Living on the Financial Edge

 Living on the Financial Edge

At Paragon Financial Advisors, we recommend our clients have a 3-6 month cash “ready reserve” to meet unexpected expenditures. For most Americans, accumulating that amount appears to be much easier said than done. In the May, 2016 The Atlantic magazine, Neal Gabler wrote an article entitled “The Secret Shame of Middle Class Americans.” Some of the items he mentioned (and the sources he quoted) are shown below.

Unexpected Expenses

A Federal Reserve Board survey designed “to monitor the financial and economic status of American consumers” found that 47% would not be able to cover a $400 unexpected expense unless they borrowed, sold something, or could not cover it at all. David Johnson (University of Michigan) surmised that Americans usually smooth consumption over their lifetime: borrowing in bad years and saving in good years. People are now spending any unexpected income (bonuses, tax refunds, etc.) instead of saving it.

A 2014 Bankrate survey found that only 38% of Americans had enough in savings to cover a $1000 emergency room visit or a $500 car repair. Nearly one-half of college graduates could not cover the expense through savings. In 2015, A Pew Charitable Trust study found that 55% of households didn’t have enough liquid savings to cover one month’s living expenses.

Another study by Annamaria Lusardi, Peter Tufano, and Daniel Schneider asked whether a household could raise $2000 within 30 days for an unexpected event. More than 25% could not; another 19% would have to pawn something or use a payday loan to raise the money. Nearly a quarter of households with an income of $100-$150,000 per year could not raise the $2000 in one month.

Liquidity or Net Worth

Is this situation only a liquidity problem or is net worth (the net sum of all assets including retirement accounts and home equity) also at risk? Edward Wolff, an economist at New York University, reported that net worth has declined significantly in the last generation. Net worth declined 85.3% from 1983 to 2013 for the bottom income quintile, decreased 63.5% for the second lowest quintile, and decreased 25.8% for the middle quintile. He looked at the number of months a household could fund its current consumption by liquidating assets if the household lost all current income. In 2013, the bottom two quintiles had no net worth; hence, they couldn’t spend anything. The middle quintile (with an average income of approximately $50,000 per year) could continue spending for 6 days. A family in the second highest quintile could maintain current spending for a little over 5 months.

Research funded by the Russell Sage Foundation found that the inflation adjusted net worth of the median point of the wealth distribution was $87,992 in 2003. In 2013, it had declined to $54,500—a decline of 38%.

Debt

Value Penguin did an analysis of Federal Reserve and Transmission data pertaining to credit card debt. In 2015, credit card debt per household was $5700. Thirty eight percent of households carried some debt; the average debt of those households was greater than $15,000. Apparently the rise of easy credit availability has supplanted the need for personal savings. The personal savings rate peaked around 13% in 1971, fell to 2.6% in 2005, and has risen only to 5.1% now. These debt levels reflect only personal debt; no serious attention is being paid to our $19 trillion government debt.

What’s Going On?

Financial products are becoming more sophisticated, both in quantity and complexity. Such additional products should provide a better way to manage personal financial “hiccups.” Lusardi and her associates (in a 2011 study) found that the more complex a country’s financial and credit market became, the worse the problem of financial insecurity becomes for its citizens. That study measured the knowledge of basic financial principles (compound interest, risk diversification, the effects of inflation, etc.) among Americans ages 25 to 65. Sixty five percent were basically financially illiterate.

Why are we at a financial advisory firm writing about this situation? The United States finds itself in the midst of a most unusual political situation. Some candidates for President of the United States are espousing theories or programs outside the normal capitalistic structure. Are conditions such as the ones described above partially to blame?

A crucial part of managing investment portfolios is attempting to monitor the economic, political, and social conditions that might affect the investing environment in the future. What will that environment look like and how will it affect the selection of assets going forward? We at Paragon Financial Advisors don’t have a crystal ball for the future, but we do try to help our clients invest for the long term. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

Social Security Changes

The Bipartisan Budget Act of 2015 passed by the 114^th Congress in December made some changes in benefits that were available for claiming Social Security benefits. How, and when, individuals and couples claim their Social Security benefits can have significant impact on the amounts received over the claimant’s lifetime(s). Usually, the minimum age for claiming benefits is 62; however, benefits will be reduced by 6 2/3 % for each year younger than the “full retirement age” (FRA) at which benefits could be received with no reduction. That FRA is dependent on the claimant’s date of birth. Benefits increase by 8% per year for each year beyond FRA that a person waits to start drawing his/her Social Security. The increase in benefit applied only until age 70; no further increase is available after that age. Two major changes were impacted by the Budget Tax Act; it eliminated “file and suspend” and “spousal benefit” provisions. The old rules are in place until April 30, 2016; after that, new rules are in place.


