September 7, 2012Vol 5, Issue 8 
DFW Financial Planning

Jean Keener, CFPGood morning.  Even though it's not officially fall, it seems like it with labor day weekend and schools back in session.  I hope you're enjoying the change.


In case you haven't noticed, we're in the middle of a nice bull market run in the stock market.  The S&P 500 (large US companies) closed yesterday at its highest level since Lehman Brothers collapsed 4 years ago and is now up more than 15% year-to-date.  International stocks are also participating in the growth with the developed markets index up more than 7% so far this year and emerging markets up more than 6%.  The US aggregate bond index is up about 3.5% so far in 2012.  What a nice reward for our investing discipline in managing through tough up-and-down markets!


Voting for the Keller Citizen's Best of the Best issue is going on now.  I am so grateful for your support of the last 3 years in voting Keener Financial Planning "Best Financial Planner."    If you could take just a few minutes to vote in this year's contest before the end of the day on Sunday, I would greatly appreciate it.  Voting is at Thank you! 


KFP's planning assistant Megan Horst started back to school at UNT last week.  Her work schedule is now 1 - 5:30 M/W/F and 7:30 - 5:30 on T/Th.  Please keep this in mind if you plan to drop by the office.


I will be out of the office on vacation the last week of September (24th - 28th), so please give us a call in the next week if there are any financial issues we need to address before the end of the month.  


In this month's newsletter, we have an information on the fiscal cliff, IRA distributions, how remarriage affects social security, and more. And women, if you have time on the 20th of September, I think you'll enjoy our conversation at the library about Women and Money -- see more info below.  Thanks for reading, and Live Well!

In This Issue
Mortgage Rate Historical Perspective
What is the "Fiscal Cliff"?
How Remarriage Affects Social Security
Withdrawals from Traditional IRAs
Women & Money workshop this month
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A little Mortgage Rate Historical Perspective

For people of a certain age, who remember taking out a home mortgage at 15%, 16% or even near the top at 18%, the astonishingly low rates that banks are charging today are a little hard to believe.  This chart, taken from statistics collected by the Federal Home Loan Mortgage Corporation for 15-year and 30-year fixed-rate mortgages, tells the story: rates have been historically low for years, and they have been trending lower ever since the bottom fell out of the real estate market.


Home Mortgage Rates


This has created a strange but not unusual market situation: people who remember the housing market collapse are nervous about buying right at the time when they can buy more house for less money than ever before in their lifetime, and finance at rates we may never see again.  Our instincts tell us to buy when the markets are booming and prices are high, and to stay on the sidelines when the markets are offering us bargains.


The economic case for purchasing a home vs. renting has always been a bit sketchy.  The real estate site Trulia has calculated that the breakeven between the two comes when you can buy for 15 times your yearly rental costs.  By that formula, if you're paying $20,000 a year in rent, you might think twice about purchasing a comparable home that costs more than $300,000.  But that formula has some embedded assumptions about mortgage rates.  If you were to buy that $300,000 house and finance it at 18.45%--the average national mortgage rate back in October, 1981--then your $4,631 monthly payments would amount to $55,572 a year--more than two and a half times the rental rate you're paying now.  This might not be the ideal tradeoff.  But at 3.55%--the average national rate in July--the payments are $1,355 a month, or $16,260.  At those rates, even if you factor in maintenance and property taxes, buying might actually cost less per month than renting.


Trulia identifies some markets where prices are historically high and historically low.  The average two-bedroom condominium or townhouse in the New York City area currently costs about 32 times as much to buy as to rent.  In Seattle, you can expect to buy at about 24 times the rental cost; San Francisco and Portland, OR now cost 22 times as much.  Meanwhile, Miami homes are going for about about eight times annual rents, while Phoenix (10 times) and Las Vegas (11) seem to be relative bargains. 


In general, you should avoid committing too much of your cash flow to the place you live; annual housing costs should be less than a third of your gross annual income.  And you probably shouldn't count on your home appreciating in value immediately.  A recent report by Fitch Investors Services says that in many markets, housing prices won't have completely bottomed out until late next year.  But with the combination of low rates and distressed prices, it may be the best time to buy that many of us have seen in a long, long time.


Material adapted with permission from Financial Columnist Bob Veres. 

