Kim 8/24/15 Kim 8/24/15

What Does the Devalued Yuan Mean for the U.S.?

A look at China’s unexpected move & its potential impact.

China has surprised global investors by weakening the yuan almost 5%. Its central bank may even weaken it further.^1,5

Why did the PRC make this move? Its long-booming economy is in a slump. Most notably, Chinese exports have taken a major fall. In July, they were down 8.3% year-over-year. By depreciating the yuan, China is trying to help its exports maintain their competitive edge.²

Some of China’s other economic indicators have also disappointed lately. Chinese imports have retreated for nine straight months, slipping 6.1% for June and another 8.1% in July. The pace of retail sales in China slowed to a 15-year low in July. Producer prices in the PRC suffered their largest annualized slip since 2009 last month. Lastly, the nation’s economy may grow less than 7% this year – which would be the worst showing since the 1990s.^1,2

How may this impact America? The effects could be felt in several areas of our economy, and there could be some positives as well as negatives.

The Federal Reserve might decide to postpone a rate hike. Our central bank appears committed to raising interest rates before the year ends, perhaps as early as next month. A repeatedly devalued yuan might make the Fed think twice about that, however. China has effectively strengthened the dollar versus the yuan, making Chinese imports to America cheaper. That could lower consumer inflation pressure, and since annualized inflation in this country is already low, there would be less incentive for the Fed to raise rates. That would be bad news for savers but better news for some mortgage holders.³

Consumers could benefit more than businesses. As referenced above, a weakened yuan makes imported goods from China less expensive for Americans. Conversely, it also makes it that much harder for U.S. businesses to sell their products in the PRC, as Chinese consumers will have reduced purchasing power.³

You may see less hiring. A mightier greenback relative to the yuan means new hurdles for U.S. businesses in China, which could cut into earnings growth. While scores of American firms sell directly to Chinese consumers, others have strong ties to Chinese factories: look at Apple, which outsources the production of its iPads and iPhones to the PRC. A devalued yuan essentially whittles down the income U.S. businesses create in China and makes outsourced manufacturing costlier for American firms. You can draw a fairly direct line here: less income and lower earnings for American businesses could lead to slimmer payrolls. In particular, firms in the technology, energy and materials sectors could be impacted.^1,3

Oil & gas could become even cheaper. Oil is a dollar-denominated commodity, so a newly weakened yuan will test China’s demand for it. A stronger dollar relative to the yuan means that oil and oil-based products will be costlier in China. The Chinese might react by decreasing oil consumption. If China’s demand for oil lessens, that would help to keep oil prices low and American drivers would likely see lower gas prices as well.³

How about the markets? Equities seem to have regained their footing. When the PRC started devaluing the yuan on August 11, Wall Street read the move as a distress signal. The Dow opened with a triple-digit drop August 11 and lost 212 points for the day. On August 12, it took an even bigger fall at the open on news of the yuan weakening again, but it was down just 0.33 points at the close. The week’s subsequent trading days brought no further dives at the opening bell. Looking at the global picture, the DAX, CAC 40, Nikkei 225, and Shanghai Composite were all up 1% or more shortly after they opened Thursday.^4,5

As for the forex market, the yuan has certainly sunk versus other key currencies. By August 13, it had lost nearly 3% against the dollar over the past five trading days, and almost 5% against the euro.⁶

Is a global currency war about to heat up? The People’s Bank of China insists it does not seek to start one. A Barclays client report released August 13 noted the PBC “downplaying the need for a weaker yuan” at a press conference and refuting claims it wanted to devalue the currency at least 10% to support exports. Yi Gang, one of the PBoC’s deputy governors, stated that there was “no basis for a persistent weakening in the yuan... and that the aim of the PBoC is to have the market determine the exchange rate.”⁵

If the yuan does keep sliding and global markets slump significantly, the Federal Reserve and the European Central Bank could react supportively, providing investors with some reassurance. A weakened yuan presents another challenge to the Fed’s plans to tighten.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600. This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - foxbusiness.com/markets/2015/08/12/us-stock-futures-slump-as-china-devalues-yuan-again/ [8/12/15]

2 - marketwatch.com/story/chinas-economy-enters-second-half-of-2015-on-weak-note-2015-08-09 [8/9/15]

3 - usatoday.com/story/money/business/2015/08/12/yuan-and-you-how-chinas-devalued-currency-affects-us-consumers/31524925/ [8/12/15]

4 - money.cnn.com/data/markets/dow/ [8/13/15]

5 - usatoday.com/story/money/markets/2015/08/13/market-calm/31610769/ [8/13/15}

6 - money.cnn.com/data/currencies/ [8/13/15]

Kim 8/10/15 Kim 8/10/15

Teaching Your Heirs to Value Your Wealth

Values can help determine goals & a clear purpose. Some millionaires are reluctant to talk to their kids about family wealth. Perhaps they are afraid what their heirs may do with it.

In a 2015 CNBC Millionaire Survey, 44% of families having at least $1 million in investable assets said that they had not yet told their children about their future inheritance. Another 27% said they had refrained from mentioning it until their children were 30 or older.¹

It can be awkward to talk about such matters, but these parents likely postponed discussing this topic for another reason: they wanted their kids to grow up with a strong work ethic instead of a “wealth ethic.”

If a child comes from money and grows up knowing he or she can expect a sizable inheritance, that child may look at family wealth like water from a free-flowing spigot with no drought in sight. It may be relied upon if nothing works out; it may be tapped to further whims born of boredom. The perception that family wealth is a fallback rather than a responsibility can contribute to the erosion of family assets. Factor in a parental reluctance to say “no” often enough, throw in an addiction or a penchant for racking up debt, and the stage is set for wealth to dissipate.

How might a family plan to prevent this? It starts with values. From those values, goals, and purpose may be defined.

Create a family mission statement. To truly share in the commitment to sustaining family wealth, you and your heirs can create a family mission statement, preferably with the input or guidance of a financial services professional or estate planning attorney. Introducing the idea of a mission statement to the next generation may seem pretentious, but it is actually a good way to encourage heirs to think about the value of the wealth their family has amassed, and their role in its destiny.

This mission statement can be as brief or as extensive as you wish. It should articulate certain shared viewpoints. What values matter most to your family? What is the purpose of your family’s wealth? How do you and your heirs envision the next decade or the next generation of the family business? What would you and your heirs like to accomplish, either together or individually? How do you want to be remembered? These questions (and others) may seem philosophical rather than financial, but they can actually drive the decisions made to sustain and enhance family wealth.

Feel no shame in exerting some control. A significant percentage of families seek to define a purpose for transferred wealth. In CNBC’s survey, 32% of parents aged 55 or younger said they were going to specify what their heirs could use their inheritances for, and that was also true for 15% of parents aged 55-69 and 9% of parents aged 70 or older.¹

You may want to distribute inherited wealth in phases. A trust provides a great mechanism to do so; a certain percentage of trust principal can be conveyed at age X and then the rest of it Y years later, as carefully stated in the trust language.

This is a way to avoid a classic mistake: giving your heirs too much money at once. In fact, a 2015 Merrill Lynch Private Banking & Investment Group report notes that 46% of high net worth parents share that very concern.²

Just how much is too much? Answers vary per family, of course. In the aforementioned Merrill Lynch survey, 46% of families said that they wanted to avoid handing down the kind of money that would dissuade their heirs from realizing their full potential in their lives and careers.²

By involving your kids in the discussion of where the family wealth will go when you are gone, you encourage their intellectual and emotional investment in its future. Pair values, defined goals, and clear purpose with financial literacy and input from a financial or legal professional, and you will take a confident step toward making family wealth last longer.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - cnbc.com/2015/07/22/wealthy-parents-fret-over-inheritance-talk-with-kids.html [7/22/15]

2 - bankrate.com/finance/estate-planning/critical-questions-before-leaving-an-inheritance-1.aspx [8/6/15]

Kim 7/14/15 Kim 7/14/15

China’s Chaotic Market

As the world watches, the nation’s government tries to end the downturn.

Investors worldwide worry about the state of China’s equity market. You could argue that these fears have impacted Wall Street as much as the crisis in Greece.

The recent ups and downs of the Shanghai Composite (SSE) have been startling: the 16 trading sessions from June 17-July 9 included daily losses of 6.42%, 7.40%, 5.77%, and 5.90% and daily gains of 2.48%, 5.53%, 2.41%, and 5.76%. To put that in perspective, imagine the S&P 500 gaining or losing 50-130 points a day or the Dow falling or rising 500-1,200 points per session.¹

The SSE is now in a bear market – it sank 24% between June 12 and July 4. Before that, it was up a dizzying 149% YTD.²

Is the summer slump in the SSE a measure of lost confidence in China’s economy? If so, will Chinese demand for oil, coal, and other imports weaken even more? The volume of imported goods to China fell 7% from Q1 2014 to Q1 2015.³

China’s government has taken some extraordinary steps to appease investors. Its actions make the Federal Reserve’s 2008 rescue effort look conservative.

