Mark J. Alaimo, CPA/PFS, CFP^® has been named a Principal in the firm and has been named as a Manager of Wealth Management Advisors, LLC (WMA).  Mr. Alaimo has been with the firm for over 6 years and assists clients with financial and tax matters in both WMA as well as within our sister firm, Sullivan Bille PC.  He holds a Master of Science Degree in Financial Planning from Bentley University and a Bachelor of Science in Accountancy from Bentley University. He is an alumnus of Central Catholic High School in Lawrence, MA and is active in his community in several capacities.   We appreciate his continued work and congratulate him on his new role!

The window of opportunity for many tax-saving moves closes on December 31. So set aside some time to evaluate your tax situation now, while there’s still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011. 1. Deferring income to 2012 means postponing taxes Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you’re able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year. 2. Paying deductible expenses sooner may help you in 2011 Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012. 3. Income tax rates to remain the same in 2012 The same six federal income tax rates that apply in 2011 will apply in 2012. So, depending upon your income, you’ll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. And, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you’re in the 10% or 15% tax rate brackets, a special 0% tax rate will generally continue to apply. 4. Is AMT a factor? If you’re subject to the alternative minimum tax (AMT), special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You’re more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. If you’ve been subject to the AMT in the past, or think that you might be for 2011, you’ll want to make sure that you understand how the AMT rules might affect you. 5. IRA and retirement plan contributions Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren’t deductible, so there’s no tax benefit for 2011–they’re still worth considering, though, because qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012. 6. Special distribution requirements at age 70½ Once you reach age 70½, you’re generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. It’s important to make withdrawals by the date required–the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011). 7. Depreciation and expense limits to drop for business owners and the self-employed If you’re a small business owner or a self-employed individual, you’re allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this “bonus” first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012. For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $139,000. 8. Last chance to deduct energy-efficient home improvements This is the last year you’ll be able to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers. However, there’s a lifetime credit cap of $500 ($200 for windows). So, if you’ve claimed the credit in the past–in one or more years since 2005–you’re only entitled to the difference between the current cap and the amount you’ve claimed in the past. 9. Other expiring provisions Barring additional legislation, this is the last year that you’ll be able to elect to deduct state and local general sales tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals. 10. Get help Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. A financial professional can help you evaluate potential opportunities, and can keep you apprised of any last-minute legislative changes.

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How Much to Withdraw

Historically, financial advisors have recommended that retirees limit annual withdrawals to a maximum of 3% to 5% of assets, adjusted for inflation, to limit the chances of running out of money. Yet a recent survey indicated the following:¹

• Nearly one-third of respondents believed they could withdraw between 7% and 10% annually.
• Just over 10% anticipated that they could withdraw between 11% and 15%.

Many respondents also underestimated the percentage of their preretirement income they would need annually to pay for living expenses. Only 45% of respondents understood that retirees typically need between 80% and 90% of preretirement income to maintain
their preretirement standard of living.

Factors Affecting Retirement Income

If your retirement assets are running short, a variety of factors are likely to influence how much you will need during your later years:

• Your retirement age.  Collecting Social Security at your earliest opportunity, which for most people is age 62, results in a permanent reduction of between 20% and 30% in the amount of your monthly benefit.
• Medical expenses. It’s no secret that Medicare is experiencing financial stress and employer-sponsored health care plans for retirees are less generous than they formerly were. The Employee Benefit Research Institute has estimated that a couple retiring at age 65 with median drug expenses would need to accumulate $271,000 to ensure a 90% probability that they will have enough to pay for medical care. This amount does not include the cost of long-term care, which would make the estimate even higher.
• Housing. A large mortgage or other indebtedness limits financial flexibility. If you live in spacious quarters, consider how you will be able to finance mortgage payments, taxes, maintenance, utilities, condo fees, and other expenses.
• Discretionary costs of living. It can be difficult to control expenses for necessities such as utilities and health care. But variable costs, such as restaurant meals and vacations, are a different matter. Review how you may be able to trim variable costs before you retire without leading a Spartan lifestyle. Getting used to a more efficient mode of living may help you in your transition to retirement.

