Are You On Track? Your A-Z Financial Freedom Resource

Are You On Track?

Your A-Z Financial Freedom Resourc


Mitchell E. Kauffman, MBA

Managing] Director

Copyright © 2016 by Mitchell E. Kauffman, MBA,
Managing Director

Shakespir Edition

All rights reserved. No portion of this book may be used or reproduced in any manner whatsoever without written permission from the author. The information in this publication does not constitute a recommendation for the purchase or sale of any securities. Readers are advised to consult their financial advisor, tax advisor and/or estate planning attorney for assistance.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mitchell Kauffman and not necessarily those of Wells Fargo Advisors Financial Network.

Any information herein is not a complete summary or statement of all available data necessary for making an investment, tax or legal decision and does not constitute a recommendation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of Wells Fargo Advisors Financial Network, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matter

Dedicated to my loving wife Joanne, without whose support this would not have been possible, and to the clients over these many years who have been helped to gain financial confidence.

Wealth Enhancers to Help Clients Achieve a “Life Well Lived”

At Kauffman Wealth Management we are dedicated to helping our clients enjoy the highest quality of life. We accomplish this by providing valuable “Life Enhancer” resources to help optimize five key areas

FINANCIAL: While it has been said that money isn’t everything, Thoreau’s famous quote “… wealth is the ability to fully experience life” speaks to how resources can certainly enable us. At KWM our top priority is to help clients achieve financial confidence so they can focus on the things in life that they enjoy. Our booklet “Are You On Track: Your A-Z Financial Freedom Resource” articulates our playbook for helping clients define, achieve and preserve their financial goals.

HEALTH: “… Health is the real wealth and not pieces of gold and silver,” as Gandhi so aptly put it. Both from a physical as well as emotional perspective, enjoying good health is critical to achieving happiness.

Knowing this, at KWM we offer numerous resources including articles and seminars by noted physicians and psychologists that help clients enhance life quality.

SAFEGUARDS: Accumulating what you have is half the job; keeping it is the other half and requires vigilance. We partner in that effort by helping clients safeguard their wellbeing with initiatives ranging from tools to help manage risk, to updates with the latest on avoiding identity theft and protecting against internet incursions. Our goal is to help clients be in the world with less worry and concern.

LEGACY-PHILANTHROPY: “The goal isn’t to live forever; rather it’s to create something that will.” Knowing that nearly 70 percent of family wealth transference and business succession plans fail, and that the vast majority of failures were attributable to poor family trust, communication and heir preparation, we know the difference good heir preparation can make. Our booklet “Are Your Heirs Prepared: Your A-Z Moneywise Family Resource” offers a step-by-step process for helping clients articulate their values, identify how much they can afford to gift without adversely impacting their own lifestyle, and how they can help their heirs prepare to be effective stewards of their estate. The priority is to facilitate family cohesion and to help clients explore what place (if any) philanthropy may play in their plans.

SOCIAL: Feeling connected not only helps us live happier lives; studies show that positive social relationships can actually increase average life span by 7.5 years! Knowing this, at KWM we sponsor a variety of financial and non-financial events that help our clients build relationships within their families as well as among each other. Our priority is to help clients enjoy life to its fullest.


INTRODUCTION How Can You Prepare for The Top Retirement Challenges?

CHAPTER 1 How Can You Achieve Financial Confidence in Retirement? Ten Planning Mistakes to Avoid

CHAPTER 2 Are Your Financial Goals Achievable? The Importance of Having “Your Number”

CHAPTER 3 Will Your Withdrawal Plan Sustain You Through Retirement?

CHAPTER 4 What Are Your Retirement Expenses? How Long Can Your Savings Cover Them?

CHAPTER 5 Will Your Tax Plan Help Sustain Your Retirement Nest Egg?

CHAPTER 6 Are You Effectively Managing Your Social Security Retirement Benefits?

CHAPTER 7 How Can You Avoid the Top 10 Estate Planning Pitfalls?

CHAPTER 8 Can Annuities Benefit Your Situation?

CHAPTER 9 Effective Tax Planning for Annuity Withdrawals

CHAPTER 10 How Can Stealth Inflation Threaten Your Retirement?

CHAPTER 11 Bond Investing: Is Following Conventional Wisdom Always Best?

CHAPTER 12 Are ETFs Right for You?

CHAPTER 13 Can Reverse Mortgages Provide Additional Retirement Income?

CHAPTER 14 Can Innovative Strategies Help Address Your Long-Term Care Challenge?

CHAPTER 15 How Can You Avoid Wealth Transference Failure?



How Can You Prepare for The Top Retirement Challenges?

It has been said that the aging of baby boomers–those born between 1946 and 1964–is analogous to a bowling ball moving through a python. At each life stage, the vast numbers of boomers have made significant impacts on our society.

With over 75 million boomers already beginning to reach age 65 and many more to come, expectations of societal change are considerable. The fact that boomers as a part of the U.S. labor force shrank from 82 percent in 2003 to just 66 percent in 2013 gives us a sense of the magnitude involved.1 Many baby boomers will be challenged with creating a sustainable, consistent retirement cash flow to allow them to focus on things they really care about and enjoy a “Life Well Lived”. The task is compounded during a low interest rate environment. Whereas in earlier times, interest-bearing investments such as CDs and bonds could provide generous, steady cash flow, today’s income investor may need a different, perhaps more hands-on approach.

The challenges will vary to the extent that some impact society as a whole (“macro” oriented), which require both effective preparation and prompt response. Others occur within our personal life experience (“individual” oriented) and therefore require more introspection. Similarly, some are more financial while others are lifestyle based. Our clients find gratification and confidence with this holistic approach which sees effective retirement as a balance between the financial and emotional aspects of retirement planning.


Our process, refined over more than 30 years of delivering exemplary award-winning service, has identified nine key challenges that, when properly addressed with the solutions articulated herein, help our clients achieve retirement confidence. A brief mention of each challenge is followed by the resources we make available within this publication and/or within our practice to support a successful resolution.

1. Longevity Risk: How can I be confident of not outliving my savings? Life spans are growing with improved lifestyles and medical technology. And with increased longevity comes the added challenge of assuring adequate financial support for those additional years. The statistics are impressive:

• A male age 65 has a 50 percent chance of living to age 85 and a 25 a percent chance of living beyond age 92.

• A female age 65 has a 50 percent chance of living to age 88 and a 25 percent chance of living beyond age 94.

• A couple age 65 has a 72 percent chance of one living to age 85 and 25 percent chance of one living beyond age 97.

Key to successfully address Inflation Risk:

• Understanding the underlying inflation rate (see Chapter 9: How Can Stealth Inflation Threaten Your Retirement?).

4. Investment Risk: How can I not be derailed by market losses? Market risk is often measured by volatility. It is important to balance the need for growth with minimizing the potential for investment loss.

Keys to successfully address Investment Risk are:

• Understanding how annuities can provide steady cash flow (see Chapter 8: Can Annuities Benefit Your Situation?).

• Understanding how bonds may have more risk than thought (see Chapter 10: Bond Investing: Is Following Conventional Wisdom Always Best?).

• Understanding how Exchange Traded Funds work (see Chapter 11: Are ETFs Right for You?).

5. Emotional Risk: How can I find fulfillment in retirement?

Major life transitions such as retirement can invoke unforeseen emotional responses that can inhibit quality of life. Clients have found that anticipating and proactively addressing these can make a significant

Guilt: After a lifetime of building savings, many can feel guilty over spending as they reach retirement.

Reduced Self-Esteem: Ending a career can mean a loss of identity and self worth.

Isolation: When work ends, there can be a loss of social connections as well.

Depression: Upon ending a career, there can be a loss of purpose and life involvement.

Fear and Anxiety: These feelings arise from the unexpected, the unknown and the “what if’s”

Regret: Uncompleted wishes, desires and fantasies about who you are and what you want to experience in life. These can involve experiences you may want to have that add passion, purpose and joy to your future. However, there can be burdens from “ghosts of the past” that may dilute potential enjoyment.

Key to successfully address Emotional Risk include an enhanced self-awareness of your priorities, likes and dislikes.

• Understanding your core priorities and dreams through exercises such as the Values-Based introspection process we offer our clients.5

6. Medical Risk: How can I prepare so that medical and long-term care expenses do not prematurely deplete my savings?

Key to successfully address Medical Risk include:

• Understanding how long-term care needs can be insured (see Chapter 13: Can Innovative Strategies Help Address Your Long-Term Care Challenge?).

7. Withdrawal and Tax Risk: How can I prioritize my withdrawals to protect against tax erosion and premature depletion?

Keys to successfully address Withdrawal and Tax Risk include:

• Understanding how tax planning can preserve your savings (see Chapter 5: Will Your Tax Plan Help Sustain Your Retirement Nest Egg?).

• Understanding how to prioritize your retirement withdrawals (see Chapter 3: Will Your Withdrawal Plan Sustain You Through Retirement?).

8. Legacy Risk: How much can I spend? How much should I leave to heirs and philanthropies?

It is all about trade-offs and prioritizing your retirement resources.

8. Keys to successfully address Legacy Risk include:

It is all about trade-offs and prioritizing your retirement resources.

• Understanding how to quantify and balance your competing financial goals (see Chapter 2: Are Your Financial Goals Achievable? The Importance of Having Your “Number”. ).

• Understanding how to prepare your heirs for inheritance (See Chapter 14: How Can You Avoid Wealth Transference Failure?).

9. Oversight Risk: How can I remain on track and proactive?

To help our clients stay engaged and feel in control of their finances, we recommend an initial analysis plus a quarterly review process which is depicted below.

This discussion has introduced how the following chapters can help you achieve financial confidence. I trust you will find this a valuable resource capable of making a significant difference in your retirement planning efforts. Please do not hesitate to contact me if you have any thoughts or questions.


How Can You Achieve Financial Confidence in Retirement? Ten Planning Mistakes to Avoid

As more baby boomers approach their golden years, they are faced with a plethora of challenges. Especially for those with greater resources, the issues can be formidable. To the extent that these are effectively addressed, the promise of those golden years can be more readily achieved with less stress– both during and after the transition.

The Top 10 Most Common Mistakes to Avoid

1. Procrastinating

Often people do not begin their retirement planning until retirement is upon them. Depending on your situation, most experts urge that this process begin no later than 5 years prior; ideally, at least 10 years or more before is advisable.

2. Not Considering How Much Retirement Income Will Be Needed

Estimates vary as to how much a person’s or couple’s expenditures will change once they retire. Generally, 75 percent of current income is a rule of thumb. Obviously this has to be adjusted for factors such as projected mortgage (if any), downsizing of residence, travel, and other expenses.

3. Not Estimating How Long Retirement Income Will Need to Last

You hear it all the time: People are living longer, and hopefully you will be among the growing number of centenarians. Other issues may arise as well, such as the likelihood of needing to provide financial assistance to your parents, children or even siblings. Careful, objective planning and ongoing management will be needed to make sure there will be enough income.

9. Forgetting About Income Taxes Just because we retire does not mean income taxes go away, starting with how best to handle lump sum distributions from a retirement plan. During retirement, income tax planning can be even more critical to preserve the nest egg. Especially with the onset of required retirement plan distributions, it is important to continually evaluate whether to take the minimum or to accelerate withdrawals.

10. Believing in Retirement Nirvana Just like “the grass is always greener…”, retirement can be seen as the cure for many of life’s woes. For those unprepared, the added time available can create a whole new set of challenges. Statistics show that the average new retiree spends about 45 hours a week watching television.7 For a fulfilling retirement, it is important to prepare for the psychological as well as the financial aspects. Just as a surgeon is advised not to operate on himself or herself or loved ones, it is often invaluable to have independent, objective, expert advice in developing and managing a program for your retirement years.


Are Your Financial Goals Achievable? The Importance of Having Your “Number”

Regardless of your level of affluence, studies show that you need to know what you want out of life before you can get it. So states the wisdom of Lee Eisenberg in his bestseller, The Number: A Completely Different Way to View the Rest of Your Life.8 Eisenberg’s number refers to that amount of savings that a person or couple must accumulate to enjoy their post-career lifestyle. His “completely different view” is based on the premise that the clearer your goals, the more likely they are achievable. Establishing a precise goal, analogous to business planning, is the best assurance of its attainment.

In practice, “Your Number” is typically not a single number but rather a series of numbers. Knowing the important role this kind of objective clarity can provide to our clients, we have spent considerable effort to develop this capability. Our version is a process capable of helping clients objectively understand their trade-off’s so they can make more informed decisions.

For those still saving, as well as for those near or in retirement, clients often grapple with covering their own financial needs versus how much for their heirs and/or charity. Many have found that by having “Your Number”, they are better able to address these issues once they know the estimated cost of supporting their lifestyle. With what remains, they can more confidently decide how much can go to philanthropy and heirs, and whether that happens during their lifetime or after they pass.

Lifestyle Goals Feasibility: Determining the feasibility of your lifestyle goals is an important starting point. Certainly if overly ambitious, the low probability of attaining those goals may render other goals inconsequential. Our process involves providing an average, annual aftertax return (ROR) needed for the lifestyle goal’s attainment. That ROR can then be compared to historic returns of different asset classes to determine the associated risk involved.

