Maximizing Social Security Benefits by Not Claiming at Age 62

Choosing the right age to start Social Security benefits is one of the most important decisions in your financial life.  Unfortunately, most people are tempted to claim as soon as they become eligible at age 62.  This strategy results in reduced lifetime benefits for you and your spouse and may have a lasting impact on your financial future.

If you can afford to wait till full retirement age (FRA) between 66 to 67, or better yet age 70, you can substantial increase your monthly benefit.  If you start social security at age 62, you will receive 25% less per month than if you waited till FRA.  If you can wait till age 70, then your monthly benefit will increase 32% more than FRA benefit.  For example, if your FRA benefit is $1,600 then you would receive $1,200 at age 62 and $2,112 at age 70.  It is tough to earn a guaranteed 8% annual return in this interest rate environment!

According to the Social Security Administration, at whatever age you start receiving benefits, you will collect the same amount of total benefits if you live to your average life expectancy.  The average life expectancy for a male turning 62 is 83.9 and the average for a female is 86.3.

Taking your Social Security benefit early may have a huge impact on your spouse.  The spousal benefit is limited since he is eligible for a percentage of your benefit and a lower benefit equals a lower spousal benefit.  In addition, if your spouse outlives you he would be entitled to your full monthly benefit for the remainder of his life.  This is known as the survivor benefit.  Also, if you claim benefits before FRA, you lose out on a very valuable strategy known as “file and suspend,” where you wait till FRA, file a claim then suspend the benefit immediately.  This allows your spouse to collect on your record while their own social security benefit grows and he can collect on the higher benefit at age 70.

The cost-of-living adjustment (COLA) is updated on an annual basis and a lower starting benefit equals lower increases in the future.

Ultimately, the right strategy depends upon several factors including retirement savings, life expectancy, career earnings and goals.  The key is to understand all your options before making a decision.

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Why We Love Robo-Advisors

One of the largest trends in investment advice is coming from an increasing number of online robo-advisors.  While services vary, the main service offering is an easy access investment plan and in some cases, basic financial planning advice.  We certainly appreciate their fee transparency (you should always know exactly what you pay for a service!) and the goal of keeping you invested.

We view these largely as a good thing for uncomplicated and beginner investors, mainly because it’s better than what they usually have…nothing!  Since many advisors have large minimums and fees in the range of 1-2% of assets under management, one-on-one investment/financial planning advice can be unattainable or seemingly very costly.  Robo-advisor’s fees generally range from .10% up to .89% with minimum deposits from $0 to $100,000.  While this is generally lower than a live advisor, you do give up significant benefits of a holistic fiduciary advisor.

The Lighthouse Financial Advisors, Inc approach is to create enough value to earn our fee and strive to keep it well below the industry average. All while providing comprehensive tax, investment, and financial planning guidance.  Part of an advisor’s value comes through managing the behavior gap, by establishing a customized investment allocation based on your risk tolerance and goals.  Then making sure you actually stick with it in tough times.  A Dalbar Inc. study shows, For the twenty years ending 12/31/2013 the S&P 500 Index averaged 9.22% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 5.02%.   This is a stunning amount of return to miss out on, and is largely due to investors behavior gap of buying high and selling low.

We also provide proactive tax planning & prep, goal setting, insurance reviews, estate planning guidance, and are virtually always available for one-on-one planning.

For additional information on the different investment profiles (which can vary widely and perhaps take more risk than you’re willing to face in a down market) created by various robo-advisors, please see this informative article from www.wsj.com – http://www.wsj.com/articles/putting-robo-advisers-to-the-test-1429887456

Written by: Luke Carey, CFP®, EA, MS

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JP Morgan Private Banker Pens ‘Sales Culture’ Diatribe

As if the fiduciary standard meme isn’t enough of a debate these days, JPMorgan hopes that nobody notices how far away they are from relative suitability. In fact, the entire JP Morgan private banker model is to shovel as much $JPM product down clients’ throats as they possibly can. Mutual funds, mortgages, trust services, credit cards, etc. are all part of the dog and pony show when you become a client of the $JPM private bank. The overt attempt to stamp JPMorgan product all over a client’s portfolio is so far beyond any discussion of ‘fiduciary duty’ that it would make you laugh if you could stop crying. Here is the correspondence that we received – both the picture of the letter and the actual text. It is eye opening:

“So, where did the crack begin?

