6 Steps to Securing Your Retirement Portfolio

Few people reach retirement with perfectly allocated and optimized 401(k)s or IRAs. Only about 45 percent of all workers even have access to a workplace retirement plan at all, according to the Washington, D.C.-based Employee Benefit Research Institute. But if you do have one, chances are good you have more than one.

The nature of the employment system is that people accumulate accounts as they change jobs, and they often end up with a hodgepodge of investments that leaves them vulnerable to risk of all kinds, including a portfolio that’s so volatile it could take a dip just when you need the money, a portfolio that is so conservative you lose to inflation, or a portfolio that is not optimized for taxes.

A snapshot of the U.S. retirement market tells the story. Of the $23 trillion in retirement assets, more than half is in 401(k)s and IRAs, and the rest is in defined benefit plans, annuities, state and local pension plans and an array of other financial vehicles, according to the Investment Company Institute’s most recent 2014.

Just beginning to think about what you need to do may be the hardest step. But ignoring your portfolio could come at a high cost if history catches you at the wrong moment. At the end of 2007, investors were woefully weighted with stocks, according to the Employee Benefit Research Institute. Nearly 1 in 4 Americans ages 56 to 65 had more than 90 percent of their account balances in equities at year-end 2007, and over 2 in 5 had more than 70 percent. Equities declined nearly 40 percent the following year, wiping out billions in retirement savings for many retirees. It forced many near-retirees to delay stepping out of the workforce.

So now, as the economy hums along and the market reaches new highs, it is a good time to re-calibrate that retirement portfolio against volatility that may strike at any time.

1. Figure out what you need. Most financial advisors will tell you that as you enter your 50s, you should have a firm idea of the budget you’ll need in retirement. So before you begin, you’ll also have to have a clear sense of your required monthly income.

**According to The Federal Reserve’s Survey of Consumer Finances, a typical American household in the 55-to-64 age range has accumulated about $120,000 in retirement assets, only enough to produce $400 to $500 of monthly income before Social Security. The typical Social Security benefit is about $1,887. If that’s not enough, you’ll need to make some changes.

2. Save more, and extend your working life. The most effective lever you have for a successful retirement portfolio is to save more. That means increasing your contributions during your working lifetime or work longer.

**Suppose you need $80,000 a year in retirement. If you can continue to earn $100,000 a year for five years past your expected retirement date and put aside $20,000 or $30,000 of that a year, you will have added a total of six to seven years of income to your portfolio. You can also increase your Social Security benefit 76 percent a month by delaying your claim from 62—the earliest year you’re allowed to claim—to 70.

3. Diversify. If you want to lower the unexpected reality of volatility within your portfolio, diversify among various asset classes. That means owning mutual funds instead of individual stocks and having multiple asset classes represented instead of just one; emerging markets stock and bond funds in addition to domestic stock and bond funds. Equally important, keep your fees low.

** Vanguard expects returns for a balanced portfolio of 60 percent stocks and 40 percent bonds over the next 10 years to range from –3 percent to 12 percent, with the most likely scenario between 1.5 percent and 7.5 percent a year on an annualized basis. Equities alone are forecast to have a return centered on the 6 percent to 9 percent range, but with a possible swing from year to year of 18 percent. Bonds expected returns are in the 1.5 percent to 3 percent range. The translation: You’ll probably earn nearly as high returns with a balanced portfolio, but you’ll face much less volatility.

4. Design your asset allocation with an view of taxes. If you have significant holdings outside your retirement accounts, think through which asset classes belong in your retirement account. You’ll save significantly on taxes if you keep the equities—which you may buy and sell more frequently as you re-balance—in your retirement portfolio. But don’t make your portfolio decisions only around your tax savings; optimizing your investment returns and keeping your principal safe is a higher priority.

5. Equities should not to be avoided. Don’t make the mistake of significantly selling all of your equities and shifting into money market funds because you think they are safer. That would likely be too conservative for the long term. If you look at the returns of equities and cash every year since 1926, equities lost value in 1/3 the time on a real basis but cash also lost money 1/3 the time too, because of inflation. Most experts recommend that in retirement you have at least a 20 percent allocation to equities.

6. Periodically re-balance. You’ll be retired for a long time, so in order for your money to keep working in the best way possible you need to continue selling high and buying low as a process, which is what re-balancing does for your portfolio.

You devoted a lifetime to accumulating assets, put these steps into action and protect your hard earned dollars. More importantly, work closely with a competent, qualified, independent and objective financial advisor.

 The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a financial professional or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

Increase Your Retirement Batting Average, Don’t Close Your Eyes!

If you don’t have an actual plan for how to achieve retirement successfully, you may just be “winging it”! Really?! How do you think that’s going to work out for you?

It’s true that while many may participate in their company’s 401(k) plan or another workplace retirement plan, many workers don’t know what to invest in or how much to save. As a result, they’re not saving enough. Additionally, surveys have shown that many workers feel overwhelmed by day-to-day financial pressures, paying monthly expenses and even job security. These only contribute to taking your eye off the ball! The result…a secure retirement Strikeout!

Retirement Plans

Consider this: According to Fidelity, the average 65-year-old couple retiring today will spend about $220,000 on health-care costs alone.

Reality is setting in with American workers. Recent polls have suggested that while half of Americans say they would like to retire before the age of 65, only 20 percent believe they will realistically be able to do so. This leaves two options: working longer or saving more.

But how much more should you save?

Determining the amount of money you may need in retirement as income is an vital factor in calculating how much you may need to save today.

Fidelity took a look at how much 401(k) investors at various ages would need to save for every $1,000 they’ll need to generate in retirement income to make their money last, assuming a 5.5 percent annual return and not taking taxes into account. The analysis had eye opening results:

• A 25-year-old just starting to save would only need put away about $160 each month to generate $1,000 in monthly retirement income.
• Start saving at age 35 and you’ll need to contribute almost $270 a month to generate the same income.
• For every $1,000 in monthly income, a 45-year-old just beginning to save for retirement would have to put away nearly $500 every month.
• A 55-year-old just starting to build a nest egg would have to make monthly contributions of $1,154 for every $1,000 in monthly retirement income—that’s double the amount of a 45-year-old and more than seven times the sum that a 25-year-old would need to stash away.

That’s why financial planners suggest that the rule of thumb is you should save anywhere from 10 to 15 percent of your income towards retirement. Yet, most workers are only putting away 6 to 7 percent of the annual income into a 401(k) or workplace retirement plan, the firm has found. Some who have delayed retirement savings may have to put away 20 to 25 percent of their income.

Can’t get there yet? Smaller increases can help. Even incremental changes like a 1 percent increase can eventually make a big difference and create hundreds of dollars in potential income in retirement.

The bottom line is that most people aren’t saving enough money. In the absence of saving an adequate amount there is no other magic bullet. You cannot start so late that assuming more risk will make up for the lack of contributions. Not to mention that more risk could mean more potential losses if the market changes. Surely that will be the fastball that sends the batter down swinging. You can choose the best investments in the world but if your only putting $500 a year into your IRA or your 401(k) plan you’re just not going to get there.

 The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a CFP, CPA or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

Successful Retirement Planning Strategies For Women

Everyone faces similar challenges in planning for their long-term financial goals, such as a successful retirement.

But women seem to have a few unique obstacles to overcome. Fortunately, through a well conceived financial plan and implementing a solid strategy, women can alleviate those obstacles:

Retirement Planning for Women

• Longer life expectancies – Women on average live seven years longer than men which means they need to plan for a longer, more independent retirement.
• Lower earnings: – According to Women’s Institute for a Secure Retirement (WISER), men are out-earning women at an average of 23 cents on the dollar. Lower earnings result in less money contributed to retirement plans and social security.
• More time out of the workforce – Women typically are the caregivers. They may spend time out of the work force to raise a family or care for ailing parents or other relatives. This time away can potentially negatively impact the raises and promotions. To compound this, while they are out of the workforce, women are not contributing to their pension, other retirement plans or social security which means they end up with less in savings than men.

