| December 20, 2011 | Vol 4, Issue 12 |
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| Greetings! | |
 Good morning, and happy holidays! Hopefully this newsletter finds you already enjoying preparations for time with family and friends over the next couple of weeks.
We've had some encouraging economic indicators in the U.S. economy. Economic growth was a modest but positive 2% for the third quarter, fueled by gains in retail sales, manufacturing and housing. This is good news, an improvement over the 1.3% growth in the second quarter. The U.S. unemployment rate, which topped 10% in 2009, has quietly fallen back to 8.6%.
In a few weeks we'll get the final investment market numbers for the year and I'll send you an in-depth look. For now, we'll settle for the headline barometer of U.S. large cap stocks -- the S&P 500. It's unfortunately back into negative territory for the year, down about 4%.
In this month's newsletter, we have a summary of the new student loan repayment program, tips for keeping your accounts secure online, gift tax strategies, and more. As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world.
Best wishes for a wonderful holiday season and happy new year to you and your family! |
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| Planning for a Successful 2012 |
 Taking a few moments now to assess your financial situation can go a long way toward positioning you for success next year. Some items to consider:
If Retired
- Have you taken any required minimum distributions from your IRAs for this year?
- Even if no IRA distributions are required, have you taken out at least enough to use up all of your deductions and exemptions or fill up the lower tax brackets? If uncertain, a tax projection before year-end can be an excellent investment.
- Social security benefits increase by 3.6%. Making a conscious decision on how to utilize these funds can help you get the most out of them.
If Still Working
- The 2% payroll tax reduction expires at the end of 2011 unless it's renewed (still up in the air as of today), so plan for a 2% reduction in your take-home pay beginning the first paycheck of the year.
- The social security tax earning caps for next year is $110,100. If you normally exceed this maximum, make plans for how to allocate this additional income when you exceed it next year.
- You can contribute a maximum of $17,000 to a 401(k) or 403(b) next year, plus a $5,500 catch-up if you turn 50 or older anytime in 2012. Review your contribution rates to save as much as possible. Consider Roth contributions if an option for you.
For everyone
- Review taxable investment accounts for opportunities to harvest losses if appropriate. This can reduce your tax bill due in April.
- Review your broker's default cost basis reporting method. Brokers will be reporting more cost basis information to the IRS beginning next year, and you can elect which cost basis reporting method is used if you act before any investment sale settles. You won't be able to wait until to file your tax return to make this decision in many situations.
- Last, but definitely not least: if you do not have estate planning documents in place, no matter what your age, please take the time to do so now before the end of the year. None of us know how many days we have on this earth, and having these documents in place can help make a difficult time a little bit easier for our loved ones.
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| New Student Loan Repayment Program |
 An October executive order creating new student loan repayment options is scheduled to go into effect in 2012.
Background
Despite more aggressive debt shedding by American consumers since the recession, student loan debt continues to grow. According to the federal government, 36 million Americans have federal student loan debt. Last summer, total student loan debt surpassed credit card debt for the first time, and this year outstanding student loan debt is on track to reach $1 trillion, according to the Federal Reserve Bank of New York.
In addition, in September, the U.S. Department of Education released data showing that the percentage of student loan borrowers who defaulted in 2009 (the latest year for which figures are available) rose to 8.8% from 7%. That percentage is likely higher now due to the recession, as millions of cash-strapped college students attempt to pay back student loans in a tough economy. According to the Chronicle of Higher Education, last year the unemployment rate for college graduates under the age of 24 rose to 9.4%, the highest level in at least 15 years.
In the meantime, college tuition continues to rise; the College Board recently announced in itsTrends in College Pricing 2011 report that tuition costs for the 2011/2012 academic year increased 4.5% for private colleges and 8.3% for public colleges (to view the report, visit www.collegeboard.com/trends). The average total cost of attendance this year is now $42,224 for private colleges and $21,447 for public colleges. And next July, the interest rate on federal Stafford Loans is scheduled to double--to 6.8%--costing the average borrower thousands of dollars over the life of the loan.