Back then, the Fed bought mortgages and securities. The People’s Bank of China is putting its money into equities. It just created a 120-billion yuan ($19.3 billion) market-stabilization fund that the nation’s leading brokerages will use to invest in the largest SSE-listed companies.^5,6

On July 8, the China Securities Regulatory Commission barred anyone owning more than 5% of a company from selling their shares for six months. Days earlier, Chinese officials suspended all IPOs, anxious about potential cash outflows from existing SSE-listed firms.^4,5

The China Banking Regulatory Commission is now letting lenders roll over loans backed by shares – and it has publicly stated its support for banks extending credit to exchange-listed firms doing buybacks. Meanwhile, the CSRC is embarking on an effort to crack down on “malicious” short selling.^2,4

Essentially, Chinese are being told that there is no downside to investing in equities – at least for the moment. (The Chinese government has even urged people to buy shares out of patriotic duty.)²

One major problem has emerged after all this: a shortage of liquidity. Only about half of Chinese firms are trading at the moment.^2,4

To some observers, these measures look like overkill given that equities amount to less than 15% of the net worth of Chinese households. (Real estate has long been the favorite investment of the nation’s rising middle class.) To economists and Wall Street analysts, these efforts are welcome correctives needed to soothe global investors as well as Chinese investors.⁶

The profile of the Chinese investor is changing, and it is changing in a way that might unnerve investors elsewhere. Less than 7% of Chinese own equities (90 million out of 1.36 billion people), but more are entering the market; in May alone, 12 million new retail accounts opened on Chinese exchanges as the SSE surged north. Who are these new investors? Some are college students. The Atlantic reports that 31% of Chinese university students now own equities, about three-quarters of them investing with mom and dad’s money in the process. Others lack higher education – of the Chinese households that opened investment accounts in Q1, only about a third were even headed by high school graduates.^2,7

Investors have yet to bail out. Even with its economy slowing and its market rollercoastering, the opportunity China presents is just too great to ignore. Lipper reports that retail investors have directed $3.4 billion into China-focused investment vehicles YTD, representing the largest first-half investment since 2009. While that inflow might weaken or reverse itself in the wake of China’s biggest selloff since 2008, international diversification has its merits – and institutional investors may see a buying opportunity. As fund manager Yu Zhang told Reuters, “We're not sure how long this volatile period will last, but to me the medium- to long-term outlook for China is still trending up.”⁸

Citations.

1 - investing.com/indices/shanghai-composite-historical-data [7/9/15]

2 - theatlantic.com/international/archive/2015/07/chinas-nervewracking-stock-market-collapse/397724/ [7/4/15]

3 - tinyurl.com/ntrfw3w [5/25/15]

4 - forbes.com/sites/gordonchang/2015/07/09/china-making-stock-declines-illegal/ [7/9/15]

5 - businessinsider.com/china-suspends-ipos-2015-7 [7/4/15]

6 - tinyurl.com/psnwgpc [7/7/15]

7 - data.worldbank.org/indicator/SP.POP.TOTL [7/9/15]

8 - tinyurl.com/nvmus8j [7/9/15]

Kim 7/6/15 Kim 7/6/15

Investing in Agreement With Your Beliefs

The case for aligning your portfolio with your outlook & worldview. Do your investment choices reflect your outlook? Are they in agreement with your values? These questions may seem rather deep when it comes to deciding what to buy or sell, but some great investors have built fortunes by investing according to the ethical, moral and spiritual tenets that guide their lives.

Sir John Templeton stands out as an example. Born and raised in a small Tennessee town, he became one of the world’s richest men and most respected philanthropists. Templeton maintained a lifelong curiosity about science, religion, economics and world cultures – and it led him to notice opportunities in emerging industries and emerging markets (like Japan) that other investors missed. Believing that “every successful entrepreneur is a servant,” he invested in companies that did no harm and which reflected his conviction that “success is a process of continually seeking answers to new questions.”¹

Among Templeton’s more famous maxims was the comment, “Invest, don’t trade or speculate.” Having endured the Great Depression as a youth, he had a knack for spotting irrational exuberance.^2,4

As the 1990s drew to a close, he correctly forecast that 90% of Internet companies would go belly-up within five years. In 2003, he warned investors of a housing bubble that would soon burst; in 2005, he predicted “financial chaos” and a huge stock market downturn. To Templeton, a rally or an investment opportunity had to have sound fundamentals; if it lacked them, it was dangerous.^3,4

Warren Buffett leaps to mind as another example. The “Oracle of Omaha” is worth $70 billion, and Berkshire Hathaway’s market value has risen 1,826,163% under his guidance – yet he still lives in the same house he bought for $31,500 in 1958, and prefers cheeseburgers and Cherry Coke to champagne or caviar. He was born to an influential family (his father served in Congress), but he has maintained humility through the decades.⁵

Money manager Guy Spier dined with Buffett in 2008 at one of the billionaire’s annual charity lunches, and in his book The Education of a Value Investor (co-written with TIME correspondent William Green), he shares a key piece of advice Buffett gave him that day: “It’s very important always to live your life by an inner scorecard, not an outer scorecard.” In other words, act and invest in such a way that you can hold your head high, so that you are staying true to your values and not engaging in behavior that conflicts with your morals and beliefs.⁵

Buffett has also cited the need to be truthful with yourself about your strengths, weaknesses and capabilities – as you invest, you should not be swayed from your core beliefs to embrace something that you find mysterious. “You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t understand. It’s not terribly important how big the circle is. But it’s terribly important that you know where the perimeter is.”⁵

Speaking to a college class some years ago in Georgia, he cited the real reward for a life well lived: “When you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”⁵

Values and beliefs helped guide Templeton and Buffett to success in the markets, in business and in life. For all the opportunities they seized, their legacy will be that of humble and value-centered individuals who knew what mattered most.

Today, socially responsible investing looks better than ever. Investors who want to their portfolios to better reflect their beliefs and values often turn to “socially responsible” investments – or alternately, “impact” investments that respond to environmental issues, women’s rights issues and other pressing societal concerns. When they emerged in the late 1980s, people were skeptical about how well such investments would perform; that skepticism is still around, but it appears to be unwarranted. Since 1990, the average annual total return for the S&P 500 has been 9.93%; the Domini 400, considered the prime index tracking socially responsible companies, has an annual total return of 10.46% by comparison. So aligning your portfolio with your outlook and worldview looks like even more like a win-win these days.⁶

Citations.

1 - forbes.com/sites/alejandrochafuen/2013/05/07/how-to-invest-think-and-live-like-sir-john-templeton/ [5/7/13]

2 - record-eagle.com/news/local_news/jason-tank-finding-the-right-mindset-is-good-start/article_42c81b99-c7c9-5fa1-83b3-4fa2f9c1c641.html [5/5/15]

3 - csmonitor.com/Commentary/Opinion/2008/0711/p09s01-coop.html [7/11/08]

4 - crossingwallstreet.com/archives/2014/02/sir-john-templeton-the-last-yankee.html [2/10/14]

5 - observer.com/2015/05/ive-followed-warren-buffett-for-decades-and-keep-coming-back-to-these-10-quotes/ [5/4/15]

6 - marketwatch.com/story/socially-responsible-investing-has-beaten-the-sp-500-for-decades-2015-05-21 [5/21/15]

Kim 6/29/15 Kim 6/29/15

WILL THINGS IMPROVE FOR MEDICARE AND SOCIAL SECURITY?

The healthcare reforms may lead to some short-term aid. Could Medicare soon be in better shape? Maybe. At the start of August, Medicare’s trustees reported to Congress that Medicare should remain financially in the black through 2029, a 12-year improvement over last year’s estimate.¹ They credited the healthcare reforms carried out by Congress and the Obama administration, citing greater efficiency that would translate to savings for the program.

However, there is no guarantee that Medicare will get to retain those federal savings, and no certainty that the savings projected by eliminating subsidies paid to private insurers will result.

Additionally, as Concord Coalition executive director Robert Bixby told the Los Angeles Times, “You can’t spend the same money twice.”² It would seem unwise to use Medicare savings to expand Medicare coverage.

The Medicare trustees claimed that with the projected $192 billion in cuts to Medicare Advantage plans, home health care and hospitals across the next ten years, both the 75-year shortfall for its hospital fund and projected costs of the Medicare Supplementary Insurance program will shrink. More alterations will be needed to keep Medicare running in decades to come, the August report notes.^1,3

Social Security’s fortunes could be enhanced in 2019. Why 2019? In that year, a new tax is scheduled to kick in for so-called “Cadillac plans” – health insurance packages with annual premiums of $8,000 or more for individuals or $21,000 or more for families. In 2019, insurers offering these plans will have to pay a 40% federal tax for every dollar spent over the $8,000 or $21,000 cutoff.^1,4

That tax is projected to give Social Security a bit of relief. In 2010, Social Security is paying out more than it is taking in – and by previous federal estimates, that wasn’t supposed to happen until 2016. According to government forecasts, it can continue using payroll taxes and interest income to cover benefits until 2024.¹

The projection that Social Security’s accumulated surplus will run dry in 2037 is unchanged. After 2037 (assuming things don’t change), Social Security’s program revenues would only cover about 75% of its expenses – so payroll taxes would have to increase, or benefits would have to be scaled down.¹

Until both programs receive true long-term fixes, we will all have to make do with these short-term encouragements.

Kim Bolker is a representative with Sigma Financial and may be reached at kbolker@sigmarep.com or 616-942-8600. This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.. www.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

Citations

1 - nytimes.com/2010/08/06/health/policy/06medicare.html [8/5/10]

2 - latimes.com/news/nationworld/nation/wire/sc-dc-0806-social-security-20100805,0,6306255.story [8/5/10]

3 - csmonitor.com/USA/Politics/2010/0322/Health-care-reform-bill-101-What-does-it-mean-for-seniors [3/22/10]

4 - slate.com/id/2232434 [10/14/09]

Kim 6/23/15 Kim 6/23/15

You Could Retire...But Should You?