Creating a retirement plan will help women to feel more in control of their finances and give them confidence about achieving their long-term financial goals.  There are a couple of steps women can take:

• Educate yourself by reading and attending workshops.
• Review your credit usage and reduce any unnecessary debt.
• Take an active role in your investments including your retirement plans.
• Invest for long-term growth, being balanced in your risk tolerance.
• Maximize your contributions to your retirement plan.
• Consider working with a financial planner.

Remember, you are in control of your financial future. Careful planning and putting a long term strategy in place can go a long way towards overcoming the obstacles, achieving your long term retirement goals and living the retirement lifestyle you desire.

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC located in Newburgh, New York and specializes in planning for women. His goal is to empower, educate and engage women around money matters.

For more information contact Steven at Compass Asset Management Group, LLC at 845.563.0537 or Contact@CompassAMG.com

Steven M DiGregorio is an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Women Empowered Toward Investment Success

Women now comprise nearly half of the U.S. workforce, and they now earn a higher percentage of the bachelor’s and master’s degrees compared to men. So how come women’s average retirement plan balances are just 60 percent of men’s average balances?  No, it’s not because there was just a great shoe sale!

Take Control of Your Finances

CONTRIBUTING FACTORS

Several factors may play into women having lower average retirement plan balances:

• Lower average salaries In 2010, the Bureau of Labor Statistics reported that the earnings ratio of women to men was 81 percent. Lower wages may translate to lower contribution and match rates.
• Tendency to select more conservative investments Generally speaking, conservative investments may result in lower long-term returns.
• Employment breaks Not only do women take time off for maternity leave, they may take additional time away for child rearing, as well as the care of elderly parents. Most who take time off for care-giving duties do not continue to contribute to any kind of retirement plan.

Combine the above factors with the fact that women usually live longer than men and, as a result, need an even bigger nest egg, and it’s not surprising that only 24 percent of women are very confident they will have enough money to take care of basic expenses in retirement.

HELP YOURSELF

There are several steps women may take to help themselves live comfortably through retirement:

• Get an idea of how much you may need in retirement If you don’t know, don’t feel bad. Only 40 percent of women (and 45 percent of men) have ever tried to calculate how much they will need to have saved by the time they retire. Try the Retirement Calculator at Fidelity.com  to gain some perspective.
• Pay yourself first Stash cash into your retirement plan — even before saving for your children’s college education (Loans may be available for college, but not retirement). You may feel that’s selfish, but one of the best gifts you can give your children is to secure your own retirement to avoid being a financial burden upon them in the future.
• Learn about saving and investing Usually the more you know, the less scary it is. A good place to start is right here. Go to the Blogs tab on our website at CompassAMG.com  for information on many financial topics, from budgeting  and investing to estate planning
• Explore when to claim Social Security Nearly 60 percent of the people receiving Social Security benefits are women. Although Social Security was never intended to cover all your retirement needs, it may be an important aspect of your retirement. If you are married, there are several scenarios to explore to coordinate you and your spouse’s benefits. For most people, delaying claiming Social Security beyond your full retirement age equals approximately 8% more per year in benefits. (This increased benefit for delaying stops at age 70.) On the Social Security Web site is a Retirement Estimator, which will help you get immediate and personalized retirement benefit estimates. Sign up for My Social Security and view your personal information.

YOU GO, GIRL

Empower your future! Explore, learn and put to work these ideas to close the retirement gap. Begin now to make your future financially secure.  A good strategy and plan will leave a lot more dough around for the magic of martinis & Manolos!! Start today!

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Written by Steven M. DiGregorio, President, Compass Asset Management Group, LLC.   Compass Asset Management Group, LLC is an affiliate of Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm.
Securities offered through an affiliate Spire Securities, LLC.
Member FINRA/SIPC.

2013 Retirement Plan Limits and Savings Strategies

A new year and new beginnings! With that said, it’s time to consider adjusting your retirement savings. The Internal Revenue Service recently issued a variety of inflation adjustments for 2013, and retirement savers can now save even more.   Take advantage!

New Limits for 2013

Beginning with the 2013 calendar year, participants in 401(k), 403(b), and governmental 457 or Thrift plans can now save up to $17,500. This is a $500 increase from 2012.  Those aged 50 or older can save an additional $5,500 as a catch-up provision for a total limit of $23,000. This catch-up ceiling is unchanged from 2012.

Retirement Plan Contribution Limits 2013

Small business owners will be able to save up to $51,000 in a SEP IRA or Solo 401(k) or up to $56,500 for those age 50+. This is also the maximum that can be added into a traditional employer-sponsored 401(k) through the combination of employee and employer contributions.

Some 401(k) plans have begun using an auto-increase option that automatically increases the savings percentage each year. This feature became available after a number of studies suggested that most people are too lazy or distracted to ever adjust their savings elections after their initial enrollment.

While some will not be able to max out their retirement account, everyone should consider increasing their savings amount in 2013. For some people, this can mean simply increasing the percentage of their salary deferral. Do whatever you can do to get the full matching amount.

You can go online or contact your Human Resources Department now and request an increase in your salary deferral beginning today.

Where Do Roth IRAs Come In?

After receiving your company match, Roth IRAs are the next best place to save. Roth IRA maximums are increasing to $5,500 in 2013 or $6,500 for those ages 50 or older. The upper income limits for eligibility begin phasing out at $178,000 of adjusted gross income (AGI) for married couples, a $5,000 increase from 2012. Singles are capped at $127,000. Those who earn more could consider a backdoor method for investing in a Roth IRA. That’s where you convert a traditional IRA to a Roth IRA account. While taxes in the process cannot be avoided, there are no limits on Roth conversions.  Avoiding tax on future growth, priceless!

How much savings is enough? 

A question many people ask.  We always suggest a target savings rate of 10% to start.  How important is saving at a 10% target rate for retirement? The difference between saving 10% of your salary and 3% of your salary could be over half a million dollars for an employee who starts out making a salary of $50,000 and invests with an 8% per year return over 30 years.  Returns are never guaranteed so the only variable that you can control is the amount of your regular contributions. Save more!

How Soon Should I begin?

While the savings amount is important, even more critical for your success is to start sooner than later!  The value of compounding is not to be underestimated.  More money working longer over time can be…priceless!  Notice in the chart below that starting the same dollar amount of a contribution amount just 10 years earlier results in more that twice the amount of retirement savings in the long-term. Clearly, starting earlier than later makes a tremendous difference! So the key is to start today!

This hypothetical example assumes the following (1) $5,000 annual IRA contributions on January 1 of each year for the age ranges shown, (2) an annual rate of return of 7% and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees or inflation. If they did, amounts would be lower. Earnings and pre-tax (deductible) contributions from Traditional IRAs are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free provided certain requirements are met. IRA distributions before age 59½ may also be subject to a 10% penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market. This example is for illustrative purposes only and does not represent the performance of any security.

It’s not too late to make a 2013 resolution that can make your retirement stress free.  So take action today! 

 

The information herein contained does not constitute tax or legal advice. Any decisions or actions based on information contained herein should not be made without first consulting a CPA or attorney.

For more information contact Compass Asset Management Group, LLC at 845.563.0537 begin_of_the_skype_highlighting 845.563.0537 FREE  end_of_the_skype_highlighting or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Make Your 401(k) Work For You

When it comes to saving for retirement and building a portfolio to last a lifetime, most Americans are way behind. More than 54% of Americans report that the total value of their household’s savings and investments is less than $25,000, according to the Employee Benefit Research Institute’s annual Retirement Confidence survey. What’s worse, 27% have less than $1,000 in assets. Just 11% have more than $250,000 set aside.

Those figures include Americans young and old, those just starting in the work force as well as those about to check out. The bottom line is clear, Americans need to modify their savings and spending patterns to have any hope of enjoying not just a standard of living they’ve become accustomed to but rather a comfortable retirement they would aspire to.

401(k) Portfolio

You work hard for your money. So here’s some guidelines to get your 401(k) on the right track and working for you!

