Issue 32.09

In 2010, anyone may convert a traditional IRA to a Roth IRA. No income limits will stand in the way of the conversion.  Should you do it? Here’s why it may (or may not) make sense for you to go Roth next year.

Why you might want to consider it.  A Roth IRA permits tax-free growth and tax-free income distributions in retirement (assuming you are age 59½ or older and have held your Roth account for 5 years or longer).  You can contribute to a Roth IRA after age 70½, without having to take mandatory withdrawals.  While contributions to a Roth IRA aren’t tax-deductible, the younger you are, the more attractive a Roth IRA may seem.

However, older investors have reason to go Roth as well – especially if they don’t really need to withdraw IRA assets.  Under present tax law, converting an untapped traditional IRA to a Roth will shrink the size of your taxable estate, and careful estate planning could foster decades of tax-free growth for those IRA assets.

Currently, if you name your spouse as the beneficiary of your Roth IRA, your spouse can treat the inherited IRA as his or her own after you die and forego withdrawals.  So those Roth IRA assets can keep compounding untaxed across the rest of your spouse’s life.

If your spouse then names a son or daughter as a beneficiary, that heir has the choice to make minimum withdrawals according to his or her life expectancy, all while the assets continue to compound tax-free. Currently, withdrawals from an inherited Roth IRA are not subject to income tax.

Why you may want to think twice about it.  The IRS regards a traditional IRA-to-Roth IRA conversion as a distribution from a traditional IRA – a taxable event.  You’ll need to pay taxes on the entire amount of the conversion.  Do you have the money to do that?

Keep in mind, however: with the market down, many IRA values are lower than they have been for years.  That translates to paying less tax on gains.  It is also worth remembering that tax rates could increase in the years ahead – another reason why now may be a good time to convert.  (You could simply do a partial Roth IRA conversion if converting the full amount would send you into a higher tax bracket.)

You may be tempted to use the current IRA assets to pay the conversion tax, but should you?  If you’re younger than 59½, you’re looking at a 10% penalty on the amount you withdraw, and you’ll lose the chance for tax-free compounding of those assets within the Roth IRA.

In two weeks: Why you may want to fund your Roth.

Issue 30.09

Information vs. instinct.  When it comes to investing, many people believe they have a “knack” for choosing good investments.  But what exactly is that “knack” based on?  The fact is, the choices we make with our assets can be strongly influenced by factors, many of them emotional, that we many not even be aware of.

Deal du jour.  You’ve heard the whispers, the “next greatest thing” is out there and YOU can get on board, but only if you hurry … sound familiar?  A shrewd investor will turn away from spur-of-the-moment trends and seek out solid, proven investments with consistent returns.

Risky business.  Many people claim NOT to be risk-takers, but that is not always the case.  Most proficient investors aren’t reluctant to take a risk, they are reluctant to accept a loss.  If taking a risk could help you retire five years sooner, would you take it?  What if the loss involved working an extra ten years before retiring … is it still a good risk?  By weighing both the potential gain AND the potential loss (while keeping your final goals in mind), you can more wisely assess what constitutes an acceptable risk.

The crystal-ball approach.  Some investors attempt to predict the future based on the past.  As we all know, just because a stock rose yesterday, that doesn’t mean it will rise again today.  We know this, but often we “shrug off” this knowledge in favor of hunches.  

The gut-driven investor.  Some investors tend to pull out of investments the moment they lose money, then invest again once they feel “driven” to do so.  This method of investing can result in huge losses.  For example, let’s say you have $100 and are given 10 opportunities to bet $10 on a 50/50 chance event.  If you lose the bet, you lose the $10.  But if you win the bet, you make $25.  What would you do?  How many times would you bet?  While the outcome is based on chance (and therefore impossible to predict), we do know this … if you were to bet at every single opportunity, you’d stand an 87% chance of ending up with more than $100.  So this is yet another argument for long-term investing.

