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Financial Strategies

Planning Techniques, Procedures and Guidance for

Military Professionals

Greetings! 

Welcome to the inaugural issue of Financial Strategies...A newsletter we provide to our clients and friends in order to keep you up to date on financial planning techniques, procedures and guidance.  Our focus will always be on current and previous military professionals, but those of you who aren't associated with the military will find information you can use as well.

Since it is tax season, this edition starts out with a tax issue that applies to military members who retire, receive a retroactive VA disability rating and compensation and then have to figure out their taxes.  Next, we'll then take a look at what you can do to prepare yourself for the potential of increasing inflation.  To wrap it up, there are two articles from the financial presses.  The first deals with increasing interest rates (often associated with increasing inflation) and bond returns.  The article looks at the conventional wisdom concerning bonds and interest rate changes and points out that conventional wisdom isn't always right.  The final article looks at Social Security planning.   Something many of us don't do. Before you start taking Social Security, make sure you have a plan.  Just like all your other financial decisions...

Feel free to pass this newsletter on to a friend and if you have any topics you'd like me to cover, let me know.

 

Cheers!

 

Curt

 
Curt Sheldon
C.L. Sheldon & Company, LLC
(703) 542 4000 or (800) 928-1820 
Curt@CLSheldon.com  
http://www.CLSheldon.com  
 

 

Retroactive VA Disability Compensation and Your Taxes 

If you will retire from the military or if you have done so recently and you qualify for VA Disability Compensation, you will almost certainly receive a retroactive decision.  And that will complicate your tax picture.  You see, VA Disability Compensation (like all VA benefits) is not subject to Federal Income Tax.  Military Pension Income is subject to Federal Income Tax.  A problem occurs when your VA Disability Award is retroactive.  Normally, your military pension will be reduced, to some extent by the amount of VA Disability Benefits you receive.  How much depends on your Disability rating.  Unfortunately, if you receive retroactive benefits, your previous military retired pay will not be adjusted.  You'll have to do it on your own and account for it on your taxes.

 

First of all, if you are more than 50% disabled, it may not be worth your time to correct your taxes.  We're probably looking at around $150-$280 in overstated income.  So, if you correct your retired pay your taxes may go down by $37 to $70 or so.  You'll have to decide if it is worth your time to do so.  If on the other hand, you are rated at less than 50% disabled the amount of tax savings could get into the hundreds of dollars (and maybe even push $1,000).  It would of course depend on your tax bracket and the amount of VA offset that was not taken.  If you decide you do want to correct the fact that the offset was not taken, here is what you would do:

  1. For the current year.  Adjust your income reported on IRS Form 1099-R to account for the VA offset that should have been taken.  Since your 1099-R and your tax return won't agree, you'll need to provide justification.  You'll most likely want to file on paper and include a letter that explains the situation.  The letter will need to include the fact that you have adjusted your 1099-R in accordance with Revenue Ruling 78-161 and the Strickland Decision.  Attach a copy of the letter from the VA establishing your disability.  Although it isn't absolutely necessary, I would include a copy of your DD Form 214 as well.  That should take care of it.
  2. If your retroactive VA decision spans more than one year (not that unlikely lately) then you have the option to file an amended tax return for previous years.  This can be done by filing an IRS Form 1040X (amended Tax Return) and by updating your retired income on the amended return.  You would document the reasons why the same as above.  You essentially have 3 years to file an amended return (it is a little more complicated than that...check out the IRS rules to confirm your situation).

 

The bottom line on this is you're going to need to do most or all of the work yourself.  If you have a tax or financial advisor that doesn't routinely work with military personnel you may have to explain the Revenue Ruling to them as well.  But, again depending on your exact situation, it may be worth your time to correct the inaccuracies in your tax return.
Is Increased Inflation on the Horizon?

Economists and market watchers have been warning investors about the prospect of increased inflation since the housing bubble burst in 2007.

Worries about inflation have been cropping up more frequently lately, largely due to escalating commodity prices, which are pushing up consumer prices, both in the United States and abroad. At the beginning of 2011, the inflation rate stood at a paltry 1.6%. By the end of the year, it had more than doubled to 3.4%.And this could be just the start of a longer-term inflationary cycle. With an improving economy and soaring federal deficits, many experts feel that prices in the United States will inevitably pick up their pace even further.

