Wee Three Things

As we are in the middle of the Holiday Season I thought now a fine time to take respite from fun and family and talk about taxes and estate planning, which, in the end is good for your family.

First, with the buzz around the fiscal cliff and the Bush tax cuts that are set to expire in 2013, what is getting overlooked is a tax that will definitely take effect in the 2013: the 3.8% tax on investment income.

Congress passed the 3.8% tax in 2010 to help fund President Obama’s Affordable Care Act and Medicare overhaul, and the new tax is scheduled to go into effect on Jan. 1, 2013.

As a result, you should meet with your advisor before year-end to decide whether to sell any assets before the end of the year. One simple idea is to rebalance your portfolio this December, instead of January, that way any gains would not be subject to the new tax. A good news note, about half of all accounts that hold dividend paying stocks are in tax-advantaged vehicles, so they remain indifferent to this new tax policy.

According to the congressional Health Care Caucus’ information site, the new tax will be imposed on unearned net investment income, including capital gains from stock sales, dividend income, bonds, mutual funds, annuities, loans and home sales. People subject to the tax are individual filers who earn adjustable gross income of more than $200,000 and married couples filing jointly with AGI of more than $250,000.

Next, if you're planning to make a charitable donation, do it before December 31 and you may be able to write it off on your 2012 taxes. A donor-advised fund can give you even more benefits. Remember you can receive an immediate tax deduction for contributions to offset taxable income, also, you can avoid capital gains taxes on the contribution of appreciated assets held for more than one year and it removes contributed assets from your taxable estate.

Finally, I found an interesting exhibit in one of my estate planning books. It compares Chief Justice Warren Burger and Elvis Presley’s wills. Elvis Presley’s will contains many important clauses that are necessary in a well constructed will. Warren Burger’s will is literally three sentences long. Elvis passed on 27 percent of his estate to heirs, while Warren Burger passed on 75 percent of his assets. The length and number of clauses mean very little to estate planning if proper planning is not completed.

Meet with your CFP® advisor or estate planning attorney, if you don’t have one start interviewing candidates.

CBlakely CFP®, CTFA      12/2012

Sources: http://health.burgess.house.gov/ Bloomberg LP, Estate Planning, by Michael Dalton

Revisiting the 4 Percent Spending Rule

A well-known approach to addressing prudent retirement spending is known as the “4% spending rule.” This guideline states that retirees with a diversified portfolio balanced between stocks and bonds can safely withdraw 4 percent of their initial balance at retirement, then adjusting the dollar amount for inflation each year thereafter.An inflation-adjusted withdrawal rate is intended to provide a predictable stream of withdrawals that keep up with inflation.

 

Conversely, using a percentage-of-portfolio withdrawal method, the retiree withdraws the same percentage annually from the prior year-end portfolio balance. The dollar amount will fluctuate with market performance, and while the portfolio balance and withdrawals may shrink, the portfolio is unlikely to ever be fully depleted.

In practice, retirees are likely to incorporate a hybrid spending method—spending moderately in years when the market is up and spending less when the market experiences prolonged downturns.

The factor that has the biggest impact on withdrawal rates is the retirement planning time horizon. For most people, an estimate of how long the retirement portfolio will be needed can be based on the investor’s current health and anticipated longevity, as determined by statistics, and history. An estimate of age 90 is a reasonable default given today’s longer life expectancies. For a 65-year-old married couple today, for example, there is a 72 percent chance that at least one spouse will live to age 85, a 45 percent chance that one will live to age 90, and an 18 percent chance that one will reach age 95!

With today's yields near historic lows retirees, whose dividends and interest combined are less than 4 percent are often reluctant to spend from principal to make up for the deficiency. And many are wondering whether 4 percent is still a reasonable spending goal.I feel it is a reasonable starting point for investors who follow a total-return spending approach. A total-return approach is one in which investors remain appropriately balanced between stocks and bonds, and diversified across varied asset classes so that portfolios may potentially benefit from both dividends and interest and appreciation of capital (i.e. stocks moving up in price).

Instead of changing the portfolio to chase income, by reducing equity exposure and adding bonds it may be wise to consider the total-return approach to allow for spending both from portfolio cash flow and from the potential increase in the portfolio value.This empirically decreases the odds of  outliving your portfolio.

CBlakely CFP®, CTFA                   October 2012 

 

Source: Society of Actuaries Retired Participants 2000 Mortality Table., Fiancial Planning Journal