Know the Right Amount of Risk

Wise investors focus on value when evaluating investment options. Too many investors focus on buying market trends and economic outlook, not realizing that trends can be deceiving and markets often perform very differently from the economy. Individual stocks can easily surprise you – rising in a down market, and falling during a rally – making it important for long-term investors to focus on buying quality investments with good fundamentals.

While economic trends can exert a powerful effect on market movements, the stock market and the economy do not move with perfect correlation and there are many occasions in which markets rally in spite of poor economic fundamentals or declining corporate earnings. This is not to say that economic outlook is unimportant. A smart investor keeps an eye on the economy and factors economic outlook into investment decisions, but ultimately seeks high-quality individual investments.
Investors do best when they take on the right amount of risk for their individual goals and tolerance. Too many investors focus strictly on generating returns while ignoring the importance of managing risk properly.
Too much risk can leave your nest egg vulnerable to market swings with too little time to recover before you must start withdrawing money and locking in the losses. Too little risk in your portfolio will reduce your potential for capital appreciation and allow inflation to eat away at the long-term value of your investments.
The challenge is determining how much risk is right for you and your portfolio. Knowing your risk tolerance and the appropriate amount of risk for your investment goals is one of the most important concepts we discuss with our clients.
No one wants to see their portfolio lose money, but it’s important to understand that an investor must take on more risk in order to achieve higher long-term returns. It’s vital to be honest about your ability to withstand short-term swings in value and accept reasonable investment losses in the pursuit of returns.
Another essential question you must answer is how much risk you need to take in order to meet your investment goals. Modern portfolio theory hypothesizes that there is an asset allocation strategy that will generate the highest return for every risk level. The right risk allocation for a portfolio will depend on a number of factors, including your expectations for return, investment objectives, time horizon, and appetite for risk.
Many popular asset allocation tools focus on age – or time until retirement – as the primary driver of an allocation strategy. While this can be useful, age is only one factor in determining a proper asset allocation strategy; other factors include liquidity needs, net worth, and investing priorities.
On the face of it, the logic of decreasing allocation to equities and increasing fixed income holdings as one gets older seems reasonable. As investors approach retirement, their ability to wait out portfolio swings or earn their way out of losses diminishes. However, many age-based allocations fail to adequately account for longer life spans and the effects of inflation, putting investors at risk of running out of money later in life.
Ideally, you should be allocating your investments based on your investor policy statement (IPS). Your investment plan should be based on the return you annually need to achieve so you can meet your financial goals by a set date in the future.
This is called the required rate of return, or RRR. Assuming you calculated the cost of your retirement years (the number of years you’ll be in retirement, the events and activities you want to enjoy, the taxes you’ll pay, the cost of inflation…), you can now reverse-engineer the calculations to tell how much you should be investing, at a specific annual percentage rate, from now until retirement…while being cautious not to exceed undue risk.
Not everyone knows how to do this. In fact, typically only good financial planners, such as a Certified Financial Planner® (CFP®), can do this.
Ultimately, holding the wrong amount of risk means you may not realize the investment gains you expect or you may experience wider swings in your portfolio’s value than you can stomach. If you are unsure about the current level of risk in your portfolio or have questions about risk management, it may be worth speaking with us. Our experienced financial advisors can help you understand the best options available to you.
Your financial goals are our priority. We start by listening to your plans for the future, and then set your dreams into short, midterm, and long-term goals. We then create a financial plan to achieve your goals, and monitor and manage your customized financial plan for steady but cautious growth, loss protection, limited taxes, and estate preservation … assuring your financial future.
We hope this article about investment principals was informative. Please contact us so we can review the possibilities for securing and increasing your personal wealth while enhancing your retirement. Thank you!
Synergy Financial Management, LLC
701 Fifth Avenue Suite 3520
Seattle, Washington   98104
ph: 206.386.5455
fx: 206.386-5452



Wish Your 401(k) Was Bigger?

The secret is consistent saving. By starting your savings early and regularly adding to your investment, your results will be spectacular.

The Data Is In

Based on data from Fidelity Investment, the 547,000 401(k) account holders who maintained their 401(k) with the same employer since 2001 presently have an average account balance of just over $331,000, up from an average of $43,900 fifteen years ago.

Now, compare their success with the investment results of the entire group of Fidelity Investment’s 14.5 million 401(k) account holders whose average account is only $90,600. Clearly, this $240,400 difference makes the case for early and steady retirement investment.

“The lesson is to get in when you start your career and save over time,” says Jeanne Thompson, one of Fidelity Investment’s senior VPs who tracks 401(k) trends. “The market and your contributions together will drive the growth.”