###

Source/Disclaimer:

¹ Source: MetLife, Met Life Mature Market Survey, October 2011.

November 2011 — This column is provided through the Financial Planning Association (FPA), the membership organization for the
financial planning community, and is brought to you by Stephen P. Ahern, CPA/PFS, CFP®, a local member of FPA.

Medical Economics is the leading business resource for office-based physicians, providing the expert advice and shared experiences doctors need to successfully meet today’s challenges in practice management, patient relations, malpractice, electronic health records (EMR/EHR), career development and personal finance.

Stephen is one of six advisors in Massachusetts being recognized.

Please join us in congratulating Steve on this honor.

What can you do to boost your returns?

Strategies to consider

Here are six possibilities, roughly in order of increasing risk:

1. Online savings accounts. You can boost your income modestly but safely by opening an online savings account. The annual interest rate for a traditional, brick-and-mortar bank’s checking and savings accounts generally is 0% to a paltry 0.10%. In contrast, an online savings account might pay as much as 1% or more.

Higher rates and the $250,000-per-depositor FDIC protection offered by most online banks make this a painless and virtually risk-free way to make your money work harder. But if you’ll be leaving one or more accounts at your traditional bank, consider any possible fee increases or interest rate reductions it may impose because of your lower balance there.

2. Longer-term CDs. If you’re willing to deposit your money in a three-year CD, you can earn about 1.5% as of this writing, and close to 2% for a five-year CD. However, be sure you know the penalty for early withdraw. In many cases, this penalty is modest enough not to be an obstacle if you’re hesitant to “lock up” your money.

At one online bank, for example, the penalty for early withdrawal on any CD is 60 days of interest. For an account paying 2% annually, such a penalty amounts to 0.33% of your principal (just $3.30 per $1,000). If interest rates increased significantly after you bought such a CD, you could withdraw the money before your term was up and reinvest it at the higher rate.

3. Short-term bond funds. A short-term investment-grade bond fund at one well-known fund family paid 1.74% annually and had a 10-year average annual return of 4.11% as of this writing — well above the lesser rates offered by money market funds. Understand, though, that such a fund is subject to both interest-rate and credit risks.

If interest rates rise, bond fund prices generally fall — though the damage typically is more muted in funds that hold securities with shorter maturities. Credit risk can be a factor if the economy takes a turn for the worse. In that case, a flight to quality can hurt debt perceived as risky, which sometimes includes corporate bonds with investment-grade credit ratings.

4. GNMA (AKA “Ginnie Mae”) funds. These funds invest in government backed Mortgage securities.  They backed by the full faith and credit of the U.S. government and typically offer higher yields than U.S. Treasuries. As of this writing, a number of these funds are paying in excess of 3% annually.  Be aware that the government guarantee applies only to the securities (mortgages) purchased inside a GNMA fund, not to your investment into the fund itself. Money invested in a GNMA fund is at risk like any other mutual fund investment, due to movements in interest rates, among other factors.

5. High-yield bonds. Also known as junk bonds, high-yield bonds are lower-quality corporate debt. There’s no doubt that yields in this asset class can be tantalizing. Even during good economic times, junk-bond yields normally are several percentage points higher than those of comparable Treasuries.

Look out, though, if investors begin to worry about whether corporate profits can support those debt payments. Junk-bond prices can quickly fall. A good time to invest in this asset class generally is when economic activity is strengthening.

6. Dividend-paying stocks. There are several reasons to consider this category. Corporate balance sheets generally are in solid shape, and the valuations of the shares of many large, dividend-paying companies have fallen near multi-decade lows.

Additionally, many of these firms have a long history of boosting their dividends annually, increasing shareholders’ income. There’s also the potential for capital appreciation. That said, even high quality stock prices can fall, so be forewarned.

Diversification rules!

Remember yield is only one component of return on a portfolio and that “total return” on a portfolio is typically better and a more important focus than the yield itself.  It is better to have a more diversified approach to investing, seeking long-term total returns.  Gains can be taken from stocks, bonds, etc. when the portfolio is rebalanced so that you get additional tax advantaged income and you are not reliant solely on the yields in a low rate environment like the current one.

