KTC Wealth & Retirement Solutions

2011 Market Commentary

2012-01-17T09:33:00.002-05:00

The equity markets in 2011 were like reality TV - a lot of drama, but not much substance. There were spirited rallies and frenetic sell offs along the way, but relatively little change in the end. The DOW posted a respectable gain of 8.4% but the much broader S&P 500 was up only 2.1% and the tech heavy NASDAQ down 1.7%. US small and mid size companies were slightly negative for the year and most international markets were down significantly.

Corporate profits, manufacturing, and retail sales, all key economic measures, showed significant improvement during 2011. The anemic housing sector continued to be a drag as did employment, though job reports were improving by year-end. Gridlock in Washington and the sovereign debt problems in Europe fueled much of the volatility investors experienced during the year. Overall, the US economy grew around 2% in 2011 and gained momentum heading into 2012.

Interest rates remained extremely low during 2011 benefiting borrowers and frustrating savers. As the year unfolded, fears of rising rates and inflation subsided as it became more apparent that this period of slow growth and low rates may continue for some time.

The US economy should continue to grow at a modest pace of about 2% in 2012. This is dependent on the European economy experiencing no worse than a mild recession as they continue to make progress with their sovereign debt problems. It also assumes that political divisiveness during this election year in the US does not do too much economic damage. At current levels, equities have a good chance to post solid gains over the next several quarters. But, with the challenges we still face at home and abroad, those gains are certain to be accompanied by continued volatility.

Jobs? Exporting the Middle Class.

2011-09-07T14:33:00.002-04:00

Isn’t it ironic that the jobs report before the Labor Day holiday posted a goose egg? As I told a friend who posted a 0.0 in college during his first semester, “nice work that had to be your goal, because that is awfully hard to do and you accomplished it.” Zero, nothing, nil, naught, zip, zilch (Yes, I hit the synonym button for zero.) Give me a break. According to an MSNBC article, this is the first time the government has reported zero, since 1945. Yes, we had job losses in the past, but for our government to report zero is ridiculous. I am going on record to say when the jobs number is revised we will have negative job growth. Why won’t the government tell you this?

Why is this shocking? We have been laying the framework for decreasing jobs for years. Please understand that as we have imported goods from China and other parts of the world we have exported our middle class. China’s growth right now centers on a boom in the middle class created by goods that we buy.

My Background

One of my paternal grandfather’s goals in life was to make sure that each of his children received an education, so they could have opportunities that he did not have. He was the manager of a tannery. I never met him. He passed away when my father was in college, but from the stories I hear he was a hard worker, instilled discipline, and loved sports.

My maternal grandfather was one of the kindest men I knew. He loved to take pictures and play games. From the time I knew him his health was an issue, but he had a caring for people and family. He also had a very competitive streak, when it came to dominos or monopoly. He caught me keeping my finger on the double five as we mixed them up and told me right then that he had seen me do it twice and not only was I cheating him, but myself as well.

(Not trying to slight them, but both of my grandmothers were caring women who loved to spoil me and could cook anything. One worked in a school kitchen and the other worked in a shoe factory.)

Both my parents graduated from Middle Tennessee State University. My father had plans on going back to work at the tannery, however he was newly married and could not come to an agreement on compensation with the owner. My father took a job with Genesco. In 1973, Genesco transferred my father to their Gamaliel, Kentucky apparel plant to be the assistant plant manager. He told my mother that they would be there two years at max; however he became plant manager and continued well past two years. My mother was a teacher, the most important occupation in our country.
In 1982, my father heard a gentleman in town was going to close his jean factory in Fountain Run, Kentucky. The gentleman had other successful businesses and the plant was losing money. My father convinced him to sell it to him and the gentleman also financed it. In discussing this with my mother, he told her if it did not work, “they could live off her teacher’s salary.” This had to be scary, if you saw how my brother, Brandon, and I ate.

This factory had 30-40 people in a facility that had a floor that would sag when people walked across it. The cutting room was in the basement of the grocery store next door. There were nights that my father would come home with a truck full of jeans, eat supper with us or watch our games and then go to Hermitage Springs, Tennessee to wash the jeans at a laundry facility. As production picked up, he bought a cattle truck, cleaned it out, and lined it with plywood. This was not our third vehicle. It was his daily vehicle. Luckily Brandon and I were young and we thought it was cool. Also note, Gamaliel really had no homeowner associations to worry about.

In 1984, dad was joined by a partner and formed Kentucky Apparel. They had worked together at Genesco and they had a great working relationship. The partner knew everything about washing jeans. If there was something to change the look of a jean you can bet he tried it. He also brought some new customers. Between 1984 and 1987, the company grew and they were named Kentucky Small Business Persons of the Year. From 1987 to 1993, they kept growing and actually began buying factories of Genesco and other companies who were getting out of the jean business. In 1993, we had factories in Fountain Run, KY, Gamaliel, KY, Tompkinsville, KY, Summershade, KY, Holland, KY, Burkesville, KY, Bowling Green, KY, Glasgow, KY, Scottsville, KY and Jamestown, TN. Most of these places are very rural. You would not be able to find some of these on a national map 15 years ago, but I suggest you Google them.

What does this have to do with jobs?

Starting in 1993, my father began writing all congressmen and senators in Kentucky and Tennessee about the North American Free Trade Agreement (NAFTA) and the impact that it would have on the apparel industry in the United States. As we know, NAFTA was passed in 1994 and my dad said his only shock was the speed in which the jobs moved. Luckily, having enough foresight, KY Apparel formed a joint venture with a Mexican family as most all our customers began demanding the goods made by the cheaper labor. I think if you asked them the next five years would be described as chaos.

For the company, we had tremendous number of orders as we were taking business from Central and South America; however with the partners in Mexico in charge of the increasing production; quality, on-time deliveries, and organization became big issues. These are things we never experienced in the United States. KY Apparel was known throughout the industry for creating a quality product, having hard workers, and delivering it when they said they would. (This is a trait of most hard working Monroe Countians.) So, how did companies in Mexico make money? The peso devalued. Labor became even cheaper in terms of U.S. dollars.

In 1996, I walked into one of my last public speaking classes for my undergraduate degree and was given 10 minutes notice that I would need to give an impromptu speech. I had just travelled with my father to Mexico that summer and began seeing the difficulties in my home county, Monroe, which has the cities of Fountain Run, Gamaliel, and Tompkinsville. We had shut a few of our other plants that were listed above in other areas however we saw OshKosh, Red Cap and other factories in our area begin to lay-off workers. I titled my speech NAFTA: How it Helped My Family, but Hurt Friendships. I was a 21 year old college kid with 10 minutes. The reasons I gave it helped my family was that the Mexican partners bought into our business and the increase in sales. On the other side, I had friends that worked for KY Apparel and were in danger of losing their jobs.

As I was driving back from a board meeting the other day, I began thinking about the recession, the lack of jobs and the shrinking middle class. I realized my speech was happening on a grander scale not just Monroe County and other rural areas. I would contend Monroe County has been in a recession since the mid-1990s. Look at the last census data, the population has declined as other rural areas. I look around and see doctors, dentists, entrepreneurs, engineers, accountants, lawyers, and teachers that I went to school with that cannot go back to their hometown due to lack of jobs. These jobs were exported out of Monroe County to bigger towns. Now that is happening to America in general.

At this time all of your politicians on both sides of the aisle were talking about NAFTA being a success. Of course, they promised laid-off workers a minimum of 18 months unemployment and re-training. This was great for some, but not all. These jobs were good second income jobs for a lot of families.

Ultimately, in 1999, my father and his business partner had enough. They decided they were going to get full control back of KY Apparel or be purchased out of the business by their partners in Mexico. The Mexican partners bought us out of the business. I can tell you at the time we (I began working in 1997) were announcing to the employees remaining that we were getting out of the business I had seen my father cry very few times. These people were like family and we knew the jobs would not be staying long term.