Even More Data

The Investment Company Institute and the Employee Benefit Research Institute reported similar findings in their study, What Does Consistent Participation in 401(k) Plans Generate? (EBRI Issue Brief #426, September 2016.) Their results concluded that consistent contributions are the essential key to building a large 401(k). Their study researched 3.5 million 401(k) account holders who held 401(k) accounts for a seven-year period, from the end of 2007 through the end of 2014. The group that consistently contributed to their account achieved much higher results than the comparison group of 25 million 401(k) account holders.

At the end of the seven-year range, 26.9% of the consistent group had over $200,000 in their 401(k) compared with only 10.7% in the broader database. Similarly, 19.3% of the consistent group had between $100,000 and $200,000 in their 401(k) account compared with only 9.5% in the broader database. As well, the consistent group had an average account balance of $170,290… which was more than double the average account balance of $76,293 for the entire database of 401(k) account holders. Further emphasizing the point, consistent participants had a median account balance of $87,418 which was more than four times the $18,127 of the overall database. The message is clear: consistent savings and investment over a period of time results in a much larger account balance.

The ICI/EBRI study also determined there are three primary factors which affect account balances:

  1. Contributions
  2. Withdrawal and loan activity
  3. Investment return


5 Prescriptions

To increase the possibility of your 401(k) account growing larger over time, consider the following suggestions:

  1. The start of a new calendar year is a great time to do a 401(k) check-up, a task you should do annually. Look at your Investment Policy Statement (IPS) to make sure your goals are still the same as when you first began your investments, and schedule a meeting with your company’s 401(k) advisor to review your holdings so you can make sure your investments are in the right proportions according to your plan.
  2. If your employer offers matching funds, save enough to at least acquire the full company match. If possible, try to increase the amount of contributions you make every year because these extra dollars could make a huge difference to your retirement lifestyle. Small changes made over time can add up to big benefits later.
  3. Taking loans and withdrawals from your 401(k) account may only hurt you in the long run. Do your best to avoid borrowing from your future. Time is your biggest ally right now; as you saw from the data, money can increase dramatically when left undisturbed.
  4. Exercise extra caution when making investment decisions and consult with an investment specialist. Your 401(k) is important to the health and wealth of your retirement years, so it deserves extra attention. You don’t have to become an expert, but you should educate yourself well enough to know why you are investing in the funds you’ve selected and how these choices work together to increase and preserve your wealth.
  5. If you change jobs and move to a new company, enroll in your company’s 401(k) plan as soon as possible so your tax-deferred savings are not interrupted. You should also discuss and consider the value of rolling over the 401(k) balance with your former employer into your new account so there’s less record-keeping, and so it’s easier to take disbursements when you’re 70½.

Contributions for 2017

For those employees who participate in a 401(k), the 2017 annual contribution limit is $18,000, the same as in 2016. There is also a catch-up contribution limit for those employees who are 50 or older, and the amount remains the same in 2017 at $6,000. If you are self-employed, the amount you can save in a solo 401(k) rose from $53,000 in 2016 to $54,000 in 2017. You may even be allowed to make after-tax contributions to your 401(k). Whichever choice is right for you, be sure to consult with your financial advisor to ensure you make the best decision for your unique circumstances.



Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452


Buy-Sell Agreement: Calamity or Certainty?

Is there a way to protect your business from the effects of the death, disability, or divorce of a co-owner?

When you went into business with a co-owner or co-owners, you entered into a legal arrangement that combined your resources and skill sets…and also, to some degree, your fortunes and misfortunes. We can’t always plan for the surprises that lie on our life’s path, but there is a brilliant legal tool which can help your business avoid disruption when calamity strikes your life, or the life of one of your co-owners.

A buy-sell agreement performs three essential functions with efficiency when disaster strikes:

  1. Identifies how the departing co-owner’s interest in the business will be reassigned;
  1. Converts the ownership interest into a liquid asset for easy transference;
  1. Resolves legal inquiry about the true dollar value of your business.

Let’s consider each:

  1. Reassignment of a co-owner’s interest: When a co-owner leaves the business for whatever reason, a decision must be made about the redistribution of the co-owner’s share. The interest may be divided equitably or by percentage among the remaining co-owners, or it may be transferred to the co-owner’s heirs, or it could be offered for purchase to a third-party. Unless you like thrills and chills, knowing what will happen to the co-owner’s interest will go a long way toward relieving anxieties!
  1. Establishing the liquidity of the business interest: When the buy-sell agreement is funded, possibly with life or disability insurance, funds can quickly become available to satisfy payout requirements and taxes. There are several ways to fund a buy-sell.
  1. Determines the precise value of the co-owner’s business interest: The tax man and sometimes the courts will need to know the exact dollar value of the co-owner’s interest. A business valuation will be required to identify the business entity’s value, based on one of several formal court-approved valuation processes.

