Good morning.  

The positive investment market performance has continued over the last month.  We have the full investment market review for third quarter below.  So far in October, the major indices have been up and down but are pretty close to where they ended September.

If you had the chance to vote in last month's Keller Citizen Best of the Best contest, thank you so much. I am delighted to share that for the fourth year in a row Keener Financial Planning was awarded Keller's Best Financial Planner .  I greatly appreciate your support!  Please watch for the full section in the Wednesday October 24 edition of the Keller Citizen. 

And, just announced this morning: the social security administration set the cost of living adjustment for 2013 at 1.7% for individuals receiving benefits.  The maximum taxable earnings will increase to $113,700 for 2013.  For information on how the COLA is calculated and more, go to www.ssa.gov.

In this month's newsletter, I've created a Q&A on the most common questions related to the potential upcoming tax changes.   We also have a very special article on writing an ethical will from Eric L. Weiner, and information on FSAs and over-the-counter medications.  Thanks for reading, and Live Well!

Q&A on upcoming tax changes

Words from the Heart: Writing an Ethical Will

The following article is provided courtesy of Eric Weiner.  I had the pleasure of hearing Eric speak on the topic of ethical wills at a financial planning conference last year, and found his book on writing an ethical will thought provoking, inspiring, and still practical.  This article provides a sketch of some of the meaning and enrichment we can gain for both ourselves and our loved ones from writing an ethical will.  If you want to explore the topic further, information on his book is available at the end of the article.  Enjoy!

By Eric L. Weiner, MSW, PhD 

Eric L. Weiner, MSW, PhD

Typical estate planning techniques involve bequeathing wealth and valuables from one generation to the next. Many people, however, view wealth as something more than money and possessions. Their view is that some of the most valuable items one can pass on can not be measured financially. Wealth, for them, includes passing on guiding principles, blessings, spiritual beliefs, and family stories. If this is true for you, consider the benefits of writing an ethical will in addition to a traditional will of inheritance.

Ethical wills have a long and rich oral tradition in Jewish history. They were first described 3000 years ago in the Hebrew Bible when Jacob addressed his 12 sons on his death bed. He told them stories, predicted their futures, and imparted his life lessons. Written ethical wills date back to the 12th century. The custom was to write directions for the religious and secular guidance of children. It is considered, after all, a good deed to instruct children before death.

Writing an ethical will is not for the fainthearted. It takes courage to confront life and one's mortality. You should be willing to ask yourself some of these questions: What do I consider the essential truths I have learned in life? What are my convictions, values and important life lessons? What role has religion played in my life? What are my spiritual beliefs? What are my hopes for the future? These are challenging questions that require deep reflection. 

Many connote an ethical will with a "death bed" statement given just before dying. For some, that may be true. More and more, however, ethical wills are being written and presented when parents or grandparents are still in their prime. They may be written and re-written at various key transitions in the family life cycle such as marriage, the birth of a child, confirmation, retirement, serious illness, and for Bar and Bat Mitzvah's. 

Consider the following ethical will excerpt found on the Internet which was written by a healthy 43- year old customer service manager. He wrote it for his wife and three children and described it as "an exercise in looking at your life, what your priorities are, what's important to you." It is brief, creative, instructive and driven by principle. 

Have integrity. Your yes should mean yes, your no should mean no. Be the person you say you are. When you peel a banana have you ever gotten anything other than a banana? That is what integrity is, being on the inside who you say you are on the outside. It is not always easy but it is always valuable.

The main ingredient for writing an ethical will is to speak from the heart. As such, anything goes. You do not have to be a professional writer and you are constrained only by the limits of your imagination. There is one important caution and that is to avoid writing the "grudge from the grave." If the intent is to guilt or shame someone, then these are issues that need to be worked out elsewhere.

The following abridged ethical will is rich with life lessons. It was written by a 60 year old nurse and mother of three children. She attached this ethical will to her Durable Power of Attorney for Health Care Decisions. In receiving this ethical will her children have a resource to guide their thinking and behavior for many years to come.

I have a great life. I have had fun and I see my life as an adventure. Humor ought to be a large part of every person's day. Every day there is a new mountain to climb. Some adventures are not much fun and do not turn out the way you want them to, but all of them shape who you are. I always make myself try to do new things because I swore never to get complacent and do only what is comfortable.

In the future I challenge you to always be willing to climb new mountains and greet new adventures. I want to see a future where you are happy, that you make supportive and provocative mates if you marry, attentive parents who challenge any children that come, supportive family to your extended family, and a loyal friend to those you choose to call friends.*

An ethical will can be a great benefit in clarifying issues left unsaid in a basic will. The basic will is written with specific amounts of money or material assets in mind. There is, however, little or no explanation given for why money is divided up in a certain way or why one adult child is given the succession rights of a family business and another child is not. An ethical will can be the connective thread that ties the loose ends together into a coherent whole. Is there a better gift one can leave their loved ones?