File and Suspend


The file and suspend provision allowed on individual who had reached his/her FRA to file for Social Security benefits but defer the collection of those benefits until sometime in the future. That delay allowed the recipient’s benefits to increase by 8% per year until benefit payments actually started. If, during that suspension time, the claimant decided to receive the original payment from FRA, that option was available. And, a lump sum for the amount that would have been received was available. In addition, auxiliary benefits might be available to a spouse or minor dependent. The real benefit was the spousal benefit (see below).


Restricted Claim for Spousal Benefits


The spousal benefits provision allowed a spouse (who had reached FRA) to file for 50% of their spouse’s Social Security benefit (who also reached FRA) while letting their own benefit grow. For example: Spouse A could receive $2000 per month at FRA; that spouse “files and suspends.” Spouse B (at FRA) could receive 50% ($1000 per month) while both spouses let their own benefits increase by 8% per year until age 70. Spouse B could then take the larger of the 50% or his/her own benefit.


The Rules Change


After April 30, 2016, an individual may still file and suspend at FRA; however, no one else may collect any benefits on the individual’s record while the suspension is in place (subject to the exception below). In addition, the option to request a lump sum payment for deferred benefits no longer exists.


Anyone who is age 62 or older at the end of 2015 retains the right to claim only spousal benefits when they reach age 66 and receive their (hopefully larger) retirement benefit at age 70. Anyone younger than 62 at the end of 2015 will no longer have the option of which benefit to claim; they will be paid the higher of their own benefit or as a spouse.


Divorcees who were 62 or older at the end of 2015 fall under the four year phase in rule also. They must have been married at least 10 years, divorced two years, and are currently single. They can file for spousal benefits at age 66 and change to their own higher benefit at age 70.


We at Paragon Financial Advisors work with our clients to help them achieve their financial goals. That includes evaluating Social Security options; we do request that each individual discuss his/her personal circumstances with the Social Security personnel to confirm their personal history. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Social Security and Medicare

There are times we read things that cause us to say, as my friend puts it, “I’ll have to think on that.”  Such a time occurred as I read an article in the April 28, 2014 Investment News (pg. 40) written by Mary Beth Franklin. The basic premise was that, in some cases, Medicare costs could exceed the Social Security benefit that one receives. Let’s look at that possibility.

Social Security and Medicare-2014

For 2014, the Social Security tax rate is 6.20% of the first $117,000 of earned income (a maximum tax of $7,254). The Medicare tax rate is 1.45% of all income earned (no upper income exclusion). Thus, most employees pay 7.65% of the first $117,000 earned in Social Security (OASDI) and Medicare (HI) taxes. That is the employee portion only; employers pay an equivalent amount. Self- employed individuals pay a tax rate of 15.30%. As of Jan 1, there is an additional 0.9% Medicare tax (added by Obamacare legislation) on individuals earning greater than $200,000 and couples earning greater than $250,000.  Thus, the maximum tax rate could be 8.55% (6.20% + 1.45% + 0.9%).

Now consider Medicare costs. Medicare Part B (medical insurance) is deducted from an individual’s Social Security benefit every month. There are two components: one for medical expenses and one for prescription drug services. Since the prescription drug service costs vary by location/plan, we will discuss only the medical insurance costs. As one’s income level increases, so does the cost of medical insurance (i.e. an increase in the amount deducted from monthly Social Security benefits). That scale (for 2014) is shown below:

Modified Adjusted Gross Income (MAGI)            Part B Premium                Drug Plan

Indiv <$85k; Couple<$170K                                  $104.90/month                 Per plan

Indiv $85k-$107k; Couple $170-$214k                  $146.90                            Plan + $12.10

Indiv-$107k-$160k; Couple-$214k-$320k             $209.80                            Plan + $31.10

Indiv-$160k-$214k; Couple-$320k-$428k             $272.70                            Plan + $50.20

Indiv->$214k; Couple->$428k                               $335.70                            Plan + $69.30

 

The maximum Social Security benefit in 2014 is $2,642 at full retirement age. The cost of living allowance adjustment (COLA increase) for 2014 was 1.5%. Therefore, a high income individual might be receiving at most $2,236.90 ($2,642-($335.70+$69.30)) less his/her individual prescription plan costs. (Note: These figures were taken from the Social Security website and are applicable for 2014; they change each year).