Before reaching for just higher yields, it’s important to be clear about your priorities. Your advisor can provide assistance in helping you find a mix of investments that suits your risk tolerance and income needs.

The maximum amount you can contribute to a traditional IRA or Roth IRA in 2012 remains at $5,000 (or 100% of your earned income, if less), unchanged from 2011. The maximum catch-up contribution for those age 50 or older remains at $1,000. (You can contribute to both a traditional and Roth IRA in 2012, but your total contributions can’t exceed this annual limit.)

Traditional IRA deduction limits for 2012

While the maximum contribution hasn’t changed, the income limits for determining the deductibility of traditional IRA contributions have increased (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household, and your income (“modified adjusted gross income,” or MAGI) is $58,000 or less (up from $56,000 in 2011). If you’re married filing a joint return, you can fully deduct your IRA contribution if your MAGI is $92,000 or less (up from $90,000 in 2011). If you’re not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $173,000 or less (up from $169,000 in 2011).

*If you’re not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $173,000 to $183,000, and eliminated if your MAGI exceeds $183,000.

Roth IRA contribution limits for 2012

The income limits for determining how much you can contribute to a Roth IRA have also increased. If your filing status is single/head of household, you can contribute the full $5,000 to a Roth IRA in 2012 if your MAGI is $110,000 or less (up from $107,000 in 2011). And if you’re married filing a joint return, you can make a full contribution if your MAGI is $173,000 or less (up from $169,000 in 2011). (Again, contributions can’t exceed 100% of your earned income.)

Employer retirement plans

The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan has increased for 2012. The limit (which also applies to 403(b), 457(b), and SAR-SEP plans) is $17,000 in 2012 (up from $16,500 in 2011). If you’re age 50 or older, you can also make catch-up contributions of up to $5,500 to these plans in 2012 (unchanged from 2011). (Special catch-up limits apply to certain
participants in 403(b) and 457(b) plans.) If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($17,000 in 2012 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans,
and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan–a total of $34,000 in 2012 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan in 2012 remains at $11,500 ($14,000 if you’re age 50 or older), unchanged from 2011.

Finally, the maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2012 is $50,000 (up from $49,000 in 2011), plus age-50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement
plan.)

Note: Contributions can’t exceed 100% of your income.

Source: Broadridge – Forefield

To read the Trends in College Pricing 2011 report, visit www.collegeboard.com/trends.

Note that the “total average cost” figure includes tuition and fees, room and board, books and supplies, transportation, and a small amount for miscellaneous expenses. This figure is often referred to as the “cost of attendance.”

Public colleges (in-state students)

• Tuition and fees increased an average of 8.3% from last year to $8,244
• Room-and-board costs increased an average of 4.0% to $8,887
• Total average cost for 2011/2012 is $21,447

Public colleges (out-of-state students)

• Tuition and fees increased an average of 5.7% from last year to $20,770
• Room-and-board costs increased an average 4.0% to $8,887
• Total average cost for 2011/2012 is $33,973

Private colleges

• Tuition and fees increased an average of 4.5% from last year to $28,500
• Room-and-board costs increased an average of 3.9% to $10,089
• Total average cost for the 2011/2012 year is $42,224

Student aid trends

The College Board also publishes an accompanying report every October called Trends in Student Aid that examines financial aid in more detail. To read the report, visit www.collegeboard.com/trends .

The College Board noted that last year, approximately 46% of all grant aid came from the federal government, 36% came from colleges, 9% came from state governments, and about 9% came from employers and other private sources. Grant aid is the most desirable type of financial aid because it doesn’t need to be paid back.

From Broadridge Forefield

Knowing what you own and why you own it

When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether those reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits into your overall portfolio can also help you consider whether a lower price might actually represent a buying opportunity. If you’re not really sure what role a security plays in your portfolio, it’s never too late to find out. That knowledge can be important, especially if you’re considering replacing your current holding with another investment.

