Age Related Retirement Milestones That Could Even Have You Looking Forward to Your Next Birthday


For most of us, our attitude towards our next birthday can change dramatically as we go through life. Early on, we may greatly look forward to certain birthdays.

For example, many people look forward to their 18th birthday because in most states, that marks the “age of majority” when they are legally considered an adult and can take control of many aspects of their lives. And the 21st birthday may be the most highly anticipated of all, for reasons that we will leave up to the imagination. Unfortunately, birthdays after that tend to generate increasingly less enthusiasm. However, you may not be aware that in the realm of retirement planning, you may have some birthdays coming up that you should actually be looking forward to! That’s because as the years pass, certain age milestones give you more options when it comes to building wealth and saving for retirement. The following is a list of some of the more important age milestones with regard to retirement planning.


AGE 50
Once people reach their 50th birthday, they often realize that they’ve been too focused on things like getting that next job promotion, raising the kids and paying for the big new house. Unfortunately for many, they find themselves behind when it comes to building up their retirement nest egg. Luckily, the IRS allows for certain “catch-up” contributions to allow them to put their retirement savings on a fast track. One of the most important is that in the calendar year you turn 50 and thereafter, you can contribute an extra $6,000/yr. as a salary deferral into your company 401(k) plan, thus raising the maximum contribution limit from $18,000 to $24,000. In addition, you can add an extra $1,000/yr. into your Traditional or ROTH IRA, thus raising that maximum contribution limit from $5,500 to $6,500. Both of these amounts are as of the calendar year 2017, and are likely to go even higher in the future.


AGE 55
If you leave your job in any calendar year when you turn 55 or older, there is a little known loophole in the tax law that allows you to take distributions from your company 401(k) plan with no premature 10% penalty. The money will still be taxable, but relief from the penalty can yield a big savings. This rule can come in handy especially if, for example, you are unexpectedly laid off from your job and need to tap into some of that money to pay bills.

NOTE: This rule applies only to distributions from 401(k) plans and NOT from IRAs, so you want to be particularly careful not to hastily roll over the entire 401(k) into an IRA before analyzing whether you might need to take some of that money out, because once the money is rolled to an IRA, the opportunity to take advantage of this rule is lost.


AGE 59½
This is the age at which you can take distributions from any tax qualified retirement plan, such as your 401(k) and/or IRA, without paying the 10% premature distribution penalty. This rule can often come into play if you are retiring early, say in your early 60s, and need some of that money for living expenses.

NOTE: There is a strange quirk in this rule; the distribution actually has to take place at least six months to the day after your 59th birthday in order to avoid the penalty. So you have to carefully count out 183 days past your birthday and make sure not to take the money before that date.


AGE 62
This is the age at which you can elect to take early Social Security.

NOTE: The benefit will be reduced for every year you are younger than the “Normal Retirement Age” (NRA), which is generally age 66, so if you take your benefit at age 62, it will be reduced by about one third, and will stay that way for life. So, it is important to think carefully before deciding to go ahead with this. Still, statistics show that well over half of recipients start taking their benefit at some point before their NRA.


Age 66
For most people, this is the age at which they qualify for their full “Normal Retirement Benefit” from Social Security. One thing to keep in mind is that there is no requirement that you start taking your benefit at this time. In fact, if you decide to wait, your benefit will increase by about 8% per year all the way until age 70, at which point it will max out. So if you don’t need the money right away, you may want to wait and let the benefit keep growing. When you do start taking your benefit past age 66, the increased amount will continue for life.

For most of us, our attitude towards our next birthday can change dramatically as we go through life. Early on, we may greatly look forward to certain birthdays.


AGE 70½
Since distributions from your 401(k) and/or IRAs must be included as taxable income on your return, many people wait as long as possible before doing this and choose to live on other money instead. Well, the IRS won’t let you wait forever. Starting in the year you turn 70½, the IRS forces you to begin taking a certain amount out of your 401(k)s and IRAs. These mandatory withdrawals are called “Required Minimum Distributions” (RMDs). They are based on a calculation taking into account your life expectancy. You can always take out more than your RMD, but if you take less you will be subject to a stiff 50% penalty, so it’s critically important to do the proper planning in advance for this particular issue.


As you can see, there are numerous age related milestones on the road towards good retirement planning, and it’s critically important to be aware of them and take advantage of them in order to maximize your retirement income. And who knows, depending on your situation, some of these rules could help you actually look forward to one of your upcoming birthdays for a change—or at least take a little bit of the sting out of it!

