Pensions and the Future of 401(k)

Pensions were created as a benefit to employees for continued loyal service to an employer. The longer you worked, the higher your salary and future pension benefits. Pension funds were professionally managed on behalf of the employees, who looked forward to a promised monthly cash stipend upon retirement. As the expense of pension plans grew, employers began looking for another way to help provide for the future security of their workers while minimizing costs. They found their solution in an act of Congress in 1980.

Many of you are familiar with the 401(k). This section of the Internal Revenue Code was enacted by congress in 1980 when it became apparent that corporate America was bound and determined to cut back on or eliminate the private pension accounts then in use. With this change, two very interesting things happened. First, retirement savings became an "elective" benefit instead of an employer sponsored guarantee. Second, the burden of selecting and monitoring appropriate investment choices shifted from the employer to the employees. The vast majority of employees contributing to 401(k) accounts have little or no experience selecting investments for their own accounts. With the recent stock market losses, the deficiency in the system is laid bare for all to see. Employees are ill-equipped to handle decisions once left to professionals. So, what is the solution?

At Comprehensive Financial Services, we are re-introducing a retirement plan system where professionals can manage your investments on your behalf. It's called Active Money Management, and it's available only through CFS. Our active money managers have over 35 years of experience making disciplined investment decisions. Over the past five years, the S&P 500, including dividend reinvestment, has returned exactly ZERO. Our money managers, over the same period, have returned nearly 36%! Using active money management, retirement assets will be constantly monitored and changed based on market conditions. All this at one-third the cost of a Traditional 401(k) Plan.

Call CFS to see if we can migrate your retirement plan to the Active Money Management plan.

Year-End Tax Ideas for Seniors 2009

Make Charitable Donations Directly from Your IRAs.
If you've reached age 70 1/2, you can transfer up to $100,000 of otherwise taxable IRA money to the public charity of your choice. The distribution will not be included in you taxable income. Additionally, since it is tax-free, it may reduce your Social Security benefits subject to tax. Be careful though - to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity (you can't receive cash and then donate it). Also, this provision expires at the end of 2009 unless Congress extends it. So, this could be your last chance.

Don't Take Your Minimum Required Distribution for 2009.
That tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age every year after they reach age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. However, a temporary tax law change made in late 2008 waives the minimum distribution requirement for 2009. This means you can leave the amounts in your account without suffering the 50% penalty. This waiver applies to virtually all qualified retirement plans. So, if you haven't already received your required distribution during 2009 and you don't need the money for the necessities of life, you can just leave it in your retirement account for another year.

ROTH Conversion Extravaganza begins January 1, 2010!
Call CFS at (702) 240-4621 to begin your ROTH Conversion process today! We'll help you calculate your tax bill as well as options for paying it. Call us today to schedule an appointment to convert your Traditional IRA to a ROTH!

Which way from here?

As I sit putting the finishing touches on my 2008 personal income tax return (yes, I filed a timely extension), all the forms and figures cast my thoughts in several directions. Is the economy on the mend? Or is it, like Apollo Creed at the end of Rocky II, just acting like it's going to get off the mat, only to slump again and be counted out? What about the stock market? I hear all sorts of chatter about bears becoming bulls and bulls turning to bears. What about skyrocketing federal budget deficits and Obamacare looming on the horizon? How will government action affect the economy and the markets? What is really going to happen? Well, my favorite answer to most questions is... it depends.

Our massive economy, more than four times larger than the second largest (Japan) truly makes the world go round. It is so involved and complex that it becomes nearly impossible for the common man to even begin to understand all things that can have an impact on it. The Conference Board recently released its monthly update on leading and coincident economic indicators. These two measurements attempt to reflect how the economy is doing now (coincident) and how it may perform in the future (leading). In summary, the LEIs had fallen for twenty straight months, but have been rebounding strongly for the past five. The CEIs have now leveled out. Taken together, these two indicators strongly suggest a near-term recovery for the economy. However, jobless rates continue to increase, with the unemployment rate nationally exceeding 10% for the first time in 25 years. Are we in store for a "jobless" recovery, where companies become profitable and expand without rehiring workers? Will the recovery materialize at all? Time will tell.

