2013 has been an excellent year so far for investors, with the S&P 500 up over 23% and the Dow Jones up nearly 19% as of the end of October. Despite this outstanding performance, we have also seen periods of significant volatility this year and over the past several years since the beginning of the “Great Recession.” Most recently, the government shutdown, talk of an end of the Federal Reserve’s stimulus program, and concern about rising interest rates have caused volatility in both the equity and bond markets during the past few months. These periods of volatility can cause significant concern in investors, and highlight the importance of a basic investing concept: Asset Allocation.

Asset Allocation is the mix of stocks, bonds, and cash equivalents in an investment account. The mix is determined through an evaluation of an investor’s goals, tolerance for risk, and investment time length. The goal of the process is to determine the appropriate percentage to be allocated to each of these asset classes to balance the amount of risk that an investor is willing to take with the return potential of the portfolio.

More simply stated, an investor’s asset allocation should provide the investor with an investment mix that provides investment returns with a level of risk and fluctuation that you are comfortable with. For example, an investor who is uncomfortable with large declines in their portfolio’s value should have an allocation with a significant percentage of investments in less-volatile bond investments rather than the more risky and volatile equity investments. Alternately, an investor who is comfortable with such fluctuations may have a larger allocation to stocks in their accounts.

Having the proper asset allocation in your accounts can provide some peace of mind for you as an investor. If your investment mix provides returns with fluctuations that you are comfortable with, you should have less concern during short-term periods of volatility that are almost certain to happen over the course of a year.

If you are unsure about what the right asset mix is in your own accounts or if you have been uncomfortable with the up and down volatility in your portfolio when you’ve opened your account statements this year, it is a good idea to discuss this concept with your Wealth Manager or Financial Advisor. Year-end is a good time to review your goals and investment mix to ensure that your current portfolio is right for you.

You’ve tirelessly worked and sacrificed to care for your family and accumulate wealth.  Now comes the hardest part:  successfully transferring that wealth to future generations.  It’s hardest, because a successful transfer involves much more than a smartly designed estate plan. 

 So…how will your children handle their inheritance?  Will they use it to enhance their financial and personal circumstances, or will it dissipate along with their work ethic and sense of personal responsibility?

 Not sure?  The statistics are grim!  They suggest that seventy percent of heirs will lose their entire inheritance within a few years, often destroying family harmony in the process.  Additionally, ninety percent will abandon their parents’ advisory team shortly after receiving their inheritance. 

 Why does this happen?  The answer is simple:  many families fail to plan for the conservation, growth, and transfer of wealth. 

 Here are several things you can do right now to help ensure that your children appreciate and appropriately utilize the fruits of your labor.

 1.  Educate your children.  This means formally teaching them about the responsibilities associated with an inheritance and instilling a commitment to respect and preserve all aspects of your family’s legacy.  This process should begin during early childhood and become more specific as they mature.

 2.  Never underestimate the value of asset protection!  Nasty “stuff” happens…even in the best of families.  Adult children are often confronted with creditors, problematic spouses, spendthrift lifestyles, and the challenges of substance abuse. The solution?  Leave a portion of your estate in a flexible, long-term trust.  This will allow your family to enjoy the benefits of their inheritance while protecting them from the afore-mentioned dangers.

 3.  Protect young heirs…from themselves.  The number one mistake made by most heirs is spending heavily and quickly.  Young adults need time to emotionally mature, establish their careers, develop sound financial habits, and…understand the value of living below their means.  Once again, a long-term trust with flexible distribution standards provides opportunity for heirs to mature before having unrestricted access to their full inheritance. 

 4.  Teach your heirs about the value of trusted advisors.  Heirs often try to manage their own investments.  They take more risk, since they didn’t earn the money.  This often leads to poor investment choices, strategies that expose them to undue volatility, or unscrupulous advisors.  Make sure that they have a relationship with your family’s advisors (wealth manager, attorney, insurance specialist, CPA, etc.). 