Frankly, the last thing you want is to wonder who will receive the departing co-owner’s interest in the business, how the value of that interest will be funded, and have uncertainty about the precise dollar value of that portion.

When a co-owner is deceased, or must leave the business because of disability, divorce, bankruptcy, or retirement, having a premeditated agreement that clearly describes the expectations of the remaining co-owners will help keep your business running efficiently during a time of difficulty and stress. Forethought and good planning will help your business weather the changes that are likely to come sooner or later.

Because life is filled with uncertainty, schedule a visit with a Certified Financial Planner® (CFP®) who will help you safeguard the financial security of your business.

It all starts with a conversation. Please call me and let’s schedule a complimentary meeting.



Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452



Synergy: Holding Real Estate in Your IRA: Limited Liability Companies, Part 4 of 4

The limited liability company is another flexible option if your IRA does not provide sufficient funds for the purchase, and neither loans nor tenancy-in-common ownership provides a solution for which you are looking.
I am going to skip the long version of what an LLC is and leave that to your attorney, but, briefly defined, an LLC is a form of business entity that offers both limited liability for its owners and certain tax benefits.
When using LLCs, it is similar to investing in a real estate investment trust (REIT) in that your IRA may be invested in limited interests which is kind of like investing in shares of stock. The difference here is that LLCs are private, and there are usually only a few investors that are limited members and a developer that is the managing member.
Here is one way an LLC may be used.
You know a developer who is getting ready to start a new project in your local area. He has used $1,000,000 of his own money to purchase the land and now is trying to raise capital to develop the property. Once the project is finished and the condos are sold, he expects to realize a large profit. He is willing to give up some of his profit in exchange for the needed capital.
The name of his company is ABC Construction Company, LLC. After your attorney has reviewed the proper agreements and you have done your due diligence, you may instruct your self-directed IRA custodian to purchase the units of ABC Construction Company, LLC that have been agreed upon with the developer.
This is a simple version, and there are many more detailed points to be considered and understood when using LLCs, but I hope this provides some food for thought.
Now we are ready to talk about how to actually purchase the property. When using your IRA to purchase property, the steps in buying real estate are really no different than if you were not using your IRA. There are a few things to be aware of, and we will review them now.
The basic steps are:
  1. The Purchase and Sales Agreement (the offer)
  2. The Acceptance
  3. The Inspection
  4. The Closing
The purchase and sales agreement is where it all starts and is probably the most important. Each self-directed IRA custodian will have their own set of rules and procedures, so you need to review their real estate processing checklist well in advance of actually making an offer.
You need to make sure that the purchase is made by your IRA custodian and not you, personally. This means that you will need to set up your self-directed IRA prior to making an offer. If you are under the gun and did not have time to open your IRA, and if the person making the offer is not a disqualified person, you may make the offer in the following way: “John Doe and or assigns”. Adding the phrase “and or assigns” will allow you to assign the contract to the IRA custodian once the account opened.
In addition, if you put up earnest money with your personal funds, you will need to make sure you include that amount in the total due so that the title company can reimburse you upon closing.
Some IRA custodians will require that they hold the original recorded title to the property in safekeeping. The title should reflect the name of your IRA custodian for your benefit, such as, XYZ Trust Company, Custodian FBO John Smith IRA.
In conclusion, I hope you now realize there are some interesting and creative ways to invest in real estate and this can be done in your IRA or other types of retirement plans. This topic is very complex and, by no means, have all the elements of this opportunity been covered in the article, but I hope it was a good start for you.
Please remember that this type of investing is best performed when using a team of professionals that can help you navigate the potential hazards. Please seek the advice from the following professionals as needed: an attorney, CPA, IRA custodian, CFP, real estate professional, mortgage broker, registered investment advisor or other competent advisor.
We hope these four articles about using your IRA funds to invest in real estate were informative. Please contact us so we can review the possibilities for securing and increasing your personal wealth while enhancing your retirement. Thank you!
Synergy Financial Management, LLC
701 Fifth Avenue Suite 3520
Seattle, Washington   98104
ph: 206.386.5455
fx: 206.386-5452

Synergy: Holding Real Estate in Your IRA: Tenancy-In-Common (TIC), Part 3 of 4

For people who identify an attractive property that costs more money than they have in their IRA or more than they can (or are comfortable) borrowing, tenancy-in-common may be a solution.