Everyone’s situation is slightly different, so feel free to give us a call if you have any specific questions about your own circumstances.



Don’t Be a Victim of the Looming 401(k) Crisis

There is a slow moving time bomb coming in the world of retirement planning, and it’s important for everyone to understand what’s happening so that they can avoid becoming a victim. The time bomb is that the traditional “3-legged stool” of retirement planning is quickly crumbling away, and it doesn’t currently appear as if anything is coming to replace it.
The 3-legged stool consists of:
(1) Social Security
(2) Defined Benefit Pensions
(3) Personal Savings.

The first leg (Social Security) is still there. Unfortunately, a sort of grand experiment has been going on for the past couple of decades for the second leg of the stool (Defined Benefit pension plans), which have been quickly disappearing to the point where they are pretty much obsolete other than for government workers. The thinking was that they could be replaced by a beefed up third leg of the stool (Personal Savings) in the form of 401(k) plans, but this “401(k) experiment” appears to be failing.
It was never supposed to be this way. The 401(k) was a little known provision added to the Internal Revenue Code around 1980, originally designed to allow executives to defer tax on some of their bonuses until they retired. But once it became clear that this provision could be used as a tax deferral vehicle for the regular wages of any employee, the modern 401(k) as we know it was born.
There was massive growth in the use of 401(k)’s over the ensuing decades, at the same time that employers were turning away from Defined Benefit Plans in record numbers. Fast forward to the situation today, where most workers in the U.S. have no Defined Benefit Pension whatsoever, and will have to rely solely on Social Security for their retirement income… along with whatever they have in their 401(k) or other personal savings.
This has created a tremendous change whereby responsibility for retirement planning has now shifted directly onto the shoulders of workers themselves… and the results don’t look good. Studies show that the average balance in a 401(k) is less than $100,000. But the true situation is actually far worse than that, because the averages are greatly skewed upward by the relatively few workers at the top who have very large balances.
The median balance, (half higher, half lower) even for workers in their late 50s, is less than $20,000.
Even more shocking, fully half of working families have no 401(k) savings at all.
There are many reasons for this. More people are working as independent contractors rather than employees. People are changing jobs more often, and/or feel like they can’t afford to save anything in their 401(k). People put it off, thinking that they’ll just get around to it at some better time in the future. And some employees don’t even have access to a 401(k) at all. For a variety of reasons, there is a massive shift going on where a relatively small number of workers at the top (the “Top 10”) have large balances, while the vast majority of people have far too little in their 401(k)’s.
The result of all this is that if people don’t pay attention to their 401(k) plans, they could be left with little more in retirement than their Social Security Benefit…which on average is about $1,400/month. Does that sound like a great retirement? For a shocking number of people, this is going to be reality for them. Even if they have a 401(k) with a balance of, say, $150,000, that should only be expected to provide an additional $6,000-8,000/yr. of retirement income, if they want it to last their entire lives and keep up with inflation. Especially if they retire with any debt, that is likely to just not be enough. This is the looming 401(k) retirement crisis that the country is facing. How can you avoid becoming a victim?
Here are the steps you should follow:
1. Enroll in your 401(k) ASAP. Ask your employer as soon as you take
a new job, and make sure you start on the very first day of eligibility.
2. If you are self-employed, look at some of the other options that are available to do on your own, such as a SEP-IRA (simplified employee pension) or an Individual 401(k).
3. Make sure you put enough away.For most people that means about 10-15% of their salary, at least. Don’t short change yourself by putting only enough in to get the employer match…you’re only hurting yourself with that strategy.
4. Look at the investment options carefully, and consider choosing some that offer the potential for future growth. Don’t put all your eggs in one basket with company stock or unbalanced fund choices.
5. When you change jobs, don’t ever spend the money you’ve accumulated in your former employer’s 401(k)…consider rolling everything to an IRA so it can keep growing vs. rolling it into your new employer’s 401(k). Follow that procedure with every job you ever take to help you build a nest egg.
6. Review your 401(k) on a regular basis to make sure it’s still doing what it’s supposed to do and balanced appropriately, based on your age and risk tolerance.
7. If you are 5 to 10 years out from retirement, and have not already met with an advisor to review your 401(k) allocations and financial goals, now is the time to do so to help ensure you are on the right track.
It doesn’t look like there’s any going back to the world of Defined Benefit Plans. Like it or not, it’s now your own responsibility to be aware of the changing landscape and that means paying attention to your 401(k). Although your company may provide the 401(k) to you as an employee, ultimately you are responsible, not your employer, to ensure you are saving enough in your plan for retirement. Working with an advisor can help ensure you have set and followed realistic goals. Your retirement lifestyle will probably depend on it!

