May 31, 2012Vol 5, Issue 5 
DFW Financial Planning

Jean Keener, CFPGood morning.  I hope your summer is off to an enjoyable start.


May has been negative for the major stock investment indices. The S&P 500 index has fallen almost 6% in the last month, but is still up more than 5% so far this year.  Developed and emerging international markets are both down more than 11% for the past month.  Year to date, developed international markets are now down about 3% and emerging markets are flat.  As would be expected, the bond market has performed well in this environment with the Barclays US Aggregate bond index up 3/4 of a percent in the last month and more than 2% year to date. 


This year's start in the markets reminds us of some key investing principles -- the futility of trying to time the market and pick stocks and the benefits of diversification and being broadly invested in the capital markets.


In this newsletter we have information on upcoming income tax changes, how much you need to save for retirement, and more.   As always, feel free to e-mail me at with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world.  Thanks, and live well!

In This Issue
Upcoming Income Tax Changes
How Much Do You Need to Save for Retirement?
Lesson from JP Morgan
2012 Roth IRA Conversions
Free Keller Workshop: Social Security
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Upcoming Income Tax Changes

Time is an issueWith the 2011 tax filing season behind us, much attention is being paid to the expiring "Bush tax cuts"--the reduced federal income tax rates, and benefits, that will expire at the end of 2012 unless additional legislation is passed. In fact, though, several important federal income tax provisions already expired at the end of 2011. Here's a quick rundown of where things stand today.


What's already expired?


A series of temporary legislative "patches" over the last several years has prevented a dramatic increase in the number of individuals subject to the alternative minimum tax (AMT)--essentially a parallel federal income tax system with its own rates and rules. The last such patch expired at the end of 2011. Unless new legislation is passed, your odds of being caught in the AMT net greatly increase in 2012, because AMT exemption amounts will be significantly lower, and you won't be able to offset the AMT with most nonrefundable personal tax credits.

Other provisions that have already expired:

  • Bonus depreciation and IRC Section 179 expense limits-- If you're a small business owner or self-employed individual, you were allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this "bonus" depreciation drops to 50% for property acquired and placed in service during 2012, and disappears altogether in 2013. For 2011, the maximum amount that you could expense under IRC Section 179 was $500,000; in 2012, the maximum is $139,000; and in 2013, the maximum will be $25,000.
  • State and local sales tax-- If you itemize your deductions, 2011 was the last tax year for which you could elect to deduct state and local general sales tax in lieu of state and local income tax.
  • Education deductions-- The above-the-line deduction (maximum $4,000 deduction) for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals both expired at the end of 2011.

What's expiring at the end of 2012?

After December 31, 2012, we're scheduled to go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). The rates that apply to long-term capital gains and dividends will change as well. Currently, long-term capital gains are generally taxed at a maximum rate of 15%. And, if you're in the 10% or 15% marginal income tax bracket, a special 0% rate generally applies. Starting in 2013, however, the maximum rate on long-term capital gains will generally increase to 20%, with a 10% rate applying to those in the lowest (15%) tax bracket (though slightly lower rates might apply to qualifying property held for five or more years). And while the current lower long-term capital gain rates now apply to qualifying dividends, starting in 2013, dividends will be taxed at ordinary income tax rates.  

Other provisions expiring at the end of the year:
  • 2% payroll tax reduction-- The recently extended 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax expires at the end of 2012.
  • Itemized deductions and personal exemptions-- Beginning in 2013, itemized deductions and personal and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).
  • Tax credits and deductions-- The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit revert to old, lower limits and (less generous) rules of application. Also gone in 2013 is the ability to deduct interest on student loans after the first 60 months of repayment.
New Medicare taxes in 2013

New Medicare taxes created by the health-care reform legislation passed in 2010 take effect in just a few short months. Beginning in 2013, the hospital insurance (HI) portion of the payroll tax--commonly referred to as the Medicare portion--increases by 0.9% for high-wage individuals. Also beginning in 2013, a new 3.8% Medicare contribution tax is imposed on the unearned income of high-income individuals. 

Who is affected? The 0.9% payroll tax increase affects those with wages exceeding $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately). The 3.8% contribution tax on unearned income generally applies to the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

What should you do?

All of these changes or potential changes mean you have planning opportunities.  Because much will likely happen legislatively at the very last minute, you don't want to expend a lot of energy planning today for changes that may not occur.  But you should pay attention as laws pass later this year, consider how it affects your financial situation, and plan accordingly. 


How Much Do you Need to Save for Retirement?

Here's a deceptively simple question: how much of your income should you save during your working years if you want to enjoy a comfortable retirement? 


I'll skip to the bottom line and tell you the answer.  It depends! ... and that's why we do financial planning.  But a researcher recently conducted a study attempting to provide general guidance, and I think you may find his results interesting.  

The study was conducted by Wade Pfau, the director of macroeconomic policy program at the National Graduate Institute for Policy Studies (based in Tokyo, Japan).  
To start with, Pfau assumed that a hypothetical person (let's call him Fred) would work for 30 years at a salary that goes up with the inflation rate, and then retire for 30 years.  Each year, Fred would save the same percentage of his salary.  Pfau also assumed that Fred would need 50% of his final year's income--on top of Social Security and any pension resources--to pay for retirement living expenses out of his portfolio. 


In the first year of retirement, Fred would draw out 4% of his portfolio.  After that, to maintain buying power, he would take out ever-higher amounts based on the inflation rate in each of the subsequent 29 years.  For the entire 60 years, Fred's money is invested in an unsophisticated (but easy to calculate) portfolio consisting of 60% stocks and 40% bonds with a six-month maturity.


Then Pfau considered what would have happened for every rolling 60-year period from 1871 to the present and, looking backwards, calculated the percentage that Fred would have had to save to reach his goal. 