Against this backdrop, following are the highlights of the new program.
Loan consolidation
Students who hold both direct federal student loans and federal student loans made by private lenders under the now defunct Federal Family Education Loan Program would be able to consolidate their loans between January and June 2012 into a single government loan at an interest rate of up to 0.5% less. The White House estimates this could help approximately 5.8 million borrowers.
Income-based repayment
The plan will accelerate the start of an income-based repayment program to 2012 from the original start date of 2014. The program, approved by Congress last year, caps monthly federal student loan payments at 15% of income and forgives all remaining debt after 25 years. Under the new plan, federal student loan payments will be capped at 10% of income with all remaining debt forgiven after 20 years. The White House estimates this could help 1.6 million borrowers.
Who qualifies?
According to the U.S. Department of Education, to qualify for loan consolidation, borrowers must have both a direct federal student loan and a federal student loan under the Federal Family Education Loan Program. To qualify for the accelerated component of the income-based repayment plan, borrowers must take out a loan in 2012 or later and have taken out a loan sometime between 2008 and 2012. Borrowers who are already in default won't qualify.
For more information on the new programs, you can call the office of Federal Student Aid, a division of the U.S. Department of Education, at 1-800-433-3243 (1-800-4fedaid) or visit www.studentaid.ed.gov. |
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'Tis the Season: Gift Tax Strategies |
 The current large gift tax applicable exclusion amount, low gift tax rates, depressed property values, and low interest rates create a favorable environment for making certain gifts.
Federal gift tax basics
Annual exclusion. Each year, you can give a certain amount ($13,000 in 2011 and 2012) to as many individuals as you like gift tax free.
Qualified transfers exclusion. You can give an unlimited amount on behalf of any individuals for tuition or medical expenses gift tax free. You must pay the amount directly to the educational or medical care provider.
Applicable exclusion amount. Gifts can also be sheltered by the applicable exclusion amount, which can protect gifts of up to $5,120,000 (in 2012; $5,000,000 in 2011). The dollar limit applies to all taxable gifts you make during life and to your estate at your death for federal estate tax purposes.
Basic planning
The first gifts you consider should generally be annual exclusion and qualified transfer gifts. You can make annual exclusion gifts to anyone for any purpose. The annual exclusion is lost in any year in which you do not use it. You can make unlimited gifts using the exclusion for qualified transfers, but gifts are limited to educational and medical purposes.
You and your spouse can split gifts that either of you make. Doing so allows you and your spouse to effectively use each other's annual exclusions and applicable exclusion amounts. For example, if you have 2 children, you and your spouse could make annual exclusion gifts totaling $52,000 to your children (2 spouses x 2 children x $13,000). If you make gifts of $52,000 for 10 years, you will have transferred $520,000 to your children gift tax free.
Next, consider gifts that are sheltered by the applicable exclusion amount. But remember that use of the applicable exclusion amount during life reduces the amount available for estate tax purposes at your death.
If you are likely to have a very large taxable estate at your death that could not be sheltered by the applicable exclusion amount, it might even make sense to make gifts that cause you to pay gift tax. For example, let's assume any additional transfer you make would be subject to the current top gift or estate tax rate of 35% and you make a taxable gift of $1 million to your child on which you pay $350,000 of gift tax. If instead you retained the $1,350,000 until death, $472,500 of estate tax would be due ($1,350,000 x 35%) and only $877,500 of the $1,350,000 would remain for your child. By making the taxable gift and paying gift taxes that reduced your taxable estate, you reduced taxes by $122,500 while increasing the amount transferred to your child by the same $122,500.
Gift considerations
If you have property whose value is depressed, now may be a good time to make a gift of it. The gift tax value of a gift is its fair market value, and a lower value means a smaller gift for gift tax purposes. However, you generally should not make gifts of property that would produce an income tax loss if sold (basis in excess of sales price). The person receiving the property would have a carryover basis and would not be able to claim the loss. In these cases, instead consider selling the property, claiming the loss, and making a gift of the sales proceeds.
