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SBJ September 2015 Informed Decisions on Inherited IRAs

SALEM, OREGON                                               SEPTEMBER 2015                                                   VOL. 11, NO. 9

 

Let’s Talk: W. Ray Sagner CFP

 

Informed Decisions on Inherited IRAs

 

While there have been a couple of articles in this column over the years discussing IRAs, there has been brief coverage on Inherited IRAs. As with most articles that appear in this space, the inspiration often comes from seeing folks that have made decisions in the past without proper guidance or enough information. The following paragraphs will lay out options for IRA beneficiaries - whether it’s one you have chosen, or it’s yourself who is the beneficiary.

Spouses have more flexibility than non-spouse beneficiaries when it comes to inherited IRAs. They can roll the IRA into their own and avoid distributions until they reach 70.5 years old. For surviving spouses that are older than 70.5 and their deceased spouse was younger, they can wait until the deceased would have been 70.5 to take distributions. They can also take all the money out within 5 years, provided the deceased was not taking the required minimum distributions required by the tax code.

Let us back up a step and clarify what the required minimum distribution (RMD) means. The year, in which an IRA owner turns 70.5, they are required to take out a minimum amount per year. The formula is simple but must be accurate -- the balance of the account on December 31st divided by life expectancy according to Internal Revenue Service tables. The penalty for neglecting the distribution is 50% of the amount required to be taken.  If you inherit an IRA, make sure that if the owner was 70.5 or older that the RMD was taken in the current year.

A non-spouse beneficiary has four options: Take a total distribution of the account in the year of death; distribute the account over five years or by the fifth year; continue the RMD of the deceased provided they were receiving it at the time of death; or roll the account into an Inherited IRA. When rolling the account over the new account must be titled correctly. When you inherit an IRA, you should retitle the account so it reads like this: "William Smith, Deceased (date of death) IRA F/B/O (for benefit of) James Smith, Beneficiary." Unfortunately, some advisors or institutions make mistakes, so you should read any documents carefully and ask questions if you are unsure of what something means.

The first option is not recommended for most people, for the entire amount will be taxed and included in your taxable income. The second option is similar -- spreading the distribution over five years will depend on your situation and your need to forestall taxes. The third option, which continues the RMD of the deceased, may be a viable option for some depending on age and the balance of the account; however, if the previous owner was along in years, the distributions could be large and few. The fourth option, taking the account over the beneficiary’s life time, is one of the best planning options for most folks.

The best thing about leaving an IRA to the next generation or even skipping a generation is that the account has the potential to continue to grow tax-deferred over the longer life span of the beneficiary. This type of strategy is often referred to as a stretch IRA. Another great benefit of an inherited IRA is that you can have access to the money before age 59.5. Most withdrawals from traditional IRAs before that age carry a 10 percent penalty, but this is not so with an inherited IRA.

As the owner of an IRA, when considering beneficiaries it is generally not a good idea to make your Living Trust the beneficiary unless special consideration is given. A trust has no life expectancy and therefore the account will be distributed and tax will be due.

An inherited IRA is centered at the three-way intersection of estate planning, financial planning and tax planning. With do-overs granted exclusively by Internal Revenue Service, one wrong decision can lead to expensive consequences. As with most financial issues, it is important to seek the advice of a Financial Planner before acting upon important decisions.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagneris a Certified Financial Plannerä  professional with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

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SBJ August 2015 Don't Let Fear Keep You on the Sidelines

SALEM, OREGON                                               AUGUST 2015                                                   VOL. 11, NO. 8

 

Let’s Talk: W. Ray Sagner CFP

 

Don't Let Fear Keep You on the Sidelines
 

Last month in this column we discussed some strategies that contribute to successful investing. For the most part the article was about paying attention and exercising discipline while making investment decisions, it was all very rational however it can come all come undone by one emotion very strong emotion, fear.Fear is a powerful emotion and market losses can be fear inducing. But history shows that emotion is a poor compass for charting your investment course.

While the U.S. stock market, as represented by the S&P 500 Index, has risen a stunning 205.66% as of March 31, 2015, since its low on March 9, 2009, some investors are still reluctant to participate after the near market collapse that accompanied the 2007-2008 financial crisis.1

Fleeing the market certainly may have felt like the right thing to do at the height of the financial crisis. But history shows that making investment decisions based on emotion has never proven successful. For instance, greed may have led an investor to own too many technology stocks when the bubble burst on that industry in 2000. Alternatively, fear may have caused investors to cash out of stocks following the crash of 1987 and miss some or all of the subsequent rebound.

Fast forward to 2015, and the reality is that investors who missed the extraordinary rally that has occurred since March 2009 may have helped to put their long-term accumulation goals at risk. This is especially true for investors with shorter time horizons, such as those approaching retirement. Consider this: From 2010 through 2014, U.S. stocks recorded an average annualized return of 15.5%, compared to 0.1% for money market securities.2 The nearly nonexistent returns associated with cash-like investments could have a powerful impact on investors' purchasing power over time.

Maintain Balance to Manage Risk

One of the key determinants to investment success over the long term is having a disciplined approach to balancing short-term risk (stock price volatility) with long-term risk (loss of purchasing power). Finding a "middle ground" in your investment philosophy -- and portfolio makeup -- may go far toward helping investors manage overall risk and realize their investment goals.

For instance, history supports the case of stocks, as they have tended to outperform other asset classes as well as inflation over long periods of time.3 But investors who are too focused on the long term may over-allocate their portfolios to stocks -- and over-expose themselves to short-term volatility risk. Alternatively, investors who are extremely averse to short-term risk may do the opposite and face heightened long-term risk.

