How much is that Doggie in the Window?

According to a recent announcement from the American Pet Products Association, Americans spent $55.7 billion last year on their pets. That’s billion, not million. An article at Time.com (http://time.com/#23451/pets-dogs-cats-spending-americans/) cleverly noted that the figure is $10 billion more than Germany spends on its defense budget.

I admit I am one of these people. My little rescue dog hit the lottery when she came to live with me. She has seven dog beds, if you include her car seat (yes, car seat). She owns more jackets than I do, although they are all for function, not fashion. She has multiple, color-coordinated harnesses, collars, and leashes so that she need never feel ashamed about how she looks. When we go on vacation, she has as much luggage as I do. Yes, she is spoiled rotten.

I am not alone. Bill Geist of the “CBS Sunday Morning” program tells a hilarious story about his “free” rescue dog: http://www.cbsnews.com/news/even-cat-people-fall-in-puppy-love/.  Sometimes, the unexpected costs can really add up.

In our industry, I see a number of fees that some people pay for investments: high commission rates for certain products, either on the front or back end of the transaction; frequent, unnecessary trade costs from a practice called “churning;” and expensive investment counsel fees. Before long, that simple purchase of 100 shares of ABC Widget Works has cost a fortune in added fees.

When you are evaluating an investment advisor, consider how the person earns his or her money. Does he receive a commission for his or her investment recommendations? Is he or she directly affiliated with a broker? Does he or she charge an additional investment counsel fee? While he or she may promise a great gross return on investment, the net return after all of those fees may be no better than what you would find with a simple savings account.

At Parsec, we do not receive commissions for any of the investment products we recommend – no commission from the trade, no commission for recommending a certain security, nothing. In addition, when we recommend mutual funds, we look for funds that do not carry significant internal fees.

We are not beholden to a particular broker. We have four brokers who we like to recommend, based upon client needs.

We do charge an investment counsel fee that we think is reasonable to industry standards. When you sign a service agreement, you see upfront what your fee schedule will be. On a quarterly basis, you receive a reports package that includes information about net-of-fee investment performance, current holdings, et cetera. We are also here to help with planning – everything from college savings to retirement to estate. We like to think service goes beyond placing a trade. Our clients pay us to act as a partner in planning their future.

Everything in life – from owning a home to adopting a rescue dog – has the potential for unexpected costs. How you invest your money, though, should be a little more straightforward. With a little research in advance, you can evaluate whether or not fees charged for service are reasonable and affordable.

Now, if you will excuse me, I need to order organic food for my doggie. And maybe I will pick up a bottle of shampoo. She told me she is tired of smelling like a bowl of oatmeal.

Cristy Freeman, AAMS
Senior Operations Associate

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Taxable Income Reduction Strategies

As a trusted financial advisors for our clients, our priority is to stay apprised on current tax laws, as well as provide planning opportunities to reduce future tax liabilities. For many of our clients, their Traditional IRAs are also their largest tax liability. When an IRA is responsibly managed, the hope is that the account will continue growing until the owner’s late 70s. At that point in time, the mandatory withdrawals from the account may offset any capital appreciation and earnings on the account. When taking into account these growth expectations, as well as the client’s necessary cash flow, many clients find that the RMDs in their 80s will far exceed their necessary cash flow. These factors contribute to an increasing likelihood of the client having a higher tax rate later in life. Higher Modified Adjusted Gross Income(MAGI) is one concern that has a trickle down effect. When MAGI gets high enough, it can result in an income based adjustment for Medicare Part B and D. It should be clear by now that a healthy retirement can actually increase tax concerns.

So, by now you may be saying, “Thanks for the depressing news Daniel, I don’t think I want to read any further. ” I encourage you to keep reading.
 
