Paul Ferraresi

A client, and good friend, S. Fish sent this link to me. The presentation is long, but, it is Really worth watching. No… there aren’t any jokes or “canned” laughter in the program! It is information to add knowledge to you on why oil prices are high. Make the “investment” of your time, digest it, and, gather more information to help you build your opinion. Weed through the promotion, marketing and agenda. You will find knowledge. Seek out professionals in this area and confirm or deny the hypothesis.

http://video.google.com/videoplay?docid=3340274697167011147

A new report by the Vanguard Group has found that Americans aged 40 to 69 expect to gradually ease into retirement, with work playing an important role in their early years of retirement.

“Six Paths to Retirement” details a variety of ways Americans approach retirement, including “downshifting” into retirement by reducing their work hours or taking on part-time work or a less stressful job. Nearly two in three respondents aged 55 to 69, the study found, “have downshifted already or plan to do so in the future.”

The Vanguard study found that retirees take six distinct paths to retirement. The “still working” crowd, the largest group of respondents (35%), stopped working fulltime in their 60s, yet, for financial reasons, continued with some type of part-time work or self-employment. The early retirees, which made up about 30% of survey respondents, stopped working in their 50s and never started working again. Vanguard says while these folks retired earlier than usual, this group “fit the conventional view of retirement,” and had adequate financial resources to support an early retirement. About 12% of the respondents were dubbed semi-retirees because while they retired from full-time work in their 50s, they “took on high levels of part-time work or self-employment,” to stay active, enjoy themselves, or to earn discretionary income, the study found.

One-quarter of Americans, the study reports, follow three other paths. There are those who will never retire – 10% of respondents – as well as what Vanguard dubs “returnees,” (5%), who retired early but then returned to work for financial and psychological reasons. The third route is the “spouse’s retirement” path (9% of respondents), which Vanguard says “represents individuals who had lower participation in full-time work in their 40s and 50s and pegged their retirement to that of their spouses.”

Hi all you bloggers out there, here is a little update on Long Term Care from Jenna Kozel with Edelman.

The new survey data shows that:

One in four Baby Boomers erroneously believe that they have coverage for long-term care expenses. According to the National Association of Insurance Commissioners, only about 5.2 million Americans have long-term care insurance – at most about 5 percent of Baby Boomers.

54 percent of Baby Boomers think Medicare will pay for long-term care services. Forty-four percent believe “other health insurance” will pay. Even half of those who say they have long-term care insurance believe Medicare will pay for the care. Medicare does not, in fact, cover long-term care indefinitely. Medicaid will cover these services, but only after requiring individuals to spend down nearly all of their assets to qualify for assistance.

Even among Baby Boomers nearing or at the age of 60 – when concerns about the potential impact of long-term care on retirement savings might be most prominent in their minds – only one in four say they are “very familiar” with long-term care insurance. In addition, 41 percent say they have not had any discussion about long-term care in the past twelve months.

Full survey data can be found here: http://www.ahip.org/content/default.aspx?docid=21352

ANB updated

Unless things improve quickly and dramatically, the 2000s will likely be the worst-performing decade for U.S. stocks since the Depression era of the 1930s. While it would be absurd to equate these two vastly different periods of history, there are some interesting parallels.

According to Howard Silverblatt, senior index strategist at Standard & Poor’s, the S&P 500 index returned about 1.0% in the 1930s on an average annualized basis. Through the end of March 2008, the index sported a minuscule gain of 0.6% so far this decade.

Of course, this follows two decades of astonishing equity gains-the index rose 17.6% during the go-go 1980s and 18.2% in the tech-fueled 1990s. It’s understandable that such a robust period like that would be followed by an epoch of lackluster returns.

Broadly speaking, both the 1930s and 2000s were characterized by crises in financial institutions, which led to equity price declines and a desperate need for liquidity. Last summer, liquidity dried, as banks refused to provide additional loans, slowing down commerce.

