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IN THIS ISSUE . . .
IMPORTANT RETIREMENT DECISIONS
Financial decisions made in retirement will have a long-term effect on your
financial well being. Some of the more important considerations include:
RETIREMENT PLAN DISTRIBUTIONS
Participants in profit-sharing or 401(k) plans must decide whether to
receive a lump-sum distribution or an annuity with monthly payments.
Individuals whose retirement benefits result solely from a defined benefit
pension plan will probably receive monthly distributions, but must choose
among several options.
While annuities assure you of a fixed monthly income, inflation can seriously
erode the purchasing power of this income over the years. With a lump-sum
distribution, you can make your own investment decisions.
The most common forms of annuities include "life only," which pays
a certain monthly amount until your death; "joint and survivor," which
will also pay a certain amount to your spouse after your death ( not necessarily
the same amount that you will receive); and "life and period certain,"
which pays a certain amount for your life or for a specific time period,
whichever is longer. The "life only" option will provide the highest
monthly benefit. The portion of the monthly payment that is attributable to
employer contributions and deferred earnings is taxable.
Tax laws regarding lump-sum distributions are very complicated and should be
carefully evaluated before you receive your distribution.
After-tax contributions made to the plan are tax free, but several options are
available for the remainder of the distribution:
1. Include all of the proceeds in your taxable income for the current year,
subjecting them to taxes at your top tax rate.
2. Roll the distribution over into an IRA, avoiding taxation until the
funds are withdrawn. Be aware that new tax laws effective January 1, 1993,
have significantly changed the procedures for these rollovers, so you should
exercise this option with caution.
3. Use five- or ten-year forward averaging to calculate your tax bill. If
your distribution is your entire interest in the plan, you have participated
in the plan for at least five years, you receive the distribution after you
leave your job, and you are at least 59 ˝, you can use forward averaging to
lessen the tax bite. This can only be used once during your lifetime.
Keep in mind that most distributions made before the age of 59 ˝ are subject
to a 10% penalty on the taxable portion of the distribution. Also, taxable
annual distributions exceeding $150,000 or lump sum distributions exceeding
$750,000 are subject to a 15% excise tax on the excess.
SOCIAL SECURITY BENEFITS
Although normal retirement age for Social Security is 65, you can retire as
early as age 62 with reduced benefits or wait until as late as age 70 to
increase benefits. Reductions for early retirement equal 5/9 of 1 percent for
each month ( or 6 2/3% annually) prior to age 65, while increases for late
retirement range from 3.5% annually to 8% annually. Waiting until age 70 to
retire will result in a 17.5% to 32.67% increase, depending on the year you
You can take distributions from your IRA without penalty after age 59 ˝.
After age 70 ˝, you must take mandatory distributions or pay a 50% penalty on
the amount you should have withdrawn. But between the ages of 59 ˝ and 70 ˝,
you can decide every year how much to withdraw. Funds withdrawn from your IRA
are fully taxable in the year of distribution, unless made with non-deductible
You should review your investments as you approach retirement age. You may
find that you need to reallocate your investments among different asset
classes due to changing personal needs or to ensure monthly distributions to
supplement your other income sources.
THE SALE OF ASSETS
Once you retire, you may decide to sell major assets such as a home or
investment property. Before selling, investigate whether an installment sale
would be more advantageous, since you can recognize the gain from the sale
over several years.
When selling your personal residence, be sure to consider the
once-in-a-lifetime exclusion of $125,000 of gain from taxable income. You can
elect to exclude the gain if you are at least 55 before the date of the sale
and have owned and used the property as your principal residence for at least
three of five years proceeding the sale.
Many of the financial decisions facing you as you approach retirement will
have a significant impact on the quality of your retirement years. If you’d
like help with these decisions, feel free to give us a call.
MONEY AS AN ECONOMIC
Looking for an indication of where the
economy is heading? You may want to take the lead of the Federal Reserve and
start following statistics on the growth of money supply.
Why is the Federal Reserve (the Fed) so interested in money supply growth?
Money supply influences interest rates, and money and credit are the basic fuel
for economic growth. If money and credit grow too slowly, recession or even
depression may result. If money and credit grow too quickly, inflation and
higher interest rates can follow, which hurts businesses and consumers and can
also lead to a recession.
There are various measures of money supply. The narrowest, M1, consists of
checking account deposits, traveler’s checks, and currency held by the public.
M2 is more widely watched and consists of all items contained in M1 plus savings
deposits, time deposits under $100,000, over-night repurchase agreements,
over-night Eurodollars, money market funds, and money deposit accounts. M3
consists of everything included in M2 plus time deposits over $100,000,
institutional money funds, term repurchase agreements, and term Eurodollars. The
broadcast measure, L, includes all items in M3 plus bankers’ acceptances,
commercial paper, savings bonds, and marketable liquid Treasury obligations.
THE FED’S ROLE IN MONEY SUPPLY
The Federal Reserve can influence short-term interest rates and money supply
in three ways:
1. Purchase/Sale of U.S. Securities in the open market. When the Fed
sells U.S. Treasury securities, it removes money from the private economy,
reducing the supply of money. When it buys securities, it expands the supply
2. Raise/Lower the Discount Rate. The Fed can raise or lower the
discount rate charged to banks in the system. Lowering the rate makes it less
expensive for banks to buy money and loan it out and vice versa.
3. Change the Reserve Requirements. The Fed can change its
requirements regarding the amount of money banks must retain in relation to
their deposits. If they lower the requirements, banks will have more money to
loan out and vice versa.
