Author: production

Current interest rates are at rock-bottom levels, and they’re likely to stay there for a while, according to recent comments from U.S. Federal Reserve Board Chairman, Ben Bernanke. It’s good news in some ways, not so good in others, because where, in such an environment, can you turn for income?

Most investors divide their portfolios into two buckets. One is principal, which comprises the assets in the portfolio, and the other income, which is made up of the interest and dividends the assets provide.

According to conventional wisdom, you can certainly live off your income in retirement, but whatever you do, don’t tap into your principal. If you do, you’ll have a smaller nest egg, which will in turn yield less income.

While it’s wise to have a base of assets that never falls below a certain level, it may pay to think of income differently. It’s possible, for example, to generate your own income – by selling some of your assets. We’re not talking about reducing your original principal, but about harvesting gains from your portfolio.

For example, you have a $500,000 portfolio that generates 6 percent ($30,000) annually in interest and dividends, and you’re taking that amount as income.

Now, let’s say your portfolio has a good couple of years, and rises to $600,000. One option is to continue to take the 6 percent in interest and dividends (now $36,000) as income. Another option would be to sell a portion of your portfolio – no more than $100,000 – so your principal will still be $500,000.

If you choose this approach, you’ll be selling your winners or other stocks you think are appropriately valued. But be aware: Doing so can generate capital gains.

It’s wise to consult with an advisor to ensure that the resulting gains are long-term (which are taxed at the capital-gains rate), not short-term (which are taxed at your regular income-tax rate).

Capital-loss deductions are a great way to take the sting out of investment losses and save some money on your taxes at the same time.

A capital loss is the loss of money incurred when a capital asset (such as investment or real estate) decreases in value and is then sold.

When you have a capital loss, you must first use it to reduce any capital gains you have on other investments, and there is no dollar limit for doing so. When your losses are bigger than your gains, you have capital losses left over; these capital losses can be deducted from your income by up to $3,000 per year (or $1,500 if you’re married and filing separately from your spouse).

If your losses exceed $3,000, you can carry them forward to future years indefinitely; there is no limit on how much you can deduct in capital losses, other than the annual maximum of $3,000.

For example, if you have $50,000 in annual income for 2013 and $5,000 in capital losses, you can deduct $3,000 of those losses in 2013 (reducing your taxable income to $47,000). You can then carry the remaining $2,000 forward to the following year, when you can deduct it from your 2014 income.

Investors often ask if the $3,000 annual maximum will be increased, and the answer is no – not in the foreseeable future. The issue is not receiving any attention in Congress. Why not consider capital losses for your 2013 tax return, and turn your losses into gains?

The tax information in this article is merely a summary of our understanding and interpretation of the current laws and is not exhaustive. Please talk with your advisor for advice about your individual situation.

Investors interested in alternative investments should be sure to understand how such products work and their unique risks, according to the Financial Industry Regulatory Authority (FINRA), which has issued an investor alert on the issue.

Traditional investments are stocks, bonds and cash, and sometimes real estate. Non-traditional (or alternative) investments are everything else. If that sounds like a loose definition, it is: Alternatives can include precious metals such as gold, hard assets such as commodities, and a number of financial products, such as private equity funds and hedge funds. They often employ complex strategies, including short selling, leveraging, and hedging, through the use of derivatives, which are complex financial instruments.

Alternative mutual funds may be a compelling choice if you’re seeking to manage volatility, but if you’re expecting them to outperform the market, you may want to reconsider. Alternatives are not hedge funds, which are widely considered (inaccurately, at times) to be outperforming investments. Many alternative funds are relatively new, so the jury is still out on their performance. And alternatives can come with high fees. According to FINRA, the average annual operating expense of an alternative fund is 1.5 percent.

A word to the wise, then: Consider alternative mutual funds if they’re right for you and your individual financial circumstances and goals, but before investing, be sure you understand not only how the fund you’re considering works, but also how it might fit into your overall portfolio. Your financial advisor can help you do this.

Most people consider a will to be their primary estate-planning tool, but relying on a will can have disadvantages.

Assets listed in a will must be processed in state probate court, which can be both time-consuming and expensive. And once the will is filed for probate, it is a public document and may be examined by anyone.

Another option may be a revocable living trust.

What are recoverable living trusts?

A revocable living trust establishes a legal entity with the power to hold title to assets.

It is created and governed by the terms of a trust agreement. This agreement lists the assets held in the trust, the individual with the power to manage and distribute those assets (the trustee), and the individuals entitled to benefit from those assets (the beneficiaries).

