Paul Ferraresi

The history of the stock market shows over 141 years of equity performance, and that there is a straight-forward cyclical pattern that emerges: Periods of worse-than-average returns followed by periods of better-than-average returns and vice versa. The most recent five years have definitely been in the worse-than-average period. Plus, since 2000 the market has been flat. (Keep in mind from 1980 to 2000 the markets produced way above average returns. Therefore, one knew that from 2000 to current would have to be below average to regress to the mean).

Jeremy Siegel, Wharton School professor and author of “Stocks for the Long-Term,” also notes the standard cyclical movement of stocks. He concludes with the following:

Earnings growth rates determine stock market performance. In 2011, earnings per share of the DOW grew at 12%. Most estimates are for earnings to grow at 9% each year for the next two years. To get to a 15,000 DOW in two years would require an 8% annual earnings increase and the Price Earnings (PE) ratio moving from 13.1 to a modest 13.6. Reaching this level is very feasible since the long-term average return of the stock market has been about 12% per year. Thus, an 8% per year increase, is right in line.
Others estimate that DOW 17,000 in two years is not out of sight. In spite of all the Anti-Business, heavy regulated prose from the present administration, the stock market has roared back over the past three years.

Let us look at the pattern: From 1982 to 2000 the stock market soared at above average returns. From 2000 to 2011 the market has been flat. So, it is rational to assume that returns will resume in an upward pattern. If all your friends, coworkers and contacts are convinced the market is dead…that is a good contrarian sign. Remember…the crowd rushed into the market full force at the top in 2000. This same group rushed out of the market when it hit bottom in 2009. Remember the success motto on Wall Street…buy low – sell high… which is the opposite of what the crowd did recently, and at EVERY market top and bottom.

TAX STRATEGIES FOR 2012

It is evident that the Bush tax cut extension will fall by the wayside on December 31, 2012. Aside from all tax rates going up at least 5%, there are deduction changes that will also raise your taxes (For those that itemize, the threshold for medical deductions will increase from 7.5% of gross to 10%. So if you have $100,000 in AGI you will now need at least $10,000 of medical deductions instead of $7,500 for the next dollar to be deductible.). Thus the new tax rate for those in the top brackets will be 42%. Also an additional 3.8% Medicare tax on investment income will be added for those earning over $200,000…that’s 45.8% – YIKES!!

Here are some tax strategies you should consider now instead of waiting until it is too late.

1) Present estate and gift exemption is $5 million (or $10 million for a couple). It is slated to drop back to $1 million ($2 million for a couple). Make use of gifting and make changes to your wills and trusts.
2) Use a family limited partnership (FLP) to channel estate transfers. The FLP allows you to give away a great deal but remain in control of the assets.
3) Open a donor advised fund to make use of charitable deductions.
4) Use highly appreciated stocks for charitable giving instead of using cash. It will save on paying capital gains tax.
5) Gift out any required mandatory retirement account distributions.
6) Look at municipal bonds to create income and not pay taxes.
7) Look at investment interest expenses for deductions. Many people overlook this.
8 ) Invest in an independent film. Section 181 of the IRS code allows this write off.

Remember if you have a traditional IRA or 401K, you may get the deduction now, but you will be paying a higher tax when you withdraw it. Consider it as a partnership account with the IRS. For every $100,000 in your account the IRS owns at least 35% or $35,000 of it (slated to go higher in the near future). So, plan your retirement on the net value in your account.

How well are couples communicating with each other about retirement? This questionnaire, which appears in Roberta Taylor and Dori Mintzer’s book, “The Couple’s Retirement Puzzle,” helps couples determine what they need to be talking about.

Are you and your partner on the same page when it comes to retirement, or are you reading different books? This simple assessment will give you a quick glimpse into how each of you views your communication.

INSTRUCTIONS: Do the assessment separately and then share your results. Put a T after the statements you believe are true, then add up all the true statements to get your score. Notice the areas that you may want to talk more about.

• We have talked about our timetable for retirement.
• We have planned for future medical and health care needs.
• We know that our roles may change as we go through transition.
• Intimacy and affection are an important part of our relationship.
• We make financial decisions together.
• Having time together and time apart is important to both of us.
• We talk about lifestyle and where we may want to live.
• We agree on our obligations and responsibilities to family.
• Social and community connections are a satisfying part of our lives.
• We have shared values and know what’s important to each other.

SCORING:

10 Give each other a big hug. You’re ready to write the “How To” book for couples.
7-9 Sounds like you’re in sync. Ongoing communication is important as you plan for what’s next.
4-6 You’re on the right track. Practice listening to each other and sharing what’s important to you.
1-3 Make time to talk about important issues related to retirement.

Source: The Couple’s Retirement Puzzle

The masterminds that conceived this plan were brilliant. The strategies used were simple…prey upon your fear and greed. You, as the “investor”, continue to be given fraudulent explanations, and, unfortunately, continue to invest.