* Abridged and reprinted with permission from Dr. Barry Baines, Ethical Wills: Putting your Values on Paper, 2002, Perseus Books

Eric L. Weiner coaches people on how to write ethical wills and gives presentations entitled "Family Legacy Conversations: What Matters Most." His book, "Words from the HEART: A Practical Guide to Writing an Ethical Will," recently won an international award. Contact him at 414-218-8899 or ericweiner@familylegacyadvisor.com for more information.

Quarterly Market Review

It seems like every quarter we find ourselves saying the same thing: what a difference a quarter makes!  In the first two months of 2012, the U.S. stock market was recording excitingly positive returns.  The U.S. economy seemed to be back on track and there was talk that the Eurocrisis was finally behind us.  Even the pullback in March left the markets in positive territory.  Then came a difficult second quarter where the indices fell across the board, nearly wiping out the first quarter gains.  Now, in the last three months, while many investors were still anxious about Europe, deficits, paralysis in Washington and unemployment, the markets have delivered an unexpected gift: a steady, gradual rise in stock prices that seemed, week by week, contrary to the mood expressed in the financial press. 

Here at the end of the third quarter, entering the home stretch for the year,  the returns on many of the broad stock indices are, surprisingly, well into double-digit territory.  Market historians will look back on the past three months as a bullish quarter, and probably conclude that investors in the first three quarters of 2012 must have been feeling ebullient bordering on giddy.

US Stocks

Overall, the Wilshire 5000--the broadest measure of U.S. stocks and bonds--was up 6.15% for the third quarter, and is returning a robust 15.85% so far this year.  The comparable Russell 3000 index rose 6.23% during the third quarter, and is now up 16.13% for the year.

The other stock market sectors moved in a very similar pattern.  Large cap stocks, represented by The Russell 1000 large-cap index, gained 6.31% for the third quarter, putting it up 16.28% for the first nine months of the year.  The widely-quoted S&P 500 index of large company stocks gained 5.76% in the same time period, and is up 14.56% so far this year.

Small company stocks have posted returns nearly identical to the large multinationals. The Russell 2000 small-cap index gained 5.25% in the three months ending September 30, and has returned 14.23% for the year so far.  The technology-heavy Nasdaq Composite Index was up 6.17% in the third quarter, up 19.62% year to date.  Twelve years after the "tech wreck" disaster in this sector, tech stocks appear to be market leaders again.

International Stocks

Global stocks have not been as robust as American shares, but they, too, are in positive territory.  The broad-based EAFE index of developed economies rose 6.14% for the third quarter, and is now in firmly positive territory, with a gain of 6.95% so far this year.  For the first time this year, European stocks are showing gains for their investors, in dollar terms, up 8.13% for the recent quarter, now up 8.00% for the year.

The EAFE Emerging Markets index of lesser-developed economies rose 6.97% in the third quarter, and is now up 9.41% for the year.  Interestingly, the highest returns of any global index came from emerging African nations (minus Zimbabwe, which is one of the ways that EAFE calculates its indices), which are up an aggregate 34.70% so far this year.  Second place goes to an index made up of the Jordanian, Egyptian and Moroccan stock markets, up 32.81% in the first three quarters of 2012.

Commodities

Commodities have also moved into positive territory, with the S&P GSCI index rising 11.54% for the quarter, now up 3.47% this year.  Energy and petroleum prices are up very modestly (0.55% and 0.93% on the year respectively); the biggest mover is agriculture (up 18.44% so far this year), with grain prices rising 31.05% due to the Midwestern drought.

Bonds

On the bond side, those of us who could not imagine how U.S. Treasuries could possibly offer lower yields are watching it happen.  The 12-month T-Bonds are now yielding just 0.15%, as investors seem to be happy to essentially lend the government money with a promise that they will get it back again 12 months later.  Locking up your money for three years gets you 0.31% a year.  Ten-year issues yield 1.63%, and 30-year Treasuries bring a 2.82% annual coupon yield.  Muni bonds are also down from where they were last quarter, with aggregate yields of 0.203% (1-year), 0.286% (2-year), 0.624% (5-year) and 1.742% (10-year).  The aggregate of all AAA corporate bonds is yielding 0.76% for bonds with a five-year maturity. 

Perspective

Is there an explanation for this three-month bull market during what can only be described as trying economic times?   People who have long experience with the investment markets are fond of saying that rallies "climb a wall of worry;" that is, the markets go up most steadily when it requires courage to buy into them.  These past three months seem to be one of the best examples of this adage that you are likely to see.  Today, it requires a certain degree of courage to believe in the long-term future of the economy and the long-term return on investments, and yet the market rise is evidence that many investors are finding that courage amid the discouraging headlines.

