Preparing for the unexpected.

What happens if you have to live on less income because you lost your job or your spouse died? The economy has not been kind to many people and job loss can happen before we’re ready to retire. That’s when a financial advisor can help.

It can be tough to find a good paying job if you’re within a decade of retirement age.  Companies are reluctant to hire you.  You may be wondering what you should do when you realize that the best path is early retirement. Where can you cut back? How should your money be invested for an extra-long retirement? These are all questions that you should not tackle on your own because the wrong decision at this age can haunt you a few years down the road.

If the major breadwinner in your family dies how will the survivor cope? One 61-year-old woman left work to care for her dying husband. After his death she could not return to work but had a lot of decisions to make. Decisions about social security, insurance, where to cut back (fewer trips, sell the motorcycle and the RV), as well as decisions about her investments.

Each case is unique, but a financial advisor should be more than a money manager. He should advise his clients about all aspects of their lives that impact their financial well-being. Ideally you will have developed a good relationship with a financial advisor before an unfortunate event occurs. But if you have not, this is definitely the time to find one.

 

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“529” Plans – Keep Your Receipts

A client recently asked me how to make sure that money moved from a 529 college savings account to a student’s checking account would be viewed from an IRS perspective.  What do you need to know if you take money from a 529 plan and put it in your, or the student’s checking account?

The answer can be found on the American Funds website.  Virginia’s 529 plan offers the American Funds and is known as CollegeAmerica.  Here are their answers:

Q: What is considered a qualified higher education expense?

A: Qualified higher education expenses generally include:

  • tuition
  • mandatory fees
  • textbooks, supplies and required equipment
  • room and board during any academic period during which the beneficiary is enrolled at least half-time in a degree, certificate or other program that leads to a recognized educational credential awarded by an eligible educational institution
  • special needs services for a beneficiary with special needs

Paying off a student loan is NOT considered a qualified expense.

Q: Who is responsible for determining that a withdrawal was made for qualified higher education expenses?

A: The account owner or the beneficiary makes the determination and must retain appropriate documentation to show that a withdrawal was made for qualified higher education expenses.

Q: Can my withdrawal be sent to my bank account?

A: Yes. You can have a withdrawal transferred to the checking or savings account linked to the CollegeAmerica account. This transaction may take place online, over the phone, or by mailing us a completed CollegeAmerica Distribution Request Form (PDF). Direct deposit withdrawals requested online are limited to $25,000 per day. Payments will be deposited into your bank account within three business days of the transaction date. Use the FundsLink® form (PDF) to link a bank account. A signature guarantee may be required.

Q: Can my withdrawal be sent to an educational institution?

A: Yes. You can call us to redeem up to $125,000 per day from a CollegeAmerica account and have the money sent directly to an eligible educational institution. We’ll need the name and address of the institution when you call.

Q: When making a withdrawal from my CollegeAmerica account, will it be reported under the Social Security number of the account owner or of the beneficiary for tax purposes? 

A: It depends on to whom the distribution is made payable. If the withdrawal is made payable to the account owner, then the tax reporting will be under the account owner’s Social Security number. If withdrawals are made payable to the account beneficiary or to the school, then the tax reporting will be under the beneficiary’s Social Security number.

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Choosing a financial advisor.

The current issue of Financial Advisor magazine has an article about the ranking of financial advisors. The issue they raise is an important one. The amount of assets that an advisor has is often used as a shorthand way of determining how “good” that advisor is. It’s a term called “assets under management” (AUM). To use an automotive expression, when you look under the hood, AUM often has no bearing on the quality of the advisor.

Some large firms, even those with over a billion dollars in AUM have one huge client and a bunch of little accounts. Under those circumstances you can imagine how much attention the small clients get.  In fact, it’s a common complaint of people who work with large firms, they don’t get much attention unless they have tens or hundred of millions in assets.

Other firms have one or several principals in their mid to late 60s. They could very well go out of business when they retire, leaving their clients looking for a new advisor. How would you feel if your advisor shut down when you are retired?

The bottom line is this: your advisor should be there for you for a long, long time. Check out the firm, ask about their clients; see if the people there will be there for you for the rest of your life.

Check us out. We stack up very well.  And check out our book on estate planning: BEFORE IF GO.

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10 Common Mistakes Made with company retirement plans.