What’s to Come?

One needs to spend only a short amount of time watching news/economic television channels to see numerous discussions that “something must be done” about entitlement programs (Social Security/Medicare). The current trajectory is unsustainable. Various solutions have been proposed: 1) Increase taxes, 2) Raise the retirement age for Social Security benefits, 3)Means test benefits (those individuals with higher incomes will receive lower/no benefits from Social Security), or some combination thereof. The purpose of this blog is not to suggest solutions for the problem; that is in the political arena and, given current political conditions, who knows what will happen. Our purpose is to suggest that plans must be made for significant changes in health care expenses as one prepares for retirement.

Health care costs are expected to increase by 5-7% per year and Social Security benefits to increase by 2% (unless changes are made to the COLA adjustment index- such as use of a “chained CPI” calculation-but that is another discussion entirely). Bottom line—health care expenses will consume a greater proportion of Social Security benefits (if any are received) in the future.

In previous a previous blog found HERE we have discussed costs of health care under the current Medicare plans. They are significant—providing approximately $300-400,000 for a couple in excess of existing Medicare benefits. Any changes made in the current plan will only exacerbate the shortage of money needed for health care in retirement.

What to Do?

Prudent financial planning requires that one take appropriate action to prepare for contingencies that appear possible or probable. If one looks down, sees a steel rail on the left, a steel rail on the right, and a bright light down the tracks in the distance, a good course of action might be to step off the railroad track. So what does one do? Work longer? Save more? Spend less? Move to a lower cost of living state? Purchase long term care insurance?

We at Paragon Financial Advisors do not sell any commercial products (insurance, etc.).  We help our clients evaluate personal circumstances and assist in determining the best course of action.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Long Term Care Considerations

In a previous blog found HERE, we discussed  general  guidelines  of planning for long term care.  We will now discuss further considerations in this blog.

Cost of Care

The majority of individuals provide for long term care through insurance.  The cost for those policies has been changing (increasing premiums or reducing benefits) over the past few years.  For example:

1. Women frequently pay more because of their longer life expectancies and more expensive claim history.
2. Age at the time long-term care begins also affects policy costs:  the younger the applicant, the lower the policy premium. Determining when to purchase a policy requires a cost/benefit analysis.  The younger you are, the longer you pay premiums but at a lesser premium rate.

Eligibility Requirements

 

A study by the American Association of Long Term Care Insurance (see Kiplinger Retirement Report, Vol 21, number 3, March 2014) showed that insurance rejection rates of policy applicants) factored in both age and medical conditions.  Twelve percent of applicants below age 50 were rejected.  The rejection rate rose to 17% for those age 50-59; 25% for those age 60-69; and 44% for applicants in their seventies.

 

Gate Keepers

 

When evaluating long term care policies, one should carefully analyze the “gatekeepers.”  These are the provisions which must be met before the policy will pay benefits.  Analyzing their provisions for benefit payment s is critical and should be done for your individual circumstances.

 

How To Pay

 

Some recent changes have been made that may allow an applicant to pay long term care premiums more “efficiently.”  Premiums can be paid with tax-free rollovers from cash value life insurance policies or deferred annuities.

 

You can also use money tax free from a health savings account.  Since contributions to such accounts are limited (based on individual age), these plans will cover only a portion of the insurance policy cost.

 

Paragon Financial Advisors does not sell insurance or any products.  On the other hand, we do assist our clients in planning for the cost of long term care.  Please call us if you would like to schedule an appointment to discuss your circumstances.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financialplanning and investmentmanagement.

Long Term Care Expenses

As the American population ages, they face the prospect of long term care expenses.  Some families faced this problem with their own aged parents and are now trying to decide how to handle the possible need for themselves.  As people evaluate their options, they are facing several factors.
 
