Thursday, February 27, 2014

Retirement Made Easy

We have discussed retirement planning in previous a pervious blog that may be seen here.  The primary question usually associated with retirement is “Do we have enough money to retire?” Asset levels, income, and anticipated expenses are, of course, prime components to the answer of that question. However, there are other factors to consider; we will discuss some of them here.

Time Management

Ah, no alarm clock to set; no meetings with peers/clients—nothing to do but what you wish. However, what will you do in retirement? The 40-55 hour work week will free a lot of time in your schedule. Have you thought about what you will do in retirement? The first few weeks of “honey-do" or deferred travels will pass. Then how will you spend your time. It really is a factor that should be considered. Some individuals may be content to do little; others may decide to expand their horizons through new activities or new vocations (possibly starting a new business). What time—and money—will be required in this new world? At the very least, the pre-retiree should develop a preliminary plan of what to do in retirement. Preliminary planning and, if possible, some actual time spent in anticipated retirement activities would help the future retiree decide if those activities are truly what he/she wants to do. One option to consider might be a “phased-in” retirement where work hours are reduced over time. Such an arrangement may help the retiree determine how he/she chooses to utilize his/her time as well as provide some relief in expenses through continued employment income.

A Family Affair

Retirement is a significant change in family dynamics. The spouse of one recently retired husband complained of “twice as much husband and half as much income.” After 30-40 years of working outside the home, ‘togetherness” may require some significant inter-personal adjustments. Spouses may wish to have discussions about how their time will be spent after retirement.

In addition, following the recent recession and loss of jobs/wealth, many families are now in the situation of helping either younger, adult children/grandchildren or parents/grandparents. Such assistance may jeopardize the long term retirement prospects of a potential retiree. While parents have a natural tendency to help children financially, the children have a longer time frame in which to recover financially; retirees usually have neither the time nor the economic opportunity to recover.

Retirement Expenses

Expense in retirement is a significant consideration. Ascertaining those expenses can be problematic. Some current expenses will go away (work related commuting expenses, noon time meals, business clothing, etc.) Other expenses may increase! With no work requirement, how will you fill your time? Will the method you choose cost more than you are currently spending on such activities? Current retirees face a long period in retirement—in many cases over 30 years. Consider the different stages in retirement. The first stage is usually one of good health, interest in varied activities, and developing new interests. That stage (around the first 10 years of retirement) may actually increase expense because the new activities cost more than the work related expense savings. The second stage (the next 10 years) generally involves less activity than early retirement years and thus may require less expense than initial retirement years. The latter years of retirement usually involve a diminished activity level but may require additional expense related to health care.

The expense estimate cannot be overstated. Determining how much to budget involves estimating costs from a new activity level at a time when income levels are also changing. Consider preparing two post-retirement budgets. The first budget should contain the normal, ongoing expenses in retirement. That budget would include things such as food, shelter, utilities, taxes, insurance, and those known items that will be required to maintain the basic standard of living you wish to enjoy. The second budget should include those items that you wish to do: travel, hobbies, starting a new business, etc. If possible, live according to those budgets in advance of retirement—see if they are reasonable; if not, then make adjustments as required. Don’t overlook the expenses that will “go away” in retirement. When will the house be paid off (if not already)? There will no longer be contributions to the 401(k) plan. Will college expenses for the children be paid off?

We at Paragon Financial Advisors can assist you in the preparation of your retirement plan. Please call us and we can discuss the particular circumstances associated with your retirement or retirement plan.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.


Friday, February 21, 2014

Trust Planning

A major benefit of trust planning in the past was the ability to shelter assets from estate taxes. There have been changes in the estate tax law (with the American Taxpayer Relief Act of 2012) that has eased the estate tax burden significantly. First, the amount exempted from estate tax was raised (currently $5.25 million per person and indexed for inflation). Thus, a married couple can shelter up to a total of $10.5 million from estate tax. Second, that act also provided for a “portability election.” That election allows any unused exclusion amount from the deceased spouse’s $5.25 million to be transferred to the remaining spouse—in essence allowing married couples to utilize the full $10.5 million exemption without the trust arrangement that had been required in the past. There are, however, still circumstances in which trust planning is advisable.

Basically, a trust is a separate, legal entity established in a written document that has three components: 1)The Grantor- who puts assets (the trust corpus) into the trust, 2)The Trustee-who manages the assets placed in the trust, and 3)The Beneficiary-   who receives benefits from the trust according to the terms specified in the governing trust document.  Trusts still offer advantages in particular circumstances. Please note that items listed below are general in nature; specific questions and appropriateness for your particular situation should be discussed with competent legal counsel. Trusts can provide the benefits in situations such as the following:

Spendthrift protection- Some individuals, regardless of age, may be incapable of managing significant levels of assets. In such situations, the trustee may manage the assets and provide funds to the beneficiary to satisfy beneficiary needs. A common provision for such beneficiary income is for “…health, education, maintenance, and support…”

Blended families—Trusts can be used in blended family situations to ensure that assets are passed to specific individuals. For example, a trust can be used to provide income to a second spouse for that spouse’s lifetime; the trust corpus can be left to other individuals (children from the first marriage).

Creditor protection- Assets held in trust may be unavailable for attachment in creditor situations. Those assets could be protected depending on trust provisions and who established the trust. It is important to note that an individual cannot establish creditor protection trusts for themselves and still maintain control of the assets. Consult your attorney for specifics in your case before relying on trust arrangements for creditor protection.

