NAPFA
Planning Perspectives
Volume 7 | Issue 1 | Jan / Feb 2012

Taking Steps to Safeguard
Your Investments..........................2

Don’t Fall in Love with Your
Employer’s Stock..........................3

Tax Outlook 2012 and 2013 .....................4

When Is the Best Time to Begin Taking
Your Social Security Benefits?...........5
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Getting a Solid Start in 2012
By Kevin Adler, Editor, NAPFA
U
ncertainty continues to rule the day in the financial world.
Our selection of articles for the January-February issue of
“Planning Perspectives” offers ideas about how to stay secure in
an unpredictable environment.
First, we look at investment uncertainty from two angles. The
exposure of the Ponzi schemes of Bernard Madoff and Allen
Stanford does not mean that investors are safe. Mary Baldwin,
CFP® provides tips about how to select a trustworthy investment
manager.
Then, Kevin Brosius, MBA, CPA/PFS, CFP®, explains how
even the strongest companies are not sure bets. That’s why
workers should not invest large proportions of their retirement
nest eggs in their company’s stock.
Next, Robert Klosterman discusses one of the biggest
sources of uncertainty in the U.S. economy today: U.S. tax
policy. He previews upcoming tax increases and proposed
increases, and he explores strategies for minimizing their
impact.
Finally, Clarissa Hobson offers a counter-balance to
uncertainty (at least for a decade or two): income from Social
Security. She discusses how spouses can maximize Social
Security.
NAPFA & Divorce Planners Association
Start Educational Exchange
Divorce is not only one of the hardest personal challenges that many people face, but it has immense
financial impacts. Financial advisors are often relied upon to help divorcing couples sort through difficult
financial issues and to facilitate communication and fairness during stressful situations.
In order to help its members become better counselors to clients facing divorce, NAPFA has teamed up
with the Association of Divorce Financial Planners (ADFP) to exchange educational programming and build
professional networking ties. “NAPFA members practice comprehensive financial planning, addressing
issues that go beyond investments,” said Ellen Turf, CEO of NAPFA. “Our hope is that NAPFA members
will learn from ADFP members about the unique challenges of working with divorcing or divorced clients,
while ADFP members will want to join our organization as Fee-Only financial planners.”
Investing
Take Steps to Safeguard Your Investments
By Mary Baldwin, CFP®
Baldwin & Associates
(Reprinted from Florida Today, with permission)
•
Know who will have custody of your
money and who will be providing
your account statements. A custodian
is the financial services company
that maintains electronic records of
financial assets.
•
Never write a check to an individual,
including an advisor or sales
representative. When you choose a
company like Fidelity, Schwab, or TD
Ameritrade, they hold the assets, and
your check is written to them. Put
another way, always use a third-party
custodian.
•
Do background checks. Check
out the people who invest for you,
including the firms that have custody
of your assets. Try the BrokerCheck
service at finra.org, the website of
the Financial Industry Regulatory
Authority. That’s the independent
regulator of U.S. securities firms and
a source of trustworthy information
about custodians.
•
Do your homework. Choose
your advisor wisely, understand
the investment risks, and know
the custodian and the level of its
insurance protection. In the event the
custodian fails, the Securities Investor
Protection Corporation protects up
to $500,000 per customer (which
includes a maximum of $250,000
in cash). Most custodians and
brokerage firms have supplemental
coverage beyond SIPC’s protection.
Schwab has an additional $150
million, and TD Ameritrade provides
$149.5 million per customer account,
for example. Make sure that your
account is covered.
www.NAPFA.org
F
inancial fraud made big news in
the early days of the economic
crisis. Many investors, including
highly sophisticated ones, were duped by
unscrupulous investment managers.
Here are steps you can take to check
out investment management firms and
see how financially secure they really
are.
www.mebaldwin.com
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Investing
Don’t Fall in Love with Your Employer’s Stock
By Kevin Brosius, MBA, CPA/PFS, CFP® Wealth Management, Inc. www.wealthmanagement1.com
bottomed at $0.55. Adding insult to injury, he
was laid off and never returned to work there.
