Don’t unwittingly let your investments become dormant

Every year in the financial services industry, there seems to be additional scrutiny and new regulations that ultimately lead to filling out more forms. Although consumer protection and disclosure is an admirable goal, at the end of the day bad apples in any field will find a way to bypass regulations. Even though Bernie Madoff, the poster child for financial criminals, is sitting behind bars, Ponzi schemes and other improper financial transactions continue to occur on a much too frequent basis. The vast majority of financial advisors do their very best to juggle the overload of rules and regulations, while at the same time doing everything they can each and every day to maximize client returns. Part of the responsibility of a financial advisor is to regularly review a client’s investment portfolio. For years, financial advisors have been warned against “churning” their clients’ accounts. Recently, a client who meets with me on a frequent basis received a letter warning him that his dormant mutual fund account would soon be turned over to the state due to a lack of activity. For some reason, a documented meeting with your financial advisor is not considered activity. To my way of thinking, this situation is the total opposite of churning. My client owns a mutual fund that has done nothing but make him a lot of money over the last few years. In our reviews, we both concluded that the best action was no action. But, in this case, inactivity led to a red flag. I subsequently contacted both the mutual fund firm and the state of Michigan. The fund company sent me a letter that stated “Michigan requires mutual fund companies to have evidence of contact with their shareholders at least every three years. The statute requires that contact must be initiated by the shareholder rather than by the mutual fund company. If the shareholder-initiated contact cannot be demonstrated over this time period, we may be required to transfer your mutual fund assets to the state as abandoned or unclaimed property.” I was taken aback that automatic programs such as dividend reinvestment are not considered activity. When I called Lansing for clarification, I was pleasantly surprised by the kindness and professionalism. I can confidently say the state is not out trying to gather wealth. Rather, the intent is to protect consumers and their families. As the state explained, the dormancy period had been recently reduced from five to three years. What’s more, the dormancy rule not only applies to mutual funds, but brokerage and bank accounts as well. Michigan simply wants to be certain that, in the event of death, the financial institution continues to hold the investment and that it ultimately gets to its rightful owners or their heirs. Unfortunately, I can envision a scenario where the state steps in with good intentions and closes out a client’s account or cashes in an entire IRA, thereby triggering a large, untimely tax. I want my readers to be aware that this can happen. Read your mail carefully, and if you receive a warning letter, immediately contact your financial advisor and take action to prevent an unwanted sale. In my humble opinion, this is one well-intentioned rule that needs some tweaking and input from financial advisors.

Making life simpler in a complex financial world

If you are past the age of 70, you need to be familiar with the phrase “required minimum distributions.” What it means is that people over the age of 70 1/2 must withdraw a specified percentage of money out of their qualified investments, which, of course, refers to IRA, 401(k) and 403(b) accounts.

Qualified dollars are those monies that have been growing tax-deferred since the day of their deposit. Over a period of time, that could add up to a significant pile of cash. But when you reach 70 1/2, the free ride is over and Uncle Sam mandates that you must begin pulling the money out and start paying income tax on it.

Naturally, the rules are overly complex. But the penalty for non-compliance is as easy to understand as it is hard to take: A hefty 50 percent! Because of this severe penalty, my firm and other financial firms throughout the nation go to great lengths to make certain our clients are in compliance.

Overall, the tax code seems like it’s becoming more complex each and every year. In addition to the required minimum distributions, the Affordable Care Act will soon be adding more complexity to the tax code.

It’s not just the tax code that’s becoming increasingly complex. The entire world of investing seems to be getting more complicated with each passing year.

Meanwhile, regardless of age, investors are receiving multiple mailings and disclosures on virtually every investment in their portfolio. Clearly, we’ve gone from a society seeking information to a society with an overload of information. I think it’s safe to say that trying to keep on top of all the necessary tax and investment data is a real challenge.

So, let’s talk about simplification. First off, I think it’s an admirable goal, and as year-end approaches along with all its attendant statements, now is an opportune time to start simplifying your life for 2014.

By simplifying, I don’t mean to reduce or eliminate your investment diversification. For example, if you have ten IRA’s with ten different investment firms, you’re receiving ten reports and paying ten administrative fees. If you’re over 70 1/2, that’s an awful lot of calculating that needs to be done in order to make certain you’re in compliance with Uncle Sam.