Future appreciation on gifted property is removed from your gross estate for federal estate tax purposes. However, while property included in your estate generally receives a basis stepped up (or stepped down) to fair market value when you die, lifetime gifts do not. Therefore, you may wish to balance the gift tax advantage of a gift with carryover basis and income tax on gain if the property is sold against the income tax advantage of a stepped-up basis and estate tax (if any) if you retain the property until your death.
In the current low interest rate environment, you may wish to consider a grantor retained annuity trust (GRAT). In a GRAT, you transfer property to a trust, but retain a right to annuity payments for a term of years. After the trust term ends, the remaining trust property passes to your beneficiaries, such as family members. The value of the gift of a remainder interest is discounted for gift tax purposes to reflect that it will be received in the future. Also, if you survive the trust term, the trust property is not included in your gross estate for estate tax purposes. Any appreciation in the trust property that is greater than the IRS interest rate used to value the gift escapes gift and estate taxation. The lower the IRS interest rate, the more effective this technique generally is.
In the current low interest rate environment, you may also wish to consider a low-interest loan to family members. You are generally required to provide for adequate interest on the loan, or interest will be deemed for gift tax purposes. However, with the current low interest rates, you can provide loans at a very low rate and family members can effectively keep any earnings in excess of the interest they are required to pay you. |
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Timing out of Gains ... Some Stock Market Perspective for the History Buffs |
Let's say you're looking at a stock market that has lost 81% over the past 2.7 years during a time of severe economic contraction. The headlines are not encouraging: the country is mired in depression, and so, too, is the rest of the world. Are you feeling bullish, or is this a great time to unload your stocks and stop the bleeding?
If you decided to unload, then you would have missed at least some of the dramatic market increases that started in 1937--4.7 years of annualized 32.1% gains, for a total gain of 266%.
Okay, suppose the market has dropped a total of 63% over a torturous 13.6 year period, and Business Week magazine has just proclaimed "The Death of Equities." Buy? Sell?
Again, the correct answer would have been "buy." After 1982, the S&P 500 gained a remarkable 666% over the next 18 years.
The accompanying chart, created by Doug Short for the Advisor Perspective services, shows a number of market ups (blue) and downs (red) since 1871, and the thing you notice is that virtually every major market move, up or down, was unexpected. The bull markets came as a surprise, and the bear markets came at times when the markets seemed to be on a long-term roll. (The scale here is logarithmic, which means that if the chart were expressed in absolute terms, the long-term rise would look much steeper.)
In truth, the decision that faced most investors in 1921 (market down 69% over the previous 15 years) or 1949 (market down 54% over the previous 12 years) was not whether to make some kind of dramatic move into stocks. The decision, made daily as the newspaper carried discouraging news over and over again, was whether to stay invested in stocks and eventually reap the gains (396% and 413% respectively) that nobody could have predicted in advance.
The most important long-term statistic to come out of this analysis may be the dramatically different size of the gains and losses. Taken together, the various bulls since the market trough in 1877 brought investors gains of 2,075%--an average of a 415% gain per bull market. The bear markets, in aggregate, cost investors 329%--an average downturn of 65%.
Nobody knows when the markets are going to suddenly take off after a bearish period, and the longer and deeper and more discouraging the downturn gets, the less likely the next bull market seems. But history suggests that patient investors get more return during market upturns than they lose when the markets drop. Long-term, trying to outsmart the market and sidestep losses would have led to missing even bigger gains. |
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Strong Password Tips for Account Security |
 In a well-known story, a simple woodcutter overhears a secret password--"Open Sesame"--that a group of thieves uses to unlock a magically sealed cave containing a vast treasure. Because the password was easy to remember, the woodcutter was ultimately able to appropriate the treasure for his own use. Had the thieves taken just a few simple common-sense precautions to protect their password, however, the story might have turned out very differently.