Have a game plan

Setting predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. If you’re an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when a security or index rises by a certain percentage, and buy when it has fallen by a set percentage. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not guarantee a profit or protect against the possibility of loss, but it can help you understand and balance your risk in the future.

Remembering that everything is relative

Asset allocation generally is responsible for most of the variance in portfolio returns. If you’ve got a well-diversified portfolio, it could be useful to compare its performance to relevant benchmarks. If your investments are at least matching those benchmarks, that realization might help you feel better about the your long-term strategy. Just because a particular index may have dropped doesn’t necessarily mean your entire portfolio is down by the same amount. Even when everything seems to be struggling, some asset classes may be struggling less than others.

Telling yourself that this too shall pass

The stock market is historically cyclical. Though past performance is no guarantee of future results, there have been a half-dozen previous bear markets–declines of 20% or more–since the early 1970s,* and though it may have taken a while, the market eventually bounced back every time. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Neither the ups nor the downs are likely to last forever, even though at the time they may feel as though they will. Even in the midst of the Great Depression, there were short-term rallies and trading opportunities. And in some cases, people built fortunes over time by investing carefully just when things seemed bleakest. Even
if you feel you need to make changes in your portfolio, they don’t necessarily need to happen all at once. Don’t hesitate to call upon us for advice.

*Source: Stock Trader’s Almanac 2011

Remembering your road map

If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class into another. You could put any new money into a type of investment you feel is well-positioned for the future. You could set a stop-loss order to prevent your investment in a security from falling below a certain level, or have an informal threshold below which you will not allow a given investment to fall before selling. Though all investing involves risk, including the possible loss of principal, and there can be no guarantee that any strategy will be successful, there are many possible ways to pursue your investment goals.

Getting expert help can assist you in determining which if any might be useful to you.  Call us, we can help.

What concerns us right now is that so many people are NOT receiving good guidance from their Advisors (if they have one!).  If someone important to you has expressed concern with these markets please know that we would be happy to speak with them and even take a quick peek at their current portfolio in order to head off any knee jerk decisions that could have long term negative consequences to their financial lives.

From many years of managing many portfolios we have always found the following to be true:  A long term perspective and a well diversified portfolio will get you the best results over time.  Sometimes the pot will go down with the markets, and sometimes it will rise.  Over time the portfolio should trend up and the short-term sharp ups and downs (volatility) in the portfolio will muted if it is well diversified and you own great funds with great managers who seek out the best companies in their area of expertise. 

This is what we put together, we monitor, and the long-term performance has proven to be the best investment approach.

Courtesy of  Broadridge Financial Solutions, Inc. with additional comments by Stephen P. Ahern, CPA/PFS, CFP

Investing with an eye to the long term is particularly important with stocks. Historically, equities have typically outperformed bonds, cash, and inflation, though past performance is no guarantee of future results and those returns also have involved higher volatility.

It can be challenging to have Buffett-like patience during periods such as 2000-2002, when the stock market fell for 3 years in a row, or 2008, which was the worst year for the Standard & Poor’s 500 since the Depression era. Times like those can frazzle the nerves of any investor, even the pros. With stocks, having an investing strategy is only half the battle; the other half is being able to stick to it.

Just what is long term?

Your own definition of “long term” is most important, and will depend in part on your individual financial goals and when you want to achieve them. A 70-year-old retiree may have a shorter “long term” than a 30 year old who’s saving for retirement.

Your strategy should take into account that the market will not go in one direction forever–either up or down. However, it’s instructive to look at various holding periods for equities over the years. Historically, the shorter your holding period, the greater the chance of experiencing a loss. And while it’s true that the S&P 500 showed negative returns for the two 10-year periods ending in 2008 and 2009, which encompassed both the tech crash and the credit crisis, the last negative-return 10-year period before then ended in 1939.

The benefits of patience

Trying to second-guess the market can be challenging at best; even professionals often have trouble. A study published in the American Economic Review (“What Are Stock Investors’ Actual Historical Returns? Evidence from Dollar-Weighted Returns” by Ilia D. Dichev, Volume 97, Issue 1) showed that stock investors who try to time the market typically experience lower returns than quoted historical returns on stocks, which reflect a buy-and-hold approach.

