Yes, Virginia, there is a Santa Claus.

In all the material world, it is worth reminding ourselves that there is much more to life than what we can see or touch.  As a reminder, here is that famous answer to Virginia O’Hanlon

Dear Editor—

I am 8 years old. Some of my little friends say there is no Santa Claus. Papa says, “If you see it in The Sun, it’s so.” Please tell me the truth, is there a Santa Claus?

Virginia O’Hanlon

Virginia, your little friends are wrong. They have been affected by the skepticism of a skeptical age. They do not believe except they see. They think that nothing can be which is not comprehensible by their little minds. All minds, Virginia, whether they be men’s or children’s, are little. In this great universe of ours, man is a mere insect, an ant, in his intellect as compared with the boundless world about him, as measured by the intelligence capable of grasping the whole of truth and knowledge.

Yes, Virginia, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy. Alas! how dreary would be the world if there were no Santa Claus! It would be as dreary as if there were no Virginias. There would be no childlike faith then, no poetry, no romance to make tolerable this existence. We should have no enjoyment, except in sense and sight. The eternal light with which childhood fills the world would be extinguished.

Not believe in Santa Claus! You might as well not believe in fairies. You might get your papa to hire men to watch in all the chimneys on Christmas eve to catch Santa Claus, but even if you did not see Santa Claus coming down, what would that prove? Nobody sees Santa Claus, but that is no sign that there is no Santa Claus. The most real things in the world are those that neither children nor men can see. Did you ever see fairies dancing on the lawn? Of course not, but that’s no proof that they are not there. Nobody can conceive or imagine all the wonders there are unseen and unseeable in the world.

You tear apart the baby’s rattle and see what makes the noise inside, but there is a veil covering the unseen world which not the strongest man, nor even the united strength of all the strongest men that ever lived could tear apart. Only faith, poetry, love, romance, can push aside that curtain and view and picture the supernal beauty and glory beyond. Is it all real? Ah, Virginia, in all this world there is nothing else real and abiding.

No Santa Claus! Thank God! he lives and lives forever. A thousand years from now, Virginia, nay 10 times 10,000 years from now, he will continue to make glad the heart of childhood.

6 blind spots for index investors

Via Market Watch.

 Here are some corners of the stock and bond markets that you may get too much or too little of in your index fund.

• Small-Cap Stocks – if you invest in a large cap index like the S&P 500 you will miss the opportunity to invest in smaller companies.
• Changing International Indexes – one investment firm may consider South Korea an emerging market, another may define it as a developed market.
• Canadian Stocks – most international index funds son’t consider Canada as part of their foreign index.
• Small Cap International Stocks – many international  indexes have no exposure to small cap stocks, which may work against you.
• Chinese Stocks – China limits the ways in which foreigners invest in its companies; read the prospectus carefully.
• Greece – if your foreign bond index is weighted toward the amount of debt outstanding, you could own too much Greek debt.

Are you a SITCOM?

We have heard about Baby Boomers, Gen Xers and Millenials.  Now we have a new term for defining a demographic group: SITCOM.

Who is part of the SITCOM?  People who are Single Income, Two children, Oppressive Mortgage.

With the market in a turmoil everyone is concerned, and rightly so, with most believing that Social Security may not be around when they retire and that Defined Benefit plans are a lot like unicorns. This is the time for people who find themselves in a SITCOM to find an advisor who can help them finish stronger.

Before Passing Along Valuables, Passing Along Values

This article in the Wall Street Journal reminded me of a project from my school years many, many years ago.  We were assigned to visit some elderly people in our community to ask them about their lives.  The results were fascinating.

Previous generations had to pass along their parents’ and grandparents’  experience and wisdom by telling family stories.   Modern technology allows the older generation to speak directly to their descendants via video records.

Todd Fithian recently made a film for his four children.

“I took the time to capture my stories, life lessons and family traditions, many of which have been passed down to me from my parents,” says Mr. Fithian, a 43-year-old managing partner of Legacy Cos., a Hingham, Mass., consulting firm to financial advisers. “These things have a trickle-down effect, but rarely do we take the time to capture them.”

Mr. Fithian’s video is part of a burgeoning effort in estate-planning circles to ensure that life lessons are passed on to loved ones. Educators, financial advisers and technology providers are approaching the task on two fronts: encouraging and helping older adults to share their stories and values before they die, and teaching adult children and grandchildren how to tap their parents’ and grandparents’ thoughts.

We can, of course, continue to pass along family lore during holidays and family gatherings.  But I have often wished I had brought along a voice or video recorder so that I could capture those stories for my children and grandchildren.

As we get older, we often share regrets.

Take the topic of risk. Much of the advice tends toward the bold. “What you are going to regret is what you didn’t do rather than what you did,” Mr. Pillemer says. “It’s criminal if you don’t take advantage of the opportunities that come up in your life.”

It’s a reminder that many of us never create a “Bucket List” and act on it before it’s too late.

7 retirement planning myths debunked

If you ever plan to retire, you have to have a plan.  The days of depending on an employer pension and government benefits are rapidly disappearing and, especially if you are under 50, you are living in a  “yoyo” economy — short for “you’re on your own.”

There are a bunch of myths about retiring that need to be abandoned.

