Every day, over 10,000 baby boomers become eligible for Social Security benefits. New rules and regulations make it difficult to apply for benefits. In fact, the maze of laws makes applying for benefits a tedious and complicated affair.
Did you know that…

…the earliest age a person can receive benefits is age 62?
…the average or “full” retirement age is between 66 and 67, depending on the year the person was born?
…most individuals will continue working until the full age of retirement to maximize their benefit policy?
…the basis for calculating benefits is a person’s top 35 years of pay?
…a person needs to work at least 10 years to earn retirement benefits?
…the average monthly retirement benefit is $1,182?
…a divorced person, who was married for at least 10 years, can claim Social Security benefits on the former spouse’s payment history?
…calculating the age when a husband and wife take their own benefits vs. when they take spousal benefits can drastically alter their benefit amount?

The Social Security Administration’s website provides some tools for calculating benefits and for applying for Social Security. However, the website does not provide any guidance on how to maximize benefits. For example, John and Susan, a married couple, have reached the age 62, allowing them to collect on Social Security. In this hypothetical situation, the net present value of their benefits is around $900,000. They both decide to work until age 65.

After consulting with their financial planner, they determine that Susan will collect her Social Security benefits at age 65 while John will take a “spousal benefit” until age 70. At this time, John can begin to collect his own benefits. Social Security is inflation-adjusted, and by delaying the start of his benefits, John actually increases their amount. By utilizing “spousal benefits” and by delaying the start of their benefits, they have increased the net value to be over $1.2 million, an increase of $300,000.
By consulting with financial advisors, baby boomers can be better prepared to apply for and receive the maximum amount of Social Security benefits available to them.

 In the past, seniors age 70 ½ and above were forced to take required minimum distributions (RMDs) from their IRAS, whether they needed the additional income or not. These RMDs were then treated as income and subject to taxes. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended the deadline for making qualified charitable distributions (QCDs) from IRAs to December 31, 2011. The QCD provision is particularly attractive if seniors do not need their RMD towards living costs and plan to give this money to charity eventually. A QCD saves the individual from having to count the distribution as taxable income.

The Qualified Charitable Distribution Process

Accountholders can instruct their IRA trustees to make a distribution directly to a qualified charity. These QCDs can account for as much as $100,000 of gross income. These distributions can make up all or part of individuals’ RMDs and be directed to single or multiple charities.

For example, an accountholder’s RMD is $20,000. The investor instructs the trustee of his or her IRA to distribute $5,000 to Charity A and $5,000 to Charity B. The investor must then take the remaining $10,000 as a distribution before the end of 2011 to avoid paying a penalty. The IRS considers the $10,000 distribution as part of the accountholder’s taxable income for 2011. However, the accountholder can direct the trustee to distribute $10,000 to each charity and have no taxable income incurred from his or her RMD.

Other Benefits of the QCD Provision

A reduction in their tax burden is not the only benefit provided to seniors. The QCD provision does not require donors to itemize their tax returns. Some states, such as West Virginia, do not allow itemized tax deductions. By making charitable donations directly from their IRAs, taxpayers can avoid additional income and, therefore, state taxes on that income. Those who itemize their tax returns are prevented from deducting more than 50% of their adjusted gross income in charitable donations. However, the QCD is not included in this percentage and allows individuals to exceed the limit.

Many taxpayers’ deduction amounts decrease as their income increases. Required minimum distributions add additional income, often unnecessarily. Large reported incomes may also increase Medicare Part B premiums or have adverse effects on Social Security benefits. By using QCDs, taxpayers can qualify for other tax deductions or savings that their incomes might otherwise prohibit them, multiplying the provision’s benefits.

 Restrictions of the QCD

While this provision provides many benefits, it also has limitations. Those who hope to take advantage of a QCD must be 70 ½ or older and have a RMD that would otherwise be considered taxable income. The IRA trustee must make the charitable donation directly to the charity from a traditional or Roth IRA. Donations from previously distributed funds cannot qualify as QCDs. Taxpayers cannot deduct these distributions as charitable contributions on federal income tax returns.