As the 90’s ended, even Alan Greenspan finally got something correct calling it “Irrational Exuberance,” there was no worry about the decreasing manufacturing base. We were making all kinds of paper profits and trading them back and forth. The government had a budget surplus from increase in capital gain tax revenue. There was no reason to worry about Monroe County or other rural areas that were losing jobs.

However, that bubble burst and Mr. Greenspan lowered rates to fuel the great real estate boom/speculation. During this period the loss of manufacturing jobs were covered up by the gains in residential construction, again no reason to worry about Monroe County.

What I contend is that we should have been worrying about Monroe County and other rural areas, because it is happening to all of the United States fifteen years later. These construction jobs will not come back for a long time and we cannot be just a service economy. We must get manufacturing back to the United States. There are a lot of great theories that these free trade agreements work, however I have never been able eat a theory or put a theory over my head at night (some went over my head). I tend to base my observations in the real world. I see another jobs initiative (stimulus) being launched and a quasi QE3 (they won’t call it QE3 for fear of mutiny). Unfortunately, none of this will work.

The importing of goods has been the exporting of the middle class. My grandparents were hardworking middle class that gave my parents the work ethic and belief to strive for the American Dream. If we lose the middle class, we lose the American Dream.

Reaction to U.S. Down Grade and Lack of Economic Growth

2011-08-09T09:59:00.000-04:00

Reading the news over the weekend, I have been shocked at the reaction to the S&P downgrade. Did we think the meaningless theatrics in Washington over the debt ceiling would truly change the course that we have been sailing for the last 30 years? Did we think adding to our debt problem in the short term while promising future reductions would allow us to keep our AAA rating? I hate to be the bearer of bad news, but the U.S. should not have a rating of AAA. If there is even more than a slight chance, you are going to default; you don’t deserve an AAA rating. (Side note: I think all of the rating agencies have major deficiencies, but we have great issues as a country that must be addressed to truly be AAA.)

I am concerned, because the reactions from our politicians are to blame someone else instead of getting to work on placing our fiscal house in order. Unfortunately our political system has created the following goal for our politicians: (yes, I kept goal singular)
1.) Get Elected next time.
For the last 30 years, we have simply ignored and provided stimulus to any potential economic hiccup. I call some of these hiccups, because they were minor to what we faced decades before and what we are facing going into the future. What we fail to realize is that we have been on economic stimulus for the last 30 years. The following have been stimulants to our economy:
1.) Decrease in Interest Rates. We have seen our rates go from the near 20% range to almost 0%. Less you pay in interest the more you can pay on other items.
2.) Decrease in Tax Rates. Same as above lower taxes allow you to spend on other items.
3.) Deficit Spending. Each dollar spend above collections is being taken from someone saving the money and given to someone spending it.
4.) Increased Consumer Debt/Reduction in savings. Lowering our savings rate place more dollars in the economy. At some point (last 3 years), this gets to a point that diminishing returns on economic growth are pushing to zero, because of interest payments. (Imagine if we had high rates.)
5.) Stimulus plans. I really think these have added very little to the economy, but may have just prolonged the inevitable. This could also fall above in the deficit spending as it increases the deficit. However I wanted to note it, because even without stimulus plans we still have deficit spending.
Now that you have reviewed the five of these, tell me which ones are going to give a positive boost for our economy going forward. None of these will and that is what the politicians will not tell you, because they do not get elected by telling you that you might need to expect slow growth and high unemployment. They hope to blame the other guy. Changes of any of these will have a negative drag on the economy, but we must address the overall debt situation because it will only continue to compound if we procrastinate.

1.) Decrease in Interest Rates. We saw what kind of mess higher interest rates started a few years ago. As for being a stimulant, they cannot go much lower, so this will not assist the economy.
2.) Lowering of Tax Rates. We all know this is not going to happen with the deficit as it is and there is a good chance they increase.
3.) Deficit Spending. We cannot keep going forward with this, so this will be dollars taken out of the economy.
4.) Consumers are tapped out and will continue to reduce their debt.
5.) Stimulus plans. We have already fired most of the bullets we have and I do not see any stimulus plans being passed by the government in the foreseeable future. The Fed may try QE3, 4, 5. Etc., but this will only slow the inevitable and could lead to more pain.
We have heard the analogy many times over of “driving the economy off the cliff.” If we do nothing this is what will happen, however the actions that must be taken are not great for the economy either. Instead of driving off the cliff, it is like driving into those yellow containers full of water. It gives us some cushion, but it does a lot of damage.

After looking at many troubling signs of our economy, I will state several of our companies have tremendous amounts of cash. This should be a positive for growth once we work out our fiscal crisis, but I tend to believe several of these companies will hold on to the cash until more is known. They want to have liquid assets should we have a slow down or should we have a freeze up in the capital markets again.

Although I do feel U.S. debt is not AAA, I do not think the U.S. will default. We as nation will work through the hardships and come out better and more careful. The unfortunate part is it will create some pain for everyone and we will repeat the cycle again. Prosperity brings comfort and comfort allows us to be undisciplined, then crisis brings discipline which brings prosperity, then repeat.

1st Quarter Review of 2011

2011-04-14T10:10:00.005-04:00

The bulls remained in charge during the first quarter of 2011. The S&P 500 returned 5.92% during the quarter, the DOW Industrial 7.07%, and the NASDAQ 4.83%. Smaller US companies advanced even more and international stocks were also positive, though they lagged the US markets. The story during the 1st quarter was that signs of a strengthening economy trumped all kinds of bad news from around the globe. Turmoil in the Middle East, debt issues in Portugal and other European nations, the high cost of recovery in Japan, and the ongoing struggles of the US housing market are all issues of serious concern. However, the markets have continued to climb based on strengthening consumer demand, increasing industrial activity, growth in corporate profits, and a stabilizing employment picture. The low interest rate environment continues to provide fuel for economic growth as well as an incentive for risk taking. However, inflation concerns are growing as consumers are seeing higher energy and food costs and investors worry about what the Federal Reserve will do in the second half of the year. Fixed investments struggled during the first quarter as the interest rate picture became more unclear. Though the market trend continued to be up, volatility increased over the last quarter. This is a clear sign that the major challenges facing the world economies can not be ignored and that future gains may be more difficult to achieve. Significant improvement in employment and keeping inflation under control are needed to allow the economy and markets to continue to move forward. If the economic recovery slows, chances increase that we will see a market pull back at some point later this year.

The Best Retirement Plans for the Self-Employed

2011-04-12T14:40:00.001-04:00

Good article on Yahoo Finance today.

If you would like to discuss this in more detail, please contact us at either 859-239-9000 or 270-846-0405.

Link

2011: Move Forward with Caution

2011-01-04T12:07:00.004-05:00

I love this time of year. You cannot pick up a financial publication without reading someone’s forecast or their top ten can’t miss investments. The great thing for these prognosticators is that no one really tracks them and they always give you that small disclaimer to consult your financial advisor and this should not be taken as a solicitation and blah, blah, blah. You know the one I am talking about. With that being said, I thought I would put out a vague piece with very little guidance on what I think, so I can match everyone else out there in the investment world. However, I will provide you with quality data to consider.

As many of you know, I live off the theory that the investment world revolves around the basic emotions of fear and greed. As Warren Buffett has summarized, he is greedy when people are fearful and fearful when people are greedy. In addition to following investor sentiment, over the past year I have read everything I could possibly get my hands on about the Dow Theory. Dow Theory was never meant to be a theory, but was based on the writings and comments of Charles Dow in regards to his Industrial and Rail Indexes from the late 1890s to early 1900s. The rail index is now known as the Transportation average.