Controlling Income

The first step in keeping MAGI low is controlling income. For retired individuals, there are two main sources of cash flow. The first being social security and pensions. These are fixed amounts that cannot be changed. The second source is income from personal assets. This includes brokerage accounts, Traditional IRAs, and Roth IRAs. A brokerage account is not a tax-deferred account. Therefore any income produced by the account will contribute to MAGI. It is possible to manipulate a brokerage account’s holdings to reduce taxable income. The second source of cash flow is withdrawals made from Traditional IRAs to supplement income or fulfill an RMD. These withdrawals are fully taxable to the individual. In addition to Traditional IRA withdrawals, Roth IRA withdrawals can be made, however, these withdrawals are not taxable to the individual if made after 59 ½. The IRS gives us tax tables, from these, we are able to determine the maximum amount of taxable income we want to produce for clients. As I said before, it may become impossible to keep income below this desired threshold when RMDs get larger and larger. If this is the case, we move on to advanced planning techniques.

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Roth Conversions and Charitable Remainder Trusts 
One of our favorite techniques to reduce the impact of RMDs is to combine the benefits of a Roth IRA with a charitable gift. The establishment of a Charitable Remainder Trust may allow someone with charitable intentions for their estate to realize the benefit now. The Charitable Remainder Trust can provide a lifetime income stream for the donor, as well as provide a large charitable deduction. In this tandem planning technique, the charitable deduction can offset the income incurred from a Traditional to Roth conversion. The reduction in the size of the Traditional IRA will also truncate the amount of the RMD going forward.
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This particular technique is just an example of some of the advanced planning options we evaluate with our clients. Every situation is different with special circumstances to consider. If you have any questions about these strategies, contact one of our advisors.
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Time is Running Out!

When we were kids, it seemed to take FOREVER for Christmas to get here.  After Thanksgiving, you knew it was close but oh so far!  Nowadays, it seems as if December just flies by.  We have so much to do!  How do we get it all done?

In the midst of the holiday chaos, let’s take a moment to handle charitable donations.  Your favorite non-profit organization appreciates anything you can do for them. 

You still have time to make a donation.  You must make cash donations by December 31 to count them toward the 2013 tax year. 

If you want to donate securities, call us the second you read this blog post.  Time is running out to ensure processing of these types of donations by December 31.

Also, if you have old clothes, furniture, or other items to donate, you should deliver the items to the charity by December 31.  (Some charities even offer pick-up service.)  Make a detailed list of the items you donated.  If something is particularly valuable, it would be a good idea to snap a picture.  You would have proof, if you are ever audited, of the item’s condition.

It is possible to get everything done on time.  As I mentioned, charities need our support.  Just take a deep breath, make a list, and do one thing at a time.  If you planned to make a donation, just add them to the “to do” list.

We hope everyone has a safe holiday season and a healthy, happy new year.

Cristy Freeman, AAMS
Senior Operations Associate

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Mise en Place: To Put in Place

Don’t hate me for this, but I am one very luck woman. My husband does 99.9% of the cooking in our house. And best of all, he enjoys it! That said, once every so often he has to work late, or he is out of town or he craves one of my few specialties and I have to put the apron on. Such was the case this past Tuesday when I decided to tackle a new recipe. Since I cook so infrequently, I can get rusty between stints, so I decided to put to practice the concept of mise en place (pronounced meez ahn plahs). Mise en place is literally translated as “to put in place.”

Mise en place is simple. Before you pre-heat the oven, you want to make sure you have all of the required ingredients and equipment needed to make the dish. Think of your kitchen as an operating room; prior to surgery, all of the surgical implements have been sterilized and the accompanying supplies (sutures, gauze, etc) are neatly lined up on a tray. Imagine if mid-procedure your surgeon cried out for gauze and the assistant had to run to the drug store to buy more. Things would not turn out so well.

So, back to my kitchen and my rusty cooking skills; as I began to dice the onions and mince the garlic, I realized there are other applications for the use of mise en place. Packing for a trip is one such example. Preparing your taxes is another. And then I thought how well this could work in estate planning. If you have all of your documents prepared, in one place and up to date (sort of like within the sell-by date), your passing will be that much easier on your survivors.