Eliminating emotion.  Many investors “stir up” their investments when major events happen … including births, marriages or deaths.  They seem to get a renewed interest in their stocks and/or begin to second-guess the effectiveness of their long-term plans.  It’s a case of action-reaction: they invest in response to short-term needs, instead of their long-term financial goals.  Many times, there is no need to fix what isn’t broken, or make a U-turn away from what they’ve done right.  By enlisting the assistance of a qualified financial professional (and relying on their skill and expertise) you can be sure that investment decisions are based on facts, and made to suit your long-term objectives rather than your personal, changing emotions or short-term needs.

Scott S. Lovell is the founder of Lovell Hathaway, Your Retirement Specialist^SM , and is a registered representative offering securities and advisory services through Geneos Wealth Management, Inc.  Member FINRA and SIPC.  For additional information, Scott can be reached at (435) 656-2518.

Issue 27.09

What should you do with that old 401(k)?

Options, options, options … There are many misconceptions about what must be done with a 401(k) when someone leaves a company.  Some people think they have to cash out their 401(k) upon leaving a job.  Others think they must “roll it over” into a new 401(k).  Still others believe that they must leave the 401(k) where it is.  None of these are true … and none are false.  These aren’t “musts”, they are options.  The big question is, which option is the right option for YOU?

Leaving it where it is … If you have enough money in your current 401(k) to meet the minimum requirement, you could leave your money where it is.  Should you?  Well, it depends.  If you feel the plan has good investment choices and the annual fees are reasonable, leaving your money there to mature could be a good option for you.

Direct rollover into a new 401(k) … If your new employer offers a 401(k), you could choose to “roll” your money into that plan, but then you will be limited to the new plan’s investment options.  So should you?  Once again, it depends.  You’ll want to look into the structure of the new plan, the fees and the investment options.

Moving the money into an IRA rollover account… If managing where your account is held and how it is invested is important to you, this option gives you a great deal of flexibility.  It also offers you more distribution options, once you are eligible.  Additionally, you could open a brokerage account or purchase a CD, provided the account is titled as your IRA Rollover Account.

Cashing out your 401(k) … The temptation to get a lump sum of money can be too great for some, especially if they have just lost their job or feel that they are in some sort of financial bind.  They may choose to cash out their 401(k) upon leaving a job.  But what are they giving up?  Well, 10% for starters.  If they are younger than 59 ½ years old and cash out their 401(k), most of them will incur a 10% penalty.  Additionally, they will owe taxes on the amount they cash out.  

Fighting temptation now could lead to big rewards later … For example, let’s say a 35-year-old leaves a job and rolls over $15,000 from a 401(k) into an IRA earning an average of 7% annually, letting the money mature over 30 years … by the time of retirement, that money could potentially grow to over $100,000.

Making a decision … If you’re unsure which choice is best for you, or if you’d like to learn more about your options, I would recommend speaking with a qualified financial advisor.  Scott S. Lovell is the founder of Lovell Hathaway, Your Retirement Specialist^SM , and is a registered representative offering securities and advisory services through Geneos Wealth Management, Inc.  Member FINRA and SIPC.  For additional information, Scott can be reached at (435) 656-2518.

This material was written by Peter Montoya, Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative or Broker/Dealer give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Issue 25 & 26

Part 2

The market.  Think of it like a flea market.  Rather than travel all over town, a flea market offers you a central location where buyers and sellers can meet up.  The stock market isn’t all that different.  Stock markets are simply gathering places for stock owners to buy and sell stock securities.

What is a brokerage?  A broker is a conduit for the buying and selling of stocks.  For example, let’s say you want to buy a stock that’s listed on the New York Stock Exchange (NYSE).  Well, that stock is bought and sold on the floor of the NYSE.  So, unless you are authorized to trade at the exchange and want to travel to New York, you instead enlist the services of a broker to take care of your buying and selling for you.  Brokerages pay fees to become members of a stock exchange and access the “floor” of an exchange for trading.  They then buy and sell stocks on behalf of their clients.

So, how do you get started?  There are all kinds of ways to get started and a myriad of brokerage choices, including discretionary dealing (where the brokerage chooses stocks on your behalf), advisory dealing (where the brokerage gives you advice, but leaves the decisions up to you), and execution-only brokerages (where you will be entirely self-directed).  Most brokerages have a minimum deposit you must make to get started, so you’ll want to look into that as well.  If you’re serious about investing and want to do it frequently and avidly, read up on the markets and consider taking a class to educate yourself.