Investor sentiment extremely bullish

In a recent poll conducted by Bloomberg, the chief strategists from Bank of America, Bank of Montreal, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Oppenheimer, RBC and UBS expect the S&P to be higher for 2011. Individual investors are currently bullish as well. From a recent USA today poll, 88% expect the market to be up in 2011, while only 1% expects the market will be down more than 10%. Daily Sentiment Index by trade-futures.com reached a 94% bullish reading in November, the highest total it has seen since January 2007. This numbers low was 7% bulls in March 2009, when we reached the market lows.

Does this guarantee the markets are heading down?

No, however it does state that sentiment is extremely bullish and market turns tend to occur after reaching extreme bullish readings. Noting the numbers for January 2007, it took until October for the market to make its peak. The lessons we want to take from these numbers are investors should be cautious and focus on quality names.
Another reason for focusing on quality names are the New Highs of the NYSE has not topped its April 26th number of 674, however each of the indexes have passed their April highs. We can interpret from these numbers that fewer stocks in the index are pushing the indexes higher. If we can get more New Highs than the April high, this is bullish, while if we continue to lag behind with New Highs the more cautious we need to become. In the recent bear market, New Lows reached its greatest number in late October, while the market finally bottomed in March of 2009. Today, we closed at a 2 year high, however new highs were 373.

Dow Theory on a Buy signal

In future writings, I will get in more detailed discussions about Dow Theory, however currently it is on a buy signal. The one thing to remember in following the Dow Theory is that at some point after many correct buy or sell signals, there will become a buy or sell signal that is incorrect. Dow Theory will never call the top or bottom of the markets, but it should be able to see the markets breaking down or a market that is beginning to recover.

In this theory, both the Industrials and Transports must confirm each other. This means they need to pass earlier highs together for a buy signal or pass lows together for a sell signal. One average breaking their recent high or low without the other is a non-confirmation and you could see the market move in the opposite direction.

Move forward with caution

In trying to reach my early goal for this piece, I leave you with “move forward with caution.” As of this moment, the Dow Theory is on a buy signal, however investor sentiment is at levels that sometime signal a pause and other times signal a reversal depending on the reactions and how the markets move in the following months. If I have one conclusion, the markets contain more capital risk for reduced upside potential. With this conclusion, focus should be on quality names that have better than average yields. In a few days, I will discuss the recent projections of Jeremy Grantham that better explains the risk/return of the markets.

6.6 Trillion in Retirement Shortfall.

2010-09-15T12:05:00.001-04:00

Story from Yahoo on Retirment shortfall.

The Housing Market Is Still Flooded

2010-08-03T09:25:00.002-04:00

This article from Zacks gives a very clear description of the current state of the housing market and explanantion of how it will continue to impact the rest of the economy. This is obviously one of the major challenges we still face.

Goldman from Richard Russell

2010-07-26T11:04:00.002-04:00

Richard Russell wrote this about the Goldman settlement in his Dow Theory Letters:

Goldman Sachs pulled off its greatest transaction with its recent settlement with the SEC. Goldman was selling mortgage securities that had been structured to fail with the bubbly housing market. These doomed securities were sold en masse to unwitting Goldman clients. If the case had gone to court as it should have, Goldman's reputation would have been ruined and its CEO would have been ousted. But Goldman paid the SEC a $550 million fine, and the case was completed and dropped. Sure, $550 million was the biggest settlement in SEC history, but it represented only two weeks of profit from Goldman's first quarter. In the Russell opinion, Goldman could have been hit with a two billion dollar fine, and Goldman would have gladly paid it with no arguments.

Fines and Financial Reforms

2010-07-16T12:13:00.003-04:00

On May 17th, I wrote a commentary on Mortgage Back Securities. Yesterday, the first part of my predictions came to fruition. I do not believe it to be a coincidence that Goldman Sachs settled with the Security and Exchange Commission the same day financial regulatory reform passed the Senate.

Goldman Sachs paid $550 million. This is a drop in the bucket to the damage that was caused. The financial reform bill will only make it more expensive for the average consumer to get proper financial products. The big boys who helped create this mess will find a new way to game the financial regulations and make money. The smaller financial institutions that were doing things right will have to push the costs on to customers. Ultimately, we look to try to end too big to fail, but we only increase the power of the bigger institutions.

If you want true financial reform, next time the SEC files suit against one of these corporations find them guilty and close their doors. If you shut down a Goldman Sachs or any of the other big players, I guarantee Wall Street will clean up its act.

Comprehending a Trillion

2010-06-09T15:22:00.003-04:00

Thought you might find this interesting in trying to comprehend the debt of the United States. It comes from Richard Russell of the Dow Theory Letters.

A subscriber sent me an e-mail in which he attempts to show how to comprehend the meaning of a trillion (in seconds). Our elected officials are charged with dealing with our national deficit. Now measured in the TRILLIONS of dollars. Very few elite mathematicians are able to comprehend the impact of TWELVE ZEROS. Instead of DOLLARS, let us imagine SECONDS of time:

ONE MILLION -------- 1,000,000 Seconds. ------ 1.65 WEEKS

ONE BILLION -------- 1,000,000,000 Seconds. ------ 31 YEARS, 8 MONTHS, 15 DAYS

ONE TRILLION ------ 1,000,000,000,000 Seconds. -----31,710 YEARS !!

Our debt is projected to top 13.6 trillion this year -----13,600,000,000,000-----431,356 YEARS

In addition, if we seized all of the assets of the WORLD Billionaires listed in Forbes, it would only total $3.6 trillion and only 38% of this comes from the U.S.

The grasshoppers and the ants - a contemporary fable

2010-05-28T16:58:00.002-04:00

Link to Article from the Financial Times.

You may have to register, but you can access the article for free. Good describtion of what is going on in Europe and the potential issues for the U.S.

Commentary on Mortgage Back Securities

2010-05-17T18:20:00.003-04:00

Thursday the NY Times had an article asking if the Rating Agencies (Moody and S&P) were duped by big banks on the mortgage backed securities (MBS) that helped spur the mortgage crisis. Congress and the Security and Exchange Commission are now reviewing these banks to see if charges should be filed. I’ll ruin this story quickly for you: SEC will file charges, Congress will grandstand, banks will deny and then settle for multiple millions maybe billions, investors in securities will get pennies on the dollar, Congress will pass a meaningless law and set more regulations, banks will lobby, bank’s Political Action Committees will donate millions to Congress, and finally we set the stage for the next crisis.

Doesn’t that make you feel a lot better? I hope your answer is no. The problem with this whole crisis is that we are dealing with two dangerous issues: greed and stupidity. One can cause an issue; both of them can cause a world crisis. Greed was not only on Wall Street, but it was also on Main Street. Main Street was trying to keep up with the Jones, while Wall Street was trying to keep up with the Jones richer cousin, the Howell’s. What people fell to realize is the greed on both streets help to feed the greed on the other street.

If Main Street needed a two day fixed period adjustable rate mortgage (I know these don’t exist), Wall Street created a security to sell to investors to fund this mortgage. There is some poor person out there who bought a house they knew they could never afford on one day and on the next bought a MBS in their IRA which contained the mortgage that they couldn’t pay. That story ends painfully.

On Wall Street and at the big banks, there are a plethora of highly sophisticated, intelligent people who are just plain stupid. How else do you explain all the derivative products and sophisticated financial models they create that assume “this and that” with the most important “this and that” being a rational market. The problem is markets are not rational nor are they efficient. They are bi-polar. So when the markets go wildly irrational the models or products they created do not calm the market down, they actually compound the problem.

Did the banks dupe the rating agencies? No, they found a willing sucker to go along with the heist. It was the rating agencies responsibility to understand the securities and their risk. To be objective as opposed to an accomplice. I just finished the book, The Big Short by Michael Lewis and let me use some of his explanations. MBS are broken into tranches from safest to riskiest (higher likelihood of having investment paid back to greater chance of default). The rating agencies then place ratings on each tranche with tranches with earlier paybacks given the higher ratings. Ratings may be AAA, AA, A, BBB, BB, B, etc. Triple BBB and higher is considered investment grade. Lower than BBB falls in to the term of junk. It was pretty non-existent for any MBS to be rated less than BBB. So you can reason, the BBB bonds were the least likely to get paid back and had borrowers with lower credit ratings. What would generally happen is that these banks would end up with the BBBs on their books because no investor wanted to take the risk.