Preparing your estate doesn’t just mean you have prepared the necessary documents. You must also sit down with your heirs and explain your plans and your wishes. Tell them why you have made certain decisions pertaining to the distribution of your assets. In addition, share with them your wishes concerning your living will and health care power of attorney. This can greatly reduce conflicts over your desired medical treatment should you become terminally ill and alleviate any stress and guilt family members may have. And finally, make sure you have your documents reviewed every 3-5 years to ensure they are current with state legislation. Remember, the only constant in life is change.

My husband does not utilize mise en place very often. He doesn’t really need to. Since he cooks daily, he doesn’t get rusty in the kitchen. But when it comes to executing an estate, he fortunately has zero experience. That is why he truly appreciated the very candid meeting we had with his parents this year. We now know where everything is and what the plans are and that gives us peace of mind.

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Leaking Hot Water Heaters

Our Asheville office was built in 1892.  I cannot speak for any upgrades made between 1892 and the mid-1980s, but I would like to think there were a few.  When Parsec moved into this building around 1986, almost the entire building had been remodeled.  It was brought up to what was then considered modern standards.

Over the years, we have experienced lots of challenges with our building.  For example, it is always fun to run network cable.  If you have ever renovated an old house, you can appreciate the architecture – and frustration – of buildings that were never designed for the age of technology.

Our latest adventure involves remodeling the top and main floor restrooms.  It was supposed to be a simple job of replacing fixtures, painting, et cetera.  Unfortunately, we discovered that the hot water heaters (inexplicably located in the ceiling) were leaking and needed replacement.  The contractor then uncovered significant water damage in one of the bathrooms, resulting in an almost complete gut of that room.

The project is now over budget due to these unexpected expenses.  As with everything else in life, the best laid plans are often derailed by things you cannot foresee.  The same principle applies to your financial life.

While we can design a careful plan for any financial goal, things happen.  You could encounter a bear market.  Or the stork can bring an unexpected baby late in life.  Or your college graduate child could move home to live with you, thwarting your plans to downsize your home.

The key to success is to be adaptable.  Realize that you will most likely need to periodically adjust your financial plan.  It will not be static.

We are here to help.  We greatly appreciate it when you tell us of life’s unexpected events.  We are a team, working together to help you meet as many of your financial goals as you can.  We encourage you to call us so we can stay on track.

Cristy Freeman, AAMS
Senior Operations Associate

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The Bucket List

Several years ago, I read a self-help book that promised to help me manage money better.  I do not remember much about the book, not even the title.  I do remember one exercise that was very useful.

I was supposed to create what is now commonly known as a “bucket list.”  I should list all of the things I wanted to do during my lifetime.  It did not matter how long the list was.  When finished with the list, I should then review it and think about how a change in money management practices could help me achieve those goals.  That would help me to set a budget, make more responsible spending decisions, et cetera.  After all, you need money to pay for most of the things you want to do in life.

I found the exercise to be very enlightening.  To my surprise, I saw that most of the items related to travel.  I realized that I needed to do a better job at maintaining an emergency fund and set a formal budget for travel.  I had been tapping the emergency fund whenever I wanted to visit some place new, which is a bad idea.  I setup a direct debit from my checking to my savings account so that savings could be automatic.  This act created a formal budget for both emergency savings and travel.

Today’s list is very different.  My revised list includes completing several projects around the house, paying off my mortgage a few years early, donating more money to my favorite charity, buying a nice road bike, and squirreling away more money for unexpected expenses and retirement.  Sure, there are a few personal goals that are not tied to money; I am not completely shallow.  In balance, the list is much more practical than years ago, when I wanted to see the world.

I still do not want to wake up one day at age 80 and realize all I ever did was work, work, work.  The list can help me stay focused on important things and achieve some of my goals.  Hopefully, I can strike the right balance between the practical (saving for retirement) and the fun (buying that road bike).  I encourage you to take some time to create your own list.

Then, please share your list with your financial advisor.  Goals change over time, so he or she should be aware of what you want from life.  Together, you can develop a financial plan to direct your savings in a manner that will bring you closer to achieving your goals.

