Changes in the Retirement Benefits Landscape

Posted by on Dec 29, 2014 in Fixed Income Investing, insurance, Investing, IRA, Retirement | 0 comments

Changes in the Retirement Benefits Landscape   A rundown of the big & little alterations coming next year.   Provided by Frederick Saide, Ph.D.   2015 will bring COLAs, changes & something new. Each year, the retirement benefits landscape looks a little different, and next year is no exception. Here’s a look at what will change, what might develop, and even what won’t change for 2015.       The 401(k) contribution limit expands $500 to $18,000 next year. The catch-up contribution limit for plan participants 50 and older also rises by $500 to $6,000. If you are in the 25% tax bracket and put $18,000 in your 401(k) next year, you will save $4,500 in 2015 federal income taxes as a result. That tax savings comes with a regular 401(k), not the Roth version.1   IRA contribution limits will stay the same, but phase-out ranges are changing. The contribution limit for Roth and traditional IRAs will again be $5,500 in 2015, with an additional $1,000 catch-up contribution allowed for IRA owners 50 and older.2   Adjustments have been made to the phase-out ranges for the deduction of regular IRA contributions. If you own a traditional IRA and contribute to a retirement plan at work, you can claim a tax deduction for your traditional IRA contribution next year until your adjusted gross income is between $61,000-71,000 (single filers) and $98,000-118,000 (married filing jointly). Those ranges are respectively $1,000 and $2,000 higher than they were in 2014. If you own an IRA and don’t put money in an employer-sponsored retirement plan but your spouse does, you can claim a full tax deduction on traditional IRA contributions until your spouse’s AGI reaches the phase-out range of $183,000-193,000 in 2015.3   The phase-out ranges regarding eligibility for Roth IRA contributions have also moved a bit north. In 2015, the ranges start $2,000 higher at AGIs of $116,000-131,000 (single filers) and $183,000-193,000 (married filing jointly).3   Charitable IRA gifts may return (if not for 2015, then for 2014). On December 3, the House approved a 2014 tax extenders bill and sent it towards the Senate for a final vote. If it is made law – and Treasury Secretary Jack Lew says President Obama is “open” to approving such a short-term bill – it would reinstate 55 expiring tax credits retroactive to January 1, 2014.4,5   Among them, according to USA TODAY: the IRA charitable rollover, the provision that permitted many IRA owners age 70½ and older the chance to donate up to $100,000 from their IRAs to public charities while excluding the donated amount from their gross incomes. (The enhanced deduction for contribution of appreciated property for conservation purposes – attractive to more than...

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What’s Fueling the Drop in Oil Prices?

Posted by on Dec 23, 2014 in cars, Fixed Income Investing, Investing, Retirement, taxes | 0 comments

What’s Fueling the Drop in Oil Prices?   How long will it last? Who wins & loses from it?   Provided by Frederick Saide, Ph.D.   On the New York Mercantile Exchange, a barrel of light sweet crude is currently worth well under $60. Prices have dropped more than 25% in a month and almost 45% year-over-year. What is behind this freefall? How long will prices keep dropping, and who does this development hurt and benefit?1      Oil prices haven’t cratered simply because of lessening demand. Make no mistake, waning demand is a major factor – and in its latest 2015 forecast, the International Energy Agency projected global demand for crude weakening further. But this is just part of the story.2   Saudi Arabia has made a punitive political move. It is the big player among OPEC nations, and it sees no point in thinning the crude supply glut. The longer it lasts, the more pressure it can put on two of its biggest competitors – Iran and Russia.3 Also on the USA making fracking more expensive and driving marginal players out of business.   Saudi Arabia has long feared Iran’s potential to develop nuclear weaponry, and if there’s too much oil on the market, the economy of Iran – which is extremely dependent on oil – could very well tank. Iran’s currency reserves are diminishing to the point where it needs oil prices up at the $130-140 level to balance its budget. Saudi Arabia has about 10 times Iran’s currency reserves, so it is much more equipped to ride out this oil bear market. Given enough economic pressure, Iran could finally make a deal with the world’s superpowers to wind down its nuclear program and signal to the Saudis that “enough is enough.” Russian president Vladimir Putin just told reporters that such a deal was “very close.”3,4   Speaking of Vladimir Putin, Russia has long supported the governments of both Iran and Syria – too much bad publicity, and now to its economic peril. Like Iran, Russia is a major oil supplier. It needs oil prices above $100 for any kind of economic stability, which it certainly lacks at present. No one has faith in the ruble, which has sunk against other currencies – and in response, Russia’s central bank just hiked its key interest rate by 6.5% to try and rescue it.5,6   Iraq and ISIS – the first making money from oil legitimately, the second illegitimately – are also punished by OPEC’s decision to sustain supply.   How will other emerging-market economies handle this tactic? Some might fare better than others. It might exacerbate the appalling economic conditions in Venezuela; it might foster additional unrest...