The solution: BBBs in New York could not go bad at the same time as BBBs in California, Arizona, Georgia, Florida, and Nevada. The banks took the BBB tranches from different areas and packaged them together in the name of diversification. In genius like fashion BBBs added with more triple BBBs naturally equal AAAs. (Remember diversification.) Paraphrasing Lewis, if you have a pile of dog crap and mix it with two more piles of dog crap, you get roses? No, you have a significant pile of dog crap.

Here’s the long term problem: Congress will now intervene for the sake of the poor and misfortunate. So the way to solve greed and stupidity is by assigning the task to the individuals who help stimulate this mess. Remember Congress is the one thanks to the influence of Wall Street and big Bank donations, who decreased regulations while at the same time pushing for lower lending standards. If you do a simple Google search of “Wall Street Donations,” you will find numerous articles where the key people arguing for financial reform are beneficiaries of Wall Street.

If you do not think Congress is greedy, read this article. Members of Congress are allowed to insider trade. So when you see any of these individuals brow beat a CEO in front of the public, they may have just shorted his stock or invested in a competitor or a replacing technology. These individuals are supposed to have blind trusts, however if they will not ban insider trading by members, you have to question how blind are these trusts.

Many banks will get charged with fraud, however everyone will settle with the SEC for major bucks. The reason they will settle is part of the game. If you are convicted of fraud, you lose your license to conduct business. Congress will push hard enough to make the headlines look good and punishing, however at the same time take campaign contributions for future help.

I worked for a big firm for 4 ½ years. I can tell you these companies have highly intelligent people who are specialist at creating products to solve last year’s problems and gaming whatever system they are given.

What to Know and Ask About Disability Insurance

2010-04-30T17:54:00.001-04:00

The commercial featuring that loud, quacking duck has gone a long way to making people think about individual disability coverage as a way to keep bills paid if the family breadwinner gets sick or injured over an extended period of time.

It’s true -- individual disability insurance is more important than ever, and every working individual should have it.

The key is shopping smart for that coverage. A financial planning professional is a good first stop for advice on that coverage, which should be considered as part of an overall financial plan.

Why is it a good idea to have personal disability coverage, particularly when most employees can buy such coverage at work for a nominal fee? That’s because most employers offer disability coverage that lasts 12 weeks or less and covers less than 60 percent of a worker’s pretax income. That might be workable for a surgery or injury with a relatively quick recovery time on the couch, but a diagnosis for even the most curable cancers can put workers with even the best financial coverage into a devastating financial bind.

And if you are self-employed, the need for the best, most flexible long-term disability insurance is even more important because other than your own resources, that coverage will be your own safety net.

Here are some essential things to know about long-term disability coverage. Remember that policy language is critical, and a financial planner can give you a second, helpful set of eyes to review what your insurance agent recommends:

If you’re considering becoming self-employed or might lose your job due to layoff: The time to buy long-term disability coverage is NOW. Insurers will base your initial coverage limits on what you’re earning in your current job, which is important since entrepreneurs and unemployed often earn considerably less – at least for awhile -- once they’ve left their current employer.

Make sure you can purchase more coverage as your income increases: Because you stand to earn more in future working years – if only based on inflation – you should make sure your benefit levels can rise to meet the demands of replacing that income if you need to in the future. Obviously, people who expect to make vastly higher salaries in the future need to plan for this.

Check for a non-cancellation feature: Make sure that once you’re approved, the insurer can’t cut your coverage unless it decides to stop writing coverage for everyone in your job class. It should also state that the insurer can’t raise your rates based on the benefits you’re to receive.
Compare benefits and premium cost: Get bids from several carriers and consider going to more than one agent. The premium you pay will depend on a wide array of factors and can vary dramatically from person to person. Such things as your age and your gender (women pay more for disability insurance because they currently tend to live and work longer, for example) will be a factor in what you pay.
Go for “own occupation” coverage: Even if you are able to work in a different capacity, own-occupation disability insurance will provide you with the income replacement you need if you are unable to work in your current occupation. Make sure you understand how that coverage fits your current profession.
Know what “elimination period” means: Like a deductible in home, health or car insurance, the elimination period is a big cost determinant in disability coverage. (It’s actually a big factor in long-term care policies as well.) Most long-term disability policies will kick in after 30 days after you’ve been declared disabled. But if you specify an elimination period of 60, 90 or 120 days, your premium will be lower. An important point about the 30-day elimination period: the benefits don’t start accumulating until you’ve been laid up a month after the ruling date and you won’t get your payment until a month after that. Be very clear with your insurer when you’ll get your first check based on what elimination period you choose, and make sure you have a cash cushion to cover that need in your emergency fund.
What’s your benefit term: For each disabling incident, your policy may pay benefits for a certain period – two, five years or until retirement. It’s all in how your policy is constructed. Many policies may pay for life if you purchase this benefit and you are disabled prior to age 60. Also, make sure there’s language that increases your benefits as your income increases over time.
See if there’s a residual benefit feature: Some policies may offer you 'residual benefits' or a partial payment if you're less than 100 percent disabled, but still can't perform all the duties of your job.

April 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Guy Waggoner, II, CFP® , a local member of FPA.

Long-Term Care Insurance

2010-04-14T10:39:00.003-04:00

This article in a recent issue of Money Magazine provides a comprehensive discussion of the factors to consider when evaluating the need for long-term care insurance.

The Federal Death Tax Might Be Taking a Holiday, But Keep an Eye on Your State’s Estate and Inheritance Tax Policy

2010-02-16T12:16:00.000-05:00

With the 24/7 rush to get health care reform legislation through the U.S. Senate in the waning days of 2009, Congress let the federal estate tax die for 2010 as planned by the Bush Administration back in 2001. That’s not expected to stay the case for long – many experts anticipate that Congress will re-apply exemption levels with retroactive legislation sometime this year to help tame rising deficits.

But, individuals and families should keep their eye on another big estate tax issue – a potentially huge hit from their home state.

A recent report in The Wall Street Journal says taxpayers with significant assets need to keep a close watch on what’s going on with their home state’s exemption levels because most states with estate or inheritance taxes haven't matched the federal exemption levels of recent years. For example, in 2009, all individuals with less than $3.5 million in assets and married couples with less than $7 million were exempt from federal estate taxes – this is likely to be the level that Congress may act to reinstate this year.

Working with estate attorneys, tax experts and financial advisors such as CERTIFIED FINANCIAL PLANNER™ professionals can help individuals determine their estate tax situation, an even more important issue now that many states have significant budget woes and may be looking for more revenue to fix them. For some individuals and families, there may be no adjustments in estate tax strategy, but others in extreme circumstances might be advised to move out of state to avoid a potentially big impact.

Individuals and couples should also realize that Congress is considering eliminating the federal deduction for amounts paid for state estate taxes. It’s expected to affect individuals with more than $3.5 million in assets, but it’s potentially another big hit.

According to CCH Wolters Kluwer, 17 states and the District of Columbia currently impose estate taxes. Eight states have inheritance taxes, which are levied on heirs, not estates. Maryland and New Jersey have both.

Every state puts its own wrinkle on estate tax issues, and that’s why it’s particularly important for retirees not only to check how those laws might affect their assets if they settle in a particular state for good.

One possible solution is a bypass trust – a trust that essentially allows the assets of a deceased spouse to access a trust that can be drawn on by the survivor. When the spouse dies, the assets in the trust can go tax-free to designated heirs, preserving the benefit of both individual exemptions. In other words, if a married couple lives in a state with a $1.5 million individual exemption and establishes such a trust, it would allow them to pass as much as $3 million to their heirs. Additionally, purchasing life insurance is an effective estate planning technique and is regarded by some experts as the safest way to avoid estate taxes, particularly if the insurance is purchased within an irrevocable life insurance trust.