For example, if to achieve their lifestyle goals the study calculates that a 10 percent average ROR is needed, that figure compared to historical returns, may suggest a more aggressive portfolio heavily weighted in growth stocks. A specific, meaningful discussion can then ensue wherein the clients can consider how comfortable they may be with that level of risk. If not, to bridge the “gap” they can consider options that may include reducing current spending, increasing savings, postponing retirement age, or some combination. Whatever they decide, they are able to feel more in control to do so based on objective feedback that can make these oft times nebulous conversations, much more tangible.

“How am I doing?” is likely the most common question clients have asked over my 30 years as an independent advisor. The “Your Number” process helps address this question by projecting the value a portfolio needs to attain each year to assure we are on track. For example, a couple may have a $133,000/yr. retirement income goal when the husband reaches his desired retirement in five years’ time. To generate that, they may need nearly $2 million. Their “Your Number” study may suggest they will need $1,827,515 in three years to show they are on track to their retirement income goal. We are able to compare their then prevailing balance to that figure, to readily gauge our progress and, hopefully, ease their concern.

“Am I Running Out of Money?” Concern over spending too much and not having enough later in retirement is another common concern. Again, the “Your Number” process gives us annual benchmarks from which clients can easily determine where they stand and if they may be spending too much, or perhaps not spending all that they could. Similarly, at ten years into retirement, the same client’s plan will show a $1,869,340 balance is needed to help assure they will not run deplete funds prematurely. Comparing that to their then current balance can quickly help them determine where they stand. This capability gives clients a greater sense of confidence and control over their futures.

Benefiting from Greater Clarity as We Age: The clarity provided by this approach may prove consistent with the normal aging process. “As people mature, their cognitive patterns become less abstract and more concrete…” according to psychologist David Wolfe. 9 Research attributes this to a normal shift from left to right brain orientation during the aging process. The result is a sharpened sense of reality, increased capacity for emotion and an enhanced sense of connectedness.

The left hemisphere helps us with rational functions such as logic and organized, quantitative processes. The right hemisphere is the intuitive side that gives us creativity and analogic reasoning. Theory suggests that many of us may be slightly dominant in one side or the other, which may lend insight into how we best learn. “In other words… “ as Daniel Pink notes in his recent book, A Whole New Mind, “… as individuals age they place greater emphasis in their own lives on qualities they might have neglected in the rush to build careers and raise families; purpose, intrinsic satisfaction and meaning.” 10 It makes intuitive sense that as we age and face our own mortality, we would become more sensitized to higher level emotional issues. That there might be a neurological or bio-chemical reason for this seems intriguing. Evidence of this trend may be found in the fact that over 10 million U.S. adults now engage in some form of regular meditation, double the number in 2005. Further, about 15 million people currently practice yoga, twice that in 1999.

While greater specificity is needed around the quest for money, Eisenberg cautions that we need to know ourselves and spend some time determining what makes us happy before we can make informed plans for leaving the world of active income. What do you want your retirement to be? Who do you want to be in retirement? Eisenberg’s research shows that even the affluent tend to procrastinate on addressing these issues.

Thus it would seem that, when tackling the three main questions we each must address— What will my retirement look like? When can my retirement plan happen? How much will it cost?—the traditional financial services approach makes a fundamental error in attempting to address the last question first. Eisenberg muses that we need to know what we need the money for before we can estimate how much. Hence the rise of various types of “life coaches” to help us wrestle with these more elusive issues.

The bottom line of the “Your Number” process is that, regardless of your state in life, better planning can often help both from an aesthetic and practical standpoint. As Eisenberg notes, “An unexamined life may or may not be worth living, but it is certainly more expensive.”


Will Your Withdrawal Plan Sustain You Through Retirement?

“Looking before you leap…” isn’t nearly as important as knowing how and where you will land. This rendition of Samuel Butler’s famous quote has no more fitting application than when considering retirement planning. More than ever, people are retiring with wealth. But they often do so without having an effective plan that determines from which account they should withdraw first to best preserve their assets. Creating a personal distribution program is the best assurance of generating a tax-efficient cash flow. Not only can this extend portfolio longevity and minimize chances of running out of money prematurely, but studies show minimizing unnecessary tax erosion can effectively equate to adding up to 0.70 percent additional annual return without assuming more investment risk.11 When creating a withdrawal plan with clients, we advise that five critical steps be followed:

1. Estimate Normalized Retirement Expenses Things often change as soon as the best laid plans are made; so is the case with estimating annual expenses. Knowing change is so much a part of our lives, we advise investors to first develop a “normalized” expense profile that considers those outlays expected year in and year out. (See Chapter 4: What Are Your Retirement Expenses and How Long Can Your Savings Cover Them?)

2. Estimate Extraordinary Expenses Trips, home repairs, medical expenses, supporting kids and parents—unforeseen items can crop up to thwart even the best plans. Figures that estimate timing and amount should be added to the expense baseline to help better prepare for the eventual reality.

3. Estimate Fixed Income

Obligatory inflows represent a cornerstone of our cash flow model. Common sources may include:

• Social Security retirement benefits

• Traditional pension payouts (note if cost of living adjustments are provided)

• Required Minimum Distributions (RMDs) for investors over age 70½

• Payout annuities where accounts have been “annuitized” and may continue for a specified period or for one or more lives

• Employment such as consulting and part-time work

4. Prioritize Discretionary Sources Creating a system that prioritizes from which accounts cash can be drawn first will help optimize tax costs and is our best assurance of portfolio sustainability, eg: not running out prematurely.

5. Identify the “Gap” The difference between obligatory in-and-out flows yields a “gap,” that is, the shortfall between expenses and income to be met from portfolio withdrawals.

In prioritizing withdrawals and from which accounts they might occur, investors find it helpful to first picture their portfolio as consisting of four distinct “buckets” capable of generating cash flow with varying tax implications as noted:

Taxable: Accounts that incur taxes whenever earnings or transactions are realized. Examples include dividends, interest and capital gain, all of which are usually taxable whether reinvested or taken as distributions.

Tax Free: These accounts provide cash flow without incurring any income taxes (may be subject to state, local and alternative tax depending on issue). Examples include municipal bond interest (may be federal or federal and state exempt), life insurance cash value loans, and qualified withdrawals from Roth IRAs.

Tax Deferred: Typically consists of annuities that have discretionary withdrawal capabilites (as opposed to those that have been annuitized and would be included under “fixed income” above). Discretionary annuity withdrawals are typically taxed as earnings first until drawn down to principal, which can then be accessed without tax implications.12

It is also important to note that since investment changes can often be made within deferred accounts without tax implications, deferred accounts can offer a tax-free environment within which investment rebalancing can more easily occur.

Tax Qualified: Pre-tax investments such as IRAs, 401(k)s, profit sharing and pensions reside here because all distributions are typically fully taxable (except for rare accounts that may hold “after-tax” contributions). As such, withdrawals from these accounts are usually the least tax efficient of the four buckets. Similar to tax deferred accounts, investment rebalancing can occur with no tax cost.

Effective “withdrawal sequencing” helps us optimally prioritize distributions from both a tax as well as an investment standpoint, which again gives us our best chance of avoiding premature portfolio depletion.

Depending on whether a higher or lower tax bracket is expected in upcoming years, tactics and priorities will vary. Specifically:

Higher Tax Bracket: In years where a higher marginal tax bracket is expected, spending corpus from the taxable bucket first can be an inexpensive tax strategy for enhancing cash flow. Although spending principal may push against conventional wisdom, doing so can actually enhance portfolio sustainability. Several factors account for this:

1. Taxable dividends and interest are often reinvested but are taxable nonetheless, so diverting these can provide added cash flow without incurring additional taxes.

2. Appreciation from investment sales can be taxed as long-term capital gains, which are typically taxed at rates less than ordinary income, another inexpensive way to generate cash flow.

3. Postponing withdrawals so deferred and qualified accounts can remain in those tax- friendly environments longer can effectively help replenish assets spent elsewhere. Particularly since growth within these accounts is not eroded by taxes and significant withdrawals, these offer an accelerated growth potential.

When done properly, a greater cash flow can be generated for the tax dollar expended.

Lower Tax Bracket: When we anticipate being in a lower marginal bracket, it is advisable to accelerate withdrawals from tax deferred and qualified buckets. Although this too may seem counterintuitive, it is often more advantageous to optimize taxes in the lower brackets than strive to pay the lowest dollar of taxes possible. Key reasons for this include:

1. Higher brackets in future years may be due to changes in personal circumstances and/or bracket increases from the government’s deficit reduction efforts. Therefore accelerating these taxable distributions beyond RMDs allows the current tax rate on these funds to be “locked in” now.

2. Preserving tax advantaged sources (assets taxable at lower rates) for future access is helpful when tax brackets may be greater so that lower taxable assets can accumulate and be withdrawn at a later, more opportune date.

3. Accelerating qualified distributions can reduce future required withdrawals when tax brackets could be greater and potentially reduce future income taxes for heirs.

Of course, over time, increased taxes and reduced tax-advantaged growth can cause lower terminal wealth and jeopardize portfolio longevity. However this strategy provides persuasive advantages particularly when tax brackets fluctuate between higher and lower in alternating years.

Effectively managing RMDs can be a valuable component of a personal distribution plan. As legal requirements for those over age 70½, RMDs can represent a cornerstone of mid and late-retirement cash flow. Since they are ordinary income (except where post-tax distributions are involved), RMDs come at the highest tax cost compared to other distributions such as qualified dividends and capital gains. There are two important strategic approaches to consider:

1. Qualified Charitable Donations (QCDs): This program, renewed annually and made retroactive to each January 1st, allows RMDs to be satisfied with amounts that are paid directly to charities with no tax implication (up to specified limits13). Particularly for those investors who are philanthropically inclined, RMD requirements can be satisfied without incurring the usual ordinary income tax on distributions. What cash flow is lost from this effort can be augmented by taking tax qualified dividends and capital gains. Overall the strategy can enhance tax efficiency and portfolio sustainability.

2. Roth IRA Rollover: This allows taxable IRA distributions to be deposited into a Roth IRA for later tax-free withdrawal. It is particularly beneficial when a low tax bracket year is followed by a higher bracket year; this strategy can expand the tax advantaged resources until times when they could be most needed (see Roth withdrawal limitations14).

Especially since tax planning must go hand in hand with effective investment management, there are several practices that should be considered:

1. Generating Excess Cash Balances beyond what may be immediately needed, as long as it is prudent from a tax standpoint, can help create a buffer for potentially greater living expenses in future years.

2. Taxable Assets are generally the most advantageous to spend down before deferred, qualified and tax free assets. These actions need to be carefully orchestrated with investment allocation and estate planning considerations as well.

3. Overweighted and Concentrated Asset Holdings can be sold as priority especially from taxable accounts to better align the portfolio with long-term targeted allocations.

4. Loss Harvesting can offer guidance for priority liquidations. Investors may be hesitant to sell assets at a loss as they hope for an eventual recovery. It is important they consider that such sales need not mean that the position will be abandoned entirely because it may be added back to the qualified account (so long as wash-sale rules are observed) to regain the exposure and desired portfolio balance.

5. Postponing Deferred and Qualified distributions allows tax-deferred growth to continue longer, which can potentially enhance accumulation and portfolio longevity. The result can be greater terminal wealth and portfolio success rates.

6. Determining Specific Assets to Liquidate by selling those that might generate the lowest taxable gain or realize a loss, then rebalance the portfolio within deferred and qualified accounts to ensure proper portfolio alignment with target allocation.

7. Asset Cultivation when no overweight exists can be done by selling proportionally from all asset classes until the selected account is depleted or spending needs are covered. Once depleted, a similar approach can be used with other accounts.

8. Large Tax Deductions, such as medical bills, when they occur, can provide an opportunity to offset additional tax qualified withdrawals.

9. Recommended Withdrawal Rates range from 3-6 percent. However, in low interest rate environments, a growing number of studies suggest that a 4 percent rate may be the only one that can “… avoid depleting the portfolio (prematurely).”15

These techniques potentially allow investors to spend and rebalance their portfolios with minimal tax costs. When done properly, studies show that portfolios can save tax erosion to such magnitudes that the benefit can in effect add up to 70 bps (70 percent) of additional annual return.16 The greatest benefit, it bears repeating, is realized when taxable and tax advantaged balances are about the same size and the investor is in a high marginal tax bracket and/or fluctuates between high and low brackets.

These hypothetical data do not represent returns on any particular investment. Each internal rate of return (IRR) is calculated by running the same 10,000 VCMM simulations through three separate models, each designed to replicate the stated withdrawal order strategy listed. Greatest benefits occur when the taxable and tax-advantaged accounts are roughly equal in size and the investor is in high marginal tax bracket. If an investor has all of his or her assets in one account type (that is, all taxable or all tax-advantaged), or an investor is not currently spending from the portfolio, the value of withdrawal order is 70 bps. The greatest benefits occur when the taxable and tax- advantaged accounts are roughly equal in size and the investor is in a high marginal tax bracket. Source: “Quantifying Vanguard Advisor’s Alpha” by Vanguard research.

You should compare your current and prospective account features, including fees and charges, before making a rollover decision. Distributions that are not properly rolled over to another retirement plan or account may be subject to withholding, income taxes, and if made prior to age 59½, may be subject to a 10 percent penalty tax. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.


What Are Your Retirement Expenses and How Long Can Your Savings Cover Them?

“Age is an issue of mind over matter. If you don’t mind, it doesn’t matter.”—Mark Twain Bringing Mark Twain’s positive perspective to our retirement years can make all the difference in helping make these years truly “golden.” That said, challenges abound as we encounter significant increases in free time to fill, more reliance on social interaction, greater time with our partner (or unfortunately without for those who may outlive the other) and predictable physical and mental decline.