When JPM PB introduces a “metric system” about 7+ years ago, Senior Bankers were to be paid a discretionary bonus based on (1) net new AUM, (2) percentage change in revenue, and (3) net new clients. Fair enough. Except in a “tales you lose, heads I win” approach, management takes these metrics and then uses them to “quintile” you vis-a-vis your peers. Remember, I said “discretionary” bonus. Over time, the quintilling system got very opaque. Regardless of metric achievement, JPM needed to do well. Asset Management needed to do well, Private Bank needed to do well, and your team needed to do well. And of course, you needed to do well: as in high quintile. In other words, you might as well say: Mars needed to align with Saturn and the moon needed to be in lunar eclipse when bonus decisions were made.

Over the same time, an intense sales culture and product push evolved. Some of the older leaders and Senior Bankers began to understand that client retention, client service, and client advisory was not factored in to any of the metrics. Need new clients: well then, open up a custody account and get the fees discounted. Need percentage change in revenue: well then, hit it on any of the metrics. Need percentage change in revenue: well then, hit it on the big one-time transaction but be sure to shuffle the account to a junior person next year (or be saddled with a revenue decline next year when the transaction does not reoccur). The “integrated team”, which was once a trusted advisory partnership, became a source of “product push” partners from different areas (lending, alternatives, mortgages, etc).

Finally senior management has been parachuted in with people who have a sales manager mindset: all with view toward achieving month to month sales objectives. Client grids handed out with products on one axis and client names on the other: why doesn’t this client have a loan, a mortgage with us, even at one point: credit cards! Let’s look at your metrics. I need a pipeline list of your prospects, etc. etc. What new sales calls are you going on. Have you been cold calling?

All the while, solid client management people with years of experience are being pushed aside, not listened to. Compensation was easily down this year for most players. People are working hard, and the beast needs to be fed, the revenues and AUM must continue to increase. Compounding: more and more. There is no relief. there are plenty of junior people that are looking to jump in your seat. There is no respect. My manager doesn’t care about me. You must get new accounts, new AUM, increases in revenue. Hopefully enough to quintile you so you have another year to play. As for your bonus this year: well…Jupiter did not align with Mars, sorry. All the while, there is no time for good solid client advisory and relationship management: that, my friend, is not a metric. And if it is not a metric achievement, it is not valued.”

Loans, mortgages, credit cards – oh my! This certainly makes the fiduciary ‘do or don’t’ conversation pale in comparison. There is also an element of how much more blood can you squeeze out of a turnip? Once clients are loaded up with $JPM product what else can they be burdened with. This seems to be at the heart of this advisor’s issue. 

Written by:  Angela Poupart/AdvisorHub –

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On the Right Side of History

story written by fellow ACA member: Sheila Padden, Padden Financial Planning

John “Jack” Bogle, founder of the $3 trillion Vanguard Group and the world’s first index mutual fund, spoke to the Alliance of Comprehensive Planners (ACP) recently in Philadelphia at our annual conference.

Why did one of the investment industry’s “Giants of the 20th Century” choose to speak to us for free? He summed it up succinctly: “We are on the right side of history.”

Bogle appreciated our commitment to comprehensive financial planning based on a fiduciary relationship with our clients. “I’ve always liked the financial planning field, particularly the fee-only field,” he said.

Bogle was well aware of ACP’s emphasis on client service. “Ultimately, clients have to be served…groups like yours, people like you, are perfectly capable of being a great place to begin all that,” he said.

He also stressed the need for long-term relationships and a long-term investment perspective. “Your clients and our clients are or should be investing for a lifetime…investing for 80 years,” Bogle said. “Think of active management this way…the average portfolio manager lasts for seven years, and 50% of mutual funds go out of business every 10 years.”

He observed that the possibility of outperforming the market over that time is “substantively zero.”