In the early 1930s, bankers similarly closed up shop to prevent a run and commerce practically ceased. Franklin Roosevelt, then newly-elected as president, ordered the Treasury to print a couple billion dollars worth of notes and made them available to the banks. Restoring liquidity was not all that different from what the Federal Reserve and foreign central banks have been doing by injecting billions of dollars into their financial systems in recent months.

There is another basic similarity between the two periods. In the 1930s, leverage, correlated directly to stock purchases, escalated in an environment of relatively low regulation and low equity.

Assess the Ultimate Goal

Usually when you ask clients whether they plan to buy a second home for pleasure or investment, the response is “pleasure.” The follow-up questions should then be: “How long do you anticipate owning it?’ Then, “What, if any, growth rate do you expect on the value of the home?” Very rarely are there “rational” responses like “20-plus years” and a “5% or so return” (which is the approximate national residential 20-year average rate of return for a home).

Many buyers anticipate that the value of their second home will double, even though they say it is not an investment.

Often clients will buy on emotional and perhaps irrational factors. They will also base their decisions on some misguided information or misinterpreted facts. The following are some of the more common misconceptions:

A vacation home is a vacation home. A vacation home can be categorized in three different ways: personal, rental, and dual purpose. The one that pertains to your individual circumstance will depend on the days used and the days rented.

I always can deduct my mortgage interest on my second home. With so many affluent clients purchasing McMansions these days, it is not uncommon to see a large mortgage on their primary residence. Remember that you can generally deduct qualified residence interest on up to $1.1 million of home mortgage debt ($1 million worth of acquisition debt on up to two homes plus $100,000 of home equity debt on up to two homes). Any excess interest on home mortgage debt is generally nondeductible. Furthermore, the owner’s overall interest deduction may be lessened due to the itemized deduction phase-out rule for higher-income taxpayers (for 2007 the AGI level is $156,400). This rule is expected to sunset by 2010. As such, if nothing is done, in 2011 it will revert back to full phaseout. (Now there are legal methods that we use with our clients that allow them to deduct interest on well above the $1.1 mm limit).

I always have to report rental income. Rental income is completely tax-free for property that meets the rules for personal-use property, but has a very limited opportunity to generate rental income (generally 14 days or less). From a tax perspective, this can be quite a boon for clients with properties that can be rented at an exorbitant rate for a short time (e.g., properties located near a major golf event, Olympics, or Super Bowl location).

Vacation home donations are always a good idea. Unfortunately, the IRS considers vacation home donation days as personal use days, not rental days, since the owner did not receive a fair market rental for the use if the home. In addition to not qualifying for additional rentals expenses, the owner receives no charitable deduction for donating the use of the home to charity.

I can use the capital-gains tax exclusion ($500,000) upon sale. The exclusion applies only to principal residences.

A 1031 (tax-deferred) exchange can be done on a vacation home. A recent Tax Court ruling (Moore, T.C. Memo 2007-134) disallowed tax-deferred treatment for a personal vacation home. The court held that a couple’s exchange of vacation homes did not qualify for like kind exchange treatment because the homes were not held for investment purposes (as required by § 1031(a)).

Rental income will be offset by cost. With property prices still high, some clients may believe they will offset the cost of a second home by renting it. Unfortunately, clients forget that in order to cover their costs they often will have to rent it out at peak season, coincidently the weeks they want to use it the most.

This is a “business.” Many people say they manage their property and thus “materially participate.” In other words, they are in the business of renting real estate and are able to take losses against other taxable income.

You can go home again. And, finally, do not “impulse buy” while enjoying a vacation. If you have an interest in purchasing real estate at a great place where you vacationed last month, I suggest that you hold off until you have “felt out the neighborhood” for a while, meaning you should visit the location a few more times. You should focus on the commute to work, the community, people, activities, and amenities, and, very important, talk to as many locals as possible, particularly those who have owned vacation homes there for some time. Do you have a similar feeling of happiness each time you visit the location? Are your experiences consistent over time?

The financial ramifications as well as the emotional toll of purchasing vacation homes can be complicated. But understanding these rules and your expectations will open the door to some great discussions with your advisors.