Major Changes to Social Security Claiming Strategies

A backroom budget negotiation at the eleventh hour in order to save the country’s borrowing authority has left a Social Security claiming strategy that was starting to gain popularity due to the potential increase in benefits on the “cutting floor”. The two strategies that potentially increased a couple’s total social security benefits, “File and Suspend” and “Restricted Spousal Benefits” now only benefit those that were born within the right time period.

• If you are already 66 or will turn 66 within six months of the new law being enacted (expected May 1, 2016) you can still File and Suspend or:
• If you turn 62 by December 31, 2015 you will still be able to claim just a spousal benefit when you turn 66 as long as your spouse is either claiming Social Security at that time or had File and Suspended by May 1, 2016 and then switch to your higher benefit when you reach 70.

For all others, you are no longer going to be able to claim only a spousal benefit while letting your own benefit accrue delayed retirement benefits. Nor will you be able to File and Suspend in order to release benefits for family members while letting yours increase.

The good news is for those who have already deployed one of these strategies those are grandfathered in as viable strategies and benefits will continue to be paid as such. It is a complicated twist to an already complicated benefit so please call or email us with your specific situation and we will be happy to offer some clarity.

Plan as if you are Single!

Plan as if you are single! While that might seem rather negative if you are married now, there is merit to planning for a time when perhaps you will not be. Ninety percent of women will be in charge of their finances at some point in their lives due to death, divorce, or inheritance. Having the means to support oneself eliminates the “Bag Lady” worry. But what is more important sometimes is how to plan for the unexpected if you are single and have the means but not the capacity to access your funds.

Recently we have had two instances of single women needing to have their children able to access their accounts. One client was preparing for the “what if’s” while the other was actually a daughter of client that was in the middle of a “what if”. Simply listing your beneficiaries on an account, or having a will, or even giving Limited Power of Attorney (LPOA) status to others on your accounts does not give enough access to the accounts at a critical time.

It is prudent to do your planning so that when you die your assets are distributed as you desire. But there is the potential for an interim time between when you are capable (mentally and physically) of accessing your funds and when they are ultimately distributed and this can be a very critical time. As fiduciaries on your accounts banks, investment firms, etc. are not allowed to move money on your behalf simply by the request of a loved one. Even if your children are listed as beneficiaries on your accounts it does not give them authority to direct the movement of money for you.

A Durable Power Attorney (DPOA) gives those you choose as trusted representatives the ability to access your accounts. For example, if you are in a car accident and end up in the hospital for a prolonged period of time, how will your bills get paid? What if you require substantial funds for your care? You may be temporarily incapacitated. No one can legally access your accounts if there is not proper documentation. A Durable Power Attorney is a notarized signed agreement that allows you to give a trusted representative access to your accounts. Of course the downside to this is that when you are healthy and able, the DPOA continues to be in effect.

It is for the “what if” moments that we cannot predict only plan for. If, at some point in your life, you find yourself single you should think about these moments before they occur. Also don’t forget to let a trusted representative know where your “important” papers are located so if there is an emergency they are readily located.

You know the saying…”Better Safe than Sorry.”

Wealth Manager Wisdom

NWIC_logo 4Here at Northwest, each new client often brings a unique financial situation, but that doesn’t mean we have to re-create the wheel each time. Given the broad experience of our Wealth and Portfolio Managers (and over 17 years in business), we have dealt with a wide range of financial issues. We want to share the stories of some of these clients and how we helped them simplify and get their financial house in order.

For confidentiality purposes, let’s call these clients the Smiths.  You may find some or all of these issues familiar. If so, we encourage you to contact one of our Wealth Managers for a review of your portfolio and financial situation.smith original

The Smiths had accounts at too many custodians. They came to us with six accounts spread amongst mutual fund companies and brokers. We helped them consolidate IRA accounts and taxable accounts to simplify their holdings. We helped them with the allocation of a couple 529 plans for their children and conducted a comprehensive financial assessment to cover college expenses and plan for their retirement.

The first chart to the right displays their original allocation at the time the Smiths became clients. While cash can be a beneficial or important holding, we concluded they had too much given their substantial liquidity and long-term investment horizon. We considered all their financial positions, even some we don’t yet manage in their 401(k)s.

The second chart below right displays the allocation of the assets we currently manage for them. smith currentOverall, we have increased their diversification, put their cash to work for them, and increased their fixed income investments to increase the stability of their portfolio and generate income.

On the estate planning side, we reviewed all of their estate planning documents, recommending they explore some changes with an attorney. We also electronically secured and stored the documents in one place should anything happen to the Smiths. Additionally, we referred them to an insurance specialist to explore long-term care insurance.

The work doesn’t stop there. In addition to managing a large portion of their overall investments in individual stocks and bonds, we meet with them a few times a year to make sure we are still on track to meet their goals.