Despite the restrictions, the QCD provision can greatly reduce the taxes owed by wealthy investors. Discuss further benefits with a tax professional or wealth manager to understand how it can affect your finances. Remember to take advantage of this extension before December 31, 2011 to increase your tax savings for the year.

The federal government is concerned about the rising costs of long-term health care for senior citizens and the disabled. And it is actually taking action.

The Community Living Assistance Services and Support Act (CLASS Act), part of the health reform legislation signed into law by President Obama in 2010, will establish the nation’s first government-run, long-term care (LTC) insurance program. Long-term care insurance is designed to cover costs associated with cognitive impairment, a chronic illness, a disability, or help with daily needs such as bathing and getting dressed.

One of the primary goals of the CLASS Act is to reign in the role Medicaid plays in long-term care. Currently, Medicaid spends one-third of its budget on LTC costs — and with a rapidly aging population, those costs are only expected to skyrocket over the next few decades.

The Act does not yet specify premium levels or the full scope of what services will be covered. The Department of Health and Human Services is responsible for determining the parameters of the program. While the program became effective as of January 1, 2011, the full details won’t be finalized until October 2012.

Here is a summary of what is known so far.

• The program will be voluntary and not funded by tax dollars.
• Employers can include the program as part of their benefits offerings and may fund all or part of the costs. Their employees will be automatically enrolled, but will have the ability to opt out.
• Eligible employees can pay their monthly premiums through direct payroll deductions, similar to traditional workplace health insurance plans.
• Participants earn eligibility for their LTC needs after at least five years of participation.
• These plans will be tax-advantaged, allowing participants to deduct their premiums and out-of-pocket expenses on their tax returns.
• Those who are currently retired are not eligible for the program. Also not eligible are the unemployed and nonworking spouses.

A Need for Supplemental Coverage?

The program’s benefits won’t be capped, but the amount paid will probably not cover 100% of all LTC costs. The law stipulates a daily benefit minimum of at least $50, and many experts believe the program will launch with a $75 daily stipend. Currently, the median cost of “adult day health care” is $60 a day, while a semi-private room in a nursing home runs $185.1

Given the rising costs of care, it is likely that supplemental insurance still may be a necessity for many who have not yet retired. Standalone LTC insurance can be pricey. In 2009, premiums for a policy with a three-year benefit period averaged $1,590 annually for a single 55-year-old.2

In addition to their costs, LTC insurance policies are complicated. If you are considering purchasing a policy before the government plan is launched, be sure to consult with your financial professional. 

¹Source: Genworth Financial, Genworth 2010 Cost of Care Survey, April 2010.

²Source: American Association for Long-Term Care Insurance, 2009 Long-Term Care Insurance Price Index.    

© 2011 McGraw-Hill Financial Communications. All rights reserved.

 This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by  Rob Hoxton, CFP, a local member of FPA.

The Middle East isn’t the only place experiencing a protest by the people.

In Madison, Wisconsin, thousands of protesters flooded the state capital for several days last week to protest the newly-elected Republican governor’s attempt to roll back state employee benefits and overhaul union rules, according to CNN. The battle is being closely watched on the national scene because if the governor succeeds, it may embolden other states to attempt similar moves.

What’s playing out in Wisconsin may be a precursor to sweeping changes in our country over the next few years. Specifically, most people agree that our country is facing massive budget issues that cannot be “kicked down the road” indefinitely. With the Republicans scoring major victories in last year’s election, they are now—right or wrong—trying to follow through on campaign promises to address these issues.

While most people agree that something has to be done with our country’s budget issues, Wisconsin’s governor is discovering that getting changes made won’t be easy.

Interestingly, the stock market keeps moving up despite the political protests here and abroad. Last week, the S&P 500 rose to its highest level since June 2008 as the Federal Reserve raised its forecast for economic growth and most companies reporting earnings topped estimates, according to Bloomberg.

What could possibly derail the market’s upward momentum? In a word—oil. As the unrest in the Middle East spreads, particularly in oil-rich Libya, a spike in oil prices could deflate the market if it causes the economy to slow down.

