RMR Wealth Management Blog

Most Business Owners Do Not Have Up-To-Date Estate Plans, But They Should - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Tuesday, February 24, 2015

(originally written by Russ Alan Prince)


As long as there are estate taxes, as long as there are intergenerational considerations, and as long as there are interconnected business interests, there will be a need for estate planning. Business owners are looking to achieve a certain agenda and do so in as tax-efficient a manner as possible. However, it’s important to keep in mind that taxes are not the tail that should wag the dog.

According to Anthony J. Carone, managing member of the specialty law firm Carone & Associates, “Basic estate planning employing such strategies and financial products as credit-shelter trusts and traditional life insurance is far from complicated and sufficient for many business owners. However, for more complicated situations there are many more sophisticated strategies available including self-canceling installment notes, granter retained annuity trusts, and remainder purchase marital trusts.”

Based on a survey of 513 business owners, a little more than seven out of ten business owners have an estate plan which is defined as having, at a minimum a will. Among the 138 business owners without an estate plan, half of them have not done the planning because the topic is very hard to deal with. “There are many reasons, “ explains Carone, “From facing the prospect of death to needing to make difficult decisions concerning the disposition of assets including the future fate of the business, estate planning can very well be arduous and emotionally nerve-wracking.”

About 30 percent of the business owners surveyed said they didn’t have an estate plan because there wasn’t a need. “Although there might not be estate tax concerns, it’s usually advisable that everyone have an estate plan, even if it’s only a will,” explains Carlo Scissura, president of the Brooklyn Chamber of Commerce and author of Maximizing Personal Wealth: An Advanced Planning Primer for Successful Business Owners, “This is especially the case for business owners as their company is often an integral and considerable part of their estate.”
For those business owners surveyed who had an estate plan, most of them are over five years old. Almost a quarter of the estate plans are two to five years old, with the remaining 12 percent less than two years old. Frank Seneco, president of Seneco & Associates, an advanced planning boutique says, “Because of changes in the tax laws, estate plans more than five years old – most probably more than a few years old – are likely to not be up-to-date and fail to take maximum advantage of available opportunities.”

What’s even more telling is that more than half of these business owners report that they’re wealthier since they created their estate plans. More importantly, nearly seven out of ten reported that since they created their estate plans they’ve experience life changing events. These events can be anything from divorce to the birth of children or grandchildren to the death of prospective guardians, and so forth.

What this tells us is that, from changes in the tax laws to changes in the lives and wealth of the business owners, their estate plans are likely outdated. In order to attain the greatest benefits from estate planning, business owners need to stay on top of the matter and revise your estate plans when appropriate.

The S&P 500 Shouldn't Be The Barometer of Investor Success, here's Why - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Friday, February 06, 2015

(originally written by Kevin Mahn)


Far too often, individual investors measure the success of their investment portfolios, or the effectiveness of their financial advisors, relative to the performance of a well-known stock market index such as the S&P 500 Index or the Dow Jones Industrial Average Index.

While it is important for investors to have a tool to measure the success of an investment strategy against, it can be very misleading, and often misguided, if an investor chooses an index as their tool that is not consistent with their risk tolerance or investment objectives.

For example, the S&P 500 and the Dow are often quoted on television and by various media outlets when providing updates on the stock market. By doing this, the media is implicitly suggesting to investors that these indexes represent how the market is actually performing. Trouble is that not everyone has the same definition of “the market” and not every investor has a portfolio that is structured like “the market” – and probably for good reason.

In an Investment News article entitled, “When underperforming the S&P 500 is a good thing,” author Jeff Benjamin claims that investors have become programmed to dwell on the performance of a few high-profile benchmarks. Benjamin goes on to state that, “… a truly diversified investment portfolio should have returned less than 5% in 2014. It was that kind of year. Any advisor who generated returns close to the S&P was taking on way too much risk, and should probably be fired.”

The suggestion of having the financial advisor fired may be extreme, especially if an investor has instructed their advisor to build a portfolio to try and provide performance consistent with, or superior to, the S&P 500 (or the Dow) and recognizes the potential risk associated with that type of strategy. However, most investors do not have this large of a risk appetite and appreciate the benefits of diversification to help deal with market volatility if and when it occurs.

To this end, many of the growth-oriented investors that we speak with at Hennion & Walsh are interested in portfolios that are managed to help deliver a reasonable return while also providing for some downside protection. As a result, investors generally do not have that large of a percentage of their portfolio assets allocated to the one asset class associated with these two stock market indexes. This asset class is U.S. large cap. To this end, Michael Baker of Vertex Capital Advisors stated in the same previously mentioned article that, “The S&P 500 really just represents one asset class – large cap stocks…and most investors only have about 15% allocated to large cap stocks.”