There's no doubt that there exists within the recent market recovery a not-so-subtle psychological lift for all those who suffered great losses over the past year. But many still remain very leery of the markets. Some, including many elderly investors, have sworn off the markets entirely (and, in most cases, rightly so). Still others, who have seen the markets rise a full 50% from the March 2009 lows are reticent to get in now, fearing they may suffer another pullback. As the economy begins to break into positive territory, the markets will continue to move higher based on the prospects of more consumer spending, which equal higher revenues and profits. Higher markets make consumers feel better about spending, especially seeing the recovery in their 401(k) and other retirement accounts. The unemployment rate may turn out to be the Achilles' heel of the markets. If unemployment remains high, even in the face of other "recovery" indicators, the markets will remain spooked about another dip into recession. Consumer spending accounts for 70% of all economic activity. When consumers don't have jobs, they don't spend.

Finally, looming on the horizon like a big black storm cloud, is the government. Will tax rates go up? If they do, will they wreck the recovery? How will we pay for nationalized healthcare? How will we pay for the debt we already have? How much is the interest cost on the national debt annually anyway? If we have too many people unemployed, will tax revenues continue to go down as deficits rise to unheard-of levels? Why do 10% of Americans pay 40% of the taxes and 40% of Americans pay no taxes? What if the guys who pay the most stop spending and investing? Well, I don't have a crystal ball, but if you look closely and follow the signs, you won't be surprised by what comes around the next bend.

The Anniversary of the Crisis

Many financial columnists are beginning to write about the one year anniversary of the loosely-termed "financial crisis." So, I thought I'd jump on the bandwagon and add a few thoughts of my own. First, I think the word "crisis" is used with far too much frequency these days. I try to be exact in my use of language. I don't always get my words just right. However, I'm pretty picky about other people's use of terms. If anything bad that happens is termed a "crisis", what do you call something that is really bad? Is a "catastrophe" worse than a "crisis"? How about a "calamity"? All these descriptors and their use in our lives often depend on how we perceive the world. For example, if someone loses a job, is it a "calamity", a "crisis" or a "catastrophe"? I guess it all depends. If the person who lost his job was financially prudent, saving money regularly, keeping a financial reserve of six months to a year of expenses and keeping personal spending within his budget, then a job loss would just be an obstacle or a setback to overcome. It wouldn't rise to the level of any of the "c" words above. However, if the person was awash in debt, had no savings and always spent more than he earned, a job loss might well be a "catastrophe" or worse.

Sound financial principles have stood the test of time because they are sound and tested by time. Pay yourself first and build up a reserve of cash for unexpected events. Make and keep a budget. Invest your capital in low-risk, diversified asset classes. If we can take a lesson from the past year, it's that risk and leverage have a way of turning on us just when we don't expect it. As soon as you're sure that your prospects can go nowhere but up, let me know. I'd like to borrow the crystal ball you're using.

Give Now or Give Later - The CLT and CRT of Charitable Giving

Even in times of economic uncertainty, many individuals are looking for the best way to support their favorite public charities. For some, it's the local women's shelter. For others it's their Alma Mater. Yet others wish to donate to their church or favorite social cause. Either way, there are two very tax efficient ways to donate that should appeal to the benefactor in all of us. These two methods are represented by their abbreviations: CLT and CRT. The CLT is a Charitable Lead Trust. The CRT is the Charitable Remainder Trust. Let's look at each individually. There are several variations of each. We'll just be going over the basics here.

You can give now to your favorite charity by using a CLT. This type of trust allows the donor to transfer an asset to the trust while retaining ownership of the asset. The charity receives the income from the trust for a certain fixed period of time or based on the remaining life of the grantor (gift giver). An analogy would be that you keep the peach tree but you agree to give away the fruit. The charity enjoys the "fruit" for the term of the trust, then the asset passes back to the donor (if a grantor trust) or to the donor's heirs (non-grantor or irrevocable trust). The grantor gets a healthy current tax deduction for the discounted value of the gift. In the case of a non-grantor trust, the "tree"can pass to the heirs without being subject to estate taxes. This type of charitable giving makes even more sense in times of depressed asset prices and low interest rates.

You can give later by using a CRT. In this type of trust, the grantor irrevocably gives assets to the trust for the benefit of the charity. However, the grantor retains the right to the income from the assets, usually for the rest of their life. Once the grantor has passed, the charity gets the remaining trust assets without restriction. This type of trust generates a tax deduction now for the grantor (based on a formula). It also reduces the grantor's overall estate value, reducing future estate taxes. In this case, the grantor gives away the peach tree, but retains the right to keep the fruit until they pass away. This type of gift is usually irrevocable and cannot be changed. Proper advice and planning are required to make sure this strategy fits in with the overall estate plan.