Before you make any big decisions, though, think about enlisting the assistance of a qualified financial professional who can give you insight and perspective on the financial markets.

Scott S. Lovell is the founder of Lovell Hathaway, Your Retirement Specialist^SM , and is a registered representative offering securities and advisory services through Geneos Wealth Management, Inc.  Member FINRA and SIPC.  For additional information, Scott can be reached at (435) 656-2518.

These views are those of the author and should not be construed as investment advice.  All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.  Equity investments (buying and selling stocks) can be risky and due to market conditions, prices may fluctuate daily. Individual investors must make their own decisions based on their specific investment objectives and financial circumstances.

Issue 22.09

The answer varies for everyone.  Here are some important factors to consider.

The big question: how much is too much?  In the first few years of retirement, some couples really “live it up” … and some of them risk spending down their retirement savings.  Their portfolios aren’t earning enough to make back the income they’re withdrawing.

Some new retirees end up withdrawing as much as 7-10% of their retirement assets annually.  A bull market tends to encourage this kind of exuberance.  But what happens when the bulls don’t run?  What if your portfolio only returns 1-2% this year?  Can you see the potential problem?

Ultimately, the answer is highly personal.  There is no “standard” retirement income withdrawal rate.  Your withdrawal rate should be determined in consultation with your financial advisor, who can help you evaluate some very important matters: your risk tolerance, your age and health, and your lifestyle needs.

Many new retirees are told that a 4-5% annual withdrawal rate makes sense.  If you withdraw 4-5% from your retirement nest egg annually and your investments steadily earn about 5-6% year-to-year, it is quite possible that your invested assets will last a quarter-century or longer given mild inflation.

But that’s a rather stable scenario.  Even more variables come into play.

Consumer costs.  Over the past 50 years, consumer prices have increased (on average) about 4% annually.  So you might assume that your portfolio should generate at least a 4% annual return just to help you keep up with the cost of living.  But if you retire with that assumption and inflation should spike notably higher for some reason after you retire, you may need to adjust your withdrawal rate.

Now consider the price of health care.  In recent years, health care costs have increased at a much greater rate than inflation.  The same goes for nursing home care.

Market dips.  When you are 35 or 40, your investments have time to rebound from a market downturn.  When you are 70, things are different.

Let’s cite an example: let’s say you are 70 years old, and you have $250,000 in your portfolio.  All of a sudden, your portfolio has two really bad years: you lose 12% in Year 1 and 7% in Year 2.  So at 72, your portfolio is now worth $204,600.  You want to get back to $250,000 or better. How long will that take?  Well, your portfolio would have to gain almost 23% in Year 3 to get back to that $250,000 level.  So if you suffer through a couple of bad years with ill-chosen investments or ill-advised asset allocations, your nest egg may be considerably smaller and your income withdrawal rate may have to change.

The wisdom of a retirement income plan.  Ideally, you will retire with the help of a financial advisor who will meet with you periodically to review your investments and income needs, and adjust your withdrawal rate over the course of your retirement.  If you don’t have a personal financial advisor or a personalized retirement income plan, change that situation today and make sure you prepare for retirement with both.

Scott S. Lovell is the founder of Lovell Hathaway, Your Retirement Specialist^SM , and is a registered representative offering securities and advisory services through Geneos Wealth Management, Inc.  Member FINRA and SIPC.  For additional information, Scott can be reached at (435) 656-2518.

This article was written by Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice.  

Many people underestimate lifestyle costs, medical expenses and inflation.

What is enough?  What is not enough?  If you’re considering retiring in the near future, you’ve probably heard or read that you need about 70% of your end salary to live comfortably in retirement.  This estimate is frequently repeated … but that doesn’t mean it is true for everyone.  It may not be true for you.

You won’t learn how much retirement income you’ll need by reading this article.  You’ll want to meet with a qualified retirement planner who can help you plan to estimate your lifestyle needs and short-term and long-term expenses.

That said, there are some factors which affect retirement income needs – and too often, they go unconsidered.

