Monthly Archives: January 2013

Asset Allocation Programs

From our new book “Before I Go”

Advisors realize that today’s hot stock, industry, or economy can be tomorrow’s train wreck. The way to reduce the risk of getting your family assets depleted as a result of overexposure to any one company, industry, or country is to diversify. The question is: what is the proper diversifcation for you and your family?

The investment industry is becoming increasingly sophisticated regarding the planning process and fnding ways of diversifying away risk.  At our firm we begin by identifying the client’s goals, time horizon, and risk tolerance. This then leads to an investment plan that strives to meet the objectives within the comfort level of the client.  The end result is usually an asset allocation decision that may include some or all of the following investment categories:

• Large Cap value stocks
• Large Cap growth stocks
• Small/medium Cap value stocks• Small/medium Cap growth stocks
• Emerging market stocks
• U.S. short/intermediate term taxable bonds
• U.S. long term taxable bonds
• U.S. tax free bonds (municipals)
• Large Cap foreign stocks
• Foreign bonds
• Cash
• Commodities
• Precious metals
• Futures
• Currencies

This is by no means a complete or exhaustive list of investment categories. It is merely a brief list of some of the most popular asset classes that are available to the public today.

 

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U.S. Economy Unexpectedly Contracts in Fourth Quarter

Whoops. 

WASHINGTON—U.S. economic momentum screeched to a halt in the final months of 2012, as businesses pared back inventories and government spending fell sharply, while lawmakers struggled to reach a deal on tax increases and budget cuts.

The nation’s gross domestic product shrank for the first time in three and a half years during the fourth quarter, declining at an annual rate of 0.1% between October and December, the Commerce Department said Wednesday.

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A Creative Plan to Keep a Cheap NYC Apartment

From the Wall Street Journal we learn the way that wealthy people who live in New York’s rent controlled apartments keep them.

 He was a married professor in his late 60s who lived in a four-bedroom place in downtown Manhattan high-rise. His rent was set at just $2,000 a month; a comparable apartment at a market rental rate would run about $10,000 monthly.

The problem: The rules governing rent-stabilized apartments in New York disqualify tenants who make more than $200,000 a year in adjusted gross income for two years in a row. And required distributions from the client’s retirement accounts were going to push him above that threshold.

The professor’s AGI was $170,000. But thanks to diligent saving during a long corporate career before he started teaching, the professor had managed to accumulate $3 million in a handful of IRA and 401(k) accounts.

He had another $1 million in a 430(b), giving him a net worth of over $4 million.  The problem?  He didn’t want to pay market rates for his apartment and …

As soon as he hit age 70 1/2, he’d have to start taking required minimum distributions on those accounts…. at about $100,000 a year–immediately putting the [him] well over the rent-stabilization income limit.

The answer:

  1. … transfer $1.5 million from his old tax-deferred accounts into his current employer’s 403(b) plan, which would shield them from RMDs as long as the professor stayed with his employer

  2. use the rest of the funds in [his] IRAs and 401(k)s to fund a Roth IRA conversion.

Suddenly the professor is too poor and can keep his rent controlled apartment.

Homework assignment: discuss the ethics of rent control.

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2013 Stock Market’s Up

For the first three weeks of 2013 the S&P 500 is up over 5%.  Foreign markets are up a little under 5%.  All in all, not a bad showing for a troubled economy both here and abroad. 

 

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Michigan Winter 2013

Seven days of snow.DSCF3508Snow geese on the Grand River.DSCF3499

We have been away from the office for a week, visiting clients and enjoying the weather in Michigan.

The temperature was mostly in the single digits.

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The benefits of Roth Conversions

Taxes have gone up and may well go up some more.  The recent tax increase on those making over $400,000 will do little to reduce the deficit.  The REAL money is with the millions of people making less.  The problem with IRAs and 401(k) plans is that the money that’s withdrawn in the future is taxed as ordinary income.  The money withdrawn from a Roth IRA or 401(k) is not taxed when withdrawn. 

Hidden in the fine print of the “Fiscal Cliff” legislation is a provision that allows people to convert funds in their 401(k) accounts into Roth 401(k) accounts without many of the limitations that were formerly imposed on these conversions. 

The American Taxpayer Relief Act of 2012 (the Act) allows 401(k) plan participants to convert funds held in their traditional 401(k)s into Roth 401(k)s. Like an IRA-to-Roth-IRA conversion, this move allows 401(k) account owners to pay the taxes on the funds when they are rolled over into the Roth—so that the funds can then grow tax-free within the Roth, where they can be withdrawn without tax liability in the future. The Act does not impose any limits on the amount that can be transferred from the 401(k) to the Roth.

These types of rollovers were always permitted, but, under prior law, a 401(k) account owner was permitted to convert only the funds that he could otherwise withdraw without penalty. This limitation effectively confined conversions to those people who had already reached age 59 ½, or who had died, become disabled, or separated from service. Other people were required to pay a 10% penalty if they converted where distributions were not otherwise permitted.