Tenancy-in-common is a form of concurrent ownership in which two or more persons each have an undivided interest in the entire property, but no right of survivorship. Because each person’s interest, or share, is undivided, each can sell his share at any time without the consent or agreement of the others. So, how does this help you? Let’s go through an example:

Let’s say you and two of your friends find a good property in which to invest, and the purchase price is $100,000. With a tenancy-in-common arrangement, you can buy the property together, with each person putting in the amount of money he or she has available. Each will own a certain percentage of the property, the income generated from its operation, and, eventually, a percentage of the profits when the property is sold.

Owners                      Contribution Amount                    % Ownership

You                                      $60,000                                               60%

Tom                                      $20,000                                              20%

Rob                                       $20,000                                              20%

Total                                  $100,000                                             100%

A tenancy-in-common arrangement also allows use of both IRA funds and non-IRA discretionary funds to buy a single investment. It is not a requirement that each of the owners use the same type of funds as the others.

Here is what I mean:

Owners                      Contribution Amount                    Contribution Type

You                                         $60,000                                  50% IRA money/50% cash

Tom                                        $20,000                                  100% IRA money

Rob                                         $20,000                                  100% cash

Total                                     $100,000                                  100%

Your IRA has a current balance of $40,000 but you do not want to use the entire $40,000, so you use $30,000 from your IRA and $30,000 from your bank account. Your total contribution amount is $60,000, and you’re a 60% owner of the property.

Real Estate C Resized

Tom’s IRA has a current balance of $20,000. He is comfortable using the entire amount, and will fund future property expense inside the IRA with his annual IRA contributions.

Finally, Rob does not own an IRA, so he will use some of his savings account to contribute his $20,000.

The possibilities are endless.

In the fourth and final article of this series, we’ll share information on how to use your IRA funds to invest in real estate through a Limited Liability Company (LLC).





Synergy Financial Management, LLC

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452

Synergy: Holding Real Estate in Your IRA, Part 2 of 4

Yes, you can use debt financing to purchase real estate in a self directed IRA. However, to do so legally, you must use the IRA-purchased property, not the IRA itself, as security for the loan. This type of permitted borrowing is called non-recourse lending. A non-recourse loan is not like the loan on your personal residence. In fact, it is very different. Here, unlike your home loan, if the loan isn’t paid back as promised, the lender may take the IRA-owned property used to secure the debt, but may not take recourse against any of your other assets. Because of its unique nature, not very many banks or lending institution offer these types of loans, but they do exist, and your self-directed IRA custodian may be able to point you in the right direction.


Like other loans, non-recourse loans do have a monthly payment and some type of amortization schedule which will need to be followed. Therefore, your IRA property will need to be able to make the loan payments from its cash flow, its annual IRA contributions (within the 2016 limits – $5,500 or $6,500 if 50 or over), or some combination of the two. Simply put, you need to have more money coming into your IRA than is going out. This also means you need to have sufficient liquidity in your IRA for other real estate related expenses like property taxes, insurance, and other repairs and maintenance. Remember, the IRA itself must pay all expenses.

Let’s look at a simple example:

Loan Information:    Present Value of Loan                               $100,000

Term (amortization period)                                                           30 year Fixed

Annual Interest Rate                                                                       7%

Monthly Payment                                                                            $665.30

Annual Payment                                                                               $7,983.62

Taxes:                        Annual Property Tax                                   $1,500

Insurance:                 Annual Insurance Premium                      $400

Repairs/Maint:         Annual Repairs                                            $150


Total Annual Cost of Property:

Payment        $      7,983.62

Taxes             $      1,500

Insurance      $         400

Repairs          $         150

Total              $    10,033.62

The amount of $10,033.62 is the amount of money going out each year, and so your property would need to have more than this amount coming in each year. So, for a person under the age of 50, you could subtract the $5,500 annual IRA contribution from the $10,033.62 annual expenses and you would need ($10,033.62 – $5,500 = $4,533.62) $4,533.62 of cash flow from the property.

In addition to annual operating expense, in accordance with Section 511 of the Internal Revenue Code, if your IRA property has debt, or if a mortgage was incurred with its acquisition, you must pay annual taxes on any income produced. This special tax is called Unrelated Business Taxable Income (UBTI). Please note that this tax does not apply to every property purchased with an IRA but only to those that have related debt. Here is an example of how it works. Please be advised that I am not a CPA and that the following calculations are for illustrative purposes only. I advise you seek tax advice from your own CPA when it applies to your individual situation.

First, your income is taxed only after deductions are made for expenses and for other items that are deductible. Then, the first $1,000 of your net income from the property is not subject to tax.

Using our previous example you will remember that we had a loan of $100,000. Let’s also say that you put down $100,000 so that the total purchase price was $200,000. Finally, let’s say you found some good renters and your net income after expenses is $1,500.

