When should you apply for social security?

The answer is different for every person. However, did you know that if you delay the onset of benefits past age 66, you will earn delayed credits? For each year you delay the start of benefits, your benefit will increase by 8% per year up to age 70! (Horsesmouth, 2012)

Applying at age 70 earns you the most credits and can result in up to 32% more benefit! So if Bob Boomer waits until age 70 to apply, his $2,466 PIA will increase to $3,255 (not including cost-of-living adjustments)! (Horsesmouth, 2012)

A Social Security Analysis could help you on the right path to making the most out of your social security benefits. Contact us today and see if our social security experts can help you maximize your retirement. www.paytaxeslater.com

Life Insurance Awareness Month

Life insurance isn’t a big part of what we do here at Lange Financial, but it is an important part. As September is Life Insurance Awareness Month, we want to share some important life insurance facts with you all.

Did you know that depending on the size of your estate, your heirs could be hit with a large estate tax payment after you die. The proceeds of a life insurance policy are payable immediately, allowing heirs to take care of estate taxes, funeral costs, and other debts without having to hastily liquidate other assets. And life insurance proceeds are generally income tax free and can be arranged to avoid probate. Finally, if your insurance program is properly structured, the proceeds from your life insurance policy won’t add to your estate tax liability.

Think it over. If you are one of the 35 million American households that are uninsured, you might want to consider what a life insurance policy could mean for your heirs.

The Lange Money Hour with Jim Lange and Special Guest Roy Williams

Join us Wednesday, September 19th at 7:05 pm on KQV 1410 AM!

What’s the best way to prepare your children and grandchildren to be good stewards of the assets they’ll receive someday? Will you reduce their motivation by giving or leaving them too much money, too soon?

On the next edition of The Lange Money Hour CPA Jim Lange welcomes Roy Williams, an expert in estate planning and post-transition research.

Roy is co-founder of the Institute for Preparing Heirs, which coaches high net worth families through the process of transferring wealth to the next generation. He’s written three books on the subject, most recently Philanthropy Heirs & Values, and has been quoted in numerous national and international publications on the subject. Interestingly, Roy also played briefly for the San Francisco 49ers as a defensive tackle, until a serious injury prematurely ended his football career. He’ll be joining us by phone from San Clemente, California.

Our show is live! Jim and Roy are available to answer your questions. To join the conversation, just call the KQV studios at 412-333-9385. You can also email your questions to jim@paytaxeslater.com. Please put Lange Money Hour in the subject line.

P.S. The show also streams live at www.kqv.com!

3 Myths About Social Security

Myth #1: By the time I retire, Social Security will be broke.

If you believe this, you are not alone. More and more Americans have become convinced that the Social Security system won’t be there when they need it. In an AARP survey released last year, only 35 percent of adults said they were very or somewhat confident about Social Security’s future.

It’s true that Social Security’s finances need work, because over the long term there will not be enough money to fully cover promised benefits. But radical changes aren’t needed. In 2010 a number of different proposals were put forward that, taken in combination, would put the program back on firm financial ground for the future, including changes such as raising the amount of wages subject to the payroll tax (now capped at $106,800) and benefit changes based on longer life expectancy.

Myth #2: The Social Security Trust Fund Assets are Worthless.

Any surplus payroll taxes not used for current benefits are used to purchase special-issue, interest-paying Treasury bonds. In other words, the surplus in the Social Security trust fund has been loaned to the federal government for its general use — the reserve of $2.6 trillion is not a heap of cash sitting in a vault. These bonds are backed by the full faith and credit of the federal government, just as they are for other Treasury bondholders. However, Treasury will soon need to pay back these bonds. This will put pressure on the federal budget, according to Social Security’s board of trustees. Even without any changes, Social Security can continue paying full benefits through 2037. After that, the revenue from payroll taxes will still cover about 75 percent of promised benefits.

Myth #3: I Could Invest Better on My Own.

Maybe you could, and maybe you couldn’t. But the point of Social Security isn’t to maximize the return on the payroll taxes you’ve contributed. Social Security is designed to be the one guaranteed part of your retirement income that can’t be outlived or lost in the stock market. It’s a secure base of income throughout your working life and retirement. And for many, it’s a lifeline. Social Security provides the majority of income for at least half of Americans over age 65; it is 90 percent or more of income for 43 percent of singles and 22 percent of married couples. You can, and should, invest in a retirement fund like a 401(k) or an individual retirement account. Maybe you’ll enjoy strong returns and avoid the market turmoil we have seen during the past decade. If not, you’ll still have Social Security to fall back on.

