Tag Archives: Tacoma

Personal finance trends – the good and bad

Posted on May 3, 2013 | Leave a comment

Positive developments in 2013

1)      Lower expense ratios on many Exchange Traded Funds (ETFs). Last year, Schwab started the trend of lowering ongoing management fees on their ETFs and eliminating the transaction costs to buy and sell these products on the Schwab platform. This move attracted the attention of competitors and now many ETFs are cheaper to own than ever before. These products allow the broadest diversification across entire market segments at the lowest possible cost.

2)      The government has increased the contribution limits for retirement accounts for the first time since 2008. Annual IRA contributions were bumped up by $500 to $5,500 for people 49 and under and $6,500 for 50 and over investors. Employer retirement plan contributions also increased. Individuals under 50 can contribute $17,500. The over-50 catch up contribution can add another $5,500 to get to $23,000 total.

3)      Congress adopted higher federal estate tax thresholds ($5.25 million per person and $10.5 million per couple in 2013) than expected by most pundits. This effectively eliminates the prospect of paying federal estate tax for 99.86% of estates according to the Tax Policy Center. It also provided much more clarity for estate planning professionals who work with high net worth individuals on estate planning issues. Many states still have lower estate tax thresholds, however. For example, in Washington state the limit is $2 million. If a person dies with an estate value of $1,999,999 no state estate tax is due. But reach $2,000,001 and an estate tax return and payment are necessary.

4)      Investors have returned to markets. According to Leuthold Group, through April 24, net cash flow into mutual funds was at its strongest pace ever with year-to-date positive cash flow $223 billion.

Trends that concern us:

1)      Regarding that cash flow, the point of concern is that $106 billion of the incoming investments have gone to bond mutual funds. We think bonds will be severely challenged to generate meaningful returns over the next several years. Combine the premium many bonds are trading at with current low yields and the fact that total return could turn negative when interest rates rise and particularly U.S. government bonds will struggle to post returns anything like the past decade. By comparison, $22 billion of new investments have entered U.S. stock funds so far this year.

2)      The low interest rate policy set by the Federal Reserve Board. This policy has lowered the borrowing costs for the U.S. Government, but it has also changed the way that we all invest. Bond investors who are searching for yield are taking considerably more investment risk with their fixed income portfolios than ever before. When the Fed finally increases interest rates, three things may happen: inflation could increase dramatically, bond default rates may rise, and returns for bonds could turn negative as investors seek newer bonds at different increasing interest rates.

3)      Less affordable long-term care insurance. A few trends are becoming clearer for the LTC marketplace. A) most residents of nursing homes are women, b) Most baby boomers don’t have long-term care insurance because they either feel that it is too expensive or they don’t think that they will ever need it, C) Rates paid for LTC policies are becoming gender based, and although they have stabilized somewhat in the past year, the combination of the continuation of the low interest rate policies by the federal government and higher claims rates by women will force LTC prices to continue to grow at higher rates than inflation.

~ Allyn Hughes, CFP® — Brooks, Hughes & Jones – Partners in Wealth Management, Tacoma, WA

www.BHJadvisors.com

If you liked this post, please share it
Email Forward to a friend

→ Leave a comment

Posted in Financial planning, Insurance, Investments

Tagged , , , , , , , , , , ,

Retirement decisions timeline

Posted on December 14, 2012 | Leave a comment

Age 49 and under. 401K contributions are limited to $17,500 in 2013. Traditional IRA and Roth IRA contributions limits are $5,500.

The income limit (AGI) for contribution to a Roth IRA in 2013 has a phaseout range from $178,000 to $188,000 for married-filing-jointly taxpayers and $112,000 to $127,000 for single taxpayers.

The income limit to make a tax-deductible contribution to a Traditional IRA in 2013 has a phaseout range from $95,000 to $115,000 for married filing jointly (if covered by an employer retirement plan also) and $59,000 to $69,000 for singles. If you are not covered by an employer retirement plan, tax-deductible contributions can be made up to $178,000 of AGI for married filers.

Age 50 and over. 401K contributions are limited to $23,000 with catch up provision. IRA or Roth IRA contributions levels are $6,500 with catch up provision.

Age 55. If you leave your job after age 55, you can begin to take 401K distributions from your former employer’s plan without paying any penalties. Income tax will still be due on the amount of the distribution.

Age 59½. Distributions from IRAs may be made without penalty. Income tax will still be due.

Age 61. Think about when you want to retire and determine when you want to start receiving Social Security if you will be eligible for it. The most likely reasons to start receiving it are: lack of employment or under-employment, lack of income from investments, or a shorter-than-average life expectancy.