Cristy Freeman, AAMS
Senior Operations Associate

 

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North Carolina Tax Law Changes

After months of grappling with members of the state’s legislature, Governor Pat McCrory signed a bill authorizing the most significant changes to North Carolina’s tax code since the 1930s on July 15.

The new tax code reduces both personal and corporate income taxes and eliminates the estate tax. Early estimates indicate that taxpayers across the board will pay less in state taxes once the changes go into effect. Some of the other key provisions of the new law are:

• Deductions for mortgage interest on first homes will be capped at $20,000.
• Charitable contributions will remain fully deductible.
• The child tax credit will continue
• Social Security income will remain exempt from state taxes.
• The corporate tax rate will be cut from the current 6.9 percent to 5 percent by 2015.
• North Carolina’s gas tax will be capped until June 30, 2015.
• A deduction on retirement income is eliminated.
• Starting in 2014, the sales tax holidays for back-to-school and Energy Star products are eliminated.
• The deductibility of the first $50,000 of business income has been eliminated
• Service contracts will be subject to sales taxes
• Electricity will be taxed at a general sales tax rate of 7%
• Amusements, movie tickets, etc will be subject to sales taxes

This is only a small representation of the changes. And this information should not be considered tax advice. Individual situations may vary. And as always, please consult your tax advisor regarding how the laws may affect you.

Tracy H. Allen, CFP®
Financial Advisor

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Ikaria or Bust

Last fall I read a fascinating article in the New York Times Sunday Magazine entitled “The Island Where People Forget to Die.”  The article is about the nonagenarians and centenarians of Ikaria, a rugged and remote Greek island in the Northern Aegean.  It explores the possible factors that allow these people to lead longer, healthier lives.   

Dan Buettner, the article’s author, opens with the story of Stamatis Moraitis, a Greek war veteran who had settled in Port Jefferson, NY after the war.  Moraitis claimed that in 1976, he was diagnosed with lung cancer.  He considered going through chemotherapy, but elected instead to return to his homeland and spend his last days in the village of his childhood.  At first, he spent his days in bed being tended to by his elderly mother and his wife.  When childhood friends heard he was back, they paid daily visits, often bringing a bottle of wine to share.  Soon, he was working in the garden and making the walk up the hill to church.  He woke when he wanted, worked in the vineyard, had lunch, took a long nap.  Evenings were spent with family and friends.   Today, he is over 97 years old.  Is this all true?  I don’t know, but Moraitis is 97 and healthy and loving life!

Buettner spent five years studying the lives and habits of the people of Ikaria.  Working with his partner, a demographer from Belgium, they verified that Ikariotes reach the age of 90 at two and a half times the rate of Americans and they are often healthier.  More impressive is the fact that Ikariotes live 8 to 10 years longer than Americans before succumbing to cancer, heart disease, dementia and Alzheimer’s disease.

So, what did Buettner uncover in his study on the centenarians of Ikaria?  In addition to the Mediterranean diet focusing fresh vegetables and fruit, yogurt, olive oil and red wine, Ikariotes are very communal and they spend many hours a day socializing with their fellow villagers.     They don’t drive, so walking is their form of exercise.  They nap every day and attend church every Sunday.  And reportedly, a healthy sex life is enjoyed by more than 80% of Ikairote men over 65.

I just returned from a Retirement Income Summit where the overriding theme was how to prepare our clients for the cost of health care in their retirement.  In my last post http://parsecfinancial.wordpress.com/2013/04/10/remember-wear-sunscreen/, I touched on this topic.

What has become abundantly clear is that it is imperative that we focus as much attention on leading healthy, active and productive lives as we spend on saving for a comfortable retirement.

While I don’t expect I will pack up everything and move to Greece, I think I could certainly find a way to incorporate many of the Ikariote habits into my daily life…now, I just need to find a way to sneak in that nap!

Tracy Allen, CFP®
Financial Advisor

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Are They Made from Real Girl Scouts?