Back in Wisconsin, the protests show we have no consensus on how to solve the deficit problem. The least painful way would be to grow our way out of the hole. More likely, though, the old Fram oil filter ad presciently spells out the path, “You can pay me now, or pay me later.”

The 2008 market collapse and tepid economic conditions have driven investors to the perceived safety of fixed income investments such as bonds.  The resulting bull market in bonds  pushed the Aggregate Bond Index (Symbol: AGG) higher by more than 22%. As bond prices rose during this time, yields fell dramatically putting the 10-Year Treasury at a 60-year low (as of November 16, 2010). In other words, we haven’t seen yields this low since the early 1950s. “With interest rates at 60-year lows, the risk of rising rates and falling prices stands at generational highs”.[1]

Fundamentally, when interest rates rise, bond prices fall. Think of the school-yard teeter-totter. Bond prices have risen as bond yields have fallen. Now, with bond yields rising, bond prices have begun to fall. Last week, investors got a glimpse of what a bond market correction looks like. From Monday to Friday, the yield on the 10-year Treasury moved higher from 2.92% to 3.32% and the Aggregate Bond Index (AGG) lost 1.27% in value for the week. The potential to lose money in bonds has not been this great in many years. The potential to make money in bonds has not been this small in many years. 

“If the 10-year Treasury merely adjusted to a normalized 5% rate (2.5% to 3% real rate with a 2% inflation assumption and some term premium), given its 9+ duration, it could suffer a price decline of over 20% (Taubes p. 5)”. A decline of 20% or more would come as a huge surprise to traditionally risk- averse bond investors.

Typically, there are  two reasons that investors buy bonds– as a source of income and for stability.  With yields at 60-year lows and the potential for capital loss at 60-year highs, investors should expect neither income nor stability.

 [1] Taubes, Ken. The Risk of Fixed Income Indexing vs. Active Multi-Sector Management. Pioneer Perspectives. Print. November 2010.

In what should be landmark legislation to reform the financial system, there is a little known component of the proposed legislation that forces investment brokers (Broker/Dealers) to actually act in the “best interest” of their clients. That’s right, your broker will have to put your interests before the firm’s.

The Dodd-Frank Wall Street Reform and Consumer Protection Act that passed the Senate a week ago Thursday requires the Securities and Exchange Commission to conduct a six-month study on the impact of adopting a fiduciary duty for brokers. As I see it, that should be an easy study to conduct. If brokers are no longer allowed to abuse their clients in an effort to line their own pockets, the impact should be positive for individual investors.

Current law only mandates that brokers meet a “suitability standard”, requiring them to offer appropriate investment advice to their clients. A “fiduciary standard”, by contrast is a much higher standard and one which will allow investors to sue their broker if the duty is breached. The relatively small Registered Investment Advisor community (firms that charge a fee for advice instead of commissions) has owed their clients a fiduciary standard of care since the Investment Advisors Act of 1940 was signed into law more than sixty years ago.

Explaining what it would mean if the SEC were to impose a fiduciary duty on broker-dealers, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told CNN that they would “for the first time … have to act in your best interests or you can sue them.”

Not surprisingly, industry executives are opposed to this legislation. Tom Currey, president of the National Association of Insurance and Financial Advisors told Politico “We frankly think, and thought from the onset, the suitability model under which broker-dealers are regulated works pretty well.” The question though is: “who does it work well for?” Clearly, it has worked well for the investment sales community but in light of revelations of the client dealings of major Wall Street firms such, it has been disastrous for the individual investor. It is high time that the brokerage community quit their self dealing and put the client’s interest first.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from HFI Wealth Management To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.

Wealth Manager is proud to present the 10th annual Top Wealth Managers survey results, rankings and analysis. The firms that participate in the Top Wealth Managers survey are the lion’s share of the largest, most established registered investment advisors (RIAs) in America—the ones that our survey partner, Fusion Advisor Network President Philip Palaveev, says are ‘the ones every RIA wants to be when they grow up.”