Surveys say that most people don’t take full advantage of company sponsored retirement plans.

What are some of the most common mistakes?

1. Many people never participate at all, and others wait months or years to participate.
2. Failure to make enough of a contribution to obtain the full company match.
3. Failure to increase your contribution after getting a raise.
4. Failure to study the investment choices.
5. Putting too much of the money into company stock.
6. Failure to re-balance the portfolio on a regular basis.
7. Leaving the plan behind when changing jobs.
8. Failure to name a beneficiary.
9. Failure to review beneficiary information.
10. Cashing the plan out before retirement.

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Income from “Total Return”

When thinking about income from an investment portfolio many people focus on interest and dividend income. That can lead to problems. In times like these where interest rates are low, the desire to get income from bonds and high dividend paying stocks can be hazardous.

Bonds that pay high yields may be low grade “junk” bonds that are riskier than high grade bonds. Or they can be long-term bonds that will lose value when interest rates rise.

Stocks with unusually high dividends may actually be paying more in dividends that they earn. How long can that go on? Focus too much on dividend income and you could be like those who, in 2008, owned lots of bank stocks that were paying some of the highest dividends. Some of these banks failed and shareholders lost all their money. The survivors cut their dividends to – or near –zero.

Don’t misunderstand; getting income from bonds and stocks is not bad. But “reaching” to get income from these sources can be hazardous.

There is another way of getting income from an investment portfolio that does not focus on just interest or dividends. It’s called the “Total Return” system.

Total Return introduces a third factor into the income mix: growth.

Let’s use a stock as an example.

Imaging that we buy XYZ company stock at $100. It pays a dividend of $3. That gives us a dividend yield of 3%. But let’s assume we chose XYZ stock not just because of the dividend but because we believed it would grow. A year later, XYZ stock is now selling for $110. The “Total Return” on XYZ is the sum of the dividend and the growth in value.

Dividend:                    $3.00 (3%)
Growth in value :     $10.00 (10%)
Total Return:           $13.00 (13%)

Under these circumstances, we could take the dividend plus part of the increased value of the stock, spend it, and still have more wealth than we had before. Viewed from the Total Return principle, we could spend up to $13 and be wealthier than before.

This example is easier to accomplish using mutual funds, and it’s one of the strategies that we employ for those who are retired and those who are still building their retirement portfolio.
If you want to know more about the Total Return way of investing, contact us.

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Mr. Market gets nervous

For a while it seemed that Mr. Market didn’t read the newspapers. Turmoil in Europe, real war in the Middle East, Central America moving across the southern border; nothing seemed to faze him as he went up, up, up.

Then suddenly it seemed that Mr. Market picked up a newspaper and fainted. A banking crisis in Portugal and Argentina defaulting on its debt (hint: Argentina default is as predictable as the rising of the sun; since gaining independence in 1816 it has been in default or rescheduling payments about a third of the time) seemed to trigger a re-assessment. Then there was good economic news (GDP rising 4% in the second quarter), something that scares Mr. Market because that means that the end of the Fed’s money printing is drawing nigh.

Anyway, those were the reasons given for the market stall and modest retreat in July.

But let’s put both fear and hope aside and take a clear-eyed view of the market and the economy:

  • The job market is showing steady gains.
  • Economic growth is slow but steady.
  • The manufacturing sector is firing on all cylinders.
  • Consumer spending grew by 2.5% as people went out to buy cars and home furnishings.
  • Business spending grew 5.5%.

We are reluctant to make market predictions because we’re not in the fortune-telling business. We’re in the business of building wealth for our clients over the long term. If this is the beginning of a correction, we believe that the long-term outlook remains good.

If the market’s actions scare you or create a growing sense of panic or concern, you may need to re-evaluate your portfolio. Create a portfolio that’s good for all seasons. Remember our slogan: Finish Stronger™.

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What do you do when the market drops 300 points?

Yesterday scared a lot of people.  And when the July brokerage statements arrive, many people will not want to open them.  It’s not been a good month for stocks.

When there’s a sudden drop in the market, one that makes people take notice, we always wonder what’s going to happen next.  Is it the beginning of a steep decline, perhaps a Bear Market?  Or is an opportunity to buy stocks on sale?  A Blue Light Special?

The answer is: nobody knows.  Anyone who pretends to know is lying.

