Achieving Diversity in Your Investment Portfolio

Achieving Diversity in Your Investment Portfolio

By Richard F. O’Boyle, Jr., MBA, LUTCF

As you approach retirement, and even during retirement, you want to diversify your portfolio to protect what you’ve earned and to grow more. Getting to this point wasn’t easy so you will need to exercise caution. But you likely want to achieve real growth in the next few years, to maximize your enjoyment during retirement, and to leave something behind for the ones you love. I’ve laid out some of the best ways you can do both. By engaging in some safe and secure allocations, you’ll protect your funds from the whims of time. By taking on some risk, you’ll stand a greater chance of adding to the wealth you’ve already accumulated.

1)    Bonds. Bonds are a relatively stable form of investment. In effect, when you buy a bond, you are lending money to an entity (Federal government, state, municipality or corporation) and will recoup the loan plus interest over the duration of the bond’s term. Federal government bonds have never defaulted in the history of the United States. What’s more, your bond money will generally grow in value faster than the present rate of inflation. Therefore, you won’t lose buying power, while increasing your wealth slightly. Unfortunately, there is a payoff for the security that bonds provide. Just as there is little risk or loss, there is little hope of large gains on this kind of investment. As you age, you’ll want to allocate more and more of your portfolio in secure bonds, but you also want to leave yourself a little wiggle room to grow. This is where the other kinds of investment come in.

2)    Stocks/ETFs/Mutual Funds. If you have invested at all, you likely know about these. These are the riskier cousin to bonds. Buying stocks is buying a little share in a company – which allows you to benefit from the growth of that company. By spreading out your investment across many stocks, through index mutual funds, you will follow the historical upward trajectory of the market overall. Of course, sometimes the market drops and, when it does, your investment will decline with it. But generally, the market grows over the long term. If you expect to have many years or even decades ahead of you, a significant allocation of stocks may be appropriate. You may even be comfortable with more than average. Wisdom typically dictates that you have your age reserved in bonds (a 45-year-old will have 45% of her portfolio in bonds). The remaining amount will be in stocks, or spread out in other kinds of investments.

3)    Binaries, Real Estate, and Alternatives. Spread Betting is a quick way to see return on your investment. It is the quickest way, actually, though caution is urged because you can see a loss just as easily. Other common investment forms like Real Estate and investment in specific business enterprises are less risk-prone, but do not offer the same speed of return as spread bets. Some people feel comfortable investing in gold and other static commodities. While it is impossible to anticipate how something like gold will change in value, its inherent worth is comforting to those who don’t have the same understanding of the stock world.

A diversified portfolio, properly stocked, will carry you through your retirement in comfort and security. Talk to your financial professional about the above options, and about how to best implement your retirement portfolio for your personal needs.

Year End Retirement Tips 2015

by Richard F. O’Boyle, Jr., LUTCF, MBA

As another year winds down – and another begins – it behooves us to take a look at our current retirement plans and make necessary adjustments.

Retirement Plan Contributions for 2015

You may have limited time to maximize your retirement plan contributions for the tax year 2015. Most people can stash money into traditional IRAs and Roth IRAs as late as April 15, 2015 (for tax year 2015), but some plans have to be filled before December 31, 2015.

The annual limit for traditional IRAs and Roth IRAs is $5,500 for 2015 ($6,500 if you are over age 50) – and must be deposited by April 15, 2015. Company-sponsored and Union/Non-Profit plans such as 401(k), 403(b) and 457 plans allow 2015 contributions up to $17,500 or $23,000 (age 50+).

If you have not yet maximized your 401(k) contribution for this current year, you may want to change your contribution percentage before the end of the year. You can increase the percentage of your salary that is contributed (and reduce your take-home pay). Contributions to deferred plans reduce your current taxable income.

