Beware of Interest Rate Risks in Your Portfolio

Longer term U.S. Treasury Bond yields remain well below their long term average. The current yield on the U.S. 10 year Treasury is approximately 2%. Long term Treasury bonds were top performers last year as they earned well over double digit returns. The 10 year Treasury returned over 17% last year as rates dropped from over 3% to under 2%. We have covered in earlier posts reasons as to why rates are so low. In the quest for income, we are continuing to see investors stretch for yield by purchasing longer term bonds. If rates were to rise, these bonds would fall in price. Investors need to begin to evaluate their portfolio for interest rate risk. Those with short term memories only need to recall that four years ago, a one year CD yielded more than 5%.

For a buy and hold investor, purchasing a long term bond could be a significant mistake. If you purchase a 10 year Treasury today and hold it until maturity, you will earn about 2% annually. While inflation is currently below trend, let’s assume it averages 3.5% (the long term average is nearly 4%). This means that if you buy and hold a 10 year Treasury, each year you will be losing 1.5% in purchasing power. In 10 years your investment will buy less than it does today. Consider the following example: A $100,000 investment that compounds at 2% per year, will be worth $125,892 in 10 years. To keep up with inflation, that $100,000 needs to be worth $141,060 in 10 years! Use a higher inflation figure like college costs or healthcare costs and the difference becomes that much larger.

We are not making a call on the bond market or interest rates. Interest rate forecasting is very difficult. A history of 10 year US Treasury Bond rates is below. It is pretty clear from this that we are near a bottom in rates and they cannot go much lower. If history is cyclical and rates were to rise, what would happen to your portfolio? We are encouraging investors to evaluate their portfolios. Stress test your portfolio for what a rise in interest rates would do to the holdings. Analyze your holdings to make sure that you have asset classes that can preserve purchasing power (beat inflation).

*****
As the Director of Investments for Planning Solutions Group, Jon Giordani provides clients with innovative investment planning strategies. Prior to joining Planning Solutions Group, Jon worked in the institutional market place as a Vice President of Institutional Sales for Deutsche Bank and a research analyst for Croft-Leominster. Jon is a Chartered Financial Analyst (CFA) charter holder and holds NASD Series 7 and 63 registrations. Jon graduated from the Johns Hopkins University where he majored in Economics.

Is This Income Taxable?

Many clients have received various types of income over the years and are not sure whether or not they have to pay taxes on the proceeds. Here is a list of some sources of income and whether or not they are taxable:

Lawsuits: Awards that are received as “Punitive” are taxable while “Compensatory” awards are nontaxable. Compensatory awards are paid to compensate for a prior loss and do not represent a “gain” to the plaintiff, unlike Punitive awards. The judge will determine to what extent the award is allocated between punitive and compensatory.

Social Security Benefits: 85% of your Social Security is taxed if your income exceeds $44,000 if your filing status is Married Filing Jointly, and $34,000 if filing as Single. The Maximum Earnings threshold is $14,640 if under your Full Retirement Age (you lose $1 of Social Security benefit for every $2 of income above this threshold) and $38,880 in the year of Your Full Retirement Age (you lose $1 of Social Security benefits for every $3 of earnings above this threshold).

Child’s investment income: The “Kiddie Tax” taxes all investment income over $1,900 of a child under age 19 (if dependent and full time student, age 24) at the Parents’ rate. (The first $950 is tax free, the next $950 is taxed at the child’s rate).

Disability Income: Disability income benefits are generally taxable if the disability insurance premiums were deducted on a corporate or personal tax return. If not deducted, the benefits are income tax free.

Alimony: Alimony payments received are included as taxable income (and deductible to the party making the payments)

Child Support: Payments are generally not taxable to the recipient.

Cash Rebates: Are generally not taxable but should be subtracted to lower the basis of the asset in question.

Gambling/Lottery Winnings: The winnings must be included in your income, however you may claim (itemizers only) any gambling losses against these winnings.

Life Insurance: Generally, death benefit payments are not taxable to the individual receiving them, however, if the policy is surrendered, the “gain” in the cash value that exceeds total premiums paid is considered taxable income.

Property Damage: As long as the total payments are less than the total cost basis in the property, the award is tax free.

Scholarships: Scholarship awards are nontaxable income, although amounts for Room and Board are to be included in taxable income.