 

 

 

The information contained in this site is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this site. Accordingly, the information on this site is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.

Contribution Limits, Social Security, and Medicare for 2015

NWIC_logo 4As we start 2015 we wanted to make you aware of some changes in contribution limits for some retirement accounts as well as changes in Social Security and Medicare.

First of all, the contribution limit for 401(k)s will increase by $500 to $18,000. For those 50 and older the catch-up contribution also will increase by $500 to $6,000. The IRA contribution limit, however, did not change and will remain at $5,500 with those over 50 allowed to contribute an additional $1,000 for a total of $6,500. You will want to consult with your tax advisor to see whether contributions will be tax deductible if you are currently working and have access to a retirement account. Remember, you have until April 15th of 2015 to make 2014 IRA and Roth IRA contributions. If you would still like to make a 2014 contribution we encourage you to do this no later than April 1st to ensure all trades and settlements are done in a timely fashion if we need to raise some cash.

If you are currently a recipient of Social Security you will receive a 1.7% cost-of-living adjustment. Further good news is that Medicare Part B will not have an increase in premiums and will remain at $104.90 a month for 2015. However, Medicare Part A will increase from $1,216 to $1,260 in 2015 and most Medicare Part D premiums will likely increase by 4% to an average $38.83.

We hope this helps you in planning your finances for 2015 and as always please contact us if you have any questions regarding your wealth.

Go Big or Go Home? Not So Fast!

NWIC_logo 4Value comes in all shapes and sizes in the world of fixed income. Unlike the stock market, availability of the bonds you like can be limited and offerings might even disappear from the secondary market during the time it takes to conduct proper research. The scarcity of coveted bonds can have several varying effects on the price of a bond. A small bond issuance of a desirable company may be in short supply, and consequently, have higher prices for those investors wishing to own the bonds. Another scenario is that the bond is in such short supply, and trades so infrequently, that when bonds do become available, they trade at wider spreads (lower prices) than their credit rating and appeal suggests. We often target bonds of this nature because we can add yield safely by essentially providing liquidity to the market. Investors who become crunched for cash for one reason or another may find themselves needing to sell one of these small, infrequently traded bond positions. When this happens, small listings (10-25 bonds) will show up on one of the several bond platforms and inventory lists we view daily. In order to move this bond inventory, which is too small to raise the interest of mutual funds, dealers must “mark down” the price to entice those buyers willing to do the research and purchase a small position. These small bond lots, which we call “odd-lot” or “spinach” pieces, offer the buyer anywhere from a few basis points (a basis point is 1/100th of 1%) more than a comparable bond to spreads in the 20+ basis point range.

At NWIC, we view the ability and know-how to buy odd-lots as a huge advantage for our clients. Investment firms smaller than ours rarely have a devoted bond manager with the time to sort through many small issues and either buy bond funds or more expensive new issues. Investment firms that are much larger operate more like mutual funds themselves and often miss the bargain odd-lot pieces. Most dealers will even say first hand that for bond pieces smaller than $100K, there is significantly less fund demand, making those bonds cheaper and preserving their availability to a degree.

As always, there are several caveats. For the same reason we are able to buy these marked down odd-lots at cheaper than normal prices, we strongly reinforce the buy-and-hold principle. Trying to sell one of these pieces prior to maturity can lead to a mark down on the sell-side. Not to fret! Our portfolios contain a diverse array bonds across the corporate, municipal, and government sectors to ensure that we are adding yield over and above going market interest rates while also preserving the bedrock characteristics of a safe and liquid bond portfolio.

It is also important to point out while there is value buying small lots, we also attain institutional pricing for individual clients by leveraging our ability to buy much larger quantities of bonds than is typical for single accounts. If this sounds contradictory to our appreciation above for small quantities, remember that the bond market is a much more fragmented market than the stock market, and that what may be available or cheap now, may change in only a matter of minutes. Finding good deals may take on the form of providing liquidity to other investors who need to sell a rarely traded bond, or doing the homework to find out why a larger issue appears cheap relative to comparable investments.

Below are two examples of odd-lot bonds. One demonstrates the benefit of odd-lots while one presents an area of caution. (Bear in mind that due to the nature of odd-lot bonds, the bonds described herein may not have been purchased directly for your portfolio. If your account was not a recipient in one round of odd-lot purchases, it will likely be a recipient in the next round, should your allocation levels warrant a bond purchase):

1) Juniper Networks 3.1% 3/15/2016 (Baa2/BBB): The most active corporate bonds will have trade amounts in the millions of dollars per day. As we mentioned above, sometimes a good name, such as Juniper Networks will show up as an odd-lot. We recently found a 35 bond lot ($35,000 par value) available and purchased it at an attractive price and yield. This trade was on July 18th and was the only trade that day, a thinly traded bond for sure. The bond was purchased at a yield to maturity of 1.03%, a spread of 55 basis points to a two-year Treasury (despite being just a 20 month bond). We view this as a strong credit that owing to infrequent trading was purchased more cheaply than a comparable bond, or even the same bond had there been more trades on that day.