The Fed regularly uses the open market, occasionally uses the discount rate,
and rarely uses reserve requirements to influence interest rates and money
USING THE EQUITY IN
Individuals over age 65 generally find that equity in their home is a
substantial portion of their net worth. Unfortunately, equity doesn’t provide
any income. In order to tap into that equity, you may want to consider one of
the following strategies:
Trade down to a smaller home — By selling your current home and
purchasing a smaller one, you may be able to lower your housing expenses,
convert some equity into a lump sum that can be invested for income, and still
leave a house for your heirs.
You may want to time the sale to take advantage of beneficial tax laws —
you can exclude up to $125,000 of gain from your tax return if you or your
spouse are over 55 and you have lived in your house for at least three of the
proceeding five years. This tax benefit can only be used once.
Obtain a reverse mortgage — If you don’t want to sell your
current home but need a additional income, consider a reverse mortgage. A
reverse mortgage is a loan against the equity in a home that pays a homeowner
over age 62 a fixed monthly amount. Repayment of principal and interest is
deferred until the house is sold or the borrower dies. Your income will depend
on the size of the mortgage and the life expectancies of you and your spouse.
You can receive payments for the rest of your life for a specific term,
usually 5 to 20 years. A term loan is normally only appropriate if you intend
to sell your home when the loan is due. Some lenders will take all or part of
the appreciation in your home that occurs after you obtain the loan, which can
significantly increase the cost of the loan.
Sale-leaseback of current home — With a sale-leaseback, you sell
your home to an investor and then rent it back from that individual. You will
generally receive a 10-20% down payment and give a 15-year mortgage to the
buyer. If properly planned, the mortgage payment you receive will be greater
than your rental payments. Finding an outside investor may be difficult,
making your family the most likely buyer.
Charitable donation — Another alternative is to give a remainder
interest in your property to a charitable organization. During your lifetime,
you own the property and receive a lifetime annuity from the charity. Once you
die, the property transfers to the charity.
There are several ways to tap the equity in your home if income is needed for
retirement. Before selecting any, however, make sure you have reviewed all
401(k) plans may become the
retirement plan of the future, as indicated by the following statistics:
While 42,000 employers terminated defined-benefit plans between 1989 and
1991, the number of 401(k) plans increased from 0 in 1980 to 100,000 in 1991. (Source:
Your Best Money Moves Now, 1993, p. 98)
As of 1991, defined-contribution plans, which include 401(k) plans, equaled
81% of all retirement plans, while defined-benefit plans compromised only 19%. (Source:
Your Best Money Moves Now, 1993, p. 98)
It is estimated that in 1991, 95% of all large and medium-sized companies
offered 401(k) plans. (Source: Buck Consultants, 1993)
Howard Johnson & Co. estimates that 401(k) plans will provide
approximately 50% of retirement income for people retiring in the year 2012,
compared to approximately 15% for current retirees. (Source:
Fortune, December 28, 1992, p. 78)
Since this is likely to be the case, it is important for participants to take
more control of their plans and for employers to make better alternatives
available to employees, as indicated by the following statistics:
One quarter of eligible workers do not participate at all in their 401(k)
plans. (Source: Kiplinger’s Personal Finance
Magazine, May 1993, p. 42)
Of those covered by 401(k) plans in 1988, 81% of those earning over $50,000
were participating in the plan compared to 67% of those earning $30,000 -
49,999, 59% of those earning $25,000-29,999, 57% of those earning
$20,000-24,999, 50% of those earning $15,000-19,999, 42% of those earning
$10,000-14,999, 33% of those earning $5,000-9,999, and 22% of those earning less
than $5,000. (Source: Financial Planning, August
1991, p. K-3)
Responding to a recent survey, 27% of the participants indicated that they
must use their 401(k) funds for education, 27% for medical expenses or
emergencies, 12% to purchase a home, and 6% for other purposes. (Source:
National Underwriter, April 12, 1993, p. 7)
Of those who received a lump sum distribution in 1992 from their pension plan
because of retirement or a job change, it is estimated that one-third spent all
of it, only 11% rolled the entire balance over to another retirement plan, and
the rest saved some and spent some of the distribution. (Source:
Employee Benefit Research Institute, Barron’s, July 12, 1993)
A 1992 survey of companies offering 401(k) plans indicates that 10% offer 1-2
investment options, 25% offer 3, 48% offer 4-5, 15% offer 6-10, and 1% offer
over 10. (Source: Buck Consultants, Registered
Representative, December 1992)
78% of employers did not know what investment management expenses their
401(k) plans incurred. (Source: Fortune, December
28, 1992, p. 78)
With 401(k) plans becoming a more important part of retirement planning, both
participants and employers must take a more active role in managing these plans.
NEWS AND ANNOUNCEMENTS
Capitalize on your property tax cut!!
Most Michigan homeowners will receive a substantial
property tax cut this March 1st, no matter which proposal passes in
the coming special vote.
Governor Engler signed into law a requirement last December that all escrow
accounts be adjusted, and that the required monthly deposit be dropped
automatically 30% be March 1, 1994.
Opportunity – why not take this reduction in your monthly mortgage payment
and save it, or better yet invest it.
At an average cut of $50 or more per month, you could accumulate over $600
per year in additional savings.
Don’t let this monthly savings disappear into a black hole of unknown
Call us at (248) 816-1230 to set up a new monthly investment account or to
add this option to one of your current accounts (we can make it automatic, no
checks to write, no postage, just a simple debit from your checking or savings
Remember, we offer all investment opportunities, from Annuities, Stocks &
Bonds, Mutual Funds (all funds excluding proprietary), to Pension &
You can start for as little as $50. Call (248) 816-1230 or (800) 878-4036.
Know where your property tax cut is by saving & investing it.
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