Inherited IRA: Don’t Let it Become a Tax Disaster

These days people are concentrating more and more of their assets in their IRAs. In fact, sooner or later most people will ultimately wind up having almost all their investment assets tied up in IRAs.

Since we all know about the two certain things in life (death and taxes), it’s becoming increasingly important to beware of the rules regarding inherited IRAs.

Ignorance of these rules can lead to tax disasters, as was evidenced in a recently published tax court
case that reveals important lessons for all of us in this complex area. Don’t let this happen to you!

Let’s go through some of the events in this case and see what lessons we can learn. The basic facts of the case are pretty simple: Thomas Ozimkoski changed his will a few months before his death to leave the bulk of his property to his wife, Suzanne.

Unfortunately, Susan was his second wife and she did not get along with his son, Thomas Jr., who chose to contest the will in probate court. Even worse, even though Thomas updated his will, he never bothered to update his IRA beneficiary form – in fact it appears that he never filled one out in the first place. As we’re about to see, this led to all sorts of problems.

Lesson #1: Always Fill Out Your IRA Beneficiary Form (and keep it updated)
If Thomas had named Suzanne on his IRA beneficiary form, that money would have passed directly to her and would have totally bypassed his probate estate. Since he never filled out his form, the money instead had to go through probate, where it was subject to Thomas Jr.’s will contest action. Money that has to go through probate is subject to all sorts of problems such as creditor claims, statutory delays, etc. In contrast, IRA assets that have a clearly designated beneficiary on the form will totally avoid probate in the first place. So Thomas’ IRA money would never have been subject to the will contest if he had just filled out that form. Big mistake on his part!

Lesson #2: Inherited IRA beneficiaries have special tax advantages, but ONLY if they are named on the form
As it turns out, Suzanne wound up settling the probate action with her stepson by agreeing to pay him $110,000 from the IRA money. Unfortunately for her, this wound up costing her much more than just $110,000. Rather than leaving the money in the inherited IRA, Suzanne incorrectly rolled that money into her own IRA. Unfortunately, since she was under 59-1/2, this now meant that any distribution taken out of the IRA was not only subject to income tax, but also an additional 10% premature distribution penalty.

If Thomas had named Suzanne as beneficiary on his IRA form, she would have been eligible for much more favorable tax treatment on that money. She could have left it in the inherited IRA, rather than rolling it to an IRA in her own name. If she had done that, she could have spread the distributions over her entire life expectancy, greatly minimizing the tax impact of the distributions. Even better, she would have been eligible to take withdrawals for the rest of her life with no penalty, regardless of her age. That’s because there is an exception to the 10% penalty for money taken out of inherited IRAs…as long as there was a beneficiary named on the form. But since Thomas never filled out his form, Suzanne was out of luck.

So what should you do to make sure your own family never has to face a tax disaster like this? Follow some simple rules.

5 Simple Rules to Avoid a Tax Disaster

1) Name a beneficiary for ALL your IRAs.
2) Name an alternate, in case the first one dies before you.
3) Never name an estate as the beneficiary.
4) Make sure your IRA custodian has a copy of the beneficiary form.
5) Keep the beneficiary form updated as your circumstances change.

As you can see, inherited IRAs are no simple matter. Make sure you know the rules, and in case you feel like you could use some assistance, seek qualified counsel to help chart your course. Don’t let your family go through a tax disaster regarding your inherited IRA!

Year End Donations

Looking to donate some of your unwanted items? Be sure to donate to a qualified organization to be able to claim on your taxes. Watch Szarka Financial’s Senior Financial Advisor Alex Menassa, MT, CPA discuss this more with Fox 8 News.

New IRS Rule Could Provide Relief on IRA Rollovers

Sooner or later, almost all investors will eventually be faced with the decision of whether to roll their 401k (or other employer sponsored retirement plan) into an IRA. The IRS recently issued a new rule that could actually make life a little bit easier for taxpayers in this regard.