The results?  Pfau found that if Fred struggled to save and accumulate during a relentless bear market, he would often have a better-than-average chance of catching a bull market in retirement, and vice versa.  The highest required yearly savings rate when he took into account the full 60 year period came to 16.62% for the unlucky person who entered the workforce in 1918.  The more normal scenarios require Fred to save anywhere from 12% to 15% a year.


Of course, people who delay setting aside retirement money to later in life--if, for example, they start saving in their 40s and expect to retire at age 60--will see this savings percentage go up accordingly.  Toward the end of his research report, Pfau discovered that if Fred only saved for 20 years, and expected a 30-year retirement, he should be prepared to set aside at least 30% of his annual income during this truncated savings period.  On the other hand, if Fred set aside money for 40 years, his minimum savings rate drops dramatically, to between 6% and 14% percent.


It is important to recognize that this is a model, not a prediction of what will happen in the future.  We don't know what future returns will be, either while people are putting money aside or during their golden years.  Beyond that, we know that some people will spend more in their retirement years than their pre-retirement income, simply because they have more free time to enjoy. 


Each person, and each sequence of years, is different, and requires more precise individual planning than any researcher can do in a broad study.  But this study offers us a pretty good look at how the different variables can play out in the long lifespans we are enjoying today, a window into how easy, or hard, it can be to save for the third stage of our lives.


The full article is available at

Lesson from JP Morgan

J.P. Morgan ChaseYou no doubt heard earlier this month that J.P. Morgan Chase suffered a $2 billion loss while trading for its own investment portfolio.  


But the lesson that was lost, amid the calls for new regulation and pronouncements that banks were too big to fail and too reliant on bailouts, is that once again a large brokerage firm was making huge bets and also advising customers on their investments.  


When a large institution trades into and out of the markets for its own profit, it sets up the most basic conflict of interest in its dealings with the investors who are receiving the advice of its brokers.  If the firm made the mistake of investing in a dog stock that isn't likely to go up in value, or if the research department determines that a certain company whose stock the firm owns is about to report unfavorable news or deteriorating financials, then the brokers are told that what the company wants to unload is a wonderful "investment opportunity" for their customers. Some resist acting on these blatant attacks on their customers, but--as evidenced by the actual volume of trading for the brokerage community's own accounts--many do not. 


When the 2008 meltdown swept through the financial world, former Federal Reserve Chairman Paul Volker proposed that brokerage firms and lending institutions be banned from trading in their own accounts, and the so-called "Volker Rule" bounced around Congress for a full year.  Industry lobbyists finally convinced our elected representatives that it was a very bad idea to force brokers to stop speculating in exotic securities and simply give good investment advice to their customers, or to require banks to lend their money to businesses and consumers instead of making wild bets with it.  What we didn't realize then, what J.P. Morgan's London Whale may have taught us, is that the consumer protections proposed in the Volker Rule might also be a great way to keep these large organizations solvent.

Converting a Traditional IRA to Roth in 2012

Roth ConversionThis year may be an excellent time to consider converting your traditional IRA to a Roth IRA. As a result of market volatility, some investors have seen a reduction in the value of their traditional IRAs, meaning that the tax cost of converting may have dropped significantly. Also, federal income tax rates are scheduled to increase in 2013, so converting this year may be "cheaper" than converting next year.


Anyone can convert a traditional IRA to a Roth IRA in 2012. There are no longer any income limits, or restrictions based on your tax filing status. You generally have to include the amount you convert in your gross income for the year of conversion, but any nondeductible contributions you've made to your traditional IRA won't be taxed when you convert. (You can also convert SEP IRAs, and SIMPLE IRAs that are at least two years old, to Roth IRAs.)


Converting is easy. You simply notify your existing IRA provider that you want to convert all or part of your traditional IRA to a Roth IRA, and they'll provide you with the necessary paperwork to complete. You can also transfer or roll your traditional IRA assets over to a new IRA provider, and complete the conversion there.


If a conversion ends up not making sense (for example, the value of your Roth IRA declines after the conversion), you'll have until October 15, 2013, to "recharacterize" (i.e., undo) the conversion. You'll be treated for federal income tax purposes as if the conversion never occurred, and you'll avoid paying taxes on the value of IRA assets that no longer exist.


The conversion rules can also be used to allow you to contribute to a Roth IRA in 2012 if you wouldn't otherwise be able to make a regular annual contribution because of the income limits. (In 2012, you can't contribute to a Roth IRA if you earn $183,000 or more and are married filing jointly, or if you're single and earn $125,000 or more.) You can simply make a nondeductible contribution to a traditional IRA, and then convert that traditional IRA to a Roth IRA. (Keep in mind, however, that you'll need to aggregate the value of all your traditional IRAs when you calculate the tax on the conversion.) You can contribute up to $5,000 to an IRA in 2012, $6,000 if you're 50 or older.

Upcoming Personal Finance Workshops
Keller Public Library Free Financial Education Seminars

The next workshop for those in or near retirement will cover social security planning.  We will look at how to use effective social security planning to maximize retirement income including when to claim, coordinating spousal benefits, minimizing taxes on benefits, increasing survivor benefits for your spouse, and more.


 The workshop is Tuesday, June 19 at 6:30 pm and is free and open to the public.  Registration is encouraged for planning purposes to   The Keller Public Library is located at 640 Johnson Road.


I'll be taking a break from personal finance workshops at the library in July and August and resuming in September.  If you have requests for upcoming topics, please let me know!

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 Keener, CFP, CRPC, CFDS
Keener Financial Planning

Keener Financial Planning provides as-needed financial planning and investment services on an hourly and flat-fee basis.

All newsletter content except where otherwise credited Copyright 2012, Keener Financial Planning, LLC.