Workers Compensation: Payments received for personal injury and/or sickness incurred on the job are generally not taxable.

Municipal Bond Income: is generally tax free unless you are subject to the Alternative Minimum Tax (AMT). Certain “private sector” Municipal bonds are not exempt from taxation under the AMT system.

Retirement Plan Loans: Withdrawals from your IRA are not taxable if the funds are “repaid” to your account within 60 days. Unpaid 401(k) loans are considered taxable income if you are terminated or leave your employer.
*****

Don Hannahs has been a Financial Advisor since 1987. He is a founding partner of Planning Solutions Group, LLC. His practice focuses on high net worth business owners, physicians, and retirees in the areas of wealth management, business continuity planning, fringe benefit design, and qualified plan analysis. Don is a Certified Financial Planner (CFP) who has clients throughout the Mid-Atlantic region and Florida.

Control What You Can

Over the last several years of difficult economic times, there is one alarming trend that I continue to see at all income levels that affects your financial security. While incomes remain flat and the markets continue to generate modest, if not negative returns, the American consumer continues to spend above their means. In its simplest form, there are three variables to your financial security: what comes in the door (income), how your assets behave (return), and what goes out the door (spending). The only variable that can truly be controlled is what goes out the door: spending. Incomes are predominately fixed, returns are controlled by the markets, but spending is 100% in your control. Yet, this is not happening. The end result of fixed income, modest returns, and excess spending is a plan behind schedule and reduced long-term financial security. My recommendation is that if there was ever a time for fiscal responsibility, it is now. Reconsider and evaluate expenses!!! Whether it is that trip to Europe, the unnecessary new car, or the extra night out for dinner; everyone should evaluate how these extra expenses will affect their long term security. Don’t get me wrong, I am a true believer in rewarding yourself for a hard day’s work. I just recommend that it is more important now to evaluate the one variable in your control – spending. If you don’t know whether or not you have financial security, or if your plan is 2-3 years old, contact us by entering your information and question in the form below for a review of your situation.

Name(required)

Email(required)

Comment(required)

*****
Robert (Bob) Carson has been a financial planner to the affluent since 1993. He specializes in providing comprehensive financial planning solutions to individuals and business owners. His primary focus is to provide advanced strategies for estate preservation, business succession planning, and asset management. In addition to his focus on clients, he also oversees a group of financial planners and an administrative support team for Planning Solutions Group. In 2001, the partners nominated Bob to act as the Managing Partner for the firm. As the Managing Partner, Bob leads the strategic direction of the firm and implements new business initiatives to improve PSG’s planning, client service, and communication. Bob earned his Bachelors degree in Accounting from the University of Baltimore. He received his Masters of Business Administration from the same institution.

Hobby versus Business?

Many clients are looking for ways to take a hobby and turn it into a legitimate business in hopes of making a profit. While the best outcome would be to generate a profit, taxpayers would be satisfied if they could claim deductions for expenses incurred in pursuing their hobby, even if the losses exceeded the income generated. The IRS has clear rules as it affects Hobby vs. Business issues. Businesses can (and do) lose money, especially in the early years. However the IRS looks at your intention to make a profit and your efforts. Additionally a business needs to makes a profit 3 out of 5 consecutive years (2 out of 7 years for horse racing). If these 2 Safe Harbor conditions are met, then the burden of proof for the lack of profit motive is on the IRS. If a business is classified as a Hobby, you are faced with nondeductible hobby losses. However, 2 years of additional deductions can be of great help to a taxpayer while determining if you truly have a valid business concept.
*****
Don Hannahs has been a Financial Advisor since 1987. He is a founding partner of Planning Solutions Group, LLC. His practice focuses on high net worth business owners, physicians, and retirees in the areas of wealth management, business continuity planning, fringe benefit design, and qualified plan analysis. Don is a Certified Financial Planner (CFP) who has clients throughout the Mid-Atlantic region and Florida.

Low Rates: Good for Borrowers, Bad for Savers

Since the beginning of the financial crisis, the Federal Reserve has employed several monetary policy tools in the hopes of stimulating the economy and improving employment. One policy has been a commitment to keep short term interest rates near zero for the foreseeable future. Longer term rates have followed the shorter term rates lower. The hope is that the low rates will encourage borrowing which will stimulate demand. For example, corporations could use the cheap money to finance growth strategies, consumers could fund large purchases such as houses or automobiles and local governments could finance capital projects such as upgrading infrastructure. For potential borrowers, these low rates are a tremendous benefit. A $350,000 loan for 30 years is nearly $500 cheaper per month than it was a couple of years ago.