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How retirees can keep from outliving their assets

Posted by on Dec 17, 2014 in Uncategorized | 0 comments

As a Hopalong Cassidy fan I really enjoy this piece of dialogue: “Do you remember where the marshal’s office is?” Answer: “Down the next block, if someone hasn’t stolen it.” Talk about hard to find. Most advisers and agents are unfamiliar with qualified longevity annuity contracts (QLACs) and deferred income annuities (DIAs). Most clients have no idea what they are either. Last summer, the Internal Revenue Service issued new rules that provide tax advantage and eliminate risk. The IRS recognized that longer life expectancy with more years spent in retirement means the real threat of outliving retirement assets. Every retiree must face the challenge of making sure they do not exhaust their nest egg without knowing how long they will live. A QLAC can be purchased within a qualified retirement plan or an IRA. Only a DIA can be used for this purpose because the IRS does not want there to be a surrender value at death. The aim is to protect against longevity risk of living too long. At this writing, only one insurance company has a QLAC available for purchase. By first quarter next year, the Life Insurance Marketing and Research Association suggests there will be a number of companies with products available for sale. That does not mean institutional marketing organizations and administrators of business plans will allow it just because a QLAC is available. QLACs suspend required minimum distribution (RMD) until age 85. RMDs require income be taken from a tax deferred plan by age 70.5. The idea is to prevent anyone from permanently sheltering their retirement assets from taxation. From a taxing perspective, these rules might make sense. From a retirement security standpoint they exacerbate uncertainty. The regulations identify the ability to convert a Roth to a QLAC. Since an individual Roth does not have an RMD requirement, why convert to a QLAC? An effective strategy for doing so is to qualify for a tax bracket bump by purchasing or converting in small chunks so there is no taxable income until age 85. When income is taken, then it may be possible to bump between brackets. Remember taxes are at the margins of the brackets and not flat across total net income. Previously, the IRS included QLAC amounts in IRAs and all qualified plans in the RMD calculation. Under the new rules, QLACs are exempt under certain conditions. These are: •All retirement money in a QLAC cannot be greater than 25 percent of the total value of all pre-tax and post-tax investments •The 25-percent figure is capped at $125,000 of all IRAs and non-IRAs combined. The $125, 000 will be indexed for inflation in $10,000 multiples •A QLAC must provide distribution no later than...

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You Can’t Hide in Fixed Income

Posted by on Dec 8, 2014 in 402k, Fixed Income Investing, Investing, Retirement, TSA | 0 comments