2) Metropolitan Transit Authority 5.5% 7/1/2017 (Aa2/AA+): As we discussed in an earlier post “What are These Bonds in my Portfolio?” we buy odd-lot municipals that are pre-refunded and backed by US Treasuries. This bond happens to be escrowed to maturity, which is like pre-refunding, but takes place upon maturity as opposed to an earlier call date. At first glance, this bond is a very safe municipal bond, backed 100% by Treasuries and offering a 2.11% yield to maturity on a tax equivalent basis for investors in the highest income bracket. This represents a spread of 116 basis points to a comparable Treasury, despite the fact that the credit is identical (the credit is identical to a Treasury but this bond would be less liquid). The Schwab listing for this bond only shows a yield-to-maturity, which normally implies that what you see is what you get, in this case an annualized return of 2.11%. Further digging into the SEC filings for this bond reveals a more concerning reality. This bond is subject to a sinking fund call (I won’t go into that definition right now but it is another way for an issuer to take back a bond from its holder prior to maturity). The research for this bond involves reading the footnote of an SEC filing from 2002 which states:

2002 Footnote

Footnote two is the relevant one here and indicates that we can lose the bond prior to maturity. After plugging the offering price into the sinking fund analysis page of our Bloomberg software, we get a yield to the sinking fund call date of -0.73%. It’s hard to say for sure whether this bond will be subject in the end to the sinking fund call, but it would be ill-advised to buy a bond that has even a small likelihood of a negative return.

These examples highlight two of the many ways we seek to create and add value for our fixed income clients and also how our research and relevant knowledge shapes our conservative investment decisions.

The fixed income securities referenced above are not the only fixed income securities we have purchased in the last year for our clients.  If you would like a list of all fixed income securities purchased in the last year, please contact us.  Additionally, it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.

 

When the Fixed Income Portfolio Manager Shops for a Mortgage

NWIC_logo 4Buying a home can be complicated. So can understanding what makes up the components of a mortgage, even one as seemingly basic as a conventional, fixed 30-year mortgage. Balancing years of honed research skills and an understanding of interest rates, with the nuances of lending tactics, and natural behavioral biases further complicate the issue. Of course, being analytically inclined, I had five lenders prepare estimates for me based on nine desired scenarios. I wanted to see estimates for 10%, 15%, and 20% down, on 4.125%, 4.25%, and 4.375% interest rate options. For most, 45 estimates would lead to paralysis through analysis, but when looking for good bond options, there are often times several hundred offerings that need to be analyzed, first relative to each other and then fundamentally on an absolute basis. Nonetheless, if you think you had a tough time choosing a lender and deciding when to lock in a rate, be thankful you haven’t had the following conversation in your head:

“Well, two days ago (June 30th) the 10-year U.S. Treasury rate was 2.53%. Today, after the ADP employment report showed a larger than expected increase in private job creation (281K jobs versus expectations of 200K), the 10-year is up to 2.61%. Because of this rate increase the lender credit, or discount points, worth about $2,000 off closing costs for the 4.25% and 4.375% rate option has vanished. Sure that $2,000 is basically amortized over 30 years (comforting), but it’s also $2,000 gone based on one day’s stalled decision making (less comforting). Now, if I wait one more day until Thursday for the nonfarm payroll employment numbers (projected to be 215K) and the numbers disappoint relative to projections (say 175K new jobs), rates should fall back into the 2.50% range, and my lender credit might magically reappear, woohoo! However, the market seems to be pricing in the good news already with today’s higher yield. Therefore it stands to reason that rates stand to go down more with a negative employment surprise than they stand to increase with continued good news, since at least some of that good news is already factored into today’s rate. That leads me to believe I should wait a day to lock in the rate, since the magnitude of a rate decrease would outweigh a rate increase. To get one level deeper, the 281K in job growth was such a surprise, that the market may have thought it was too good to be true, so that today’s rate of 2.61%, while higher, is still skeptical. In that case, a reaffirmation of job growth with Thursday’s nonfarm payroll report equaling projections would cause a further rate increase (say 2.7%), contradicting my earlier theory.”