As the federal government and states start flipping their taxpayers’ couch cushions for more revenue, experts say it’s also important for individuals and couples to be particularly careful about domicile issues – the actual amount of time individuals live (and therefore can be taxed) in a particular state. In an audit, revenue officials might check the minute details on a taxpayer’s lifestyle to determine where they owe tax – car registrations, club and church memberships, health care providers, burial sites and voting records. In other words, the tax planning behaviors of the mega-rich are increasingly becoming relevant for the borderline rich.

One more thing to watch – Congress may eventually act to diminish or eliminate other methods long used by individuals and couples to cut estate taxes. Reports have surfaced that family limited partnerships, grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs) might go the way of the dodo since they provide the means to freeze or cut the value of assets being transferred out of the owner’s home state.

Taxpayers concerned about their estate tax situation might also bring another key group of people into the discussion – their heirs.

When talking about extensive assets, it’s good to discuss the tax situations of the giving and the receiving parties to make sure the chosen solutions are best for both sides. It is best to hold a financial planning family meeting to discuss charitable giving intentions, and the protection of the total family’s wealth. Clear communication on planning strategies will ensure maximum family wealth preservation.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Guy Waggoner, CFP®, a local member of FPA.

4th Quarter 2009 Investment Commentary

2010-02-01T15:46:00.001-05:00

The stock market climbed back from the sharp declines of 2008 and early 2009 to finish the year with strong overall gains. The S&P 500 was up 26.5% for the year and the DOW 22.7%. Riskier sectors of the market did even better with technology up 43.9% (NASDAQ), smaller U.S. companies up 34.4% (Russell 2500), and emerging markets up 79.0% (MSCI-EM).

2009 began with investor confidence shattered by turmoil in the financial sector, a deepening recession, and a cascading credit crisis. The tide began turning in March as the financial sector and economy stabilized in part due to massive government monetary and fiscal stimulus. Stocks rallied for the rest of the year even though unemployment, the real estate sector, and consumer spending continued to be concerns.

Fixed income investments also rebounded in 2009. As the financial system stabilized and credit markets thawed, quality issues became much less volatile and riskier bonds rose dramatically (BarCap US High Yield up 58.2%).

The economic outlook is significantly better now than it was a year ago. Serious problems still remain, but the weakest sectors are no longer getting worse, while the stronger areas are getting better. These trends should continue resulting in modest GDP growth of 2.0% - 2.5% in 2010. The biggest problem for investors is that equities have already soared 60% or more from the lows of early 2009. At these levels much of the recovery is already priced in and any disappointments along the way could lead to renewed market volatility.

How to Get 2010 Off to a Great Financial Start

2010-01-28T16:48:00.002-05:00

Plenty of people make resolutions to lose weight, get a new job or make other things happen in their personal life, but relatively few make solid resolutions about money. Make 2010 the year you’ll live a better life financially. Here are a few resolutions to think about:

Write down the things you really want in life: Have you ever written down the big things you want in life? Granted, all great dreams don’t cost money, but many of them do. Money buys freedom – to travel, to retire early, to start a business, to change careers. Putting goals in writing gives them a formality and a starting point for the planning you must do.

Evaluate your risk tolerance: One of the most beneficial things financial planners do is help you articulate your financial goals and establish (or re-establish) your tolerance for risk. With the recent recession and market turbulence, many individuals would benefit from an analysis of how much risk they want (or need) to take based on what they want to achieve with their money.

Track your spending: If you haven’t purchased financial accounting software or set up a reliable accounting method of your own, this is the year to do it. Diligent expense tracking is the first critical step to getting personal finances in order whether you do it on paper or on your computer. Mint.com or QuickenOnline.com are free online programs that help you do this.

Get tax and planning advice toward retirement, other goals: Maybe you’ve always winged it with your taxes and considered your company 401(k) the ticket to your financial future. Chances are your planning is inadequate. Start getting references on good tax professionals and consider sitting down with a CERTIFIED FINANCIAL PLANNER™ professional to discuss your whole financial picture.

Cut your debt: If you can’t ever seem to get yourself completely out of credit card debt, make this the year to do it. Take inventory of your balances, figure out if you can consolidate them under your lowest-rate card, and resolve to pay off an amount that exceeds the minimum -- on time, every month. And if you can pay extra toward mortgage, auto, student or other borrowings, do so.

Start saving -- or save more: If you haven’t signed up for your employer’s 401(k) plan or begun a savings plan tailored for the self-employed, this is the year. And resolve to save at least 5-10 percent of your take-home pay based on your cash flow, and place the maximum amount in your retirement plans and savings.

Invest in yourself: If going back to college or taking specific coursework will help you advance in your career, plan to do it. If investing in a health club membership that you actually use makes sense for your health as well as your insurance costs, do it. Keep in mind that bettering yourself is always a good investment.

Redefine the way you shop: If you’re an impulse shopper, break the habit in 2010. As a suggestion, get a legal pad and make that your centralized shopping list – use a single page for groceries, stock-up goods (it’s wise to start buying essentials in bulk if you can measure the savings), essential clothing or big expenditures you’ll need to make at specific times. Taking that pad with you wherever you spend money is a good way to keep a grip on your wallet as long as you don’t stray from the list.

Change the way you commute: If driving is the single best option to getting to work or other destinations, it’s tough to make that switch. But if you have the option to leave the car in the garage at least one day a week and walk, bike, carpool or take public transportation instead, try it. You’ll save money on gas, maintenance, insurance and parking costs, you’ll benefit the environment and in the case of walking or biking, the exercise may do you good.

Cut unnecessary expenses: Do you really need deluxe cable? How much are you paying for your Internet service? Can you wear a sweater around the house and lower the thermostat? In every budget, there are items that can be cut – or at least trimmed. Take a hard look at all your “essentials” to see how essential they really are. Aim for a target of at least 10 percent and start setting that money aside on a regular basis.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Guy Waggoner, CFP® , a local member of FPA.

Roth Conversion- that is the question for 2010

2010-01-26T09:30:00.008-05:00

Only a handful of times in financial planning do we see a legislative change that will impact individuals and their heirs for decades to come. It allows for any individual to convert all or some of their assets in a conventional IRA, 401(k) and 403(b) accounts to an after-tax Roth accounts in 2010 and forward. Prior to 2010, single filers making more than $105,000 and joint filers making more than $176,000 were not allowed to make the conversion. The legislation that bore this opportunity is the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). TIPRA is also the same legislation that allowed after-tax 401(k) contributions or better known as the Roth 401(k). (To read more on Roth 401(k) go here.)The extra benefit of converting in 2010 is half of the tax liability can be paid in April 2011 (2010 tax year) and the other half in 2012 (2011 tax year). Now that I have hyped the opportunity, a Fidelity Investments survey found only seven percent of individuals polled expect to make any conversion.

Does converting save taxes?

There is no easy answer to this question, because it revolves around government regulation. The open answer depends on whether you feel these dollars will be taxed at a lower rate today than in the future. We can run several scenarios, but it will ultimately fall back on tax rates used in the assumptions.

So what do we do know about tax rates?

As the law is currently written, the tax cuts passed in the Bush administration will sunset on December 31, 2010. Our current tax rates will revert back to 2001 rates, causing most everyone’s taxes to increase by a few percentage points. This brings an additional question into play for those that choose the Roth Conversion: do I pay all of the tax on my 2010 taxes or split between two years with the potential for the later year’s tax rates to increase. Luckily, you do not have to declare how much you want to split if you choose to do the conversion until your 2010 taxes are due. So hopefully by early 2011, we will know what Congress will do on the sun setting tax rates.