Americans are the most generous people in the world. We consistently lead all other countries in charitable giving. If charitable giving is part of your future estate plan, contact CFS to receive a free estate planning consultation.

2009 Mid-Year Review

With the first half of 2009 behind us, I'd like to take a look at what has happened and speculate about what we might expect for the second half of the year.

First, looking at the financial markets, we can take stock in the fact that markets are still way off their October 2007 highs. The DOW industrials remain down over 40%, the S&P 500 is off by 42% and the NASDAQ composite down 36%. Virtually no sector was spared in the Stock Market Carnage of 2008. How has the markets fared year-to-date through the end of June? The DOW is down 3.75% but the S&P 500 and the NASDAQ are up 1.1% and 16.3%, respectively. Some say they are sniffing the beginnings of a bull market these days. Which way will the markets go? Honestly, I've never been more certain about the direction of the markets than I am right now. Clearly, at these price levels, there are strong arguments to start accumulating shares in solid, reliable companies. On the other hand, there are great arguments that say the worst is yet to come. Job losses could lead to more mortgage defaults. Credit is hard to come by. Businesses are not growing and they are not hiring. The macro economy remains fraught with uncertainty. From an investment standpoint, the financial markets hate uncertainty.

Where does all this leave the average investor? I believe there are opportunities in ANY market, as long as yo know where to find them. I also strongly believe that buy-and-hold investing is dead for the foreseeable future. If your stock broker was unable to tell you that October 2007 was the top of the market and you should sell to lock in your gains, how do they know that this is the bottom? If you are worried about the volatility in the markets, or you just can't afford to lose any more money, there are safe places of refuge you can run to in troubled times. At CFS, we specialize in safe investment strategies. We have access to asset classes that don't derive their values from the gyrations of a fickle stock market. We can safely craft a portfolio which can deliver needed cash flow with double-digit returns outside of the stock market. Call CFS today so we can honestly and objectively evaluate your holdings and get you in a position to succeed.

Found Money - Sell Your Life Insurance Policy?

Many of you who are at or near retirement have not fared well during the past six months. Many market-based portfolios have dipped by as much as 50% or more since this time last year. Retirees who were counting on those portfolios to provide retirement income are now asking themselves if they will have enough cash to live out their lives in comfort. These are real concerns for many retirees who have seen their hard-earned savings evaporate under the pressure of a collapsing economy. Will you have time to recover what was lost? Should you keep your money in the market since you've already lost so much? Will you have to cut back on your lifestyle and future plans? These questions and others are keeping many seniors awake at night. However, one solution has appeared on the horizon that might just be your saving grace - your life insurance policy.

Several months back, I wrote about a new asset class called Life Settlements. The following is an excerpt from that article:

"This new asset class provides the potential for handsome returns while giving the investor a safe, non-correlated investment alternative. Until recently, there was no way for an individual investor to participate in this asset class. Now, there are companies in the marketplace who will sell fractional ownership in life settlement investments for as little as $50,000. What are life settlements anyway? A life settlement is simply the sale of an existing life insurance policy by a terminally ill or elderly person to another party. The price of the policy is negotiated and sold by the owner at a discount to the face amount. The purchaser then collects the full amount paid out under the policy. Life settlements are attractive to policyholders because they provide a secondary market for life insurance policies that are no longer needed or wanted. Investors are attracted to life settlements because they offer the opportunity for potentially high returns that are not tied to stock or bond markets, interest rates, or business cycles."

The companies I mentioned in the excerpt above are willing to pay you good money for the right to purchase your life insurance benefits. They are willing to pay you cash now for the right to collect on your policy when it matures. For insureds who meet a specific set of criteria, these settlement companies may offer you as much as 50% or more of your future death benefit in cash now! That is money you can put in your pocket to supplement your retirement or make up for market losses. So, rather than continuing to pay on that policy you can no longer afford or no longer need, you can sell it to willing buyers for a percentage of the death benefit.

These types of arrangements are not for everyone and having adequate representation as the seller is important. However, for the right person, a life settlement could be just the ticket to providing much needed cash in your golden years. Call me today for a free evaluation of your life insurance policy and to see if your policy qualifies for a settlement.