First, some background. As we have written about many times in the past, fixed pension plans are going the way of the dinosaur. For most people going forward, their major sources of retirement income savings will be their 401k. Depending on where you work, chances are good that you are eligible to contribute to a 401k plan through your employer. And if you move from job to job, you may begin to build up a collection of 401k plans from each employer.

Sooner or later, you’ll be faced with the decision of what you should do with these 401ks and begin considering rolling them into an IRA. Maybe you would like to pull all the 401k money together from the different plans into one IRA account to make it easier to administer and keep track of everything. Maybe you want a wider assortment of investment options than what the 401ks offer, and/or you want just one comprehensive set of investment options that applies to all the money rather than having each of the 401k’s subject to their own individual limitations. Or maybe you’re finally ready to retire and you want total flexibility to take distributions from the entire amount whenever you want, to meet your retirement income needs.  In any of these cases, you could potentially consider consolidating all the 401ks into an IRA by doing a rollover. Of course, this is a decision that must be made on a case by case basis depending on the needs of the taxpayer.

There are generally two ways to accomplish an IRA rollover. Many taxpayers who are not familiar with these rules, who maybe have never done this before, might only be familiar with the first method, known as the “60-day rule”. Under this method, the taxpayer just asks the 401k provider for a total distribution, and the taxpayer then has 60 days to deposit the money into their new IRA.  The problem is that if they miss the 60-day time window the whole thing is considered a taxable distribution rather than a rollover, including being subject to a 10% penalty if the person is under age 59 ½. Certainly an ugly situation in which no one would want to find themselves, but it’s happened to many taxpayers in the past.

Up until now there was almost no way for taxpayers to avoid the harsh consequences of missing the 60-day time window. But under a new rule issued this past August, for once it’s “the IRS to the rescue”!  Under the new rule, if a taxpayer misses the 60-day time period they can actually fix this problem themselves, and at practically no cost. All they have to do is fill out a form asking for a waiver of the time period, provided that the reason for the late rollover is among a specific list of permissible reasons allowed by the IRS. There are 11 acceptable reasons under this new rule, including financial institution error, misplacing the rollover check, mistakenly depositing the rollover into the wrong account, and other misfortunes such as severe damage to a personal residence, death or serious illness of a family member, and incarceration.

It’s not often that the IRS actually issues rulings that are so helpful and, dare we say it, “compassionate”! So this is certainly good news. On the other hand, taxpayers should be aware that this ruling does not change the fact that the rollover has to otherwise be valid in all respects, such as being the taxpayer’s only rollover within a 12-month period.  Also the new IRA custodian will still have to alert the IRS that this is a late rollover, which could invite an audit to make sure that the relief conditions were properly met.

Taxpayers should also be aware that there is a better method to make a rollover that avoids all these problems in the first place, known as a “trustee-to-trustee transfer” or a “direct rollover”. This is actually considered the “gold standard” for how to make a rollover. Under this method, you first have to decide who your new IRA custodian is going to be. Then you direct the 401k plan (preferably by phone if the plan so allows, otherwise via rollover paperwork) to make out a check directly to your new IRA custodian. The key is that the check is not made out to you personally; it’s made payable to “XYZ Custodian, IRA FBO (“for the benefit of”) John/Mary Smith”. That’s what makes it a direct rollover. The check is mailed to your address, and you forward it to your new IRA custodian.  In this case there is no 60-day time limit at all to worry about. You can initiate a direct rollover at any time for 401ks that you’ve had for many years, and take as long as you like to deposit the check into your new IRA (not that you’d necessarily want to wait very long!)

Any time the IRS issues a ruling like this that is actually helpful, it can be considered a victory for taxpayers.  However, there are still plenty of other rules and traps to watch out for. If you are considering a rollover, feel free to contact us for more detailed guidance.

When a Loved One Dies Are You Responsible For Their Debt?

When a spouse or loved one dies, surviving family members are often faced not only with the emotional aftermath of dealing with their loss, but also with an avalanche of legal and administrative issues to deal with for which they are totally unprepared. And in these situations, the last thing that grieving family members may have expected is a barrage of phone calls from debt collectors seeking payment for the deceased’s outstanding debts. Often the surviving family members have no idea how to handle these issues. Should these debts be paid? Who is liable? Are other family members personally responsible? And are family members entitled to inherit any assets if there are outstanding debts?