Regrettably, this lesson has to be relearned
over and over again. It was reported that
WorldCom employees lost over $1.1 billion
in 401(k) assets when the company declared
bankruptcy in 2002. Just a year earlier,
Fortune ranked WorldCom 60th on the
list of “Most Admired Companies.” Enron
employees held 62% of their 401(k) assets
in company stock and lost an estimated
$1.3 billion when the company collapsed in
2001. As late as 2000, Enron ranked 25th
on the “Most Admired Companies” list and
among the top five in “Quality
of Management.” Same stories
at Lehman Brothers and Bear
Stearns in 2008.
Do you think the company
you work for is well run and
immune to a significant
change of fortune? So did
many employees at Eastern
Air Lines, Orion Pictures, Schwinn Bicycle
Company, Wang Laboratories, Bethlehem
Steel, Bradlees, Converse, Montgomery
Ward, Polaroid, Sunbeam, Pan Am, Adelphia,
Global Crossing, Spiegel, Bennigan’s, Circuit
City, Countrywide, Washington Mutual,
Lenox, Vivitar, Reader’s Digest, Blockbuster,
Hollywood Video, and Borders. Each
company declared bankruptcy.
The average life expectancy of a
multinational corporation is 40-50 years,
according to Arie De Geus, author of The
Living Company. Considering that your work
life and retirement are likely to be more than
50 years, do you really want to risk your
fortune in the company stock?
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L
ast month, I was a volunteer on the
Jumpstart Your Retirement Hotline,
sponsored by NAPFA and Kiplinger’s
magazine. A caller asked for advice about
his portfolio. He had saved diligently for
retirement and had a considerable portfolio
to show for his efforts. However, half of
his money was invested in the stock of the
company where he worked. I asked him why
he invested so heavily in the company stock,
and he told me he really trusted and admired
the management team. Really? Are you
willing to bet half of your retirement funds on
them?
Unfortunately, in meeting
with prospective clients,
I often find this situation
when employees have
accumulated their
employer’s stock through
ESOPs, restricted stock,
and/or company matches
to employee contributions
inside 401(k) plans.
In 1999, a friend who worked for a hightech company asked me for investment
advice. His investable assets were about $1
million, which was pretty good for someone
who was only 48. But most of his money
was in his company’s 401(k) plan, which was
100% invested in the company’s stock.
I explained to him the additional risk
he was assuming by having his total
portfolio invested in one company, and I
recommended a more diversified, less volatile
portfolio. He agreed with my recommendation
but said he wanted to wait for one more split
of the company stock...and he’s still waiting.
Eighteen months later, the stock crashed
from its high of about $100/share and finally
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Taxes
Tax Outlook 2012 and 2013
By Robert Klosterman, CFP®
t’s clear that 2012 will be a year to
watch tax policies carefully and to take
actions based on legislative and political
developments.
If the so-called “Bush tax cuts” expire
at the end of 2012, the federal longterm capital gains tax would rise from 15
percent to 20 percent. Also, a 3.8-percent
surtax on investment income and gains for
taxable incomes above $200,000 single and
$250,000 joint returns has been proposed as
a way to fund surging costs in Medicare.
It doesn’t stop there: income from interest,
dividends, annuities, rents, royalties, income
from passive activities, gains from securities
and commodities trading, and gains from
certain dispositions of business property
could be included. (Items not included for
the calculation are retirement income from
pensions, IRA distributions, Social Security,
life insurance proceeds, municipal bond
interest, and income from a business you
materially participate in.)
While pensions, IRAs, and companyprovided annuities are not covered by
the surtax, they do count toward the
income threshold that would trigger the tax
liability. For example, if $250,000 of family
income comes from pensions and/or IRA
distributions, all investment income would be
subject to the Medicare tax on a joint return.
If $50,000 comes from pensions and IRAs
and $250,000 from interest, dividends and
capital gains, then $50,000 is subject to the
Medicare tax.