 Remember – your heirs are the stewards of your family’s legacy!  Prepare them now, and they will be far more likely to enrich their lives and those of the next generation.

Mention estate planning, and conversations invariably turn to taxes. Thankfully, the American Taxpayer Relief Act of 2012 ushered in several sweeping and permanent changes. 

 For example, the amount exempt from federal estate, gift, and generation-skipping taxes is set at $5 million, indexed for inflation ($10 million for married couples).

 Although taxes are important, there are other equally critical considerations. Here are other estate planning objectives that most of us deeply care about:

  • Care for loved ones,
  • Pass on your legacy,
  • Avoid probate and intestacy,
  • Plan for disability, and
  • Peace of mind.

 Not sure if your current estate plan addresses these objectives?  Ask yourself these questions:

  • Who will receive my (family) assets?  When?  How?
  • Will my children share equally?
  • How can I shield my child from a financially predatory spouse?
  • How can I provide for a child with substance abuse issues?
  • Should I provide for grandchildren?  How?
  • How can I ensure that an inheritance is a financial legacy rather than a short-term windfall?
  • Who will care for me and my spouse if I/we become disabled?  How have I ensured this?
  • Can my business remain in the family?
  • How will successor management be identified and developed?
  • How can I fairly treat my children who do not participate in the family business?

These are important objectives and questions.  If you can’t answer these questions or don’t like the answers, it’s time to seriously review your estate plan.  Our Trust Officers will be pleased to discuss these matters with you, keeping in mind that you should always consult with an experienced estate planning attorney before finalizing your plan. 



The anticipated growth of Medicare costs is the largest contributor to our country’s long-term budget deficit issues.  Few of us will pay sufficient taxes and premiums to cover our eventual Medicare costs. 

All of this spells big trouble.  Here’s a quick Medicare primer that explains why.

Is Medicare truly a bigger long-term problem than Social Security or defense spending?   Yes!  The Congressional Budget Office projects that Medicare spending will rise to 6.7% of Gross Domestic Product (GDP) over the next 25 years…from 3.7% this year.  Some believe that is a conservative estimate.

Why is Medicare so problematic?  While rising Social Security costs are driven primarily by the ‘number’ of elderly people, Medicare costs are driven by two factors:  the number of elderly AND rapidly rising medical costs. 

Don’t most Americans cover their Medicare expenses via payroll taxes during their working lives?  Not even close!  According to a study by the Urban Institute, a married couple (both 66) with average earnings will pay roughly $122,000 in dedicated Medicare taxes through the payroll tax (including their employers’ share).  That couple is likely to receive nearly $390,000 in benefits, adjusted for inflation, during their lifetimes.

 Why are healthcare costs rising so quickly?  This is a “Good News/Bad News” story.  The good news is that our medical system has developed more sophisticated and successful means of treating serious illnesses like cancer, heart disease, and other maladies.  These means are expensive!  The bad news is that our system wastes enormous sums of money without enough bang for the buck.  Countries like Canada, Britain, Australia, Germany, France, and Japan all enjoy higher life expectancies…while spending less per capita!

 What are possible solutions?  Here’s where it gets complicated.  We could pay more in taxes;  however, higher taxes alone will not suffice unless the increases are much higher than anything currently being debated.  Other options include raising the eligibility age, more competition, restricting payments on treatments not proven to be more effective than less costly alternatives, and reducing benefits for the affluent. 

 Fixing Medicare will not be easy!  Let’s hope that Congress and the President take seriously every budget negotiation as an opportunity to fix a problem that promises to get much worse over time!



Tax day is rapidly approaching, and April 15th also marks the last day that an IRA contribution can be made for the 2012 tax year. If a taxpayer wishes to make both their 2012 and 2013 contributions prior to this date, it may be helpful to briefly review the 2012 IRA limits and the new changes for 2013.

The contribution limit for IRA accounts for 2012 contributions is $5,000 for taxpayers under 50 years of age, and $6,000 for those that are age 50 and older. These amounts increased slightly for 2013 contributions to $5,500 and $6,500, respectively.