2011 Changes in Tax Law

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” (the “2010 Tax Act”), signed by President Barack Obama on December 17, 2010, makes important changes to the taxation of estates and gifts, which will affect many grandparents. This Act significantly increases the prior exemptions for estates and gifts. It will affect many existing wills and estate plans, so it would be wise for grandparents to review their estate-planning documents with their attorneys to determine if changes are appropriate.

The 2010 Tax Act reinstates the federal estate tax at rates of 35 percent (as opposed to 45 percent under prior law) and provides for a federal exemption of $5 million for individuals and $10 million for a husband and wife for 2011 and 2012. It also keeps the tax rate at 35 percent for gifts made in 2010 through 2012. The lifetime gift-tax exemption amount is reunified with the $5 million estate-tax exemption, providing for a unified gift and estate tax exemption of $5 million for decedents in 2011 and 2012. This makes lifetime gifts much more attractive as an estate-planning vehicle.

Keep in mind that even though federal estate taxes have been eliminated on estates of less than $5 million (or $10 million, in the case of a surviving spouse), there may still be significant state estate taxes on estates of less than $5 million. New York State, for example, has not changed its $1 million exemption to conform to increases in the federal estate-tax exemption, and thus, a decedent with a $5 million estate who dies in New York will be subject to state estate tax of approximately $400,000, even though there is no federal estate tax.

7 Good Reasons to Change Your Will

1. You Get Married

Your new spouse doesn’t automatically become your chief heir. Most states give a spouse one-third or one-half of an estate. If you don’t have any children, your parents or siblings would get the rest. To leave all your property to your spouse, you’ll need a will. You cannot disinherit a spouse without his or her consent.

If you are living with someone but are not married and you want your significant other to inherit any of your property, you need a will.

2. You Become a Parent

Obviously, the big question is how your children will be cared for if both you and your spouse die. Now you definitely need a will to name a guardian for your children, as discussed earlier.

Consider using trusts, perhaps in your will, to handle assets that would go to your children. Execute a durable power of attorney naming your spouse or someone else to act for you in financial matters when you can’t. Durable power remains effective even if you become mentally unable to handle your own affairs.

3. You Approach Middle Age

Your assets are growing, so tax planning could save your heirs thousands in federal estate taxes. The time to act is when you and your spouse have a combined net worth, including house, retirement plans, and insurance proceeds, that approaches the amount vulnerable to the federal estate tax. You can give an unlimited amount to your spouse tax-free, by designating it in your will or by owning all assets jointly, for example. But with a little more planning, a married couple can leave twice the amount of the estate-tax exemption–up to $7 million after the second spouse dies, assuming that Congress reinstates the estate tax that lapsed at the end of 2009 and continues the $3.5 million exemption in effect at that time.

Some in Congress would like to boost the estate tax threshold to $5 million and reduce the tax rate to 35%. If they have their way, a married couple could exempt up to $10 million from estate taxes.

 Update your will to reflect family births, deaths, separations, or divorces. Review guardian, trustee, and personal-representative appointments. Reevaluate the nature of specific gifts to people or groups. And recalculate how much life insurance you need.

 4. You Get Divorced

Review absolutely everything. The people in your life are changing. So must your estate plan. You need a new will altogether because in most states a divorce automatically revokes the provisions of a will that apply to a former spouse. In some states a divorce revokes the entire will.

You’ll want to set up trusts to control the assets you plan to leave your children. And revise any living trusts to remove your former spouse as a beneficiary or trustee. Do likewise with a durable power of attorney or a living will. Plus, unless restricted by a divorce decree, change the beneficiaries on your life insurance, pensions, and IRA.

5. You Remarry

You and your new spouse may have to plan for families from prior marriages and for children you have together. Consider a prenuptial agreement, should you want to keep assets separate and nullify your inheritance rights to each other’s estates.

You’ll want to provide for your new spouse and still be certain your children are taken care of. To do this, talk to an estate-planning lawyer about a qualified terminable interest property trust — QTIP, for short. This trust can be set up in a will to give your spouse the income from the trust property and some rights to principal. But when he or she dies, the assets go to beneficiaries you have chosen.

