Is it Time for a Roth IRA Conversion?

When it comes to retirement planning, conventional wisdom has always dictated deferring income until you retire. A lower tax bracket will probably prevail once retired. The bigger question now... does this rule still apply?

Our national debt is expected to surpass $10 trillion this year. A staggering figure! This has many people speculating... me included... that current tax rates are unsustainable. At some point, the IOU's issues all over the world via our US Treasury Department will have to be repaid.

It's great to think this will occur through current income tax collections, estate taxes, capital gains, etc. Unfortunately, I think the math is faulted. Higher taxes will probably be coming in the near future. Further, while the Obama Administration feels higher net income people could foot the bill, the income threshold is already starting to come down. At some point, it will probably be spread across all income levels. I don't think he will have a choice.

If you believe tax rates are going to increase, there are several reasons to consider a Roth IRA conversion:

1. Investors are not required to do a full conversion. Converting some funds to a Roth IRA gives the investor a hedge against future tax increases.
   


2. Investors will pay less in taxes for conversions today than they would have several years ago when their IRA account values may have been higher.
   


3. For long-term investors converting during the current bear market, all the gains i the next bull market will grow income-tax free for life.
   
   
4. The Tax Income Prevention and Reconciliation Act of 2005 eliminates the $100,000 income restriction for conversions in 2010 and half the income can be recognized in 2011 with the balance in 2012.
   
   
5. The Pension Protection Act of 2005 says that employer plans can now be converted directly to a Roth IRA and retirement or separation of service is considered a triggering event. If a 401k plan offers in-service withdrawals, those distributions can be converted to a Roth IRA. Plus, beneficiaries of an inherited employer plan can now convert those funds directly to a Roth IRA. (Note: $100,000 income limit still applicable for 2009)

When to refinance?

How did the mortgage process get so complicated? Products have become so confusing in recent years, it's hard to understand how they actually work. With products like, negative amortization, 7/1 ARM, interest only, reverse mortgage, etc. It's hard to know what you're getting yourself into and what changes will occur at a future date.

Fortunately, it doesn't have to be this difficult! Mortgage rates are near historic lows and good old fashioned fixed mortgage (15 or 30 years) will answer a lot of prayers for first time home buyers and/or individuals looking to refinance.

When it comes to refinancing, there are a number of reasons to do so:

1. Lower Your Monthly Payment - This is the most common reason for getting a new mortgage. Reducing your interest rate and thus your monthly payment(s) makes good economic sense. Most people will follow the "2%" rule of thumb, but this doesn't always apply. The bigger the mortgage, the less of a change you need to make it worth your while. A big mortgage will change the numbers. For example, a 750,000 mortgage (30 year fixed @ 6%) requires a monthly payment of $4,497. Simply reducing the rate to 5.5% lowers your payment to $4,258 (a savings of $339 per month or $2,863 per year).
   


2. Consolidate Debt - Bundling debt into one payment can make sense for some people. Should you carry credit card debt that is not paid in full each month, the interest rate could be significantly higher than that of a mortgage. Some rates are now in the 20% range. I'll be the first to admit putting your HDTV on a mortgage turns a short term purchase into a 30 year commitment. The amount of money you will pay for your television will be significantly higher. But, if monthly cash flow is a concern, this could be a way of reducing monthly expenses. Any savings could be applied to the principal on your mortgage.
   


3. Borrow Home Equity - Owning a home is expensive. Sometimes refinancing and using some of your equity allows you to upgrade a kitchen or a bathroom. It would be ideal to pay cash for this renovation, but coming up with $10,000- $50,000 isn't an option. Some parents also use their home to finance kids college or a purchase of a new car. As a Financial Advisor, I recommend against this as college and cars should be separate goals with different time frames. However, using your home to finance these items is becoming more common. Also, the interest can be tax deductible.

Madoff - The Simple Math

150 - Jail sentence issued to Bernard Madoff on June 29, 2009

1,341 - Number of Madoff customers according to company records.

12 - Recommended prison term in years recommended by Madoff attorney.

109 - Number of nights Madoff spent in jail since pleading guilty in March.

$13 Billion - Estimated net losses suffered by Madoff clients since 1995.

$1.225 Billion - Amount recovered by bankruptcy trustee for Madoff victims.

$188 Million - Cash advances promised to Madoff investors as of June 23.

$973 Million - Losses deemed not covered by Securities Investor Protection Corp. (SIPC).

61727-054 Bernard Madoff federal prison inmate number.

Michael Jackson - The Legend and Financial Disaster

He truly was a one of a kind. With the passing of Michael Jackson, we now reflect back on the true extent of his talents. Nobody will deny, he may have been the best entertainer of our generation. He will be remembered right along side Elvis Presley and The Beatles.

His financial affairs were a different story. He couldn't budget and didn't seem to have an interest in doing so. His larger than life lifestyle was out of control and resulted in a tumultuous balance sheet. Last minute loans from hedge funds (allegedly at 16%) averted a foreclosure of his Neverlands mansion in California a few years ago. And, his scheduled comeback tour was an ill fated attempt to get out of debt. He was scheduled to perform 50 shows in London and hoped to net $100m. Unfortunately, he owed somewhere around $500m at the time of his death.

If we go back to financial planning 101, it's pretty simple. Spend less than you're making and you'll be in good shape. He must have missed this class. A basic income statement would have been appropriate. Total expenses were running way ahead of income and changes should have been made.