Having all of their investment portfolios allocated to one single asset class, such as U.S. large cap, would have rewarded investors well since the last major market crash hit bottom in March 2009. However, this does not mean that this will always be the case going forward nor has it been the case historically.

The chart below from First Clearing shows the annual returns of several asset classes from 2000 – 2014. A quick review of this chart will show how well U.S. large cap stocks have performed since 2009. Since the media focuses on U.S. large cap indexes, investors have thus been constantly reminded of how well “the market,” or more specifically U.S. large cap stocks, has done for the past five years. By further reviewing this chart, however, investors are also reminded that this is not always the case. U.S. large cap stocks suffered significant losses in 2008 and 2002 and additional losses in 2000 and 2001. Additionally, while large cap stocks finished in the top half of asset class performance in each of the past four years, they have only achieved this ranking once over the eleven years prior to 2011.


Asset Class Returns (2000 – 2014)

First Clearing, LLC, 2015. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.


Source: On the other hand, this chart attempts to illustrate the value of asset allocation with the asset class box named “Asset Class Blend,” which is simply an equal weighting of all of the asset class indexes included on the chart. While I am not suggesting that such a blend is appropriate for all investors or all market environments and would likely include more asset classes and sectors to make the chart more comprehensive, the results shown in this chart still certainly demonstrate the potential benefits of diversification in down and/or volatile markets.

Not inclusive of the potential fees for the implementation of each respective strategy or associated tax implications, $1,000,000 invested in large cap stocks in 2000 would have been worth $1,866,218 at the end of 2014. Conversely, the same $1,000,000 invested in this particular asset class blend strategy in 2000 would have been worth $2,831,257 at the end of 2014 based upon the annual returns listed in this Asset Class Returns table.

$1,000,000 Investment Comparison from 2000 – 2014

Data source: Asset Class Returns (2000 – 2014) chart shown above in this post. Chart source: First Clearing, LLC, 2015. Data assumes reinvestment of all income and dividends and does not account for taxes and transaction costs.

As a result, it is imperative that investors are honest with themselves about their true tolerance for risk. If they are truthful to themselves, their risk appetite should not change based upon the current directional performance of “the market.” If an investor is not comfortable assuming the risk of “the market” or a single asset class, such as U.S. large cap, in all market environments, then they should consider the following:


1. Building (or maintaining) a diversified portfolio, incorporating a variety of asset classes and sectors, consistent with their tolerance for risk, investment timeframe and financial goals.

2. Utilize a benchmark to gauge the performance of their investment strategy that is consistent with (1) above as opposed to using a widely recognized stock market index, such as the S&P 500, that may not be relevant, and is likely very unhelpful, to them.

3. Try to not make critical portfolio decisions based on short-term performance results but rather consider longer-term performance results relative to their own overall financial goals.

4. Avoid the temptation of being influenced by media reports on general market performance to measure the success of their own investment portfolios, or the effectiveness of their respective financial advisors.

This Is The Best Illustration of History's Bull And Bear Markets We've Seen Yet - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, January 07, 2015

(originally written by Sam Ro)


The S&P 500 is up a whopping 212% from its March 2009 low of 666.

That means this bull market has been humming for a very long 68 months, which seems like a long time.

But by historical standards, the length and strength of this bull run isn't that spectacular.

Some folks have been tweeting this awesome chart from Morningstar's Jerry Kerns. The blue illustrates past bull markets' durations and returns (total and annualized). The red illustrates the bear markets. (Note: this was published in May.)

This chart does a fantastic job communicating a few important things. For instance, there's a lot more blue than red, a unique way of reminding investors that stocks have spent more time going up than down.

We particularly love what's illustrated by the y-axis. It's the multiple by which the stock market will go up or down from the beginning of each bull and bear market, respectively.

As you can see, the amount by which the stock market can fall is limited to 100%. Indeed, market crashes are scary, but you usually lose less than 100% of your investment.

However, the amount by which it can go up is unlimited. Indeed, this is why shorting the market can be a very scary process. It's also a reminder that you can make more than 100% of your initial investment if you're long.

How Not to Leave Your 401(k) Money On The Table: New Year's Tips - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Tuesday, January 06, 2015

(originally written by John Wasik)


Although I think that 401(k)s are flawed vehicles, for most Americans they are the only long-term savings vehicle they have.

It’s far too easy to leave money on the table in these plans. Here’s what you should be thinking about as the year begins:

* Contribute As Much As You Can. Remember that you can leave money on the table two ways: The most important is failing to take advantage of a company match. So grab the free money.

The second mistake is not taking advantage of tax savings. Remember you don’t pay federal taxes on the money you contribute to your 401(k). It reduces your federal liability.

You can contribute up to $18,000.

* Don’t Leave Your “over 50″ Bonus on the Table. Age has its benefits. If you’re 50 or older, you can chip in another $5,500 into your 401(k) this year.