1. Participate in your plan

If you’re lucky enough to have a 401(k) at work, contribute to it. The healthiest 401(k) plans tend to be those where the majority of the eligible employees are participating in the plan. Many 401(k) plans now have automatic enrollment, where eligible employees are automatically enrolled in the 401(k) plan; automatic increases, where the percent of salary employees contribute to the 401(k) plan is automatically adjusted upwards on a regular basis; and investment workshops, websites or advice provided to workers.

2. Avoid risky behavior

What kind of risky behaviors are we talking about? Having an outstanding loan that represents 25% or more of your total 401(k) account balance; not being properly risk adjusted or diversified; not using an investment strategy; concentrating in specific asset classes; concentrating in company stock; not taking full advantage of the company match; saving 2% or less; and not saving at all.

3. Increase your contribution rate.

If you are participating in your 401(k), consider upping the percentage of your salary that you contribute because every little bit matters. Contributing just 1% or 2% more of your salary to your 401(k) can have a dramatic effect on your retirement savings over time.
For example, a 30-year-old employee earning an average salary of $50,000 who increases her contribution rate from 4% to 6% will have accumulated an extra $295,000 by the time she reaches retirement age.

4. Put your plan on autopilot

Face it, its human nature to avoid change. Since what you start you may well just leave alone, make it a positive. If you contribute 6% to your 401(k), you’re likely to keep it that way even if you get a raise. But you should consider taking advantage of any and all tools that take the guesswork out of saving and investing. Consider signing up for automatic escalation and automatic rebalancing tools if your employer offers such options.

5. Take advantage of advice

The median annual return for employees using investment help was almost 2% higher than those who did not, according to a joint study from Hewitt Associates and Financial Engines.

According to Hewitt, one in every two firms in its survey currently offers online investment guidance, and 39% offer online, third-party investment advisory services. In addition, 28% of employers currently offer managed accounts that let participants delegate management of their account to an outside professional.

6. Don’t forfeit free money

If your employer has a matching contribution in the plan, don’t miss out! It’s hard to believe, but more than one-in-four workers leave free money on the table. They contribute below the company-match threshold, according to Hewitt. Contribute enough to your 401(k) to receive your full employer match.

7. Don’t cash out

If you’re changing jobs or leaving your current job, don’t cash out your 401(k) savings. About 46% of employees cash out, according to Hewitt. But doing so can have serious consequences. Typically, you’ll play a tax on the amount withdrawn and a 10% early withdrawal fee. Rather, you may want to consider taking control by considering a 401(k) rollover to an advisor you trust.

8. Don’t over-invest in company stock

Over-investing in company stock means that both your human capital and financial capital are tied to your employer. And if your employer goes belly up, you lose your job and a good portion of your 401(k).  We would recommend contributing no more than 10% of your 401(k) to your employer’s stock.

For more information contact Compass Asset Management Group, LLC at 845.563.0537or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Plan Ahead Using this Capital Gains Strategy to Lower The Tax Bill

While politicians do a sugarplum dance on the edge of the fiscal cliff, it looks more likely that many people will face a 20% federal tax rate on long-term capital gains in 2013. That rate will automatically kick in unless Congress extends the current 15% rate and the President goes along. Don’t bet your holiday cookies on those two things happening.

Those in higher income tax brackets will face the new 3.8% Medicare surtax beginning Jan. 1 on net investment income. The surtax will affect unmarried investors with adjusted gross income above $200,000 and married joint-filers with an adjusted gross income above $250,000.

Tax Savings Idea

But don’t give up hope. Here is a year-end strategy to consider as a “return on investment” perspective. 

What if you have some great long-term stock and mutual-fund winners in your taxable investment account that you don’t want to walk away from? Consider selling the shares before the year ends. You would owe the resulting 15% tax on April 15 of next year when your 2012 Form 1040 comes due. Assuming you still wanted to own the investment, after you sell, you can buy the shares right back and hold on to them as long as you’d like.

What could this strategy mean to you? Let’s do the math:

• Assume an investor triggers $100,000 of long-term capital gains and a $15,000 federal tax hit by selling winners now, then buying the shares right back.
• The $15,000 2012 tax hit will represent the “investment” in this strategy.
• The “return” on the investment is the tax savings from having the gains taxed this year versus waiting until later when rates are higher.

Scenario 1 – 20% Capital Gains Rate and A Medicare Surtax

• The investment in this strategy is the $15,000 tax bill ($100,000 x 15%).
• If the investor would have sold next year, they would have owed $23,800 ($100,000 x 23.8).
• That tax-savings benefit is $8,800 which translates into a 58.7% rate of return ($8,800/$15,000 = 58.67%).

Scenario 2 – 15% Capital Gains Rate and A Medicare Surtax

• The investment in this strategy is the $15,000 tax hit ($100,000 x 15%).
• If  the investor would have sold next year, they would have owed $18,800 ($100,000 x 18.8%).
• That tax-savings benefit is $3,800 which translates into a 25.3% rate of return ($3,800/$15,000 = 25.3%)

Scenario 1 – 20% Capital Gains Rate and No Medicare Surtax

• The investment in this strategy is the $15,000 tax hit ($100,000 x 15%).
• If the investor would have sold next year, they would have owed $20,000 ($100,000 x 20.0%).
• That tax-savings benefit is $5,000 which translates into a 30.0% rate of return ($5,000/$15,000 = 30.0%)

The Bottom Line

The game plan outlined here is definitely not foolproof nor does it apply in all circumstances, because nobody knows what the long-term capital gains tax rate will be for next year and beyond. Important to note as well, any profits that accrue after you buy back those winners will be higher-taxed short-term capital gains if you don’t hang onto the shares for more than one year.

The information herein contained does not constitute tax or legal advice. Any decisions or actions based on information contained herein should not be made without first consulting a CPA or attorney.

For more information contact Compass Asset Management Group, LLC at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Real Estate Investing With Your IRA

While home prices still may not have hit bottom nationally, demand for distressed properties on at the lower end of the market is starting to grow. Large scale investors like hedge funds and private equity firms are rushing in with cash on hand, and that gives them the upper hand in competition for these properties.

So how does an individual investor, without extra cash lying around, get in? Retirement funds.

It may sound risky, but with strong rental demand and relatively little supply of single-family homes, it could be less risky than the stock market. That’s because your gains are largely coming from rental income not home appreciation, which is why this works so well in today’s market.

The catch is that you have to do it through what’s known as a “Self-Directed IRA”. Not a lot of firms offer these structures, but a few names that do are: Guidant Financial, Sterling Trust, IRA Resources and PENSCO. The firms act as custodian of your Self-Directed IRA, holding the property and dealing with all associated expenses.

Section 408 of the Internal Revenue Code permits individuals to use a self-directed IRA to purchase real estate investments such as commercial property, condominiums, residential property, international real estate, mortgages, trust deeds, real estate contracts, private placements, limited partnerships, limited liability company’s (LLC’s), and many other types of investments with retirement funds held in many common forms of IRA’s.

“It’s really an account that provides greater flexibility than what a third party administered 401K, for example, would provide,” says Kelly Rodriques, CEO of PENSCO.  That’s in part because real estate has become a valued investment opportunity area, given the recent downturns.

Imagine purchasing a commercial property or multi-family housing unit and receiving rental income in your IRA for thousands of dollars a month.

This type of IRA does carry restrictions.

• The property must be used purely as an investment, with all the income going directly back into the IRA.
• The owner may not occupy the home or even use it as a vacation property.
• The owner can manage the property, doing maintenance and supervising the renting, or can hire a rental management company which would be paid for out of the IRA.

It is also possible to get a mortgage through the IRA, that is referred to as a non-recourse loan.  “It’s a loan that can only seek the property, the collateral, as its sole recovery, if the property goes into default, so you as an individual can’t sign up to guarantee the loan,” says Rodriques. The IRA is not just purchasing the property, but it is responsible for liabilities and payments.

All this may sound complicated, but for some it may well be worth the extra time and energy. With a rising number of foreclosed properties coming to the market this spring, and banks far more willing to do short sales on troubled loans, opportunities are everywhere.

The information herein contained does not constitute tax or legal advice. Any decisions or actions based on information contained herein should not be made without first consulting a CPA or attorney.