The Fiscal Cliff

Whenever you read about America's economic recovery, there is inevitably a mention of the looming fiscal cliff, a scary future event that could decimate the economy and drive share prices back down. 


What is this fiscal cliff?  Why are economists so frightened of it?  


The term refers to a sudden change in a lot of different tax policies that is scheduled to take place automatically at midnight on December 31.  As soon as the clock strikes twelve, the Bush-era tax cuts will expire, eliminating the 10% tax bracket altogether, and moving the current 25%, 28%, 33% and 35% brackets up to 28%, 31%, 36% and 39.6% respectively.  At the same time, the 0% capital gains tax rate would bump up to 10%, and the tax rate on dividends would rise to 15% or 28%, depending on the recipient's income tax bracket. 


Also expiring: a provision that eases the so-called "marriage penalty," some deductions for college tuition, child tax credits, dependent care credits and a particularly harsh phase-out would eliminate up to 80% of some taxpayers' itemized deductions for mortgage interest, state and local taxes, and charitable donations. 


Making the cliff a bit steeper, the Budget Control Act of 2011--what most of us remember as the tense compromise that ended last year's budget standoff--calls for automatic government spending cuts of $1.2 trillion from the federal budget over the next 10 years.  


The cliff becomes a bit steeper still as the Obama-era payroll tax cuts (reducing taxes by about 2% for workers) expire at the same moment in time.


All of this would boost government revenues and lower government spending--the opposite of a government stimulus--and suck some of the spending power out of consumer balance sheets.  How much?  The Congressional Budget Office estimates that if we go over the cliff--that is, if Congress doesn't act between now and the end of the year--a total of $560 billion would exit the economy to pay down the government deficit.  That's the good news.  The bad news is that the CBO estimates that this would reduce America's total economic activity in 2013 by four percentage points.  To put that in perspective, last year our economy grew at a 1.7% rate. 


So is a recession inevitable?  What are the odds that Congress will take bold, decisive action during a Presidential election year?  Some pundits believe that the magnitude of the economic consequences has gotten the attention of Congress, and that no matter who gets elected, something will be done.  Hopefully they are right.


We don't need to know the future to be successful investors.  But it does make sense to be aware of upcoming events to manage our own expectations and avoid emotion-based responses as our investment values are affected as these events unfold.  


Material adapted with permission of Financial Columnist Bob Veres.

How Remarriage Affects Social Security

Remarriage and Social Security If you're receiving social security retirement benefits and considering remarriage, it makes sense to understand how your benefits may be affected.


If you're receiving benefits based on your own work record, your benefits will continue.  


If you're receiving spousal benefits based on your former spouse's work record, those benefits will generally end upon your getting remarried, but you may be able to receive benefits based on your new spouse's work record, or on your own.  For example, Judith is a 66-year-old divorcee and receiving a $1,100 monthly benefit based on her former husband Bob's work record.  Judith plans to remarry Bill who is also 66.  Bill is receiving a $2,000 monthly social security benefit.  Judith will no longer be eligible to receive benefits on Bob's record, but can change to spousal benefits on Bill's record and receive $1,000 per month.  Or, if she is eligible for benefits on her own record, she'll receive those benefits if they're higher.


If you're a widow(er) under age 60, or you're disabled but under age 50, remarriage ends any benefits based on the record of your deceased spouse. However, if you remarry after age 60 (or after 50 and are disabled), those benefits remain intact, unless you choose to receive the spousal allowance through your new spouse. If your second marriage ends as a result of death, divorce, or annulment in less than 10 years, you will again be eligible to collect benefits on your first spouse's record. Benefits paid to a disabled widow(er) are unaffected by remarriage.


Note, too, that if you were the working spouse during your first marriage, your remarriage does not change the Social Security benefits paid to your ex-spouse.


Because the rules surrounding payment of benefits are complicated and depend on your particular situation, it pays to get advice specific to your situation and develop a plan that's best for you.  Information is available from the Social Security Administration at (800) 772-1213 or at, and a financial professional can help develop a strategy integrated with the rest of your financial picture.


Material adapted with permission from Broadridge Investor Communication Solutions, Inc.

Withdrawals from Traditional IRAs

Withdrawals from Traditional IRAs In these challenging economic times, you may be considering taking a withdrawal from your traditional IRA before you reach retirement age. While you're allowed to withdraw funds from your IRAs at any time, for any reason, the question is, should you?