Inflation Rates Around the World (as of December 31, 2011)2

Country

Rate

Brazil

6.5%

Canada

2.9%

China

4.1%

France

2.5%

Germany

2.1%

Greece

2.4%

India

9.3%

Italy

3.3%

Japan

-0.5%

Mexico

3.8%

Russia

7.0%

United Kingdom

4.8%

United States

3.4%

Venezuela

28.9%

Staying Ahead

For investors, staying ahead of inflation means choosing investments that are most likely to provide returns that outpace it. Here's a look at how a climbing inflation rate could impact various investment types and asset classes.

  • Domestic Stocks -- Although past performance is no guarantee of future returns, historically, stocks have provided the best potential for long-term returns that exceed inflation. An analysis of holding periods between 1926 and December 31, 2011, found that the annualized return for a portfolio composed exclusively of stocks in Standard & Poor's Composite Index of 500 Stocks was 9.83% -- well above the average inflation rate of 2.99% for the same period. However, over shorter time periods the results are not as appealing. For the 10 years ended December 31, 2011, the S&P 500 returned an average of only 2.92%, compared with an average inflation rate of 2.50%.3
  • International Stocks -- During the same 10-year span that ended December 31, 2011, the Morgan Stanley Capital International (MSCI) EAFE, which is composed of established economies such as Germany and Japan, outpaced U.S. inflation with an average return of 5.12%. The MSCI Emerging Markets index, which tracks developing world economies such as Brazil and China, was even more stellar, returning an average of 14.2%.4
  • Bonds -- Historically, investors have turned to shorter-term corporate and high-yield bonds for protection in rising-rate environments.There are two types of bonds that receive a lot of investor interest when inflation starts to rise: Treasury Inflation-Protected Securities (TIPS) and I Savings Bonds. Both TIPS and I bonds are types of fixed-interest rate bonds whose value rises as inflation rates rise.
  • CDs and Other Cash Instruments -- The Federal Reserve is still keeping a tight lid on interest rates, forcing investors who hope to keep pace with inflation by investing in cash instruments facing a harsh reality. The rates on a one-year CD are averaging under 1%, while a five-year CD is yielding an average of under 2%, according to Bankrate.com. Money market and other bank savings accounts are also averaging well under 1%.6

Although many economists project overall U.S. inflation to remain modest in the near future, most see an uptick down the road. For investors, a well-rounded portfolio may be your best weapon. The key is to consider your time frame, your anticipated income needs, and how much volatility you are willing to accept, and then construct a portfolio with the mix investments with which you are comfortable. Consult your financial professional to discuss your specific needs and options.

 

Source/Disclaimer:

1Source: U.S. Bureau of Labor Statistics, January 2012.

2Sources: TradingEconomics.com; U.S. Bureau of Labor Statistics, January 2012.

3Sources: Standard & Poor's; U.S. Bureau of Labor Statistics. The S&P 500 is an unmanaged index. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

4Source: Morgan Stanley. The MSCI EAFE and MSCI EM are unmanaged indexes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

5Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

6Source: Bankrate.com, January 20, 2012.


Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

2012 McGraw-Hill Financial Communications. All rights reserved.


February  2012 - This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by  C.L. Sheldon & Company, a member of FPA.

 
News From the Financial Presses   

A Research Surprise on

Bond Funds 

Conventional wisdom says rising interest rates lead to falling bond prices, and that's often true-when it comes to individual bonds. But it doesn't necessarily apply to bond funds. The key is to own a widely diversified, equally weighted portfolio of bond funds, according to research conducted by Andrew D. Martin, president of 7Twelve Advisors LLC. (Click Here to Read More)
 

Should You Take Social Security Early or Late?

Assuming the Social Security system continues to operate without a hitch, you can begin receiving your retirement benefits early, late, or right on time. The best option depends on your personal circumstances.  (Click Here to Read More)

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.

 

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Military Professionals have unique financial benefits and unique financial needs.  If you think you might need help, take a look at our website at www.CLSheldon.com to see if we can help you reach your financial and lifetime goals.