For more information contact Compass Asset Management Group, LLC at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Traditional or Roth IRA, Which is Right for You?

Do you need to plan more for your retirement?  These days who doesn’t?

You may want to consider opening an individual retirement account to complement any workplace savings plan for which you might be eligible.  IRAs provide the potential for tax adantaged, compound growth of your retirement savings.  One key consideration in establishing a new IRA though is to decide whether a traditional IRA or Roth IRA makes the most sense for you. Contrasting the immediate and long term benefits of each will follow:

Rules that Apply to both Traditional or Roth IRA

• Income Limits – To qualify for IRA contributions in 2011, your income must not exceed $169,000 (phaseout from $169,000 – $179,000) for married couples filing jointly and $107,000 (phaseout from $107,000 – $122,000) for single filers.
• Contribution Limits – Both types of IRA have the same maximum annual contribution limits: $5,000 for tax year 2011, plus an additional $1,000 “catch-up” contribution for those 50 and older in that year.
• Timeline for Contributions – Contributions to either IRA  for 2011 can be made until 4/15/2012.  Note that Roth IRA accounts must be opened by 12/31/2011.

Traditional IRA 

With a Traditional IRA your contributions are tax-deductible, provided you don’t participate in a retirement plan at work.  If you and/or your spouse contribute to a workplace plan, you may still be able to make tax-deductible contributions if your income falls below certain limits.  Here your investments will grow tax-deferred until you withdraw money in retirement.  Any withdrawals are then taxed as ordinary income.  The IRS requires that you begin taking minimum withdrawals by age 70 ½.

In essence, a traditional IRA provides a modest tax break now and the promise of tax-deferred, compound growth into the future.

Roth IRA

With a Roth IRA, your contributions are made with after-tax dollars and investment growth is not taxed at all!  You can begin to make withdrawals without tax or penalty as long as the account has been in existence for more than five years and you are older than age 59 ½.  So while a Roth IRA provides no immediate tax break, it does offer the tremendous benefits of both compounding and tax-free growth!  A Roth also provides significantly more flexibility than a traditional IRA.  Since your Roth contributions are made with after-tax money, you can withdraw them at any time!  Additionally, unlike a traditional IRA a Roth IRA does not require minimum withdrawals after age 70 1/2.  As a result, your funds potentially can grow tax-free indefinitely—providing income in later retirement or becoming part of your estate.

The Bottom Line

If you are eligible for either a Roth or a tax-deductible traditional IRA, you must decide whether getting a tax deduction now is more important than not having to pay tax on withdrawals.

Younger investors in particular may benefit greatly from the Roth’s tax free growth. Other investors may find the ability to deduct their contributions now more compelling—for example, if they are in a high tax bracket today, and expect to be in a low bracket during retirement.

Regardless of which type of IRA you select, the tax-sheltered growth of an IRA can be a powerful ally in funding your retirement expenses.  Most importantly, the key to a successful retirement is making contributions to a qualified retirement plan both early and consistently.  No matter what market or economic environment we are experiencing, it’s important to stay focused on your long-term goals.  Contributing to your own personal IRA is a great way to do that.

The information herein contained does not constitute tax advice.  Any decisions or actions based on tax related information contained herein should not be made without first consulting a CPA or Accountant.

For more information contact Compass Asset Management Group, LLC  at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Investment Strategies to Help You Rest Easy

Markets keeping you awake? Here’s some ideas we’d like to share.

Recent years have had no shortage of drama: the debt-ceiling debate, a ratings downgrade of the U.S., questions about European banks and sovereign debt, China slowdown and resulting wild swings in the stock market.  It all makes for a lot of sleepless nights.

Given all the confusion & uncertainty, how can we possibly rest easy knowing our future financial security is at stake? Ultimately, a smart, long-term investment strategy should enable us to weather — and even take advantage — of these kinds of storms. 

So, how to get there? Many times, sitting tight is the best strategy, as long as your portfolio is properly adjusted for risk you can withstand. Trying to react or time the enormous swings usually leaves many worse off.  Yet doing nothing does not always make us feel more secure either.  So here are five strategies that might give you more peace of mind without completely revamping your entire portfolio.

Cash

Examine the amount of cash in your portfolio. Having a secure rainy-day fund when the world is a little crazy helps soothe the nerves. A good rule of thumb is to have enough cash on hand to handle about four to six months of your living expenses in case you lose your job.  That may sound like a lot of money, but with so much economic uncertainty in the air, having that cushion makes more sense than ever. If you are light on cash, there are a couple of things to consider.

• You can sell into market rallies to improve your cash position. Big moves up along with several nasty moves lower provide great opportunity. We always expect times of volatility in the future, so take advantage of upward swings to ensure you have a sufficient but not overweighted cash position.
• You might have some large losses that aren’t bouncing back with the broader market when it does rally. You can sell those shares at a loss, and use those losses to offset capital gains when you sell your winners.

Utilities

These companies aren’t sexy, but they have often times proven to be somewhat steadier than the general markets. Ensuring that you have exposure to this sector will reduce the ups and downs in your investment holdings. The Dow Jones Utility Average tends to gyrate along with the rest of the market, but its moves have been smaller.  More importantly, utilities generally provide strong dividend yields, and unlike the yields of non-utility companies, they are historically very dependable. So, even if the utility stocks fall in value with the broader market, you still have the dividend income, which can smooth out the ride and provide more consistency in performance.

Other dividend-payers

While riskier than utilities, investing in very large companies with solid track records that are paying consistent dividends is prudent.  In the “old days”, didn’t we call these companies “Blue Chip”?  In a low yield environment, these 3-6% dividends are higher than treasury yields and you have the added value of future appreciation of the stock as well!  If you’re not sure of which of these stocks to pick, go with Exchange Traded Funds or ETFs to provide a broad diversification to those dividend paying companies.  Again, not terribly sexy, but as with utilities, you get a little income that helps make the pain more bearable.

Gold

Gold, which usually jumps when stocks waiver, can generally provide somewhat of a hedge for the rest of your portfolio.  Volatility in the precious metals markets has shown that this is not an area to time or toy with.  Still, many elements that support gold remain in place.

• Difficult fiscal challenges in Europe, China and emerging markets.
• A weak dollar.
• Uncertainty about the US economy.

Gold, like stocks and bonds, will continue to bounce around, so don’t overplay your gold hand.  Look to enter that market when there are larger pull-backs and position your portfolio for the longer term.

Vices

If the crazy market and the related economic and political mayhem has some thinking about a drink or grabbing a smoke. As a result, vice oriented stocks do fairly well when everything else is going haywire.  More importantly, stocks of companies in the tobacco and alcohol industries can sport yields approximating 4-6%.  Moral perspective aside, these stocks have proven their value.

Once you feel like you’ve positioned your portfolio adequately, including your cash position, you can then start to think more clearly about other opportunities that might present themselves. When panic moves occur, as we’ve seen on a number of occasions during the past several weeks, values can emerge.  Some stocks with strong balance sheets and growing earnings or market share can become a lot cheaper in uncertain markets and present great investment opportunities for the long-term.  Stick to companies you feel confident will endure the test of time.  In the end, patience & prudence will pay off.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Tax-smart Strategies for Retirement Income Distribution

The first wave of baby-boomers turns 65 this year, and that means millions of new retirees will begin to switch from accumulating a nest egg to drawing income from it. If you’re a boomer, it’s time to start thinking about how you’ll convert decades of savings into a lifetime stream of income, which accounts to tap first and how best to navigate. Different sources of income have different tax consequences. Withdrawing funds in the most tax-efficient way will not only minimize your tax bill but could also make your savings last longer.

Key Strategies for Retirement Income Distribution

Knowing which accounts to raid first can stretch your savings.

Generally, if you benefited from a tax deduction for contributing to an IRA or 401(k), every dollar you withdraw later will be taxed at your ordinary income-tax rate — currently as high as 35%. Each year, you’ll receive a Form 1099-R from your account custodian that documents the taxable distributions to report on your tax return.