* Watch out for minimum distributions. If you’re 70 1/2 or older, the IRS makes you take “required minimum” distributions out of your IRA. If you don’t take the money out, you could face a 50-percent penalty.

* Don’t Forget Your IRA. The limit is $5,500 for individual retirement accounts with another $1,000 as a “catch-up” contribution for those over 50. Deductions for these contributions, however, get a tad tricky. This is how US News explains it:

“Workers who have a retirement account at work can claim a tax deduction for making a traditional IRA contribution until their modified adjusted gross income is between $61,000 and $71,000 for individuals and $98,000 to $118,000 for couples in 2015, up $1,000 and $2,000, respectively, from 2014.

Spouses without a workplace retirement plan who are married to someone with a 401(k) can claim the IRA contribution tax deduction until their income is between $183,000 and $193,000 in 2015. “

* You May Qualify for a Saver’s Credit. If you’re within a certain income range, the government will give you a tax break for saving. It’s called the “saver’s credit.”

“Workers who save in a 401(k) or IRA may be eligible for the saver’s credit if their adjusted gross income (after deductions) is less than $30,500 for singles, $45,750 for heads of household and $61,000 for married couples in 2015.

These limits are between $500 and $1,000 higher than in 2014. This valuable tax credit is worth 50 percent, 20 percent or 10 percent of your 401(k) or IRA contributions up to $2,000 ($4,000 for couples), with the biggest credit going to savers with the lowest incomes. The maximum possible saver’s credit is worth $1,000 for individuals and $2,000 for couples.”

Don’t wait until the end of the year to make savings decisions. Make it part of your planning today.

The Shale Revolution Is Changing How We Think About Oil And The Dollar - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, October 09, 2014

(article originally written by Elena Holodny)


Historically, there's been a pretty consistent correlation between oil prices and the US dollar.

When the dollar strengthened, oil prices would fall — and vice versa.

For the longest time, this relationship has been explained by the huge flow of US oil imports.

However, a new report by Goldman Sachs's Jeffrey Currie says that rationale has broken down in the wake of the American shale revolution.

"In 2008 ... the US was importing on a net basis nearly 12 million [barrels per day] of oil and products," Currie writes. "Owing to shale technology, today that number is now less than 5 million b/d. And subtracting out Canada and Mexico, the number drops to 2.4 million b/d. In other words, net imports are over 60% lower than in 2008."

This has "significantly reduced the correlation between commodities and the US dollar," he writes.



Back in the day...

In the past, Currie writes, investors believed that the "primary mechanism for the correlation" between oil prices and the dollar was the large US petroleum current account deficit.

"From the early 2000's to the global financial crisis, increasing oil imports saw a widening US current account deficit, which put depreciation pressure on the dollar (appreciation pressure on oil producers currencies), which in turn put further widening pressure on the current account deficit (for any given volume of imports), causing additional dollar weakness," Currie writes.

By 2008, oil reached $147 per barrel and the US dollar was at its weakest point versus the Euro at 1.6. At the time, the US was importing on a net basis approximately 12 million barrels per day of oil and products.


And then there was the shale revolution...


Today, the number of imports has dropped to around 5 million. If you take out Canada and Mexico, that number falls further to 2.4 million — a stark difference from 2008's 12 million.

Overall, oil imports are down more than 60% since 2008.

Imports have dropped because the US is now using hydraulic fracturing to extract oil from its massive shale basins, creating more supply.

And it's during this same 2008 - 2014 time period that there's been a huge reduction in correlation between oil prices and the US dollar, according to Currie.

"Along with the post-crisis financial market normalization, [the drop in oil imports] has dramatically reduced the correlation between oil and the USD, to around 0% (i.e. uncorrelated) today from historical highs near 60% in 2008/2009," Currie writes.

Thus, according to this analysis, although oil prices have recently dropped as the dollar has surged, one trend doesn't explain the other.

Wall Street Declares The Great Profit Margin Boom Is Finally Over - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, September 03, 2014

(originally written by Myles Udland)


During the post-financial crisis bull market, corporations have seen profit margins expand as companies cut costs by laying off workers and getting more productivity out of the employees that remain.

But recent data have painted a somewhat conflicting picture, and it looks like by some measures profit margins might be getting slimmer, or "rolling over."

Following the financial crisis, companies of all sizes saw margins expand. But of late, smaller companies haven't continued to enjoy record margins, and while larger companies are still seeing margins hold up, as seen in this chart by UBS.

Second quarter GDP data showed that after-tax corporate profit hit a new record high. But following the second GDP estimate released on August 28, The Wall Street Journal's Justin Lahart highlighted a sometimes overlooked adjustment in the profit margin data.

