Wealth Talk

News and Ideas

Many 401(k) Balances Coming Up Short

By Joe Bonnett CFP®, ChFC® on December 21, 2011

Are individuals, in general, saving enough for retirement? No. In fact, the median 401(k) account balance for a baby boomer age 60 to 62 is well shy of what that boomer will need. According to The Wall Street Journal, many boomers in their early 60s find that their 401(k) plans come up short.

Only ¼ of what’s needed

According to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for the 2/19/11 Journal article, many boomers will not be able to maintain their household’s standard of living in retirement. The median 401(k) account balance is less than ¼ of what’s needed. The analysis assumed people need 85 percent of their working income after they retire to maintain their standard of living.

“The 401(k) generation is beginning to retire, and it isn’t a pretty sight,” concluded the article’s writer, E.S. Browning.

2012 contribution limits

The ultimate goal would be to contribute the maximum amount allowed by the Internal Revenue Service.

  • For 2012, contribution limits for 401(k)s will increase to $17,000, up from $16,500 in 2011, according to the IRS.
  • Catch-up contribution limits for those ages 50 and over will remain $5,500.

Click the image or this link to learn more: 2012 Retirement Plan Contribution Limits.

New: Contribute 15% of your salary

The Journal article noted that Vanguard Group, one of the biggest providers of 401(k) plans, has changed its advice on how much people should save:

  • Vanguard long advised people to put 9% to 12% of their salaries – including the employer contribution – in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says.
  • Now Vanguard urges people to increase their contributions up to 15% of their salaries, including the employer contribution, because of the stock market’s weak returns and uncertainty about the future of Social Security and Medicare.

I have long stressed the importance of having a 401(k) or other defined contribution plans to an individual’s overall retirement plan. This latest analysis suggests it would be good to meet with a qualified advisor to see how your retirement plan is doing.

Posted in Personal Finance, Retirement Planning | Tagged , |

Act Quickly if You Plan to Buy Assets for Your Business

By Joe Bonnett CFP®, ChFC® on December 9, 2011

Business owners will want to take note that the increased section 179 expense deduction limit of $500,000 expires by the end of 2011. You may want to chat with your CPA and act before the year ends.

That’s because if you own a profitable business, and you plan to purchase equipment, property or vehicles for the business, you may be able to claim a Section 179 deduction and decrease your tax liability, so long as you have placed the qualifying asset in service this year.

Form 4562 from the IRS says:

  • The maximum section 179 expense deduction currently is $500,000 ($535,000 for qualified enterprise zone property). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2 million.
  • For tax years beginning after 2011, the increased section 179 expense deduction limit of $500,000 and threshold amount before reduction in limitation will no longer apply.
  • The 100% special depreciation allowance will not apply to most property placed in service after December 31, 2011.
  • For tax years beginning after 2011, the definition of section 179 property will no longer include certain qualified real property.

More information, including any future developments affecting Form 4562, such as possible new legislation, will be posted at irs.gov/form4562. Please contact your CPA or tax specialist for assistance, since neither Bonnett Wealth Management nor Securities America provides tax advice.

Posted in Taxes | Tagged , , |

Three Year-End Gifting Strategies

By Joe Bonnett CFP®, ChFC® on December 7, 2011

This year gifting is being aided by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Here are 3 gifting provisions that may work for you:

1. Qualified Charitable Distribution (QCD).

This year IRA owners and beneficiaries age 70½ or older can make a tax-free Qualified Charitable Distribution of otherwise taxable dollars from an IRA to a qualified charitable organization. QCDs are limited to $100,000 per year, per IRA owner or beneficiary, but they also satisfy your Required Minimum Distribution (RMD) up to $100,000.

2. Donation of appreciated stock.

The 0% capital gains rate on long-term investments has been extended for taxpayers in the 10% and 15% tax brackets. So, if you have adult children in these tax brackets you might consider gifting your appreciated stock. Your child can have taxable income up to $34,000 this year (or $68,000 if married and filing jointly) and not have to pay capital gains tax. Continue reading →

Posted in Charitable Giving, Taxes | Tagged , , |

7 Things the Bonnetts Love about Nebraska City

By Joe Bonnett CFP®, ChFC® on December 6, 2011

Let’s take a break from reporting on investment strategies, tax news and retirement planning. Instead, I’d like to share a few outtakes from my family’s recent getaway to Nebraska City, Neb.

