November 3, 2014Vol 7, Issue 2 
DFW Financial Planning

Jean Keener, CFPGood morning.  I hope you enjoyed your extra hour of time this weekend.


We're coming off of another volatile month in the investment markets, but still on track for a rewarding investment experience this year.  The S&P 500 (large US company stocks) is up nearly 11% year to date.  US small companies have fared less well with a 1.9% return as measured by the Russell 2000.  Internationally, results are mixed with developed international market stocks now down 2.8% year to date and emerging markets stock up 3.6%.  Bonds are on still track for a strong year with the Barclays US aggregate bond index up 5.1%.


In this edition of the newsletter, we have a articles on why investment losses matter, pet trusts, updated figures for 2015 for retirement plan contributions, social security, and medicare, and more.


As the holidays approach, we find our available financial planning appointments quickly filling up between now and the end of the year.  If you have a financial issue you'd like to address before Christmas, please call us soon so we can still get you on the calendar.  For both Thanksgiving and Christmas, we'll be closing at noon the day before the holiday and reopening the following Monday. 


Please let me know if you have suggestions for newsletter articles or questions on your financial planning world.   Thanks for reading, and don't forget to vote tomorrow!

In This Issue
Medicare and health insurance deadlines
Why Losses Matter
2015 Retirement Contribution, Social Security, and Medicare Numbers
Managing Net Investment Income Tax
Pet Trusts
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Medicare and Health Insurance Deadlines

This is a busy time of year with several deadlines coming up that could be important to your financial situation. 


  • Medicare open enrollment is going on now.  October 15 - December 7.  If you're on medicare, this is your opportunity to change your medicare plan and drug coverage for 2015.
  • Open enrollment for the health insurance exchange: November 15, 2014 - February 15, 2015.  If you want coverage in effect on January 1, 2015, you need to be enrolled by December 15.

Also, please be aware that getting enrolled in Medicare coverage takes a minimum of 30 days on someone who is just turning 65, and, for those who are over 65 and have to get a creditable coverage certificate from their employer, it takes longer.  So, if you're getting ready to retire, it's important to start the enrollment process as soon as you decide.  Delay can mean that you have additional costs to buy COBRA until your medicare goes into effect and have additional stress of coordinating your coverage dates.
Why Losses Matter

Why Losses Matter Everybody who told us that the steep market drops last month wouldn't last can rightly claim they're right.  When the S&P 500 was down 7.4% during a two-week sell-off, there was no way to know whether we'd have to endure more of the same.  Staying the course turned out to be exactly the right strategy, but that doesn't mean that we shouldn't be concerned about downside risk.  In fact, during the downturn, all of us should have been working hard to keep our portfolios from falling as far and as fast as the American indices.


Isn't this a contradiction?  There is no contradiction between holding on during market downturns and building portfolios that are unlikely to lose as much as the broader market during a bear market free-fall.  You hold on because no living person knows when the stock markets will recover, but history tells us that they always do seem to recover and eventually deliver returns that are higher, on average, than the returns you get when the money is safely stored under your mattress. 


But you also pay attention to downturns because the further your portfolio falls, the harder it is to recover.  There's actually a rational reason why you tend to fear losses more than you enjoy your gains.


The mathematics show the asymmetrical effect of losses vs. gains.  If your $1 million portfolio loses 10%, falling to $900,000, then it requires an 11.11% gain to get you back where you started.  It doesn't seem fair, but that's how it is.  A 20% loss requires a 25% gain, and if your portfolio were to drop 40%, you'd need a subsequent 66.67% gain to climb back to your original $1 million nest egg.


Chances are, you know how we fortify portfolios against losses: we include a variety of different types of assets--including bonds which, against every single market prediction at the start of the year, are actually delivering positive returns almost all the way across the maturity spectrum.   We include foreign stocks, which haven't exactly been knocking the lights out this year, but which will, someday, offer strong gains when the U.S. markets are weakening.  All of these different movements tend to have a calming effect on the portfolio's returns, not always in every circumstance, but fairly reliably over time.