And these plans need to be implemented in a way that keeps costs low, such as a passive, low-cost index approach.

“Trading is murdering,” Bogle said. “The more you trade, the less you make.”

His prescription for a better financial world fit right in with the ACP philosophy. When asked what he would do to change the financial world for the better, Bogle called for three things: 1) a federal standard fiduciary duty for investment advisors, 2) investor education, and 3) a change in corporate focus.

He explained his views on the fiduciary duty owed to customers very simply: “Anybody who touches other people’s money is a fiduciary. …Did I make myself clear there?”

Bogle said he saw investor education as one of the key services provided by ACP advisors. “You all are accomplishing this every day,” he said.

He also stated that the knowledge and hand holding provided by financial planners is invaluable. Bogle particularly noted the importance of understanding cost – lifetime cost.

Finally, he issued a challenge to current management in the financial industry. “Directors have to wake up and make sure their companies are run in the interest not of their managements, not in their political contributions, and not in their executive compensation, but in the interest of their stockholders,” Bogle said.

His lifetime of achievements in the financial services industry adds heft and credibility to his opinions. We were honored to have Bogle address our group and endorse our approach.

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Four Ways a CPA Could Help Wealth Management Clients

Financial advisors get trained in taxes, of course, but they often just get a basic framework for how to structure investments. A CPA can bring a much deeper level of understanding to a client’s tax situation, here’s four reasons how:

1. Let’s face it – taxes are complicated.

From the Medicare surtax to the new, higher top tax rate, wealthy clients face a tax picture with widening complexity. Knowing how investments impact the tax picture — in ways that are not always obvious — can save clients big money.

For Example, will selling an investment this year produce gains big enough to trigger the Medicare surtax? Should municipal bonds be pursued as a source of tax-free income? A CPA can define this for you, avoiding unnecessary surprises come April 15..

2. Asset location is critical.

Investment professionals know that asset allocation is important, but so is asset location. The tax treatment of assets varies by which type of account they’re housed in. Bonds, for example, are better held in tax-sheltered accounts because their income is taxed at the ordinary rate of up to 39.6%. Stocks fare better in non-retirement brokerage accounts because long-term gains can be taxed at the favorable capital gains rate of 20% rather than the higher ordinary income rate.

Where assets are housed is a key component of Morningstar’s gamma factor, a way to calculate an advisor’s value. Proper asset location can boost returns by 20 to 50 basis points a year, Morningstar researchers have concluded.

3. Boomer clients are retiring.

You know the stats: 10,000 baby boomers retire each day, a pace expected to continue for the next 19 years. If your boomer clients haven’t already made the shift to retirement, they soon will.  Boomers need financial advice on how to minimize taxes and generate enough income.

Retirement withdrawal strategies are complicated. The rules of thumb around which accounts to tap, and when, may not work in all circumstances. For example, Some clients may be better off depleting their tax-deferred accounts early on in order to avoid a big tax hit late in retirement. Accountants take a holistic approach to retirement planning.

4. Tax returns show what you’re missing.

A talented accountant can spot not just missed opportunities for tax savings, but also potential gaps in a client’s financial picture. A CPA can review a tax return and understand where a client should be going with their wealth management.  Can your clients defer income to take advantage in a federal subsidy for health insurance on the new exchanges?  Are they contributing too much – or too little – in tax-deferred retirement accounts?

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The Cost of Doing Your Own Taxes

Doing your own taxes is frustrating: finding the forms, deciphering the instructions, finding your paperwork, doing the math, figuring out what needs to be attached, worrying about a tax audit.   

What you may not realize is that doing your own taxes also costs you money. It costs you money because you don’t know all the credits and deductions you are entitled to, so you end up paying more tax than you truly owe. (After all, when was the last time you settled down for a quiet evening with the Internal Revenue Code?)  