Nebraska City is beautiful. It’s a town with a lot of history, several interesting museums, Arbor Day Farm, apple orchards, vineyards, an Arnold Palmer-designed golf course, and more. Here are the 7 things my family loves most about Nebraska City:

1. The Lied Lodge.

In mid October, we spent a weekend at the Lied Lodge & Conference Center. We try to get to Nebraska City every year, but we don’t always spend the night. So, this was a special trip.

The entrance to Lied Lodge is impressive. The lobby has huge timbers, 30-foot high ceilings and a grand two-sided fireplace flanked by leather chairs and rocking chairs. We all love to swim, and Lied Lodge has a beautiful, indoor pool.

2. Family time.

Here’s the Bonnett family. That’s Claire (age 8), Penny (11 months) Jake (age 9) and my wife, Susie. We love to visit as many parks in Nebraska City as we can. They have lots of trees and plenty of grassy areas.  Bonnett family competitions come down to two favorites: swinging contests and flag football. Continue reading →

Posted in Lifestyle | Tagged , , , |

How Investors Grew Their Accounts by 50% and 64%

By Joe Bonnett CFP®, ChFC® on October 20, 2011

The quarterback has the ball and is ready to pass. He scrambles left. The defense pursues, and he’s sacked. If only he had stayed in the pocket, behind his offensive linemen, he could have bought extra time and made a big play.

In football, it’s easy to second-guess the quarterback. But making investment decisions is not so simple. However, recent research from Fidelity Investments shows that investors who “stay in the pocket” perform well — to the tune of 50% and 64% growth in their 401(k) account balances.

I’m going to show you 2 charts.

  • The first chart shows that investors who held onto their shares of stock grew their account balances far more than those who sold their stocks. (50% growth v. 2% growth)
  • The second chart shows that investors who maintained regular 401(k) contributions grew their account balances far more than those who panicked and stopped making regular contributions. (64% growth v. 26% growth)

This information is gleaned from a Fidelity Investments study of workplace defined contribution data.* It was based on nearly 20,500 company defined-contribution plans and more than 11.6 million record-kept participants.

Just to be clear, the growth rates mentioned above and below are for the entire period of the study, October 2008 to June 2011, and are not average annual growth rates.

Here’s the first chart. Notice the difference between those investors who sold their stocks and those who didn’t …

Maintain equity positions chartSource: Fidelity Investments.*

Posted in Investing | Tagged , , |

5 Reasons to Continue Investing in Stocks

By Joe Bonnett CFP®, ChFC® on September 26, 2011

The Nebraska Cornhuskers are now members of the Big Ten Conference.

Storyline: For many, the move to the Big Ten is intimidating.

  • Big Ten schools boast student bodies as large as 62,000 and football stadiums seating 100,000+. Michigan’s “Big House” holds 114,800+.
  • The total National Championships (for all sports combined) at Big Ten schools numbers into the hundreds.
  • In football, the Big Ten is known for its gritty, physical style of play. Each Big Ten team has the potential to be a handful.

The Huskers’ October 1 trip to Madison, Wis., led to a 48-17 loss to the Wisconsin Badgers. On October 8, Husker Nation welcomed Ohio State to Lincoln with a 34-27 win. The schedule continued with Minnesota (41-14 win away), Michigan State (24-3 win at home), Northwestern (28-25 loss at home) and Penn State (17-14 win away), Michigan (45-17 loss away) and finally a November 25 win against Iowa at home (20-7).

Nebraska Cornhusker football

Bottom Line: It’s hard to predict how well the Huskers will do. Long-term, however, I think the Huskers will do great because they have a great program. Continue reading →

Posted in Investing, Retirement Planning | Tagged , , |

Taxes and Certificates of Deposit

By Joe Bonnett CFP®, ChFC® on September 25, 2011

According to data supplied by American Funds and Thomson Reuters, 180-day CDs generated 3.75% average annual returns from Sep. 1991 – Aug. 2011. As measured by the U.S. Consumer Price Index, inflation ran 2.55% over this same period. It might seem, then, that CDs helped investors to augment their buying power. Such a conclusion, however, may not account for taxes.