Contribution limits for qualified retirement plans such as 401(k) or 403(b) plans also increased slightly for 2013, with those below age 50 allowed to contribute $17,500 and those over age 50 able to contribute $23,000. SIMPLE IRA plan participants are allowed to contribute up to $12,000 and $14,500, respectively.

Please contact your Wealth Manager, Financial Advisor, or tax advisor for further information on the contribution limits and income restrictions for IRA accounts in 2013.

February was generally a good month for the markets, with most U.S. markets adding to their existing gains so far in 2013. Bond markets ticked upward and erased a substantial portion of the small losses incurred in January. The Dow Jones finally reached the 14,000 mark once again and flirted with all-time high levels that were reached prior to the ‘Great Recession.’

Despite these positives, the more concerning news item is the lack of a deal to avoid the automatic spending cuts brought on by reaching the extended ‘fiscal cliff’ deadline. Passing the deadline without a deal means the implementation of the ‘sequester cuts’ that reduce spending for national defense, Medicare, and other Federal budget items. Though the overall amount of the cuts of $85 billion is small relative to the $3.55 trillion Federal budget, the continued partisanship and unwillingness to negotiate is the more problematic issue. Another deadline is looming at the end of March, when lawmakers have until March 27 to reach a deal to authorize funding to keep the government funded and running for the rest of the year.

The good news is that the markets have generally shrugged off this missed deadline. Market momentum has continued upward and the Dow reached a new all-time high in early March. Some economists feel that the economy and markets will strengthen further once we have passed all of the self-made deadlines in Washington on the various budget and fiscal policy issues that are currently up for debate. The sequester cuts may have a slowing effect on the already fragile economic recovery, but there are expectations for some strengthening in the second half of the year. Passing each of these deadlines in Washington removes some uncertainty from the markets, and that typically leads to good market performance.

That does not necessarily mean that we are in the clear when we finally pass all of these deadlines, as persistently high unemployment remains a concern and corporate earnings continue to be mixed. The Federal Reserve has already sparked some concern that their latest stimulus program might not last as long as previously anticipated, which could be problematic if inflation increases before a there is a substantial decline in unemployment.

Despite these concerns, if Congress and the President can reach a deal prior to the next fiscal deadline, the certainty provided by a deal could provide some momentum that bolsters market returns and hopefully leads to a strengthening economic recovery as we move through the rest of 2013.

Believe it or not there are still a few private sector employees that still have what would be considered a traditional pension or defined benefit plan, although this benefit is rapidly disappearing.  A pension is a plan where contributions were made on behalf of the participant during their working years and their ultimate payout is calculated using a number of factors such as years of service and salary levels.

 A common question we get when an individual is offered the choice is whether or not they should take the monthly payout option or a lump sum.  As with many choices in life there is no clear-cut answer.  “It depends” is the correct answer even though it is often met with frustration from the individual looking to make a quick and easy decision.

 There is a the quick math calculation which tells you if a lump sum of money is worth more or less than a series of lifetime payments.  This calculation will require you to make assumptions about rates of return and how long you will live in order to give you the answer you seek.  There are many online calculators available and for our purposes in this blog post we will focus on some other mitigating factors.


 The funding level of a pension measures the ability to meet future obligations.  Plans that are between 60-80% funded are only allowed to pay half of the benefit in a lump sum.  Plans that are less than 60% funded are prohibited from paying out dollars in a lump sum.  If you are being offer a lump sum less than half than the value of the benefit paid there would have to be some pretty compelling and extraordinary circumstances to opt for a lump sum.


 Monthly payments from a pension plan are a great way to meet your monthly expenses.  However, if your expenses are met through other sources you may benefit from rolling over your lump sum payment into an IRA and deferring the tax liability (monthly pension benefits are taxed as ordinary income when received) until the time when you actually need the funds.  Although there are some monthly payouts that allow a survivor benefit, if the ultimate goal is to preserve and pass to the next generation the lump sum rollover works better.