Investing timidly may shield you against risk… but not against inflation.  Provided by Frederick Saide, Ph.D.  When is being risk-averse too risky for the sake of your retirement? After you conclude your career or sell your company, you have a right to be financially cautious. At the same time, you can risk being a little too cautious – some retirees invest so timidly that their portfolios barely yield any return.  For years, financial institutions pitched CDs, money market funds and interest checking accounts as risk-devoid places to put your dollars. That made sense before the Federal Reserve took interest rates down to historic lows. As the benchmark interest rate is now negligible, these conservative options offer you minimal potential to grow your money.   In 2014, annualized inflation has vacillated between 1.1% and 2.1%. Yields on typical 1-year CDs, money market funds and interest checking accounts haven’t even kept up with that.1,3,4   The rise of the all-items Consumer Price Index doesn’t tell the whole story of inflation. Food and electricity prices rose 3.1% during the 12 months ending in October, for example.2    With the federal funds rate still at 0%-0.25%, a “high-yielding” 6-month CD might return 0.75% for you, and the yield on a 1-year CD might barely be above 1%. Looking at Bankrate’s survey of CD rates as 2014 draws to a close, that’s exactly what we see. A good yield on a 5-year CD is less than 2.5% right now. (Some history worth noting: on average, those who put money in long-term CDs at the end of 2007 the start of the Great Recession saw the income off those CDs dwindle by two-thirds by the end of 2011.)3,4    Retirees shouldn’t give up on growth investing. Many people in their fifties, sixties and seventies need to accumulate more wealth for retirement – even with their current or imminent need to withdraw their retirement savings. Because of that reality, many baby boomers and seniors can’t refrain from growth investing. They need their portfolios to yield at least 3% and preferably more. Otherwise, they risk losing purchasing power as consumer prices increase faster than their retirement incomes.    Do you really want to live on yesterday’s money? Could you imagine trying to live today on the income you earned back in 2003 or 1998? You wouldn’t dare try, right? Well, this is essentially the dilemma that risk-averse retirees face. They realize that their CDs and money market accounts are yielding almost nothing; they are withdrawing more than they are earning and their retirement fund is shrinking. So, they must live on less.    In recent U.S. history, inflation has averaged 1.7%-4%. What if that holds true for the next 20 years?5...

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If only investment decisions were rational

Posted by on Dec 4, 2014 in Uncategorized | 0 comments

If only investment decisions were rational Frederick Saide3:03 p.m. EST December 3, 2014 More good investment advice from our expert, Frederick Saide, president of Scotch Plains-based Foundation Insurance Services. (Photo: FILE PHOTO)  7CONNECT 3TWEETLINKEDINCOMMENTEMAILMORE Listening to drive time radio psychologists dispense daily psychobabble, makes me think of Orson Welles and radio’s big moment 75 years ago. Some people realized “War of the Worlds” was entertainment, but others did not. It remains arguably the most widely known delusion in United States history. If investor decisions were entirely rational, there would be no need to understand the principals of behavioral economics. The theory was developed by Amos Tversky and Nobel Prize-winner Daniel Kahneman and simply states investors and markets are not entirely rational. Translation, we’re irrational about saving and spending money. Behavioral economics are not limited to financial services and investing. It was featured in the movie “Moneyball,” which made famous a method of evaluating professional baseball players based on their actual performance rather than a perception of how they might perform in the future. Where are we going with all of this? Very simple. In 2003, the Dalbar Survey of Investor Returns found the average mutual fund investor earned only 2.6 percent annually from January 1984 to December 2002 during a bull market, compared to annualized inflation of 3 percent and an S&P 500 return of 12 percent. Similarly, the decision about when and how to claim Social Security is no different. The strategy usually chosen is reaching age 62 and filing rather than based on sound analysis and winds up hurting recipients in the long run. These are a small sample of the questions I continually hear: •I want the money now before Social Security goes broke. Social Security is funded by the Payroll Tax and the program has tremendous popularity. Claiming early only leaves money on the table. If you are over 55 any future changes will not materially impact you. If you are 25 you will have time to adjust. The Center for Retirement Research at Boston College states, “Don’t start benefits early because you think Social Security has money problems …You won’t get more if you do.” •I want to delay drawing down on my investment portfolio until I absolutely have to act. When you delay Social Security, you will have to draw income from your portfolio. It is important to understand that the stock market is subject to volatility, sequence of return risk, and sequence of choice risk. How are these risks magically more secure than guaranteed payments from the government? Understanding this issue is critical to the long-term success of your portfolio. Every advisor should help clients focus on the bigger issue to delay Social...

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