While Twain will be the first to admit that money doesn’t buy happiness, it can sure make the ride more enjoyable. In addition to that positive attitude, understanding what may lie ahead financially can help us better prepare for success. The good news is we are not alone, as about 72 million baby boomers have begun reaching retirement age.

New research by David Blanchett, head of retirement research at Morningstar, suggests retirement spending habits can at different stages mimic those of a smile pattern. A “retirement spending smile” effect is noted by Blanchett, whereby changes in real consumption tend to be greater in both early and late retirement. Numerous planning challenges can arise at each. Depending on how well these are handled, retirement success can be facilitated or impeded because in the long run, creating a successful retirement is as much about realistic financial planning as it is about bringing a positive attitude. A few ideas: 27 Our simple yet empowering planning approach to retirement cash flow management can help clients gain this financial confidence. As a starting point, we encourage clients to first take inventory of their expected retirement inflows. These usually include Social Security, pension (for those fortunate few), part-time employment and/or rental income.

1. Early Years

Peak activity level as retirees now have time and health to fulfill a lifetime of dreams pondered as we strive to enjoy life to its fullest. The ancillary burst of expenditures may be best handled by setting aside larger portions in cash to help meet these higher expenses. Doing so can help reduce the uncertainty (called “sequence risk”) of potentially having to sell investments during a market downturn.

2. Mid Years

By the mid-70s, some novelty has worn off as a retirement routine sets in. The expected slowdown occurs as our bodies and minds seem less able to handle vigorous activities. During Blanchett’s “bottom peak of the smile,” expenditures often normalize. A steady income stream becomes increasingly important as life and expenses become more predictable.

3. Later Years

Our energy levels wane as we become more dependent on others. The resulting increase in medical costs can create the final peak of the smile, especially if long-term health care begins. Here we might consider risk transference strategies such as purchasing a long-term care policy to help reduce the sudden outflow of cash toward these expenses.

We then work to estimate annual expenses, knowing as Blanchett points out that these will likely fluctuate over time. To that, we often find it takes 18-24 months following retirement before we can get a consistent spending pattern and lifestyle. That said, the following Consumer Expenditure Survey17 for those over 65 years of age may provide a helpful reference.

Taking the difference between in and out flow (annual expenses), we can then identify the “gap”, which may reveal a shortfall that can be filled from our client’s investment portfolio. Here we use the analogy (see next page) of a “spigot,” a mechanism that allows us to “fill our retirement cup” as much as is needed each year with flexibility to close it off when our cup is filled.

Research shows that a happier retirement can be based upon the type of income being received. Specifically, those retirees for whom income is generated from anticipated, steady sources often report a more enjoyable retirement. Retirees can then spend less time preoccupied with cash flow and spend more time enjoying family and activities.

The worksheet on the following page may assist you with your expense planning efforts.

The bottom line is that having a more defined picture of both your spending habits as well as your physical and emotional habits can help you lead a more successful and enjoyable retirement. Spend your time with friends and family, don’t be afraid to take on new hobbies, and embrace all the new journeys of your newly found free time. After all, we work so hard to get here, so let’s make the best of it.

Consumer Expenditure Survey, U.S. Bureau of Labor Statistics, September 2012 30 31


Will Your Tax Plan Help Sustain Your Retirement Nest Egg?

“Goodbye tension, hello pension.” This well-known retirement quip speaks to the financial security we hope to achieve when work becomes optional. With the demise of employer-sponsored pension plans, however, creating a sustainable lifetime income stream can seem more challenging than ever.

Effective tax planning can do much to extend clients’ retirement assets and make running out of money less likely. Here are top strategies that many have found helpful.

1. Rollover Your 401(k) For most clients, their employer retirement plan (401(k), profit sharing, etc.) represents a significant portion of their nest egg¸ so making the right decisions is imperative. Upon leaving your employment, a distribution decision may be needed. Key considerations include:

Age: If under 59½ and planning to take withdrawals, we can avoid the 10 percent premature withdrawal penalty (see below) by leaving funds with your employer (if allowed to do so).

Advantages that prompt many clients to rollover their retirement plan to their own IRA include: Tax Free Transfer: Funds transferred directly to your IRA custodian can postpone taxes.

o Investment Flexibility: Self-directed IRAs offer a wide range of programs as opposed to the often restrictive employer approved funds in 401(k)s.

o Administrative Convenience: Withdrawals and investment changes can be done directly without working through an HR department plan administrator or plan custodian.

Costs: Employer plans often receive fee discounts, so be sure to weigh any cost increases.

2. IRA

When contemplating IRA withdrawals, keep these in mind:

• Those under age 59½ could face a 10 percent tax penalty in addition to having all withdrawals recognized as ordinary income. Consider:

o Substantially Equal Payments: For those who can take early up to age 59½, IRC Sec 72t offers an exception to the 10% penalty for withdrawals taken in substantially equal payments until age 59½.

o Net Unrealized Appreciation (NUA): For those with employer stock in their 401(k), the special NUA rule allows for ordinary income tax on the cost basis upon withdrawal.

• Gains receive long-term capital gains when subsequently sold.

• Employer stock can be rolled over to your IRA while preserving the NUA tax advantage so long as the transfer is done “in-kind.

3. Required Minimum Distributions

Generally all retirement plans must start distributions by April 1st of the year following the one in which the owner reaches age 70½.

• Amount is based on the prior year end plan balance and owner’s life expectancy.

4. Roth Conversion

Because Roth IRAs allow tax free qualified withdrawals, clients may consider converting all or a portion of their traditional IRAs. Key factors:

• Pre-tax portion of IRA (that which has not yet been taxed) is taxed at time of conversion.

o That tax is an upfront cost that takes several years to “make up” before the account is even which makes it important to weigh that cost against potential Roth benefits.

• Premature 10 percent penalty does not apply even if below age 59½.

o As long as no subsequent withdrawals are made until after age 59½.

Withdrawals qualify as tax-free if done after age 59½ and five years after the first Roth was established, as well as for death, disability and for first time home buyers.

5. Social Security Retirement Benefits

Can be tax free or partially tax free depending on total income. Being aware of the rules can help:

• Gross Income (P-AGI).

o Preliminary Adjusted Gross Income includes earnings, pensions, interest, dividends, municipal bond interest, and 50 percent of social security benefits.

o For P-AGI over $25,000 ($32,000 for married) 50 percent of benefits become taxable.

• There is no age forgiveness. Therefore, for clients whose income may be near these thresholds: it is important to coordinate discretionary income such as IRA withdrawals.

Distributions earned from investments not held in retirement plans or IRAs are taxable when paid even if reinvested. Strategies to consider:

• Mutual funds typically pay out capital gains near year end regardless of the time shares have been held. Therefore, we advise clients to consider postponing fund purchases until after the fund’s “record date.” A record date is the date established by a mutual fund issuer for determining the holders who are entitled to receive a distribution or dividend.

• Municipal bond interest can be double tax free for those in your state of residence.

o Recall interest is added to your P-AGI calculation when figuring Social Security taxation.

Annuity income may be fully or partially taxable. Key factors include:

• Contributions that used after-tax dollars are not taxable when distributed.

• Annuity withdrawals must be taxed as earnings first, before tax free principal can be accessed.

• Annuitization payments are proportionally taxed based on an “exclusion ratio” until all principal has been distributed. Afterwards, 100 percent of payments may be fully taxable. Strategizing: With the above in mind, here are several strategies that can help clients control their retirement taxes:

6. “Bunching” Income and Deductions To help reduce taxes in alternate years, consider accelerating income when there are excess deductions.

• Similarly, accelerating your itemized deductions (medical expenses, state and local income and sales taxes, mortgage deduction, charitable contributions) when the discretion exists to do so, can help offset higher income years and protect against deduction “phase outs.”

7. Spend Principal to Delay Taxable Distributions In theory we are taught it is taboo to spend principal. In practice, that spent principal could be replaced with earnings from other accounts that are not tapped. The goal is to enhance our tax control without sacrificing future cash flow. This can be done with careful planning to help preserve long-term cash flow potential.

• Spending long-term capital gains can give us tax advantages and similarly allow the untapped account to potentially continue growing uninterrupted.

• Generate qualified dividend income which receives tax favored treatment.

8. Gift Appreciated Assets

Many of us are gratified by making charitable contributions. Doing so using appreciated assets can give the same gratification with greater tax benefit, because the donor receives a charitable deduction for the asset’s current market value without having to recognize the taxable gain.

Those proud of paying taxes in the lowest bracket may be missing an opportunity to enhance cash flow. In many situations there may be more advantage to taking additional income so to “fill up that low tax bracket cup” and build a cushion for future years.

With so many moving parts it is important to reassess annually with both your CPA and your financial advisor so they can help coordinate your retirement income and help you achieve a “Life Well Lived”.


Are You Effectively Managing Your Social Security Retirement Benefits?

With national unemployment surpassing 10 percent officially (unofficially estimated at 15-17 percent), more and more clients in their 60s are addressing Social Security issues sooner than they expected, and many of them have these questions:

1. Early Retirement Benefits: When should I begin taking my benefits?

2. Taxation of Benefits: How can I minimize the tax on my benefits?

3. Delayed Retirement Credits: Does it make sense to postpone my benefits?

4. Spousal Benefits: When should my spouse take benefits?

5. Benefit Contingency Plans: How can I replace some/all of my benefits if Social Security changes?

6. Strategies to Consider: What tactics might enhance my lifetime benefits?

Early Retirement Benefits

Allows eligible recipients to begin receiving their benefits four to five years prior to their full retirement age (65-67 depending on year of birth). The major disadvantage is that benefits are reduced by 20-30 percent for the recipient’s lifetime; spousal benefits can also be limited depending on circumstances.

Despite these drawbacks, about 74 percent of eligible Americans elect to receive early benefits (SSA Annual Statistical Supplement, released Feb. 2011).

Early benefits have appeal to those who are not working, need cash flow, and/or are concerned that Social Security’s days may be numbered—a “take the money and run” philosophy.

Helping clients calculate their “break-even age” can assist with this decision. As an example, if you are currently 62 and your full retirement age is 66, your monthly benefit of $1,600 would be reduced to $1,200 (by 25 percent) if you started today. By about age 77, you could break-even (total early benefits would equal those received at full retirement) at $230,400. The break-even age increases to age 82 if we assume the early benefits were invested at 6 percent annually. So, in this simplified example, if the client has a high probability of living past 77 (or 82, depending on your assumptions), he/she would be better off waiting until full retirement. The Social Security Administration’s online calculator (http://www.ssa.gov/pubs/10147.html) is a great resource to help with these calculations.

Early Benefits Earning Limits

For those who take early benefits and are employed with compensation over the “earnings limit,” Social Security will take back $1 of benefit for every $2 earned over the limit. This continues until the year in which full retirement age is reached. During the year they reach full retirement age, the new earnings limit applies only for the period before the month they reach full retirement age. If earnings exceed the limit in this period, benefits are reduced $1 for every $3 earned over the annual earnings limit.

The amount that is withheld, however, may not be lost. That is because the SSA will, after full retirement age, recalculate benefit amount and give credit for any months when benefits were reduced because of earnings.

Taxation on Benefits

Benefits can be taxed as ordinary income, depending on the recipient’s Preliminary Adjusted Gross Income. Preliminary Adjusted Gross Income (P-AGI) includes earnings, pensions, interest, dividends, municipal bond interest, and 50 percent of social security benefits. For P-AGI over certain amounts, a percentage of benefits become taxable. This applies to all social security recipients; there is no age forgiveness, so it is important to check the prevailing AGI threshold for Social Security benefit taxation.

For clients whose income may be near these thresholds it is important to coordinate discretionary income such as IRA withdrawals. We might also consider “bunching” income and deductions in alternate years.

Delayed Retirement Credits

For those who postpone benefits and continue working past full retirement age, their lifetime benefit can be increased up to 8 percent for each additional year worked through age 69. The precise formula is based on birth year. So for a client who is 66 this year and entitled to $1,600 of full retirement benefit today, working an additional two years could increase their monthly benefit to $1,856. Thus, for clients who are active, in good health and have a family history of longevity, there may be benefit to continue working. (see [+ http://www.ssa.gov/OP_Home/handbook/handbook.07/handbook-0720.html+])

Spousal Benefits

For those age 62 and over whose spouses are alive and receiving benefits, they may be eligible for spousal benefit even if they do not have enough of their own work credits or have never worked at all. The maximum is 50 percent of the spouse’s benefit and may be reduced depending on how many months prior to full retirement age that payments begin. Upon application, the Social Security Administration will automatically pick the greater of the spousal benefit or actual benefit based on own work credits.

The wife’s benefit may be optimized if she claims her benefit at age 62 (see study by Steven A. Sass, Wei Sun Center for Retirement Research at Boston College http://works.bepress.com/anthony_webb/26/). Because most husbands have higher lifetime earnings and shorter life spans, the women often receive the majority of spousal and survivor benefits. When a spouse dies, the survivor can claim the greater of their own earned benefit or their spouse’s earned benefit. This may be reduced if claimed prior to full retirement age.