Since the first $1,000 is not subject to tax, only $500 will be used in the UBTI calculation. ($1,500 – $1,000 = $500).

The tax is based on the relationship between the average amount of debt on the property during the preceding twelve months and the property’s average tax basis. Here tax basis is the purchase price, increased by improvements or decreased by depreciation, during the same period.

In our example our ratio looks like this:

Debt                                        $100,000

Basis (purchase price)        $200,000

Ratio equals                         $100,000/$200,000 = 50%

We then apply the ratio to the income that is subject to the UBTI tax.

$500 x 50% = $250

The $250 is then taxed at the current rate for trusts. The trust tax rates, like other tax rates, are a moving number.

Here we will use a trust tax rate of 37.5%.

$250 x 37.5% = $93.75

The $93.57 is your tax liability.

You should notice that as the debt is reduced, the UBTI tax is decreased proportionately.

In our next article, we’ll present information on how you can use your IRA to establish a Tenancy-in Common (TIC) allowing the concurrent ownership of property between two or more parties. Stay tuned!


Synergy: Holding Real Estate in Your IRA, Part 1 of 4

For many years now, people have been using non-directly owned real estate in their IRAs and other retirement plans. These intangibles are investments like REITs and real estate mutual funds. Most people didn’t know they could use the retirement plans to purchase directly owned real estate such as raw land, commercial buildings, condos, residential properties, empty lots, trust deeds, or real estate contracts.

In general, the Internal Revenue Code (IRC) section 408 does not prohibit the holding of real estate in an IRA, provided the transaction is not prohibited under IRC Section 4975.


Code section 4975 covers what transactions are prohibited between an IRA or retirement plan and a “disqualified person”. Generally, “disqualified persons” are defined to be the account holder, other fiduciaries, certain family members, and businesses under the account holder’s control. In essence, the prohibited transaction rules prohibit an IRA or qualified retirement plan from owning a piece of property which will be purchased from or use personally by the account holder, family members, or businesses under the account holder’s control. Simply put, the property must be used for investment purposes only and cannot be used personally while maintained in the IRA. In addition, properties that are individually owned outside of the IRA cannot be transferred or purchased by one’s individual IRA.

Remember, the IRS will not let you use your IRA to purchase your home or vacation home. Nor will they let your business lease property from your IRA. You cannot have personal use or benefit from the property. If you did, it could cost you plenty in taxes and penalties

However, it may make sense to take the property out of the IRA as a distribution and live in it during retirement. Make sure not to move in until the distribution is complete. The distribution would need to be at the current market value as of the date of distribution, and taxes would be due unless your account was a Roth IRA. This may be a good reason to convert your IRA to a Roth. Further, if you are under the age of 59 ½, a 10% penalty may also apply.

Example: Convert your IRA to a Roth IRA and pay the income taxes now. Once the conversion is complete, use your new Roth IRA to purchase a residential rental property in a location in which you may want to retire. Rent the property until retirement. When you are ready to retire, take the property out of the Roth IRA as a tax-free distribution, assuming you follow the rules, and then you may live in the property.

For those of you who stopped reading and immediately called your basic IRA provider so you could get started investing in real estate right away, you probably were told that you were not allowed to do so and now think I’m crazy. So, now that you’re back, let’s find out how you go about doing this.

The first key step to investing tax-deferred or tax-exempt in real estate is to open a self-directed IRA with any one of the dozen or so independent IRA custodians that allow real estate investments. Remember, just because it may be okay with the IRS does not mean your local bank, stockbroker, or insurance company will provide this service.

A self-directed IRA is simply an IRA where you are in control of your investment options and are not limited to just stocks, bonds, mutual funds, and other traditional securities. In a self-directed IRA, you have access to all of these traditional investments plus real estate and even other alternative asset classes.

Because fees and other services may vary, it is a good idea to check out a few of the independent IRA custodians to find the one that fits best with your needs.

Now that you know how to open an account, let’s discuss how to fund the account. In 2016, the IRA and Roth contribution limits are $5,500 or $6,500 for an individual over the age of 50 and making catch up contributions. We all know that $5,000 or $6,000 is not enough to buy rental house, so how else can we fund the IRA?

One very popular way, if eligible, is to roll over your 401(k) plan into a new self-directed IRA or use a self-directed 401(k) that is allowable by both the IRS and the IRA custodian.

In many scenarios, the IRA holder will have sufficient funds to cover the real estate purchase, but what if you find a great investment property for your IRA, something really valuable, and your retirement account simply doesn’t have adequate funds? Luckily, there are a number of ways in which you can make the purchase and still keep the transaction both legal and profitable.