A reasonable goal in 2014, then, would be to simplify. In all likelihood, you could consolidate those ten IRA’s into one or two. Your custodial fees would very likely be reduced, maybe even eliminated.

With the proper custodian, you can continue to diversify among several asset classes and, more important, dramatically reduce the volume of reports and tax forms in the years ahead.

My experience is that, once clients get deeper and deeper into their retirement years, they like simplified reports and minimal paperwork. A number of our clients actually have their mandatory distributions set up to be automatic each and every year.

That’s another smart way of keeping their investment world as simple as possible without sacrificing the integrity of their investment objectives. And that’s an objective for which we all should strive.

Will you be able to simplify and consolidate your financial world in 2014? I certainly hope so. But if you’re really serious about it, the time to start planning is now.

Will Janet Yellen be good to your children?

The turmoil over the rollout of the new health care law and the higher premiums many are paying has dominated the domestic news lately. But there’s another change about to occur that could also impact your pocketbook, and I don’t believe it’s getting enough coverage.

Ben Bernanke, our nation’s Federal Reserve Chairman, will soon step aside and be replaced by Janet Yellen, the first-ever woman to hold the office.

Congress created the Federal Reserve in 1913. But in 1977, Congress amended the Federal Reserve Act and established what is known as the dual mandate, which tasks the Fed to maintain price stability and full employment.

Most experts agree that Chairperson Yellen will continue the policies of her predecessor, which means we can expect continued low interest rates throughout the economy.

As a financial advisor, I’m certainly concerned about our ballooning national debt. But I’m equally concerned about another frightening economic trend. Income inequality.

Over the past few years, I can’t tell you how many times my retired clients have expressed a concern that their adult children and grandchildren will never be as financially comfortable as they are.

Unfortunately, I see very little that would incline me to disagree with that likelihood.

During her confirmation hearing, Yellen stated, “It’s not a new problem, it’s a problem that really goes back to the 1980s, in which we have seen a huge rise in income inequality.”

She believes there are many causes for the inequality, including technology, globalization, and the decline of unions. Clearly, there is a problem, just as there is with health care. And, as with health care issues, fixing the income inequality problem will take a great deal of effort.

Every suggested fix seems to have a legitimate counter argument. For example, increasing the minimum wage has been proposed. Some experts contend, however, doing that could actually increase unemployment.

Another popular suggestion for leveling the playing field would be to raise taxes on the top wage earners. The counter argument is that increased taxes would substantially reduce spending by the wealthy. Less spending would result in an economic slowdown and still more unemployment.

In short, Chairperson Yellen is going to have a challenging job.

She’ll have to deal with politicians who hold conflicting political and economic views. Her suggested solutions include a “multitude of things, including education, maybe early childhood education, job training and other things.”

She noted that the Federal Reserve cannot change all these problems but her goal is to “try to bring about a strong economic recovery that creates jobs and gives people more opportunities to rise up the ladder”.

Think of the Federal Reserve Chairperson as the one steering the boat. The problem is, she doesn’t set the course. That’s in the hands of politicians who have proven to be poor stewards of our dollars.

There’s no question in my mind that Janet Yellen has inherited a difficult situation. There will be many challenges. Let's hope she can close the income gap by helping people up the economic ladder rather than by making everyone poor by pushing us down the ladder.

To get up that ladder, we’ll need an economy much stronger than we’ve seen in many years. If politicians would allow economics to trump politics, I’m confident the economy would take off like a rocket.

For now, bitcoins are a currency to be cautious of

I may be dating myself, but when I was growing up, windows were things that kept the wind out of the house or let it in, depending on the season. An apple was something that grew on trees and was used for pies and snacks.

Today, technology has brought new meanings to both words. The new meanings of these words are ever-present reminders of how technology has changed our lives.

Back in the day, if a transaction wasn’t handled using cash, it was more than likely paid for by check. Many readers can probably recall going into a retail establishment and seeing a bounced check taped on the wall. I guess the intent was to let everyone know that Mr. or Mrs. Whomever wrote bad checks and that they should be embarrassed and not be deemed as trustworthy.

Then came credit cards and debit cards, which most people carry in their wallets today. Whether you use cash, checks or credit/debit cards, there is a common thread. They are all linked to a currency.