Benefit Contingency Plans

We prepare clients for a number of possible changes as the Social Security system works to remain viable. Proposals that may be considered include:

1. Raising the ceiling on the maximum wage base from current levels to $250,000;

2. Accelerating by 5 years the gradual increase in full retirement age to 67;

3. Modifying the benefit calculation to reduce benefit growth;

4. Introducing “means testing” that could increase taxation and/or reduce benefits for recipients with household income over specified thresholds.

Whatever the outcome, it is critical that we offer clients “contingency plans” capable of replacing benefits that could be lost as a result.

Strategies to Consider

Taking Early Benefits and Investing the Cash: Consider the above example wherein a client begins his $1,200 early benefit at age 62 and invests it at 6 percent annually. After 5 years he would have about $57,811 accumulated, which could potentially generate the $400 per month difference (between full and early retirement benefit) for about 22 years. But if the money earns 3 percent, that benefit is only generated for about 13 years. Obviously much here depends on actual investment returns and longevity.

Make Up for Low Earnings Years: In general, for those born after 1928, benefits are calculated by averaging the 35 highest years of indexed earnings. For those who made little or nothing in one or more of those 35 years (often those who took off to raise a family), waiting to retire until normal retirement age might increase benefits, because each year they wait to retire gives a chance to earn enough to replace a lower year of earnings in the calculation.

Claim and Suspend: For couples with one wage earner who has reached full retirement, often the husband, he may allow his wife to receive spousal benefit now based on his earnings record by claiming, then immediately suspending, his benefit. This strategy would allow him to continue accruing delayed retirement credit which would increase both his eventual monthly benefit plus the survivor benefit of his wife. The end result could enhance the couple’s overall lifetime benefits.

Social Security Buy Back: Undoing a decision to receive early retirement benefits could be advantageous under certain circumstances. Say a couple, both now 70, took early benefits at 62 and now receive $11,556 annually. Had they waited until 70, they would be receiving $20,000 annually instead, despite their not having worked since age 62. If they each pay back $79,305 in benefits and reapply, they effectively purchased an additional $8,444 of annual inflation adjusted annuity benefits. A comparable commercial annuity, according to economics professor Laurence J. Kotlikoff of Boston University, might have cost them 40 percent more.

The downside is that up to 85 percent of the benefit could be taxable, whereas the commercial annuity would include return of principal and therefore be less taxed. Note that any withdrawals from an annuity may be subject to income taxes and a 10 percent federal tax penalty may apply if prior to age 59½. Remember that withdrawals from annuities will affect both the account value and the death benefit.

There are no hard, fast rules as each client situation needs to be evaluated based on their individual circumstances. Also, while we can educate, there is no substitute for the client having a face-to-face meeting with a Social Security Administration representative and consulting their tax advisor. As advisors we can add tremendous value by making clients aware of the various issues and guiding them through their decision-making process.


How Can You Avoid the Top 10 Estate Planning Pitfalls?

Upon your death, the best thing you can do for your loved ones is allow them to resolve your estate quickly and easily, so they can get on with their lives. But people often fall into 10 estate planning traps. Here is how to avoid them. Understanding and avoiding these common errors can help minimize the tax bite for your heirs and ensure that your wishes are fulfilled.

1. Not funding your living trust

This important trust places your assets “in bin” while you are alive. Postmortem a pre-appointed trustee is provided to manage them. Living trusts can usually help avoid probate (a costly court proceeding that decides which heirs receive your assets after your death) and help reduce taxes on your estate. No matter how thorough your living trust is, it needs to be adequately funded. Generally, to be effective, you must move property and assets into the trust by making the trust the legal owner of those assets. If you don’t make the appropriate title transfers, assets may be subject to probate and eventually, estate taxes.

2. Too much JTWROS property

Joint-tenancy-with-right-of-survivorship (JTWROS) is a type of brokerage account that you share with your family members while you are alive. After you pass away, your survivors inherit your share of the account. While titling assets under JTWROS does avoid probate, it does not avoid estate taxes. It is important to keep in mind that property

3. Leaving too many assets to a surviving spouse Under the current tax laws, you are allowed to transfer as many assets in your estate as you wish to your spouse either while you are alive or at your death. The problem and extra tax may come when those assets pass to the next generation. A major goal of a living trust is to preserve the first-to-die spouse’s applicable exclusion amount. This is the amount that is exempt from estate and gift taxes. Depending on current laws, it may be better to pay some estate taxes at a lower marginal tax rate upon the first spouse’s passing.

4. Not equalizing assets through gifts between spouses This is another example of improper titling and wasting the applicable exclusion amount. Having all property titled in one spouse’s name can create problems when the nontitled spouse dies first and does not pass on any property under his or her credit.

5. Not having a will If you die without a will, the disposition of property falls under the purview of the state intestacy laws. In effect, a judge decides who gets what according to a preset formula based on lineage. Not only can your wishes be thwarted, but this process can also bring additional legal costs, taxes, delays and frustrations to your heirs.

6. Improper ownership of life insurance Policies are often owned by the insured, payable to the insured’s estate or survivors. This is included in the owner’s taxable estate and is therefore subject to estate taxes. You can avoid this by giving the policies directly to the beneficiaries or transferring them to an irrevocable trust.

7. Being donor and custodian of a UTMA account If you are the custodian and donor to a uniform transfer to minors account, that account will be included in your estate and possibly subject to painful estate taxes.

8. Not knowing where all the documents are Heirs are often burdened with hunting down accounts and documentation. A scattered estate plan created by a secretive deceased person may cause some assets to be left uncollected, undistributed and even lost. It is best to keep copies of documents, recent account statements and safe deposit box information in a notebook and to make your trusted heirs aware of its contents.

9. Naming the wrong executor The tasks facing an executor are often formidable and demanding. If you are concerned that your spouse, relatives or friends are not up to the task, consider hiring a professional or a trust company.

10. Not periodically updating an estate plan It is human nature not to think about dying. That makes estate planning one of the most frequently procrastinated aspects of our financial plans. Often when the original documents are drafted, people are tempted to put them on a shelf and be done with them.

As your economic situation, health, family and the tax code inevitably change, so too should your estate plan. You should review your estate plan at least every couple of years. It’s best to work with an experienced advisor who can help make the necessary modifications.

Even the most sophisticated estate planning tools can go awry due to some simple oversights. Be sure to work with an experienced financial professional to help you achieve your estate planning goals.


Can Annuities Benefit Your Situation?

Mention the word “annuity” at a social gathering and you are likely to get a wide range of reactions ranging from “expensive” and “loss of control,” to “lifesaving” and “sleep at night comfort.” As with most things in life, the truth may not really be black and white but shades of gray between the extremes. For a growing number of those either in retirement or planning for retirement, “…the life-time income guarantees offered by these insurance company products can add security to portfolios…” according to a Wall Street Journal report.14 A surprising comment coming from a leading publication that prior to the 2007-2008 financial crisis had been a long-term critic of these programs.

The word “annuity” itself often conjures different perceptions, some accurate and some not. A common and perhaps traditional view is that of a contract wherein an investor can receive lifetime income in exchange for relinquishing ownership (and control) of a lump sum of money. So, as the thinking goes, if the investor lives a long time, he can do well. By contrast, should he die prematurely, then the insurance company makes out.

While this perception may be at the base of their historic roots, the reality is that these products have benefited from many innovations, particularly in recent years. Certainly all annuities involve a contract between the investor and an insurance company. Beyond that, the word “annuity” can embrace a wide range of products, some more beneficial than others depending on the specifics of your situation.

So before making a decision, it is important to be aware of these 13 critical considerations:

1. Immediate verus Deferred

As noted above, some annuities provide their cash flow benefit right away, hence the term “immediate” annuity. They offer simplicity and predictability. By contrast, others may postpone their benefit until a future date and thereby provide an opportunity to accumulate. These are called “deferred” annuities and can offer a potential for growth as well as future income.

2. Fixed versus Variable

The way annuities accumulate value can be based on a stated interest rate (fixed), on the performance of some underlying investments (variable) or a combination of the two.

Fixed: It is important to carefully review the different interest rates and time frame for which those are offered.

Variable: We need to focus on a number of aspects, including: o Investment Options: For those programs that allow us to select from among a variety of investment options or funds, it is important to research how well these are regarded by independent rating firms such as Morningstar. Having more higher rated funds available with a broad range of objectives can give us flexibility to adjust our investment program as needed. o Flexibility to Select: What restrictions exist on selection both in terms of which funds and how often can they be changed? o Investment Control: To help control their risk, some insurers may stipulate that they have the power to move money from our designated investments into either fixed accounts or funds that they manage.

Hybrid: Some programs such as Equity Index Annuities (EIAs)15 may combine these programs, providing the principal stability of a fixed annuity with their earnings based on a portion of the upward movement of a market index. Considerations include: o Investment Options: What indices are available? o Performance Restrictions: Especially during periods of low interest rates, it is important to understand what restrictions or “Caps” may limit the upside earnings potential.

3. [*Living Benefit Guarantees]

These can come in several forms. Each provides us with a contingency plan in case the investments do not perform well:

Account Value: Here the insurer is promising to provide a specific lump sum amount at a specified time. This is referred to as a Guaranteed Account Value, or GAV.

Income Benefit: This allows us to convert the account balance into an income stream that could last a lifetime, for multiple lifetimes, for a specific time period, or a combination of these. Since the investment is replaced with this income stream, we would unfortunately not benefit if the investment value increases in the future. Options of this type are called Guaranteed Income Benefits or GIB.

Withdrawal Benefit: By contrast, this option may allow us to create a cash flow which includes our current account balance plus future earnings. Called a Guaranteed Withdrawal Benefit (GWB), the cash flow may continue until the “withdrawal base” is depleted. The duration of that cash flow may be extended if our investments perform.

Hybrid: Recent innovations have created programs whereby the strengths of these can be combined to give you the best of all worlds.

For example, a “Guaranteed Lifetime Withdrawal Benefit (GLWB)” can provide that if the investment account does deplete, the insurer will step in and guarantee that the cash flow continues for the rest of your life. This in essence combines elements of the GMIB with those of the GWB.

4. [*Death Benefit Guarantees]

While most often known for their living benefits, annuities can provide a range of death benefits as well. The typical base is to offer the greater of the original deposits less withdrawals or current market value. For additional cost, there may be a broad array of enhancements as well.

5. [*Minimum Accumulation Rates]

Some programs may offer a minimum rate at which the guaranteed income base will grow each year even if there is no investment performance. While attractive, it is important to keep in mind that these increases will only be of benefit when the guaranteed income commences. As such, they are not “walk away” increases to the investment account that would be available if the contract were liquidated.

6. Distribution Rates

At a point in time when we want to start taking cash flow, we will find that insurers may limit that cash flow to a certain percentage of the guaranteed value each year. With some insurers, this may be based on the annuitant’s age.

7. Costs and Expenses

Fees will differ depending on the type of annuity:

• Fixed and Equity Index programs often have fees charged to the investor that are built in and costly. The interest rate or “caps” will have the insurers revenue already included.

• Variable contracts typically have a number of fees including but not limited to mortality, administration and fund expense. It is important to be aware that because these programs offer more, they tend to be more expensive than non-annuity investments. Therefore, it is important we be aware of the fees and carefully evaluate whether they are justified by the benefits for each individual situation.

8. Surrender Charges and Liquidity

In lieu of initial commissions or fees, many annuities will have the ability to asses a schedule of charges when money is withdrawn, and have that ability last for a specified period of time. Depending on the contract, surrender periods may last 0-10 years or longer. Shorter surrender periods typically involve lower interest rates or “caps” for fixed and index annuities and greater costs on the variable; therefore, it is important to carefully consider the time frame and liquidity needs when making this decision.

9. Advisor Compensation

How is the salesperson or advisor paid? For those who receive their commission or fees initially, this may reduce the incentive to provide guidance later when needed. By contrast, advisors who receive their compensation over time (often called a recurring fee) will have financial incentive to provide guidance on an ongoing basis.

10. Proprietary Programs

Advisor objectivity can be clouded when the employment firm is the same one that offers investment and annuity products. Conflicts like this can be reduced if the advisor is independent of the insurer. It is also a good idea to have the flexibility to change insurers if the current one experiences problems, and/or if new, more attractive products become available.

11. Insurer’s Financial Strength

Since the guarantees may be as good as the insurer is solvent, it is important to know the insurer’s ratings and ability to manage risk. Guarantees are subject to the claims-paying ability of the issuing insurance company. Ratings assigned to any issuing entity are subject to change and do not apply to any of the underlying investment options of annuity products.

[*12. Long-Term Health Care]

As our population ages, more insurers are providing additional options to support a long-term care situation if it should arise. This may come in the form of enhanced payout benefits or waiver of surrender charges.

13. Insurer Service

Since annuities are long-term investments, we are dependent on the insurer to deliver a high- service quality– not just at the onset but for years to come. How available is the insurer to not only provide service but also answer questions as they arise?

With our longer life expectancies there is an increased risk of running out of money. When we combine that with investor discomfort from the economic uncertainty over the recent years, we find more clients receptive to the benefits that annuities offer. That said, it is critical that before purchasing an annuity clients carefully weigh their circumstances including time horizon, liquidity needs, income goals and risk tolerance.

Some benefits may be more appropriate than others. Also important to keep in mind is that while this list contains items of which investors should be aware, it is by no means comprehensive. Readers are encouraged to discuss details with their advisors and insurers.

*All products and features are subject to availablity. This information is not considered a recommendation to buy or sell any investment.