Cost of Care
 
According to the insurer Genworth, the median US rate for a private nursing home room in the US is approximately $84,000 per year.  In Texas, that figure is $65,000 and in the Bryan/College Station area, it is $62,963.
 
Assisted living facilities cost $41,400 (median US; Texas is $42,270; and Bryan/College Station is $44,400. The annual inflation rate in Texas has been approximately 5% for assisted living facilities.
 
Method of Provision
 
Several alternatives to fund long term care are available:
 

1. Insurance policies—Long term care insurance has been a method used by many to pay for care. However, this market is changing.  Some long-term care policies written in past years are not meeting actuarial assumptions; therefore the insurance caregivers are attempting to modify these contracts.   Newer polices are more expensive or have reduced benefits.  Policy premiums obviously vary depending on age and health of the policy applicant. In some cases, women are being charged more than men because their claims are longer (longer life expectancy) and more expensive.
2. Self Fund- -Individuals may plan to pay long term care costs from their assets.  In this case, the obvious questions arise:
• How long will the care be required?
• What will be the inflation rate on cost of care?
• What will be the rate of return on assets reserved for long term ca
3. “Coinsurance” Planning- Individuals may opt for reduced insurance benefits and plan to supplement those benefits with personal funds.  You have many options available for long term care insurance policies; determining the appropriate policy requires considerable evaluation to ensure the policy you purchase best meets your needs.

If you are self funding, we recommend that you reserve at least three years (inflation adjusted) needs per person based on the cost of care in your area.

Paragon Financial Advisors do not sell insurance (or any products).  However, we do assist our clients in the evaluation of planning options to provide for long term care expenses.  Please call us if you would like to schedule an appointment to evaluate your circumstances.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Long Term Care

Declining ability to take care of one’s self is a rising concern, especially as life expectancy increases. The prospect of spending time in a care facility is not something anyone desires; however, it will be a fact of life for some. As such, prudence demands that long term care provisions be addressed in any financial planning—especially for aging individuals. Let’s review some facts:

1. Currently, 70% individuals over the age of 65 will spend time in a long term care facility.
2. The average length of stay in a long term care facility is 2.44 years.
3. The national average cost of a semi-private room in an assisted living facility is about $250 a day, or $91,000 a year
4. Long term care costs have been rising at about 4% per year.

Given these statistics, the financial impact of long term care must be considered in retirement planning. In addition, family conditions must be considered. Will there be a support system (family close-by) that will allow individuals to live at home as the ability to take care of themselves declines? How do we plan for those contingencies? We discuss some of the options below.

 

Self-Insure

 

Individuals with significant assets have the ability to cover costs of long term care from their own income/assets. Level of benefits and quality of care simply becomes a cost/benefit decision. However, the majority of individuals are not in the position of doing this.

 

Long Term Care (LTC) Insurance

 

Long term care insurance is an option for many individuals; however, the LTC insurance industry is in a state of flux. There are several factors to consider here:

1. Insurance Company- As with any insurance product, the quality of the insuring company affects the likelihood of future ability to pay. It is interesting to note that two of the largest insurance companies (Genworth Financial and John Hancock) have filed for premium increases on their long term care product. Apparently the actual costs experienced have exceeded the actuarial assumptions used in pricing older long term care policies. NOTE: An obvious implication for policyholders of older policies is to carefully weigh any “opportunity” to switch from an older policy to a newer policy. It is quite likely that newer policies will not provide the same level of benefits at a comparable cost.
2. Insurance Policy- The actual insurance policy options vary significantly. Some of the questions to ask about policy coverage are:
• Gate keepers- Gate keepers are those conditions that must be met before the policy begins paying benefits. Usually these are expressed in the ability to perform specific functions (i.e. feeding, toileting, transfer of locations, etc.)
• Care location- Does the policy provide for benefits when the individual is at home with a caregiver, or do benefits become payable only when the individual is in a long term care facility?
• Benefit coverage- How long will care benefits be paid? Is there an escalation benefit to allow for increases in long term care coverage costs over time?
• Exclusion provisions- How long must the individual wait before benefits under the policy begin paying? Is a prior hospital stay required?