But besides missing opportunities to lower your tax bill, it also costs you money just to fill out your tax return. The IRS does projections for how long it takes the average taxpayer to complete each tax form. These projections are presented below (in hours:minutes). Referring to this table you can see that if you only have wage income (Form 1040) and some bank interest (Schedule B), the IRS calculates it will take you 3 hours and 33 minutes to learn about the law and the forms and 6 hours and 41 minutes to actually fill out the forms: a total of 10 hours and 11 minutes. If you have capital gains from a mutual fund, the total jumps to 15 hours and 5 minutes.                                                                                                                                                                                                       

Form               Description                             Education          Preparation       Hours:Minutes

 1040               Basic form                                  3:25                  6:16              9:41

Sch A              Itemized Deductions                   :39                  1:34              2:13

Sch B              Interest Income                            :08                    :25               :33

Sch C & E      Small Business &                         1:41                  2:52              4:33

                        Self-employment Tax

Sch D              Capital Gains                              3:04                  1:50              4:54

Sch E              Royalties and Rents                   1:01                  1:25              2:26

2106               Employee Business Expenses     :12                   :24                :36

2441               Child/Dependent Care Credit     :25                   :50              1:15

4562               Business Depreciation               5:10                 5:59            11:09

 So, how much is that time worth? If you get an hourly wage, say $10 an hour, multiply your wage by the estimated time. Fifteen hours and five minutes is 15.08 hours (the .08 comes from dividing 5 minutes by the 60 minutes in an hour, which gives you the decimal fraction.) Ten dollars an hour times 15.08 hours equals $150.80, your cost for doing your own taxes. 

If you receive a salary, you can calculate your hourly wage by dividing your salary by 235 (365 days minus weekends, holidays, vacation and sick days) and then dividing that figure by 8 (for an 8 hour workday). If you earn $35,000 a year, the calculation is $35,000 divided by 235 (148.94) divided by 8 (18.62), which gives you your salary-based hourly wage. Multiply $18.62 by the IRS time estimate for each form and you will know how much it costs you to do your taxes. The same tax return as above (Form 1040 with Schedules B and D) would cost this salaried worker $280.74 in terms of the value of his own time (or, more correctly, in terms of how much his employer values his time).

 And this does not include all your time or costs. The IRS does not count the time it takes to do record keeping, the major headache in figuring capital gain basis for a Schedule D. The IRS also does not count the time it takes you to assemble, copy, and mail in all the forms – or the hours it takes to learn the latest computer program that promises “to do it all for you” (after you have entered in all the numbers).

 Furthermore, you cannot deduct the value of your time spent preparing your return.  Only money spent for professional tax preparation is tax deductible.  If the salaried employee found someone to prepare his taxes for the same $281 it costs the employee to do it himself, the after-tax cost would be only $202 ($281 minus the 28% tax deduction). Not only would this taxpayer get professional help with his taxes, it would cost him $79 less than doing it himself!

 Finally, remember that all the time you spend doing your taxes comes from your own personal time: weekends and holidays. This is time you spend with your family and friends; time for yourself. How much is that time worth?

 Article written by a fellow Alliance of Comprehensive Planners member,

Robert Reed, Columbus Ohio

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Why Financial Industry Regulations Impacts You

Currently, the financial advisory industry is in the midst of numerous regulatory changes with the most important issue involving the definition of “financial planner” and “financial advisor” and whether these titles require professionals to have a legal responsibility to put their clients’ interests first.  As the law stands now, only advisors registered with the SEC (or state regulator) are held to the fiduciary standard (Note: all financial advisors at Lighthouse Financial Advisors are registered with the SEC and adhere to the fiduciary standard).  Fiduciary standards are typically associated with professions such as medicine and law.

The difference is fiduciaries get paid to provide advice, while brokers get paid based on the investment products they sell.  Unfortunately, most consumers do not understand the difference.   The sales side of the industry is lobbying hard to keep the current standards in place, while the fiduciary advisors are working to create professional standards and mandatory disclosure to consumers.

The goal is to create a new profession that people will recognize for higher standards and personal care.  This will result in less expensive financial products, clear consumer information and more planning options for the middle class.

