the corporate tax rate is lower than the maximum 35% federal rate here in the U.S.--plus, of course, state taxes. This covers a lot of territory. According to the latest update in Wikipedia, only the United Arab Emirates, Guyana, Japan and Cameroon assess higher corporate tax rates than the U.S.; their rates top out at 55%, 40%, 38% and 38.5% respectively.)

Next, the company is reincorporated, and its global headquarters is shifted to the foreign country. Operations continue exactly as they were before, which may mean that most of the sales and profits are still coming from the U.S. market. But the taxes are now paid at the lower rates of the overseas location.

The net result is to shift tax revenue to Ireland, the Netherlands, Switzerland and Canada, which offer a combination of low corporate tax rates and a territorial tax system, whereby income from foreign sources (like, for instance, the U.S.) isn't taxed at all.

How does this affect you? First of all, you will bear a slightly higher tax burden as the government seeks to recover lost revenues. The Journal report found that if just 19 of the 60 companies had to pay U.S. taxes on their earnings like you or me, the $98 billion in additional tax revenues would more than offset the $85 billion in automatic spending cuts that were triggered by the fiscal cliff negotiations. In addition, companies that are holding assets offshore for tax reasons have effectively made that money unavailable to invest in the U.S., which could lower economic growth and cost jobs for the U.S. economy.

More directly, that offshore money is no longer available to pay dividends to shareholders like you and me, or to buy back shares, which raises the value of our stock holdings.

Finally, an inversion could actually trigger higher taxes for its shareholders.

How? When the company inverts or reincorporates abroad, all current shareholders are required to pay capital gains taxes on their holdings in that year, as they are issued new stock in the new company. So if you happen to own $100,000 worth of Medtronic, and your shares originally cost you $20,000, you would get a 1099 in the mail saying that you have $80,000 in realized gains, subject to capital gains taxes immediately. If you had planned to hold those assets until death, and get a step-up in basis for your heirs, well, that strategy is preempted by the company's decision to invert. If you were holding the stock long-term to avoid annual taxation, or trying to shift tax obligations to next year, tough luck. You're paying taxes now, whether you like it or not.

Is there a way bring these assets back into the U.S. tax system? One obvious possibility is to lower our corporate tax rates below the rates of other countries. But there is no guarantee that those nations wouldn't lower their rates in turn, leading to a global race to the bottom, with the logical outcome that corporations would essentially be granted a 0% tax rate everywhere. And a lower corporate tax rate would, of course, mean higher individual tax rates, which is politically unlikely at the moment. Opponents would note that the share of federal revenues paid by corporations has already fallen from 32% in 1952 to just 8.9% today.

Another possibility is being explored in Congress. A recently proposed bill would require the foreign partner of any inversion tactic to be larger than the American merger partner; otherwise, the company is assumed, for tax purposes, to be domiciled in the U.S. The argument is a good one: these companies want to take advantage of U.S. laws and have full access to the U.S. consumer market, but not have to pay for it.

Sources:
http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx

http://www.azcentral.com/story/opinion/editorial/2014/07/31/corporate-headquarters-overseas-taxes/13439141/

http://dealbook.nytimes.com/2014/07/14/shire-and-abbvie-in-talks-over-53-billion-pharmaceutical-merger/?_php=true&_type=blogs&_r=0

http://www.usatoday.com/story/money/business/2014/07/21/stateline-tax-inversions-state-taxes/12941521/

http://www.latimes.com/business/la-fi-obama-offshore-tax-20140717-story.html

http://online.wsj.com/news/articles/SB10001424127887324034804578348131432634740

http://www.latimes.com/business/hiltzik/la-fi-mh-corporate-tax-scam-20140708-column.html#page=1

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.

GOOD NEWS OR BAD NEWS?

July joined January as the only two down months for the U.S. investment markets, and the month's last week (down 3%) provided yet another exciting lurch of the roller coaster. But if you put it all in perspective, July's overall 1.5% decline is relatively small and has since been mitigated somewhat by rising stock prices in August.