6. You Retire or Move to Another State

If you retire to another state (or any time you move to a new state, for that matter), have your estate-planning documents reviewed in light of that state’s laws and your current needs.

Durable powers of attorney become even more important. For example, if you are stricken with Alzheimer’s disease, you may become unable to give the required consent for financial transactions. Life insurance coverage may not be needed anymore. But if your estate faces an estate-tax liability or if your spouse is dependent on retirement income that will end with your death, consider keeping the coverage.

7. Your Spouse Dies

This loss can leave you emotionally vulnerable to financial mistakes. For at least several months, avoid selling your house or making other drastic changes.

Seek expert advice. There may be tax benefits to disclaiming some of your inheritance in favor of alternate beneficiaries, such as your children, if your spouse’s estate is subject to the federal estate tax and you have enough assets of your own, including liquid assets.

You’ll need to get a new will and, if needed, a revocable living trust. Execute a new durable power of attorney and a living will (which expresses your wishes in case of an illness that leaves you permanently incapacitated). Put these in a safe place, and tell people who need to know where they are.

Five Financial Tips for Women

Five Financial Tips for Women

  1. Make it a Priority to Understand What You Already Have – For working woman, make sure you fully understand your employee benefits and your company’s retirement plan.  Make it a point to see what your short and long term disability and life insurance can offer you and then fill in the gaps with individual policies. You may be surprised what your benefits do and do not cover.  It’s better to know now then at the time you may need to use them. 
  2. Fund Your Retirement Plan:  Most employers offer employees a retirement plan and you must take advantage of it. Make sure though that you consult with a qualified financial advisor when choosing your fund choices.  Leave the selection up to the professionals and review it once a year to make sure your maximizing your returns. Beyond your company’s retirement plan, look into getting your own IRA or Roth IRA, which allows you grow wealth tax-free through the course of your lifetime – it’s worth looking in to.
  3. Recognizing the Challenges is Half the Battle: There’s no doubt about it – women face obstacles that men do not.  Women still earn less than their male counterparts, live longer and are typically out of the workforce for 12 years, on average, taking care of children and now more than ever, aging parents. Recognize these challenges, set goals and build a plan to action to overcome your specific hurdles.  Things such as making a career move or initiating salary negotiations, refinancing your mortgage, opening up an IRA or Roth IRA and adjusting your risk tolerance on your investments can all make a powerful impact on your financial picture. 
  4. Don’t be Afraid to Fire a Bad Advisor:  Let’s face it, there are thousands of financial advisors out there…some of which may suit you better than others.  Choosing a financial advisor is like choosing a doctor.  Choose a person who focuses on your needs and not there’s, someone who listens to your goals, keeps you on track and meets with you at least once a year to review your situation.  If you’re not satisfied with the relationship you have, move on! 
  5. It’s Never Too Late:  Regardless of your age, there are ideas and options that can help your financial picture – we see it everyday.  There is no better time to start investing than right now. Make it a priority to meet with an advisor in 2011.  Ask people you trust to refer you to someone that listens and achieves results and get started as soon as possible.

Three Financial Pioneers Create the Power of Index Investing

The Conception of Index Investing

In 1974 John Bogle founded and created The Vanguard Group – now one the world’s largest mutual fund companies offering 120 different mutual funds holding over $1 trillion.  In 1975, Mr. Bogle championed the first low-cost, index fund which transformed the mutual fund industry crediting him with the title “Father of Index Investing”.    His investment philosophy was simple; it advocated capturing market returns by investing in broad-based index mutual funds that are characterized as no-load, low-cost, low-turnover and passively managed.

Bogle felt that indexing was a logically compelling method of investing. “In the world of investing, there are very, very few sure things. But the closest thing to a sure thing is that the Wilshire 5000 index will outperform actively-managed funds by 1.5 to 2 percentage points a year over a sustained period. The logic behind this startling fact is as follows:  all mutual fund managers together provide average investment performance, but in fact, investing in an index fund that matches the average market return can be your best chance of getting an above average return compared to other non-indexing investors.

His theory was supported by three crucial points: superior diversification/allocation, lower annual operating expenses and lower taxes.  Bogle felt that indexers had the advantage of these three things plus steady, cumulative power of broad diversification and lower expenses, not just short pockets of strong investment performance such as in 1995, 1996 and 1997.