The general rule in these situations, per the State of Ohio, is that the decedent’s “estate” is primarily responsible for their debts. But in many cases, creditors automatically assume that if the decedent had any assets when they died, these assets must be used to pay their outstanding debts before family members can inherit anything. But that’s not really the case! How is that possible? The reason is that it’s only the PROBATE estate that is primarily responsible for the debts. Assets that pass outside of probate do not fall into this category, and are often beyond the reach of creditors (there are some exceptions, discussed later). In cases where the decedent took the time to do probate planning, most or all of their assets could pass outside of probate and thus be exempt from their outstanding debts.

Here are some of the most common examples of assets that can be structured to fall outside of probate:

1) Assets that pass via designated beneficiary form, such as IRA accounts, 401(k)s, pensions, annuities, and life insurance. As long as the form names someone who outlived the decedent, these assets will not need to go through probate.

2) Assets that are titled Joint with Right of Survivorship. This typically applies to the residence owned by a married couple. The “right of survivorship” feature (shown on the title of the property) means that the house will pass to the survivor outside of probate.

3) Assets that are titled Payable on Death (POD) or Transfer on Death (TOD). This applies to any checking accounts, savings accounts, other bank deposit accounts, or automobile titles where the decedent had filled out a form making them POD or TOD.

4) Assets placed in a trust. These assets are considered as being owned by the trust, not the decedent, and pass outside of probate.

If the decedent did proper probate planning, there is often virtually nothing left to go through probate, and thus nothing for creditors to take, even if the decedent had sizeable assets such as IRAs, bank accounts, etc. This often comes as a surprise to family members, who may be approached by debt collectors trying to get them to pay quickly, before they learn these rules.

For example, the decedent may have signed a long-term lease agreement for an automobile shortly before passing away. In these cases, the leasing company may try to collect the payments for the entire contract from the surviving spouse and/or other family members, who may not realize that only the probate estate is liable (of course, in this case, the car itself would have to be returned because under a lease agreement the decedent never owned it in the first place). Another typical example is credit card debt, which is generally unsecured and thus “dies with the debtor,” meaning that it can be claimed only against assets in the probate estate, if any.

There are, however, some exceptions to these rules in which the spouse and/or family members can indeed be liable for some or all of the decedent’s outstanding debts. Here are some common examples:

1) In cases where a family member co-signed for a debt, they would remain personally liable for the entire debt.

2) In cases where the debt is secured by an asset, such as a mortgage on the house or an auto loan secured by the car, that particular asset would be subject to the debt.

3) In the case of medical expenses, Ohio law generally follows the “Doctrine of Necessaries,” which makes the spouse liable for the decedent’s unpaid medical bills.

4) If the decedent had any long term care expenses paid by Medicaid, the State will generally enforce collection from other assets even if they passed outside of probate, in particular the family residence.

As you can see, there are a myriad of rules that can apply when it comes to the question of who is liable for the debts of a decedent. The bottom line is that surviving family members should never make any assumptions, such as thinking they are personally liable for these debts, and/or that they can’t inherit any assets without paying these debts first. Instead, they should speak with a qualified professional and get good counsel before taking any actions in this area. As always, it pays to think before you act! Feel free to contact our office if you have any questions about these issues.

Take Control by Using IRAs to Cut Your Taxes

It’s getting to be that time of the year, when we all have to deal with one of the two great certainties of life.

One of them is taxes…and, well, you know what the other one is! And when it comes to taxes, the wealthy and powerful may have all sorts of tax avoidance options available to them. But for the vast majority of ordinary wage earners, the single most powerful, most versatile weapon they have available to cut their taxes could be the IRA deduction. Even if 2015 is already in the rear view mirror, and you’re feverishly working on your tax return at the last minute, wondering what you can do to cut down on that tax bill…the IRA could be the ace up your sleeve. However, there are a myriad of rules that apply in this situation, so no one should EVER just assume that they are eligible for this tax savings vehicle- it’s more complicated than you might think. Will it work for you?

Find out by using this step-by-step decision tree:

1. First of all, keep in mind that you must have “earned income” to make an IRA contribution. This would include wages, salaries, tips, taxable alimony, and net earnings from a trade or business. It would generally NOT include interest, dividends, pensions, annuities, or capital gains. So IRA deductions are generally associated with people who are still in their working years, as opposed to being retired.

2. Secondly, you must determine whether you are eligible to actually take a deduction for your IRA contribution. This is perhaps the single most misunderstood aspect of IRAs…Many people fail to understand that making an IRA contribution is NOT the same as getting a deduction for it. If you’re not eligible for a deduction, making non-deductible contributions to an IRA is generally a bad idea. In that case it’s generally better to consider contributing to a ROTH IRA instead, which is made with after tax dollars.