Age 62. Eligibility for Social Security begins. The Social Security Administration no longer sends an annual estimate of your expected benefits. You will have to access the estimate at www.ssa.gov. Your Social Security benefit will be permanently reduced by 25-30% if you begin payments at 62 instead of your Full Retirement Age (FRA). Keep in mind that starting Social Security early may also reduce benefits available to your spouse by as much as 35%. And if you continue to work while you receive Social Security, your benefits will be reduced by one dollar for every two dollars you earn over $15,120 in 2013.If you were born on January 1st, you should refer to the previous year.

  1. If you were born on the 1st of the month, we figure your benefit (and your full retirement age) as if your birthday was in the previous month. If you were born on January 1st, we figure your benefit (and your full retirement age) as if your birthday was in December of the previous year.
  2. You must be at least 62 for the entire month to receive benefits.
  3. Percentages are approximate due to rounding.
  4. The maximum benefit for the spouse is 50% of the benefit the worker would receive at full retirement age. The % reduction for the spouse should be applied after the automatic 50% reduction. Percentages are approximate due to rounding.

Age 65. Medicare eligibility begins. From three months before you turn 65 to three months after you turn 65 you may sign up for Medicare Parts A, B and D. Sign up for Medicare Part D (prescriptions) from October 15 until December 7. If you (or your spouse) are covered by an employer-paid health plan, you have eight months after you retire before you will have to pay a penalty to join Medicare.

Age 66 or 67. Considered Full Retirement Age (FRA) for Social Security recipients. If you were born before 1954, you are eligible at age 66. From 1955 to 1959, your FRA increases from 66 years and 2 months to 66 years and 10 months. If you were born in 1960 or later, the FRA is 67. At FRA you can still continue to work without receiving reduced Social Security benefits.

Age 70. Last year to receive deferral credit for postponing receipt of Social Security benefits. There is no reason not to take Social Security at this point. If you continue to work, and your earnings are higher than previous inflation-adjusted earnings, your Social Security benefit will continue to be increased even if you are already receiving it.

The year you reach 70½. (Or, more precisely, April 1st after the year that you turn age 70 ½). Distributions from IRAs, and other tax-deferred retirement plans like 401K and 457 plans (except Roth IRAs) must be started. The distribution amount will be determined by dividing the total value of all tax-deferred retirement accounts as of the previous December 31 by your life expectancy using IRS tables. If you fail to take this distribution, or your distribution amount is less than the minimum required, the tax penalty is 50% of the amount you failed to remove from the account.

~ Allyn Hughes, CFP, CLU, ChFC — Brooks, Hughes & Jones, Partners in Wealth Management — Tacoma, WA

If you liked this post, please share it
Email Forward to a friend

→ Leave a comment

Posted in Financial planning, Investments

Tagged , , , , , , , , , , , , , ,

Retirement spending varies by age band

Posted on March 26, 2012 | Leave a comment

When working with a client on a financial plan, one of the most difficult decisions that we have for a client is “what percentage of your pre-retirement income do you expect to live on in retirement?”

Most financial planners use a fairly well accepted percentage like 70% for folks who are comparatively well off and 80% for folks who have saved more modestly for retirement.  For these folks, Social Security often makes up a larger percentage of their retirement income.

Generally these percentages work but they don’t explain much about the differences in their expenses that most retirees actually face.

A professor from California Lutheran University, Somnath Basu, created an interesting “age banding” framework to try to explain how retirees in different age bands (65-74, 75-84 and 85-94) spend differently in retirement as they move through these age bands.  His analysis had two very useful assumptions:

1) That the basic inflation rate for some expenses during retirement – taxes and basic living needs – is relatively modest, just 3%.

2) That the basic inflation rate for other expense categories like leisure and health care in retirement is higher – approximately 7% each year.

Basu’s research showed that the amount that retirees spend on each of these four sets of expenses (taxes, basic living needs, leisure and health care) often also varies from age band to age band.

For example, retirees from 65-74 are no longer earning paychecks, and they are relatively healthy so they spend more on leisure activities.

Age Range Type of Spending Spending Level Compared to Pre-Retirement Assumed Inflation of Spending
65-74 Taxes 50% 3%
Basic Living Needs 70% 3%
Health Care 115% 7%
Leisure 150% 7%

In the second decade of retirement (ages 75-84) this spending pattern changes and spending on leisure dramatically drops while taxes and health care costs rise:

Age Range Type of Spending Spending Level Compared to Pre-Retirement Assumed Inflation of Spending
75-84 Taxes 100% 3%
Basic Living Needs 80% 3%
Health Care 120% 7%
Leisure 50% 7%

Finally, from age 85-94, this trend continues and leisure costs drop again.  Here is how spending looks during this decade within this framework:

Age Range Type of Spending Spending Level Compared to Pre-Retirement Assumed Inflation of Spending
85-94 Taxes 100% 3%
Basic Living Needs 90% 3%
Health Care 125% 7%
Leisure 25% 7%

The most important point of this analysis is that retirees should understand that their costs will change throughout their retirement years and their personal rates of retirement inflation might be very different from that of a friend or close relative—especially if they have a variety of health-related issues.  Thus, it’s misleading to apply a rule of thumb like 70% or 80% of pre-retirement spending to a retirement that could last decades and have very distinct stages with changing expenses.