Obviously, the U.S. dollar is the American unit of currency. Our neighbors to the north have the Canadian dollar, featuring my favorite, the Loonie, a gold-colored coin introduced in 1987. The British have the pound, the Japanese, the yen, and the Germans, the mark. All these various currencies throughout the world have been associated with a specific nation. But, technology is trying to change the world again.

Recently on the business channel, I saw the Winklevoss twins, who made their name via their well-publicized battle with Mark Zuckerberg. The issue in dispute was who really started Facebook. Today, the Winklevoss brothers are big investors in digital currency. Yes, in today’s high-tech world, technology has brought us a new, digital currency straight out of cyberspace. A currency, by the way, that is not affiliated with any nation. The term for this new currency is bitcoin.

As a non-techie, I’m still trying to wrap my head around the concept and practicality of bitcoin. It’s far more complex than trying to convert one nation’s currency to another’s, especially since it isn’t backed by the full faith and credit of any country. Some people, like the Winklevoss twins, believe there is a lot of money to be made in this relatively new cyberspace currency. I bring this up because they may be right. Bitcoin may have the potential to make someone some money. It’s certainly possible that, as more and more people hear the term bitcoin, they may begin to use bitcoins in their transactions.

But, being somewhat of a skeptic, I believe there’s a great potential for a lot to go wrong. I say this because it’s difficult to regulate cyberspace. What’s more, bitcoin values fluctuate and I have yet been able to find anybody that can answer all my questions.

Basically, I just want to make my readers aware of this new cyber currency. But I also want to express my concerns because it’s somewhat complex, it appears unregulated and as a financial adviser, I see quite a few red flags. Years from now, bitcoin may be a household word. But right now, as I see it, it’s a word for caution. This may be one instance where technology has gotten ahead of itself.

Financial goals are a ‘marathon rather than a sprint'

A good friend of mine recently participated in the New York marathon. During our discussion, it occurred to me that financial planning is much like a marathon race. Fulfilling financial goals tends to be a marathon rather than a sprint.

As a financial advisor, I’m much like a trainer helping a runner prepare for a marathon. The goal may be funding a college education for a child or grandchild, or building a sufficient retirement nest egg. When you’re a seasoned veteran like me, it’s personally rewarding to see a couple financially comfortable in retirement. Especially when they thank me because they couldn’t have done it without my guidance.

I’m not patting myself on the back, I just feel fortunate to have a career in something I’m passionate about.  And the reality is that not everyone is going to achieve their goals, often because something goes horribly wrong during the marathon.

That’s why every plan should have contingencies to be prepared for the unexpected curve balls that come in life.

You shouldn’t go on a boat without life jackets or drive a car without seat belts, but too many people set and work toward their financial goals without the proper safety precautions. Proper planning allows you to adjust your stated goals and objectives when obstacles arise.

Death, disability and the need for long-term care are examples.  Nobody likes to talk about these issues, but they need to be discussed and incorporated into the planning process.

Many people believe that life insurance is only for those with young children. Well, parents with young children do need life insurance. But college educations shouldn’t be shelved because mom or dad died unexpectedly. I could make a mathematical argument that anyone with a child should have a minimum of $500,000 of life insurance protection. But life insurance should not be just for those with young children.

It may surprise some, but people over 50 purchase a significant amount of life insurance. One overlooked benefit is instant liquidity, which can prevent a family from an untimely sale of an asset because of death. like being forced to sell real estate at below market values.

Today there are even life policies that can offer double duty. By that I mean using the death benefit as a living benefit. For instance, if you needed long-term care, you could use the life policy death benefit value to help fund the astronomical cost.  You don’t have to meet St. Peter to collect on your life insurance.

While you’re employed, disability income protection is also important. Your largest investment is likely yourself and your education. If you couldn’t work, how would the bills be paid?  For many, lack of disability coverage is a gaping hole in their financial planning.

Life is a marathon in which we’d all love to cross the finish line in relatively good health. But life doesn’t always work that way. Some won’t cross the finish line and others will need assistance. But every one of us needs to incorporate the unthinkable into their financial planning.

It is easy to overlook, neglect and rationalize why life insurance isn’t needed.  But nobody can predict what roadblocks they’re going to encounter along the marathon of life. If you want to be prepared, you have to plan for them.

