Paul Ferraresi

Here are a few changes to your taxes in 2012:

Annual Gift Tax Exclusion – Remains at $13,000

Lifetime Exemption for Gift and Estates – Increases to $5,120,000
(This exemption is scheduled to drop on 1/1/13 to $1mm)

35% Bracket Starts at (for joint returns) – $388,350

Those in 15% Bracket – Pay $0 tax on dividends and capital gains
(married with taxable income of up to $70,700; single with income of up to $35,350)

AMT Exemption Drops in 2012
Single – From $48,450 To $33,750
Joint Ret. – From $74,450 To $45,000

Maximum Contribution to 401k – Increases to $17,000

Wages Subject to Social Security Tax – Increases to $110,100

Now, for the special bonus… Starting January 2013, the Bush extended tax cuts expire. There will be major rate increases for everyone and decreases in deductions! Enjoy this year and get your tax planning in place immediately.

Here is an excerpt from an article written by Gary Smith in Investment Advisor magazine, December 2011:

Imagine you’re given the choice of two different times to be a stock market investor. Let’s assume that the S&P 500 represents the stock market investment in this example.

On the day of your first choice, which we’ll call Option No. 1, the conditions are as follows:

• Over the previous 10 years, the S&P 500 has gained more than 350% and is up nearly 18% in the last year alone.
• The stock market is generally expected to continue to do quite well.
• The S&Ps P/E ratio is around 31.
• The prime rate, the interest rate charged to the most credit-worthy borrowers, is 9%.

The conditions for your second choice of when to invest, Option No. 2, are a bit different:

• The previous nine years have seen the S&P 500 cut in half, plunging more than 47% in just the last 12 months.
• Fear is rampant, and little hope is held out for the stock market.
• The S&Ps P/E ratio is around 24.
• The prime rate is 3.25%

When would you rather be an investor?

If you haven’t already guessed, the conditions described above are those that actually existed in our not-too-distant past.

Option No. 1 is March 24, 2000. The roaring bull market of the 1990s fed the euphoria of early 2000. Many investors became increasingly aggressive, abandoning more conservative investments like bonds in favor of high-flying “dot-com” darlings. For those who gave in to the temptation to chase the bull market higher, the timing couldn’t have been worse. If you chose Option No. 1 as your entry date, what you bought was the investment experience that led to the conditions described in Option No. 2. Over the next nine years, the S&P 500 fell from 1,527 to 683 — a 55% decline. March 2000 ushered in the stock market’s “Lost Decade,” culminating in the global financial crisis and market meltdown of 2008-2009.

Option No. 2 is March 6, 2009. The collapse in housing prices triggered a banking crisis, which spread to a global credit crisis. The world’s financial system teetered on the brink of an abyss. If you chose that day to plunk down your hard-earned cash, you ended up buying a market that would go up by more than 65% in just over 2-1/2 years. The S&P 500 bottomed at 666.

Where are we today?

Now that you have read a portion of Gary’s article, what is your take?

Step away from your “feelings.” What is the feeling in the air? Is there pessimism or optimism? What are the fundamentals in the stock market now? Keep in mind, “regression around the mean.” What have the markets done in the past five years; therefore, over the next five years it should do ??? !

Here are a few simple strategies to build your wealth:

• SPEND LESS THAN YOU EARN. You can’t make your money grow if you spend it all.
• LIST YOUR FINANCIAL PRIORITIES. Put your retirement at the top of the list.
• ESTABLISH AN EMERGENCY FUND. Low-risk, accessible cash will lessen the temptation to dip into retirement savings in an emergency.
• MAKE SAVINGS A HABIT. Even a little can add up, thanks to the power of compounding.
• PAY YOURSELF FIRST. Stock away at least 20% of your pay. Have the money automatically deposited so you’ll never miss it.
• CUT EXPENSES. It’s one of the fastest and best ways to make money. Clip coupons, buy second-hand on eBay, eat out less often. Funnel this “found money” into your investments.
• CREATE INCOME. Take a second job, rent out a room or downsize and invest the profits.
• INVEST REGULARLY. Use time and timing to get into the marketplace. If you don’t know how to invest, find out how! Go through training, read books, ask an expert and then apply your knowledge. Remember: Don’t work for money. Let money work for you.
• CREATE LONG-TERM WEALTH. Money in a savings account is safe, but inflation will erode its value. Stocks provide long-term growth.
• DIVERSIFY. The best way to balance your risk is with a portfolio that spreads your money out over a variety of financial instruments.
• REVIEW. Revisit your spending plan, savings and goals monthly to be sure you are on track.
• AVOID BAD DEBT. Don’t borrow for things such as vacations, clothing or furniture. Borrowing to remodel a home, on the other hand, may be good debt that can provide long-term financial benefits.
• BEWARE OF HIGH-INTEREST LOANS. Look at the total cost of repaying the principal and interest, not just the low monthly payment.
• GET OUT OF BAD DEBT. Otherwise, finance fees eat up principal that could be earning interest.
• HANDLE CREDIT CARDS WISELY. Keep only one or two cards. Transfer high-interest balances to zero-interest cards.
• PLAN TO RETIRE LATER. If you’re doing what you love, work is fun! You can work longer, work part-time or become a consultant.
• DELAY TAKING SOCIAL SECURITY. Benefits will be higher when you start.

I find that people who have not saved properly for retirement always rebuff my comment to build a retirement fund assuming you will live to be 100. They laugh it off and I say…but, what happens if you do live to be 100? What is your plan? The fastest growing segment of Americans is those living past the age of 100.

A host of experts are predicting what the future will bring. Ken Dychtwald, a leading “age wave” expert, characterized the 10 physical, social, spiritual, economic, and political crises we will face as we age in the 21st century in the following list. (You can learn more at www.agewave.com.)

1. A Pandemic of Chronic Disease
2. Mass Dementia
3. The Caregiving Crunch
4. Coping With Death and Dying
5. “Gerassic Park”
6. An Inhospitable Marketplace
7. Changing Markers of Old Age
8. Financial Insecurity
9. Age Wars
10. Elder Wasteland

Let’s hear what Dr. Dychtwald has to say about one of these issues, #5. What about “Gerassic Park”? As Dychtwald writes,

All future-oriented public policy in America, including policy regarding Social Security and Medicare, is based on the assumption that there will be no meaningful breakthroughs that will affect longevity or biological aging. So what happens if we wake up tomorrow morning and there is a breakthrough?

Might it be a “Gerassic Park” in which, instead of cloning entire humans, we find a way to clone organs? What if we learn to manipulate the body’s immune system to increase longevity? Can we imagine a future without cancer, a world without Alzheimer’s or heart disease? It is possible…. The biotechnology century is coming; we should expect the unexpected.

–Dr. Ken Dychtwald, “THE 10 PHYSICAL, SOCIAL, SPIRITUAL, ECONOMIC, AND POLITICAL CRISES THE BOOMERS WILL FACE AS THEY AGE IN THE 21ST CENTURY,” American Society on Aging (www.asaging.org)

I see medical breakthroughs each day. That is why, as a Certified Financial Planner, I am bound to do planning for my clients assuming a life expectancy of 120 years.

You may think that living 120 years is far-fetched. When I was in my early teen years, as my grandfather retired at age 65, it was expected he would be dead by age 70. Over the past 50 years, with medical advances, the Insurance Institute states that a married couple reaching age 65 can expect one of the spouses will easily live to the age of 95.

Better plan for at least 30-40 years of retirement funding.

Discipline or regret!