In our next articles in this series, we will review three ways in which you may want to pursue real estate investing with your IRA.

  1. Loans.
  2. Tenancy-in-common (TIC)
  3. Limited liability companies (LLC)

We hope this information is helpful for you and we invite you to read the next article in this interesting series.


Synergetic Finance

701 Fifth Avenue Suite 3520

Seattle, Washington   98104

ph: 206.386.5455

fx: 206.386-5452




10 Steps to Retirement Freedom

Everyone thinks retirement is a long way off, but it’s not. People in their 50s know “the years have run like rabbits”, to misquote a line of poetry from W. H. Auden. Get married, have children, buy a house and before you know it, it’s time to think seriously about your retirement lifestyle.

balloons-287-x-218Retirement, of course, is a topic that has been on your mind since you first began your working life. The most important asset you have is time and its positive effect on accumulating wealth. There is never a better time than right now to assess your situation. As a financial professional, I can help you determine the retirement lifestyle you want to have, and also help you calculate your capacity to achieve it.

Step 1: Study Your Monthly and Annual Expenses

The first thing to do is to look closely at how you’re spending your money. If you’re not exactly sure, my advice is to keep a log for two months and jot down every expenditure, no matter how small. You may be surprised to see how much you spend every month on such things as coffee, lunch, cable services, etc. While these expenses may provide a pleasant quality of life, they may also be draining your ability to have a more enjoyable lifestyle in retirement.

Step 2: Consider Cutting Back and Saving the Difference

Since time is your ally, use it to your advantage by reducing some of your unnecessary expenses and depositing these saved funds in the investments that will fund your retirement. Remember the story of the “Unnecessary Refrigerator”: Mary wanted to buy a new refrigerator and it would only cost $1,000. The old refrigerator was just fine and still had a long, useful life. When Mary began to calculate the effect of this expense through the next 20 years she realized that the $1,000 she wanted to spend on the refrigerator would become $8,000 in 21 years at a 10% rate of growth. Her decision became clear: did she still want a new refrigerator, or would she rather have another $8,000 when she retired? It’s the same choice for you. The more money you can set aside now in a well-planned portfolio, the more likely you’ll feel secure when it’s time to retire.

It’s important to realize that most people struggle with cutting back on their lifestyle when they enter retirement. They are very used to the lifestyle patterns they established when they were working and are reluctant to shift into a new pattern of living. This can become a serious problem when income is reduced but the expenses remain at their “working life” level. Challenge yourself to seriously consider what you can cut now so you can enjoy many satisfying retirement years.

Step 3: Estimate Your Costs in Retirement

This is not as difficult as it sounds, but you may need a financial professional to show you how it’s done. The first thing to do is establish goals for your retirement years. Do you intend to live where you live now, or are you thinking about moving closer to your children and grandchildren, or to a warmer region? Does the idea of travel appeal to you; do you want to volunteer your time and talents; do you want to start a new business? Whatever it is you choose to do, a financial professional like me can help you convert these interests into dollar values. I’ll also be able to calculate such expenses as your monthly needs for food, medicine, entertainment, etc. In essence, we’ll build a budget for your future lifestyle.

Step 4: How Much Revenue Will You Receive?

We’ll also need to identify the sources of your income. Perhaps you are in an employer-sponsored retirement plan like a 401(k), or a pension plan. You may have an IRA, and your investment portfolio may be a source of income for you in later years. You may own property that provides rental income, or might decide to buy some when you are retired as a way of offsetting taxes, investing in appreciating property, and hiring a management firm to run this “business” for you. If you’re married, your spouse’s retirement accounts should be included in your revenue calculations. There is also Social Security, and you and your spouse’s retirement benefits can be calculated, giving you a good idea of the monthly income you can expect.

You or your spouse may decide to turn your hobby into a source of income, or you might be interested in working part-time. If you have expertise, you may want to offer your services as a paid consultant. If you’re able to bring in additional revenue, this will preserve the funds in your investments, allowing them more time to appreciate.

Step 5: How Do Your Projected Revenues and Expenses Match Up?

Now that you have a great idea about how much income you can expect when you’re in retirement, and you also know what your monthly and annual expenses are likely to be, are you in the black? If not, then it’s back to the drawing board to look more closely at the possibilities for increasing your revenue or decreasing your expenses.

Remember, your best ally is the use of time. Consulting with a professional financial advisor like myself can help you find ways to improve your future circumstances. Together, we’ll calculate your Required Rate of Return (RRR) which will give us an insight on how to structure your investment portfolio and other financial assets so you can annually achieve the return you need to live the lifestyle you want. There is no magic in any of this; a financial advisor can mathematically calculate the best array of investments to achieve your retirement goals while controlling risk.