Health.  Most of us will face a major health problem at some point in our lives – perhaps even multiple or chronic health problems.  We don’t want to think about that reality.  But if you’re a new retiree, think for a moment about the costs of prescription medicines, and recurring treatment for chronic ailments.  These minor and major costs can really take a bite out of retirement income, even with a great health care plan.  While generics have slowed the advance of prescription drug costs to about 1-2% a year recently,¹ one estimate found that a 65-year-old who retired in 2007 would need $215,000 to pay for overall retirement health care costs – up about 7.5% from 2006.²

Heredity. If you come from a family where people frequently live into their 80s and 90s, you may live as long or longer.  Imagine retiring at 55 and living to 95 or 100.  You would need 40-45 years of steady retirement income.

Portfolio.  Many people retire with investment portfolios they haven’t reviewed in years, with asset allocations that may no longer be appropriate.  New retirees sometimes carry too much risk in their portfolios, with the result being that the retirement income from their investments fluctuates wildly with the vagaries of the market.  Other retirees are super-conservative investors: their portfolios are so risk-averse that they can’t earn enough to keep up with even moderate inflation, and over time, they find they have less and less purchasing power.

Social Security (or lack thereof).  In 2005, SSI represented 39% of a typical 65-year-old retiree’s income . But by 2030, Social Security may only replace 29% of that income, after deductions for Medicare premiums and income taxes.  Since 1983, retirees earning more than $25,000 in SSI have had to pay income tax on a portion of their benefits.³ This is all presuming Social Security is still around in 2030.

So will you have enough?  When it comes to retirement income, a casual assumption may prove to be woefully inaccurate.  Meet with a qualified retirement planner while you are still working to discuss these factors and estimate how much you will really need.

Scott S. Lovell is the founder of Lovell Hathaway, Your Retirement Specialist^SM , and is a registered representative offering securities and advisory services through Geneos Wealth Management, Inc.  Member FINRA and SIPC.  For additional information, Scott can be reached at (435) 656-2518.

This article was written by Peter Montoya Inc. and should not be construed as investment advice. 

Some things to think about this year – and every year.

This is the year!  Yes, you can make 2009 the year you alter your financial life for a better financial future.  Let’s look at some steps you might think of taking with the goal of financial freedom in mind.

No, we’re not talking about those ridiculously obvious steps the usual articles recommend, like “write your goals down” and “set a budget”.  Let’s go past the clichés and get into the real issues. 

Look at your income source, your expenses and your debt.  How do you earn income?  If you earn it from one source, is there effectively a ceiling on it, or is there real potential for your income to rise in the next few years?  Now look at your core living expenses, the ones you can’t avoid (such as a mortgage payment, car payment, etc.).  Can any core expenses be reduced?  Investing aside, you position yourself to gain ground financially when income rises, debt diminishes and expenses stay (relatively) the same.

Maybe you should pay your debt first, maybe not.  If you are a business owner or a professional, for example, you’ll likely always have some debt.  Your ultimate goal should be to build wealth – and you can plan to build wealth and minimize debt at the same time.

Some debt is “good” debt.  A debt is “good” if it brings you income.  If you buy a rental property, you’re paying a mortgage, but that’s considered a “good” debt because you’re getting passive income from the rent payments.  Credit cards are “bad” debts.

If you’ll be carrying a debt for a while, put it to a test.  Weigh the interest rate on that specific debt against your potential income growth rate and your potential investment returns over the term of the debt.  If the interest rate on that debt looks like it will outpace your income growth and investment returns, then you should really think about paying that debt down fast, because you can’t afford that interest rate.

Of course, paying off your debts, paying down balances and restricting new debts all works toward improving your FICO score, another tool you can use in pursuit of financial freedom (we’re talking “good” debts).

Implement or refine an investment strategy.  You can’t refrain from investing, even when the bears are out.  You’re not going to retire on the relatively small elective deferrals from your paycheck; you’re going retire on the interest that those accumulated assets earn over time, plus the power of compounding.  Investing can also potentially bring you passive income.  Consistent investing, this year and in years to come, has the potential to help you improve your financial life.