In summary, with the Bush tax cuts set to sunset, increasing deficits and the lack of funding on benefits promised in Social Security and Medicare, tax rates will not go lower with the high possibility of moving higher.

Are there other benefits to converting besides taxes?

Yes, there are several benefits for certain individuals. Some of these are no required minimum distributions at 70 ½, easier distribution rules for early withdrawals once the account is open for five years, tax diversification, and helping to simplify estate planning.

Required Minimum Distributions

I have always said that an IRA or 401(k) plan is a good way to save money, until you accumulate wealth outside of the plan. At the age of 70 ½, individuals are required to take a minimum amount from their IRAs whether they want to or not. Roth IRAs have no required minimum distribution. This allows individuals to take the distributions when needed and not forced by the distribution rules.

Distributions from Roth IRAs

After a Roth IRA has been open for five years or longer, an individual can withdrawal their contributions without penalty or tax. Unlike conventional IRAs, the first dollars drawn from a Roth Account are deemed to be the contributions. So in reality, an individual can draw as much as they have contributed to their Roth IRA at anytime (after the 5 years) for anything without tax and penalty. In discussing the Roth Conversion, the amount converted will be deemed contributions, since taxes will be paid. This will allow individuals who have not had the chance to contribute to a Roth IRA to not only change the tax rates of future earnings, but also open this money up for different uses.

For example, a parent is planning to save money for a child’s college education. In addition to 529s, UTMAs and college savings plans, the parents can use portions of the Roth IRAs to pay for college. This will allow assets to continue to grow in the parents name should the child get a scholarship or choose not to attend higher education.

Tax Diversification

If you have read any financial planning piece of information in the last thirty years, you have heard of diversification. However, most people talk about asset diversification and few people talk about tax diversification. To explain tax diversification, let me give you a few tax rates on some investments: capital gains on stocks – 15%, dividends – 15%, interest from bonds – ordinary income (this could range from 10%-35%). In conventional IRAs, we pay the ordinary income tax rate on any distributions, thus contributions, capital gains, dividends and interest earned are taxed at ordinary income rate when taxed.
If we have a stock, who pays a dividend that is normally taxed at 15% in an IRA, when distributed to us this dividend has a high possibility of being taxed at a rate higher than 15%. Assume an individual has $500,000 with half in an IRA and half in a regular account. This individual’s asset allocation calls for 50% stocks and 50% bonds. This individual should buy all the bonds in the IRA in order to avoid paying ordinary income rates on dividends and capital gains. (Note: this assumption assumes the individual is buying taxable bonds and not municipals.)

An individual converting to a Roth creates new planning opportunities with tax diversification. If we assume the above individual chooses to convert part or all of his IRA and pays the tax with part of the taxable account, he has moved a portion of two asset types to a tax free investment vehicle.

Estate Planning

When an individual accumulates wealth and part of the wealth is a tax-deferred asset, this asset could be taxed both by estate taxes and income taxes at a combined rate above 60%. If you refer to Roth 401(k): Better for Heirs, it will explain in more detail the benefit of Roth savings to heirs. Briefly, an individual who inherits a Roth IRA will not owe any income tax on the IRA. Estate tax may be owed. The only requirement of the beneficiary is that they take tax free distributions from the Roth based on their life expectancy.

Summary

It is difficult to determine the ultimate tax benefits of a conversion; however what is not difficult is that a conversion opens many beneficial planning opportunities as well as questions. There is no blanket yes/no answer on the conversion. Some will convert all, others none, and a portion will convert part of their IRAs. As you are reviewing your financial plan or goals, we will be more than happy to assist you in the decision making process.

If you have any questions, please contact either Guy at (270) 846-0405 or Alan at (859) 239-9000.

General Note on 401(k) conversion: No matter what the new law says; money in a plan is still subject to the rules of the plan. Most plans do not allow in service rollovers (rolling out of the plan while an active participant), especially for participants under 59 ½. So, even if the new law says you can roll from a plan to a Roth IRA, your plan document probably does not allow it while you are an active participant.

Third Quarter Market Commentary

2009-10-13T14:50:00.001-04:00

The strong stock market rally continued in the 3rd quarter. The S&P 500 gained 15.61% in the quarter and is now up almost 20% for the year. Smaller U.S. companies and international markets also posted gains of 15-20% during the quarter.

The market was pushed higher by continuing evidence that the economy has bottomed out after the worst recession in several decades. The economy expanded slightly in the 2nd quarter and is likely now growing at a modest 2% annual rate. This nascent economic upturn has erased only a fraction of the damage done over the last two years, but may well be the foundation of a longer and stronger recovery.

The Federal Reserve continued to keep interest rates low to support the economic recovery. Many fixed income investments have stabilized in recent months as concerns of defaults and financial sector instability have diminished.

The rapid market recovery has clearly increased the level of risk for investors. Equities are now priced at a level that leaves little room for economic missteps. A continued market recovery is dependent on a robust economy, which is in turn dependent on strong consumer demand. Consumers will continue to struggle until housing prices begin to climb and unemployment begins to fall. Until then, the prospect for market volatility remains high.

Fear and Greed

2009-09-08T16:03:00.001-04:00

This is a good article on the emotions that often rule the market and how you can use them to your advantage.

http://money.cnn.com/2009/07/20/pf/funds/fear_greed.moneymag/

Roth IRA: Is Now a Good Time to Convert My Traditional IRA?

2009-08-06T13:25:00.000-04:00

Currently, any individual or family with Modified Adjusted Gross Income (MAGI) less than $100,000 can rollover a Traditional IRA to Roth IRA. Starting in 2010, the restriction on Traditional IRA conversions to Roths are removed. With the economic downturn and lower stock price, is now a good time to convert for those that are not restricted by income?

When converting your IRA, you will be taxed for the amount converted to a Roth. Once you convert to a Roth, these assets and any growth in these assets will never be taxed again. With the stock indices still 20% lower than a year ago, you can take advantage of lower values in your portfolio to decrease your taxes. Lower values are not the only reason to covert to a Roth, but it does help. Other things to consider when choosing whether to convert or not are income, current taxes, future tax increases or decreases, and time until retirement. Please review our other articles in the Roth Section to get more insight into investing in Roths.

Wills and Estate Planning

2009-08-03T13:53:00.002-04:00

If you do not have a will or are considering updating your will or estate plan, I would highly recommend you read Stephanie McGehee-Shacklette's article on Wills and Estate Planning. She is an attorney in Bowling Green with the firm Harned, Bachert and Denton.

Wills and Estate Planning

Second Quarter Market Commentary

2009-07-23T13:52:00.000-04:00

The equity markets staged a strong recovery during the 2nd quarter after the precipitous decline of 2008 and early 2009. The S&P 500 was up 15.93% for the quarter and pushed into positive territory for the year. The NASDAQ did even better fueled by the tech sector, but the Dow Industrial Average lagged and is still down for the year.

The sharp rise in equities over the past few months was driven by 2 factors: a consensus view emerged that equity prices had been driven too low by the fear that gripped investors over the past 6 months, and early signs began to appear that the worst of the recession and financial crisis may be behind us. Hard hit sectors (like housing and industrial production) began to stabilize and some sectors like retail sales actually showed improvement. The economy probably contracted again during the quarter, but at an annual pace of about 2%, much better than previous quarters.

The Federal Reserve continued its effort to stimulate the economy by keeping interest rates low even as the potential for inflation began to worry some analysts. Lower quality bonds rallied during the quarter as fixed income investors were more willing to accept some risk in order to improve yields.

The economic recovery is sure to be slow and sporadic. We may see economic growth by the end of this year, but a truly strong economy is probably still several quarters away. Unemployment and housing will continue to be problem areas and the financial sector, though out of intensive care, needs time to fully recover. The equity markets are sure to be disappointed during this long and difficult recovery process meaning the rough ride for investors is probably not over. Hopefully, we will not revisit the lows reached earlier this year, but we are almost certain to see market volatility as the recovery unfolds.