 Few pension plans adjust payments for inflation.  If your lifetime pension payment today is $1,500/month you would need $2,336.95 to buy the same level of goods and services in 15 years assuming a historical 3% annual inflation rate.  The longer you live you have no mechanism to combat inflation with a pension plan that doesn’t offer inflation adjustments.


 A lot of people know themselves and their limitations.  All things being equal some people know that if they have access to a half million dollars they would be too tempted to squander the money as opposed to only having access to a check each month.  Research shows that when given the choice an overwhelming number of pension recipients and lottery winners will choose the lump sum.  In reality there are some individuals are simply better off protecting themselves from themselves.


 Future pension obligations are on a liability on a company’s books.  So if you may want to consider the long-term financial viability of your former employer.  The Pension Guaranty Benefit Corporation is a U.S. Government Agency that insures plan benefits but only to a certain amount.  The PGBC website allows you to find out if your plan is covered.

 This is not meant to be a comprehensive list, only food for thought beyond a simple online calculator.  I often hear “my coworker retired last year and said the lump sum was what I should do.”  Please realize their circumstances could be vastly different from yours and sometimes the options available could be different as well.  Do your homework and if necessary ask for help from a reputable financial planner/advisor.

Individual Retirement Accounts are a great savings vehicle simply because they allow you to grow your savings on a tax-deferred basis.  As you know, IRAs are not tax-free; the savings are taxed upon withdrawal.  Many savers hold off on withdrawing these funds until the IRS forces you to take distributions at age 70 and a half. 

Any time you take a distribution from your IRA, it is reported as income on you 1040 (line 15).  In most cases, the distribution will increase your adjusted gross income, which in turn may increase your taxable income and as a result your tax liability may increase. 

One strategy to mitigate the impact of an increase in tax liability due to required minimum distributions is called a Qualified Charitable Distribution (QCD).


  • Savers must make the distribution from their Traditional IRA after the date in which they turn 70.5;
  • Charity must be a qualified public charity; the IRS has a list of these charities on their website.  If you would like to see if your charity of choice qualifies, click here;
  • The check from your IRA must be made payable to the charity, not you;
  • The donation must qualify as a 100% cash donation; so no Badger season tickets in exchange for your donation;
  • And no more than $100,000.00 per taxpayer can be donated in this way in 2013.

Who benefits:

Although the answer to this question will typically be; “It depends on each individual’s tax situation…”; generally speaking, non-itemizers & high income taxpayers that already make large cash donations.

For instance, assume the following:

  • Taxpayers; married filing jointly
  • Non-itemizers – they take the standard deduction of $12,200.00
  • Prior to their QCD their AGI is $89,000.00
  • They have a $10,000.00 mandatory distribution from their IRAs in 2013.

If they take their $10,000.00 mandatory distribution amount and execute a qualified charitable distribution, their AGI drops from $89,000.00 to $79,000.00.  Aside from the obvious decrease in adjusted gross income, if you have medical expenses, the threshold amount for deductibility drops from $8,900.00 to $7,900.00 (10% of AGI).

For high income earners; as of January 1, 2013, married taxpayers with income of at least $300,000.00 will face limits on the value of deductions and personal exemptions.  These limitations are based on AGI.  The use of Qualified Charitable Distributions may lower the taxpayers AGI to put them under this threshold and open up the possibility of qualifying for deductions they wouldn’t otherwise qualify for.

The most important part of tax strategies is being educated about them.  Talk to your tax professional to determine if Qualified Charitable Distributions are a good strategy for you.

Happy New Year

December 28, 2012

A few facts heading into the New Year:

Come March 9th, the current bull market will turn four years old.  The historical average for U.S. bull markets is 30 months.  The S&P 500 ended March 9th 2009 at 676.53, its lowest point since September 12, 1996.  As of writing this blog, the S&P 500 is at 1,411.03.  From March 9th 2009 – December 31st 2009 the S&P rallied 65%!  It continued on the bullish trend in 2010 and 2011 returning 15.06% and 2.05% respectively.  With one trading day left, the S&P is set to return around 12% in 2012.  Not a bad rally.