Long term care policy purchase decisions warrant significant consideration. Policy differences can be substantial and costs vary dramatically. A frequent question arises concerning when to purchase a policy. The older the individual, the more costly the policy; consequently, purchasing a policy at a younger age (in the 50s age group) might make more sense.

 

Medicaid

 

In some cases, long term care benefits are available for individuals who lack personal resources or long term care insurance. Such Medicaid payments are made to the long term care provider on behalf of the individual. Obviously there are conditions which must be met. There are two primary conditions:

1. Means test- The amount of monthly income for the individual cannot exceed a certian amount per month.
2. Asset test- The assets available to the individual in terms of savings, investments, etc. cannot exceed specified levels.

There are planning techniques available to address these two conditions; they are complex and warrant discussion on an individual case basis.

 

We at Paragon Financial Advisors do not sell insurance (or any other) products; however, we can help our clients evaluate long term care options available to them. There are alternative products (usually in the life insurance market) which are available but the cost/benefit in them warrants specific analysis. Please call us if you need assistance in planning for your long term care needs.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

 

 

United States. Department of Health & Human Services. Long –term Care Insurance Costs. N.p.: Administration on Aging, June. 2012. Web. 14 March 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.

               

Paragon Perspectives

In this quarter’s newsletter I will be discussing Estate Planning, Exchange Traded Funds (EFTs), and Retirement.  Although each of the following articles cover a different topic, they are all components of the financial planning process.

 

Although estate planning is a subject that some people would prefer not to discuss, it is a vital part of a financial plan. The first article, "To Trust or Not to Trust," explains why high net worth couples should include a trust in their estate planning process.  Keep in mind that trusts are not just for high net worth individuals.  There are other reasons to include a trust in your estate plan.  Trusts provide asset protection for your heir(s), manage assets for your minor or impaired children, and have age specific asset distribution benchmarks for your heir(s) (i.e. age 25, 30, etc.). 

 

The second article, “Three Reasons to Add ETFs to Your Portfolio," considers why ETFs could be a good addition to your portfolio.  ETFs are a relatively new investment product than became available in the U.S. in 1993 and have gained in popularity over the past several years.  ETFs started as index funds, but in 2008 the Securities and Exchange Commission began allowing the creation of actively managed ETFs.

 

Lastly, the third article “So, You’re Ready for Retirement…Or Are You?” discusses how over the past several years retirement planning has come to include a period of transition.  This transition period is not for everyone, but the option should be explored before retiring.        

 

   As always, we at Paragon Financial Advisors welcome your questions about your account.  If you are interested in Financial Planning or any of the topics discussed please call us. 

 

If you did not receive a copy of this quarter’s newsletter please email info@paragon-adv.com to request one.

 

Sincerely,

 

David W. Hailey CTFA^®, CFP^®

Principal and President

What’s Your Number?

A recent TV commercial featured ads asking individuals the question above. The number referred to the amount of money the individual would need to fund their retirement. While that number was hypothetical, numbers can have significance. Witness the “talking heads” on the financial news channels as they await and report the periodic economic data news (Gross Domestic Product (GDP), unemployment, Consumer Prices (CPI), etc.). They will discuss the numbers, the trends, and the potential impact that data has on the financial markets. Ah, but now-as radio commentator Paul Harvey used to say- for “the rest of the story.”

Columnist Samuel Rines wrote an interesting article entitled “Monthly Economic Data Aren’t Reliable” in the June 28, 2013 Wall Street Journal. His basic premise is that all economic data is incorrect when initially issued; it is then corrected in subsequent time periods as more data are received. For example, the annualized change in GDP for the fourth quarter of 2008 was reported as -3.8%. Following subsequent revisions, the final GDP number for that quarter was -8.9%; an error of 134%. Revisions apply in much of the economic data reported. Those revisions matter. The Federal Reserve uses such economic data to analyze the economic growth and then make economic policy.

Employment data is another example. Initial employment data in February, 2013 was reported as a net new job growth of 236,000. It was revised in March to 268,000, and again in April to 332,000. The unemployment rate (currently 7.2%) is a frequently reported number. Its calculation counts anyone who works at least one hour as “employed,” and does not count anyone who stops looking for work as “unemployed” even though that person does not have a job. A much better number might be the actual employment percent of the eligible workforce—that number stands at all-time lows.