Equity Index Annuities (EIAs) are complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity. Many insurance companies only guarantee that you will receive 87.5 percent of the premiums you paid, plus 1 to 3 percent interest. Therefore, if you do not receive any index-linked interest, you could lose money on your investment. One way that you could not receive any index-linked interest is if you surrender your EIA before maturity. Some insurance companies will not credit you with index-linked interest when you surrender your annuity early.

It is important to review the terms, conditions and expenses of any program before investing. Information can be found within a program’s prospectus. This is a strategy that could, in part, include use of Variable Annuities with living benefits. The “floor” that could be set is an income floor with a Guaranteed Minimum Income Benefit Rider, or a Guaranteed Minimum Withdrawal Benefit. These are available at additional cost.

Investors should carefully consider the investment objectives, risks, charges and expenses of variable annuities and their underlying funds before investing. The prospectus contains this and other information about variable annuities. The prospectus is available from your financial advisor. Read it carefully before investing.

Variable annuities are long-term investment alternatives designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if made prior to age 59½, may be subject to a 10 percent federal tax penalty. Early withdrawals may be subject to withdrawal charges. Partial withdrawals may also reduce benefits available under the contract as well as the amount available upon a full surrender. An investment in variable annuities involves risk, including possible loss of principal. The contracts, when redeemed, may be worth more or less than the original investment.

The Income/Benefit bases do not guarantee a cash or account value, cannot be taken as a lump sum, and do not guarantee a minimum return for any portfolio.


Effective Tax Planning for Annuity Withdrawals

Effectively managing the income taxes in your investment portfolio can make a significant difference in your retirement. The question is, how well are you doing? Since the 07-08 financial crisis, investors concerned about their retirement have benefited from using some types of annuities. These programs not only provide life-time income guarantees; they can also be a potent way to accumulate earnings on a tax deferred basis. However at some point you will want to withdraw those earnings. Understanding the tax nuances associated with those withdrawals can help assure you are doing all you can to optimize how much is available for spending.

But let’s back up a minute. An annuity is a contract between you and an insurance company where funds can be invested and earnings accumulate tax deferred. When withdrawals begin, those accumulated earnings are subject to income taxes. For annuities outside of a retirement plan, the deposits (called premiums or cost basis) can be withdrawn from the contract tax-free since you already paid taxes on those contributions.

All said, there are several important principles and techniques to help preserve as much of your withdrawals as possible.

Last In-First Out (LIFO): When it comes to annuity withdrawals, the IRS generally requires that earnings be distributed first and be taxed in that year. In addition, earnings withdrawn prior to age 59.5 will incur a 10% tax penalty. Once the accumulated earnings have been distributed, 55 subsequent withdrawals will be mostly principal (cost basis) which was presumably taxed when originally earned (and therefore cannot be taxed again).

Annuity Laddering: One strategy that could potentially work around some of the LIFO requirement is “laddering.” Herein, multiple annuities are established with different companies then depleted one at a time. This allows tax-free principal to be accessed sooner. We effectively postpone taxes on earnings in the other annuities while still benefiting from the cash flow withdrawals. Sometimes clients raise concern because this strategy includes principal invasion. However, they may be consoled to realize what is being depleted in one contract may in part be replaced by postponing distributions from another. When applying laddering it is important to use different insurers so to avoid the “Serial annuity (aggregation) rule.” 18

1035 Tax Free Exchange: The IRS allows you to transfer an annuity from one insurer to another without incurring taxes. So if a contract that is out-dated, has inferior benefits compared to current offerings, has higher fees or simply no longer meets your needs, you can replace that existing annuity with a new one without incurring any tax liability. With all 1035 exchanges, the contract must be like for like (same owner and annuitant) so please consult your CPA or financial advisor for specifics.

Partial 1035 Exchange: A subset of the 1035, this allows you to do a partial 1035 exchange and carry over the proration of the cost basis. There is a two step process:

Do a partial exchange from an existing annuity contract to another company; do not take withdrawals from either annuity for at least 180 days. If you take a withdrawal from either annuity prior to 180 days of transaction, the withdrawal could be considered all earnings and fully taxable.

For example, suppose you have an existing annuity contract with total premiums (cost basis) of $500,000 and total value of $1MM (e.g. $500,000 in taxable gain). Since typically the earnings are taxed first, you would pay taxes on the first $500,000 of distributions. If you were to apply the rules of IRS 2011-38 you could transfer a portion of the annuity, say half, to a new contract with a different insurer. Since the cost basis is split pro rata the new contract would have a value of $500,000 with $250,000 cost basis.

After 180 days, you could generate cash flow from one contract, only have taxable earnings of $250,000 and postpone taxes on the second until needed.19

Annuitization: All annuities provide the ability to convert the investment’s value into a cash flow stream for a specific term or for life. Since the stream includes principal plus the accumulated earnings a portion is not taxable until the entire principal is returned. Thereafter the stream is 100% taxable. Particularly for clients who have legacy goals, they may want to consider an annuity that offers a “cash refund” death benefit so beneficiaries can receive any remaining principal in case of premature passing.

Spousal Continuation: As a general rule, when a death occurs, if the spouse is listed as the sole primary beneficiary on the contract, he/she may be able to assume the contract for his/ her own benefit. Mechanically, the contract is credited with the death benefit then is re-titled in the survivor’s name as owner and annuitant. This allows the contract to be stretched and taxes deferred. (FYI, older contracts may not credit the death benefit if it is continued, that is true of current contracts.)

Bottom line, annuities can be an effective tool for building your wealth on a tax deferred basis. It is important to strategically plan withdrawals so to help assure there is not unnecessary erosion from income taxes. Any annuity withdrawal should be done with an eye toward surrender charges, fees, rider terms, and tax implications. It is a good idea to consult your CPA and financial advisor before any transactions.

[_ Annuities are generally considered long-term investments. Withdrawals made prior to age 59 ½ may incur a 10% federal penalty. Withdrawals from annuities will affect both the account value and the death benefit. The hypothetical example presented is for illustrative purposes only and is not indicative of any specific annuity’s performance. Individual results may vary. Guarantees are subject to the claims paying ability of the insurance company. Wells Fargo Advisors Financial Network does not offer tax advice or services. _]


How Can Stealth Inflation Threaten Your Retirement?

How can it be in recent years that gas prices exceeded $4 per gallon and food prices rose, yet inflation, as measured by Consumer Price Index, hovered around the 2 to 3 percent range? Does there seem to be a disconnect to you?

If your answer is “yes”, you are not alone. Despite repeated reassurances by the Federal Reserve Bank that inflation was well in hand, a growing number of notable economists have been questioning how accurately the CPI actually tracks the true rise in the very same consumer goods and services that we use every day.

To fully appreciate the controversy, it may be valuable to step back and take this in context. The Bureau of Labor Statistics of the U.S. Department of Labor is charged with tracking changes in the prices of 207 consumption items such as raw materials, and goods and services, at the manufacturer, wholesale, and retail levels in 44 geographical areas. The result is 9,108 components, which, at times, behave similarly and, at other times, differently. The technical issues imposed are daunting to say the least. While the methodology used for this tracking can be critical, it is inevitably the local retail price level that most affects consumers at the grocery store, gas pump and restaurant.

The official monthly “All Urban” CPI is depicted in the following chart. You may recall when the economy was coming off the 2008-2009 financial crisis, the big concern was actually “deflation.” That occurs when prices decline and is perhaps the scariest of all scenarios. Deflation 59 was a dominant factor in extending the Great Depression of the 1930s.

When consumers believe that prices are falling, they are less likely to spend money and do the activities they normally do. The economic results can be disastrous.

So during much of the recovery, the Federal Reserve has been working to actually create modest inflation. And they have claimed reasonable success in those efforts, as shown in the chart below.

But there are a growing number of leading economists and academicians who have been questioning the accuracy of the government’s CPI to track the true costs of goods and services on which we spend money every day to live, work and entertain ourselves. One noted economist, John Williams, has gone so far as to routinely refer to the CPI as a “bogus index”. The Dartmouth-trained economist believes that the Bureau of Labor Statistics has, under the auspices of “improvement”, actually changed the calculation method “24 times since 1978” and that if the same methodology were being used today, the true CPI figures would be more like 10 percent!

One methodology change in particular, called the “substitution effect,” was recommended by the Boskin Commission Report under the Bush 1 and Clinton administrations in the 1990s. It is often cited as an overt example of CPI understatement. Underlying this process is the presumption that when prices for goods and services rise, consumers will tend to “substitute like products to avoid the price increases.”

An example is when the price of steak rises, it is assumed that even the most devoted consumer will choose to buy hamburger instead. Whether that behavioral change actually occurs and to what extent is the subject of great controversy. Critics claim that this one change in and of itself could be understating the true inflationary pattern by 1-2 percent annually. The argument continues that when you filter in all the other methodology changes, some minor and others major, the end result is a dramatically understated CPI.

What possible incentive would there be to understate such a critical economic indicator? The CPI is the key inflation index used to adjust Social Security, military retirement, and numerous other entitlement programs. It is also the basis for our income tax system, including tax brackets, personal exemption, and the standard deduction. The Boskin Commission estimated that over $600 billion would be saved if CPI increases could be reduced by 1.1 percent annually for the 10-year period 1997-2006, so supporters of this theory are confident that motivation abounds.

Conspiracy theories aside, “product downsizing” may be another way that inflation is subtly affecting us. When this happens, packaging of items, particularly in the food category, contain less product than before, but priced the same as before.

The New York Times suggested an idea called “stealth inflation” where commodity costs rise in the face of an otherwise tight-fisted economy where frugal shoppers abound. Rather than pass prices on and risk losing market share to a cheaper competitor, the slightly smaller package allows manufacturers to pass on rising prices in a discreet manner less likely to incur customer wrath. For example, when a 2-ounce candy bar suddenly appears on the shelves as 1.8 ounces but continues to sell for the same price, the change could be construed as an 11 percent price increase.

As John Gourville, Harvard Business School marketing professor so aptly put it, “Consumers are generally more sensitive to changes in prices than to changes in quantity.” So Gourville suggests that subtle changes in package design or inclusion of more air to fill the package can give the same shelf appearance. But the reality is that less in hand for the same price equals higher cost. And that spells inflation in any language.

How these practices specifically affect us may be the fuel for much economic controversy. When translated into our future planning, at the very least it can serve to place more emphasis on the need for growth in savings among investors of all ages.

There is common agreement, especially with our increased longevity: Over one in four of us may be facing 30 years or more of retirement (according to the Society of Actuaries Annuity 2000 Mortality Table). Should inflation average 5 percent per year, it will take $141 in just seven years to buy what $100 buys today in 2015. Since the number one fear of retirees today is running out of money, achieving financial independence in our golden years is vital. Therefore, it is absolutely imperative that techniques geared toward capital and purchasing power preservation be an essential part of every retirement portfolio.


Bond Investing: Is Following Conventional Wisdom Always Best?

When it comes to bonds, the old adage “they ain’t what they used to be” may hold good wisdom in this challenging economic climate. Bonds are essentially loans that investors make to domestic and foreign corporations, U.S. and foreign governments as well as state and local municipalities. As such, they represent a wide spectrum of investment opportunity. Some, particularly U.S. government, higher-rated corporate and municipal bonds, have been traditionally viewed as a safe haven and buffer against stock market volatility. Others, such as high yield and international bonds, may offer greater risk with varying degrees of upside potential. Bonds have also been sought for their diversification and for reliable competitive interest rate returns.

But in this environment of low interest rates and sovereign and municipal debt uncertainties, some of these long-held beliefs are being called into question. Clients, perhaps more than at any other time over my nearly 30 years of advisory experience, are raising issues that I thought would be helpful to address. Some of these issues include:

1. Are bonds not a safe investment that should be part of all investors’portfolios, especially as they approach retirement?

Bonds are traditionally used to provide predictable income, diversification and to buffer against portfolio volatility. That is why so many investors flocked to bonds in the aftermath of the financial crisis. In fact, “… since January 2007, average net new money going into bond mutual funds each month has been roughly four times greater than net outflows from equity funds.”16

However, the correlation between bonds and stocks is seen as getting closer to the point where they may no longer offer the kind of diversification as they once did. And, the low interest rate environment has offered disappointedly low income opportunities when compared with other options such as dividend-paying stocks.

Many economists point to the increased volatility of bond markets and that bond losses can be greater and continue for longer periods than those of stocks. For example, the bond markets experienced a 67 percent decline (in real terms) from December 1940 through September 1981 for 20-year U.S. Treasuries. In fact, they did not return to their 1940 level until 1991.20

Of course, the definition of a “safe investment” will vary among investors. For those who define it as stability of principal, it is important to fully understand the risks posed by bonds at a time when market rates are low and perhaps poised to rise.

Are bonds a good investment when interest rates are low?

Traditional (fixed coupon) bonds have their maturity and interest rates set at the time of issue. As such, they can be viewed as contracts, many of which are bought and sold daily. Because interest rates are constantly changing in the marketplace, the value of those fixed contracts will fluctuate as well. For example, if a bond is issued at a 5 percent rate and the next year market rates rise to 6 percent, investors are less attracted to the 5 percent bond, and consequently the price could fall.

Conversely, if rates fall to 4 percent the next year, the bond becomes more attractive, and the price could rise. Because of this, the price of bonds is said to be “inversely related” to interest rates. So when market rates have been low and begin to rise, we could expect to see bond values fall. Investors need to be aware that buying many types of bonds in a low-rate environment could cause their bond portfolio to decline in value when interest rates rise.