If you have a properly constructed portfolio, what happens next won’t bother you.

By a properly constructed portfolio we mean a portfolio that’s designed to be robust, that’s properly diversified and one that is designed for your risk tolerance.

When the stock market is going up, the value of that part of your portfolio devoted to stocks increases in value.  And while you may think that’s a good thing, what it’s doing is increasing the portion of your investments to stocks which are the riskiest part of your portfolio.  Over time, during a Bull Market, your portfolio is becoming riskier and riskier.  Unless you take active measures to bring your investments back to your original asset allocation – a fancy way of saying the portion of your portfolio that’s devoted to stocks and bonds – when the market takes a dive, your portfolio will decline more than you want.

If yesterday’s drop felt more like a drop-kick, you own too much stock. It’s time to to re-evaluate your risk tolerance. Talk to your financial advisor.

So, to answer our original question: What do you do when the market drops 300 points?  If you had a portfolio that’s designed with you and your future in mind, the answer is nothing.  On the other hand, if it caused you to panic, call us and let’s talk.

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If you’re rich, will your kids stay rich?

Different countries have different ways of expressing the same beliefs about wealth: “Shirtsleeves to shirtsleeves in three generations” is the one I most often hear. In Japan, it’s “Rice paddies to rice paddies in three generations”. In China, “Wealth never survives three generations.” In fact, for 70% of all wealthy families, the money has been spent, or otherwise lost before the end of the second generation.

People who have enough money to consider themselves, ‘rich” – those with at least $10 million — worry about their kids squandering the money they’re given or inherited.

According to a study by U.S. Trust, 75% of families worth over $5 million made it on their own. In other words, they built it, mostly by starting a successful business.

Unfortunately, that doesn’t mean that their kids are equally smart or hard working. And it doesn’t mean that their parents are wise investors.

That means there’s a market out there for advisors who can teach the kids (and often the parents) the ins and outs of investing. This provides these families with the means to keep the wealth they have earned and keep it for the next generation, and the next after that.

But just as important is passing on the social, intellectual and spiritual capital that created the wealth in the first place. Too often the children of wealthy families fail to appreciate the work and sacrifice it took to create that wealth, and assume it will always be there for them.

At Korving & Company often serve several generations of the same family. If you have concerns about your children’s ability to manage money, call us for a consultation.

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Retirement Issues for Small Business Owners

Small business owners facing retirement have issues that corporate employees don’t have. Most can’t simply announce their decision to retire and walk away.

Most small business people have a large part of their net worth tied up in the business. They often assume that they will be able to realize the value of their business to fund their retirement.

There are several problems with this. The first problem is that the value of a small business is very dependent on the economy. For example, a business tied to the construction industry that may have been worth $10 million at the peak of the cycle may be worth only a fraction of that once the economy turned down. The second problem is that the business owner may have an exaggerated idea of the value of his business and its worth when he’s no longer around.

Small businesses often depend on the owner to generate business. In business it’s often personal relationships that generate new and repeat customers. If the owner retires and leaves, the business frequently dies. For that reason, many buyers of small businesses require the previous owner to continue working for a number of years during a transition.

This means is that succession planning is vital to the financial well-being of the small business owner.

Of course, the ideal answer for small business owners is to have their retirement assets outside of their business. Business valuations, economic cycles, and succession planning remain important to the small business owner. But having a fully funded retirement portfolio makes retirement for the small business owner more certain and a lot less stressful.

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Teach your kids about money

Kids learn about money from their parents.

They observe what parents do and what they say about money and pick it up by osmosis.  It’s the same way they learn to talk, and end up talking in the same dialect as their parents.

An article in the Wall Street Journal by Beth Kobliner tells us that

Three out of four American teens lack the skills to decipher a pay stub. That’s just one of the sobering findings from the first international test of teenagers’ financial literacy. American 15-year-olds posted barely average scores, with the U.S. ranking in the middle of the 18 countries whose students participated.

That tells us a lot about the financial skills of the average parent.

What’s to be done?

As a parent of young children, plan to getting better educated about saving, credit cards, debt, investing and all the things that make you financially literate.  If you don’t want to read books on the subject, get help from people whose job it is to educate you, like RIAs who are Certified Financial Planners.

At the very least, you can visit the website: Money as you grow, “20 things kids need to know to live financially smart lives.”

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