So what’s an investor supposed to do? Consider economic data figures as a “best guess” and view the data in terms of a broad indicator of the economy and its direction of growth. Monitor future adjustments and factor those into your assessment of actual economic growth. Certainly a macro view of the economy is important in your investment plan; but keep in mind your long term financial goals. Make investment decisions with those goals as a guide. We, at Paragon Advisors, will be happy to discuss your financial plans with you and assist you as you work to achieve your financial objectives.

Taxes-Estate and Gift

We at Paragon Financial Advisors are not accountants and urge you to verify any items we discuss with your tax professional to determine its implications in your particular situation. We also do not believe you should “let the tax tail wag the investment dog.” That is, your investing should not be dependent solely on tax considerations. However, tax consequences certainly should be considered when all other things are equal. Taxes can have a significant impact on your total economic well- being. It is in that spirit that we discuss the Congressional resolution (enacted at the last minute) to the fiscal cliff.

One of the more favorable (relatively) aspects of the American Taxpayer Relief Act of 2012 was the impact on estate and gift taxes. Prior to this act, estate tax rates were scheduled to rise to a maximum tax rate of 55% and the exclusion amount from this tax was to fall from $5.1 million per person to $1 million per person. With the 2012 Act, the exclusion amount was made permanent at $5 million indexed for inflation (the current amount for 2013 is $5.25 million). The tax rate, however, was raised from 35% to 40%.

Another permanent aspect of the ’12 Act was the provision of “portability.” Portability simply allows the surviving spouse to utilize the deceased spouse’s unused portion of the exclusion amount without the necessity of utilizing trust arrangements. This concept appeared in 2011, but was made permanent in 2012. It is important to note that this portability applies only to the last deceased spouse so, for multiple marriages, some planning pitfalls appear.

While the exemption amount remained higher and the tax rate lower than many had expected, there are other estate planning techniques that are still “at risk.” Some trust planning techniques ( such as grantor retained annuity trusts—GRAT’s) and the discount valuations for family limited partnerships (FLP’s) may be in danger; hence, there is some urgency in implementing those types of plans if appropriate.

As usual, we here at Paragon Financial Advisors remain available to assist you in working with your legal professional as you complete your estate planning. Please do not hesitate to call on us.

A "How To" Estate Plan for Your Digital Assets

The last two posts introduced what digital assets are, the importance of planning for them, as well as some obstacles that exist.  Please take a moment to read them HERE.  In this final post we will explore a few solutions that have been developed to help with planning for digital assets.

“After you pass away, the everyday things in your life will become significant to your friends and family.  No matter how simple, your digital content is no exception; in many respects, it may become even more valuable.”  Evan Carroll, Your Digital Afterlife.  We know that planning for digital assets is important.  Now how do we do it?  While there is no single answer, a combination of options may help.

The very first step is compiling a list of all websites where accounts are held.  For each website, read the terms of use or find out how each website handles the account and the data within it upon death.  Do they let you choose who can access the account?  What documentation is required to grant access to an heir?

Second, research the laws in your state.  Are there any existing laws governing digital assets?  If there are, do they cover access to any digital account AND access to any digital assets held within the account.  If no laws exist, speak to legislators in your state to voice concern. 

Estate planning attorneys can also be an asset.  Visit with your estate planning attorney about including language in your last will and testament to express your desires about management of your digital assets.  Do you want the executor to also handle access to your digital accounts and digital assets?  Do you want to leave a memorandum with instructions for digital assets and their access, handling, distribution and disposition?

Services and technology solutions have been introduced to try to address this growing area of need.  There are programs for the purpose of storing usernames, passwords, and other documents in an encrypted format.  Some of them are strictly for the purpose of making a record of all accounts and access to each that cannot be used during life.  Upon receipt of a death certificate they will release all information to the authorized individual. 

“In its simplest form, a digital legacy is a summation of the digital assets you leave behind for others.  As the shift to digital continues, the digital assets left behind will become a greater part of your overall legacy.”  Evan Carroll, Your Digital Afterlife.  A complete plan uses several of these options in conjunction.  Visit with loved ones, your financial advisor and your estate planning attorney to begin developing a plan to ensure that your digital legacy continues—your way. 