Divorce protection- Unfortunately, divorce is becoming a common factor in marriages today. A well drafted and well maintained trust can remove assets to be shared by a departing (ex) spouse. Again, an individual cannot establish such a trust for themselves; establishment must be done by another party (i.e. parents leaving assets to their child in trust are not subject to divorce proceedings).

Estate planning—Even though the exclusion amount discussed above eliminated the need for some trusts, there are other tax advantages to be gained through trust planning. Income shifting or estate growth planning can be done with specialized trust. Charitable trusts, personal residence trusts, and numerous other techniques may be used for specific circumstances. These cases are best discussed with your attorney.

We, at Paragon Financial Advisors, do not draft legal documents; that is to be done by the attorney of your choosing. However, our principals have extensive experience working with trusts and can assist you in determining the questions to ask as you use trusts to further your financial goals. If you have any questions please call us.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management services for our clients.

Thursday, February 13, 2014

Corporate Stock Repurchases

Last year (2013) was a time of significant corporate stock buy-backs. Corporate management used about $750 billion (some of which was borrowed at historically low interest rates) to repurchase shares of their company stock. The last time such levels of buy-backs were done was in 2007—remember what happened in 2008? Buy-backs reduce the number of corporate shares outstanding in the market; therefore, the earnings per share of the company increases. Given that stock price/earnings multiples have increased from 14 times to 16 times in 2013, the net impact of stock buy-backs has produced some very favorable results for corporate incentive packages paid to management. Increasing earnings per share is a good thing is it not? That depends.

The prudent investor should determine why corporations are pressuring buy-backs. Corporate management may have these concerns:

  1. Slow growth in the economy does not justify spending corporate cash in expanding operational capability.
  2. A declining demand for corporate products has occurred.
  3. No better available alternatives may exist for investment (in the opinion of corporate management).

The return of cash to investors may occur because the corporate management worries about the general economic growth in the coming years, a particularly troubling possibility in light of the stock market increase in 2013.

Of course, management may have felt that investment in their shares was appropriate and that their stock was undervalued at current market levels. Many things must be considered in making an investment decision. We at Paragon Financial Advisors help our clients analyze the investments that may be appropriate for their investment goals.

If you have unanswered questions about corporate stock buy-backs or need additional guidance please call us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management services for our clients.

Friday, February 7, 2014

Fee Only or Fee Based Advisors

There is considerable discussion in the investment profession concerning the compensation of advisors for investment advice. What is the difference and does it matter? That’s the subject of this discussion.

Fee Only

Fee only compensation means the advisor is compensated by a flat fee or percentage of assets under management (annually); compensation may also be based on an hourly rate or fee for service for specific tasks performed. In either case, there is no additional compensation (sales commissions, etc.) for services performed or investments provided. Registered investment advisors (RIAs), such as Paragon Financial Advisors, operate under this arrangement.

A fiduciary requirement exists: the firm must put the best interest of the client first in all cases. This fiduciary requirement includes advising the client of all aspects of advisor compensation and the disclosure of any conflicts of interest the advisor may have with the client’s portfolio.

Regulatory oversight for fee only advisors is provided by either the Securities and Exchange Commission (for firms with more than $100 million in assets under management) or the state securities agency (for firms with less than $100 million in assets). Such advisors are subject to random audits by the oversight agency and to penalties if appropriate rules are not being followed.

Fee Based (Fee and Commission)

In contrast, broker-dealers and businesses that buy/sell securities and also give advice are compensated by fees plus commissions. Those commissions may be based on a “per transaction” basis thereby giving the advisor an incentive to sell a specific product or products from a specific vendor (because of higher commissions paid).

No fiduciary standard exists (except in a few states) for fee based advisors. They are subject to a “suitability” requirement (i.e. “Is the investment recommended/sold suitable for the investor?”). Therefore, if two investments can be deemed “suitable” for a client and one provides a higher commission to the advisor, the advisor is free to choose either as appropriate for the client. Fee based advisors are generally not required to disclose to the client all compensation arrangements or conflicts of interest.

Regulatory oversight for fee based advisors is provided by the Financial Industry Regulatory Authority (FINRA). FINRA does have circumstances in which additional information concerning disclosure of conflicts of interest must be disclosed to the client; it also provides for dispute resolution between advisors and clients according to binding arbitration.

Hybrid Arrangements

In other situations a fee only advisor can have arrangements/ownership in firms that are actually fee based. For example, a fee only advisor might have securities licenses that entitle him/her to receive commissions from a broker dealer. In such a case, the advisor must be registered with the SEC and subject to FINRA oversight as a broker. Thus the advisor is subject to a fiduciary standard when giving advice and a suitability standard when providing commission services. Sound confusing? It is.

Much discussion is occurring in the financial services industry about fee only vs. fee based. In addition, industry groups weigh in on the subject. The National Association of Personal Financial advisors require its members be compensated solely by the client and that neither the advisor nor a related party receives any compensation based on the purchase/sale of any product. The CFP Board of Standards requires that Certified Financial Advisors may not use the term “fee only” if they are associated with a broker dealer or any firm that receives transaction based compensation.

We at Paragon Financial Advisors keep it simple—we are a fee-only registered investment advisory firm. We are also a firm member of the National Association of Personal Financial Advisors and the three firm principles at Paragon hold the Certified Financial Advisors  designation.  We offer financial planning and investment management services for our clients.