A Family Mission Statement Can Help Any Family Manage Assets,
Philanthropy and Direction

A family doesn’t need a surname like Vanderbilt to benefit from a family mission statement.  A mission statement is a collaborative document created by one or more generations of family so standards and goals can be set for the handling of all family assets, including businesses and philanthropy in particular.

While mission statements aren’t legal documents – in fact, many are done both in written form and on videotape as a companion to legal wills and directives –  their purpose is to make a record of the family’s values, goals and aspirations and how those sentiments should drive future decisions about family wealth management, business succession plans and charitable pursuits.  Multi-national companies have mission statements. Non-profit corporations have mission statements.  A mission statement for your family, helps identify and clarify specific values and goals, facilitates group decisions, instills confidence and encourages unity.  

It should also identify family leadership who will work with other relatives in implementing those goals.

While the end product should produce a document built from discussion, argument and consensus, it’s not so much about the piece of paper as the process. Many families start the process as a way to build consensus about long-term financial, business, estate and philanthropic goals, but the conversation can take twists and turns that don’t directly involve the family money. In this process, a family can identify the strengths, weaknesses and unearthed priorities of all family members and might reveal leadership few had expected.

Trained financial advisors including financial planners, tax experts and estate attorneys, can help explain the process and set an agenda for families to follow in creating the mission statement. While some extended families may elect to bring in a facilitator to guide their process, there are generally four components to a family mission statement – estate issues, philanthropy, business planning and family dynamics in general.

It also helps to start with some questions that can guide the discussion.  Many experts start with questions that first get family members talking about their relationships and how their dynamics work, and then move into business and money matters.

• What’s most important about our family?
• What do you think our goals should be?
• When do you feel most connected to the rest of us?
• How should we relate to one another?
• What are our strengths as a family?
• Where do you think we’ll be as individuals in 5, 10 and 15 years?
• In order, what are the five things you value most in life?
• How should we behave toward each other?
• How should we take care of relatives who are or become sick or disabled?
• How should we resolve our disputes?
• How important is the family business to you?
• What should we be doing differently with our family money as well as our assets inside the business?
• What professionals or structures should we bring in to help us manage our wealth?
• What’s the best way for us to be building our wealth?
• What do you think the role of our family should be in helping the community?
• What should we be doing individually and as a family with regard to philanthropy?

Structurally, the written mission statement can be whatever you agree it should be – most experts say it should be no more than a paragraph long, but that’s a guideline, not a rule. It is also very important to focus on the positive, meaning what you want to accomplish and achieve as a family, as opposed to want you want to avoid. And it needn’t be set in stone – a family should have a meeting every year or two to revise or approve its mission.  The family mission statement helps a family establish its identity and the variety of voices within, and those voices may be subject to change over time. The family mission statement is a living, breathing document that can evolve over time. In today’s fast paced world, it is easy to get caught up in the here and now, a family mission statement can help you stay true to your family’s values. As a result, families may not feel the pressure to keep up with the Joneses because their mission  statement helps achieve balance. It is also very important to focus on the positive, meaning what we want to accomplish and achieve as a family, as opposed to want we want to avoid.

The right mission statement can help reset goals and diffuse tensions later. It can also be used to moderate discussions that inevitably happen after major changes within the family – death, divorce or happily, an increase in the number of heirs and participants.

As for the age of the participants, it can start in very basic form with younger children and the process can mature as they age. It’s actually a good idea to bring young members into a customized version of the process for youngsters so they can comfortably adjust to working as adults with the older members of the family.

For additional resources on how to create a family mission statement, please consider utilizing any of these websites

http://www.nightingale.com/mission_select.aspx?from=homepage&element=missiontitle

http://www.ehow.com/how_2043790_write-family-mission-statement.html

http://www.franklincovey.com/msb/

Most of our Shepherdstown lines are up and running now. Unfortunately the toll-free and main line are not. It seems that someone fed the gremlins last night and they fried these two lines. Everything should be back to normal later this afternoon. In the meantime, call 304-876-2656 or 304-876-2664 to reach us.

Good morning! We thought we should let you know that we are experiencing some problems with the phone system in our Shepherdstown office. We anticipate that it will be solved later this morning. In the meantime, please contact us by email or cell phone.