 If you took a pass on the upfront deduction by contributing or converting funds to a Roth IRA, you’ll enjoy some tax-free income in retirement. Your annual Form 1099-R will note that you received a distribution from a Roth account, but it won’t specify whether any of the money is taxable (you’ll have to calculate that yourself on Form 8606, available at http://www.irs.gov). You may withdraw Roth IRA funds, up to the cumulative amount of your contributions, at any time tax-free and penalty-free. But you must wait until you are at least 59 1/2 years old and the account has been open at least five years before you can access the earnings tax-free (unless you use the money to buy a first home).

If you made nondeductible contributions to a traditional IRA, distributions are a little trickier.

Spread out the tax liability

Just as you should diversify your assets among various types of investments to minimize your risk, it’s a good idea to vary your tax liability.  The old assumption that you would be in a lower tax bracket in retirement is not only more questionable but hopefully for you, improbable!  The liklihood that future income tax rates will rise is greater now more than ever.  Hence, it makes sense not to put too many of your eggs in a single basket.

If you have been contributing to a 401(k), 403(b), 457 plan or a federal Thrift Savings Plan, have you avoided accumlating assets in taxable savings and investment accounts?   Reconsider, current tax laws could tax those assets at a lower rate than ordinary income from the retirement plans.  You may also want to contribute to or convert some retirement funds to a Roth account so that you will have more control over how much you pay in taxes in retirement.

First out: Taxable accounts

Conventional wisdom suggests that you should withdraw money from your taxable accounts, can benefit from lower capital-gains rates, before touching your retirement funds. Tapping taxable accounts first not only minimizes your tax bill but also allows your traditional IRAs and other tax-deferred accounts to continue to compound unfettered by taxes for as long as possible. The result: a bigger nest egg.

Of course, every rule has its exception.  Sometimes it pays to tap into your tax-deferred retirement accounts once you can — but before you are required to — so that your IRA doesn’t grow too big, which would result in large required minimum distributions each year after you turn 70 1/2, along with hefty tax bills.

If you have a brokerage account and sell assets that you’ve owned for more than a year, you’ll pay just 15% on your profits and, in some cases, no tax at all. Or, if you sell an asset in a taxable account at a loss, you can use it to offset investment gains, potentially wiping out any tax liability on your profits. Excess losses may be used to offset up to $3,000 of ordinary income per year and may be carried forward to offset income in future years.  You generally cannot claim tax-deductible losses in a retirement account.  Qualified dividends are also taxed at a maximum 15% rate or 0% for those who are eligible.  Although interest on your savings is taxed at your ordinary income-tax rate, the principal (the money you originally invested) is tax-free.

Next: Retirement accounts

After exhausting your taxable accounts, focus on your traditional retirement accounts, such as IRAs, 401(k)s and other employer-based retirement plans. You’ll pay taxes on your entire withdrawal at your ordinary income-tax rate (except for any after-tax contributions you made, which would be tax-free). If you need $20,000 per year in after-tax money, for example, and you’re in the 25% tax bracket, you’ll have to withdraw nearly $27,000 from your IRA.

You can start taking withdrawals from your traditional IRA penalty-free once you turn 59 1/2, but you’ll owe federal and possibly state income taxes on the distributions. You probably can’t invade your 401(k) or similar employer-based retirement account while you’re still working, unless your plan has an in-service distribution provision that allows you to take withdrawals once you reach the 59 1/2 milestone.  But if you leave your job when you are 55 or older, you can take penalty-free withdrawals (but still owe taxes). If you roll over your retirement funds to an IRA before age 59 1/2, you’ll lose this early-out option.

Once you turn 70 1/2, it’s time to reimburse Uncle Sam for all those years of tax-free growth. You must start tapping IRAs and other traditional retirement accounts by April 1 of the following year and take withdrawals by December 31 each year after that.  If you delay your first distribution until April 1, you’ll have to take a second distribution by the end of that same year which could result in a sizable tax bill.

Your required minimum distributions, known as RMDs, are based on your account balance at the end of the previous year divided by your life expectancy, as determined by IRS mortality tables. If you don’t take a distribution of at least the required amount, you’ll be hit with a stiff penalty: 50% of the amount you failed to withdraw. In most cases, you should save your tax-free Roth IRA distributions for last. Unlike traditional IRAs, Roth IRAs have no annual distribution requirement.   Should you have funds left over when you die, your heirs will thank you: Distributions from inherited Roth IRAs are tax-free; those from traditional IRAs are taxed at heirs’ ordinary income-tax rate.

Don’t be afraid to tap your Roth IRAs earlier as a way to increase your retirement income without being pushed into a higher tax bracket. The bottom line: Decide whose taxes you want to minimize — yours or your heirs’.

The information herein contained does not constitute tax advice.  Any final decisions or actions should not be made without first consulting a CPA or Accountant.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Roth IRA 101 – The Basics

Take advantage of this tax-advantaged account to stretch your savings.

I’ve received quite a few questions recently about how Roth IRAs work, so I figured it would be helpful to put several questions and answers together as an all-in-one Roth IRA guide.

Roth - The Golden Retirement Egg

 Contribution limits

Everything I read about preparing for retirement says to “save like mad.” What are the rules and contribution limits for Roth IRAs?

You’re smart to start saving early for retirement in an IRA. The more you can take advantage of tax-advantaged retirement accounts, the easier it is to stretch your savings. You can contribute up to $5,000 to an IRA for 2011 (or $6,000 if you’re age 50 or older by the end of the year), and you still have until April 18, 2011, to make your 2010 contribution. You can contribute to either a traditional IRA or a Roth, if you are eligible, or a combination of the two types of accounts, as long as your total IRA contributions for the year don’t exceed the $5,000 maximum (or $6,000 if you’re 50 or older).

You are eligible to contribute to a Roth IRA if your modified adjusted gross income is $122,000 or less if you’re single, or $177,000 or less if you’re married filing jointly. You don’t get a current tax deduction with a Roth as you do with a traditional IRA (in most cases), but you can access your Roth contributions penalty-free and tax-free at any time, and you can withdraw the earnings tax-free after age 59½. A Roth has a few additional advantages, too — you won’t have to take required minimum distributions beginning at age 70½, as you would with a traditional IRA, and your heirs can inherit any money remaining in your Roth IRA income-tax-free after you die.

Can you invest in both a 401(k) and a Roth?

Yes, you can contribute to both a Roth IRA and an employer-provided 401(k) in the same year. For 2011, you can contribute up to $16,500 to a 401(k) (or up to $22,000 if you’re 50 or older by the end of the year).

Roth conversions

I earn too much to contribute to a Roth IRA, but I would like to contribute to a traditional IRA and then convert it to a Roth. If I make my 2010 IRA contribution before April 18, 2011, can I still take advantage of the special tax rule that allows me to spread the converted amount — and resulting tax bill — over two years?

No. That was a special deal for conversions made in the 2010 only. If you had converted your traditional IRA to a Roth in 2010, you could have chosen to pay the taxes on the conversion all at once when you file your 2010 return or to pay half the tax bill on your 2011 return and the balance on your 2012 return. Although you still have until April 18, 2011, to make your 2010 IRA contribution, it’s too late to take advantage of the one-time opportunity to spread your tax bill over two years.

However, the back door into an IRA is still open: If you earn too much to qualify for a Roth IRA, you can contribute to a traditional IRA and then convert the IRA to a Roth, regardless of your income. It will count as a 2011 conversion, and you’ll have to pay the tax on that conversion when you file your 2011 taxes next spring.

Roths and the self-employed

I’m self-employed and file Schedule C. Can I still contribute to a Roth IRA?

You can contribute to a Roth IRA if your modified adjusted gross income is below the $122,000 cut-off for single filers, or $177,000 if married filing jointly — whether you work for an employer or work for yourself. But because you’re self-employed, you have an even better option for saving for retirement: You can open a solo 401(k), which allows you to contribute up to $49,000 (depending on your income), plus an additional $5,500 if you are 50 or older, for a total of $54,500 for 2011. You can choose either a traditional solo 401(k), which enables you to deduct your retirement contributions from your income taxes now, or a Roth solo 401(k), which will provide tax-free withdrawals in retirement.