The "record" after-tax corporate profits exclude two adjustments — one that measures the change in the value of inventory and another that measures depreciation of plants and equipment — and were these items included, corporate profits as a percent of GDP would be 10% lower than a year ago.

And though the adjusted profits are still near record highs, corporates have clearly seen some decline in profit.

This chart from FRED shows how the unadjusted and adjusted measure of corporate profits have diverged in the last year.

Some economists on Wall Street have also noted this divergence, and when you look "under the hood" of corporate balance sheets, profit margins might be getting squeezed for the first time since the financial crisis.

In a recent note to clients, Sean Darby, chief global equity strategist at Jefferies, said, "Glancing at U.S. nationwide operating margins suggests that margins did indeed peak through 1Q and 2Q of 2014."

Darby noted three factors that contributed to this contraction: increased capital expenditures, share buybacks, and higher input costs. Darby adds that while the "high degree of U.S. sector oligopolization," among other factors, will keep costs constrained, "the best of the restructuring and cost cutting is over."

This chart from Darby shows how multiple expansion for the S&P 500 coincided with with an increase in profit margins, which have recently pulled back.

Dean Maki at Barclays said the catalyst for the squeeze in corporate profit margins is straightforward: labor costs are rising faster than output prices. The broader implications of labor costs rising faster than prices can sometimes be ominous, but Maki writes that, "While sliding profits often lead to recessions, there is nothing that says this is inevitable."

This chart from Barclays shows how labor costs have outpaced prices this year.

Maki expects the decline in corporate profits to put pressure on companies to raise prices, which the Fed likely welcomes, given that inflation has been running below is 2% target this year.

In her speech at Jackson Hole last month, Fed Chair Janet Yellen said there are still pockets of weakness, or "slack," in the labor market. And in an optimistic reading, the increase in wages highlighted by Maki could indicate the start of a "virtuous cycle" in the labor market, where employees gain leverage and are able to command higher wages. Or at least, this is how the Fed would want to see this play out.

At Capital Economics, John Higgins also sees profit margins falling in the face of a strengthening labor market, but like Maki, Higgins does not see this fall coming as a collapse that sends the market tumbling.

"The structural forces (e.g. globalization) that have put significant downward pressure on labor's share of income since the turn of the century are unlikely to disappear any time soon," Higgins writes. "So the after-tax profit share is unlikely to collapse and trigger the sort of major correction in equity prices that bears anticipate."

The "significant downward pressure" Higgins references is something that Business Insider's Henry Blodget has argued is the result of ever-greedier corporate leaders extracting profit by suppressing wages, creating, "a country of a few million overlords and 300+ million serfs."

And when you look at this chart showing how employee compensation as a percent of GDP has fallen, it's easy to see part of what the inequality argument is driving at.

It's also worth noting that companies in the S&P 500 enjoyed record profit margins in the second quarter.

In a recent note to clients, Goldman Sachs's David Kostin wrote that he sees profit margins for the S&P 500 remaining near 9%, while consensus estimates are for margins to expand to 10% by the end of next year.

And while the S&P 500 is among the most-referenced stock indexes, and is often considered the "benchmark" index for U.S. equities, it still excludes many thousands of smaller public — not to mention all private companies — possibly painting a misleading picture of the state of corporate earnings.

The S&P 500 is market cap weighted, meaning the largest companies make up the largest percentage of the index. Currently, that means Apple is the largest company in the S&P 500; in its most recent quarter, Apple's gross margin was 39.4%. 

Many have called the current bull market and economic recovery a "balance sheet recovery" that has seen companies repair balance sheets by, again, cutting costs, and engaging in financial engineering to boost earnings and stock prices.

This behavior has fed the ever-growing profit margins gains.

But if this trend is faltering, and companies start investing in their actual businesses rather than just their financial statements, then maybe we can drop "balance sheet" from the word "recovery."


The Spanish 10-Year Yield Just Fell Below The US 10-Year Yield - Here's What That Means - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Monday, June 09, 2014

(originally written by Joe Weisenthal)


This is something that would have been unfathomable a year ago, or even 6 months ago really.

The Spanish 10-year bond is now trading with a lower yield than US bonds. That means at 10-years, Spain can now borrow money more cheaply than the US can.

Jamie McGeever has the chart which shows the historical spread between 10-year Spanish bonds and US ones.

The chart's a little blurry, but you can see that in 2012, at one point, Spanish bonds were trading for over 600 basis points higher than US ones (meaning that if the US 10-year was at 2.5%, then the equivalent Spanish one was at 8.5%). This was in the throes of the Eurozone debt crisis, when it looked like peripheral Eurozone countries might default or leave the Eurozone, causing their debt to be denominated into weaker home currencies.

But since those tough days, several things have happened.

One is that the Eurozone vowed to implicitly backstop government debt, which took away the risk of default basically.