Why you should think twice


I generally recommend using your retirement funds for one purpose only--retirement. Why? Because frequent dips into your retirement funds will reduce your ultimate nest egg. Plus, there will be less money available to take advantage of the twin benefits of tax deferral and any compound earnings. Depleting your retirement funds too soon can create a challenging situation in your later years.


And then there are taxes. If you've made only deductible contributions to your traditional IRA, then all the funds in your account are subject to federal income tax when you withdraw them. They may also be subject to state income tax (not for Texas residents of course).  If you've made any nondeductible (after-tax) contributions to your IRA, then each withdrawal you make will consist of a pro-rata mix of taxable (your deductible contributions and any earnings in your account) and nontaxable (your nondeductible contributions) dollars.


All your traditional IRAs (including SEPs and SIMPLE IRAs) are treated as a single IRA when you calculate the taxable portion of a withdrawal. So you can't just transfer all your nondeductible contributions into a separate IRA, and then withdraw those funds tax free. And, if you're not yet age 59�, the taxable portion of your withdrawal may be subject to a 10% federal early distribution tax.


10% early distribution penalty


To discourage early withdrawals from IRAs, federal law imposes a 10% tax on taxable distributions from IRAs prior to age 59�. Not all distributions before age 59� are subject to this penalty, however. Here are the most important exceptions:

  • Distributions due to a qualifying disability
  • Distributions to your beneficiary after your death
  • Distributions up to the amount of your tax-deductible medical expenses
  • Qualified reservist distributions
  • Distributions to pay first-time homebuyer expenses (up to $10,000 lifetime)
  • Distributions to pay qualified higher education expenses
  • Certain distributions while you're unemployed, up to the amount you paid for health insurance premiums
  • Amounts levied by the IRS
  • Distributions that qualify as a series of substantially equal periodic payments (SEPPs)
The SEPP exception to the early distribution penalty

The SEPP exception allows you to withdraw funds from your IRA for any reason, while avoiding the 10% penalty tax. But the rules are complex, and this option is not for everyone. SEPPs are amounts you withdraw from your IRA over your lifetime (or life expectancy) or the joint lives (or joint life expectancy) of you and your beneficiary. You can take advantage of the SEPP exception at any age.  

To avoid the 10% penalty, you must calculate your lifetime payments using one of three IRS-approved distribution methods and take at least one distribution annually. If you have more than one IRA, you can take SEPPs from just one of your IRAs or you can aggregate two or more of your IRAs and calculate the SEPPs from the total balance. You can also use tax-free rollovers to ensure that the IRA(s) that will be the source of your periodic payments contain the exact amount necessary to generate the payment amount you want based on the IRS formulas.  

Even though SEPPs are initially determined based on lifetime payments, you can change--or even stop--the payments after five years, or after you reach age 59�, whichever is later. For example, you could start taking SEPPs from your IRA at age 50, without penalty, and then, if you no longer need the funds, reduce the payments (or stop them altogether) once you reach age 59�.  

hort-term loan


If you only need funds for a short period of time you may be able to give yourself a short-term loan by withdrawing funds from your IRA, and then rolling those dollars back into the same or a different IRA within 60 days. However, watch the deadline carefully, because if you miss it, your short-term loan will instead be treated as a taxable distribution. And keep in mind that you can only make one rollover from a particular IRA to any other IRA in any 12-month period. A violation of this rule can also have serious adverse tax consequences. 


Some material adapted with permission from Broadridge Investor Communication Solutions, Inc.

Upcoming Personal Finance Workshops
Keller Public Library Free Financial Education Seminars

Personal Finance Workshops are held on the third Tuesday of the month at 6;30 pm at the Keller Public Library.


September's topic is Women and Money.  We will discuss the unique opportunities and challenges women encounter in managing our personal finances throughout our lives.  We'll also review some straight-forward solutions to balance competing priorities in working with our money.  This will be an interactive discussion, and women of all ages are invited to attend.  Women and Money is Tuesday, Sept. 20 at 6:30 pm.  Please RSVP to [email protected] for planning purposes.


October's topic is Investing Basics: How to build a diversified portfolio and keep more of your money.


The Keller Public Library is at 640 Johnson Rd.

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 [email protected].
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.