Income from CDs held in non-retirement accounts is taxable. Suppose, hypothetically, that an individual’s federal income tax rate is 30% and state income tax rate is 5%. The CDs held for 20 years would have generated, not 3.75% returns annually, but only 2.60% annually after taxes. Compared with 2.55% annual inflation, the investment effectively fails to grow.

Of course, CDs held within retirement accounts are subject to tax rules that impact various taxable events, depending on the type of retirement account, when the investment is made and when it is liquidated. Bonnett Wealth Management and Securities America do not provide tax advice. Please see a qualified tax advisor for assistance.

Posted in Personal Finance, Retirement Planning, Taxes | Tagged |

Dealing with Emotions in Times of Market Volatility

By Joe Bonnett CFP®, ChFC® on August 30, 2011

The stock market is always ripe for drama. In mid July, the markets were healthy, and most investors were pleased. Then, on August 8, there was a selloff. The Dow Jones Industrial Average had its sharpest one-day drop since the financial crisis of 2008—it fell 634.76 points or 5.5% that day. While the week ended with back-to-back advances for stocks, the markets entered a period of great volatility.

For a moment, I admit, I had my own twinge of concern. The U.S. has never had a credit rating less than AAA. So, this is new territory, and 2008 is still fresh in everybody’s minds.

But here’s the thing: You can act sensibly and do well in the stock market. Unfortunately, most investors fall short of the market’s overall performance, oftentimes because they panic. Notice this chart:

S&P 500 v. the Average Equity Investor

S&P 500 v. the Average Equity Investor chart
Source: DALBAR 2011 Qualitative Analysis of Investor Behavior*

Here’s what we learn from this chart:

Posted in Investing, Retirement Planning | Tagged , |

Now Is Not the Time to Panic

By Joe Bonnett CFP®, ChFC® on August 12, 2011

Don’t worry about the S&P downgrade of U.S. treasury securities. Focus instead on your long-term plan.

News organizations are in the business of selling papers and magazines. Sometimes I think they love to run headlines like, “Downgrade Ignites a Global Selloff.” That was the headline on the front page of my print edition of The Wall Street Journal on Tuesday, August 9, 2011.

Of course, the stock market lost a lot of value on the previous day. The Dow Jones Industrial Average plunged 634.76 points over worries, the Journal reported, about the downgrade by Standard & Poors of the U.S.’s credit worthiness. Even so, is it accurate to say that the August 5 downgrade ignited a selloff on August 8?

I disagree with the assessment by the financial press. I don’t think the markets are worried about a U.S. treasury default. The two other major ratings agencies, Moody and Fitch, have maintained their AAA treasury ratings. I agree with the Journal’s Monday, August 8, 2011, “Review & Outlook” editorial on page A14, which said “Despite S&P’s opinion, there is no chance that America will default on its debts.”

SOME GOOD ADVICE

I regularly read and collect quotes by famous, intelligent people, who have a knack for accurate, succinct statements that keep things in context. Listen to what others say about investing in tumultuous times . . .

Benjamin Graham—Warren Buffett’s instructor at Columbia Business School and mentor. Here are three quotes from Graham’s book, The Intelligent Investor: A Book of Practical Counsel,  which Buffet once said was “By far the best book on investing ever written.”

  • “The investor’s chief problem – and even his worst enemy – is likely to be himself.”
  • “The most realistic distinction between the investor and the speculator is Continue reading →
Posted in Investing | Tagged , |

Assets Trump Age for Baby Boomers

By Joe Bonnett CFP®, ChFC® on August 4, 2011

Almost three-fourths, or 73%, of all middle-income Baby Boomers in the U.S. believe their financial situation, not their age, will determine when they retire, according to a recent study by the Bankers Life and Casualty Company Center for a Secure Retirement (CSR).

Yet, despite their shift in perspective from age to assets, most Boomers haven’t made an effort to start saving the amount they need to retire comfortably. The study found that more than 50% of those surveyed had saved less than $100,000 for retirement, 19% have saved less than $10,000 and 14 percent do not have a pension, 401(k), IRA or any other retirement savings vehicle.

Posted in Retirement Planning | Tagged , |