It might be better to wait a bit longer.

Some people retire at first opportunity, only to wish they had waited longer. Thanks to Wall Street’s long bull run, many pre-retirees have seen their savings fully recover from the shock of the 2007-09 bear market to the point where they appear to have reached the “magic number.” You may be one of them – but just because you can retire does not necessarily mean that you should.

Retiring earlier may increase longevity risk. In shorthand, this is the chance of “outliving your money.” Bear markets, sudden medical expenses, savings shortfalls, and immoderate withdrawals from retirement accounts can all contribute to it. The downside of retiring at 55 or 60 is that you have that many more years of retirement to fund.

Staying employed longer means fewer years of depending on your assets and greater monthly Social Security income. A retiree who claims Social Security benefits at age 70 will receive monthly payments 76% greater than a retiree who claims them at age 62.¹

There are also insurance issues to consider. If you trade the office for the golf course at age 60 or 62, do you really want to pay for a few years of private health insurance? Can you easily find such a policy? Medicare will not cover you until you turn 65; in the event of an illness, how would your finances hold up without its availability? While your employer may give you a year-and-a-half of COBRA coverage upon your exit, that could cost your household more than $1,000 a month.^1,2

How is your cash position? If your early retirement happens to coincide with a severe market downturn or a business or health crisis, you will need an emergency fund – or at the very least enough liquidity to quickly address such issues.

Does your spouse want to retire later? If so, your desire to retire early might cause some conflicts and impact any shared retirement dreams you hold. If you have older children or other relatives living with you, how would your decision affect them?

Working a little longer might be good for your mind & body. Some retirees end up missing the intellectual demands of the workplace and the socialization with friends and co-workers. They find no ready equivalent once they end their careers.

Staying employed longer might also help baby boomers ward off some significant health risks. Worldwide, suicide rates are highest for those 70 and older according to the World Health Organization. Additionally, INSERM (France’s national health agency) tracked 429,000 retirees and pre-retirees for several years and concluded that those who left the workforce at age 60 were at 15% greater risk of developing dementia than those who stopped working at 65.³

It seems that the more affluent you are, the more likely you are to keep working. Last year, Bank of America’s Merrill Lynch and Age Wave surveyed wealthy retirees and found that 29% of respondents with more than $5 million in invested assets were still working. That held true for 33% of respondents with invested assets in the $1-5 million range. Most of these millionaires said they were working by choice, and about half were working in new careers.¹

Ideally, you retire with adequate savings and a plan to stay physically and mentally active and socially engaged. Waiting a bit longer to retire might be good for your wealth and health.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - tinyurl.com/o8lf6z2 [8/1/14]

2 - money.usnews.com/money/blogs/on-retirement/2015/02/05/6-reasons-you-shouldnt-retire-early [2/5/15]

3 - newsweek.com/2015/03/20/retiring-too-early-can-kill-you-312092.html [3/20/15]

Kim 6/8/15 Kim 6/8/15

Are Your Kids Delaying Your Retirement?

Some baby boomers are supporting their “boomerang” children Are you providing some financial support to your adult children? Has that hurt your retirement prospects?

It seems that the wealthier you are, the greater your chances of lending a helping hand to your kids. Pew Research Center data compiled in late 2014 revealed that 38% of American parents had given financial assistance to their grown children in the past 12 months, including 73% of higher-income parents.¹

The latest Bank of America/USA Today Better Money Habits Millennial Report shows that 22% of 30- to 34-year-olds get financial help from their moms and dads. Twenty percent of married or cohabiting millennials receive such help as well.²

Do these households feel burdened? According to the Pew survey, no: 89% of parents who had helped their grown children financially said it was emotionally rewarding to do so. Just 30% said it was stressful.¹

Other surveys paint a different picture. Earlier this year, the financial research firm Hearts & Wallets presented a poll of 5,500 U.S. households headed by baby boomers. The major finding: boomers who were not supporting their adult children were nearly 2½ times more likely to be fully retired than their peers (52% versus 21%).³

In TD Ameritrade’s 2015 Financial Disruptions Survey, 66% of Americans said their long-term saving and retirement plans had been disrupted by external circumstances; 24% cited “supporting others” as the reason. In addition, the Hearts & Wallets researchers told MarketWatch that boomers who lent financial assistance to their grown children were 25% more likely to report “heightened financial anxiety” than other boomers; 52% were ill at ease about assuming investment risk.^3,4

Economic factors pressure young adults to turn to the bank of Mom & Dad. Thirty or forty years ago, it was entirely possible in many areas of the U.S. for a young couple to buy a home, raise a couple of kids and save 5-10% percent of their incomes. For millennials, that is sheer fantasy. In fact, the savings rate for Americans younger than 35 now stands at -1.8%.⁵

Housing costs are impossibly high; so are tuition costs. The jobs they accept frequently pay too little and lack the kind of employee benefits preceding generations could count on. The Bank of America/USA Today survey found that 20% of millennials carrying education debt had put off starting a family because of it; 20% had taken jobs for which they were overqualified. The average monthly student loan payment for a millennial was $201.²

Since 2007, the inflation-adjusted median wage for Americans aged 25-34 has declined in nearly every major industry (health care being the exception). Wage growth for younger workers is 60% of what it is for older workers. The real shocker, according to Federal Reserve Bank of San Francisco data: while overall U.S. wages rose 15% between 2007-14, wages for entry-level business and finance jobs only rose 2.6% in that period.^5,6

It is wonderful to help, but not if it hurts your retirement. When a couple in their fifties or sixties assumes additional household expenses, the risk to their retirement savings increases. Additionally, their retirement vision risks being amended and compromised.

The bottom line is that a couple should not offer long-run financial help. That will not do a young college graduate any favors. Setting expectations is only reasonable: establishing a deadline when the support ends is another step toward instilling financial responsibility in your son or daughter. A contract, a rental agreement, an encouragement to find a place with a good friend – these are not harsh measures, just rational ones.

With no ground rules and the bank of Mom and Dad providing financial assistance without end, a “boomerang” son or daughter may stay in the bedroom or basement for years and a boomer couple may end up retiring years later than they previously imagined. Putting a foot down is not mean – younger and older adults face economic challenges alike, and couples in their fifties and sixties need to stand up for their retirement dreams.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - pewsocialtrends.org/2015/05/21/5-helping-adult-children/ [5/21/15]

2 - newsroom.bankofamerica.com/press-releases/consumer-banking/parents-great-recession-influence-millennial-money-views-and-habits/ [4/21/15]

3 - marketwatch.com/story/are-your-kids-ruining-your-retirement-2015-05-05 [5/5/15]

4 - amtd.com/newsroom/press-releases/press-release-details/2015/Financial-Disruptions-Cost-Americans-25-Trillion-in-Lost-Retirement-Savings/default.aspx [2/17/15]

5 - theatlantic.com/business/archive/2014/12/millennials-arent-saving-money-because-theyre-not-making-money/383338/ [12/3/14]

6 - theatlantic.com/business/archive/2014/07/millennial-entry-level-wages-terrible-horrible-just-really-bad/374884/ [7/23/14]

Kim 6/1/15 Kim 6/1/15

When a Minor is a Beneficiary

Some factors for parents & grandparents to consider. Naming a minor as a beneficiary brings up a major concern. If parents or grandparents make a child a primary or contingent beneficiary of an insurance policy, IRA or investment account, they should be aware that most policies and investments will not directly transfer to a minor. They need to be received by a court-approved property guardian, a trustee of a children’s trust, or a revocable living trust beforehand.¹

State laws prevent children from receiving large lump sums. They commonly prohibit minors from owning real property worth more than $2,500-5,000 (the limit varies per state) or receiving cash inheritances greater than that. It is incredibly rare for insurers to distribute life insurance proceeds to minors.^1,3

As for POD checking and savings accounts and CDs, banks will usually allow the child or the child's parent(s) to receive sums less than the aforementioned limits. For larger sums, the parent(s) will likely have to turn to a court and ask to be appointed guardians for the money if no property guardian, children’s trust or revocable living trust is in place.²

A personal guardian is not always a child’s property guardian. Usually, one person serves as both – but if that person lacks financial literacy or accountability, another property guardian may need to be appointed to manage assets for the child until the child turns 18. If that is desired, a court must review the choice of guardian and the inherited assets will be probated.³

How may circumstances like these be avoided? Parents or grandparents would be wise to consider three options.

A property guardian can be appointed for a child in a will. If an individual who may become the child’s personal guardian is negligent or incompetent at managing wealth, this may be worthwhile. The property guardian will need court approval to sell any of the inherited assets, and rules will govern how the assets are spent.³

A property guardian should be someone likely to live at least until the child turns 18. A bank is the property guardian of last resort, as banks charge fees and have no personal stake here.