November 10, 2013

Puerto Rico a cause for concern for Michigan investors

 

 Over the years, I can’t tell you how many times I’ve heard people claim that they don’t pay any income tax. When I question them and ask them for a look at their pay stub, it shows that Uncle Sam is indeed getting a substantial cut.

What these individuals don’t seem to understand is that they have enough taxes withheld from their paycheck, so that they’re not required to pay any additional tax when they file. They may even receive a tax refund. But, in reality, they’ve already sent plenty of money to Washington with every paycheck.

Over the past few months I’ve talked to a lot of people who are angry about taxes. The anger isn’t so much about the amount they pay, but rather about the inexcusable misuse of tax dollars in the form of spending snafus, cost overruns and just plain wasteful spending.

It seems that those in Washington are simply poor stewards of our tax dollars. They continue to spend recklessly and then at election time claim we need more tax dollars for teachers, policemen and infrastructure. The question that needs to be asked is how many teachers and policemen could be hired if they stayed within their budgets.

I speak of taxes today because many people turn to municipal bonds to help ease their tax burden. For most people, interest on municipal bonds is free from federal income taxes. If you’re a Michigan resident and own a Michigan municipal bond, the interest is free of both federal tax and Michigan state tax. However, for certain investors, interest may be subject to local taxes or federal alternative minimum tax.

That tax-free status makes municipal bonds very popular. But, as with any investment, they carry risk. For example, it’s likely that many Detroit bondholders will suffer losses as a result of the default.  And, of course, the market value can change on a daily basis.

So if you’re a Michigan resident who owns Michigan tax-free bonds within a mutual fund or unit investment trust, there’s something you need to do. Take a very close look at your holdings.
We’re all aware of Michigan’s past economic issues and our current rebound. But the real potential to hurt many investors in Michigan bond portfolios is not even a Michigan problem. The problem is Puerto Rico. Yes, Puerto Rico, a territory of the United States.

Puerto Rico is having significant financial problems. Many Puerto Rican bonds are at or near junk status according to various rating agencies. Most people are not aware that federal and state tax-free Puerto Rican bonds have a way of finding their way into various state portfolios.

For example, I recently came across a State of Michigan tax-free bond portfolio that had more than 20 percent of its portfolio in Puerto Rican bonds. In other words, the label of the portfolio doesn’t fully describe the contents.  If the Puerto Rican bonds default, there will be a lot of surprised Michiganders.

Portfolio managers of Michigan bond portfolios may have purchased Puerto Rican bonds to help boost returns. Unfortunately, the financial problems brewing in Puerto Rico are buried in the news. That tiny U.S. territory is on the brink of causing a lot of havoc for investors throughout our nation. If you own a Michigan tax-free portfolio, please check to make sure all of its holdings are indeed within our great state.

Fax your questions to Ken Morris at 248-952-1848 or email to ken.morris@investfinancial.com. Ken is a registered representative of INVEST Financial, member FINRA, SIPC and is vice president of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. INVEST and Society for Lifetime Planning are independent companies.