Depending on state law, you may be able to act as trustee and receive income from the trust as a beneficiary during your lifetime.

A way to avoid delays

The advantage of a revocable living trust is that it avoids probate, and the associated delays and costs.

Also, because the trust will pass outside the probate process, the trust agreement is more likely to remain confidential and will not be subject to public scrutiny.

However, a revocable living trust is not for everyone. Establishing one requires the services of an estate-planning professional, and there can be tax consequences.

Individuals considering using a revocable living trust as part of their estate plan should consult an advisor or attorney specializing in estate planning for advice and assistance.

The information contained in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations and is not intended to be legal or tax advice.

For many retirees, income generated from investments is crucial. However, in today’s low-yield world, it’s not so easy to find an investment that provides a decent return. For example, at one point this past spring, a 10-year U.S. Treasury note was yielding just above 2 percent, and other income investments weren’t yielding that much more.

One option is investing in high-yielding bonds. While these bonds typically offer higher yields than investment-grade bonds, they also present more risk in the form of defaults by bond issuers. And many high-yield bonds are currently trading at record-high prices, which exposes investors to the possibility of a dramatic decline. The yield on the Barclays U.S. Corporate High-Yield index, which tracks high-yield bonds, recently fell below 5 percent for the first time in history.

Generally speaking, risk-sensitive retirees may want to look elsewhere for an alternate source of income than high-yield bonds. One alternative is to invest in stocks that pay dividends. Another possibility is investing in preferred stocks.

These typically have a higher claim on assets and earnings than common stock, and dividends on preferred stock are paid out before dividends on common stocks. On the down side, preferred stock does not normally come with voting rights, which may concern some investors.

Of course, no investment is right for every investor, so if you’re seeking income in a low-yield environment, it is best to consult your advisor. He or she can help you determine which investments meet your individual financial circumstances and goals.

If your fund receives a low third-party rating, you might consider it bad news. But the good news is that as long as you’ve selected a fund that meets your specific investment objectives, third-party ratings may not matter.

Morningstar is one of the much-followed mutual fund rating companies. It uses a risk-adjusted formula based on performance over the last three, five and ten years to rate mutual funds. The funds are rated on a one-star (lowest) to five-star (highest) scale. Ratings are assigned on a curve: 10 percent of funds receive five stars; 22.5 percent receive four; 35 percent, three stars; 22.5 percent, two and 10 percent of funds receive a single star.

While ratings can be a valuable part of the mutual fund analysis process, many investors use the number of stars a fund receives as the main criteria for gauging its performance. This may not be wise; you may not realize it, but not every fund has an equal chance of receiving a high rating.

Ratings are assigned over an entire ratings category. In many ratings categories, however, there are different asset classes, such as small-cap funds and large-cap funds. At any given time, one of those asset classes is likely to be performing better than another. As a result, funds in asset classes that are performing well overall are more likely to be highly rated.

Past performance doesn’t guarantee success

As well, past performance does not guarantee future success. As the research company Financial Research Corporation discovered through a data-ranking process, one year’s top performers are no more likely to deliver superior returns the following year than are the year’s worst performers, calling third-party rating systems into question.

Truth is, no third-party system can begin to replace the analysis conducted by you and your advisor in defining your specific investment objectives and building a portfolio that meets those objectives.

US workers are approaching a retirement crisis, even as the economy and stock markets are seemingly improved: New data shows that 57 percent of US workers and retirees report less than $25,000 in total household savings and investments, excluding their homes.

That data is the result of a survey conducted by the Employee Benefit Research Institute (EBRI), and it’s jarring because, in 2008, only 49 percent of workers reported having this little money saved.

Today, the situation has reached crisis levels: In fact, only half of the 1,003 workers and 251 retirees surveyed said they could come up with $2,000 for an unexpected need in the next month.

The outlook is no better. The percentage of workers who have saved for retirement plunged from 75 percent in 2009 to 66 percent in 2012. According to the survey, 28 percent of workers are not confident they will have enough money to retire comfortably – the highest level in the study’s 23-year history.

One problem is we’re living longer. For example, a man who reaches age 65 in 2013 is expected to live an additional 20.5 years, up from 19.5 in earlier projections. Our extended lifespans will force us to stretch our retirement savings.