Step 6: Control Taxes

Another tactic you should employ is minimizing your taxes during your retirement years. When building wealth, you must not only find ways to increase your revenue, but also find ways to preserve your capital. In a conversation with your financial professional, a discussion can determine whether it’s better to draw from taxable accounts when you’ve retired, or your tax-deferred accounts instead. Exploring how part-time work might result in taxable Social Security benefits is another important consideration. Assessing the effect of local and state taxes on your property or income is necessary. If you decide to downgrade the size of your home to purchase a smaller property, tax issues will arise that could be mitigated with thoughtful planning. As your financial advisor, I can work with you and your tax professional to ensure that as much of your wealth is preserved as possible.

Step 7: Pay Off Existing Debt

Now that you have a fairly accurate idea of what your income and expenses will look like during retirement, the next task is to study the debts you’ve incurred and make a plan to diminish and extinguish them.

By being debt-free, you’ll be more in control of your monthly expenses in retirement. A debt analysis may reveal the value of implementing this strategy. Under certain conditions, it may be more sensible to enter retirement with an on-going mortgage…yet it may not. Because you don’t know which choice is better for your unique circumstances, a debt assessment will satisfy this question and improve your planning process. Debt can serve a purpose, but it has to be a purpose that best benefits you.

Step 8: Ramp Up Your Savings

As you near retirement age, it’s likely that you are now drawing the largest salary of your career. By increasing your investments, you can add a burst of value to your future financial security. If you have an employer-sponsored retirement savings plan or Individual Retirement Accounts (IRAs), make sure you are taking advantage of the annual maximum allowable contributions. Remember that the ceiling is higher if you’re 50 years old or older; as catch-up contributions allow you to invest additional funds to your employer-sponsored plan and your IRA in 2016.

Step 9: How Does Your Home Contribute to Your Retirement?

As mentioned above, it may be advisable to sell your home and acquire more suitable lodging. If your home and property require a lot of physical work like mowing lawns, emptying the gutters, etc., or the house is too big and no longer suits your personal needs, it may be a good idea to find more suitable housing. You could save money on your annual property taxes, move to a location that’s more appropriate to your new lifestyle, doesn’t have stairs, or saves you the hassle of shoveling snow in the winter.

As your financial advisor, we could also look into the idea of a reverse mortgage which could secure your housing needs for the rest of your life while also providing additional monthly income to maintain your chosen lifestyle. You may have many choices available to you which are yet unknown…and which could resolve your financial concerns.

Step 10: Planning for Health Care

As you plan your transition into retirement, you will need to become familiar with Medicare, and with supplemental insurance to cover the expenses Medicare won’t. There are a variety of supplemental insurance policies available for different lifestyles and needs. If you’re entering retirement as a healthy individual, you might choose a supplemental policy that requires lower premiums than someone who has medical issues. I’d be happy to look into this with you, and together we can consider the impact of deductibles, copayments, and supplemental insurance. There’s also value in having having a long-term care insurance policy, or acquiring a life insurance policy to offset medical expenses, and for other purposes.


Preparing for retirement with enough time to carefully assess your choices and maximize your current potential for improving your retirement lifestyle in the years to come is critically important to your future financial well-being, security, and peace of mind. The greatest fear people have is outliving their resources and being at the mercy of the government or their loved ones. By being proactive now and building a realistic plan, you can enter your retirement years with the confidence that comes from prudent foresight and wise choices.


Have You Checked Your Estate Plan Lately?

Hopefully you already have an estate plan, and if not, you should make this an immediate priority. Though it may be uncomfortable to think about, legal instructions must be clearly stated to direct your personal and financial affairs in case of death or your inability to care for yourself. An estate plan helps you control how your property will be managed when you are no longer able to do so yourself.


Estate Planning

When to Review

Without question, the best time to review your estate plan is immediately after a major life event, as listed below. Major changes to your life or lifestyle must be mirrored in your legal documentation. Too often we hear about families that live through the heartache of legal confusion and lost intentions. You can make it so much easier for your loved ones, both family and friends, when your wishes are clearly described.

In addition to reviewing your estate plan after a major life event occurs, you should also make it a regular practice to review your documentation each year, refreshing some of the details affected by changing economic and tax related issues. While a quick review may be sufficient once a year, a more thorough review every five years is a wise protocol.