How to avoid the 'death tax'

2009-06-18T14:48:00.000-04:00

The smart use of gifts and trusts can help you pass on more of your money to your heirs.

http://money.cnn.com/2009/06/03/pf/Death_tax_morrissey.fortune/index.htm?postversion=2009060405

For Goodness Sakes name a Beneficiary

2009-06-11T15:56:00.000-04:00

You would be surprised at how many IRAs have no beneficiary named. Is your IRA one of these? By not naming a beneficiary, you are taking an asset that should be easily distributed at your death and making it difficult. An IRA left without a beneficiary is paid to the estate of the decedent.

Why is this difficult?
1.) The asset goes from immediately distributable to the beneficiary and placed in the probate process of the estate.
2.) These assets become immediately taxable. There are ways to postpone the taxes on a decedents IRA, but a beneficiary must be named.
3.) Your wishes and the rules of law may be different. You may intend for your IRA to go to a certain individual, however without a beneficiary they will be distributed according to state law.

Other IRA beneficiary mistakes:
1.) Not routinely updating your beneficiaries.
a. A beneficiary predeceases you in death.
b. An ex-spouse.
c. A change in planning.
2.) Not naming contingent beneficiaries.

Stretching an IRA
If you name a beneficiary, you leave those individual choices at your death. As always a spouse can roll an IRA directly into their IRA, however all other beneficiaries can either take the distribution immediately or Stretch the IRA.

By taking an immediate distribution of the IRA, the beneficiary incurs all the taxes due on that IRA in the year of the distribution. Depending on the size of the distribution, you may be moved in to higher tax brackets. In stretching the IRA, the beneficiaries are allowed to establish a new IRA in which they take Required Distributions based on their life expectancy. By simply naming beneficiaries, you give your beneficiaries choice in determining the distribution of your IRA.

Estate and Gift Planning in a Recession

2009-05-04T14:56:00.000-04:00

Very few people saw their net worth increase over the last 18 months. Homes, stocks, bonds, cars, private businesses, etc, all took a hit from October 2007 to today. So, why is this the best time to consider estate and gift planning?

The simple answer is that valuations are down on almost everything. If it does not change your lifestyle or future income, it is normally better to give at or near the bottom as opposed to the top. As with most stocks, you can give an asset that is down approximately 35-50%. By no means does this make you feel good, however if you are looking at estate tax issues the gifting limit is still at $1 million while you are living and a total of $3.5 million over your life and death. This amount did not shrink 35-50%, because of market conditions. It, however, may shrink by more than this due to government regulation in the near future. (The estate planning world thinks we may get a set amount in the near future, but nothing is guaranteed or promised).

Publicly traded stocks are some of the easiest assets to give. These are normal gifts, because of ease of transfer and daily valuations. However, you should not limit your focus on just publicly traded stock. Unlike these stocks, private business do not value their stock daily and usually only do so for specific reasons. In reviewing several private valuations on multiple companies, we see valuation losses equivalent to publicly traded stocks. There are several reasons for this:
1.) Some companies base their valuation on multiples derived from the public world.
2.) Current economic conditions of the individual businesses
3.) Human emotions and error. By making one or two different assumptions, a valuation for a company can change significantly. Most valuation firms are not projecting higher growth rates like 2006-2007, but apparently these projections were not accurate, so what makes us think they are today.

In summary, these tough economic times allow us a rare opportunity in estate planning. Individuals facing estate tax issues or business succession issues can use a time like this to their advantage. If you have any questions, we will be more than happy to assist you in developing a plan along side your estate planning attorney.

Power of Compounding

2009-04-08T09:51:00.000-04:00

The Million Dollar Challenge

http://finance.yahoo.com/focus-retirement/article/104801/The-One-Year-%241-Million-Challenge?mod=retirement-401k

401K Loans

2009-03-12T11:14:00.000-04:00

http://finance.yahoo.com/focus-retirement/article/104600/Borrowing-From-401(k)-Should-Be-a-Last-Resort;_ylt=Auwyk3dEAFZP9iG2FqPmmXC7YWsA?mod=retirement-401k

What are your 401k fees?

2009-02-27T13:55:00.000-05:00

Linked is an article I read on 401(k) fees. Many individuals have no idea what they are paying for their 401(k).

http://finance.yahoo.com/focus-retirement/article/104586/Why

Income Planning: Sequence of Returns versus Average Returns

2009-02-01T12:07:00.000-05:00

Most of you have been told that you can expect to make anywhere between 8-12% by investing in the market. The problem, most people think this is yearly, however since 1950; the S&P 500 has finished between 8-12% 5 times. The chart below displays the number of times the S&P 500 finished with an annual return in specific ranges.

(O.K., There is no Chart.) I can not get it to translate from word to Blogger.

Here is the Data

Return - Occurence

-4% or lower - 14

-4-0% - 3

0-4% - 5

4-8 % - 4

8-12% - 5

12-16%- 8

16-20%- 7

20%+ - 11

The purpose of this chart is to provide a reference that annual returns falling exactly between 8-12% are uncommon. The 8-12% is an average expected return over a 10 year period. FYI, the actual return from 1950 to 2007 was 8.66%.

Why is this important?

If you have 10 or more years until retirement, your priority should be diversification and saving as much as you can. In a normal 10 year period, the peaks and valleys will balance themselves out.

As you approach retirement, you need to start shifting you focus away from the accumulation of assets, but more to the replacement of income. (Income planning) It is my opinion that the most critical years of retirement is the 5 before you retire and the 5 years after you retire. Having significant swings in the market during this 10 year time period can greatly affect your retirement income potential. For example, someone retiring in 2000 planning on taking distributions of 5% saw there income cut tremendously. However a different individual retiring in 1995 would have seen considerable portfolio growth prior to 2000 to with stand the hit. (Note: there is also a chance this individual possibly got caught up in the internet craze and focused on accumulation instead of income planning.)

One should not expect to change their lifestyle during retirement with market gains. Instead, as our grandmother’s told us, we should put away for that rainy day.

Interesting Article: Nine Retirement Killers

2009-01-21T09:09:00.000-05:00

I read the below article on Yahoo Finance. Over the next few weeks, I will address each point in more detail. If you have any questions, please feel free to contact me.

http://finance.yahoo.com/focus-retirement/article/104396/Nine-Retirement-Killers?mod=retirement-preparation

Roth 401(k): Saving More?

2009-01-15T14:21:00.000-05:00

In 2005, U.S. savings rates hit a negative for the first time since the great depression. The average individual used their previous savings or borrowed to cover their personal expenses. For reference purposes, the savings rate in the early 1980s was over 10% and has steadily decreased. According to the Bureau of Economic Analysis, the personal savings rate has stayed consistently less than 1% since 2005 with both positive and negative quarters.

By reviewing the data above, it appears that the majority of Americans spend what they have. We build a little savings then spend it or build a credit card balance then save to pay it off. This is a society of instant-gratification. I am just as at fault at teaching this principle as anyone else. To encourage my 8 year-old son to study hard on spelling tests, I said I would pay him for each correct word. (He has only missed one in two years and it was a challenge word.) The mistake I made and had to adapt was not having any guidelines on the use of the money. I would pay him monthly and he would want to go to the toy store. Normally, he would have one toy in mind and we would get it, however he would want to spend the remaining balance before we left.

How does the Roth 401(k) help me save more?

The Roth helps you save more, because you are prepaying your income tax on this contribution and on average we do not have the discipline to save long-term.

For example, if you are in the 15% tax bracket when you retire and you contribute $5,000 in a Traditional 401(k), you are contributing a $4,250 to your retirement and $750 to a future tax liability. It appears that you have an asset of $5,000, but you have to remember the liability. In addition, each $1 that contribution gains $0.85 is an asset and $0.15 is a future tax liability.