An UTMA custodianship may be arranged. In 49 states (South Carolina being the exception), an adult may be appointed as a custodian for assets left or gifted to a child under the Uniform Transfers to Minors Act (UTMA). This appointment is made through the language of a will or living trust. (Vermont recognizes only the older Uniform Gifts to Minors Act, or UGMA, under which the custodian is more rigorously supervised.)³

The UTMA custodian serves as asset manager and financial recordkeeper, overseeing the assets inherited by or gifted to the child until the child turns 21 (18 in some states). He or she is authorized to manage, spend and invest these assets for the child’s benefit and eventual use and file the relevant tax returns. These actions do not need to be supervised by the courts. When the child turns 21 (or 18), the custodianship concludes and the child receives 100% of the assets – which may be a problem.³

A child’s trust is another possibility. A child’s trust, also called a testamentary trust, can be established through language in a will or living trust document; it allows a trustee to use the inherited assets to fund education, health care and everyday expenses for the child. The minor need not receive the funds at 21, as is usually the case with an UTMA custodianship; the assets can be received later in that individual’s life. A variation of this, the pot trust, provides for multiple children and lets a trustee vary the amount spent per child. A pot trust exists only until the youngest child reaches legal age; ideally, the children for whom the trust is created are born within several years of each other. If the children reach legal age or the age when they are supposed to receive the assets before the trust can be implemented, then it is revoked and the inherited assets simply pass to them. These trusts can be designed to try to minimize taxes and administrative expenses.^3,4

An irrevocable variant is the §2503(c) trust, or minor’s trust. A minor’s trust is funded with irrevocable transfers of assets, which commonly begin while the trust creator is living. The transfers are tax-exempt under the Internal Revenue Code; the wealth may accumulate within the trust without the trust creator being subject to gift or estate tax. A trustee manages the trust assets until a specified date or circumstance, and then they are distributed to the young adult heir.⁴

Naming a minor as a beneficiary means recognizing certain factors. Financially speaking, if you fail to appoint a trustee or a property guardian for a minor through your will or living trust, then you are leaving it open to the courts to decide who that trustee or guardian may be. So it is vital to address these matters. As one or more children approach legal age, terms of your will or revocable trust need to be reviewed and possibly changed as well.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - wellsfargo.com/retirementplan/financial_matters?page=name-ben [5/20/15]

2 - nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter1-4.html [5/20/15]

3 - thismatter.com/money/wills-estates-trusts/minor-children.htm [5/20/15]

4 - tinyurl.com/kg5rdtx [5/20/15]

Kim 5/18/15 Kim 5/18/15

The Big Economic Mystery of 2015

If the economy is healthy, why are retail sales so poor?

Retail sales have been flat or negative for four out of the past five months. Even though households are saving an average of $50 a month on gasoline compared to a year ago, that savings has not inspired consumers to increase their spending.¹

Commerce Department data released last week showed no retail sales growth in April; even core retail sales (which exclude car and gasoline purchases) rose only 0.2%. Retail purchases fell 0.2% in Q1, representing the first quarterly dip since 2012. Through April, they were up just 0.9% annually.^2,3

What is holding the consumer back? If economists could pinpoint this on a single factor, there would be no mystery here. Significant clues have emerged, however.

Are people just saving more? Apparently they are. The personal savings rate declined 0.4% in March to 5.3%, yet it was at 5.3% or greater throughout the first quarter. In the previous three quarters, it never reached that percentage.⁴

Studies from the Federal Reserve and Visa also affirm a trend toward thriftiness. According to Fed research, Q1 saw the biggest decrease in consumer credit card use in any quarter in the past four years. Half the consumers contacted in a recent Visa poll indicated they would keep the money they saved thanks to cheaper gas prices; just 25% said they would spend it.²

Is cheap gasoline a factor? Certainly, because as gas prices drop fewer dollars are spent on fuel and automotive costs. That makes the headline retail sales number weaker. The weakness was already present, though: minus gasoline purchases, retail sales are up 3.6% in the past 12 months. That compares to 5.7% average annualized growth since 1990.²

How about the blizzards & port strikes that happened this winter? Analysts have frequently cited those two developments – but headline retail sales rose 1.1% in March even with their presence, and were flat for April as weather and labor conditions improved.²

Are households devoting more money to paying off good debts? Quite possibly, and this may also have influenced the retail sales retreat. As MarketWatch notes, student loan debt is now the fastest-growing debt in America. Households have also spent more on healthcare in recent years, implying greater out-of-pocket medical costs. (Healthcare spending has not flagged like discretionary spending, which is a big reason why headline consumer spending looks somewhat better than headline retail sales.) In the Visa poll mentioned above, 25% of the respondents said they would use their savings at the pump to address existing debts.²

What types of stores are suffering the most from the decline? Retail purchases at electronics stores retreated for a seventh consecutive month in April. Spending at department stores fell in April by 2.2%, the largest monthly amount in more than a year; furniture and auto sales also declined. The silver lining: sales rose 0.8% in April at online businesses, 0.7% at restaurants and 0.3% at home improvement stores.^2,3

How long might this continue? Some analysts are optimistic that this slump will end this quarter. They point to decent year-over-year wage growth (2.2%), the April rebound in hiring, and warmer weather as positives. Other analysts feel that the economy is less healthy than it appears; they sense that the Fed will refrain from raising interest rates until 2016 in light of subpar retail sales and other factors.³

One thing is for certain: Wall Street will review the May and June retail sales reports with great interest. If discretionary consumer spending continues to lag, it will signal a loss of momentum in the growth of the economy.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - blogs.wsj.com/moneybeat/2015/05/13/markets-react-to-weak-retail-sales-report/ [5/13/15]

2 - marketwatch.com/story/retail-sales-flat-in-april-as-gas-savings-continue-to-be-pocketed-2015-05-13 [5/13/15]

3 - bloomberg.com/news/articles/2015-05-13/retail-sales-little-changed-as-americans-reluctant-to-splurge [5/13/15]

4 - tradingeconomics.com/united-states/personal-savings [5/14/15]

Kim 4/29/15 Kim 4/29/15

The Difference Between Good & Bad Debt

Some debts are worth assuming, but others exert a drag on retirement saving. Who will retire with substantial debt? It seems many baby boomers will – too many. In a 2014 Employee Benefit Research Institute survey, 44% of boomers reported that they were concerned about the size of their household debt. While many are carrying mortgages, paying with plastic also exerts a drag on their finances. According to credit reporting agency Experian, boomers are the generation holding the most credit cards (an average of 2.66 per person) and the biggest average per-person credit card balance ($5,347).^1,2

Indebtedness plagues all generations – and that is why the distinction between good debt and bad debt should be recognized.

What distinguishes a good debt from a bad one? A good debt is purposeful – the borrower assumes it in pursuit of an important life or financial objective, such as homeownership or a college degree. A good debt also gives a borrower long-term potential to make money exceeding the money borrowed. Good debts commonly have both of these characteristics.

In contrast, bad debts are taken on for comparatively trivial reasons, and are usually arranged through credit cards that may charge the borrower double-digit interest (not a small factor in the $5,347 average credit card balance cited above).

Some people break it down further. Thomas Anderson – an executive director of wealth management at Morgan Stanley and the author of the best-selling The Value of Debt in Retirement – identifies three kinds of indebtedness. Oppressive debt is debt at 10% or greater interest, a payday loan being a classic example. Working debt comes with much less interest and may be tax-deductible (think mortgage payments), so it may be worth carrying.³

Taking a page from corporate finance, Anderson also introduces the concept of enriching debt –strategic debt assumed with the certainty than it can be erased at any time. In the enriching debt model, an individual “captures the spread” – he or she borrows from an investment portfolio to pay off student loans, or pays little or nothing down on a home and invests the lump sum saved into equity investments whose rate of return may exceed the mortgage interest. This is not exactly a mainstream approach, but Anderson has argued that it is a wise one, telling the Washington Post that “the second you pay down your house, it’s a one-way liquidity trap, especially for retirees.”^3,4

Mortgage debt is the largest debt for most new retirees. According to the American College, the average new retiree carries $100,000 in home loan debt. That certainly amounts to good debt for most people.³

Student loans usually amount to good debt, but not necessarily for the increasing numbers of retiring baby boomers who carry them. Education loans have become the second-largest debt for this demographic, and in some cases retirees are paying off loans taken out for their children or grandchildren.³

Credit card and auto loan debt also factor into the picture. Some contend that an auto loan is actually a good debt because borrower has purchased a durable good, but the interest rates and minimal odds of appreciation for cars and trucks suggest otherwise.

Some households lack budgets. In others, the budget is reliant on everything is going well. Either case opens a door for the accumulation of bad debts.

The fifties are crucial years for debt management. The years from 50-59 may represent the peak earning years for an individual, yet they may also bring peak indebtedness with money going out for everything from mortgage payments to eldercare to child support. As many baby boomers will retire with debt, the reality is that their retirement income will need to be large enough to cover those obligations.

How much debt are you carrying today? Whether you want to retire debt-free or live with some debt after you sell your business or end your career, you need to maintain the financial capacity to address it and/or eradicate it. Speak with a financial professional about your options.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - foxbusiness.com/personal-finance/2015/03/26/strategic-debt-can-help-in-retirement/ [3/26/15]

2 - gobankingrates.com/personal-finance/19-easy-ways-baby-boomers-can-build-credit/ [4/23/15]

3 - usatoday.com/story/money/columnist/brooks/2015/04/22/retirement-401k-debt-mortgage/25837369/ [4/22/15]

4 - washingtonpost.com/news/get-there/wp/2015/03/26/the-case-for-not-paying-off-your-mortgage-by-retirement/ [3/26/15]

Kim 4/20/15 Kim 4/20/15

Are You Underprepared for Retirement?