This is not made up. It’s how the analytical mind sometimes wanders in well thought out, but ultimately confusing directions. After an internal monologue like that it is necessary to snap out of it. More often than not, whether buying a home or a bond, trying to base your purchase decision on relatively small rate movements will cause you more headache than it’s worth. In this case, any mortgage whose rate has a “4” as the first number is a very good rate on a historical basis. Similarly, we may buy a bond with a 2.5% yield to maturity because it is a good rate that day relative to comparable bonds and the underlying credit is sound fundamentally. If tomorrow’s yield is 2.7% because interest rates moved, yes, the bond will decline in value slightly in the short-term (remember if you hold to maturity the bond repays you par value). However, interest rates can move down as easily as they can move up from day to day. If you like the rate or yield to maturity on that day and you have done your comparative homework, it is a sound purchase. We hope you enjoyed the comprehensive first person perspective on analyzing different types of fixed income investments.

30yr

How Our Wealth Managers Helped One New Client

NWIC_logo 4Here at Northwest, each new client brings their own unique financial situation. We wanted to share one in particular, and demonstrate how we are helping this client simplify his financial life, reduce risk, and reduce costs: Let’s call this client Joe.  You may find some or all of these issues familiar. If so, we encourage you to contact one of our Wealth Managers for a review of your portfolio.

When Joe came to us he had four IRA’s, managed by two different managers, who invested primarily in high cost mutual funds.  It’s one thing for a do-it-yourself investor to utilize active mutual funds, but we take issue with a financial adviser who charges fees to allocate (and trade) your assets in high-cost mutual funds. The other leverage Joe gives up with multiple IRA’s at different managers is the ability to reach break points with an adviser by combining IRA’s. The chart displays Joe’s current allocation.  The weighted average fee for the investments in his account was 0.77%.  In addition to the internal mutual fund fees, Joe has been paying around 2.00% to his investment advisers according to the current allocationstandard fee schedule provided by his advisers’ SEC filings. By properly reallocating Joe’s portfolios towards individual stocks and bonds (as well as some low-cost Exchange Traded Funds) we should be able to cut Joe’s fees by more than half.  Moral?  It pays to shop around.

After reviewing Joe’s financial situation, a face-to-face meeting, and a risk tolerance survey, we think Joe’s overall allocation is inappropriate and that his tolerance is somewhere between conservative and moderate. Joe’s current portfolio allocation (see chart) is too risky for his situation as made evident by the non-diversified real estate portion (one REIT holding) and sizeable investment in junk (high yield) bonds.  Moral? Monitor your allocation and risk level even if your portfolio is being managed by an investment adviser.

In the end, we will combine Joe’s accounts where possible, reduce his fees, and make an allocation more appropriate for his situation.

 

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The information contained in this site is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this site. Accordingly, the information on this site is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.

 

Q&A: How Might I Optimize Social Security Benefits for My Wife and Me?

NWIC_logo 4QUESTION:  I heard some advice while playing golf with friends, but I really don’t have an understanding of what might be best for us to do regarding Social Security. Specifically,

  1. If my wife were to begin collecting her Social Security retirement benefits at age 62, would I collect half of her amount as well; I am 64? Regardless, wouldn’t it make sense for my wife to begin collecting Social Security at 62 anyway, because once I begin collecting my Social Security, the one-half spousal amount that my wife would receive from mine would be more than the relatively small amount she would receive from her past earnings?

  2. If my wife were to begin collecting her Social Security at age 62 but when I begin collecting for my Social Security benefits at age 66 or later, at that point can she then receive half of my amount?

 

ANSWER:  These are excellent questions. We will tell you, however, waiting until FRA (full retirement age) for both will lead to the maximum benefit. Unfortunately, once you claim benefits before FRA you are locked into a lower percentage for claiming purposes. In other words, if your wife starts to collect her benefit at 62 she will only get  approximately 75% of her benefit (the calculation is based on when you claim and when you are considered full retirement and then you multiply the amount of months you take it early by a percentage!) and then when she switches to yours she will only get approximately 35% of your full benefit not 50%. “Each person’s payment is computed based on that person’s age when that person’s payment begins, regardless of the other spouse’s age or payment.”

Here’s where it gets tricky because if your benefit at 64 is greater than your portion of your spouse’s benefit at 62, you would have to claim your benefit. Social Security always looks at what your greatest benefit would be and thus it creates a permanent reduction in benefits. Furthermore, if you continue to work then for every $2 you make above $15,480 for 2014 your benefits are reduced by $1.

There are several strategies couples can use to maximize their total benefits if they wait until at least one reaches FRA. Contact us if you would like us to run some strategies for you.  Also, the longer you wait to receive benefits the higher the survivor benefit would be for your wife. Regardless of when she starts collecting she would be entitled to 100% of what you were receiving including delayed retirement credits if you waited past 66. Bottom line, the magic age in all of this is full retirement age or in both of your cases 66.

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The information contained in this site is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this site. Accordingly, the information on this site is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.