•  It’s OK to postpone saving for retirement until other needs are taken care of.  Wrong.  There are always “other things” that interfere with saving for retirement and if you let them get in the way, you’ll never start.
• Medicare will take care of almost all your health care needs.  In reality it will cover about half.
• You’ll need far less income in retirement to maintain the same standard of living.  Only if you decide to become a hermit.
• You can claim Social Security early and still get full benefits later.  Wrong.  When you begin taking benefits you are locked in (unless you pay it all back).
• You should rely heavily on bonds rather than stocks as you get older.  Only if you plant to die soon and expect zero inflation.
• Any retirement target-date fund will allow you to “set it and forget it.”  Target date funds vary widely in performance and there are no guarantees associated with them.
• You’ll be able to make up a savings shortfall by retiring later or working part-time in retirement.  That’s a hope, not a plan.  You may not be physically able to work after retirement.   Because of the costs of benefits, many employers are reluctant to hire older workers.

A plan is needed, and needs to be constantly updated to keep you on the path to the kind of retirement that you want.

The Internal Revenue Service Announces An Increase in the Annual Gift Tax Exclusion

From the Hook Law Center

The Internal Revenue Service recently announced it has raised the limit on the annual gift tax exclusion; this change will give individuals more flexibility to make gifts during their lives in order to avoid the estate tax.  Starting in 2013, the annual exclusion for gifts goes up to $14,000 per recipient; it was previously $13,000 per recipient.  Spouses can combine their annual exclusions to double the size of the gift per recipient.

Considering the uncertainty of the estate tax exemption in 2013, this change is especially beneficial.  Due to the “fiscal cliff,” among other economic and political developments, it is possible that the new estate tax exemption will be lower.  While we know what the federal estate tax rules continue until the end the year, what will happen in 2013 and beyond is still unknown.

However, under current law the estate tax exemption is scheduled to drop significantly from $5,120,000 in 2012 to $1,000,000 in 2013.  Moreover, the estate tax rate is scheduled to jump from 35% to 55%.  The portability of any unused exemption between spouses will disappear.  Thus, families with estate tax challenges are advised to consider leveraging the gift tax annual exclusion.

There are several exclusions from the gift tax limitations

The Internal Revenue Code includes other unique opportunities for lifetime gifts which are not subject to the gift tax.  The payment of tuition is an especially helpful way to transfer wealth from one generation to another without triggering gift tax.  As long as payments are made directly to an educational institution, a donor can pay for a student’s entire tuition without being penalized by the gift tax.  Medical bills, if paid directly to the provider, are also not subject to the gift tax.

Dividend Yields

Tony Gleason, Portfolio Co-manager of the Neuberger Berman Equity Income Fund notes that:

…at this point in time, non-U.S. equities in both the developed and emerging markets have a significant leg up on their U.S. counterparts. In fact, dividend growth rates of non-U.S. companies have been higher than their U.S. counterparts since 2008.

This is another argument to be made for investing globally.

 

The Alternative Minimum Tax (AMT)

Alternative minimum tax, or AMT, is an additional tax you pay on top of the regular income tax. Originally designed to prevent high-income individuals from using tax shelters and other gimmicks to pay less than their fair share, it now applies to millions of ordinary taxpayers. Broadly speaking they can be divided into three groups:

• People with larger than average deductions for personal exemptions and/or state and local taxes. Often there is little they can do to plan around this problem.

• People who exercise incentive stock options and decide to hold the shares. Planning is often crucially important for these people. (See our books Consider Your Options for people who receive options andEquity Compensation Strategies for professional advisors.)

• People with some unusual item on their tax return, such as a large long-term capital gain.

More information here.

Open a Roth IRA for Minors

Consider this example: If a child invests $2,000 in a Roth IRA each year from ages 13 to 17, that $10,000 could increase in value to almost $296,000 by age 65, according to research by  T. Rowe Price. That assumes the account earns a 7% annual rate of return. If that panned out, the account could provide tax-free income of $11,800 a year for 30 years.

Tax-free compounding of earnings inside an IRA is a beautiful idea — and a powerful one. The longer you can keep your money invested in a tax-free vehicle, the greater your wealth accumulation. What better way to accumulate a large amount of savings than to start during childhood? When tax-free compounding has more than 50 years to run its course, a relatively modest savings plan can produce substantial wealth.

There’s no minimum (or maximum) age to set up a Roth IRA. And there’s no requirement that the same dollars that were earned be used to fund the IRA. If your child earned money on a summer job and spent it on whatever kids spend money on these days,* there’s nothing wrong with using money provided by parents to establish the IRA. The child has to have earned income, though.

The major impediment to IRAs for children, especially young children, is the earned income requirement. An unmarried person must have earned income of his or her own to contribute to a Roth IRA. The income has to be compensation income, not investment income. And it has to be taxable compensation income.

That doesn’t mean your child has to actually pay tax on the income. If the total amount of income is small enough so your child doesn’t have to pay tax, that’s okay. But your child has to have the kind of income that would call for a tax payment if the amount were large enough.

Investment conversation for the holidays

Some good advice from the Wall Street Journal

If you plan to spend some time with your adult children during the holidays, point them to a new report from T. Rowe Price, TROW +1.55% the Baltimore-based mutual-funds company. In a survey of investors ages 21 to 50, researchers found that such individuals have laudable goals—72% said saving for retirement is their top financial priority—but a poor understanding of how to reach them. Many advisers recommend saving at least 15% of annual income, but about two-thirds of those ages 21 to 50 with access to a 401(k) are contributing 10% or less of their salaries to their accounts. Young investors also might be overly cautious: Fully 37% said they are refraining from investing in stocks. So go ahead: A little dinner conversation about planning for the future never hurts.