Here is how it works. You invest a small amount of money over time. Eventually, you can start withdrawing the money. You will get your full investment back, in anywhere from 14 months to 60 months. The money will come back to you tax-free for as long as you live. Once you die, your spouse will get about one half of your payments until they die.

Sound too good to be true? Sounds like a Bernie Madoff pitch, or an overseas scam, or a Ponzi scheme???

Oh, there are a few other factors…you must make this investment for every day you work, it is dependent on new investors coming in every year, the plan sponsor has no liability if things do not work out, the plan sponsor can add new beneficiaries at any time, the plan sponsor can change the rules, including raising your required investment and making a portion of the benefit payment taxable. Most importantly, you cannot get out of the required investment. Upon investigation, you will find there is no money in the plan. They promised you they would put it in a “lock box”. The administrators have taken all the money out and spent it without your permission. There is only an “IOU” in the box that your neighbors, you, your children and grandchildren must pay back.

Are you getting interested, or, ready to walk away? Is this investment something you would place your hard earned money into?

Well, this “investment” you make is our Social Security system. If any Wall Street money manager offered this deal, they would be cellmates with Bernie Madoff. Yet, your representatives in Washington have been doing this to you for almost 70 years. Ah, yes….the failure of government programs. Any private pension plan that was set up this way would have the administrators put away for life.

The purpose of my essay is to have you plan now for the following:

(1) If you are 55 or older, you probably will get your “promised” benefits if you live a normal life expectancy. Expect 100%, not 85%, of the benefits to be fully taxable in the future.

(2) Social Security will be “means” tested. Thus, those at or somewhat above the poverty level, most likely, will get their benefits. Anyone above the “means” test number will not get the benefits, or, be excessively taxed, including penalties.

(3) For those under 55, do not count on Social Security as part of your retirement. Take aggressive action now to build your own retirement funding. Consider a non-qualified plan that can provide tax-free benefits, in the future, for you.

(4) Try to set up a “side business” now, even as you work full-time, so you can maximize amounts set aside for retirement to replace your “expected” social security benefits. Remember, you work from age 25 to 65 to accumulate enough money to live from age 65 to 105.

(5) Keep in mind if you save 10% of your gross income from age 25 to age 65, and assuming a 0% rate of return, you will have enough capital to live for four (4) years after you retire. At a 25% savings rate, (same 0% return), you will have 10 years of retirement capital. (Don’t laugh at 0% return. Most people are saving for retirement accounts in money market accounts, CD’s, and T bills. They are paying about ½ of 1% interest, less taxes and inflation….so your return is about negative 3% with a depreciating dollar.)

See your advisor today to get a plan in place.

Discipline or Regret!

“The grass may look greener on the other side but it still has to be mowed.”

The stock market meltdown forced people to start thinking more seriously about retirement, but many still have misconceptions about it.

(1) For instance, a research paper from the pre-crash era found that 59% of workers expected to get a traditional pension when they retired. Unfortunately, 41% reported that they or their spouse were currently in a pension plan! This shows how a person’s expectations for retirement do not match with reality (no, the solution is NOT to watch more Reality TV).

(2) Many people that came into my office approaching retirement with $500,000 in an IRA or 401K felt they are “set for life”. Assuming present tax rates stay the same and using a 33% tax bracket, then, that account today, after taxes, is only worth $335,000. Using their current income needs, after tax, say, of $80,000 and a simple 3% Government Bond rate of return, that
money will be gone in less than 5 years after retirement. Hello Wal-Mart greeter!

(3) People counted on their homes, prior to the housing bubble burst, as their retirement nest egg. Unfortunately, if they sold the home at 65, took all the cash to live on, they never thought about where would they reside…under a bridge? Many had said to me, well, our house has doubled over the past 10 years. We can take that money and downsize to a smaller home. They forgot to add in that the smaller home they plan to move into, over the past 10 years, also doubled, so, they will not have as much as they imagined for retirement. Ah, yes, another money Myth-conception! (The housing boom gave many Americans a daily reminder of their investing savvy, of which they had nothing to do with the bubble, and created widespread overconfidence).

(4) Finally, I never tell people how to live or how to spend their money. I only ask them to analyze each “want” item (want versus need). How many “Starbucks a day” do you need versus want. How much vacation or shoes do you “need”. No, I am not a killjoy – rather – pause and think.

If you bought one Starbucks instead of two a day, at a $4 savings:

• $4/day for 6 days is $24/week.
• Over 1 year is $1248/year
• Over a 30 year period (age 35-65) at a 7.2% rate of return (tax free) would be a total of $121,845 lost, which equates to about $8800/year in lost income during retirement.

Oh yes, what do you have to show for that extra “Starbucks” you had at, say, age 42? It does not have to be “Starbucks”. You get my point.

Discipline or regret!