A university study serves as a wake-up call. Financially speaking, how many Americans are truly on track to retire? A recently published white paper suggests that about half of us are approaching our “third acts” with faulty assumptions.

Perception differs from reality. Researchers from the University of Alabama and Ohio State University looked at the Federal Reserve’s Survey of Consumer Finances and assessed the retirement readiness of its 2,300-odd respondents. They determined that 58% of these workers (age 35-60) were saving too little for the future, with a near-majority of that 58% failing to recognize the gravity of their situation. Only 42% of households were sufficiently prepared for retirement, but 46% of households believed they were.^1,2

The researchers discovered two other interesting disconnects. One, a slight majority of those who were saving adequately for retirement believed they were not saving enough. Two, the insufficiently prepared workers who were in line to receive old-school pensions were more likely to have flawed assumptions about their retirement readiness than workers without future pensions.¹

Just how much money do you really need for retirement? The answer to that question varies per household, but many households could stand to save more. One old rule of thumb says you should save the equivalent of 12 times your end salary for a comfortable retirement. If you retire earning $150,000 a year, that means $1.8 million.³

Very few IRAs or workplace retirement plan accounts contain that much – so if your retirement nest egg needs to be that large, other sources of funding for your retirement probably need to emerge.

A household with either or both spouses earning $150,000 may have those resources. A middle class household may need to dedicate 10% or more of its income to retirement savings accounts.

Saving 5% of your salary for retirement probably means saving too little. Take the case of someone who starts saving for retirement at age 30 while earning $40,000. Hypothetically, assume that this person gets a 3.8% raise annually (which may be optimistic) and gets a consistent 6% yield from his or her retirement accounts (this is a hypothetical example). What if this person works until full retirement age (67)? In 2052, 37 years from now, this worker will have, under these conditions, a retirement nest egg of $423,754. Not bad, but not fantastic.³

Another old rule of thumb says living comfortably in retirement requires 85% of your end salary. A nest egg of $423,754 is clearly too small to provide that for most of us, even with income withdrawn from it supplemented by Social Security payments.³

If you save and invest ably over 30 or 40 years, you might end up a millionaire with the help of strong yields and compounding. You may need to be a millionaire to retire.

What if interruptions mar your retirement savings effort? They may mar it, but they should never halt it. Divorce, medical issues, prolonged joblessness – these and other events may impede your progress toward your savings goals, but the effort to save must still be made as you want time on your side.

If you are able to anticipate such an interruption, there are ways to plan to possibly make up the slack. You could explore investing more aggressively during that time period – but you invite greater market risk. You could cut back on household expenses (or inessential expenses) to free up more money to sustain your pace of retirement saving. Or, you could determine potential strategies far ahead of such disruptions by sitting down with a financial professional to run some scenarios (laid off at 60, taking three years out of the workforce at age 35 or 40 to be a stay-at-home mom or dad, and so forth).

You should strive to be financially prepared for your retirement, and for the unexpected life events or financial surprises that may occur before it arrives.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - time.com/money/3764455/retirement-readiness/ [4/1/15]

2 - plansponsor.com/Who-Has-a-Realistic-View-of-Retirement-Readiness/ [2/20/15]

3 - investopedia.com/articles/professionals/011215/retirement-savings-how-much-enough.asp [1/12/15]

Kim 3/31/15 Kim 3/31/15

The Psychology of Saving

How many households have the right outlook to build wealth?

Why do some households save more than others? Building household savings may depend not only on cash flow, but also on psychology. With the right outlook, saving becomes a commitment. With a less positive outlook, it becomes a task – and tasks and chores are often postponed.

Financially speaking, saving is winning. Sometimes that lesson is lost, however. To some people, saving feels like losing – “losing” money that could be spent. So assert Ellen Rogin and Lisa Kueng, authors of a recently published book entitled Picture Your Prosperity: Smart Money Moves to Turn Your Vision into Reality. They cite a perceptual difference. If people are asked if they can save 20% of their income, the answer may be a resounding “no” – but if they are asked if they can live on 80% of their income, that may seem reasonable.¹

There may be a gap between perception & behavior. Since 2001, Gallup has asked Americans a poll question: “Thinking about money for a moment, are you the type of person who more enjoys spending money or more enjoys saving money?”²

While more respondents have chosen “saving money” over “spending money” in every year the poll has been conducted, the difference in the responses never exceeded 5% from 2001-06. It hit 9% in 2009, and has been 18% or greater ever since. In 2014, 62% of respondents indicated they preferred to save instead of spend, with only 34% of respondents preferring spending.²

So are we a nation of good savers? Not to the degree that these poll results might suggest. The most recently available Commerce Department data (January 2015) shows the average personal savings rate at 5.5% - a percentage point higher than two years ago, but subpar historically. During the 1970s, the personal savings rate averaged 11.8%; in the 1990s, it averaged 6.7%.^2,3

What reminders or actions might help people save more? Automated retirement plan contributions can assist the growth of savings, and are a means of paying oneself first. There is the envelope system, wherein a household divides its paycheck into figurative (or literal) envelopes, assigning X dollars per month to different packets representing different budget categories. When the envelopes are empty, you can spend no more. The psychology is never to empty the envelopes, of course – leaving a little aside each month that can be saved. Households take an incremental approach: they start by saving one or two cents of every dollar they make, then gradually increase that percentage, household expenses permitting.

Frugality may help as well. A decision to live on 70% or 80% of household income frees up some dollars for saving. Another route to building a nest egg is to invest (or at least save) the accumulated consumer savings you realize at the mall, the supermarket, the recycling center – even pocket change amassed over time.

How many households budget like businesses? Perhaps more should. A business owner, manager, or executive may realize savings through this approach. Take it line item by line item: spending $20 less each week at the supermarket translates to $1,040 saved annually.

Working with financial professionals may encourage greater savings. A 2014 study on workplace retirement plan participation from Natixis Global Asset Management had a couple of details affirming this. While employees who chose to go without input from a financial professional contributed an average of 7.8% of their incomes to their retirement plan accounts, employees who sought such input contributed an average of 9.5%. The study also learned that 74% of the employees who had turned to financial professionals understood how much money their accounts needed to amass for retirement, compared to 54% of employees not seeking such help.⁴

Saving money should make anyone feel great. It means effectively “paying yourself” or at least building up cash on hand. A household with a save-first financial approach may find itself making progress toward near-term and long-term money goals.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - businessinsider.com/mental-trick-save-money-2015-1 [1/27/15]

2 - gallup.com/poll/168587/americans-continue-enjoy-saving-spending.aspx [4/21/14]

3 - bea.gov/newsreleases/national/pi/pinewsrelease.htm [3/2/15]

4 - bostonglobe.com/business/2014/09/06/advice-seekers-save-more-study-finds/dJmUUXz78twO9OxLcRTqdN/story.html [9/6/14]

Kim 3/23/15 Kim 3/23/15

Reining in Your Debt

Americans are spending freely again. That has a downside.

As the Great Recession faded, American household debt gradually decreased. In fact, it declined by $1 trillion between mid-2008 and mid-2014, according to the Federal Reserve.¹

Now household debt is increasing once more. The Fed found it climbing by $78 billion (0.7%) during Q3 2014.¹

On the macroeconomic level, that can be interpreted as a positive: it hints at greater consumer spending, easier credit, and more lending taking place to accommodate consumer borrowers. On a microeconomic level, it is more troublesome. It may mean a change in perception, with debt not seeming as onerous as it once did.

If households really are looking at debt through rosier-colored glasses, they might do well to remember an inescapable fact. When they use a credit card or take out a consumer loan, they are borrowing money they do not have for things they do not absolutely need. The average indebted U.S. household was carrying $15,611 in credit card debt alone in December, the Fed notes. Even if Mom or Dad is a business owner or self-employed entrepreneur, that is an awful lot of revolving debt for a couple or family.²

There are only two ways to reduce debt. One is spending less, the other paying it down. The first tactic requires a change in habits; the second usually requires more income.

How about not buying 20% of what you want? Or alternately, paying for everything in cash? Either strategy might reduce your household debt significantly in a given month.

Where can you find more income? Life may allow you to take on an additional, part-time job – or a higher-paying one. Most people do not have either option at their disposal, so they must look for additional short-term or recurring income derived from consumer savings: they stop eating out or drinking lattes, they stop subscribing to cable or keeping up health club memberships they seldom use, they elect not to buy any clothing for a few months, vacation locally or drive the same car for a decade. All that can put more money in a family’s pockets.

Most households lack budgets. Rather than being old-fashioned or bothersome, they are instrumental in determining spending patterns and opportunities for savings. What is mysterious about your personal finances can clear up with a budget, and you get the sense of being on top of your financial life.

Debt can be managed. When you look at your spending habits, ideas to reduce it, control it and defeat it will surface.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - news.investors.com/investing-personal-finance/010215-732937-cut-debt-and-manage-household-spending-and-budget-in-2015.htm [1/2/15]

2 - nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/ [3/19/15]

Kim 3/17/15 Kim 3/17/15

The Strong Dollar: Good or Bad?

What is dollar strength & who invests in it?

You may have heard that the dollar is “strong” right now. You may have also heard that a strong dollar amounts to a headwind against commodities and stocks.