However, the low rates aren’t welcome relief to everyone. If not already, individuals will soon begin to feel the effects of low rates in their pocketbooks:
• Penalty to savings: Prior to 2008, it was pretty easy to find a shorter term CD yielding     5%. Today, this same CD yields less than 0.50%. This is a loss of $4,500 per year of income per $100,000 invested.
• Profitability is being squeezed at financial service companies. Consumers are likely to face   rising fees from banks (remember Bank of America’s attempt to charge $5 per month to use an ATM card?). Here at PSG, we are already seeing insurance premiums being increased by life insurance companies.
• Pension funds and endowments are not hitting their needed returns. Most of these funds are assuming actuarial returns of 7% or more. With 10 year treasury bonds yielding less than 2%, these funds likely don’t have a chance of generating these types of returns. Municipalities may be forced to raise taxes to plug holes to meet the promises made to retirees. Colleges may have to raise tuition if a significant portion of their operating expenses is coming from the endowment.

As an investor, be careful of stretching for income. Any potential investment that is not guaranteed has downside risk. Countless times over the past year, we have been asked by clients how to reposition savings accounts, money market investments or proceeds from a CD that has matured. Our answer has been that if you can’t tolerate any losses, keep it safe. Give up the interest and upside to protect against capital loss. Be wary of investments that offer above average rates.

We recently had a client contact us to look into an investment that another firm was recommending. The client was elderly and did not like losses. However, she also did not want to earn near 0% which was what her savings account was paying. The proposed investment was pitched as a safe, income alternative. We looked at the investment and found that the assets would be invested in a collection of closed-end municipal bond funds. Yes, the investment did offer significant income above that of CDs and savings accounts. However, we pointed out that several of the bond funds lost over 20% in 2008! There was no guarantee the the client’s principal would be returned. In our opinion, this investment did not meet her primary goal of capital preservation.

The bottom line is to understand the opportunities that low interest rates present, but also evaluate your investment options carefully before you take unnecessary risks with money that you need to keep secure and liquid.
*****

As the Director of Investments for Planning Solutions Group, Jon Giordani provides clients with innovative investment planning strategies. Prior to joining Planning Solutions Group, Jon worked in the institutional market place as a Vice President of Institutional Sales for Deutsche Bank and as a research analyst for Croft-Leominster. Jon is a Chartered Financial Analyst (CFA) charter holder and holds NASD Series 7 and 63 registrations. Jon graduated from the Johns Hopkins University where he majored in Economics.

Financial New Year’s Resolution—Pay Yourself First

For many of us, January is a time to make New Year’s Resolutions. For others, it is a time to start sorting through the bills leftover from the holidays. Regardless of your situation, it is important to put yourself first…especially when it comes to your retirement. Each year, it is wise to consider increasing the amount you save to your 401(k) or other retirement plan and the new 2012 salary deferral limits may encourage you to make a change to your current savings plan.

There have been several changes to the Pension Plan Limits for 2012. The Salary Deferral Limits for 401(k), 403(b), & 457(b) plans have been increased to $17,000 (from $16,500). Unfortunately, for all those individuals over the age of 50, the catch-up contribution limits remain the same at $5,500.

Quick Summary:
• Annual addition limit (now $50,000, formerly $49,000);
• Salary deferral limit (now $17,000, formerly $16,500);
• Maximum compensation to be considered (now $250,000, formerly $245,000);
• Compensation used to determine a Highly Compensated Employee (now $115,000, formerly $110,000);
• Compensation used to determine a Key Employee (now $165,000, formerly $160,000);
• Social Security taxable wage base (now $110,100, formerly $106,800);
• The catch-up contribution limit remains the same ($5,500).