3. Should I buy bonds at a premium?

A low interest rate environment often makes bond prices rise on the secondary market, resulting in the trading price exceeding the bond’s par value. But the problem is that when that bond eventually matures, it is the par value and not the cost that gets redeemed. An income investor who spends the interest generated along the way could end up with less than the purchase price when the bond is redeemed.

Proponents of premium bonds may argue that they can be effective when the interest is reinvested; however, this “total return” strategy can present some challenges. First, reinvestment of interest payments can be difficult if the amounts are too small to purchase additional bonds. If reinvestment is impeded, the return on those interest payments will be limited, and that will reduce overall performance. Second, premium bonds can experience greater volatility as interest rates rise. Even investors who are planning to hold bonds to maturity can become unnerved to see their account values fall abruptly. Therefore, purchasing premium bonds can pose greater risk than what may be apparent and should be considered carefully.

4. Should I buy bond mutual funds?

Mutual funds offer some very positive advantages: diversification, reduced costs when compared to individual bonds, professional management, simplicity, liquidity and convenience. There is a very broad spectrum of bond funds, varying by bond type, maturity, strategy, open versus closed end fund and so on. It is important to keep in mind that individual bonds typically have a return of par value that is guaranteed by the issuer. When we invest in open-end bond funds, we are buying into an existing portfolio of bonds that is perpetual. This implies that as bonds within the portfolio mature, the proceeds are usually reinvested in additional bonds. So, to that extent, we lose the predictability of maturity that individual bonds provide, and that may create additional uncertainty and risk factors.

Also, bond funds may be advertised for their relatively high yields, modest average portfolio maturities and average investment grade. Bond funds, like all mutual funds, are hardly transparent. We typically do not know the current portfolio holdings until three to six months after the fact, a practice funds use to prevent “front running.” The key is to remember that “average” means there are just as many bonds below as above the figures. So if a fund’s yield seems too good to be true, it is likely being raised by inclusion of lower grade and/or longer maturity bonds that are being masked within the averages.

Finally, bond funds typically charge 0.50 to 1.5 percent in annual management fees. Especially in a low interest rate environment, managers are particularly challenged to deliver sufficient value that can compensate for their fees. But there are opportunities to add value, especially when dealing with more aggressive segments of the bond markets. For example, the managers who are somehow able to help their investors profit from the European sovereign debt crisis could be worth their weight in gold! Similarly, those who can successfully navigate the challenging waters of municipal debt and high yield “junk” bonds could potentially deliver exceptional value that more than offsets their fees.

But many of these could be considered speculative and only suitable for the more aggressive investor. For more moderate risk investors seeking a “safe haven” and reliable income, many bond funds can be highly challenged in a low, potentially rising rate environment to earn their keep and more challenged to protect their investor’s principal.

5. If inflation should rise, what would this mean to my bond investments?

Inflation can be a dirty word where bond investors are concerned. The reason is because most bonds provide a fixed income stream for their lifetimes. When inflation rises, of course, the purchasing value of such fixed income streams can erode. So even the very hint of rising inflation can cause volatility in bond markets as bond investors will often sell their holdings and move to cash. There are exceptions, such as “floating rate,” “Treasury Protected Inflation,” and “high-yield” bonds, which, if properly managed, may have a greater potential to perform. These aside, in our current environment, where many economists fear that greater inflation may be coming and that the U.S. government’s official inflation indices may not be accurately tracking inflation increases21, bond investors should be wary.

6 Should I be worried about talk of a “bond bubble”?

In the aftermath of the financial crisis, investors poured inordinate amounts of money into individual bonds and bond funds as they sought “safe haven” from stock market declines. This was particularly the case but not confined to just U.S. Treasuries. Jeremy Siegel, renowned author and finance professor at Wharton, has continually warned of bond bubbles developing in 2010 and 2011.22 “Now bond bears say the latest rally is setting up the bond market for an even bigger crash (than that of stocks in 2008-2009) once interest rates start to rise again.”23 It is almost axiomatic that when we see investors move money at greater than normal rates into a given investment sector, there is cause for concern. Especially given the cyclical nature of markets, there is certainly enough data to, at the very least, cause concern.

All investments are subject to risk. There is no assurance that any investment strategy will be successful. Past performance does not guarantee future results. Diversification does not ensure a profit or protect against a loss.

7. Since longer maturity bond have higher yields, should I invest in them?

Yield-hungry investors are often tempted by advertisements promising higher interest rates. Mutual funds may also use longer-term bonds to help increase their stated yields. It is important to realize that these higher yields come at a price, which is often in the form of greater volatility. The fact is that price sensitivity can be affected by a bond’s “duration.” This is a calculated figure based on several factors including the bond’s interest coupon and its length of time until maturity. It is widely accepted that “… the greater the length of the bond’s remaining term, the more sensitive it will be to changes in interest rates.”24 Simply put, higher duration and/or longer maturity implies greater price sensitivity, which translates to increased risk. Investors should be mindful of this when considering whether longer-term bonds may meet their needs.

8. Which types of bonds are most at risk should interest rates rise?

Historic trends give us some sense of priority and also risks:

• Treasury Bonds provide a reliable return when held to maturity, so they historically exhibit the greatest price decline when market rates increase.25

• Corporate bonds, because they offer higher yields, can be less sensitive to rising interest rates.

• High-yield corporate bonds, because they are typically below investment grade, usually offer higher interest rates. However, since their fortunes are based more on the issuer’s performance, these can move more in sync with the stock markets and may be the least sensitive to rising rates. “…the problem is that the correlation between high- yield bonds and equities has demonstrated a nasty tendency to spike upward just when it is most important for it to remain low– for example, when equities are experiencing negative returns. Again, this is because much of the return of high-yield bonds is a result of risk premiums associated with equities, not debt.” 26

• Treasury inflation bonds are designed with the goal of maintaining relatively stable principal during rising rate environments. Whether they do or not depends on many market factors and who the issuer is. “One market that now makes no sense to us is the popular treasury inflation protected securities (TIPS), where…the yield on the benchmark 10-year TIPS turned negative for the first time in history…”27

• Floating or adjustable rate bonds are loans that financial institutions make to businesses that are often below investment-grade credit quality. As such, they have a high debt-to-equity ratio and typically generate yeilds that are greater than investment- grade bonds. Analysts and financial regulators alike have expressed concern to the point of issuing an investor alert, as “...investors may not realize that they could be taking on more risk if they invest in products with higher returns.” 28 The alert was prompted by the four-fold influx into folding-rate loan funds between 2008 and 2011.

Bond values can decrease sharply when interest rates rise. For example, Treasury yields need only rise 0.3 percent over one year, on average, to produce a loss on the Barclays Treasury Index, according to a First Pacific Advisors study. Their advisors see interest rate risk at the greatest it has been since the 1950s.29

Conventional wisdom suggests that traditional fixed income instruments, including bonds of various types, have an important role to play in most investors’ portfolios. However, in our current low-interest environment where the uncertainties are great, many analysts do not see an attractive reward potential to offset the myriad of risk involved in significant bond investing. In fact, some see bonds as almost impractical on a risk/reward spectrum. It may very well be that on a longer-term basis we embrace bonds in most clients’ portfolios. But at a time of so many potential risk exposures, it may be prudent to consider other strategies that can help control portfolio risk and provide predictable cash flow when needed.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus, which contains this and other information, can be obtained by calling your financial advisor. Read the prospectus carefully before you invest.


Are ETFs Right for You?

Ever feel like you are being “acronym-ed” to the point of distraction? The financial world, with its own brand of terminology, has been accused of making things confusing. Consider the term “ETFs,” which stands for Exchange Traded Fund. These securities enjoy similar trade characteristics with stocks, where the price is determined throughout the trading day by investor demand. As such, most are highly marketable and may also be margined (collateralized for loan purposes at a brokerage).

One of the most common ETFs are “spiders,” which follow the S&P 500 Index (NYSE Symbol: SPY). With as little as a single share, investors can own a fund that tracks and trades based on all underlying stocks in the S&P 500 Index. Since launched in 1993 by State Street Global Advisors, spiders have gained popularity to the point where total ETFs assets have surpassed the $1.5 trillion mark.30

While many investors have embraced ETFs for their transparency, low cost and tax efficiency, ETFs can also provide hedging strategies and an efficient way to access niche assets. With so many investors taking the plunge into ETFs, does this product make sense for you? The following summarizes key benefits and risks to help you make a more informed decision:


Since ETFs track a specific set of assets or an index, it is usually clear what is being purchased. Using the “spider” as an example, investors know they are buying a basket of the 500 stocks that represent the S&P 500 Index. Transparency helps us build more efficient portfolios because 71 we can diversify among various asset classes and know exactly how much is weighted in each category. By contrast, open-end mutual funds are allowed to delay announcements of their specific holdings for three to six months, so it is more challenging to know what the fund manager is holding on a given day.

Low Cost

ETFs typically boast low costs relative to mutual funds as a key advantage. For example, Morningstar depicts the average U.S. large cap stock ETFs as costing 0.47 percent in annual operating expense, compared to 1.31 percent for mutual funds in the same category 2. One reason: Mutual funds shares are typically transacted by the fund company itself (investors purchase and sell fund shares with the fund company itself) rather than on an exchange, so mutual funds can have greater operating costs. Costs vary between investments and should be considered before investing.

Tax Efficiency

Especially when compared to mutual funds, ETFs can offer tax advantages. One reason is that mutual funds have more transactions to accommodate shareholder redemptions or to rebalance assets. By contrast, ETFs accommodate inflows and outflows by using “creation units,” or baskets of assets that approximate the entire ETF’s investment exposure. So although mutual funds and ETFs are viewed by the IRS in the same light, their different operating procedures can cause a significantly different tax impact for the investor. For example, new mutual fund investors may find their fund recognizing capital gains occurring earlier in the calendar year, even before their investment was made. This is because mutual funds accrue gains throughout the year and assign them pro rata to every investor as of a specified date of record (often in December). By contrast, ETFs typically do not have as much active trading within the fund, so there are less taxable events. Hence, ETFs generally have a much lower tax impact than mutual funds. Also note that the sale of an ETF may be subject to capital gains taxes.

ETFs can also offer an alternative to “wash sales,” a rule specifying that when a stock is sold at a loss, the same stock cannot be repurchased within 30 days of the sale. So if the stock should rally after the sale, investors could miss out. By contrast, the stock could be sold, losses realized, then 72 an ETF purchased that relates to that stock’s specific sector. This provides an alternative to the wash sale rule and can allow for uninterrupted exposure to a specific market sector. Please note that investors can repurchase stock within the 30 day period of the sale, but the loss can no longer be realized and is adjusted into the new share’s cost basis.

Active versus Passive Management

Much controversy surrounds the value of active management. In fact, one of the investment world’s most significant ongoing debates regards the value managers add to the funds they manage. The typical mutual fund manager charges a fee to oversee the underlying fund investments, make trades, and invest according to the fund’s goals. While beyond the scope of this book, suffice it to say that many ETFs do not have an active manager, but rather only replicate a portfolio that often costs much less. Note that there is no guarantee that any investment will meet its stated objectives.

Diversification and Strategies

ETFs can offer immediate portfolio diversification with lower operating costs. One strategy finds investors using ETFs to gain exposure to less “mainstream” areas such as precious metals, natural resources, specific industries and/or geographical regions. These may serve as “satellite diversifiers” to help gain access to those asset classes that may be difficult to purchase individually. Keep in mind that diversification does not ensure a profit or guarantee against a loss.

Another strategy is to construct entire portfolios around ETFs. The portfolios can be geared toward various risk tolerances, from conservative to growth. Brokerage firms and advisors may use this strategy and, by adding their oversight to selection and monitoring, can provide a version of low cost, managed portfolios. Since ETFs trade like stocks, we can use the same order tools designed to automatically capture gains and control losses through “limit” orders. For example, a standing order can be placed to sell the ETF when its price either rises by, say, 10 percent, or falls by 10 percent. By contrast, we are unable to do this with mutual funds, since they are transacted by the issuing fund and are priced at day’s end as opposed to during the day. Please note that transaction fees/commissions can apply to ETF trades.


While ETFs may be appealing for these and other reasons, it is important they be considered with the caution that is prudent with any investment. The principal value of ETF shares will fluctuate with changes in market conditions. For example, because ETFs are priced based on market demand, the actual trading price may be higher or lower than the net value of underlying assets (called “NAV”). Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. This could present an additional source of uncertainty or risk that should be considered. Transaction costs can vary between brokers, and liquidity can vary based on supply/demand.

Since ETFs have grown so quickly, there are new products coming out all the time. There are now leverage products, inverse products and other complicated structures that may be overwhelming to the novice investor. You also need to be careful if you are investing in a systematic arrangement such as monthly contributions. ETFs trade like a stock, so they typically incur a cost per trade, and they may not make sense from a cost standpoint. For this type of arrangement you may want to consider mutual funds or a managed ETF portfolio with a brokerage firm.

For these reasons and more, it is important to seek advice from a qualified financial advisor. Any investment needs a thorough review and should be part of a comprehensive plan. While ETFs may make sense in your portfolio, it is important to do the proper research and seek help through the advice of a financial advisor when necessary.

Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors, and may be subject to special and greater risks. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.

Exchange traded funds (ETFs) are sold by prospectus. Please consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.