No age restrictions

Is there a minimum or a maximum age to contribute to a Roth IRA?

No. Unlike traditional IRAs, which permit contributions only until age 70½, Roth IRAs have no age limit for contributing, as long as you have earned income from a job and you meet the income-eligibility limits. And if you aren’t working now for any reason (because you’ve retired, say, or you’re a stay-at-home parent) but your spouse still has a job, then he or she can contribute up to $5,000 (or $6,000 if you’re 50 or older) per year on your behalf.

We hope this information proves to be helpful guidance to your curiosity concerning Roth IRAs.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Married? How to Manage Both 401(k)s Properly

So what should we call this process?  “Marriage Diversification”?  If a married couple each have any retirement plan be it IRA, 401(k), 403(b) or other, managing the assets appropriately can be challenging.

Couple Planning Together

1. Should they each have the same funds in their accounts?
2. Should they pick different but similar funds?
3. Should one portfolio be aggressive and the other more conservative?

Ideally, a husband and wife should collaborate on their retirement planning, including choosing investments. Unfortunately that doesn’t usually happen. A 2009 Fidelity study of more than 500 couples found that only 38% made joint decisions together about retirement finances.

That said, it doesn’t necessarily follow that working as a team means you and you must have completely different investments in your 401(k) plans either.  In fact, such an approach could make it more difficult to manage the retirement portfolios.  Depending on how similar the choices in your plans really are, the ability to provide a quality diversification advantage may not be possible.

Basically, even though you have separate retirement accounts, you are essentially investing one pool of money that you will both depend on in retirement. So your goal should be to create the best overall portfolio with the entire pool.  That being said, you probably have different opinions and views regarding risk and exposure to certain areas of the market.

1. Manage the same – Let’s start with the understanding that you both have decided to manage the assets as one pool with the same strategy.  The challenge is then to agree on the asset allocation percentages.  Compromise is key.  Once you decide upon the allocations, research each offering set to determine which options in each plan fit the strategy.  Be aware of factors like fees, performance consistency and risk.  Now model the portfolios to be as closely similar as possible thereby creating essentially the same portfolios.  The drawback here is that you don’t have any more diversification than you could each achieve on your own in your individual portfolios.
2. Manage Similarly – Should you have different choices in your 401(k)s, this would be a good option.  Maybe one plan has a particularly good large-cap value fund but the large-cap growth choice is better in the other plan.  Maybe there are entirely different offerings, i.e. one plan includes a short term bond choice and the other has an emerging market fund.  Pick the best options and allocate as one large pool of assets.  This practice will necessitate that you evaluate the strategy performance by reviewing the entire picture.  The advantages being stronger diversification choices and enhanced performance/cost than in managing the same (1).   The downside, this can be complicated to evaluate well.  Consider using an Investment Advisor, usually for a small fee, to get it right.  Then you’ll have the peace of mind knowing there’s a professional opinion involved.
3. Manage as separate accounts – It is a common strategy to manage these monies separately with individual views as to risk and preferences.  Evaluate your personal ideas, comfort with risk and performance expectations before embarking on this strategy.  Of course you would again research the individual choices in each plan with no comparison to your spouse’s portfolio.  After building your own portfolios, you should then have a professional evaluate the synergy of the two portfolios together.  Performance & risk will both be affected when you view this in its entirety.  You may find that some small, refining changes could be made and will be acceptable to both parties.

The bottom line is that Marriage Diversification will prove beneficial from many perspectives.  Clearly, these strategies involve careful consideration of your personal circumstances and individual views.  Ultimately, the idea is for you to consult each other about the process of investing in your 401(k)s and plan your retirement in together.  It is always a strong recommendation to hire a professional investment advisor to assist, recommend and continually monitor & assess your overall performance and strategy.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

 

Bond Bubble to Burst? Take Shelter?

For those that are in retirement already or approaching retirement soon, the prospect of a bursting bond bubble and another hit to your personal retirement assets is enough to make you head for the hills!  The past decade has proven to be quite volatile given two “stock bubbles”, a “real estate bubble” and a “derivatives bubble”.  Now, with so much money flowing into Treasuries and interest rates so low, many are wondering if the next great event will be a “bond bubble” bursting!

While investors certainly need to be cautious and alert to the risk of investing in bonds today, do not to be misled by the media hype of another bubble about to burst.  It would not be recommended for investors to avoid bonds entirely due to the “inflated” fears.  While bond prices are relatively high and interest rates inordinately low, that is largely a reflection of the outlook for continued sluggish economic growth and restrained inflation in the near future.

Eventually, I believe that outlook will change and the Fed’s easy-money policy, budget deficits and spending in Washington, D.C. will have the potential to reignite inflation at some point down the road. But even if that eventually happens, it could take years for expectations and bond yields to reflect that scenario.

The phrase “bond bubble” conjures up visions of a meltdown the likes of stock and real estate markets’ free fall declines.  But bonds have never had such a devastating collapse. Indeed, the worst 12-month loss for the U.S. bond market was merely a fraction of recent equity losses.  Interestingly, although the values of bonds and bond funds do traditionally take a hit when interest rates rise, investors who own a bond fund or diversified portfolio of bonds should see their returns rise over time assuming they reinvest interest payments in new bonds paying the higher rates.

So what’s an investor to do?

The answer comes down to weighing the alternatives.  You could easily avoid a possible bond bubble by selling out of bonds. But then where would you put the proceeds? Stocks or CDs?

• Increasing your exposure to the equity markets could leave you at even greater risk than holding onto your bonds since stock downturns are generally far steeper than anything you’re likely to experience in bonds.
• Some people see safety in gold. If you mean safety in the sense of stability, it’s an illusion. Gold prices jump around like stock prices.
• You could sell your bond holdings, put the proceeds in cash equivalents like short-term CDs, money-market accounts or money funds and then get back into bonds after the bond bubble bursts (if that really happens) or the concern about a bubble passes. But in the meantime you could be earning a measly 1% or less — and you would have to have the luck of timing to get back into the bond market.

The fact is this, although it’s easy to think that with interest rates so low they have nowhere to go but up, no one really knows what the future of rates will be, let alone the timing of any movements. Given that uncertainty and the lack of decent alternatives, you could consider maintaining your position in bonds but take reasonable precautions to limit the downside should interest rates rise.

What precautions am I referring to?

• Make sure the bond positions in your portfolio are well diversified. While Treasury securities offer the most protection from default, they tend to be more sensitive to interest rate changes. So you might want to consider investing in a portfolio that contains both Treasurys to limit credit, or default, risk as well as high-quality corporate bonds that, because of their generally higher coupon rates and yields, won’t be hit quite as hard as Treasurys if rates rise.
• Stick to the short to intermediate end of the maturity spectrum, as bonds with shorter maturities tend to lose less value in periods of rising rates.  This is no silver bullet because with interest rates so low it’s very possible that rates on short-term issues could climb more than those on long-term bonds. Still, over longer periods short- and intermediate-term issues are likely to provide smoother returns and more protection from rising rates.  You could build a portfolio of short to intermediate term bonds on your own or more simply be reinvesting dividends in a broadly diversified bond fund that holds both Treasurys and high-quality corporates.  In fact, you can get the entire U.S. taxable bond market in a single fund with a total bond market index fund. That would put you squarely in the intermediate-term range.  If you want to tilt your holdings more toward the shorter-end, you could invest some of your money in a short-term bond index fund as well.
• You could devote a portion of your bond money to TIPS, or Treasury Inflation-Protected Securities  Two concerns though: Although TIPS give you a guaranteed “real” rate of return above inflation, that real rate has been quite thin lately as investors have been less concerned about inflation.
• Consider high-yield or junk bonds, but remember, they’re always riskier than investment-grade issues. And they could get hit especially hard if investors become convinced the U.S. economy is headed for a dreaded double-dip recession. So if you do decide to branch out, think of them as long-term components of a portfolio that you will periodically re-balance.