Manage the money you make on your way to financial freedom.  It’s amusing: all these Internet gurus tell you they have a method to make you “financially free” or “debt free”, but few tell you how to manage the money you make.  Their not-so-subtle message seems to be “succeed and live lavishly” – if you make it financially, you’ve earned the freedom to blow it all on cars, boats and luxuries.

This is a classic nouveau riche mistake.  If you simply accumulate unmanaged assets, you have money just sitting there open to risk – inflation risk, market risk, even legal risks.  Don’t forget taxes – while not technically a “risk”, they are a threat to your money.  The greater your wealth, the more long-range potential you have to accomplish some profound things – provided your wealth is directed.

If you want to build more wealth this year or in the near future, don’t neglect the risk management strategy that could be instrumental in helping you retain it.  Your after-tax return matters even more than your investment return, so risk management should be part of your overall financial picture.

Request professional guidance for the wealth you are growing. A good financial advisor will really help to educate you about the principles of wealth building. You can draw on that professional knowledge and guidance this year – and for years to come.

Scott S. Lovell is the founder of Lovell Hathaway, Your Retirement Specialist^SM , and is a registered representative offering securities and advisory services through Geneos Wealth Management, Inc.  Member FINRA and SIPC.  For additional information, Scott can be reached at (435) 656-2518.

This article was written by  Peter Montoya Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Part 2

Beyond Roth and Traditional, there are other choices.

Uni-K (Individual K). Annual Contribution Limit Varies

The Uni-K is a profit-sharing plan with no annual contribution requirements for owner-only small businesses.  It is cost-effective, and can offer some major advantages compared to some other small business plans - such as increased contribution limits.  Contributions are tax-deductible to the business, and employee contributions are made pre-tax.  Distributions may be taxable, and there is usually a 10% penalty applied to withdrawals by participants under the age of 59 1/2.

Roth 401(k). Annual Contribution Limit = $15,500.00*

First introduced to investors in 2006, the Roth 401(k) has the same contribution limits as a regular 401(k) plan.  In essence, it is a 401(k) account that, in terms of taxes, is treated like a Roth IRA.  The major difference is that 401(k) contributions are made pre-tax, whereas the Roth 401(k) is funded with after-tax dollars.  Which is better?  It depends on your situation and whether you’d like to be taxed up front, or later on.

Regarding Roths … it is worth noting that the laws permitting Roth IRAs and Roth 401(k)s will be up for renewal in 2010.  What does that mean?  Well, there’s always the chance that Congress could decide not to extend the laws, in which case you could no longer contribute to these accounts.  However, that merely means you will be forced to make new contributions to the traditional versions of these accounts after 2010.  It does not mean that you will be taxed on or lose money from the accounts.

The bottom line. You should consult a qualified financial advisor regarding your IRA options.  There are many choices available when it comes to IRAs, and it is vital that you not only understand each choice, but how that choice could affect your unique financial situation.  No one IRA is the “right” IRA for everyone, so do your homework and seek advice from a qualified professional if you are in any way unsure of how to proceed.

Scott S. Lovell is the founder of Lovell Hathaway, Your Retirement Specialist^SM , and is a registered representative offering securities and advisory services through Geneos Wealth Management, Inc.  Member FINRA and SIPC.  For additional information, Scott can be reached at (435) 656-2518.

* As of 2007.

These views are those of the author and should not be construed as investment advice.

Beyond Roth and Traditional, there are other choices.

What don’t you know?  Many Americans are aware of Roth and Traditional IRAs … but there are also other types of IRAs that serve the self-employed, as well as IRAs for the self-directed investor.  Here’s a quick look at several basic classes of IRAs, as well as some variations and additional information.

Traditional. Annual Contribution Limit = $4,000.00*

Created in 1974 as part of the Employment Retirement Income Security Act, the traditional IRA is essentially an individual savings plan.  Contributions are tax-deductible (when requirements are met), with an annual limit.  Although earnings within the Traditional IRA grow tax-deferred until withdrawal, they will be taxed when withdrawal begins — and this must happen by the time the owner reaches the age of 70 ½.  If the required amounts are not withdrawn at that age, a 50% penalty will be assessed on the amount not taken.