While there is some truth to that, there is more to the story. A strong dollar does not necessarily rein in the bulls, and dollar strength can work for the economy and the markets.

The U.S. Dollar Index has soared lately. Across July 2014-February 2015, the USDX (which measures the value of the greenback against key foreign currencies) rose an eyebrow-raising 19.44%.¹

On March 9, the European Central Bank initiated its quantitative easing program. The dollar hit a 12-year high against the euro a day later, with the USDX jumping north more than 3% in five trading days ending March 10. Remarkable, yes, but the USDX has the potential to climb even higher.^2,3

Before this dollar bull market, we had a weak dollar for some time. A dollar bear market occurred from 2001-11, partly resulting from the monetary policy that the Federal Reserve adopted in the Alan Greenspan and Ben Bernanke years. As U.S. interest rates descended to historic lows in the late 2000s, the dollar became more attractive as a funding currency and demand for dollar-denominated debt increased.⁴

In Q1 2015, private sector dollar-denominated debt hit $9 trillion globally. Asian corporations have relied notably on foreign currency borrowing, though their domestic currency borrowing is also significant; Morgan Stanley recently researched 625 of these firms and found that dollar-denominated debt amounted to 28% of their total debt.^4,5

So why has the dollar strengthened? The quick, easy explanation is twofold. One, the Fed is poised to tighten while other central banks have eased, promoting expectations of a mightier U.S. currency. Two, our economy is healthy versus those of many other nations. The greenback gained on every other major currency in 2014 – a development unseen since the 1980s.⁴

This explanation for dollar strength aside, attention must also be paid to two other critical factors emerging which could stoke the dollar bull market to even greater degree.

At some point, liabilities will increase for the issuers of all that dollar-denominated debt. That will ramp up demand for dollars, because they will want to hedge.

Will the dollar supply meet the demand? The account deficit has been slimming for the U.S., and the slimmer it gets, the fewer new dollars become available. It could take a few years to unwind $9 trillion of dollar-denominated debt, and when you factor in a probable rate hike from our central bank, things get really interesting. The dollar bull may be just getting started.

If the dollar keeps rallying, what happens to stocks & commodities? Earnings could be hurt, meaning bad news for Wall Street. A strong dollar can curb profits for multinational corporations and lower demand for U.S. exports, as it makes them more expensive. U.S. firms with the bulk of their business centered in America tend to cope better with a strong dollar than firms that are major exporters. Fixed-income investments invested in dollar-denominated assets (as is usually the case) may fare better in such an environment than those invested in other currencies. As dollar strength reduces the lure of gold, oil and other commodities mainly traded in dollars, they face a real headwind. So do the economies of countries that are big commodities producers, such as Brazil and South Africa.⁶

The economic upside is that U.S. households gain more purchasing power when the dollar strengthens, with prices of imported goods falling. Improved consumer spending could also give the Fed grounds to extend its accommodative monetary policy.⁶

How are people investing in the dollar? U.S. investors have dollar exposure now as an effect of being invested in the U.S. equities market. Those who want more exposure to the rally can turn to investment vehicles specifically oriented toward dollar investing. European investors are responding to the stronger greenback (and the strong probability of the Fed raising interest rates in the near future) by snapping up Treasuries and corporate bonds with longer maturities.

Stocks can still rally when the dollar is strong. As research from Charles Schwab indicates, the average annualized return for U.S. stocks when the dollar rises has been 12.8% since 1970. For bonds, it has been 8.5% in the years since 1976. A dollar rally amounts to a thumbs-up global vote for the U.S. economy, and that can certainly encourage and sustain a bull market.⁷

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [3/9/15]

2 - reuters.com/article/2015/03/10/us-markets-stocks-idUSKBN0M612A20150310 [3/10/15]

3 - forbes.com/sites/maggiemcgrath/2015/03/10/u-s-equities-hammered-on-dollar-strength-and-oil-weakness/ [3/10/15]

4 - valuewalk.com/2015/02/us-dollar-bull-market/ [2/4/15]

5 - tinyurl.com/ptpolga [2/25/15]

6 - blogs.wsj.com/briefly/2014/12/24/how-a-strong-dollar-affects-investors-at-a-glance/ [12/24/14]

7 - time.com/money/3541584/dollar-rally-global-currencies/ [2/13/15]

Kim 3/10/15 Kim 3/10/15

Will Baby Boomers Ever Truly Retire?

Many may keep working out of interest rather than need. Baby boomers realize that their retirements may not unfold like those of their parents. New survey data from The Pew Charitable Trusts highlights how perceptions of retirement have changed for this generation. A majority of boomers expect to work in their sixties and seventies, and that expectation may reflect their desire for engagement rather than any economic desperation.

Instead of an “endless Saturday,” the future may include some 8-to-5. Pew asked heads of 7,000 U.S. households how they envisioned retirement and also added survey responses from focus groups in Phoenix, Orlando and Boston. Just 26% of respondents felt their retirements would be work-free. A slight majority (53%) told Pew they would probably work in some context in the next act of their lives, possibly at a different type of job; 21% said they had no intention to retire at all.¹

Working longer may help boomers settle debts. A study published by the Employee Benefit Research Institute in January (Debt of the Elderly and Near Elderly, 1992-2013) shows a 2.0% increase in the percentage of indebted households in the U.S. headed by breadwinners 55 and older from 2010-13 (reaching 65.4% at the end of that period). EBRI says median indebtedness for such households hit $47,900 in 2013 compared to $17,879 in 1992. It notes that larger mortgage balances have been a major factor in this.¹

Debts aside, some people just like to work. Those presently on the job expect to stay in the workforce longer than their parents did. Additional EBRI data affirms this – last year, 33% of U.S. workers believed that they would leave their careers after age 65. That compares to just 11% in 1991.²

How many boomers will manage to work past 65? This is one of the major unknowns in retirement planning today. We are watching a reasonably healthy generation age into seniority, one that can access more knowledge about being healthy than ever before – yet obesity rates have climbed even as advances have been made in treating so many illnesses.

Working past 65 probably means easing into part-time work – and not every employer permits such transitions for full-time employees. The federal government now has a training program in which FTEs can make such a transition while training new workers and some larger companies do allow phased retirements, but this is not exactly the norm.³

Working less than a 40-hour week may also negatively impact a worker’s retirement account and employer-sponsored health care coverage. EBRI finds that only about a third of small firms let part-time employees stay on their health plans; even fewer than half of large employers (200 or more workers) do. The Transamerica Center for Retirement Studies says part-time workers get to participate in 401(k) plans at only half of the companies that sponsor them.³

Boomers who work after 65 have to keep an eye on Medicare and Social Security. They will qualify for Medicare Part A (hospital coverage) at 65, but they should sign up for Part B (doctor visits) within the appropriate enrollment window and either a Part C plan or Medigap coverage plus Medicare Part D.³

Believe it or not, company size also influences when Medicare coverage starts for some 65-year-olds. Medicare will become the primary insurance for employees at firms with less than 20 workers when they turn 65, even if that company sponsors a health plan. At firms with 20 or more workers, the workplace health plan takes precedence over Medicare coverage, with 65-year-olds maintaining their eligibility for that employer-sponsored health coverage provided they work sufficient hours. Boomers who work for these larger employers may sign up for Part A and then enroll in Part B and optionally a Part C plan or Part D with Medigap coverage within eight months of retiring – they do not have to wait for the next open enrollment period.³

Prior to age 66, federal retirement benefits may be lessened if retirement income tops certain limits. In 2015, if you are 62-65 and receive Social Security, $1 of your benefits will be withheld for every $2 that you earn above $15,720. If you receive Social Security and turn 66, this year, then $1 of your benefits will be withheld for every $3 that you earn above $41,880.⁴

Social Security income may also be taxed above the program’s “combined income” threshold. (“Combined income” is defined as adjusted gross income + non-taxable interest + 50% of Social Security benefits.) Single filers with combined incomes from $25,000-34,000 may have to pay federal income tax on up to 50% of their Social Security benefits in 2015, and that also applies to joint filers with combined incomes of $32,000-44,000. Single filers with combined incomes above $34,000 and joint filers whose combined incomes top $44,000 may have to pay federal income tax on up to 85% of their Social Security benefits.⁵

Are boomers really the retiring type? Given the amazing accomplishments and vitality of the baby boom generation, a wave of boomers working past 65 seems more like a probability than a possibility. Life is still exciting; there is so much more to be done.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - marketwatch.com/story/only-one-quarter-of-americans-plan-to-retire-2015-02-26 [2/26/15]

2 - usatoday.com/story/money/columnist/brooks/2015/02/17/baby-boomer-retire/23168003/ [2/17/15]

3 - tinyurl.com/qdm5ddq [3/4/15]

4 - forbes.com/sites/janetnovack/2014/10/22/social-security-benefits-rising-1-7-for-2015-top-tax-up-just-1-3/ [10/22/14]

5 - ssa.gov/planners/taxes.htm [3/4/15]

Kim 3/3/15 Kim 3/3/15

Are Americans Growing More Optimistic About Retiring?

Pragmatism seems to be replacing pessimism, at least.

Is it okay to retire today? Many baby boomers shelved notions of retiring during the past few years. Layoffs, the decline in home values, the crushing bear market of 2007-09 – those memories were just too fresh, and their economic effects were still being felt by many households.