People Begin to Take Notice

After 3 years of excellent performance, two the world’s most respected financial experts took notice and began to research Bogle’s theories – they wanted to take an acadeic approach to proving his theories.  Rex Sinquefield and Roger Ibbotson sought out to create strong theoretical support for indexing and they did just that. In 1979 they published Stocks, Bonds, Bills and Inflation (SSBI) which is now updated annually and serves as the standard reference for informaiton on investment market returns.  Together Sinquefield and Ibbotson executed a large volume of academic studies examining the performances of mutual funds under actual market conditions establishing, very convincingly, that the ‘beat the market’ efforts of investors who pick stocks and time markets are impressively and overwhelmingly negative. In contrast, they found that indexing stands on solid theoretical grounds, has enormous empirical support and works very well for investors. The message ofindexing is therefore unmistakably obvious: they found that the only consistent superior performer is the market itself and the only way to capture that superior consistency is to invest in a properly diversified portfolio of index funds.

After publishing their study, Sinquefield became the co-chairman for Dimentional Fund Advisors, an index mutual fund manager that began in 1981 – a company that now holds $227.6 billion in assets.  Roger Ibbotson, who was already a professor at Yale, founded Ibbotson and Associates which continued to focus on bridging the gap between academic knowledge and industry practice on asset allocation.  For over 30 years Roger Ibbotson has been committed to delivering innovative asset allocation solutions, helping investors reach their financial goals and providing asset allocation thought leadership to money managers, mutual fund companies and other investors all over the globe.  Still today, Ibbotson supports his roots and is a Board Member, one of 9 “Academic Leaders”, which advises Dimentional Fund Avisors – the world’s leading index mutual fund manager.

You owe it to yourself to check out the benefits of index investing…

Last Minute Tax Strategies for IRAs & Other Retirement Accounts

Make your 2010 IRA contribution as late as April 18, 2011: 

You can contribute up to $5,000 (or $6,000 if you are 50 or older) until the time you file your income tax return, but no later than April 18, 2011.  If you participate in a retirement plan at work, the IRA deduction phases out if you are married and your joint AGI is $89,000 or more, or if you are single and your adjusted gross income is $56,000 or more.  Filing an extension will not buy you additional time.  Non-deductible pay-ins to IRAs and Roth IRAs are also due by April 18, 2011.

Make a deductible contribution to a spousal IRA:

If you do not participate in a workplace-based retirement plan but your spouse does, you can deduct some or all of your IRA contributions on your 2010 income tax return as long as your adjusted gross income does not exceed $177,000. 

Make a contribution to a Roth IRA: 

Contributions to Roth IRAs are not tax deductible, but the earnings on them may be withdrawn totally income tax-free in the future as long as the distributions are qualified.  A Roth IRA distribution is qualified if you’ve had the account for at least five years, the distribution is made after you’ve reached age 59½, you become totally and permanently disabled, in the event of your death, or for first-time homebuyer expenses.  Contribution limits are the same as traditional IRAs, except the maximum contribution for both Roth and traditional IRAs is still limited to $5,000 or $6,000 for persons age 50 or older.

To make a full Roth IRA contribution for 2010, your AGI cannot  exceed $177,000 if you are married or $120,000 if you are single.  You are subject to the same limitations for a non-working spouse.  Subject to some exceptions, I usually prefer Roth IRAs to traditional IRAs or even traditional 401(k)s.

Look into Roth IRA conversions:

The rules for contributions to Roth IRAs are different from the rules for Roth IRA conversions.  Prior to January 1, 2010, you could only convert a traditional IRA to a Roth IRA if your AGI was $100,000 or less (before the conversion).  However, this dollar cap is now removed starting January 1, 2010 and there is no limit to your earnings in order to qualify for a Roth IRA conversion.  Please remember that a conversion to a Roth IRA may place you in a higher tax bracket than you are in now and have other adverse consequences, such as subjecting more of your Social Security to be taxable due to the increase in your AGI.  Please also note that a Roth IRA conversion does not have to be all or nothing. You can elect to do a partial Roth IRA conversion and you can convert any dollar amount you decide is best for your situation.  Our most common set of recommendations after “running the numbers” is usually a series of Roth IRA conversions over a number of years.  Please remember that a Roth IRA conversion may not be appropriate for all investors.