The bottom line though, is that timing the bond market makes about as much sense as timing the stock market…, none at all.  So despite the cries that the bond market is about to blow, I contend it would be a mistake to pull entirely out of bonds.  A more prudent way to go is to make sure your bond holdings are sufficiently diversified so your portfolio won’t be devastated should rates rise, and that it will also be in a position to benefit over time from higher rates.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. No client or prospective client should assume that any information presented and/or made available on this site serves as the receipt of, or a substitute for, personalized individual advice from the adviser or any other investment professional.

Investment Moves that Increase Financial Aid

Financial aid season for college students doesn’t kick off for another five months, but parents should take a close look at their investments and assets now to help maximize their child’s aid eligibility.

The Free Application for Federal Student Aid (FAFSA), which students must fill out in order to apply for federal, state and some school aid, determines the expected family contribution (EFC) – the amount that your family could be responsible to pay out of pocket toward college education. The lower the EFC, the more financial aid a student is likely to receive.

Positioning for Financial Aid

Parents who are considering selling investments, like stocks or mutual funds, or real estate should consider the impact their capital gains or losses will have on their child’s financial aid eligibility. In general, capital gains increase a family’s adjusted gross income (AGI), which tends to decrease their financial aid. In addition, this year presents a new opportunity for high income-earning investors to roll over their Individual Retirement Account (IRA) into a Roth IRA, which can provide plenty of tax perks but can hurt their request for financial aid.

Here are four investment moves that can impact the amount of financial aid a student gets.

Rolling an IRA into a Roth IRA

This year, a new opportunity became available to retirement savers, which permits those with more than $100,000 in annual modified gross income to roll over savings from a traditional IRA into a Roth IRA. With a Roth IRA, you’ll pay taxes upfront and you can withdraw tax free, assuming you’re at least age 59 1/2 and have one Roth IRA account open for at least five years. The upshot here is if you think your personal tax rate will be higher when you retire, it might be better to bite the bullet now and pay the taxes while you’re in a lower bracket. The drawback is that you’ll have to pay full income taxes on the conversion. And for individuals with children about to enter or in college, this rollover could lead to a smaller financial aid package. That’s because the entire amount that gets converted to the Roth IRA will show up on their tax return as income.  This could be extremely damaging for a family that would [otherwise] qualify for financial aid.

There is a way for parents to accomplish a rollover without sacrificing their child’s aid eligibility. The Department of Education is permitting colleges to ignore this conversion when they’re reviewing a family’s income for financial aid purposes. The ultimate decision will be made by each individual college, and parents will need to contact the school to request that they ignore this rollover as part of their income. Otherwise, there’s a greater chance that the school will take the rollover into account.

Managing capital gains and losses

Given the recent volatility in the U.S. markets, it’s likely that many investment portfolios have taken a hit. Although selling a stock at a loss is never ideal, such a move can help increase the amount of aid your child will receive.

Selling at a loss may only make sense if the individual isn’t planning to hold on to the investment for the long run. However, if you were investing for the short term or if you were hoping to use this money to help pay for college tuition, it might be time to sell. You may be better off to sell sooner rather than waiting for the future when you may have gains that would count against them in the financial aid formula. It might be better to take the loss that would be deducted from your earned income on their tax return and will lower the adjusted gross income.

Selling an investment at a profit will increase your AGI, which would likely lower the amount of financial aid  you can get. However, taxpayers in the 10% or 15% tax brackets who have long-term capital gains (requires a holding period of more than a year) pay zero taxes through the end of 2010.

Consider impact of selling real estate

Homeowners thinking about selling their home may or may not impact their child’s financial aid eligibility depending on how much their property fetches.

Currently, there is a capital gains exclusion of gains up to $250,000 in profit per person or $500,000 in profit per couple who files jointly; the sale doesn’t show up in your AGI unless the home sells and you’re left with a gain higher than these amounts. Homeowners must have owned and lived in the home for at least two years. (Sales of investment properties show up on your AGI regardless of how much they sell for.)

To determine capital gains, the cost basis, which is the price at which you bought your home and the cost of the improvements that you made, is subtracted from the selling price (including commission).

Shifting assets from child to parents

Parents often move assets into their children’s names for tax purposes – but this tactic will almost certainly hurt them come financial aid time. The federal needs analysis formula assesses child assets at a rate of 20%, while parent’s assets are assessed at up to 5.64%. The EFC will probably be higher when the assets remain in the child’s name and they could lose out on need-based aid, assuming they qualify.

One option is to move the assets from the student to the parent’s name before filing the FAFSA. Or parents can move some of their cash into their child’s 529 plan, which is treated as a parental asset. This money, however, will have to be used for educational purposes; otherwise, when you withdraw, the earnings will be taxed as ordinary income and hit with a 10% tax penalty. Also, such a move will probably make the most sense for someone moving cash from a bank account into a 529 plan.

* Consider the investment objectives, risks, charges and expenses of the 529 Plan carefully before investing.  Consultation with a tax adviser is recommended as Compass Asset Management Group. LLC does not provide tax advice.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

 

Savvy Investors Prefer Preferreds

 

Shares of Preferred Stocks offer corporate bond-like yields plus potential gains.  Sound attractive?  Let’s take a closer look.

Although bought and sold like common stocks, preferreds are more similar to bonds. They represent debt, not ownership in the corporation. They’re called preferred because a firm must pay its preferreds’ dividends before paying common stock dividends. During periods of market volatility, many investment-grade preferreds can possibly pay dividend yields higher than some bond coupons.

Like bonds, corporations issue preferreds to raise cash. At the IPO, the issuing firm sets the issue price, typically $25, and the annual dividend (usually paid quarterly), which generally remains fixed for the life of the preferred. The initial dividend yields (coupon rate) can range from 4% to 7%, depending on the market.

Because preferreds trade on the open market, the share prices vary with supply and demand. If the shares trade below the IPO price, the yield to new investors (market yield) moves above the original coupon rate, and vice versa, similar to bonds.

Preferreds have minimum 30-year maturities and some are perpetual, meaning that the issuer is not obligated to redeem them. Most preferreds are “callable”, meaning that the issuer has the right to call or redeem them at the “call price” on or after a specified date (call date), typically five-years after issue. The call price is usually the original issue price, but is sometimes slightly higher.

The issuer is not obligated to redeem the shares at the call date. Companies are most likely to call preferreds if prevailing interest rates are below the coupon rate. If so, they would save money by calling the existing shares and selling new preferreds paying lower rates.

Investors meanwhile, purchase preferreds mostly for the steady income. They usually don’t offer much appreciation potential. However, market volatility can create opportunities.

Before the IPO, the issuer designates the preferred dividends as “cumulative” or “non cumulative.” If cumulative, the issuer is obligated to pay the dividends. If it suspends the payouts, it still owes the money and must catch up by the maturity date, when it calls the shares, or before it pays dividends on its common stock. If non-cumulative, the issuer doesn’t have to make up missed dividends.

Corporations that issue preferreds typically sell more than one series, for instance, Series A, Series B, and so on. Unlike regular stocks, there is no fixed ticker symbol format for each series. Different websites and brokers might use different symbols for the same preferred. W

Let’s talk Yield to Call

Unlike market yield, which simply reflects the annual dividend and current trading price, the “yield to call” takes the call price and call date into account. For example, say that you pay $26 per share for 7% (coupon rate) preferreds originally issued at $25 that can be called in 12 months. The market yield is 6.7%, but you would lose $1 per share if the shares were called. If called in 12 months, your total return, or “yield to call,” would drop to 2.9%. Conversely, if you bought the same shares at $24 one year before the call date, the yield to call would jump to 11.5% if called in 12 months.

Successful preferred investing requires understanding the issuer’s ability to pay the prescribed dividends.

With banks paying next to nothing on money market accounts, this a good time for income-oriented investors to consider preferred stocks.  While these tools are clearly not meant for every investor, they provide a unique income strategy coupled with the added benefits of potential appreciation and complement a well thought out diversification strategy.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

 

The Road Trip Plan To Retirement

Most of us work hard all our lives to get to the endgame of retirement. But retirement  isn’t the endgame any more, as if it ever was.  Retirement is just the beginning of another stage of life.