The Power of Time

Note: Though past performance is no guarantee of future results, the odds of achieving a positive return in the stock market have been much higher over a 5- or 10-year period than for a single year. Calculations by Forefield based on total returns on the S&P 500 Index over rolling 1-, 5-, and 10-year periods between 1926 and 2010.

Another study, “Stock Market Extremes and Portfolio Performance 1926-2004,” done by the University of Michigan, showed that a handful of months or days account for most market gains and losses. The return dropped dramatically on a portfolio that was out of the stock market entirely on the 90 best trading days in history. Returns also improved just as dramatically by avoiding the market’s 90 worst days; the problem, of course, is being able to forecast which days those will be. Even if you’re able to avoid losses by being out of the market, will you know when to get back in?

Keeping yourself on track

It’s useful to have strategies in place that can help improve your financial and psychological readiness to take a long-term approach to investing in equities. Even if you’re not a buy-and-hold investor, a trading discipline can help you stick to a long-term plan.

Have a game plan against panic

Having predetermined guidelines that anticipate turbulent times can help prevent emotion from dictating your decisions. For example, you might determine in advance that you will take profits when the market rises by a certain percentage, and buy when the market has fallen by a set percentage. Or you might take a core-and-satellite approach, using buy-and-hold principles for most of your portfolio and tactical investing based on a shorter-term outlook for the rest.

Remember that everything’s relative

Most of the variance in the returns of different portfolios is based on their respective asset allocations. If you’ve got a well-diversified portfolio, it might be useful to compare its overall performance to the S&P 500. If you discover you’ve done better than, say, the stock market as a whole, you might feel better about your long-term prospects.

Current performance may not reflect past results

Don’t forget to look at how far you’ve come since you started investing. When you’re focused on day-to-day market movements, it’s easy to forget the progress you’ve already made. Keeping track of where you stand relative to not only last year but to 3, 5, and 10 years ago may help you remember that the current situation is unlikely to last forever.

Consider playing defense

Some investors try to prepare for volatile periods by reexamining their allocation to such defensive sectors as consumer staples or utilities (though like all stocks, those sectors involve their own risks). Dividends also can help cushion the impact of price swings.

If you’re retired and worried about a market downturn’s impact on your income, think before reacting. If you sell stock during a period of falling prices simply because that was your original game plan, you might not get the best price. Moreover, that sale might also reduce your ability to generate income in later years. What might it cost you in future returns by selling stocks at a low point if you don’t need to? Perhaps you could adjust your lifestyle temporarily.

Use cash to help manage your mindset

Having some cash holdings can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to act thoughtfully instead of impulsively. An appropriate asset allocation can help you have enough resources on hand to prevent having to sell stocks at an inopportune time to meet ordinary expenses or, if you’ve used leverage, a margin call.

A cash cushion coupled with a disciplined investing strategy can change your perspective on market downturns. Knowing that you’re positioned to take advantage of a market swoon by picking up bargains may increase your ability to be patient.

Know what you own and why you own it

When the market goes off the tracks, knowing why you made a specific investment can help you evaluate whether those reasons still hold. If you don’t understand why a security is in your portfolio, find out. A stock may still be a good long-term opportunity even when its price has dropped.

Tell yourself that tomorrow is another day

The market is nothing if not cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may get another chance. If you’re considering changes, a volatile market is probably the worst time to turn your portfolio inside out. Solid asset allocation is still the basis of good investment planning.

Be willing to learn from your mistakes

Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions.

From many years of managing many portfolios we have always found the following to be true: 

A long term perspective and a well diversified portfolio will get you the best results over time.  Sometimes the pot will go down with the markets, and sometimes it will rise.  Over time the portfolio should trend up and the short-term sharp ups and downs (volatility) in the portfolio will muted if it is well diversified and you own great funds with great managers who seek out the best companies in their area of expertise. 

This is what we put together, we monitor, and the long-term performance has proven to be the best investment approach.

Courtesy of  Broadridge Financial Solutions, Inc. with additional comments by Stephen P. Ahern, CPA/PFS, CFP