Roth. Annual Contribution Limit = $4,000.00*

The Roth IRA began in the 1998 tax year, a result of 1997’s Taxpayer Relief Act. A Roth IRA gives individuals the ability to invest post-tax income (up to a specified amount) each year.  Roth IRA earnings grow tax-free, and withdrawals may be made free of penalty after the owner reaches the age of 59 ½, as long as the funds have been in the account for a minimum of five years.  While contributions to a Roth IRA are not tax-deductible, a Roth IRA has an advantage on the back end, with fewer requirements and limitations regarding withdrawals.

SIMPLE. Annual Contribution Limit = $10,500.00*

A Savings Incentive Match Plan for Employees IRA (SIMPLE-IRA) is a qualified retirement plan provided by employers with 100 employees or fewer.  Unlike plans such as the 401(k) or 403(b), a SIMPLE-IRA has (hence the title) much simpler and more affordable administration rules.  They have lower contribution limits than many other types of IRAs, but they are funded by pre-tax salary reduction and require the employer to contribute a minimum amount.

SEP. Annual Contribution Limit = $45,000.00*

The SEP-IRA (Simplified Employee Pension) plan tends to be, perhaps surprisingly, even more simple than the SIMPLE-IRA.  Contributions are tax-deductible, but as with a Traditional IRA, qualified withdrawals taken after age 59 1/2 are subject to taxation at standard income tax rates.  If an employer implements an SEP plan, all employees must receive the same benefits.  If you are self-employed with no employees, there are no administration costs.

In issue 16: More info on IRAs.

Scott S. Lovell is the founder of Lovell Hathaway, Your Retirement Specialist^SM , and is a registered representative offering securities and advisory services through Geneos Wealth Management, Inc.  Member FINRA and SIPC.  For additional information, Scott can be reached at (435) 656-2518.

When it comes to your investments, do you have the patience to reap long-term rewards?

“But it looks so good!”  When you hear about a new stock becoming available, are you enticed by its promise?  Do you suddenly feel compelled to run right out and buy shares?  Let’s say you DON’T buy shares, and then the stock doubles after the initial public offering.  Do you run out and buy it THEN?  Do you sell shares of a loser in favor of this new stock that’s hot?

Grab the reins!  A recent study found that in most cases, investors who sell one stock for another that seems more promising typically find the new stock trailing the old stock throughout the next year.  Meaning, if they’d held out for twelve months, they’d be better off.  Just like playing roulette, quick and frequent stock trading might hold big rewards … but it doesn’t happen often.  If you’re investing small amounts, just for fun and to see what happens, well that’s your call.  But if you’re trying to reach a long-term goal (like retirement), a more committed investment strategy could be a better choice.

What is long-term investing?  Is three months a long-term investment?  What about six months?  What about a year?  Actually, a long-term investment is typically five years or more.  If you’re currently buying and selling stock every few months, you may want to reconsider your strategy.  You certainly would not be the only investor with a “love ‘em and leave ‘em” stock trading mentality, but that kind of investing is haphazard and can be very risky.

Be advised.  If you’re reading this, nodding, and realizing that you are not truly a long-term investor, then chances are you have been investing on your own and have not yet enlisted the help of a financial advisor.  A seasoned financial advisor can assist you in determining your risk tolerance and help you to develop a long-term investment strategy based on your goals.  Do you have to have a financial advisor to be a good investor?  No.  But if you’re not ready or willing to spend time doing research, or if you feel you need guidance to keep you on track, enlisting some professional assistance could be a good move.

A good strategy.  The way I see it, a good investor is steadfast and employs a solid long-term, goal-oriented approach.  He or she is patient, invests consistently, saves regularly, reinvests dividends, and evaluates portfolio returns over the years (not months or weeks.)

Scott S. Lovell is the founder of Lovell Hathaway, Your Retirement Specialist^SM , and is a registered representative offering securities and advisory services through Geneos Wealth Management, Inc.  Member FINRA and SIPC.  For additional information, Scott can be reached at (435) 656-2518.

These views are those of the author and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.