The result?  A smoother ride puts more money in your pocket.  If an investor experienced returns of +20% and -10% in alternate years over the next 20 years, a $100,000 portfolio would grow to just under $216,000.  If a more diversified investor experienced a smoother ride of 10% a year, her portfolio would grow to just under $673,000.  The power of steady compounding is a marvelous thing to see.  The drag of losses can be debilitating to a portfolio's growth.


You won't experience either of those trajectories, of course.  But if you can somehow avoid the worst of the market's falls, even if it means never beating the market during the up-cycles, you raise your chances of long-term success.  If you can do this and remain invested through a lot of uncertainty, like we experienced last month, chances are you'll enjoy better long-term returns than a lot of the "experts" you see screaming at you to buy or sell on the cable finance channels.


Oh, and that 7.4% drop?  The S&P 500 had to go up 7.99% to recover the ground it lost in that two-week period, and it has.  It's now up 8.3% from its October 15 closing low and we're on to new highs.


 Material adapted with permission of financial columnist Bob Veres.

2015 Retirement Contribution, Social Security, and Medicare Numbers

mountain-scene.jpg The IRS and Social Security Administration have released updated figures for 2015 based on inflation over the last year.  Here are the highlights.   

Retirement plan 2015 contributions limits

  • IRA limits didn't change: still $5,500 with a $1,000 catch-up for those 50+
  • 401(k), 403(b), governmental 457(b), and TSP increased: now $18,000 with a $6,000 catch-up for those 50+ 
  • Simple IRA increased: now $12,500 with a $3,000 catch-up for those 50+
  • Max for employer retirement plan contributions increased: now $53,000
For details on other limits for 2015, visit the IRS website.

Social Security for 2015
  • Monthly benefits are increased by 1.7% for 2015.
  • Maximum wages subject to the social security tax increased to $118,500.
  • The annual retirement earnings test exempt amount for beneficiaries under full retirement age increased to $15,720.  In the year you reach full retirement age, it's increased to  $41,880.
  • The amount of earnings needed to earn one Social Security credit will increase to $1,220 from $1,200 in 2014.
For other social security figures for 2015, visit the social security website.

  • The Medicare Part B premium of $104.90 didn't change, although the premium surtax continues to apply for couples with incomes above $170,000 and singles above $85,000.
For updates to other Medicare costs for 2015, visit the Medicare website.


Managing the Net investment Income Tax

2014 tax planning With the year coming to a close, it's a good time to consider ways to reduce your tax liability for the year.  If you are subject to the 3.8% net investment income tax, there are strategies that may help you manage that tax. 


The tax is applied to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds $250,000 if married filing joint, or $200,000 if single. MAGI is basically adjusted gross income plus any associated foreign earned income exclusion.   If you're below these levels, it doesn't apply to you.


Any strategy you consider should be directed at the appropriate target.  If your net investment income is greater than your MAGI over the threshold, then your focus should be aimed at reducing your MAGI. Conversely, if your MAGI over the threshold is greater than your net investment income, you should try to reduce your net investment income. 


Here are a few strategies that may help you manage the net investment income tax:

  • Before selling appreciated securities, consider whether you can offset the gain with capital losses. Likewise, if you have any capital loss carryforwards, you should review your portfolio for capital gain opportunities to make use of the capital losses.
  • Consider gifts of appreciated securities to tax-qualified charities.
  • If passive income is from a business, offset passive income with passive losses. If you don't have passive losses, you may be able to convert the passive income to non-passive income (not subject to the tax) by becoming more active in the business.
  • You may be able to reduce your MAGI by increasing contributions to a traditional IRA, 401(k), or 403(b).
  • Consider investments that may have growth potential but typically do not generate dividends.
  • Generally, any gains in tax-deferred annuities and cash value life insurance are not reportable as income unless withdrawn, which may help reduce both your MAGI and your net investment income.