Retirement Plan Contributions for 2015

The IRS has left retirement plan contributions for 2015 at the same levels as 2015. But the thresholds for qualifying for Roth IRAs is increasing slightly. If your adjusted gross income is less than $129,000 (for singles) or $191,000 (for married persons filing jointly) then you are eligible to contribute to a Roth IRA. Eligibility starts to phase out if you earn more than $114,000 (singles) and $181,000 (couples).

Year-End Tax Strategies

If you want to reduce your taxable income for 2015, you may consider paying off more expenses that you can deduct. For example, some people will prepay their real estate taxes, homeowner’s insurance premiums or make mortgage payments in advance that would normally be due in early 2015.

Deductions for Medical Expenses

For 2015 the amount of medical expenses required to reach the deductible threshold has increased for people under age 65.  You must have medical expenses greater than or equal to 10% of your adjusted gross income in order to be able to deduct them. People aged 65 and older only need expenses of 7.5% through 2017.

Health Insurance Individual Mandate

Beginning in 2015, individuals are required to carry health insurance either through their employer or individually. In order to set an individual plan in place for a January 1, 2015 effective date, people shopping on the government Insurance Marketplace (http://www.healthcare.gov) and for New Yorkers (http://www.nystateofhealth.com) must sign up for (and pay for) a plan by December 23, 2015. The actual mandate kicks in March 31, 2015.

Health Savings Account Contributions

If you have a high-deductible health insurance plan that includes a tax-preferred Health Savings Account, you can still maximize your contributions for 2015. The contribution limit for 2015 is $3,250 for individuals and $6,450 for families. The maximum takes into account both employer and employee contributions to the HAS. For those 55 and older the maximum is increased by $1,000.

Social Security and Medicare in 2015

The Social Security Administration will increase benefits by 1.5% in 2015. Medicare Part B premiums will remain at $104.90 per month, but high-income individuals will see the surcharge for Part B and Part D increase slightly.

How Much Life Insurance Do I Need?

Most people buy term life insurance to provide for their family’s financial needs in the event that we die while they are still dependent on us. Permanent life insurance is also a useful wealth transfer tool when used for estate planning, as well as a modest savings vehicle. But far and away, life insurance is used by families to pay the mortgage, raise the children and put them through college if we die young.

Generally the first step in the life insurance buying process is to find an agent who you can trust and work comfortably with. The agent will help you to determine how much life insurance you should carry, what type(s), and from which company.

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Retirement Plan Limits for 2015

by Richard F. O'Boyle, Jr., LUTCF, MBA

The Internal Revenue Service is boosting the maximum contribution that workers can make to their 401(k), 403(b) and most 457 retirement plans without paying upfront taxes. The limit will rise by $500 to $17,000 for 2015. Workers over 50 can add another $5,500 to that. Individuals may still contribute $5,000 to traditional IRAs or Roth IRAs, or $6,000 if older than 50.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2015. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2015. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2015; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

Should I Replace My Life Insurance or Annuity Policy?

by Richard F. O'Boyle, Jr., LUTCF, MBA

Life insurance and annuity contracts are intended to be medium- to long-term agreements. Term life insurance policies often have 20-year durations, and many annuity contracts have 8-year surrender periods. But in some cases, it makes sense to cancel or replace a contract with a new one. When should you cancel or replace your life insurance or annuity policy?

You may consider making the change if:
- The term is expiring on your old policy and the rate is sky-rocketing;
- Your health has improved from the time when you originally applied for your policy, for example, you may have quit smoking, lost a lot of weight, controlled diabetes, or passed five years after cancer. Many companies will allow you to take a new medical and keep the existing policy with a new lower rate;
- The rate on a permanent policy may have become unaffordable and it is at risk of lapse. Consider reducing the death benefit (and thus the premium) or using cash values and dividends to pay the premium over the short term;
- Companies change the contract terms on newer policies for Universal Life from time to time. Consider switching to a different UL policy if the crediting interest rate or guaranteed minimum are better or if the monthly costs of insurance are lower. Keep in mind that as you get older your underlying costs get higher;
- A 1035 exchange allows you to transfer the cash values of a life insurance policy or annuity contract directly into a new contract without exposing the cash to taxation. Again, make sure that the terms of the new contract are more favorable. With an annuity, you should check the guaranteed minimum interest rate, since on older contracts it may be much higher.