MORRIS: Public sector employees have much to think about

Well, the Tigers are finished until spring training, the Lions have a bye week, and Uncle Sam is staying open for a few more weeks. So now is a good time to review your finances.
I particularly want to address a group of people that are often overlooked by the financial industry. I’m talking about people who are employed by municipalities and school districts.
Impacted by years of a soft Michigan economy and changes in state and city hall budgets, many of these professionals need to make the same decision many in the business world have had to make. Should you retire early or remain on the job?
There are a lot more moving parts to analyze for public sector employees versus the private sector. For example, most automotive workers had a 401(k) plan and a pension. For most, the choice was simply whether to maintain a monthly pension check or select a lump sum distribution.
Certainly those were huge, life changing decisions that had to be made, along with some critical investment decisions. But with public employees there are even more moving parts. It’s going to require a sharp pencil to make some tough decisions.
For example, many educators, firefighters and police officers can increase their pension amount by purchasing additional years of service. The cost depends on such factors as years of service and income, and the financial return can be substantial.
Social Security can also be a bit more complicated for police officers and firefighters. Many had the option of not participating in the Social Security program during their careers and participating in an alternative program instead. Or they could choose to retire early then re-enter the workforce, making it possible to become Social Security eligible.
Many of these professional also have what is called a 457 Deferred Compensation Plan. They’re somewhat similar to corporate America’s 401(k) program, but with some significant differences, including the ability to receive income prior to age 59 1/2 without a ten percent tax penalty. The 457 funds can also be rolled into an IRA, but the 10 percent penalty gets back into the equation.
Another option unique to police officers and firefighters is the Deferred Retirement Option Program, aka DROP. Simply stated, DROP allows participants to elect their pension and continue to work.
While they work, what would have been pension contributions go into the DROP fund. The fund can accumulate significant dollars, which are taxed at retirement when the retiree is likely to be in a lower tax bracket. Or they can be rolled over in an IRA.
The public sector employs a large segment of the population. For educators it’s somewhat simple in that they can purchase additional years of service. For firefighters and police officers there’s even more to the equation.
Some decisions can be made simply by mathematics, while others are a question of lifestyle. By that I mean the choice to re-enter the workforce or just retire and forgoing the opportunity for additional income. Physical and mental health are obviously a part of that equation.
I encourage police officers, firefighters and educators to seek professional advice, especially with all of these moving retirement pieces and formulas. You risked your life every day. There’s no need to put undue risk on your retirement nest egg.

Fax your questions to Ken Morris at 248-952-1848 or email to ken.morris@investfinancial.com. Ken is a registered representative of INVEST Financial, member FINRA, SIPC and is vice president of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. INVEST and Society for Lifetime Planning are independent companies.

Figure out your health care premium and budget accordingly

For the past few weeks, politics have trumped economics. I still find it hard to believe that, with so many deadlines of national importance, our elected officials made certain they enjoyed their vacation time. I was raised with the idea that you didn’t take time off unless your work responsibilities were in order.

Evidently, keeping our nation running and open for business is not the top priority in Washington.
I’m not alone in believing the taxes I pay Uncle Sam every year far exceed my fair share. I even used to comment that I’d like to meet the other family I support. Taxes have grown so much in recent years, I still joke that it feels like I’m carrying the tax burden of two households.

In the past year, I’ve highlighted some of the new taxes in the Affordable Care Act that might impact your pocketbook. The one that most news agencies talk about is the tax penalty for not purchasing health insurance.

Readers also need to be aware that there’s now an additional Medicare tax on investment income that kicks in for married couples with income in excess of $250,000. High-income earners must also pay an additional 0.9 percent tax on wage (earned) income.

These are just a few of the many changes, and there are now additional IRS agents to make certain we all comply.

Because of the new taxes and the way healthcare was restructured and re-categorized, I was hoping that premiums for healthcare insurance would only see modest rate increases. But my instincts told me they’d be significantly higher.

Unfortunately, Blue Cross Blue Shield recently informed me that my instincts were right. And the reality far exceeded my fears. I was stunned when Blue Cross notified me that my current health insurance program was being discontinued.

However, they did suggest another program that I could switch to. I’m aware that health care coverage is complex and I didn’t expect the new offering would have the same coverage as the discontinued program. But the differences were incredible.

First, the premium was 14 percent higher. Significant, but not surprising. The annual deductible, though, was a shocker. For 2014, it will increase a whopping 275 percent over the 2013 amount.

I was so stunned; I redid the math and contacted Blue Cross to make certain I was correct. They confirmed, and I kiddingly told my wife that if I could afford it, our new healthcare coverage program would make me sick.

So it’s important that everyone does their math as soon as possible in order to establish a realistic budget for 2014. Don’t be surprised when all the Christmas credit card bills come in January. Between increased taxes, premiums, and deductibles, I’m projecting the new health care law will increase my own number by an additional $1,000 per month.

I don’t like it, but I have to budget for it. Suddenly the affordable health care act doesn’t feel so affordable. I strongly suggest that everyone does their own analysis and math projections. For some, there might not be any significant change; for others, the change could hurt quite a bit.

But, rather than guess, I urge you to get a handle on it ASAP. You might conclude that, in addition to supporting another family, you’re now also subsidizing their health care.

Fax your questions to Ken Morris at 248-952-1848 or email to ken.morris@investfinancial.com. Ken is a registered representative of INVEST Financial, member FINRA, SIPC and is vice president of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. INVEST and Society for Lifetime Planning are independent companies.