I spotted a headline online recently announcing that a new flavor of Girl Scout cookies would have a secret ingredient.  I laughed out loud.  I immediately thought of that line from the “Addams Family” movie, delivered so well by Christina Ricci, “Are they made from real Girl Scouts?”  (Look it up on You Tube.) 

As it turns out, the secret ingredient is not Girl Scouts; it is a vitamin cocktail.  I looked at the ingredient label on their website.  Yes, you get a small dose of vitamins when you eat 3 cookies…along with 8 grams of fat.  Am I supposed to feel better when I eat more than 3 cookies, because the cookies are “good for me?”

We all know that, no matter how nutritious new forms of cookies, potato chips, and burgers may claim to be, they cannot replace a balanced diet that contains fruits and vegetables.  Fad diets come and go.  You might lose a few pounds, only to regain them because who can eat mango smoothies all the time? 

You can apply the same principle to your investments.  Chasing the latest fad in investment strategy can be costly.  It is important to be very thoughtful about your asset allocation.  As we have said many times, it is easy to have an allocation of 100 percent equities in an up market.  It is extremely difficult to stick with that strategy when the market drops 500 points in one day. 

Your investment advisor is here to help you.  If you have not taken a look at your asset allocation in awhile, now is a good time to begin the conversation.  Have your goals changed?  Has your family expanded?  Have you started a new business?  All of these events, as well as many others, can prompt a change.  We are here to help, so put down the Girl Scout cookies and give us a call.

Cristy Freeman, AAMS
Senior Operations Associate

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The Fiscal Cliff, Taxes and Investment Decisions

This morning CNBC had a headline “Fending off the Fiscal Cliff”.  I turned off the TV.  You have to beware of headlines that create a sense of urgency to do something in your portfolio.

This sort of reporting promotes what I call the “I’ve got a feeling” trade.  This is when you take some action in your portfolio based on the mood of the day. Currently, there is a lot of focus on the Presidential election.  If you are concerned about the other candidate winning, keep in mind that someone is equally concerned about your candidate winning.  Don’t make investment decisions based on emotion.

Taxes can be a factor, but should not be the sole driver of an investment decision.  Tax planning for this year is particularly difficult due to the uncertainty of future tax rates.  The Bush tax cuts are set to expire on 12/31, which would cause the tax rate on qualified dividends to increase from a current maximum of 15% to as high as 39.6%, depending on your tax bracket.  We likely will not know anything on income tax, estate tax, alternative minimum tax, the possible return of the IRA charitable deduction for those over 70.5, etc. until after the election or even later in December.  It’s also possible that these tax rates could be finalized in the first quarter of 2013 and made retroactive to 12/31.

This year is unusual in that some of the usual rules of thumb about capital gains may not apply.  Typically, people want to delay paying taxes whenever possible.  However, you way want to realize some long-term capital gains in 2012 in order to lock in the 15% tax rate which will likely be higher next year.  In addition, capital gains rates are currently 0% for taxpayers who are in the 10% or 15% tax brackets based on their taxable income.  The 0% tax rate for these people also expires on 12/31/2012.

You may not want to realize capital gains early under certain circumstances.  For example, if you have investments that are highly appreciated and you are advanced in age or in poor health.  Depending on the size of your estate and what happens with estate tax law, the beneficiaries of these assets may receive a step-up in basis for all or a portion of the assets upon the taxpayer’s death.   Therefore, it wouldn’t make sense to sell assets and pay taxes on the gain when a step-up might be available in the near future.

We recommend that you avoid making major decisions or changes to your portfolio based on fears or possibilities that may or may not materialize. While some limited amount of portfolio rebalancing may make sense, you should discuss your particular situation with your Parsec advisor if you have questions.

Disclaimer:  we are not licensed CPAs and do not give tax advice.  We offer some general guidance with respect to the mechanics of tax issues, but we encourage you to consult with your CPA or a qualified tax professional before making any decisions or taking action.

Bill Hansen, CFA

Managing Partner

October 12, 2012

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