In 2015, boomers seem a bit less hesitant to begin their “third acts.” In this year’s CareerBuilder retirement survey, 53% of workers older than 60 indicated they are postponing their retirements. That may not seem a statistic worth celebrating, but five years ago 66% of respondents to the survey said they were putting off leaving work.¹

Retirement may not mean a “clean break” from the workplace: 54% of this age group told CareerBuilder that they would try to work at least part-time when retired. In fact, nearly one in five said they planned to continue working 40 hours a week or more. These boomers cited two compelling reasons to keep a foot in the office: household financial pressures and the employer-sponsored health insurance they could count on between ages 60 and 65.¹

Two other recent polls echo the findings of the CareerBuilder survey. Last year’s United States of Aging survey (a joint project of the National Council on Aging, USA TODAY, United Healthcare and the National Association for Area Agencies on Aging) found 89% of respondents 60 and older certain that they could enjoy and sustain their quality of life as seniors. While 49% worried that they might outlive their money, this was down from 53% in the 2013 survey.²

Ameriprise Financial recently released the findings from its poll of 1,000 retirees aged 60-73; the respondents had retired within the past five years and possessed $100,000 or more in investable assets. Generally, they were happy about retiring: 76% reported feeling “in control” of their choice to leave work, and 75% indicated they were “very satisfied” with retirement life. For a slight majority of respondents, the transition was reasonable: 53% said they had been healthy enough to retire, and 52% said they were emotionally ready when they made the move.³

How many of them had retired by choice? An encouraging 51%; just 15% said they retired as a result of job loss, downsizing or buyouts.³

Remember, retirement may start unexpectedly. No one is invincible, and as the Employee Benefit Research Institute (EBRI) discovered in a 2014 study, health or disability reasons prompt 61% of retirements. Workforce downsizing and eldercare responsibilities were the two other most-cited motivators, but only 18% of respondents cited either of those factors. In surveying 1,500 retirees last year, EBRI also learned that 49% had exited their careers earlier than they had anticipated – in fact, 35% of them had retired prior to age 60. An unexpected retirement may also upend some household financial assumptions – turning to the Ameriprise study, we see that while 28% of those respondents reported spending less in retirement than they thought they would, 22% are spending more than they expected.^3,4

If you were to retire two years from now, would you be ready for that transition? Would you hold up financially if events forced you to retire today? If you are within ten years of your envisioned retirement date, it might be prudent to revisit your savings strategy and retirement plan to double-check your retirement readiness.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - nbcnews.com/business/careers/could-2015-be-year-retirement-party-n308871 [2/19/15]

2 - usatoday.com/story/news/nation/2014/07/15/aging-survey-research/11921043/ [7/15/14]

3 - benefitspro.com/2015/02/03/retired-boomers-in-control-happy [2/3/15]

4 - tinyurl.com/qc67lyd [2/10/15]

Kim 2/23/15 Kim 2/23/15

Will You Have to Pay Back Health Insurance Credits?

Millions of taxpayers may end up doing so in 2015.

If you received a 2014 health insurance subsidy, you may get an unpleasant surprise. When the Health Insurance Marketplace (HIM) went online in late 2013, Americans shopping for coverage were asked to see if they qualified for a subsidy called the Premium Tax Credit. Millions of Americans did receive this federal assistance, which made it easier for them to pay health insurance premiums. PTCs were awarded based on household size and estimated 2014 household income.¹

Of course, estimates don’t always match reality. Some households earned more than they thought they would in 2014. Others experienced life events like divorces, births or deaths. Because of these developments, certain households ended up receiving PTCs that were too large for their incomes and family size.

Is yours among them? If it turns out that way, you may have to pay a percentage of that federal credit back.

How will you know if the 2014 health insurance credit you received was too large? Two new federal forms will help you find out.

Form 1095-A, akin to a health insurance W-2, is being sent out to you from the health exchange where you purchased your coverage. Form 1095-A shows you the total Premium Tax Credit that was paid to the insurer by the government on your behalf in 2014. Form 1095-A will help you (or your tax professional) fill out Form 8962, which is used to calculate the proper size of your 2014 Premium Tax Credit in light of your family size and actual 2014 modified adjusted gross income (MAGI).²

If you ended up receiving a smaller PTC than you should have in 2014, then the IRS will send you a refund representing the difference. If you received a PTC that was disproportionately large, then you are looking at repayment of a percentage of that credit.²

How much could a taxpayer have to pay back? Fortunately, the IRS has capped the repayment amount. The most an individual taxpayer has to pay back is $1,250. The cap for households is $2,500.³

The IRS also just issued Notice 2015-09, which offers taxpayers facing financial hardships another break related to this issue. Under federal standard tax law, a taxpayer would owe a penalty for failing to repay the excess advance premium tax credits back to the federal government by April 15. A penalty would also be assessed for a taxpayer whose estimated tax payments fall short of the amount due. Well, Notice 2015-09 suspends these late-payment penalties for the 2014 tax year, provided you pay your 2014 federal taxes by April 15 (or October 15 with an extension). So if the IRS notifies you of the overpayment of credits, you can claim relief from the late payment penalty by responding by letter and relief from the estimated tax underpayment penalty via submitting Form 2210 along with your 1040.^1,4

Did you buy your own health insurance even though your employer offered it? If you worked for a big employer that offered a health plan but opted to buy your own health coverage instead, you might be eligible to claim a Premium Tax Credit for 2014 (and get the resulting tax refund). Your employer may or may not send you Form 1095-C, which indicates the employee share of the health insurance premium for the most inexpensive plan that the employer sponsored. If that employee share exceeds 9.5% of your 2014 income and you went out and self-insured last year, you can claim a PTC for 2014. If your employer doesn’t send you Form 1095-C, request it.²

Since household income estimates are used to determine advance Premium Tax Credits, it looks like low-income and moderate-income taxpayers who self-insure may have to continually reconcile health insurance subsidies received versus health insurance subsidies warranted.

As a last note, there is an outside chance that the Premium Tax Credit may disappear altogether. The Supreme Court will rule later this year (but probably not prior to April 15) on whether it should be offered in the 36 states that didn’t set up their own health care marketplaces. If the SCOTUS decides that it shouldn’t be offered (and therefore, shouldn’t have been offered) in those 36 states, you will see a lot of amended 2014 returns and repayment of health insurance credits.⁵

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.

Citations.

1 - irs.gov/Affordable-Care-Act/Individuals-and-Families/The-Premium-Tax-Credit [1/27/15]

2 - kiplinger.com/article/taxes/T027-C000-S004-health-law-breeds-new-tax-forms.html [10/15/14]

3 - bankrate.com/finance/taxes/premium-tax-credit.aspx [1/6/15]

4 - healthaffairs.org/blog/2015/01/27/implementing-health-reform-aca-related-tax-penalties-waived-high-court-turns-back-oklahoma-ag/ [1/27/15]

5 - forbes.com/sites/anthonynitti/2015/01/10/four-things-sure-to-destroy-your-tax-season/ [1/10/15]

Kim 1/12/15 Kim 1/12/15

Getting a Jump on Tax Season

What should you bring to your preparer?

You can file your federal tax return starting January 20. IRS filing season will start right on time in 2015, and there is wisdom in filing your 1040 well before April 15. You can get it out of the way earlier, and if you e-file, you can put yourself in position for an earlier refund.¹

What should you gather up for your CPA? If you want to save time and possibly money along with it, come to your preparer’s office ready with the appropriate paperwork. If you own a business, that list includes all W-2s and 1099-MISC forms you get from clients, any 1099-INT and K-1 forms displaying interest income, your Schedule C and P&L reports, and any and all paperwork you can round up detailing your expenses – your personal expenses too, not only business costs but also any tuition, medical and miscellaneous ones. If you have made charitable contributions worth itemizing, that paperwork needs to reach your preparer. The same goes for documents detailing mortgage interest, other forms of interest paid, and any tax already paid.²

If you have receipt management software, your CPA will love you for using it (beats getting a manila envelope, file folder or shoebox full of receipts to sort through). If a calamity or an accident destroyed a bunch of your business records, remember that the IRS may give you a break – but your CPA needs solid proof of the misfortune to try and make a case to the IRS and get you some leniency.

What are some things people too often forget to bring? Social Security numbers for new babies (and taxpayer-ID numbers and contact information for the nannies of those babies). Logs of unreimbursed mileage. Real estate stuff, too: closing letters related to a refi, receipts for real estate taxes (assuming they haven’t been paid through escrow).³

If you received any health insurance subsidies, you may want to wait until February. Did you pay for your own health insurance in 2014? Do you remember how you had to estimate your 2014 income when you applied for coverage? If you got a subsidy, it was based on that estimate, and an estimate is by definition inexact. Some taxpayers ended up earning more than the incomes they estimated to the exchanges, some less. That could mean one of two things: a big 2014 tax refund, or owing thousands more in taxes.⁴

If you pay for your own health coverage, the exchange at which you bought it should send you Form 1095-A by January 31. Form 1095-A will list how your household self-insures: who pays premiums, and the amount of any monthly subsidies. Your CPA can plug these details into Form 8962, which explains the breakdown on insurance, subsidies and income for your household to the IRS. If you were only self-insured for part of 2014, your CPA must note any subsidy payments by the month.⁴

Should you jump to a new CPA? If he or she is aloof, sloppy, or seems more like a file clerk than someone interested in minimizing your tax burden, maybe you should switch. There are some tax preparers who outsource their work to people overseas, and you probably don’t want that to happen to your return. We are early in 2015, and if you really have the itch to switch, consider taking your 2013 return to 2-3 candidates – not only to get a tax prep quote, but to see if they have insight on your situation that your current preparer lacks.⁵

In getting a jump on tax season, you can get that bothersome item off your to-do list sooner and focus on the more exciting parts of your career, business or life.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600

Citations.