Some economists think that the stock rally was a gift from the central banks.  For months, it was rumored that the U.S. Federal Reserve Board would engineer another stimulus package, which had already been dubbed "QE3"--and indeed Fed Chairman Ben Bernanke announced that the Fed would inject $40 billion a month into the market for securitized home mortgages, adding to the money supply, possibly driving down mortgage rates and (again possibly) stimulating the housing and homebuilding sectors of the economy into hiring again.

Meanwhile, the European Central Bank has finally announced that it would do what economists were calling for three years ago: purchase Eurozone government bonds to reduce the borrowing costs of countries that are restructuring their finances--notably Spain and Italy.  After two press conferences on different sides of the Atlantic, some of our worst-case economic scenarios (a 2008-like collapse of the Eurozone banking system; a U.S. recession) seem to have become less likely to occur.

The U.S. economy is certainly not in danger of breaking any speed records as it continues to climb out of the Great Recession; in the last week of September, the government announced that from April through June, GDP grew just 1.3%.  Economists remain wary of the "fiscal cliff"--the simultaneous expiration of lower tax rates and automatic federal budget cuts--that will take place, absent Congressional intervention, at the stroke of midnight, December 31.  Add in the stubbornly high unemployment rate, and there is plenty of reason not to be bullish on stocks for the last three months of the year.

But of course that was also true before stocks went up the past three months.  Optimists can point to 96,000 new jobs continuing to be added, and the fact that long-term, the unemployment rate has been trending downward from around 10% at this time three years ago.  A Bloomberg News survey recently forecast that the U.S. economy will grow 2.1% over the next three months, and the forecasts from the Federal Reserve Board anticipate 2.5% to 3% GDP growth in 2013.  At the upper end of that estimate, we are talking about a return to economic normalcy, and a chance to chip away at the jobless rate.

Who's right?  Who knows?  All we know for sure is that the global economy is in a slow-growth recovery, with little indication that growth will accelerate dramatically.  Persistent concerns about global debt issues and threat of recession remain.  Buying stocks today is a bet that the hard work of millions of people still employed will produce positive results over the long term, which will ultimately reward the owners who hold their shares.  For as long as the markets have existed, staying invested has been a good long-term strategy--and in the face of so much short-term uncertainty, this is about all we have to go on. 

Content adapted with permission of financial columnist Bob Veres.

Health Care Flexible Spending Accounts and Over-the-Counter Medications

A health-care flexible spending account (FSA) allows you to pay for certain qualified medical and dental expenses with pretax dollars. With a health-care FSA, you can contribute pretax earnings to the plan (usually through a salary reduction agreement with your employer) and submit qualifying expenses to the plan for reimbursement. If you tend to spend a lot of money on medical expenses that are not covered by your health plan, contributing to an employer-sponsored health-care FSA is a good way to help pay for these expenses.

Although over-the-counter (OTC) medications used to be reimbursable from a health-care FSA, the Patient Protection and Affordable Care Act of 2010 amended the definition of qualified medical expenses for health-care FSA reimbursement purposes. As a result, OTC medications (except for insulin and medications that are prescribed by a physician) are no longer eligible for reimbursement.

However, many OTC medications are also available by prescription. You may want to ask your doctor for a prescription for any OTC medications that you use on a regular basis (e.g., pain relievers and allergy medications). You'll need to submit the prescription along with a receipt to your FSA provider in order to get reimbursed. Some FSA providers offer forms that allow your doctor to write a prescription once for any of the OTC medications that you'll need throughout the year.

Currently, there is no legal limit on the amount that you can contribute to a health-care FSA. However, most employers do impose a cap on contributions (typically $3,000 to $5,000). And beginning in 2013, if a health-care FSA is part of a cafeteria plan, annual contributions will be capped at $2,500 (starting in 2014, that amount will be adjusted for inflation).

Finally, when participating in an FSA, it's important to remember that you cannot carry over any money you contribute from one plan year to the next--in other words, if you don't use it, you lose it. As a result, it's important to choose your contribution amount carefully so that you don't risk losing any contributions at the end of the plan year. 

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

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

My last personal finance workshop at the library for 2012 is this evening.  The topic is Investing Basics: How to build a diversified portfolio and keep more of your money.  This session is recommended for those who want to take a more active role in understanding their investments, want to make better decisions about investment options in their employer retirement plans, or for those just getting started with investing.  If this sounds like you, I hope you'll join us.

The Keller Public Library is at 640 Johnson Rd.