Now assume the same contribution is made into a Roth 401(k). You will contribute $5,000 and make a prepaid tax of $750. This asset will be $5,000 and each $1 gained on the contribution will be an asset.

I know you are now saying, what about the additional tax you are paying today?

I agree, we are paying it today, but we have a $5,000 asset versus $4,250 asset and no future tax liability on gains. If you are paid bi-weekly, your take home check will be reduced $28. By choosing the Roth, you are making yourself save more before you receive your take-home. Based on the example above and current society norms, the average person would spend it, but would you get anything for it?

In summary, prepayment of tax on your retirement savings increases actual savings and eliminates any taxes on future gains.

Taking Social Security Early

2008-12-15T10:03:00.000-05:00

In 2005, 85% of men and women took early Social Security benefits versus 66% of men and 71% of women in 1999. I have attached an article from Yahoo on this subject.

http://finance.yahoo.com/focus-retirement/article/104299/Taking-Social-Security-Too-Soon-Can-Cost-You?mod=retirement-post-spending

Roth 401(k): Better for Heirs

2008-11-20T09:58:00.000-05:00

As we discussed previously, there are many retirement benefits of the Roth 401(k), (See Roth 401K: Change in Mindset) however the benefits of the Roth 401(k) do not stop with retirement planning. The Roth 401(k) will provide you and your heirs with different Estate Planning alternatives.

In talking with clients about Estate Planning, I have stated many times that Traditional IRAs and 401(k)s are tax efficient, until you build considerable wealth outside of these investment vehicles. If you have built wealth outside of a deferred plan, there is a strong chance you will not take distributions when you become eligible at 59 ½, but wait closer to your mandatory withdrawal age of 70 ½. Many advisors, including myself in the past, have normally recommended spending down tax deferred assets last due to the taxation on your distribution.

However, this does not happen with out a consequence. At the time these assets pass to your heirs (except spouse), your deferred account could be taxed at a total rate up to 70%. Without properly structuring your assets, you will owe both estate and income tax on these investments. There are several solutions that may reduce this tax:
1.) If you intend to give to charitable organizations, consider using your deferred assets.
2.) Your heirs can place the assets in a “Stretch” IRA, but they must be named as beneficiary of IRA. (Always have Primary and Contingent Beneficiaries on your IRA or 401(k). Do not let these be paid to the estate.) With the Stretch IRA, estate tax will be owed, but your heirs can postpone the income tax and take required distributions based on their age.
3.) Spend down your deferred accounts. You will need to meet with your financial planner and accountant to make sure this works for you and your goals.
4.) Start making Roth Contributions to your 401(k).

How do the Roth 401(k) contributions help my estate plan?

If you are in the situation I have described above, you should consider making your contribution to your 401(k) after-tax (Roth). By prepaying the income tax, you are simultaneously reducing your estate today and the future income tax liability. In addition, you are providing an income tax free resource to your heirs that they can take as a lump sum or “Stretch.” Stretching for a Roth is the same as above and allows continued deferred growth as a Traditional IRA, however since this is a Roth, distributions will be tax free.

Please contact us if you have additional questions or need help with retirement or estate planning.

(Note: There is a Required Minimum Distribution on the Roth 401(k), however we expect most individuals to roll to a Roth IRA, avoiding this regulation.)

The Roth 401(k): A Change in Mindset

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In recent years, Congress has passed many new regulations and laws offering new features to 401(k) plans. One of the most overlooked and under used is the Roth 401(k) concept. The Roth 401(k) allows you to make after-tax contributions inside of your already established 401(k) plan. No new plan, no new account; all you need to do is change your contributions from before-tax to after-tax. Just like your Roth IRA, neither the contribution nor gains will be taxed when you take distributions. It is my opinion that the Roth 401(k) is the most significant change in 401(k) plans, since their inception.

Why have I always been told to save tax-deferred (before-tax) during my working years?

To understand our mindset and the almost 30 year history of 401(k), we must understand the times when the 401(k) was established. When Johnson and Johnson started the process of adopting a 401(k) plan in 1979, 84 % of plan participants in the public sector were covered by a defined benefit plan (pension). In 2005, only 17% of plan participants had access to a defined benefit plan. In a 2007 survey from the Employee Benefit Research Institute, 40% of remaining defined benefit sponsors expect to close their plans to new employees in the next two years and another 27% of sponsors plan to freeze benefits to all participants. In addition, the Social Security system appeared to be considerably more stable in 1979 than it does today. We needed incentives to get people to contribute to 401(k)s. These incentives were
1.) Higher Contribution Limits than IRAs
2.) A Company Match
3.) Income Tax Deductible
With the responsibility of each individual’s retirement savings moving away from private businesses and government to personal savings, our incentives are changing from the aforementioned to the most cost efficient replacement of income during retirement. The Roth 401(k) feature was created to give individuals an additional choice in their retirement. Essentially, do I pay my taxes now or do I wait to retirement?

What will my tax rate be at retirement?

There are two things I can predict; you will pay taxes and the tax code as it is today will be tweaked or completely modified. Since 1913, the top tax bracket has changed 50 times. That is 50 times in 95 years or once less than every two. This does not include the highly debated alternative minimum tax. Currently, we are at a low tax rate compared to history and with huge payments lurking in the near future to stabilize both Social Security and Medicare I expect taxes to increase.

Does the Roth 401(k) benefit me?

There are some general rules of thumb:
1.) If you anticipate your tax rate being the same or higher in retirement, you will have more after-tax money in a Roth.
2.) In general, if you have 20 years until you expect to take distributions, the Roth will be higher.
3.) If you are accumulating wealth outside of a Traditional 401(k), or IRA, the Roth contribution will provide the benefit of tax-free gains.
4.) Never reduce your contribution to be able to do the Roth, there are some circumstances this might be a benefit, but it sets a bad habit. Do a partial amount in the Roth, and increase your Roth contributions as you get raises.

Many Roth 401k Calculators can be accessed on the internet, but a very good calculator is SmartMoney’s http://www.smartmoney.com/retirement/401k/index.cfm?story=roth-ira-calculator#worksheet

Use Scenario 1 as your current retirement plan and Scenario 2 as the Roth alternative. At the bottom, they will compare the additional tax you paid versus the after-tax balance of your two scenarios. Only check Re-Invest Difference, if you have the discipline to do this, for 95% of the population, this in a NO answer.

Finally, change the scenarios. You will see at a higher return the Roth benefit is greater. If you wait a few years to start your contributions, you will see the benefit in the Roth decrease. Finally, the calculator is set to 59 ½ as distribution age. If you plan on not taking distributions until later change your age, example, you are 42 and you do not plan on taking distributions until 65, take five years off your age. The results will project for you at 64 ½ instead of 59 ½. This is the one flaw I find in the calculator, however it is easily remedied.

Additional topics we will discuss on the Roth are estate planning benefits, as well as 401(k) creditor protection with Roth taxation.

Introduction

2008-09-11T11:14:00.000-04:00

KTC Retirement Solutions is a new undertaking for Kentucky Trust Company. The retirement business is the same, but the branding, oh what an adventure. You should sit in a room with five smart, analytical individuals and discuss branding. One things for sure, we are at least smart enough to know we need help.

You may see the name of this blog change as we get further with our project, but for now we will be known as "KTC Retirement Solutions." How did we come up with this you might ask? It took a lot of debate (seriously), so let's breakdown each word.
KTC = Kentucky Trust Company
Retirement = Employer Sponsored Plans, IRAs, and Income Planning for Individuals
Solutions = The CEO wanted it. In all seriousness, solutions is what we try to provide each of our customers every day. We look at ourselves as problem solvers, whether it is setting up the appropriate retirement plan for your business, making a Roth versus a traditional contribution, or determining the amount of income you will need at retirement.

Shortly, we will begin posting information that we think is useful for our clients as well as our future clients. In addition, let us know of any specific retirement topics that you want covered.