1 - forbes.com/sites/robertwood/2014/12/29/irs-announces-2014-tax-return-filing-opens-starting-january-20-2015/ [12/29/14]

2 - outright.com/blog/what-do-you-need-to-bring-to-your-accountant-at-tax-time/ [3/18/14]

3 - foxbusiness.com/personal-finance/2014/03/18/what-documents-should-take-to-tax-preparer/ [3/18/14]

4 - money.cnn.com/2015/01/02/pf/taxes/obamacare-income-tax-subsidies/ [1/2/15]

5 - dailyfinance.com/2014/12/25/hire-cpa-prepare-taxes/ [12/25/14]

Kim 12/29/14 Kim 12/29/14

The Market Is Up & I Am Not ... Why?

Remember that the major indices don’t represent the entirety of Wall Street. The S&P 500 is up about 10% YTD, why aren’t I? If your investments are lagging the broad benchmark, you may be asking that very question. The short answer is that the S&P is not the overall market (and vice versa). Each year, there are money managers, day traders and retirement savers whose portfolios wind up underperforming it.¹

Keep in mind that the S&P serves as a kind of “Wall Street shorthand.” The media watches it constantly because it does provide a good gauge of how things are going during a trading day, week or year. It is cap-weighted (larger firms account for a greater proportion of its value, smaller firms a smaller proportion) and includes companies from many sectors. Its 500-odd components represent roughly 70% of the aggregate value of the American stock markets.²

Still, the S&P is not the whole stock market – just a portion of it.

You can say the same thing about the Dow Jones Industrial Average, which includes only 30 companies and isn’t even cap-weighted like the S&P is. It stands for about 25% of U.S. stock market value, but it is devoted to the blue chips.²

How about the Nasdaq Composite or the Russell 2000? The same thing applies.

Yes, the Nasdaq is large (3,000+ members), and yes, it consists of insurance, industrial, transportation and financial firms as well as tech companies. It is still undeniably tech-heavy, however, and includes a whole bunch of speculative small-cap firms. So on many days, its performance may not correspond to that of the broad market.^2,3

That also holds true for the Russell, which is a vast index but all about the small caps. (It is actually a portion of the Russell 3000, which also contains large-cap firms.)²

If you really want a broad view of the market, your search will lead you to the behemoth Wilshire 5000, which some investors call the “total market index.” You could argue that the Wilshire is the real barometer of the U.S. market, as it is several times the size of the S&P 500 (it includes about 3,700 firms at the moment, encompassing just about every publicly-traded company based in this country. In mid-December, the Wilshire was up about 9% for 2014.^4,5

One benchmark doesn’t equal the entire market. There are all manner of indices out there, tracking everything from utility firms to Internet and biotech companies to emerging markets. As wonderful or dismal as their performance may be on a given day, week or year, they don’t give you the story of the overall market. Your YTD return may even vary greatly from the gains of the big benchmarks depending on how your invested assets are allocated.

During any year, you will see certain segments of the market perform remarkably well and others poorly. Because of that ongoing reality, you must adopt an investment strategy suited to your needs, risk tolerance, and time horizon.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

Citations.

1 - us.spindices.com/indices/equity/sp-500 [12/11/14]

2 - investopedia.com/articles/analyst/102501.asp [12/11/14]

3 - quotes.morningstar.com/indexquote/quote.html?t=COMP [12/11/14]

4 - web.wilshire.com/Indexes/Broad/Wilshire5000/Characteristics.html [12/11/14]

5 - money.cnn.com/quote/quote.html?symb=W5000FLT [12/11/14]

Kim 8/25/14 Kim 8/25/14

Less Protection for Inherited IRAs

They are no longer exempt from creditors & bankruptcy proceedings. A SCOTUS ruling raises eyebrows. On June 12, 2014, the Supreme Court ruled 9-0 that assets held within inherited IRAs by non-spousal beneficiaries do not legally constitute “retirement funds.” Therefore, those assets are not protected from creditors under federal bankruptcy statutes.^1,2

This opinion may have you scratching your head. “IRA” stands for Individual Retirement Arrangement, right? So how could IRA assets fail to qualify as retirement assets?

Here is the background behind the decision. In 2010, a Wisconsin resident named Heidi Heffron-Clark filed for Chapter 7 bankruptcy. In doing so, she listed an inherited IRA with a balance of around $300,000 as an exempt asset. No doubt this seemed reasonable: the Bankruptcy Abuse Prevention and Consumer Protection Act provided a cumulative $1 million inflation-adjusted bankruptcy exemption for both traditional IRAs and Roth IRAs in 2005.³

So under BAPCPA, wasn’t that $300K in inherited IRA funds held by Ms. Heffron-Clark creditor-protected? Her creditors, the bankruptcy trustee and the Wisconsin bankruptcy court all thought not. That wasn’t surprising, as bankruptcy trustees have issued numerous challenges to the exemption status of inherited IRAs since BAPCPA’s passing.³

Clark v. Rameker made it all the way to the country’s highest court, and boiled down to one question: is an inherited IRA a retirement account, or not?

The Supreme Court rejected the idea that a retirement account for one individual automatically becomes a retirement account for the individual who inherits it. It made that stand based on three features of inherited IRAs:

** The beneficiary of an inherited IRA can draw down all of the IRA balance at any time and use the money for anything without any penalty. Compare that to the original IRA owner, who will face penalties for (most) IRA distributions taken before age 59½.

** Typically, beneficiaries of inherited IRAs must start to take required minimum distributions (RMDs) in the year after they inherit the IRA; it doesn’t matter how old they are when that happens. They could be 68 years old, they could be 8 years old – age doesn’t factor into the RMD rules.

** Unlike the original IRA owner, the beneficiary of an inherited IRA can’t contribute to that account – another strike against the contextualization of an inherited IRA as a retirement fund.³

All this gave the high court a basis for its decision.

Do IRA funds that pass to surviving spouses remain creditor-protected? It would seem so. Frustratingly, the Supreme Court didn’t tackle that question in its ruling. IRAs inherited from spouses are still presumably exempt from federal bankruptcy laws, and if a surviving spouse rolls over inherited IRA assets into an IRA of his or her own, the resulting enlarged IRA is presumably still defined as a retirement account.Oral arguments heard in Clark v. Rameker may help to reinforce this view; the bankruptcy trustee’s lawyer emphasized the differences between Ms. Heffron-Clark’s inherited IRA and one inherited from a decedent.³

State laws may save some inherited IRA assets. If a non-spousal beneficiary inherits an IRA and lives inAlaska, Arizona, Florida, Missouri, North Carolina, Ohio or Texas, state law is on his or her side. In those states, bankruptcy exemption statutes shelter inherited IRAs.²

What if the heir lives elsewhere?That could pose a problem.If an IRA owner fails to play defense, the IRA assets could one day be at risk if a non-spousal beneficiary inherits them.

Designating a trust as the IRA beneficiary isn’t the only option here, but it certainly has merit. The hitch is that putting an IRA into a trust is rather involved. Trusts also come with fees, paperwork and complexity, and the non-spousal beneficiary of the IRA assets should have some financial literacy.¹

In the case of a traditional IRA, a Roth conversion might be an option worth examining. (The conversion would have to happen during the original owner’s lifetime.) Another option: some of the IRA balance could be spent on life insurance which could be left to a trust; life some of the IRA balance could be spent on life insurance which could be left to a trust; life insurance proceeds are tax-free, and a life insurance policy is much more suited to inclusion in a trust than a traditional or Roth IRA.²

The bottom line?If you fear that the heir(s) to your IRA might face bankruptcy proceedings someday, talk with a financial or legal professional about your options. If state law won’t protect those assets, a trust might be wise.

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com

1 - blogs.marketwatch.com/encore/2014/06/12/scotus-inherited-iras-not-retirement-accounts/ [6/12/14]

2 - tinyurl.com/n9g4acw [7/13/14]

3 - theslottreport.com/2014/06/supreme-court-inherited-iras-are-not.html [6/18/14]

What Does the Devalued Yuan Mean for the U.S.?

Teaching Your Heirs to Value Your Wealth

China’s Chaotic Market

Investing in Agreement With Your Beliefs

WILL THINGS IMPROVE FOR MEDICARE AND SOCIAL SECURITY?

You Could Retire...But Should You?

Are Your Kids Delaying Your Retirement?

When a Minor is a Beneficiary

The Big Economic Mystery of 2015

The Difference Between Good & Bad Debt

Are You Underprepared for Retirement?

The Psychology of Saving

Reining in Your Debt

The Strong Dollar: Good or Bad?

Will Baby Boomers Ever Truly Retire?

Are Americans Growing More Optimistic About Retiring?

Will You Have to Pay Back Health Insurance Credits?

Getting a Jump on Tax Season

The Market Is Up & I Am Not ... Why?

Less Protection for Inherited IRAs

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