Review Your Estate Plan Now If…

  1. Your marital status changes, or the marital status of any of your children or grandchildren changes.
  2. An executor, trustee, or guardian dies or is unable to continue in their role.
  3. Your family increases through birth, adoption, or marriage.
  4. One of your family dies, becomes seriously ill, or is unable to properly care for themselves.
  5. A family member becomes dependent on you.
  6. A significant change has occurred to your assets, or to your intentions for their disposition.
  7. You are the beneficiary of a large inheritance, or the recipient of a substantial gift.
  8. There has been an increase to your income, or your spending and saving requirements have changed.
  9. You have reached retirement age.


Important Details to Consider

When you conduct a periodic review, these are some of the essential items to assess:

  1. Have you considered what your family’s financial needs may be immediately after your death? Do you have sufficient life insurance to meet those needs if probate takes months to resolve?
  2. Have you and your financial advisors discussed the effect of state and federal income tax on your estate, and made plans to minimize the effect?
  3. Do you have a living trust or a testamentary trust? Review the named beneficiaries of these trusts and confirm that the designated beneficiaries are correct.
  4. Reflect upon your family members and friends and determine how you feel about them. Are they deserving? Is anyone left out who should be included?
  5. If you have a retirement plan or a life insurance policy, confirm that the beneficiaries are correctly named.
  6. Make sure that any property you own is correctly titled so the transfer of property is efficient and without ambiguity.
  7. Have you made plans to provide lifetime gifts to any of your family or friends? If so, are these gifts still gifts you intend to make?
  8. Are you considering making charitable gifts or bequests? If so, review them for accuracy or to make adjustments.
  9. If you are the owner or co-owner of a business, provisions should exist for the transfer of your business interest. If you have a buy-sell agreement, check to make sure it is adequately funded.
  10. Carefully review your will to make sure it still reflects the outcomes you desire. Confirm that the people or organizations named as beneficiaries will receive exactly what you wish.
  11. Reaffirm that your choice for an executor, or the guardian of your minor children, are still appropriate and prepared for the task.
  12. If you became incapacitated, are your living will, durable power of attorney for healthcare, and your Do Not Resuscitate order in the hands of those you trust to carry out your requests?
  13. Have you prepared the legal documentation that authorizes the management of your property should you become incapacitated?

As you see, it’s important to spend some time periodically reviewing your estate plan. Not only are people counting on you to have done this well, but it also gives you peace of mind knowing your personal and business affairs have been carefully and properly assigned.

If you would like to discuss your estate plan with me, please give me a call. I would be delighted to discuss your preparations and willing to assist you with making good choices for your unique circumstances.


Playing by the Rules and Saving Money with Accrued Interest on Bonds

27857550566_65c88f3883 Bonds


You’re Kidding Me!

How would you like to limit your capital gains, and therefore limit your capital gains tax, as well as increase the basis of your bonds, which also decreases your capital gains tax?



Did You Know?

When bonds are sold between interest payment dates, part of the cash you receive includes the interest that accrued up until the date of sale. In essence, the cash from your sold investment contains three elements:

  1. The principal
  2. Capital gains on the principal, if any
  3. Interest earned

Here’s How You Do It

If You Are the Seller:

Have your accountant report your accrued interest as gross income. By doing this, you are removing the interest earned as only being capital gains. At the same time, you are increasing the bond’s basis which raises the floor on the bond, also limiting capital gains tax.

Here’s how it looks in an example:

A bond costing $5,000 is sold for $5,300 on May 31. The sale price includes $200 of interest the bond accrued from January 1 through May 31.

Normally the $300 of increased value would be accounted as capital gains, but not this time. Have your accountant report interest income of $200, and capital gains income of $100. By dividing the earned interest and allocating the two portions as shown, you have limited your capital gains income and lowered your capital gains tax accordingly.

If You Are the Purchaser:

As the purchaser, you can deduct the accrued interest from the next interest payment. Use Schedule B to report the total interest payment, and on a separate line list “Accrued Interest”. You can now subtract this amount from the total interest, limiting your tax obligation. By parsing these funds, the basis of the bond does not include the amount of accrued interest.

Here’s a good example of how this works:

The purchaser of the $5,300 bond mentioned above receives $450 in total interest for the year, from June through December. The purchaser’s accountant uses Schedule B to report $250 of taxable interest income ($450 total interest – $200 accrued interest). This reduces the purchaser’s capital gains, siphoning off $200 into the taxable interest income category.

The other advantage is that the bond’s basis remains at $5,100 (the $5,300 purchase price minus the $200 accrued interest), also limiting capital gains taxes.


Limiting the amount of taxes you pay can significantly add to your wealth appreciation, your family’s financial well-being, and an ever-improving lifestyle. Consulting with a Certified Financial Planner® (CFP®), providing you with quality financial information and advice, can be very rewarding.



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