Substitute "online account" for "magically sealed cave," and the same holds true today. Most of us have significant financial and personal information that's readily accessible through the Web, in most cases protected by nothing more than a username and password. Given the damage that can result from unauthorized access to this treasure trove of information, it makes sense to pay attention to a few simple common-sense rules that apply to online passwords.
Don't share your password
The thieves in the story were doomed from the start--all shared the same password, and had to yell it out loud to open the cave. Today, we type passwords into computer keyboards, phone and ATM keypads, and at checkout registers. Just as you wouldn't shout your password out for all to hear, don't make it easy for others to see you entering your password (e.g., by looking over your shoulder). And don't share your username or password with anyone, for any reason.
Do use strong passwords
Your password should never be a word that can be found in a dictionary; today's cybercriminals use sophisticated dictionary programs that can quickly try to enter every word in the list as your password. Better to use a combination of numbers, uppercase letters, lowercase letters, and symbols. And a longer password is generally better than a shorter password. Your password also shouldn't contain personal information that's easy to guess--children's names, names of pets, or phone numbers, for example.
Many websites provide specific criteria for passwords. For instance, you may have to choose a password that is exactly eight characters long, contains both uppercase and lowercase letters, at least two numbers, and at least one punctuation symbol. The tradeoff, of course, with such "strong" passwords is that they're not always easy to remember.
You might try using mnemonic devices to remember your passwords (tnwoeIgtra33p!!= there's no way on earth I'm going to remember all 33 passwords!!). In practice, though, like many, you may find yourself breaking the next general rule.
Don't write down your passwords
You may keep track of all of your different account and website passwords by writing them down. That's really not a good idea, though. It's a particularly bad idea to keep your list of passwords on a file stored on your computer or mobile device. The risks are obvious--just imagine the consequences if your password list were to fall into the wrong hands.
If all the mnemonic tricks in the world aren't going to help you remember the seemingly countless number of passwords you need to be able to recall on a regular basis, and there's just no way that you're going to part with that password list, consider a password manager program or application. These programs encrypt your login and password information--basically, you only need to memorize one password: the one that lets you access the password manager.
If you do keep a password list, make sure the list is stored someplace safe, and that it's not readily accessible by others. For example, don't leave your list of passwords open on your desk, right next to your computer.
Do use different passwords for different accounts
When you spend the time coming up with a strong password that you can remember, there's an overpowering temptation to use that same password everywhere you can. Bad idea. You should always try to use a different username and password with each account. The danger in using the same username and password for everything is that if one of your accounts is compromised, all of your accounts are at risk. And change your password periodically; change it immediately if you see any suspicious activity in your account.
Don't let your guard down
Good password practices and a little common sense can go a long way in protecting you from cyberthieves. The key is to avoid common mistakes, educate yourself on basic Internet security practices, and stay on top of things by regularly checking your accounts. Above all, don't be lazy--the time and effort you'll spend today implementing effective passwords is nothing compared to the problems you'll face if you find that you're not the only one with access to your accounts. |
| Retirement Income Workship | |
This month's workshop focuses on how to structure your retirement income and portfolio. It's designed for those in or very near retirement.
The workshop is at 6:30 pm this evening, Tuesday, December 20. Registration is encouraged for planning purposes to library@cityofkeller.com.
Workshops are usually on the 3rd Tuesday of the month at 6:30 pm. Please mark your calendars and tell your friends about ones that interest you. The Keller Public Library is located at 640 Johnson Road.
I'm planning topics now for 2012. If you have suggestions, I would love to hear them! Thank you.
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I hope you found this newsletter informative. KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients. To learn more or schedule a time, call 817-993-0401 or e-mail jean@keenerfinancial.com.
Sincerely,
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Jean Keener, CFP®, CRPC®, CFDS
Keener Financial Planning
Keener Financial Planning is an hourly, as-needed financial planning and investment advisory firm working with individuals at all financial levels.
All newsletter content except where otherwsie credited Copyright ©2011, Keener Financial Planning, LLC. |
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