Meanwhile, the Eurozone economy has sputtered along, and inflation has dropped to its lowest levels since the crisis, which puts downward pressure on yields. And now just last week, the ECB has taken further steps to reduce interest, causing a further push into peripheral debt.

Now it's important to note what this doesn't mean: It doesn't mean that the market deems the US to be riskier than Spain. US credit default swaps (hedges against default) remain much tighter for the US.

In fact, while Spain has come a long way for the dark days, it's gotten to the point where plunging borrowing costs are actually a negative sign as they are an artifact of slow growth and deflation. So while this is a major milestone and moment for Spain, it's not necessarily all good.

The Bond Market's Nemesis Is Making A Comeback - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, May 29, 2014

(originally written by Anthony Valeri)


Inflation—one of bond investors’ chief enemies—may be making a resurgence. The rate of inflation remains low, but market awareness about a possible bottom is increasing. This week the Federal Reserve’s (Fed) preferred measure of inflation—core personal consumption expenditures (PCE)—is expected to increase to 1.4% for April 2014 after a 1.2% annualized rate in March.

Inflation is an important risk to monitor in bond investing. Since most bond interest payments are fixed over the life of the bond, rising inflation can erode the value of those payments and lead to lower bond prices.

The PCE will likely follow the recent increase in the widely followed core Consumer Price Index (CPI), which rose to a greater-than-expected 1.8% in April 2014 after an above-forecast increase in March. Core CPI has accelerated in recent months with the three-month change equating to a 2.3% annualized rate of inflation [Figure 1]. Prices at the producer level, often watched for signs of “pipeline” inflation pressures, have increased as well. Core finished goods prices as measured by the Producer Price Index (PPI) bottomed in late 2013 and have moved steadily higher since.

Core CPI has accelerated in recent months with the three-month change equating to a 2.3% annualized rate of inflation.

Several factors point to prices firming up further (for more insights see the Weekly Market Commentary: The Big Bang Theory: Inflating the Stock Market, 4/21/14):

•Global economic growth. Second quarter 2014 economic growth in the United States is expected to bounce back from a weak first quarter and is oon pace to expand at a 3.5% rate, according to the Bloomberg consensus forecast, based on a rebound in consumption and industrial production following a snowier and colder winter that depressed economic activity. Overseas, China’s Purchasing Managers’ Index (PMI)—an important gauge of manufacturing activity in China—showed signs of stabilization after a year of deceleration.

•Housing rents. Housing purchases have slowed due to higher interest rates, housing price gains, and still-tight residential mortgage lending standards. But housing rents, a key driver of core CPI, have steadily increased since late 2013 and may likely continue to exert upward pressure on core CPI over the remainder of 2014. Housing rents comprise roughly 25% of core CPI and favorable year-over-year comparisons may boost core CPI.

•Job growth. The three-month moving average of monthly private payroll gains is 225,000, the highest since November 2013. Although job growth remains sluggish compared with prior recoveries, continued improvement may lead to price pressures over time.

Measures of inflation expectations in the bond market have also increased. The breakeven inflation rates implied by Treasury Inflation-Protected Securities (TIPS) are near one-year highs [Figure 2]. In April 2014, the five-year TIPS auction witnessed very strong demand, and demand was again robust at last week’s 10-year TIPS auction. Higher implied inflation rates indicate investors are requiring greater inflation protection. Since the beginning of May 2014, the yield differential between intermediate- and long- term Treasuries has increased, leading to a steeper yield curve, which often reflects greater, longer-term inflation risks.

Still Modest

To be sure, the increases in inflation expectations and in the broad price indexes, such as the CPI, are still modest by historical comparison. The 10- year TIPS yield suggests that CPI inflation will average 2.25% over a 10-year horizon—a low level.

The three factors mentioned earlier that may continue to lift inflation will take time to influence prices. Economic growth and job gains will likely need to increase further and remain at higher levels to generate sustained price pressures. Wage pressures, a bigger driver of inflation, remain muted and limit the potential pace of price gains, but signs of wage pressures may be emerging. The most recent Employment Cost Index (ECI) released for the quarter ending March 31, 2014, diverges from the recent trend of small business that intend to increase worker compensation [Figure 3]. The next release of the ECI, in late July 2014, may reflect the stronger compensation plans. We expect this to translate to a gradual increase in the rate of inflation.

Still, any increase in inflation is noteworthy due to the diminished protection offered by high-quality bonds. Subtracting the annualized rate of inflation from the 10-year Treasury yield reveals how high-quality bonds remain expensive. The greater the inflation-adjusted, or real, yield the more attractive bond valuations are and vice versa. The real yield has turned substantially lower in 2014, despite indications of an improvement in economic growth prospects in recent weeks [Figure 4]. Real yields still indicate an expensive bond market and one that is not properly compensating investors for inflation risks even if modest.