The unemployment rate fell to its lowest level since 2008 last month.  As irrelevant as this number is becoming, it does still mean something: it gives us a gauge of how many people dropped out of the labor force.  With all joking aside; overall, the U.S. labor market has recovered about 4.2 million of the 8.8 million jobs lost as a result of the financial crisis.  The current unemployment rate is 7.7% and the Fed has committed to keeping interest rates at close to zero until the unemployment rate falls to 6.5%, provided that inflation expectations remain subdued.  So as irrelevant as many of us view this figure, it should be a key measure for potential growth.

The CPI index, the key measure for inflation, has jumped 1.8% compared to a year ago.  When the more volatile food and energy is stripped out, the so-called core-CPI was up 1.9% during that same time period.  A reading of under 2% in core inflation is considered within the Federal Reserve’s comfort zone. 

Home prices have seen their biggest rise in more than two years.  The prices are up 3.6% from a year earlier.  The rebound was spurred by a combination of record low mortgage rates, an improving jobs market and a drop in foreclosures to a five-year low.  There may still be some room for price appreciation though, as indicated by the Case-Shiller index, which is still down 28.6% from the peak level reached in 2006.

With home prices rebounding somewhat, that could bring back one of the classic engines of the economy; construction.  Last month, there were 861,000 housing starts (seasonally adjusted) – that’s a 21% increase from last year.  Good news/bad news… Construction boosts the economy but housing starts brings more supply to the market.  Economics 101 tells me that continued increase in housing starts, with all else remaining the same may dampen any potential price appreciation in existing homes.  But that remains to be seen.

It may be too early to signal a rise in income and wages, but that has been the trend at least the last couple months.  Between October and November, seasonally-adjusted wages and disposable income have both increased by 0.6 percent.  Certainly not a revolutionary change, but its more than we have seen the last couple years, and with unemployment dropping, it makes sense that income would also creep up.

As I experienced and I am sure you experienced during the holiday season, our spending increased.  Seasonally-adjusted personal consumption expenditures went up by 0.4 percent between October and November.  Personal consumption accounts for about two-thirds of GDP.

Gross Domestic Product (GDP), is the broadest measure of our nation’s economic health.  With the help of consumer spending and probably more notable, a surprise growth in our exports to other countries; our economy grew at an annual rate of 2.7% from July to September.  Keep in mind, the target rate of growth tends to be 3%, anything lower than 3% isn’t much to get excited about.  With that said, we are growing and we are growing at a slightly faster rate than we have in the last couple years.

We’ve seen better, but we’ve been through worse.

Thank you all for your business in 2012 and Happy New Year.

Divorce Assistance

December 3, 2012

We’ve all heard the divorce statistics such as one of every two first marriages ends in divorce.  Unlike other areas in financial planning (e.g. retirement, death, college education, etc.) divorce is generally not a planned occurrence.  At least it isn’t for those of us living outside of Hollywood.  Because of this, most individuals going through a divorce experience a steep learning curve in a short period of time.

Imagine a woman after 20 years of marriage trying who never looked at the joint investment account statement trying to make heads or tails of it.  Or think of the man who left all the bill paying and checkbook balancing to his wife now trying to figure out the cost of running a household.

There is a fairly new designation where individuals can become a Certified Divorce Financial Analyst.

A CDFA™ usually will have a financial planning or accounting background and is trained in the financial complexities that arise during divorce.  This individual is used to compliment, not replace an attorney.  That doesn’t mean you will get double-billed however.  Figuring out the present value of a future annuity as compared to a home value less present and future maintenance cost is something well-suited for a CDFA™.

A CDFA™ might work for one client or act as a “financial neutral” in a mediation case.  For more information on the role CDFA™ may play and the benefits they can provide you can go to www.institutedfa.com.  You will also find a directory of CDFA™ professionals in your area.


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