We’re not relying on pension plans either; fewer and fewer Americans are covered by traditional pension plans. According to US Department of Labor data compiled by the EBRI, pension plan participation declined dramatically from 28 percent in 1979 to 3 percent in 2011.

If you think you need to reevaluate your own retirement savings, your advisor can help.

Your portfolio can increase in value because the prices of the stocks and bonds it holds are going up. Or it can grow by generating an income paid in the form of dividends.

So what are dividends, and how can they benefit you?

When a company earns profits, it often pays a share of those profits to its shareholders. These profits are called dividends.

Dividends are typically paid by large, well-established companies that generate profits regularly but are too mature to grow significantly. Fast-growing companies in new industries such as biotechnology seldom pay dividends; instead, they invest their profits in technology for future growth.

Dividends are a significant component of most stocks’ total return. Over the long term, half of US stock returns have been derived from dividends, according to the most recent data from investment research organization, Morningstar.

As of March, the average dividend yield of the S&P 500 Index was 2.04 percent – about in line with its 10-year average of 10.6 percent, according to FactSet Research Systems Inc. However, as FactSet also points out, 239 companies in the S&P 500 Index (48 percent of the index) were paying higher dividend yields on their stocks than they were paying coupons on their own intermediate-term bonds.

While dividend-paying stocks provide income, and therefore may be expected to show lower overall returns, in fact, many actually provide high returns. According to Ned Davis Research Inc., from 1972 through March 2013, S&P 500 Equal Weight Index stocks that grew their dividends returned an average annual 10 percent, and stocks that paid steady dividends had returns of 7 percent (compared to 2 percent for stocks that didn’t pay a dividend.)

Dividend-paying stocks and mutual funds are often particularly attractive for tax-deferred investments such as 401(k) plans and traditional Individual Retirement Accounts (IRAs) because the payment of taxes is deferred until withdrawal – after the dividends have compounded many times.

US workers are approaching a retirement crisis, even as the economy and stock markets are seemingly improved: New data shows that 57 percent of US workers and retirees report less than $25,000 in total household savings and investments, excluding their homes.

That data is the result of a survey conducted by the Employee Benefit Research Institute (EBRI), and it’s jarring because, in 2008, only 49 percent of workers reported having this little money saved.

Today, the situation has reached crisis levels: In fact, only half of the 1,003 workers and 251 retirees surveyed said they could come up with $2,000 for an unexpected need in the next month.

The outlook is no better. The percentage of workers who have saved for retirement plunged from 75 percent in 2009 to 66 percent in 2012. According to the survey, 28 percent of workers are not confident they will have enough money to retire comfortably – the highest level in the study’s 23-year history.

One problem is we’re living longer. For example, a man who reaches age 65 in 2013 is expected to live an additional 20.5 years, up from 19.5 in earlier projections. Our extended lifespans will force us to stretch our retirement savings.

We’re not relying on pension plans either; fewer and fewer Americans are covered by traditional pension plans. According to US Department of Labor data compiled by the EBRI, pension plan participation declined dramatically from 28 percent in 1979 to 3 percent in 2011.

If you think you need to reevaluate your own retirement savings, your advisor can help.

Your estate represents a lifetime of work, so it’s understandable you’ll want to leave as much as possible to your heirs. However, today’s costly probate procedures present obstacles; for a hassle-free transfer, you need to simplify the probate court process.

After you die, your estate will be processed in one or more state probate courts, depending on where your assets are located.

If you die without a will, the court will decide how to distribute your assets, based on state laws. This can be an expensive process. Your estate may have to pay for court costs and legal advice your heirs may require.

You can simplify the probate court process and associated costs by increasing the items that are considered “non-probate” and are transferred without a probate procedure. These include:

• Assets registered as “joint tenants with rights of survivorship.” Ownership of these accounts passes directly to the other named account holders immediately upon your death.
• Assets with a designated beneficiary. Many retirement accounts (such as IRAs and 401(k) plans), and insurance products, allow you to name individuals or institutions as recipients of these assets when you die. These assets are excluded from your probate estate and transferred directly.
• Assets in a revocable living trust. A revocable living trust is a legal entity which effectively holds legal title to assets within the trust, providing for a direct transfer of assets to your beneficiaries.
• Transfer on death. You can specify that many of your assets, such as securities and brokerage accounts, be set up as “transfer on death” (TOD). Upon your death, they will bypass the probate court process and go directly to whomever you specify in your TOD policy.

You may not be able to take it with you, but with thought, you can ensure your heirs will inherit it hassle-free.