Estate Planning for Digital Assets Poses Some Questions

Over this three post session I’ll venture into a topic that most of us are familiar with but probably not prepared for.  We all use technology in various ways.  Some of us are more active using online resources than others.  Have you stopped to consider what will happen to your digital assets upon your death?

First, what are digital assets?  Evan Carroll, author of Your Digital Afterlife writes:

“Email, photos, videos, Facebook accounts—they’re the elements of your new digital life.  In fact, almost without realizing it, we have shifted toward an all-digital culture.  Future heirlooms like family photos, home movies, and personal letters are now created and stored in digital form.  And increasingly they’re stored online at popular sites that might not be accessible to your loved ones after you pass away.”

In a recent presentation at the National Association of Personal Financial Advisors (NAPFA) conference Mr. Carroll describes four different types of digital assets that should be considered.

1. Contents of computers and devices such as desktop computers, laptops, tablets, mobile phones and other similar devices.
2. Email including incoming mail, stored mail and sent mail.
3. Social networking and websites like Facebook, Twitter, Flickr, Pinterest, LinkedIn and others.
4. Online business and account management.  This could include sites such as eBay, Etsy, blogs, advertising, PayPal, online banking and bill payment services.

Do digital assets have value?  Think about email in particular.  How much of your day to day routine involves email in one way or another?  All online accounts use email as a hub for management of your account.  I receive bank statements and ebills, reminders from the bank, reminders of service from the exterminator, emails from the kids teachers and principals, password reset requests, order confirmations and travel itineraries to name a few.  Not to mention all of the personal interactions with friends, relatives, volunteer organizations and clubs the kids are involved in.  What would happen to all of these things upon my death?  Is my spouse completely prepared to take over the daily management of our lives in my absence without access to all of these digital assets?  Unfortunately the answer for me is no.  I suspect the answer may be the same for many of you.

The issue is even more imperative if you are one of the many entrepreneurs who operate a small business through sites like Etsy, eBay or others.  Is there someone who knows how to wrap up your business dealings?  How would you access the business records held as part of the history of these online accounts?

Each site has a “terms of use” section with details about how the account is handled should a death occur.  How would a person navigate the requirements of each account when they all differ slightly in what is required upon death and what they will provide?

Basically I have asked a lot of questions and offered few answers.  I will be exploring different options in future posts.  Stay tuned…

Inflation and the Cost of Living

The news media has been reporting some of the discussions between the two major political parties in the “reduce spending/raise taxes” debates –especially as they relate to “entitlement” reforms such as Social Security. One of the items being mentioned by the presidential administration is a change in the method of calculating cost of living adjustment (COLA) for Social Security benefits. The change basically involves changing how the Consumer Price Index (CPI) that drives the benefit increase is calculated.

Calculation of the CPI is complex and different people will be affected by it differently depending on the actual “basket of goods” they purchase. We are not going to have an in-depth discussion on the actual calculations and associated nuances here. If your actual purchases are food, energy, healthcare, and education related, your cost of living is greater than the approximately 2% the government is calculating now. The new idea is to use a “chained” CPI for calculating benefit increases. Chained CPI basically assumes that consumers will actually change their buying habits rather than just seeking cheaper brands. For example, if the price of beef goes up, consumers will start buying more chicken and not just substituting hamburger for steak. Hence the actual cost of living for the consumer should be based on the increase in chicken prices instead of beef.

So why are we having this discussion? It’s not just Social Security benefits that will be affected. How many other things are impacted by various COLA adjustments? How about the indexing that occurs throughout the IRS tax code? The lower the increase in those amounts, the greater the number of people who will be impacted by higher taxes (remember “only the very rich who don’t pay their fair share will see tax increases”?). But investors in particular should be ware. If an investor  believes inflation is only 2% when inflation is actually greater than 5% (and makes investment decisions accordingly in a 1.9% 10 year Treasury or 2.99% 30 year Treasury bond environment), then erosion of buying power is almost guaranteed. For most people, retirement is not difficult in the first 5-10 years. The problems occur in the later years when delaying retirement or earning additional income is not an option. Should you have any questions, please contact us at Paragon Financial Advisors; we can assist you in your retirement planning.