3. Whether you’re eligible to take a deduction for your IRA contribution depends on whether you’re an active participant in a retirement plan at work. If you have no retirement plan at work, you get a full deduction for your IRA contribution. But if you are an “active participant” in a retirement plan at work, you have to fall under certain income limits to qualify for an IRA deduction. For this purpose, anyone who is covered by a defined benefit plan, or who made salary deferrals into a 401k plan, would be considered an active participant. Since this would apply to most people, we will assume that the answer to this question is YES.

4. Assuming you are an active participant in a retirement plan at work, then your eligibility for an IRA deduction depends on your modified adjusted gross income (AGI). For married taxpayers filing jointly, if they have modified AGI of $98,000 or less, they qualify for a full deduction for IRA contributions. Modified AGI between $98,000-118,000 means a partial deduction, and modified AGI of over $118,000 means NO deduction. This rule disqualifies a lot of people from being eligible to deduct their IRA contributions. Again, if your modified AGI is over these limits, it’s generally better to contribute to a ROTH IRA instead, on an after tax basis (we’ll talk about this in more detail shortly.) In the case of single taxpayers, they get a full deduction for AGI $61,000 or less, partial deduction for AGI between $61,000-71,000, and no deduction for AGI over $71,000. Again, many single taxpayers are surprised when they discover that this rule disqualifies them from deducting their IRA contribution.

5. Assuming you still qualify for a full IRA deduction after considering the guidelines stated above, then you can deduct up to $5,500 for an IRA contribution for 2015. If you turned 50 or older by the end of 2015, you can deduct an additional $1,000, for a total of $6,500. This one move could instantly save you thousands of dollars in taxes!

6. Better yet, you have until April 15, 2016 to make an IRA contribution for the tax year 2015. As a matter of practicality, if you make any IRA contribution between January 1 and April 15 of 2016, be sure to carefully designate on your check the tax year to which the contribution applies. That’s because any contribution made in that time window could apply to either 2015 or 2016.

7. Unfortunately, many taxpayers—especially married couples—have a modified AGI that is too high to qualify for IRA deductions. In this case, they should consider making ROTH IRA contributions instead, on an after tax basis. There are also income limits for eligibility for ROTH contributions…but these are much higher than the limits for IRA deductions. For 2015,married couples filing jointly are eligible to make ROTH contributions as long as their modified AGI is under $183,000.

8. Even though ROTH contributions are made on an after tax basis, which means they won’t save you tax dollars today, there are still some powerful tax benefits to using a ROTH. Earnings on a ROTH are tax deferred, which means the account will grow much faster than the equivalent earnings from a regular non-qualified investment account. Better yet, once you are retired you can generally take money out of a ROTH account on a tax free basis! This can serve as an important planning tool to control your taxes in retirement.

9. It’s important to keep in mind that an individual is limited to a total of $5,500 in IRA contributions for tax year 2015 ($6,500 if age 50 or over), whether that amount goes into a traditional, or a ROTH IRA. In other words, that amount can be split between a traditional and a ROTH IRA…but you can’t put the full amount in both.

The world is filled with taxes that you can’t do anything to avoid. But for most ordinary wage earners, IRAs represent a unique opportunity. IRAs are one tool that can actually be used by a wide swath of taxpayers to actually take control of their tax situation and make a real difference. So while you’re working on that tax return this year (and maybe cursing Uncle Sam under your breath!), keep in mind that knowing these rules, and applying them to your full advantage to potentially save thousands every single year, can have a huge cumulative impact on your ability to build wealth over the course of your working life. If you have any questions about how these rules could apply to your specific situation, by all means give us a call and let’s talk about it!


Fed’s Interest Rates Hike Decision Signals Stormy Waters Ahead

Don’t look now, but the smooth waters we’ve seen over the past few years, in terms of market performance, are poised to get rougher in the months ahead.

This distinct possibility may have played a pivotal role in the Fed’s decision not to raise interest rates in September.

Over the past few years, the market has been relatively calm and steady, and a lot of investors have forgotten what real volatility can look like. For example, the market has historically experienced a  “correction” (defined as a drop of 10% or more from any given peak) once every 18 months or so. Yet until recently, the markets had gone four full years without experiencing any corrections. That stability is very easy to become accustomed to, but can prove to be very deceptive.