One reason investors seem to be optimistic despite the market downturn is the report by the Bureau of Economic Analysis showing that the U.S. gross domestic product grew by a robust 4% rate in the second quarter this year. This would represent a pretty large reversal from the 2.1% decline in the first quarter.

Any time the economy grows at a 4% rate, it's an indication that we're living in a terrific business climate. But there is reason to wonder about that number and whether it reflects what many people seem to think it does. For one thing, the final GDP figure will be revised at least twice between now and September. These revisions can be significant. The first quarter estimates initially came in at 0.1% growth, then were revised to a 1% drop, then a much larger 2.9% drop before the BEA revised it back to -2.1%.

For another, the second quarter may have picked up some of the growth that was suppressed in the first quarter by the well-publicized weather anomalies. Indeed, a big part of the final GDP number came in the form of replenishing inventories and stockpiles, not real spending, which grew by just 2.3% for the quarter. (Of course, that, too, is subject to heavy revision.)

Job growth has been rising but the housing recovery, so robust last year, has stalled. People are saving more and spending less. Gas prices remain about where they were before the ISIS advance through Syria and Iraq. Add it all up, and we are likely looking at another year of below-historical-average growth, rather than the long-anticipated economic takeoff which was originally projected for 2015 or, perhaps, later. If the stock markets were buoyed by the comforting feeling that good times are here again, they may experience disappointment when the final numbers come in.

But, ironically, that may actually be good news for the markets in the longer term. Fed Chairperson Janet Yellen is watching the economy closely for signs of overheating--for, in other words, signs of 4% or greater economic growth. If the second quarter number is revised downward, and the rest of the year shows steady moderate growth, the Fed is likely to keep interest rates low, stimulating both the economy and the stock market, for the foreseeable future.

Source:
http://finance.yahoo.com/news/why-the-economy-s-performance-may-be-overrated-161117764.html

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.

THE GAS PRICE STIMULUS

Iraq is one of the world's largest oil producers, so when the ISIS militants rolled in from Syria and took over Iraq's largest oil refinery, global oil traders and gas companies braced for a sharp spike in prices. Consumers expected to see higher prices at the pump in short order.

Instead, oil and gasoline prices are right where they were a year ago. "Regular" grade gasoline prices in different parts of the U.S. fell during the winter and have risen again in the summer months. If you happen to live on the West Coast and suspected that you paid more for gas than the rest of the country, you are right; the prices in California and the West Coast generally are more than 50 cents a gallon higher than the cost at the pump along the Gulf Coast, where the U.S. has the bulk of its refineries. People in the Northeast, Mid-Atlantic and Southern states generally fill up their tanks at cheaper prices.

For a longer-term view, prices hovered around a dollar a gallon for most of the 1990s. (The good old days!) Since then, the price has gradually crept upwards, with greater volatility and a deep price drop during the Great Recession. Since the beginning of this decade, prices have remained fairly level, and indeed today's gasoline prices are almost exactly what they were in early 2008.

Prices have held steady despite the turmoil in the Middle East, in part because most of the Iraqi oil fields are located in the southern part of the country, a safe distance (so far) from the ISIS insurgency. The other main oil fields are located in Kurdish-controlled areas in the northern part of the country, and the Kurds have managed to protect their ethnic border with great effectiveness. Add to that a recent agreement in Libya between the central government and a regional militia that will add 150,000 barrels a day to that country's crude oil exports.

The moderation in prices, from $4.00 at the pump two years ago to roughly $3.60 today, is acting as a kind of stealth stimulus for the U.S. economy. U.S. drivers are expected to use roughly 133 billion gallons of gasoline this year, so the price break adds $53 billion of savings to peoples' balance sheets. This, added to the lower costs for factories, airlines and electric power plants, could add half a percentage point to U.S. economic growth in 2014.

Sources:
http://www.rte.ie/news/business/2014/0707/629012-energy-index/
http://hosted.ap.org/dynamic/stories/O/OIL_PRICES?SITE=AP
http://www.usatoday.com/story/money/markets/2014/07/06/oil-iraq/12004745/
http://money.cnn.com/2012/06/15/news/economy/gas-prices-stimulus/index.htm

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.