We believe inflation is likely to increase only slowly, but current bond yields offer limited protection against rising inflation. Low real yields present an unattractive investment proposition for bond investors, and renewed weakness in the economy is needed to justify current real yields. Inflation is likely to creep toward the Fed’s 2% target over 2014 and into 2015, meaning the Fed is likely on track to raise rates in late 2015/early 2016. The Fed is projecting a median 1.0% and 2.25% fed funds target rate by year-end 2015 and 2016, respectively, but fed fund futures indicate a 0.6% and 1.6% rate for the same time periods—a significant disparity. Fading rate hike expectations indicate pricing could be as good as it gets for high-quality bonds.

How to Avoid the Most Common Required Minimum Distribution (RMD) Mistakes - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, May 22, 2014

(originally written by Barry Glassman)


When you put earned income into a tax-deferred account like an IRA or a 401(k), Uncle Sam eventually wants to collect those taxes. So starting in the year you turn 70 ½, the IRS requires that you take a Required Minimum Distribution (RMD). It’s important to know when and how much to take to avoid hefty penalties. Here are the Top 5 mistakes people make with RMDs and how you can avoid them:

1.       Knowing when to take the first distribution

One of the most confusing RMD requirements and the question most people ask is, “When do I have to start taking my required minimum distributions?” The clock starts the year that you turn 70 ½, but you can delay taking that first distribution until April 1 of the year following the year that you turned 70 ½.

Let’s say you turn 70 ½ on November 5, 2014. For this first distribution, you can elect to either take the RMD by December 31 of 2015, or wait and take it by April 1 of 2016. Keep in mind that if you delay your first RMD distribution to 2016, you’ll have to take two RMDs in that year, one for the delayed initial year, in this case due by April 1, 2016 and one for the prior year, due by December 31, 2016.

2.       Missing a required distribution

The most common mistake people make is to forget to take a required minimum distribution each year. As I mentioned above, with the exception of the first year, RMDs must be taken by December 31 each year. If you fail to take the full required distribution by December 31, the IRS will impose a 50% penalty for the amount not taken on time.

3.       Not calculating your RMD correctly

Many people forget to include all their retirement accounts when calculating their RMDs. These accounts include:

•Profit-sharing plans
•Traditional IRAs, as well as IRA-based accounts such as SEPs, SARSEPs and Simple IRAs
•Traditional and Roth 401(k) and 457(b) plans
•403(b) contracts
Your RMD calculation is based on the December 31 balance in those accounts so you’ll need to have your December account statements handy.

If you have multiple IRAs, you can add those balances together and treat the calculation as one. The same goes for 403(b) contracts.

4.       Taking the distribution from the wrong account

RMDs from multiple IRAs or 403(b) accounts can either be taken from each account, or aggregated and taken from just one account. But keep in mind that you can’t take those distributions from another type of plan, i.e. you can’t take an IRA distribution from a 403(b) account or a 401(k) distribution from an IRA account.

401(k), 457(b) and profit-sharing plans cannot be aggregated. Each RMD must be calculated separately and taken from that account.

5.       Not planning ahead for your RMDs

The world of RMDs is complicated with exceptions and rules for many circumstances from naming beneficiaries, to the treatment of inherited IRAs, and those still employed at 70 ½, not to mention tax planning for RMDs. This list is long and mistakes are all too common, so it’s a good idea to seek advice from your accountant or financial planner before it’s time to take them. For answers to many RMD questions, a great resource to consult is The Slott Report - American’s IRA expert.

Required Minimum Distributions, like death and taxes, are a fact of life for those who deferred taxes on their income. While you can’t escape this requirement, by understanding the details, at least you’ll avoid costly penalties.

Your Financial Checklist For Every Stage of Life - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, May 01, 2014

(originally written by Laura Shin)


A good friend of mine messaged me recently. She was facing the big 4-0, and, as people are wont to do around significant ages, she got to thinking about some big questions.

Because life and money are inextricably linked whether we like it or not, her transition into a new decade also made her wonder how one’s financial priorities should change as the years pass.

Your financial goals should, in fact, shift along with your situation to serve your biggest needs. Some of your concerns will be long-term — for instance, saving for retirement takes place across decades — but that doesn’t make shorter goals, such as saving for a down payment on a home, any less challenging. Knowing what financial milestones to hit when will help you ensure that you don’t have to scramble for any of them.

“Most people when they’re getting into the workforce or out of college don’t look at their overall financial picture. You’ve got to look long term and short term as well. The earlier you look at the short-term milestones, the easier it will be to secure your retirement in your future years, so getting situated in your 20s makes it easier to plan in your 40s, 50s and 60s,” says Andrew Rafal, partner and cofounder of Phoenix-based Strategy Financial Group.