All of this changed in August, when the market suddenly experienced a severe downturn in just a few days, losing more than 12% of its value from the high reached in May. And volatility returned in a big way, with the market experiencing more than twice the 1% daily gyrations this year, and more than five times the 2% daily gyrations, as of last year. All of these huge daily swings coming in a period of just two weeks.

So what’s going on? It’s actually a combination of factors. First of all, you could say that the market was just “due” for a correction… and that idea certainly has some validity. But there’s more to it than just that. Another major factor cited by many economists is the fact that market volatility may have been artificially suppressed by the Fed’s quantitative easing program (QE) over the past few years. The idea is that when investors know that the Fed is trying to stimulate the economy by keeping interest rates low, they are more willing to assume greater risk than would otherwise be the case, but that all changed late last year, when the Fed phased out their QE policy. The argument is that this “kicked out the artificial support” and left the market to finally stand on its own two feet…which fostered the return of market volatility closer in line with historical norms.

But why would this specifically happen in the month of August? One clear answer could be the situation in China. The Chinese stock market took a plunge over the summer, and in August it became clear that the “Chinese economic miracle” may have run off the rails…at least temporarily. The Chinese government’s official forecast for economic growth this year is around 6.5%, which represents a huge slowdown from the 10-11% of previous years. And many private observers say that the truth could be far worse. Judging from data like freight shipments, energy usage, and auto sales, it is very possible that the true rate of growth could be closer to 2%, or even less than that…perhaps even negative, for the first time in decades.

This has major implications for the world economy. China’s imports of raw materials are critical to the economic health of many emerging market countries. And the growing Chinese economy, now the world’s second largest, has become an important source of profits for many of the world’s major corporations. For example, China is now the world’s largest auto market…30% larger than the U.S. Many people are shocked when they learn that General Motors sells more cars in China than in the U.S. A slowdown in Chinese auto sales is big news for a lot of companies.

All of this has raised the risks in the global economy, which is still fairly weak outside of the U.S. This could be a big reason why the Fed decided not to raise interest rates in September, in spite of the fairly robust state of the U.S. economy. Many commentators have noted that the Fed seemed to be taking a more comprehensive, global outlook in making their rate decisions, and thus decided that the overall world situation was too fragile to risk higher rates at this time. Clearly, the Fed was concerned about some of these issues and wasn’t quite yet ready to take any chances on doing anything that could further destabilize the situation.

These same risks could weigh on the markets in the coming months. In addition, September and October have historically been the worst months, BY FAR, for the markets. Historically speaking, more corrections (and outright bear markets) have started in September and October than any other months of the year.

So when you look at the overall situation, with no more QE to prop things up, weakness in the rest of the world, a potentially significant slowdown in China, and negative seasonality, investors should brace themselves for a lot more market volatility than they’ve seen in quite a long time. Which makes it a good time to review your overall financial plan to consider making any necessary adjustments, in anticipation of more stormy waters ahead!


Financial Planning for Individuals in Blended Families

According to census figures, over 1300 blended families are created every day… and almost 50% of Americans have at least one step relative, based on findings from the Pew Research Center.  So for many Americans, step families have become the norm.  And apart from the usual issues of managing everyone’s schedules regarding custody of the children, and dealing with the personality dynamics involved when different families come together, there are also a host of financial issues that have to be addressed in these types of situations.  Here are some of the most common issues that come up:

  • Whether to get legally married: One of the major decisions to consider is whether to legally “tie the knot”, which carries a host of ramifications.  For one thing, under ERISA law your spouse must be the beneficiary of your 401k plan at work, unless they sign off on a waiver.  In contrast, this is not the case with your IRA accounts or other investment accounts, where you are free to name whoever you like as beneficiary.  This could also factor into the decision of whether to roll over a 401k into an IRA, because doing so gives the owner more rights to name beneficiaries than leaving the assets in the 401k after you leave a job.

Another huge ramification of getting legally married is that you’ll be subject to asset division rules if the new marriage doesn’t last forever.  Statistics show that 2/3 of second marriages also end in divorce.  If you get married a second time, from that date forward all assets that you accumulate will be considered marital property, which means that your spouse will be entitled to half in the event of another divorce.  Not only that, but most jurisdictions still enforce spousal support, which generally means that the higher earning spouse will have to share some of their income with the lower earning spouse, even AFTER the divorce…typically for one additional year for every three years of marriage.  In contrast, this will not be an issue if there is no legal marriage, because Ohio stopped recognizing common law marriages after 1991.