This information is not considered a recommendation to buy or sell any investment or insurance. We strongly recommend an advanced tax and estate planning expert be contacted for further information. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mitchell Kauffman and not necessarily those of Wells Fargo Advisors Financial Network.

Expressions of opinion are as of this date and are subject to change without notice.

Margin may not be suitable for all clients as it may involve a high degree of risk and the potential for losses can be magnified. Please consult your financial advisor or visit http://sec.gov/investor/pubs/margin.htm for additional information. The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. Please note that individuals cannot invest directly in an index. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of Wells Fargo Advisors Financial Network we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.


Can Reverse Mortgages Provide Additional Retirement Income?

Paying the taxes associated with IRA (or other qualified retirement plan) withdrawals is without question the downside of the whole arrangement. But for those who have small or no mortgages on their homes, a “less taxing” approach for generating retirement income has been gaining attention. The strategy, albeit with a cautionary note, involves reducing or delaying IRA withdrawals and replacing that income by tapping the home’s equity using a reverse mortgage.

Reverse mortgages are in essence mortgage loans that work backward. Instead of sending a check to the lender every month to pay interest and reduce debt, the mortgagee receives money from the lender and sees a corresponding increase in the mortgage balance. The proceeds can be received in a lump sum, in periodic payments over a period of time, or as credit line that may be used as needed.

The uniqueness and appeal lies in the fact that no repayment of the loan is required until: (1) the home is sold (2) the mortgagee dies or (3) the mortgagee has vacated the property for 12 or more months. Depending on the type of reverse mortgage, repayment may be accelerated if the home owner uses the home as collateral to incur more debt, fails to pay property taxes, fails to insure the home, or fails to maintain the home. The reverse mortgage can be paid off from other sources, or the lender can in some instances require the home to be sold to satisfy the reverse mortgage.

The trade off in this strategy is between creating an ever-growing liability that has no immediate out-of-pocket expenses versus taking money out of the IRA’s tax-free growth environment and paying income tax on the withdrawals.

To illustrate, let’s use a fictional Jim Smith, age 62 and single. Jim’s Traditional IRA has $1,000,000 that grows at 6 percent per year and his fully paid home has $2,000,000 in equity that appreciates at 5 percent annually. After considering Social Security and pension income, Jim estimates he will need an additional $27,000 to meet his pre-tax retirement spending goal of $80,000 per year.

If Jim simply takes the $27,000 per year from his IRA, at age 70½ the IRA balance would be $1,352,532 and he must begin required minimun distributions (RMD) each year beginning with $49,362. Assuming Jim dies at age 90, his Traditional IRA will have a value of approximately $1,321,556. Jim’s house will have a projected value of $7,840,258 and his gross estate will be approximately $10,007,102.

Alternatively, if Jim uses an 8 percent reverse mortgage (ignoring origination expenses, which can be high), he will need approximately $22,950 per year to substitute for the taxable IRA distribution of $27,000 until age 70½. By delaying withdrawals, Jim’s IRA then is worth about $1,640,967. Since his first withdrawal of $59,889 more than meets his income needs, further loans from the reverse mortage could be stopped.

If Jim passes away at 90, and assuming he makes no payments, the balance of the reverse mortgage will have grown to approximately $1,188,264 and the value of his home will be approximately $7,840,258. In addition, the projected value of his Traditional IRA would be $1,688,655 at age 90. Jim’s gross estate would be approximately $8,340,648 after the reverse mortgage is paid off.

In essence, by using the reverse mortage to delay IRA withdrawals, Jim has spent down his estate without incurring the income taxes associated with either selling his home or taking more IRA withdrawals.

If his priority is to provide himself a higher cash flow, then by using the reverse mortage in this manner he has increased it by over 20 percent. Among the downsides are that his heirs are left with a smaller inheritance and more income taxes. In general, high wealth clients who are advised to reduce their net worth for estate tax purposes may find a reverse mortage beneficial. Obviously, these are very general calculations for illustrative purposes only and do not take into account many variables such as inflation, real estate appreciation and loan costs.

A number of considerations need to be kept in mind. If Jim at age 70½ decided to begin paying back the reverse mortage with the extra income from his RMD, the mortage balance at age 90 could be significantly less. Alternatively, he might consider converting his Traditional IRA into a Roth IRA and use the reverse mortage to help cover the associated taxes. Excessive postponement of IRA withdrawals can limit his flexibilty when the RMDs begin and have been called “an income and estate tax time bomb”.

The decision to use a reverse mortgage can be complex and may vary for each person’s situation. Some of the factors to consider may include (1) the homeowner’s desire to leave value to his or her heirs at death, (2) the homeowner’s and the homeowner’s spouse’s age and life expectancy, (3) assumptions regarding future home value appreciation or depreciation, (4) current and future income tax rates, (5) the ever-changing estate tax rates and possible repeal of the estate tax, (6) inflation assumptions, (7) growth of principal and income assumptions over a long period of time, (8) the acceleration terms, conditions and interest rate of the reverse mortgage contract, (9) the changing pension laws, (10) long-term care expenses for the homeowner and the homeowner’s spouse, (11) educational goals for children and grandchildren, and (12) whether the required minimum distributions will be spent or invested during the owner’s lifetime. For additional information on Reverse Mortgages, see the California Department of Real Estate website at http://www.dre.ca.gov/ reverse.htm.

In any case, a retirement income and tax plan that considers the entire picture often provides the best results. Please keep in mind that this chapter is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact a financial advisor, attorney or tax advisor as appropriate.

There are significant costs associated with a reverse mortgage such as: up-front mortgage premium, annual premium, origination fee, closing costs, monthly services charge and appraisal fees. Reverse mortgages contain significant risks including: the borrower may need home equity for something more important; the homeowner is still obligated to pay taxes, insurance, and maintenance; if the borrower moves, the loan becomes due, and the total amount due may be larger than anticipated or planned for; and the individual’s Medicaid may be affected. Senior citizen borrowers with good credit should carefully analyze the options of a more traditional mortgage, such as a home equity loan, against a reverse mortgage. Reverse mortgages may not be suitable for every investor.


Can Innovative Strategies Help Address Your Long-Term Care Challenge?

When planning for retirement, all possible risks must be considered and evaluated. One of the most commonly overlooked is the potential need for long-term health care (LTHC) for you and/or your spouse. The cost of LTHC can be staggering and can derail even the best laid financial plans. When evaluating the risk of the cost for LTHC, the old adage about three ways to manage risk can be clearly applied.

1. Avoid the Risk

Unfortunately, growing older is a fact of life and healthcare concerns increase with age. Individuals can embrace a healthy lifestyle to reduce the risk, but nobody can completely avoid the risk with any certainty. Individuals can also choose to live in denial that a LTHC incident may never happen to them and do nothing to protect themselves. Unfortunately, the odds do not favor this approach, given that about 70 percent of individuals over age 65 percent will require at least some type of long-term care services during their lifetimes and 20 percent will need five years or more of care (US Dept of Health and Human Services; see [+ http://www.longtermcare.gov/LTC/Main_SiteUnderstanding_Long_Term_Care/Basics/Basics.aspx+]).

2. Retain (Manage) the Risk

Investors of sufficient wealth can self-insure and plan to cover LTHC expenses out of pocket without regard to how an incident could erode their estate.

3. Transfer or Share the Risk

Investors can pay a credible entity, typically an insurance company, to cover some portion of the risk. It is incumbent on financial advisors to help clients understand these options and guide them toward making the most effective decision for their situation. The good news is that a number of recent innovations have made LTHC insurance more economically attractive to share the risk of a LTHC incident with a financially sound insurance company.

These changes can best be appreciated in the context of reviewing the major aspects of LTHC coverage:

Facility Types

These include nursing homes, day care centers, assisted living facilities and home care. We often recommend all three be considered.

Service Level

Three types of ongoing services and support are available for those who have disabilities or chronic conditions. Here, too, we typically suggest all three be included:

• Nursing Home: Skilled professional nurses, therapists or doctor’s aides provide professional care 24/7.

• Intermediate: Skilled but on a less than round-the-clock basis.

• Custodial: Assistance provided by nurses’ aides, home health workers and possibly family caregivers, that centers around supporting “activities of daily living (ADLs)” including eating, bathing and dressing.

Daily Benefit Amount

Costs range from $50 to $350 per day; clients may choose coverage that will pay a maximum amount toward these levels. Obviously the higher benefit amount, the greater the premium. Individuals will often select a $150-$250 daily benefit depending on their financial situation. In Southern California, for example, costs can range from $175-$225 per day, depending on shared or single room, http://californialongtermcare.com.

Elimination Period

This describes how long after the onset of a LTHC condition before a policy begins paying benefits. Policies generally range from 30 to 180 days or more, with premiums greater at lower levels. Since Medicare coverage is for the first 100 days, many people often consider 90 days as a moderate choice.

Benefit Duration

This addresses how long benefits will continue to be paid from the onset of a condition, often 2-5 years or lifetime. Here again, the longer the benefit duration, the greater the premium. This one is very much individualized, based on specifics such as the individual’s age and financial resources.

Inflation Protection

This provides that the benefit amount can increase each year at a selective annual percentage, and the increase can be either simple or compound. It is particularly important for younger individuals to consider this so the coverage can keep pace with inflation.

Leveraged Effect

The primary reason for using insurance is to have a significantly greater amount of potential benefit, relative to the dollars paid for that coverage. In this context, we can explore the various insurance options that are available.

Traditional Coverage

The health insurance-based “pay as you go” approach is the most common plan design, where the insured pays a premium annually for LTHC coverage. Variations on this may include “paid in full” options where the insured pays a greater premium for a set period, say 10 years, after which no further payments are required. There are also riders that will waive future premiums whenever benefits are being paid out of the policy.

The downside is that this is an expense that the insured must pay out of cash flow or savings, and it is a “use it or lose it” proposition. If there is no LTHC event, premium payments have been an expense and there has been no benefit realized. In this respect, the “pay as you go” method is similar to fire insurance on a house. There is only a benefit when there is a claim.

There have been many recent innovations that address this concern and may give individuals more options. These vary and can include:

Annuity Riders

Some annuity companies will offer limited flexibility should a LTHC incident occur. These may include forgiveness of surrender charges and increased access to living benefits beyond the policy’s normal terms. For example, if the policy provides at age 65 that the living benefit can be accessed at 5 percent per year, a LTHC event may allow the owner to access the living benefit at a 10 percent annual rate.

Combination Annuity-LTHC Policies

Thanks to tax and accounting rules included in the Pension Protection Act of 2006 (PPA), distributions from PPA compliant annuities that are used to cover qualified LTHC expenses can be taken tax-free. This allows investors to redirect premium dollars to their portfolio, thereby giving them what amounts to a dual benefit. On the one hand, they get the tax advantage withdrawals (more after-tax dollars) to help cover costs in case of a LTHC incident. On the other, they can keep dollars working in their portfolio that might have otherwise gone out as expense premiums to cover traditional “pay-as-you-go” LTHC policies. Annuity companies may offer LTHC benefits for specific time periods and could offer an extension of benefits if needed. Other companies may offer LTHC benefits that are a multiple of the initial single premium. It is important to note how inflation protection on these various options can differ.

Hybrid Life Insurance

These are permanent life insurance policies that offer LTHC in addition to life insurance benefits. The policies, mostly single premium, combine life insurance with LTHC insurance. If there is a LTHC event, the policy owner may access the LTHC benefits on an income tax-free basis. If the client has a LTHC claim, payments under the LTHC rider reduce the life insurance amount. If there is no LTHC event, the ultimate life insurance proceeds are payable income tax free to the policy beneficiary. The “hybrid” policy addresses the concerns of the “use it or lose it” policy design. Of course, policies that offer multiple benefits may not offer the same benefits as policies that are designed to meet one specific insurance need.

To illustrate, one of our clients, male 64 years old, experienced a LTHC situation with a family member and wanted to protect his estate should he have a similar incident. Following a thorough review, we identified a hybrid life insurance program whereby a $100,000 single premium would not only provide $4,354 of monthly LTHC benefit for up to six years ($313,452 lifetime) with a 3 percent compound inflation rider, but also offer a death benefit that began at $208,788 the first year and declined to $104,484 after 30 years. Additionally, the policy gave a “return of premium” guarantee that could allow the client to walk away with his original deposit (less benefits paid) at any time. Compared to traditional LTHC coverage where $4,000-$5,600 in annual premium outlays is lost if benefits are not used, the hybrid gives the option of retrieving all or a portion of the deposit as unused benefits. It thereby delivers an alternative to the “use it or lose it” proposition that traditional “pay as you go” programs provide, and allows the client to potentially preserve his assets for greater income flexibility in his future.

The solution is always contingent on each individual’s specific situation including their goals, affluence and concerns. Having an awareness of these various options will help ensure the optimal LTHC solution.

Long-Term Care Insurance may not be suitable for all investors. These policies have exclusions and/or limitations. The cost and availability of LTC insurance depend on factors such as age, health, and the type and amount of insurance purchased. Any guarantees are based on the claims paying ability of the issuing company. There are expenses associated with the purchase of LTC insurance. Surrender charges may apply for early withdrawals and, if made prior to age 59½, may be subject to a 10-percent federal tax penalty in addition to any gains being taxed as ordinary income. Please consult with a professional when considering your insurance options.


How Can You Avoid Wealth Transference Failure?

If you believe that everything has been done to preserve your estate as it passes to your heirs, you may want to think again. Almost 70 percent of family wealth transference and business succession plans fail, according to studies cited by Victor Preisser and Roy Williams, in their book Preparing Heirs.