Here’s a cheat sheet on what financial tasks you should take on when. Keeping in mind that people hit different milestones at different times — for instance, some marry and become parents in their 20s and others in their 40s — these money to-dos are tied to life landmarks rather than ages.

New Grad, Entering The Workforce

1. Make a budget.

Know what your income is and learn not to spend more than that. That’s how you’ll start to build your wealth. Here’s a primer on how to create a budget.

2. Track your expenses.

Plenty of online aggregators, such as Mint or EMoney, will hook up to all your financial accounts so you can get an easy snapshot of where your money is going, how your investments are doing and other trends in your finances, like your net worth. That information will help you make smart choices and reach some of the more challenging goals. “Having the visual of your income and expenses is the first step to building that retirement plan,” says Rafal.

3. Pay down your debt.

If you have credit card debt, that is higher priority than your student loan debt. “Most credit card loans debt will be three to five times higher in interest than the student loans, so we’d want to focus on paying those down first, and pay the minimum to student debt,” says Rafal. Once you pay off the cards, then you can pay more than the minimum on your student loans.

4. Start saving for retirement.

If your employer offers a 401(k), 403(b) or similar retirement account and offers a match, do what is required to get it. For instance, if you need to contribute 4% of your salary to get that match, be sure to do so. It’s free money from your employer. If you can afford it, also begin contributing to a Roth IRA. Use this guide to see how you should set up your financial accounts.

5. Designate beneficiaries on your financial accounts.

When you name a beneficiary on an account, you’re designating who should receive the assets in the event of your death. This is a basic financial task you’ll have to return to, as your life changes. For now, you’ll probably want to name your parents or siblings, presuming you’re not married.

6. Start your estate planning.

Get a power of attorney, which designates someone to act on your behalf in business and legal matters should you become incapacitated, and a living will, which outlines in advance what actions you’d like taken regarding your health should you no longer be able to make those decisions yourself. Also, name a health care proxy, which is a power of attorney for your health decisions.

7. Get disability insurance.

If your employer doesn’t offer it and you can afford it, this insurance will provide you an income stream should you become unable to work. “It’s critical, whether you’re in your 20s, 30s, 40s, 50s or 60s,” says Rafal.

Advancing In Your Career

1. When you switch jobs, be sure to negotiate.

The earlier you start earning more, the more you’ll earn over your lifetime, as those increases compound on each other . Learn here how to negotiate your salary.

2. Also, take your retirement money with you.

Especially since people nowadays tend to stay at companies for shorter periods than prior generations, make sure to take your 401(k) or 403(b) money with you when you go. You can either roll it over to your account with your new employer or move it into an IRA you control at a brokerage firm of your choosing.

3. Start working with a fee-based financial planner with an eye on retirement.

Find a planner who will work with you for a couple of hours for a flat fee. He or she can give you a high-level overview of what you should be focusing on money-wise and how you can save for the marathon financial goal of saving for retirement.

“They can show you saving a certain amount every month at a certain rate of return — this is how much you’ll have in the future. In the 20s or 30s, that’s something we don’t really think about the future. We focus on the short-term. But having someone explain that to you and map it out, that’s critical for success,” says Rafal. Find out here the 10 questions you should ask a potential financial advisor.

Getting Married

1. Create (or update) your will, and update your beneficiaries, power of attorney, health care proxy, etc.

Most people will want to update these to name their spouse.

2. Look into getting life insurance and re-evaluate other insurance policies.

Some couples will opt to get life insurance right away and others might wait until they have children. It depends on your situation and predilection. Some couples in which each partner earns roughly the same amount may opt not to, but others in the same situation might buy life insurance simply to lessen the blow of the loss of that income during an already difficult time. “With both [people] earning and the fact that term insurance is cheap, it’s one of those things we hope we never need to utilize, but it’s just part of that asset protection. If somebody does pass away early and you’re grieving, it’s just another piece of covering the what-if scenario,” says Rafal.

Look into getting group term insurance, which will cover you for a period of time, through your employer, or if you feel you need extra coverage, buy your own individual term insurance.
Also, if, through marriage, two health insurance policies become available to you, compare them to see if it makes the most sense for both of you to be on one. Re-evaluate if your disability insurance coverage would be adequate, and add your spouse to your auto insurance coverage.

Buying A Home

1. Buy a house that won’t put too much stress on your assets.

“Don’t overextend,” says Rafal. “Work with an investment advisor and a mortgage broker to make sure when you purchase that home that you’re comfortable with your income and debts.”

2. If you’re married and haven’t bought life insurance yet, look into it now, and update your disability insurance.

Now that you’re taking on a big debt together, it may make sense to get life insurance so that if something happens to one of you, the survivor can still pay the mortgage. Make sure your disability insurance policy would cover the cost of your home.