~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

If you liked this post, please share it
Email Forward to a friend

→ Leave a comment

Posted in Financial planning, Investments, Retirement

Tagged , , , , , , , , , ,

2012 tax changes and contribution limits

Posted on December 1, 2011 | Leave a comment

EMPLOYER RETIREMENT PLANS

Participants in employer retirement plans such as 401ks and 403bs will be able to contribute an extra $500 as the limit moves up to $17,000 in 2012. Catch-up contributions, allowed above the $17,000 level for people over age 50, remain at $5,500.

IRA INCOME LIMITS GO UP

Traditional IRA (tax-deductible contributions)

  • Joint tax return filers – $92,000 – $112,000 ($173,000 – $183,000 if your employer does not offer a retirement plan)
  • Singles and head of household – $58,000 – $68,000

Roth IRA (after-tax contributions)

  • Joint tax return filers – $173,000 – $183,000
  • Singles and head of household – $110,000 – $125,000

The amount you can contribute to an IRA has not changed – $5,000/year under age 50, $6,000 50 and over.

ROTH CONVERSIONS

If your income exceeds the limits to make a deductible Traditional IRA or Roth IRA contribution, there is still a way to move money into the tax-free character of the Roth IRA. Again in 2012, there is no income limit for an IRA conversion, moving money from a Traditional IRA to a Roth IRA.

You can make a non-deductible contribution to a Traditional IRA and convert that money to a Roth, paying no taxes. If you have previously existing money in a Traditional IRA that was deductible at the time of contribution, it can be converted to a Roth IRA. You would owe ordinary income tax on the amount converted but future growth in the Roth IRA would be tax free.

SOCIAL SECURITY WAGE BASE

Earned income subject to tax for Social Security increases from $106,800 to $110,100.

TAX BRACKET CHANGES

Revised income ranges for each bracket are largely a function of inflation over the past year. The figures here bump the beginning income for each bracket upward by 2.35-2.43%.

Bracket Married Filing Joint Return

Single
10% $0 – $17,400 $0 – $8,700
15% $17,400 – $70,700 $8,700 – $35,350
25% $70,700 – $142,700 $35,350 – $85,650
28% $142,700 – $217,450 $85,650 – $178,650
33% $217,450 – $388,350 $178,650 – $388,350
35% Over $388,350 Over $388,350

ESTATE AND GIFT TAXES

The exclusion from federal estate tax is increased from $5 million to $5,120,000

The annual exclusion for gifts remains at $13,000 per recipient from any individual. A couple can therefore give $26,000 to any individual.

AMT PATCH

The exemption from Alternative Minimum Tax still awaits its adjustment. This may not be settled by year end.

Many other credits, deductions and phase outs – impacting lifetime learning credits, student loan interest, medical savings accounts and standard deductions – have also been tweaked.

~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

If you liked this post, please share it
Email Forward to a friend

→ Leave a comment

Posted in Financial planning, Investments, Taxes

Tagged , , , , , , , ,

Why choose a Registered Investment Advisor instead of a broker?

Posted on October 17, 2011 | Leave a comment

Visit riastandsforyou.com to discover the difference of working with an independent Registered Investment Advisor. RIA firms accept a fiduciary standard to act in your best interest.

A Registered Investment Advisor (RIA) is a professional advisory firm that offers personalized financial advice to its clients.

  • Many independent RIAs work with complex portfolios and address unique needs that require a highly customized level of investment management strategy and consultation.
  • Many independent RIAs are owned by the individual advisors who run them.
  • Many independent RIAs provide advice and services for a fee based on a percentage of the client’s assets.
  • RIA firms are registered with the Securities and Exchange Commission or state securities regulators, are subject to the Investment Advisers Act of 1940, and have a fiduciary duty to act in the best interest of their clients.

Why might an independent RIA be a good choice for an investor?

  • Independent RIAs generally have affiliations with a variety of firms who assist with tax planning, estate planning, money management and more. These affiliations allow them to help their clients with complex financial needs.
  • An independent RIA’s affiliations generally make available a wide universe of products and services to them, so that an RIA can tailor solutions to an individual client’s goals.
  • Some independent RIAs’ compensation is directly related to growing their clients’ assets, which can benefit both the advisor and client alike.