The statistic is sobering. Despite considerable time and money often expended on quality financial and legal advice, less than a third of wealthy families are able to keep control as their assets pass to the next generation. Assets can include a family business, real estate and financial investments, as well as philanthropic foundations and trusts.

That history’s largest intergenerational wealth transfer is about to occur makes the concern particularly poignant. Experts project that $25 trillion is expected to pass from elder parents to baby boomers over the next 20 years, $7.2 trillion of which will go directly to boomers.31 The possibility that a majority of these may not occur successfully is mind boggling!

We would expect that estates lacking technically competent transference plans or having plans that are not up to date would have issues. It is only natural that discussions of our own mortality are not a favorite topic. As a result, many families will find themselves postponing vital planning activities and discussions that can help preserve their estates. These can vary from making sure proper wills and trusts are in place to periodically reviewing an existing plan and beneficiary designations to be certain all aspects are current with prevailing tax laws and family circumstances.

But the thought that plans can fail despite being technically sound and up to date is surprising, to say the least. “Failure” can take a number of forms. Of course there is the obvious: estate erosion attributable to inadequate tax planning, liquidity issues that may force below market “fire sale” of otherwise wanted assets and lack of specificity that may lead to conflicts between heirs. Beyond that is the probability that “…the heirs will involuntarily lose control of the inheritance left them…not from outside sources, but rather in the values and practices of the heirs themselves.”31 Key among these are the values and skills the next generation are given to wisely oversee their inherited wealth– thus, the term “values transference” is coined. A common deficiency in unsuccessful transfers is a clearly developed plan or family mission statement, and the presence of open communication.

The fact is, poor inter-family communication is cited as a key ingredient. A 2005 study by Dr. Ken Dychtwald of Age Wave32 found less than one-third of boomers and their parents have had a thorough discussion on all aspects of legacy planning. Factors for this were not surprising but noteworthy; personal discomfort with topics of inheritance and death are the biggest barriers to discussion. But it was unexpected that 34 percent of boomers studied were more uncomfortable discussing their parent’s situation than the parents themselves.

Further, 25 percent of boomers hesitated because they thought such conversations would be upsetting to their parents, whereas 36 percent of the parents thought it would upset their boomer children. Both groups about equally (22 percent boomers, 20 percent parents) thought the talk would cause conflict within the family. It could be that each generation is misreading the other.

The solution may lie in our ability to develop a framework for open discussion. This starts by expanding the concept beyond inheritance. Whereas inheritance refers to the physical assets and possessions that we pass, legacy includes the intangibles. Thus the “six pillars of legacy” include not only the (1) financial assets and/or real estate and (2) personal possessions of emotional value, but also (3) value and life wisdom lessons; (4) ethics, morality, faith and religion; (5) customs and traditions; (6) memories and stories; and (7) instructions and wishes to be fulfilled.

When facilitating these discussions through family meetings, I encourage clients to begin by speaking of their positive family stories. These tend to unite family members through their shared history and are less likely to be controversial. Not only can everyone be right and have what they want but also, this often provides clues as to how other issues might be broached.

Often the “fear” factor encourages us to postpone uncomfortable discussions; however, it does not eliminate the need to deal with the issues sooner than later. When we do, we may find the fears are exaggerated or unfounded. When and if conflict arises, family members often welcome the opportunity for discussion and resolution. In short, studies show that avoiding the potential for conflict now may result in greater conflict later.

A Concluding Note

Investment results are certainly an important key to financial security. That said, we have found over our 30 years of providing award-winning service33, that when clients know their entire financial house is in good order, they are “freed” to focus on other aspects of their lives that can potentially offer fulfillment.

Our team’s Comprehensive Wealth Management process, as described below, sees investments not in and of themselves, but rather, in the context of tax planning, estate planning and risk-insurance management. This holistic approach gives clients their own personal “Chief Financial Officer” who knows more than just the numbers—someone who is also intimately familiar with their dreams and concerns. This highly personalized service is capable of not only effectively reacting, but also more proactively anticipating client needs— and often resolving questions before they are even asked.

The “Financial Enhancers” discussed herein represent only one aspect of our efforts. Helping clients balance their lives, we also offer resources that consider your:

• Health: Physical impact to give you longevity

• Safeguards: Insurance and estate planning tools

• Legacy-Philanthropy: Family and community impact to give you meaning

• Social: Emotional impact to give you connection

This publication goes well beyond textbook knowledge. It shares many practical insights and tactics that often are only learned from being “in the trenches” and actually sitting with clients as they share their innermost fears and dreams. While every person is unique, we all share many similar concerns and aspirations. My sincere hope is that the materials offered herein can offer a positive impact to your life.

To explore our services further, I invite you to visit our website at www.KauffmanWealthManagement.com and to contact me directly at (866) 467-8981. I look forward to discussing how we can support your efforts to achieve a “Life Well Lived”.

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them. Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours-one that delivers services according to the needs and perspectives of its clients.

Many people find that having a trusted independent advisor can provide financial confidence by clarifying economic complexity, navigating through turbulent markets, and providing a buffer between them and changing times.

Discover how Kauffman Wealth Planning extraordinarily personalized approach to wealth planning and management can help you on the road to a “Life Well Lived”.

140 South Lake Avenue, Suite 217, Pasadena 91101: 626.795.6874
550 Periwinkle Lane, Santa Barbara 93108: 805.969.5444
Toll Free: 866.467.8981
Email: [email protected]

The information contained in this book does not purport to be a complete description of the securities, markets, or developments referred to in this material and does not consititute a reccomendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mitchell Kauffman and not necessarily those of Wells Fargo Advisors Financial Network. Expressions of opinion are as of this date and are subject to change without notice. Wells Fargo Advisors Financial Network is not responsible for the consequences of any particular transaction or investment decision based on the content of this book. All financial, retirement and estate planning should be individualized as each person’s situation is unique.

This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Keep in mind that there is no assurance that our recommendations or strategies will ultimately be successful or profitable nor protect against a loss. There may also be the potential for missed growth opportunities that may occur after the sale of an investment. Recommendations, specific investments or strategies discussed may not be suitable for all investors. Past performance may not be indicative of future results. You should discuss any tax or legal matters with the appropriate professional.

Foot Notes

1 “What Baby Boomers’ Retirement Means for the US Economy,” by Ben Casselman, Five Thirty Eight Economics, May 7, 2014. [+ http://fivethirtyeight.com/features/what-baby-boorners-retirernent-rneans-for-the-u-s-econorny/+]

2 “Better Financial Security in Retirement? Realizing the Promise of Longevity Annuities,” by Katharine G. Abraham and Benjamin H. Harris, Nov. 6, 2014, Brookings, [+ http://www.brookings.edu/research/papers/2014/11/06- retirement-longevity-annuities-abraham-harris +]

3 “Just the Facts on Retirement Issues” by Center for Retirement Research at Boston College, Feb. 2003, p. 3 http:/icrr.bc.edu/wp-content/uploads/2003/02/jtf_6.pdf

4 “Controversy Over Inflation: Is There More Than We Are Aware Of?,” by Mitchell Kauffman, MBA, MSFP, Certified Financial Planner, 2011.

5 “Values-Based Financial Planning: The Art of Creating an Inspiring Financial Strategy,” by Bill Bachrach [+ http://www.billbachrach.com/store/values-based-financial-planning+]

6 “Dalton, T. Retirement at 62: Is Receiving Social Security Worth It?’‘ CPA Journal Online, June 2006.

7 “Do Boomers Have the Guts and Wisdom to Course Correct Our Aging Nation?” by Ken Dychtwald, Ph.D., Huffington Post, 2013, [+ http://www.huffingtonpost.com/ken-dychtwald/aging-tips-do-boorners-have-the-gutscourse_ b_2852559.htrnl 9 +] “The Number,” by Lee Eisenberg, Free Press, 2006.

8 “A Whole New Mind,” by Daniel Pink, Penguin Group, 2005 p. 60.

9 “A Whole New Mind,” by Daniel Pink, Penguin Group, 2005.

10 “Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha,” by Francis M. Kinniry Jr., CFA, Colleen M. Jaconetti, CPA, Michael A. DiJoseph, CFAand Yan Zilbering, Vanguard Research, 2014, p. 20-21.

11 “How Annuities Are Taxed,” by Kimberly Lankford, Kiplinger, July 10, 2009.

12 “How Annuities Are Taxed,” by Kimberly Lankford, Kiplinger, July 10, 2009.

13 “Charitable Donations from IRAs,” IRS, [+ http://www.irs.gov/Retirernent-Plans/Charitable-Donations-frorn-IRAs+]

14 “Making the Case to Buy an Annuity,” by Lavonne Kuykendall, Wall Street Journal, March 8, 2011.

15 “FINRAinvestors: Equity-Indexed Annuities- A Complex Choice,” [+ http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/AnnuitiesAndinsurance/pO10614+]

16 Average of monthly net new cash flows from Jan. 2007-Sept. 2010 as reported in Investment Company Institute’s “Long-Term Mutual Fund Flows Historical Data” as of Nov. 20, 2010.

17 “Consumer Expenditure Survey”, U.S. Bureau of Labor Statistics, September 2012.

18 Serial annuity (aggregation) rule states that if you own different annuity contracts with the same insurer purchased the same year and used the same Social Security number, then withdrawals taxed as if they carne from the same annuity contract. See “Annuity ladders to tax-smart client’s cash flow” by Bruce Beaty, Legacy Marketing Group (http://www.producersweb.com/r/LGY/d/printFocus/?pciDflaa525a9698fe24ace62e65b7524881)

19 Partiall035 Exchange: Also called “IRS Revenue Procedure 2011-38,” please see http://www.irs.gov/pub/irs-drop/rp-ll-38.pdf.

20 “Credit Suisse Global Investment Returns Yearbook for 2010.”

21 “The Controversy Over Inflation: Is There More Than What We Are Aware of?” Mitchell Kauffman, CFP® http://kauffrnanwealthservices.com, August 31, 2011.

22 “The Bond Bubble and the Case for Stocks.” Jeremy Siegel and Jeremy Schwartz, Wall Street Journal, August 22, 2011 and “Jeremy Siegel Warns of Bond Bubble.” Julie Crawshaw, Money News.Corn August 18, 2010.

23 “Beware of the Bond Bubble. Again.” Jonnelle Marte, Smart Money, August 24, 2011.

24 “Volatility of Bonds in the Secondary Market,” William Spaulding, http://thisrnatter.corn/rnoney/bonds/bondvolatility.htm 2005-2011

25 “Is this the start of a lost decade for bonds?” Martin E. Beaulieu, Investment News, July 25, 2010, p.l. Treasury bonds are backed by the paying ability of the U.S. Government.

26 “High Yield Bonds and Their Correlation to Equities.” Millares Asset Management, http://www.artisarnng.com/rnillares/pdf/rnillares_583023.pdf pg. 1

27 “The Bond Bubble and the Case for Stocks.” Jeremy Siegel and Jeremy Schwartz, Wall Street Journal, August 22, 2011

28 “FINRA Warns Investors About Chasing Returns in Structured Products, High-Yield Bonds and Floating Rate Loan Funds.” Financial Industry Regulatory Authority, July 25, 2011.

29 “Risk of losing money on Treasuries ‘quite substantial;’“ Investment News, June 6, 2011, p. 1

30 As of June 30, 2013 according to Pensions & Investments annual survey.

31 “Preparing Heirs: Five Steps to Successful Transition of Family Wealth and Values,” by Roy Williams and Vic Preisser, San Francisco: Robert D. Reed Publishers, 2003.

32 “The Allianz American Legacies Study” by Dr. Ken Dychtwald of Age Wave, 2005.

About The Author

As managing director and owner of Kauffman Wealth Management, Mitchell Kauffman has been providing wealth management and financial advisory services to his clients for over 30 years. Kauffman is a CERTIFIED FINANCIAL PLANNERTM practitioner and holds an M.B.A. from the Claremont Graduate University, where he served as a graduate fellow under the late Dr. Peter F. Drucker. He also earned a Certification in Financial Planning and a Master’s of Science from the College for Financial Planning in Denver, Colorado, as well as a Bachelor of Arts in Business Economics and Political Science from the University of California at Santa Barbara.

He is also an accomplished writer and speaker, whose contributions to his profession have been published in the Wall Street Journal, Los Angeles Times, Chicago Tribune, and Kiplinger, as well as several publications in Southern California.

Kauffman was one of only five financial advisors in the U.S. named to the Advisor Hall of Fame for 2010 by Research magazine. This honor had been bestowed on only 100 advisors during its prior 20-year history.

Kauffman Wealth Management serves clients from two office locations: 140 South Lake Avenue, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108. Securities offered through Wells Fargo Advisors Financial Network, member, FINRA/SIPC.

Wells Fargo Advisors Financial Network is not affiliated with any of the entities or groups listed above. *Advisor Hall of Fame: Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Investment products and services are offered through
Wells Fargo Advisors Financial Network, LLC (WFAN),
Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN

Pasadena Office: 626-795-6874
Santa Barbara Office: 805-969-5444


Are You On Track? Your A-Z Financial Freedom Resource

  • ISBN: 9781311987129
  • Author: Mitchell Kauffman
  • Published: 2016-03-31 00:05:14
  • Words: 22253
Are You On Track? Your A-Z Financial Freedom Resource Are You On Track? Your A-Z Financial Freedom Resource