While any of these alternatives may help reduce your net investment income or your MAGI, it's important to consider them in the context of your overall financial plan.  Reducing your tax liability isn't a good thing if it also results in a lower total net worth.  So before implementing strategies to reduce exposure to the net investment income tax, make sure you've consulted with your tax or financial planning professional to ensure you've considered the full situation. 


Some material adapted with permission of Broadridge Forefield Investor Communications Inc.

Pet Trusts
My dog Elwood

The death of Joan Rivers this summer has brought pet trusts back into the news.  When her estate planning documents were unveiled, it became clear that she was a careful planner of her legacy--and also a devoted pet owner.  As a dog lover myself, I was happy to learn about the careful provisions Rivers made for her pets.  And I thought you might be interested to learn about the varying level of detail you can use to arrange for the care of your pets after you're gone as well.


Rivers left the bulk of her estate to her daughter Melissa and her grandson Cooper--an estimated $150 million in total value.  The two rescue dogs who shared her New York residence, and two other dogs who lived at her home in California, were beneficiaries of pet trusts, which included an undisclosed amount of money set aside for their ongoing care, and carefully written provisions that described the standard of living that Rivers expected them to receive for the remainder of their lives.


Traditional pet trusts are honored in most U.S. states (including Texas!), as are statutory pet trusts, which are simpler.  In a traditional trust, the owner lists the duties and responsibilities of the designated new owner of the pets, while the statutory trusts incorporate basic default provisions that give caregivers broad discretion to use their judgment to care for the animals.  Typical provisions include the type of food the animal enjoys, taking the dog for daily walks, plus regular veterinary visits and care if the pet becomes ill or injured.  The most important provision in your pet trust, according to the American Society for the Prevention of Cruelty to Animals, is to select a person who loves animals and, ideally, loves your pets. 


The trust document will often name a trustee who will oversee the level of care, and a different person will be named as the actual caregiver.  In all cases, the trusts terminate upon the death of the last surviving animal beneficiary, and the owner should choose who will receive those residual assets. 


Some states have different laws that require different arrangements.  Idaho allows for the creation of a purpose trust, and Wisconsin's statute provides for an "honorary trust" arrangement.  There are no pet trust provisions on the legal books in Kentucky, Louisiana, Minnesota and Mississippi, but pet owners living there can create a living trust for their pets or put a provision in their will which specifies the care for pets.  


A simple alternative that doesn't require a trust is to set aside an amount of money in the will to go to the selected caregiver, with a request that the money be used on behalf of the pet's ongoing care.


It should be noted that a pet trust is not designed to pass on great amounts of wealth into the total net worth of the animal kingdom.  The poster child of an extravagant settlement is Leona Helmsley's bequest of $12 million to her White Maltese, instantly putting the dog, named "trouble," into the ranks of America's one-percenters.  Rather than confer a financial legacy on an animal, the goal should be to ease any financial burdens the successor owner might incur when caring properly for your loved animals for the remainder of their lives, including food and veterinary bills.


How long should you plan for the funding to last? Cats and dogs typically live 10-14 years, but some cats have lived to age 30, and some dogs can survive to see their 24th birthday.  Interestingly, estate planners are starting to see some pet trusts extend out for rather lengthy periods of time, as owners buy pets that have longer lifespans.  For example, if an elderly person has a Macaw parrot as a companion, the animal could easily outlive several successor owners, with a lifespan of 80-100 years.  Horse owners should plan for a life expectancy of 25-30 years, and, since horses tend to be expensive to care for, the trust will almost certainly require greater levels of funding.  On the extreme end, if you know anyone who happens to have a cuddly Galapagos giant tortoise contentedly roaming their backyard, let them know that their pet trust would need to be set up for an average 190-year lifespan.

Parts of this article were adapted with permission of financial columnist Bob Veres. 
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, fee-only financial planning and investment management services.

All newsletter content except where otherwise credited Copyright 2014, Keener Financial Planning, LLC.