The Medicare tax also can apply to the
sale of a personal residence. The calculation
www.whiteoakswealth.com
of the gain on a primary residence will be
the sales price minus the cost basis minus
the primary residence exclusion ($250,000
single, $500,000 joint filer). No exclusion
exists on secondary residences. Any gain
over the $200,000 on a single return and
$250,000 on a joint return would be subject to
the Medicare tax.
Irrevocable trusts and estates do not
benefit from the threshold of $200,000 to
$250,000 of adjusted gross income. The tax
can be applied with as little as $12,000 of
taxable income. It also appears that children’s
unearned income reported on a parent’s
return will be affected by the tax.
Tax Planning
How can you respond if these new taxes
are enacted? One option is to do a Roth
conversion so that you can pay taxes now for
those retirement funds. This avoids having
investment income in 2013 that will put you
over the income threshold limits. Another
option is buying tax-free municipal bonds for
fixed-income needs. Meanwhile, watch out
for the tax rate on qualified dividends, which
conceivably could rise from the current 15
percent to as high as 39.6 percent.
The other idea is to accelerate income into
2012, which is possibly the last year when the
current rates and rules will be in effect.
As always, remember that the best
decision is based on your individual
circumstances. Talk with a financial advisor or
CPA.
www.NAPFA.org
I
White Oaks Wealth Advisors
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Retirement Planning
When Is the Best Time to Begin Taking
Your Social Security Benefits?
By Clarissa R. Hobson, CFP®
Carnick & Company
•
Are both individuals eligible for benefits
based on their own working records?
• What age should each claim benefits?
• Can strategies be used to increase
benefits?
If both are eligible for benefits, calculate
whether each should claim their own benefit
or claim spousal benefits. If one spouse
earned significantly more, it’s likely the other
spouse should claim a spousal benefit, which
is one-half of the higher earner’s benefit.
Here are two strategies that help
maximize benefits. “File and Suspend”
is often employed when the couple has a
significant wage disparity, and the higher
wage earner wants to maximize benefits by
waiting until 70. The lower-earner, if 62 or
older, could claim on his or her own record,
or could opt for the higher spousal benefit.
However, the lower-earner cannot claim
spousal benefits unless the higher-earner
has filed.
Here’s how to solve it: If the higher-earner
has reached full benefits age, he or she
files for benefits. Then the lower-earner files
for spousal benefits, but the higher-earning
spouse suspends the receipt of benefits.
Thus, the lower-earner claims higher
benefits, while the higher-earner continues
accruing credits. This is particularly beneficial
if the higher-earner dies first because the
survivor will have a higher benefit.
“Restricting an Application” to a
spousal benefit only is a less-commonly
used strategy. Here, the lower-earner claims
his or her benefit, and the higher-earner
applies for spousal benefits (note: the higherearner must be eligible to take benefits). If
the higher-earner has reached full retirement
age, he or she is eligible for half of the
lower-earner’s full benefit amount, even if
the spouse is receiving a reduced benefit
because he or she started early! Then, the
higher-earner can switch to his or her own
benefit amount at age 70, and the lowerearner can switch to a spousal benefit.
These strategies can be complex, but
worth it.
www.NAPFA.org
S
ocial Security benefits represent one
of the only streams of lifetime income
available with built-in cost-of-living
adjustments. Benefits come with rights of
survivorship, so when one spouse dies, the
other spouse receives the higher of the two
benefits.
Deciding when to take Social Security
benefits is critically important to maximizing
long-term benefits. Benefits may be claimed
as early as age 62, but if income isn’t
needed, or if you’re still working, you can
wait up to eight years. Taking benefits early
results in a permanent reduction; the earlier
benefits are taken, the greater the reduction.
Postponing benefits beyond full benefits
age results in a credit of 8% per year
(up to age 70), plus annual cost-of-living
increases (COLIs). So if full retirement age
is 67, monthly benefit amounts will be 24%
higher (plus COLIs) if benefits are delayed
to 70. The COLI will be applied to the higher
benefits and will apply to survivor benefits.
Married couples have many factors to
consider prior to filing:
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