As for estate planning? This should be interesting. Having three children with two different women, I wonder if Michal Jackson had a will? Who will become the guardian of his children? Only time and legal wranglings will tell.

Retirement Planning - Is $1 Million Enough?

Trying to accumulate $1,000,000 use to be a retirement goal for many Americans. It represented both a sizable amount of money and put you into an elite group. You were now considered a "Millionaire."

Unfortunately, times have changed and the the new question is now: "Is $1 million still enough today?"

Well, to steal a cliche... It depends! Inflation over the years has eroded buying power and everyone has different goals and expectations of what his/her retirement will look like. For some, it will simply be relaxing and going trout fishing. Fortunately for this person, fishing isn't too taxing on the budget. For others, Royal Caribbean easily rolls off the tongue and cruising the world is the dream. This individual will require a whole different budget.

Our parents generation use to rely upon years of company loyalty and thus a pension check. Toss in social security as an income supplement and you were all set. Today's generation of workers are facing a different set of variables. For starters, most people no longer stay with one company their entire career. And, even if the do, it no longer guarantees them a pension.

Tomorrows retiree's will have to rely upon several sources of income to replace their salary. You will have to carefully evaluate your retirement plan and how much annual income you will need to suit your lifestyle. Unfortunately, reality dictates most people spend more time planning dinner than retirement, so for many this will require putting pen to paper.

Let's look @ an example: A couple with a household income of $52,000 will probably seek to replace 75-100% of their income. Assuming the mortgage is paid off and the kids are out of college, doing with less and maintaining your existing lifestyle is feasible. In simple math; less expenses = less required income.

Household income of $52,000 per year equates to roughly $4,000 per month. Assuming no pension, social security and other sources of income will have to suffice. Should social security provide $1,500 per month (simply an estimate), another $2,500 will be required to fill the void. Retirement plans (401k, Traditional IRA, Roth IRA, etc.), annuities (variable and/or fixed), rental income and/or part-part employment are the obvious choices.

The problem comes into play with higher income levels. An individual wishing to maintain a current lifestyle of $120,000 per year will find a different set of challenges. Once again, we'll assume no pension. His/her retirement income will have to be derived from social security and other various sources. Most people in this tax bracket will max out and receive social security benefits just over $2,000 per month (assuming a retirement of 67 years of age). If $10,000 is the magic number per month and social security provides just $2,000 per month, an $8,000 shortfall exists. Where does the remaining income come from???

As a Financial Advisor, I've always said, "I don't care how much you make, tell me how much you can save." For many, these words will be the difference in having an enjoyable retirement and not.

What is a Mutual Fund and Can I Lose All of MY Money???

There are two questions I am frequently asked when it comes to investing. The first is a general question while the second pertains more to the recent economy and stock market turmoil.

Q: What exactly is a mutual fund?

A: A mutual fund is a professionally managed pool of money. Thousands of investors mail money to a fund company and the collective amount is overseen by a Portfolio Manager. There job is to follow the mutual fund(s) stated objective and purchase stocks, bonds, money market instruments and/or other securities instruments to create a diversified portfolio.

Q: Can I lose all of my money?

A: A mutual fund portfolio consists of hundreds of stocks. To go out of business, a fund would have to witness each and every company in their portfolio file bankruptcy. Should your portfolio own 200 stocks such as Proctor & Gamble, IBM, Verizon, Disney and Exxon Mobile, these companies along with the other 95 holdings would have to go out of business in order for you to lose all of your money.

The best example may pertain to Massachussets Investors Trust Fund (MITTX). Considered to be "America's First Mutual Fund", this equity offering has been in existence since 1924. Not only has it survived the Great Depression, 15 recessions and 6 major wars, it has never missed a dividend payment in it's 85 year history. Through 3/31/09, the fund sports an annualized return of 8.56%. A $1,000 investment in 1924 would now be worth $1,076,307.

Life's Lessons - Plain Vanilla

Life teaches us many lessons. As a child, I remember my father treating all my friends to ice cream when the Good Humor man came through our neighborhood. After waving down the truck, my dad would order the same flavor ice cream cones. One week it was vanilla and the next chocolate. His reasoning was simple. Everyone received a cone and nobody squabbled over who got what flavor. As he use to say, "keep it simple."

The mortgage business should be so easy. Since 2000, the types of mortgages offered to the general public became a potpourri of financial bliss - or mess. Borrower's didn't understand loan specifics. And, who can blame them with product names such as; interest only, negative amortization, option ARM and 2/28 to name a few. Yes, you can blame the lenders for steering people into ill advised products. But, personal responsibility should always be the bottom line. If you don't understand something, ask more questions, but don't sign on the dotted line until you feel comfortable.

Stevie Wonder could have seen this financial mess coming. Many borrower's were simply blinded by greed and the right to own a property at any cost. This seemed to be accompanied by little or no money down purchases. What's wrong with the plain vanilla mortgage(s) of our parents generation? Fixed mortgages for 15 or 30 years work great! They're simple to understand and have no future rate increases. You can go to bed each night knowing exactly what your mortgage payment will be for the next 15 or 30 years.

With mortgage rates hovering around historic lows, most properties are now more affordable than they've been in several years. If you can't afford to purchase a home with a fixed rate mortgage, you probably don't have enough of a down payment. Most banks are once again requiring a down payment of 20-25%. This size investment increases the likelihood that you will not walk away from a property when times get tough.

Owning your own home is a wonderful concept, but 'keep it simple'.