*****
Richard is the Director of Retirement Plan Services for Planning Solutions Group.  He provides the strategic oversight to the firm’s retirement plan consulting services, and also provides the oversight of the firm’s design, servicing, and monitoring of the retirement plan services offered to our clients.  Richard has been working in the financial services industry since 1994.  As a Retirement Specialist with Brown Advisory in Baltimore, he was responsible for coordinating the marketing, sales, and client service efforts for the firm’s brokers and strategic advisors.  Prior to that, he spent 12 years at T. Rowe Price in Baltimore, working with their largest institutional clients in varying capacities including client service and marketing.  Additionally, he was the manager for the firm’s institutional proposal support team.  Richard holds his FINRA Series 6, 7, 63, 65 and Life & Health Insurance licenses.  Richard graduated from Towson University where he majored in Economics and Political Science.

Partners of Planning Solutions Group Presented with 2012 Five Star Wealth Manager Award

For 2012, two of the partners of Planning Solutions Group, Larry Briskin and Tim Kvech were named as Five Star Wealth Managers for the Baltimore area. At PSG, we take pride in serving our clients at the highest level and it is always a privilege to be acknowledged for our efforts. The Five Star award goes to professionals who provide quality services to clients and the decision on the annual award recipients is based on comprehensive consumer-driven industry research. With a firm-wide goal to exceed our clients’ expectations, these awards add credence to PSG’s ongoing enhancement of client services.

When asked about their roles and responsibilities as advisors in today’s volatile economic climate, the partners and planners of PSG agree that their priority as advisors is to reach out to clients and make sure that a well-defined plan is in place to ensure that their clients can still achieve their financial objectives. Tim Kvech elaborates: “The most important service that we can provide to our clients is our time and proactive advice. Clients need to know that we are always thinking about their financial security and our job is to call them before they call us.”

The planners at PSG focus on taking complex subject matter and explaining it in terms that each client can readily understand. Tim explains, “Our firm truly focuses on holistic planning and we understand how each moving part can potentially affect a client’s overall financial plan. Too many times, we find that other firms work in a vacuum and they fix a problem in one area but accidentally create problems in other areas. Our role is to review and coordinate how every piece of the puzzle inter-connects so that we can build a successful estate, business, and family wealth plan.”

Planning Solutions Group has developed systems and processes that create fluidity and stability even amidst market volatility. According to Larry Briskin, “This has been a challenging financial environment in which to provide wealth management services. It has required substantial time not only to manage risk in each portfolio, but also to create reasonable expectations of returns. Direct client contact, supportively and frequently, has been required to maintain strong client relationships.”

One of the primary reasons that the PSG planners have been successful in securing client relationships and building their business is due to the support staff working behind the scenes. While many advisors enjoy success as sole practitioners, PSG maintains that a team approach to financial planning takes the level of client service up a notch. This differentiating factor makes it easy to retain and gain clients even through volatile markets. Larry remarks, “I could not provide each client with the WOW experience without our outstanding support team contributing immensely and proudly.” Tim adds, “We are finding that many clients are leaving smaller firms that do not have the resources or staffing to keep up with the ongoing client needs. We are very fortunate that we have an extremely talented and professional staff that can provide and give the attention that each client deserves.”

So, what lies ahead in financial planning and wealth management? Larry comments, “Moving forward, we need to continue to navigate the turbulent waters of a cyclical bear market that is now nearly 12 years in duration. And, we will need to be looking for the signals of when the current bear market will end and give way to a new cycle – hopefully and presumably one in which capital appreciation will again emerge in a growing economy.” Tim believes, “For the firms that truly focus on the clients’ best interests, we see a bright future for financial planning and asset management.”

• The 2011 Five Star Wealth Managers do not pay a fee to be included in the research or the final list of Five Star Wealth Managers.
• Only wealth managers with more than five years of experience in the financial services industry are considered.
• The overall evaluation score of a wealth manager reflects an average of all respondents and may not be representative of any one client’s experience.
• The Five Star Award is not indicative of the wealth manager’s future performance.
• Wealth managers may or may not use discretion in their practice and therefore may not manage their client’s assets.
• The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or Baltimore Magazine.
• Please keep in mind that working with a Five Star Wealth Manager is no guarantee as to the future investment success nor is there any guarantee that the selected wealth managers will be awarded this accomplishment by Five Star Professional in the future. For more information on the Five Star award and the research/selection methodology, go to: fivestarprofessional.com

The full Five Star article is available through the link below:
http://www.pageturnpro.com/Crescendo-Business-Services/34703-2012-BALWM-Lawrence-Briskin/index.html#1

To find out more about the company in this article, please click below:
www.psgplanning.com
-