New York requires a lengthy process to replace a life insurance or annuity contract. This is designed to ensure that both you and your agent “do the math” to make sure the new policy costs are fully disclosed, that the new policy is suitable for your needs and you both quantify the costs and benefits before changing plans.

When considering replacing or cancelling your life insurance policy, keep in mind that by starting a new policy, you have a new two-year “contestability” period where there might be limits on the payout of the death benefit. Never cancel a policy until the new policy is in force, even if it means paying premiums for both policies for one month.

How to Choose a Life Insurance Agent or Financial Advisor

by Richard F. O’Boyle, Jr., MBA, LUTCF

The process of working with a life insurance agent or financial advisor should not be stressful, although frequently it is. I have spent many hours with nervous couples who were so anxious about being “sold” something they didn’t really need or understand that they couldn’t focus on the constructive task before them. This is largely because insurance agents and financial advisors have the reputation of being commission-hungry sharks.

When you entrust the management of your retirement nest egg or your family’s life insurance safety net to a professional, you should walk away with a peace of mind that you are putting your finances on the right track. A good agent is not only knowledgeable about the technical aspects of planning, but also can “consult” with you to learn exactly who you are and what you need.

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Book Review: “Buckets of Money: How to Retire in Comfort and Safety,” by Raymond J. Lucia, CFP

Book Review: “Buckets of Money: How to Retire in Comfort and Safety,” by Raymond J. Lucia, CFP (John Wiley & Sons, Inc., 2004)
by Richard F. O’Boyle, Jr., LUTCF, MBA
“The Insider’s Guide to Retirement and Insurance Planning”
http://www.retirementandinsurance.com

We’re taught to save throughout our working years to fund our retirement – diligently socking money into our 401(k)s and paying down our debt. But once we flip the switch and settle into a presumably worry-free retirement, how do we effectively and efficiently spend down our assets in those golden years? Ray Lucia, a Certified Financial Planner with a celebrity’s flair, helps us to answer this tough question with his “buckets of money” planning strategy.

The gist of “Buckets of Money” is that our nest eggs should be separated into three “buckets” of ultra-safe income streams, conservative medium-term assets and aggressive stock funds. Over seven-year cycles, the funds are depleted and shifted into the next immediate bucket to be used for current income. The buckets strategy leaps the key retirement planning hurdle by providing safety, growth, diversification, tax-efficiency and lifetime income. The book identifies which investments are appropriate for which buckets, along with guidelines for the proportions of each.

The book reads like a infomercial, but don’t let that turn you off. The general discussion of asset classes and products (stocks, bonds, annuities, etc.) is valuable for the novice and experienced investor alike. His comprehensive perspective honestly allows him to cover all potential investment classes. Mr. Lucia isn’t trying to sell you on anything other than his planning strategy (and he does that well).

Mr. Lucia’s website contains some notes on changes, but I’d like to see a fully updated edition of the book. For example, the buckets strategy recommends real estate holdings of as much as 20% of a portfolio in the form of real estate investment trusts. Given the 2015 mortgage meltdown, perhaps that should be reconsidered. Mr. Lucia only skims past the important backstop that life, disability and long-term care insurance provide as we switch our retirement portfolio from accumulation mode to distribution mode. Fortunately, the author takes into account the complexities of the tax code since intelligent tax planning can make or break a retirement plan. The book’s numerous statistical examples remain useful today.

The worksheets included in the book are quite easy to use. While the potential to “do it yourself” is there for the experienced investor who has a trusted advisor, I wouldn’t recommend that an individual adjust her portfolio without consulting a professional. I’m not sure if the buckets strategy is an “all or nothing” approach to investing. Any retirement plan can benefit from the non-controversial concepts presented here.