Having Children

1. Review your estate plan.

Draw up a will if you haven’t yet. “Work with a licensed attorney to make sure not only the assets are protected and but that you’re protecting against incapacity and that if anything does happen, your children will go to the right guardian,” says Rafal.

Establish a trust if you have substantial assets and would want to leave your assets to your children in a way not immediately payable to them upon your death.

2. Start saving for their college education.

Open a 529 account for them, and get in the habit of saving every month with automatic transfers, but if you have to choose, make saving for retirement a higher priority. Your children can always take out student loans, but there are no loans for retirement , and if you save for their college over your retirement, they may end up having to support you later on.

3. Relay financial lessons to your children.

Instill good habits in your children starting from a young age.

Established In Your Career

1. Max out your retirement contributions.

At this time, you’re probably earning the most you’ll earn in your life, so you want to make sure to save as much as you can in both your employer-sponsored retirement account as well as in your own Roth IRA or traditional IRA.

2. Be proactive in your tax planning.

Meet with a licensed CPA to maximize your deductions, since this is also the time when you are likely to be paying the highest taxes. You may also want to set up a Health Savings Account, which will allow you to save on health expenses with pretax money, while also potentially using that money as an investment vehicle.

Also analyze your investment choices according to your tax liabilities. Rafal suggests taking more risk in your after-tax accounts such as a Roth IRA or Roth 401(k) where you won’t pay any tax on the earnings of those investments.

3. If you find yourself taking care of your parents, consider their needs in the context of all your financial priorities.

Home health care and assisted living facilities are expensive and those costs need to be weighed against saving for your own retirement and your children’s college educations. Talk with your siblings to come up with a solution that takes into account all your other needs.

4. Consider your own long-term care plans.

“This is also a good milestone to look at, ‘What can I do, so I’m not a burden on my family?’” says Rafal. Investigate traditional long-term care insurance, which would provide nursing-home care, home-health care or other types of personal care for people over 65 who need supervision.

Because many people find long-term care insurance expensive and they are mostly considering buying it right when they are also facing the financial challenge of retirement (usually in the 50s), many opt not to buy an expensive type of insurance that they are not certain they will use. One new option that helps alleviate those fears of not using the insurance is hybrid policies that offer life insurance with a long-term care option attached. However, they require a large upfront investment and offer meager returns, so they are not for everyone. For many, they are more of an estate-planning tool.

5. Begin planning your retirement income.

“Most people work their lives, they build assets and accumulate but don’t have a plan on the way down,” says Rafal. To turn from this accumulation mindset to the decumulation mindset, talk with your financial planner about how best to turn your savings — your 401(k), IRA, Social Security, pensions, etc. — into income. Consider buying an annuity, in which you use a chunk of your retirement savings to buy yourself a guaranteed source of income for a certain time period.

Learn how the age at which you take Social Security will affect the amount you receive, about required retirement income distributions, how to pull money from different retirement accounts without getting hit with a big tax bill, etc.

This would be a good time to talk to a new type of financial planner called a Retirement Income Certified Professional (RICP), who specializes in helping people turn their retirement assets into income. An RICP can look at important financial factors such as whether you might outlive your nest egg considering inflation and best- and worst-case scenarios when it comes to your investments, health expenses and more.

6. If need be, catch up on retirement contributions.

If you’re behind on building your nest egg, at age 50, you can start contributing higher amounts to your 401(k) (an extra $5,500 annually in 2014) and IRA (an extra $1,000 in 2014).


1. Know your budget.

Even before you retire, know what your income and expenses will be. With your planner, review your plan for turning your assets into steady income in the most tax-efficient way possible. Also discuss when the best time is for you to start taking Social Security. Make sure you’re familiar with the biggest money mistakes retirees make so you can avoid them.

2. Review your investments.

Look at your risk tolerance to maintain the nest egg you built and not suffer a big loss right at the beginning of your retirement.

3. Downsize.

A smaller home could help reduce your property taxes, utilities and other expenses. Moving to a new community could also have social benefits.

4. Look at how to fund potential long-term care costs.

If you didn’t opt to buy a policy before, look at how you could self-fund, sign up for a long-term care or hybrid policy now, or work out a plan with your family.


1. Don’t make any immediate changes.

Work with a trusted advisor to make sure your retirement plan is still on track. If there are life insurance proceeds, invest based on your current goals.

2. Review your estate plan.

“You may have developed an estate plan years ago that hasn’t been updated. Work with an attorney so if you’re incapacitated, loved ones can step in and make both medical and financial decisions for you. Also, make sure the assets can pass to family in way you intended at this point in your life,” says Rafal.

3. Downsize, and consider moving to a full retirement community.

These types of homes have a range of activities and can accommodate independent living as well as offer some assistance and even full-time care.


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RMR Wealth Management, LLC is a SEC-registered investment advisor.
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