Conversions could be highly beneficial for younger savers. These people may not have reached their full earning potential and may fall into a lower tax bracket today than they expect to reach later in life. Further, these taxpayers have a longer period before retirement, meaning that the funds converted will have more time to grow tax-free within the Roth.

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Real Assets

I once heard someone define real assets as things that when you drop them on your foot they hurt.  These are things that represent tangible stuff, unlike financial assets which are mostly marks on paper or records stored in computer files.  An example of a tangible asset that most people own is a car, or a home.  Keep in mind that cars deteriorate in value and homes can do the same, but many tangible assets increase in value because of scarcity coupled with increased demand.  An example of a real asset that has grown in value over the past decade is gold.

While many people collect actual physical tangible assets, in most cases it’s not practical for most people to collect, say, barrels of oil.  For these, the financial services industry created investments products that are backed by real assets such as gold, silver, oil and many other assets that are, or may become, scarcer or more valuable.

You can buy funds or ETFs that are backed by precious metals, by oil or natural gas, by real estate, by timber or lumber, by soybeans or cattle, by collectibles and even by toll roads.

The attraction of many tangible assets is that if inflation picks up, “real” assets are usually beneficiaries of price increases.  On the other hand, be careful of speculative excesses.  As large new oil and gas reserves are discovered and opened up, the scarcity value quickly dissipates and prices of these commodities can drop quickly. 

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Are you a boomer business owner?

There are 12 million baby boomer business owners, and they’re about to retire.  Their businesses are worth trillions of dollars, but they may not know how to actually turn the business into a financial assets that they can use during retirement.  Many don’t have a transition plan.  The problem is liquidity.  A business if often less liquid than a house and the value of a business may be closely tied to the presence of the owner.
 
One expert in helping small business owners is quoted as saying: “Small business owners often have less in investment assets than their employees, figuring that their business may be worth millions of dollars.  For most small business owners, 80 or 90 percent of their personal wealth is tied up in a privately-held, illiquid business and most of them don’t know how to take that asset and turn it into cash they can use to support themselves in retirement. And they don’t even know what they don’t know about it.”
 
An owner’s cash often goes into supporting the business and his lifestyle.  When times are good and businesses are in demand, the owner is reluctant to sell.  During bad times, as many small businesses are facing today, the sales value of a business may be a fraction of what it once was.  
 
A lot of the problem is brought about by psychology.  Most small business owners have confidence in their ability to manage their business but lack confidence in making investments.  This creates problems because if the retirement assets are tied up in the business, when it’s time to “cash out” the boomer business owner finds himself forced to keep running the business because he can’t get a  fair price and doesn’t have enough saved to really retire. 
 
How to solve this dilemma?  That’s a subject for another day.
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Herding your accounts

From the Wall Street Journal:

Keeping track of your finances in retirement can be a job in itself, and managing your investments is only a small part of it. Staying on top of basic tasks is tough, and if tax rules, technology, Medicare, Social Security and the markets keep changing, it will only get tougher.

You can’t do much about government policy or macroeconomics, but you can simplify your financial infrastructure by consolidating accounts…

It is common for people to have five or more investment accounts, such as a 401(k) or profit-sharing plan or two, a pension they rolled into an individual retirement account, a deductible IRA, a Roth IRA, an inherited IRA and perhaps even a lonely Keogh from a freelance stint in the 1980s.

You should consider rolling accounts that have the same tax-deferred treatment—pension rollovers, 401(k)s, regular IRAs, profit-sharing plans and Keoghs—into a single giant IRA.

We have commented about before and we discuss it in our book Before I Go, but it bears repeating because there always seem to be accounts that are not consolidated for reasons that are mostly simple inertia. 

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Now available: “Before I Go”

Korving & Company is very excited to announce the publication of “Before I Go.” 

During our quarter-century as advisor to hundreds of families, we have been called on to help many people whose lives were disrupted by the death of a loved one.  In most of those cases the person left behind had to struggle with more than the grief of loss.  They had to face the challenge of doing many of the things that were done by the one who passed on, but were not sure where to go for all the information.

The best time to gather all the information together is before we pass on, and since we are never sure when that will be, the right time is now.   Before I Go is the result of years of experience determining what information has been overlooked when making estate plans.

It allows you to specify:

  • You Advance Medical Directive (Living Will).
  • What you would like for your funeral arrangements.
  • Who to contact in case of your death.
  • Where and what your financial assets and liabilities are.
  • What your dependents income will be if you’re no longer there.
  • What the household expenses are and how they are paid.
  • Who to call on for legal and financial advice.

Most people actually don’t know the answers to these questions and spend many months trying to figure these things out.  It always creates a great deal of unnecessary stress and worry that could be avoided with the proper plan.

In describing the book to a nurse in her early thirties, we were told to hurry up and write it because she did not know where her husband’s insurance policies were or how much their investments were worth. 

We wrote Before I Go, and an accompanying workbook that is an instruction manual and checklist that you can leave behind for those you love.  They can use it after your passing to make their lives easier.

For a copy, please contact us via our website or phone at 757-638-5490.

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