A Brighter Future

The Recovery

After a tumultuous year in 2008 and a two-year recession, the global economy has begun to recover. People naturally are impatient with the slow pace and worried that the future is murky. No one knows whether the economy will slip into another recession or we’ll have a sluggish and jobless recovery. But it’s also possible that the recovery that has been sneaking up on us may turn out to be a strong and durable one.

What we do know for sure is that the stock market has not yet discounted a robust future. The Dow is no higher than it was 11 years ago. The market has not even climbed back to the levels of the dark period of last fall. If the historical trend of 10 percent annual growth had taken place over the last decade, the market should be more than double the current level. Over the last decade, we have had the worst stock market returns since reliable data became available in 1926. The market returns this decade are worse even than the ones during the Great Depression in the 1930s. The good news is that frequently the stock market does well following bad periods.

Value Based Financial Planning: An Hour to Change Your Life

It’s important to think about the big picture, but you can’t control the global economy. You can, however, control how you handle your personal financial situation and that’s what we do at Lexington Avenue Capital. It’s common not to have a plan for your financial future and little idea of exactly what your goals are. Most investment portfolios are a hodgepodge of accounts and securities. Frequently spouses fail to communicate on their finances. With value based financial planning, we try to bring order to this chaos. Everyone has unique needs and desires and resources. We help you clarify your goals, understand the trade offs and develop a financial road map to help you reach your most important objectives with the highest probabilities of success. While we want to help you define the big picture, we’ll handle the little details too so we can lower your stress and spare you some worries.

Taking Social Security Seriously

Frequently we work with people approaching retirement and we find that until they are actually on the threshold of filing for Social Security benefits, they don’t take it seriously. For most people, Social Security will be an important part of their income in retirement. Making sure that both spouses maximize benefits can be a complicated process and people should begin understanding the ramifications in their 50s. At that age, it’s still not too late to influence their individual Social Security formula, which is based on an adjusted 35-year earnings history. Recently we posted an article on our blog that goes into more detail about this. http://luxenberginfo2.blogspot.com/2009/12/taking-social-security-seriously.html

Year End Actions to Lower Taxes

Before year-end, it’s sometimes possible to take actions to lower taxes. One possibility given the big bear market, is to realize tax losses on securities. This can be done by selling individual securities or mutual funds, which may be lower in price than when they were purchased. These losses can offset capital gains on other securities or be saved for future years. Also, $3,000 of such losses can be used each year to offset ordinary income.

Roth IRAs in 2010 – One Time Only Conversion Opportunity

Soon we will be hearing a lot about the opportunity to convert retirement savings to Roth accounts in 2010. In one of the earlier tax bills, Congress approved a one-year opportunity for high bracket earners to convert portions or all of some retirement accounts into Roths. In doing so, people will have to accelerate the taxes due on these accounts but the payments can be divided between payments in 2011 and 2012. Once accounts are converted to Roths and held for five years, no taxes will be owed when the money is distributed. Also, unlike ordinary IRAs, there are no required distributions from Roths so they are a good estate planning vehicle. This shift is especially beneficial if one has money outside of retirement accounts to cover the taxes. This opportunity should be evaluated on an individual basis and we are geared up to help with that decision.

Lexington Avenue Capital Management

Unbiased, fee-only advisors working with individuals to help them develop sound financial strategies to reach their most important goals. Call us today for a complimentary Financial Road Map planning session or other financial questions.

Larry Luxenberg
luxenberg@lexingtonave.com
845-708-5306
www.lexingtonave.com

Investment Advisory Services provided through Partnervest Advisory Services LLC, a Registered Investment Advisor. Past performance is not indicative of future returns. Products with issuer guarantees carry the risk of issuer default.

Taking Social Security Seriously

A Key Decision for Retirement Planning

Most people who are younger than age 62 do not take Social Security seriously. For decades, the media has hammered into people that Social Security is going bankrupt and they cannot depend on it for retirement. Changes in the program will be necessary to keep it solvent but that has happened in the past and will likely happen again. The most recent major reforms occurred in 1983 and changes are needed again as life expectancies increase and major changes occur in Americans’ work habits.

Still, each year the Social Security Administration sends out more than $600 billion in benefits and nearly all Americans depend on the payments as one of their top four assets in retirement. Understanding the program is vitally important for most people.

One of the most important decisions people make about retirement is when to begin receiving Social Security benefits. And yet many people either do little analysis or only simple calculations. Delaying benefits can sometimes result in doubling monthly payments so it’s worth spending time on the decision. Many current retirees will collect more than $1 million in benefits from Social Security.

Ideally, Social Security should be part of your total retirement planning and should begin 10 to 15 years before full retirement age, now 66. Benefits are based on reported income during your top 35 working years. The formula is skewed toward average wage earners so people in their 50s can still influence benefits. In some cases people might want to take part-time jobs or even decline to use deductions and pay more taxes to maximize future benefits.

To the extent people analyze the decision, most use a simple break-even analysis that calculates when the higher payments received at a later age would surpass the smaller payments received for more years. This analysis ignores many factors and it’s potentially misleading. Frequently, people using this analysis underestimate their life expectancy. One quarter of the people who start Social Security at full retirement age will live into their 90s. A mistaken analysis will cost them dearly for decades.

The critical ages for influencing Social Security benefits are the decades of the 50s and 60s. By age 70, everything will be cast in stone. The Social Security formula is skewed toward modest earners, so people in their 50s can still greatly affect their Social Security benefits. Self employed professionals and spouses who left the workforce to raise children are among those who could benefit most from an analysis.

The analysis is complicated for one person but it is much more complicated for a couple, particularly when the ages and earnings histories diverge. Other factors to take into account are that benefits are cut between ages 62 and 66 if the person continues to work; one spouse can receive half the benefits of the other upon reaching full retirement age; and a survivor receives the highest benefits of either spouse. Social Security benefits are also taxed once the retiree reports income above a certain threshold. Those taxes now begin on couples with incomes about $32,000 and as much as 85 percent of the benefits are subject to taxation if their combined income is more than $44,000.

Each person or couple’s situation is unique but a proper analysis of when to apply for Social Security benefits should weigh at least 13 factors: age of each spouse, health, family history, joint life expectancy, previous marriages, current and future spending, retirement plans, tax bracket, reduction in benefits if they work before full retirement age, current assets, future sources of income such as pensions or inheritances, and life insurance. The Social Security website, www.socialsecurity.gov, provides a wealth of information and calculators where one can access his own earning history, but no one source of analysis takes everything into account. An accountant or financial advisor should be able to calculate different scenarios and advise on the risks and advantages of each. It is a complicated topic; long academic papers are being written on the subject.

In all cases it pays to begin taking your own benefits by 70 or spousal benefits at full retirement age. If you receive retirement benefits early, between 62 and 66 now, the benefits are permanently reduced by as much as 35 percent depending on year of birth. Between 66 and 70, your own benefits increase by 8 percent a year. Spousal benefits, which are a maximum of 50 percent of the higher earning spouse’s, cannot increase past full retirement age. However, survivor benefits do increase. Once the higher earning spouse dies, the survivor receives benefits equal to those of the higher earning spouse so it’s important to take joint life expectancies into account.

It’s not uncommon for people today to underestimate their life expectancy and outlive their assets. This is particularly important for women, who on average outlive their spouses and will end up relying on one Social Security check in their later years. Getting the best possible answers on Social Security could make a big difference in the comfort of one’s retirement.