With most retirements often lasting 25 or 30 years nowadays, financial experts are telling people to think of it in four phases, much like a road trip.

1. The planning phase
2. The exhilaration period
3. A more relaxed phase
4. Finally arriving at your destination.

Before you retire

Retirement shouldn’t be a single goal of money alone. Think about what you want your retirement to be. Do you plan to work a little? Volunteer? Travel? Devote yourself to a new pursuit?

Wherever your retirement ends up, you should start planning for it now by taking a good hard look at your current expenses, both a) fixed – mortgage, utilities, car payments; and b) variable – food, travel & health care. Then make changes based on your expected income and expenditures in retirement.

Remember to include quarterly and annual expenses like property taxes, club memberships and association fees. New retirees often find they initially spend about as much as they did when they were working, yet eventually many expenses trail off.

Once you understand your expenses, you’ll need to map out a plan to meet those income requirements. Think of this in three buckets:

• Cash. Clearly, this is your most secure bucket. Many advisors recommend that anyone nearing retirement keep about 10-12 months of expenses in cash to cover emergencies the other two buckets fail to cover. This can change later depending on your level of comfort.
• Income. The primary source to meet your ongoing income needs. This bucket includes pensions, Social Security, guaranteed income annuities, dividends and interest-bearing stock and bond funds.
• Investment. Because retirement, for many people, can last 30 years or so, a healthy chunk of your assets should still be invested for the long haul. So you’ll want a diversified allocation of stocks and bonds to provide long-term growth—an important factor in meeting the financial requirements of the latter stages of your retirement. The exact mix depends on your personal risk tolerance.

Pedal to the metal

Most people find the early years of retirement fairly active—some travel or start a business, or take part in other pastimes that can be costly. All that can add up to higher variable expenses, which means you’ll need more cash to pay for them.

If your income bucket isn’t producing enough, you could consider converting some long-term assets from the investment bucket into income-producing vehicles such as bonds, dividend-paying stocks and immediate or guaranteed income annuities. Best bet to convert: more aggressive stocks or mutual funds, as you’ll want to make your portfolio more conservative as you age.

What you choose to convert to depends on both risk tolerance and need—if you’re conservative, better to go with safer choices like bonds or annuities. If you’re comfortable with more risk—consider dividend-producing stocks.

But the decision to sell stock to fund your golf game shouldn’t be made lightly. You should tap your investment bucket as little as possible, so plan appropriately.

One key factor in this planning is taxes.  Traditionally, people just think about asset diversification, but tax-deferred accounts like IRAs, 401(k) plans and many annuities should take advantage of your tax situation and Social Security benefits.

Gearing down

The trip isn’t over but your speed isn’t quite what it once was. Your trips around the world have become visits to the grandchildren; you’ve passed on your business and are settling down.

Although ongoing expenses may be less than in earlier years of retirement, inflation has reduced your income’s purchasing power. Even if, as most economists predict, inflation won’t go much beyond today’s 2% to 3% a year, that can still hurt: $400,000 in current savings will require $487,000 in 10 years’ time to have the same purchasing power.

If you haven’t been keeping a close eye on your portfolio, this is a good time for a checkup. If your income-producing vehicles are coming up short, think about switching over more of your long-term assets. Again, take only what you’ll need. Overall, roughly 60% to 70% of your assets should be in the income bucket by this stage.

Finding a place to park

The active phase of your retirement is pretty much done with. Now, your goals are to make certain you’re comfortable while looking to make your assets last as long as necessary. This slice of retirement will likely include more doctors’ visits, prescription costs and other medical expenses than your earlier years. That makes security job one.

At this point, most retirees’ assets are in cash or ultra-safe securities like government bonds that offer both income and security. If you’re also planning your estate, you may want to consider keeping some money in a mix of high-quality bonds or blue-chip stocks that pay dividends to leave to your heirs.

Where to live will be a central issue. Congratulations if your health allows you to continue to live independently. Whether you stay where you are or move, you’re probably going to have to pay a substantial sum out of pocket for whatever care you require, which will mean a greater strain on your income bucket.

That illustrates the importance of planning for retirement for the long haul. Knowing what your and your family’s goals are is important, not just five years from now, but 20 and even 30 years from now.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

 

Protect Your Portfolio Using Options Strategies

Four ways to protect your stock portfolio using options.  Use these strategies to handle the market’s surprises.

Many investors have heard horror stories about options. “They’re too risky, too complicated, and too speculative,” some have warned. Contrary to that belief, options are not always risky or complicated. In fact, as you understand the advantages and disadvantages of options, you’ll appreciate how you can use options in conjunction with stocks. Although most investors’ primary goal is to earn profits, one constructive way of using options is to protect your stock portfolio from disasters. Here are four strategies to consider:

1. Sell a covered call This popular options strategy is primarily used to enhance earnings, and yet it offers some protection against loss. Here’s how it works: The owner of 100 (or more) shares of stock sells (writes) a call option. The option buyer pays a premium, and in return gains the right to buy those 100 shares at an agreed upon price (strike price) for a limited time (until the options expire). If the stock undergoes a significant price increase, that option owner reaps the profits that otherwise would have gone to the stockholder. Thus, the covered call writer sacrifices the possibility of earning profits over and above that previously agreed upon price — in exchange for that real cash payment. Additional details are required to gain a complete understanding of this idea, but the basic premise is this: cash now in exchange for profits that may never materialize.

2. Buy puts When you buy puts, you will profit when a stock drops in value. For example, before the 2008 crash, your puts would have gone up in value as your stocks went down. Put options grant their owners the right to sell 100 shares of stock at the strike price. Although puts don’t necessarily provide 100 percent protection, they can reduce loss. It’s similar to buying an insurance policy with a deductible. Unlike shorting stocks, where losses can be unlimited, with puts the most you can lose is what you paid for the put.   By picking a strike price that matches your risk tolerance, you guarantee a minimum selling price — and thus the value of your portfolio cannot fall below a known level. This is the ultimate in portfolio protection. The reason the vast majority of conservative investors don’t adopt this strategy is that puts are not cheap, and this insurance often costs more than investors are willing to pay. Yet the protection a put provides just may be priceless.

3. Initiate collars – Collars represent the most popular method for protecting portfolio value against a market decline. The collar is a combination of the two methods noted above. To build a collar, the owner of 100 shares buys one put option, granting the right to sell those shares, and sells a call option, granting someone else the right to buy the same shares. Cash is paid for the put at the same time cash is collected when selling the call. Depending on the strike prices chosen, the collar can often be established for zero out-of-pocket cash. That means the investor is accepting a limit on potential profits in exchange for a floor on the value of his or her holdings. This is an ideal tradeoff for a truly conservative investor.

4. Replace stocks with options The three previous strategies are relatively easy to use and involve little risk. The stock replacement strategy, on the other hand, can be tricky. If not done properly, the investor’s portfolio can vanish. The idea is to eliminate stocks and replace them with call options. The point of this strategy is to sell stock, taking cash off the table. The stocks are then replaced by a specific type of call option — one that will participate in a rally by almost the same amount of stock. Ideally, the chosen stocks can incur only limited losses when the market declines. This strategy is similar to buying puts: limited losses, profit on rallies, and costly to initiate. For example, let’s say you own 300 shares of XYZ Corp. You have a nice profit that you want to protect. The stock is currently at $54 per share. You sell the shares and buy three call options with a 50 strike price (giving you the right to buy shares at $50). You choose a fairly long time period — perhaps one year (minimizing commissions to replace options as they expire). It’s crucial to replace stock with options whose strike price is lower than the current stock price. The risk for inexperienced investors is that they may choose less expensive call options (out of the money). That is far too risky because there’s no guarantee those options will increase in value.

These four strategies are designed to protect a portfolio against varying amounts of loss. Don’t assume that they also guarantee profits.  In fact, before using any option strategy, the best advice is to consult with a professional to both gain a more thorough understanding of what it is you are attempting to do and the best advice in how to do it.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.