  • What to do with the house:  this is often a very contentious issue with blended families.  If you put the house title as joint with right of survivorship to keep it out of probate, you’re giving the joint owner immediate and full rights to the house – it’s the same as gifting them half the house right away.  This would not be a good solution if the goal is for each spouse’s children to inherit their half of the house… in that case, it might be better to set up a trust to determine what happens to the house if one of the spouses passes away, how long the other spouse can continue to live there, etc.  These issues can get very complicated very quickly.
  • What to do with investment/financial accounts:  Here again, things can get very complicated in a hurry.  If you put these accounts in joint title, you’re essentially giving a gift of half the account to the other owner, immediately.  If this isn’t the goal, another option to consider using a Transfer on Death Designation…this will keep the account out of probate and get it to the other spouse in case the owner dies, but does not give the other spouse any immediate ownership in the account before the death of the owner.
  • Updating beneficiaries on life insurance policies and IRAs: If you’ve had life insurance policies and IRAs for many years, it’s very easy to forget to update the beneficiaries as circumstances change, as in the case of newly blended families.  The last thing you want is to continue to name an ex spouse as beneficiary and thereby create a disaster if you pass away unexpectedly without having updated these forms to reflect your new wishes.

As you can see, blended families can face a host of financial planning issues that can become very complex, very quickly !!  If you’re in this situation, make sure you sit down with your financial or legal advisor and carefully go through these questions to make sure that your financial affairs are put in good order to reflect your new circumstances.



Three Surprising Things About Social Security That Everyone Should Know

For most people, Social Security is going to be an important part of their retirement income.

But in spite of how well known this program is, and the fact that its coverage is nearly universal, and that you probably have a lot of friends, neighbors and relatives already drawing benefits…there are plenty of things about Social Security that might really surprise you. Here are just 3 typical examples:

Spousal Benefits:

Did you know that even if you have never worked a day in your life, and have never contributed to Social Security, you can draw spousal benefits based solely on the fact that you are married to someone who is eligible for benefits? That’s right. A lot of people have no idea that spousal benefits even exist…so to them, it’s like free money. Of course, you are always entitled to your own benefit based on your own work history, if that’s higher. But even if you have NO work history, you’ll be eligible for your spousal benefit, which will be equal to one half of the working spouse’s benefit. Plus, the spousal benefit does NOT reduce any of your benefit if you contributed to social security through your own job…it’s strictly an additional benefit. In order to qualify, the working spouse has to be eligible for their own benefit, and the spouse must be at least 62 years old. Keep in mind that the longer you both wait to receive benefits, the higher the monthly benefit will be.

Benefits for Divorced People:

Here’s more good news for those that have gone through a divorce: Did you know that you can claim Social Security benefits based on your ex-spouse’s work history? That’s right. Even if your ex-spouse has remarried, you can draw spousal benefits, as long as you qualify. To qualify, you must have been married for at least 10 years prior to getting divorced and you must not have remarried. If you have remarried, you can only qualify for benefits based on your current spouse’s work history. Another very welcome surprise is that these benefits are completely independent of whatever decisions your ex-spouse makes regarding their own benefit and does not impact or reduce their benefit in any way. They do not even have to have filed to receive their own benefits for you to receive yours. The only requirement is that the working ex-spouse is ELIGIBLE to receive their own benefits. This can be a really nice unexpected bonus at retirement for people who have gone through a divorce.

The Advantage of Waiting:

Many people know that taking their Social Security early will result in a reduced benefit. For this purpose, “early” means before your normal retirement age (NRA), which for most people is currently around age 66. But did you know that if you wait until past your NRA, your benefits will continue to increase? That’s right…for every year you wait, your benefit will increase by an average of 8%, all the way until you reach age 70. That means that if you wait until age 70, your benefit will be about 32% higher, for the rest of your life! So how do you decide if you should wait? One way to decide is if your family has a history of longevity, and you are in good health, then it often makes sense to wait. Another way to decide is if you have other income sources and don’t need the money right away, particularly if you are still working at least part time, which has become a common trend these days. So remember: it can pay to wait!

The upshot of all of this is that Social Security is an important part of retirement planning for most people, and there are a lot of rules to be aware of that might have a significant impact on your overall situation.

So make sure you are educated on all your options and feel free to call me if you have any questions.