Brooks, Hughes & Jones is a Washington state Registered Investment Advisor with offices in Tacoma and Friday Harbor, WA. The three partners, Gary Brooks, Allyn Hughes and Nancy Jones have each earned the CERTIFIED FINANCIAL PLANNER™ designation.

Learn more about how we help clients manage financial decisions and opportunities at our web site — www.BHJadvisors.com.

If you liked this post, please share it
Email Forward to a friend

→ Leave a comment

Posted in Financial planning, Investments

Tagged , , , , , ,

European debt crisis presents difficult challenges

Posted on October 6, 2011 | Leave a comment

The government debt situation in Europe has been the largest driver of market volatility over the past two months. Concern continues to grow that select European countries are close to defaulting on their loans. European banks may have catastrophic exposure to debt problems and there is concern that the problem could spread outside of Europe.

The best review of the situation that we’ve read is a Sept. 29 market bulletin from J. P. Morgan titled “Is a More Integrated Europe the Answer?” The bulletin analyzes the current economic situation among the 17 countries in the European Monetary Union. It provides a very good overview of the issues and suggests that solving this crisis will require “enormous financial, social and political costs.”

Some of the most notable points include:

  1. Most of the countries in the European Monetary Union (EMU) have different cultures, languages and economic strengths and weaknesses. There is common currency but no common fiscal oversight. There is no common Federal Reserve equivalent to provide liquidity to banks. There is also no ability to influence fiscal policy and taxes across borders.
  2. The unsustainable financial situation of a few outlying countries in the EMU is forcing politicians in the financially stronger countries to bail out both the euro and countries with burdensome debt. This decision might be good for the EMU as a whole, but is bad for individual countries. In comparing the U.S. financial crisis and taxpayer-supported bailouts of prominent companies, the article makes an interesting point: “imagine if the government wanted to allocate trillions of U.S. taxpayer dollars to help another country pay its bills!” This makes the European challenge very difficult politically.
  3. Given that the situation in the EU could lead to another global recession, the market strategists at J.P. Morgan encourage investors to “consider alternative strategies, such as long/short and market neutral approaches to help dampen volatility and provide greater diversification.”

This is what we have focused on over the past few weeks.

The complete market bulletin is available here.

~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

If you liked this post, please share it
Email Forward to a friend

→ Leave a comment

Posted in Investments

Tagged , , , , , , , , ,

Bonds less incredible than you think

Posted on October 5, 2011 | Leave a comment

Here is Gary Brooks’s column from the October 5 Tacoma News Tribune.

If you liked this post, please share it
Email Forward to a friend

→ Leave a comment

Posted in Commentary, Investments

Tagged , , , , , , , ,

GET unit price takes huge leap

Posted on September 12, 2011 | Leave a comment

As a follow-up to my September 8 column in The News Tribune (see below), here is some more detail about the new unit price to participate in Washington’s Guaranteed Education Tuition (GET)  program.

The 2011-12 purchase price for one GET unit is $163.  One hundred units is the equivalent of one year of tuition at a Washington state university (though the account value can be applied to any accredited institution of higher learning). I was conservative in the article suggesting that the new price would be north of $130, “possibly well beyond.” I didn’t want to present too shocking of a figure and have it turn out to be off base.  I wouldn’t have been surprised by $150 but $163 is a big leap. Of course, the price is dictated by a massive spike in tuition rates at Washington state schools.

Considering that the payout value for participants redeeming their GET units this year is $102.23, the new purchase price includes a 59% premium over today’s tuition rate. And if you buy units with a periodic payment plan that includes a 7.5% program fee, the premium you pay goes up to 66.5% over today’s actual tuition cost.

If tuition costs advanced at 8% per year, catching up with a 60% premium would require six years before you broke even. Therefore, you wouldn’t want to invest after your child was 12 years old if you intended to start redeeming units at 18. If units will be used over four years, you could actually invest beyond 12 and still expect to catch up with the premium before the student graduated. Since Washington state school tuition inflation has been closer to 16% than 8% over the past three years, the breakeven period would come quicker, just a little over three years.

The GET unit price for the 2008-09 enrollment period was $76. In four years, the cost has gone up 114.5%. Over the six years previous to 2008-09, GET units increased in price by just 46.15%.

The biggest challenge to the state will be generating enough new interest in the program so that the funding model remains viable. Investment returns alone will not support continued elevated tuition inflation. Over time, more new participants may be required to provide cash flow for students currently redeeming their units.

If the high price of GET units leads to fewer participants, the programs sustainability will be challenged.

~ Gary Brooks — Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA

If you liked this post, please share it
Email Forward to a friend

→ Leave a comment

Posted in Commentary, Financial planning

Tagged , , , , , , ,