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Basis of Investment Decisions

We at Lighthouse Financial Advisors believe in investing strategically in Dimensional Fund Advisors (DFA) mutual funds because of their unique approach of translating financial science into practical investment solutions for clients.  We invest in Dimensional to build portfolios along the dimensions of expected returns that can be pursued in a cost-effective manner.  Their dynamic, market-driven process and flexible trading strategies allows them to manage the tradeoffs that matter for performance, while balancing opposing premiums, diversification, and costs.  Dimensional’s process is applied consistently across a broad range of competitively priced strategies, which span asset classes and geographies, to help meet the diverse needs of investors worldwide.

At Lighthouse, we avoid the traps of Conventional Investing.  Those are making prediction bets, searching for the “best” fund managers, investing based on what the media says and being influenced by stock tips from acquaintances.  We, and DFA, base our investments on the four principles of Strategic Investing listed below:

1)      Market Equilibrium:

  • Trying to outsmart other investors is very tough to do, almost so that we feel it is impossible.  Market prices are based on many competitive buyers and sellers with the same public information, but different opinions about the expectations of an investment.

2)      Diversification:

  • Regardless of what you’re invested in, each holding carries risk one way or the other.  By investing in many groups of investments around the world you help reduce the risk of losing your overall net worth.

3)      Asset Allocation:

  • We work with you to discover the Investments you’re comfortable making.  Various groups of stocks and bonds carry various degrees of risk and expected return.  We want you to feel comfortable in the investments you decide on.

4)      Purpose and Discipline:

  • Investing is the journey to a personalized financial destination.  First, the plan is created, then the process gets put in place and then you finalize with the product to invest in.  Whether it is a good or bad market you should always stick to your plan.

 

For more information on Dimensional Fund Advisors, view their site at: http://us.dimensional.com/

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I Got a Guy & Second Opinions

Many prospective clients we talk to already have someone they consider a financial advisor or close too. 
 
Your guy could be an accountant that only prepares your taxes, but does little tax planning.  Or an insurance/annuity salesman where seemingly every problem can be fixed with complicated annuities or costly whole-life insurance.
 
All too often, your guy is a relative or family friend with the best of intentions, but wrong allegiance – to their company and not to you.
 
Here are potential signs your advisor may be working against your best interests.
1. There isn’t a “CFP” or “RIA” after their name.
2. He’s pitching products rather than asking questions.
3. You’re not sure how she gets paid.
4. He won’t promise in writing to put your interests first.
If and when you find yourself questioning whether the person in front of you giving advice is offering objective guidance, please always consider a second opinion.  Better yet, interview 3-4 different advisors.  I know we truly appreciate an educated consumer and are always willing to provide a second perspective.
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Why it is Important to Have a Will

According to a recent study, more than half of Americans age 55 to 64 do not have wills (the numbers are worse for those 45 and 54).  I want to focus on the ramifications of why a will is necessary and why it is important to act now to discuss the matter with your financial planner.

A main reason to draft and execute a will is so you can choose who and when loved ones will inherit your assets, serve as the guardian for your children and make the financial decisions once you pass.  Yes, your spouse and children will most likely inherit your assets if you pass without a will (“dying intestate”) but they may be subject to estate taxes and an expensive, lengthy process called probate.  This is when you seek the courts help in sorting out a deceased person’s affairs.

A common reason people say they do have a will is the cost.  However, if you have a less complicated financial situation, there are numerous online DIY sites such as Legal Zoom or Smart Legal Forms.  They cost is approximately $40-70 for a will, living will, healthcare power of attorney and financial power of attorney.  It is recommended to hire an estate lawyer if you have a large estate or complicated family dynamics.

A forgotten aspect of the estate planning process is to ensure you have the correct beneficiary designations.  Retirement accounts and life insurance have special rules.  All too often, we see parents or ex-spouses listed as beneficiaries when someone has children or gotten remarried.  Although your will may specify your spouse and children are to inherit your estate, retirement accounts and life insurance flow outside of the will.

These are just a few of the many reasons to focus on drafting or updating your will.  Your loved ones will thank you later!

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Lighthouse Financial Advisors

3 Harding Rd Suite B
Red Bank, NJ 07701

P: 732.747.6697
F: 800.886.0302
info@lfadvisors.com

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Client Relationship Summary – Form CRS
Firm Brochure – Form ADV 2A

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