Easy Does It

How might this balanced approach to risk be used to get investors back in the market? One of the best ways to take emotion out of investing is to create a plan and stick with it. And one of the best ways to do that is through a systematic investment plan called dollar cost averaging (DCA).3 Dollar cost averaging is a process that allows investors to slowly feed set amounts of money into the market at regular intervals.

Although DCA does not assure a profit or protect against a loss in declining markets, it can help achieve some important objectives. First, it gives investors a measure of control while eliminating much of the guesswork -- and emotion -- associated with investing. Second, DCA can help investors take advantage of the market's short-term price fluctuations in a systematic way -- by automatically buying more shares when prices drop and fewer when prices rise.

It is important to remember that periods of falling prices are a natural part of investing in the stock market. But by maintaining a long-term focus and following a balanced approach to managing investment risk, you may better position yourself to meet your financial goals. A qualified financial professional can help you identify which strategies may be best for your situation.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Plannerä  professional with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. .You may view the Company’s web site at WWW.TheLegacyGroup.com.

Source/Disclaimer:

1Wealth Management Systems Inc. Stocks are represented by the daily closing price of Standard & Poor's Composite Index of 500 Stocks (the S&P 500), an unmanaged index that is generally considered representative of the U.S. stock market. The percentage increase represents the gain through March 31, 2015. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

2Wealth Management Systems Inc. For the five years ended December 31, 2014. U.S. stocks are represented by the S&P 500 Index. Money market securities are represented by Barclay's 3-Month Treasury Bill rate. Example does not include commissions or taxes. Past performance is no guarantee of future results.

3Dollar cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares through periods of high and low prices. This plan does not assure a profit and does not protect against loss in any markets.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible

 

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SBJ July 2015 Strategies That Contribute to Successful Investing

SALEM, OREGON                                               JULY 2015                                                   VOL. 11, NO. 7

 

Let’s Talk: W. Ray Sagner CFP

 

Strategies That Contribute to Successful Investing

In it for the long run

Investing is not a sprint, it’s a marathon. In a volatile market, investors can exhaust themselves chasing after the “latest and greatest” investment tip. But trying to take advantage of a short-term trend to support a long-term strategy is like starting a marathon at full speed. So rather than expending all of your energy right out of the gate, consider these actions to keep your portfolio in good financial health:

• Focus on yourself: You have no control over the future of the economy or the financial
markets. The only thing you can control is your commitment to a disciplined approach to
investing.

• Fuel for peak performance: Just like your body requires plenty of water and
the right food to function properly during a marathon, your portfolio should be regularly rebalanced to ensure your original asset allocation is aligned with your goals. Uncontrollable swings in the market make portfolio rebalancing more important than ever in an effort to keep moving ever closer toward your goals.

• Keep pace with change: Changes will happen in your life—whether planned or unplanned—and more likely than not, they’ll impact your investment goals. That’s why it’s important to revisit your financial goals regularly and make necessary updates to reflect those changes. While it’s easy to look backwards at historical market performance, it’s not easy to predict what will happen next, so you may find yourself selling when you should be buying, and vice versa. For example, let’s take a look at the performance of all of the funds in the Morningstar Large Cap Value category for two consecutive five-year periods—2004 through 2008 and then 2009 through 2013. Of the funds that ranked in the top 25% of the group in the first period, more than 50% dropped to the bottom—or completely out of existence. Ranking managers by their five-year returns provides little insight into future performance. And 22% of top quartile managers from 2004 to 2008 are no longer included within the Morningstar U.S. Large Blend Category. The bottom line is that when it comes to stellar past performance credited to “highly rated” funds, it’s important to remember that yesterday’s top performer may be tomorrow’s underachiever.

• All in good time: If you’re like most investors, you started your financial plan with the intent of achieving any number of goals. Some were short-term, like buying a house, while others had longer time horizons, such as enjoying a comfortable retirement, sending your kids to college, or buying a second home. Over the years, you’ve probably invested in stocks and bonds in an effort to steadily build and preserve your wealth over the decades to come. Your long-term strategy did not include trying to jump in and out of the market based on its short-term performance. Brief, explosive spurts of market volatility (both positive and negative) are the norm, but an impulsive investor who abandons the market during one or more of its sharp downturns, may miss the strong, ensuing rebounds.

Understand the risks
While many investors worry about market risk, company risk, interest rate risk, inflation risk or credit risk, what it all really boils down to is the risk of losing money. For most, losing money evokes a powerful, visceral reaction—so much so, that some investors turn to market timing or the buying and selling of a security based on future predictions or last year’s winner; however, choosing when to invest is extremely difficult, as those who are tempted to try and time the market may run the risk of missing periods of exceptional returns. While market movement is difficult to predict, there are a number of potential catalysts that could point to a more positive direction, and missing that move could be costly.

While it is reasonable to be critical of statistics over a specific time period, it can still be constructive. Using the S&P 500 as a proxy for the domestic equity market, let’s look at a 20-year investment period between 1994 through 2013. From this, we can see that:

• If an investor missed just the 10 best days, almost 40% of the gains would be lost.

• If they missed the 20 best days, about two-thirds of the gains are gone.

• Missing 40 best days resulted in a loss. If market volatility isn’t managed properly, market timing can seriously impact long-term performance. On the other hand, volatility provides investors the opportunity to buy stocks and mutual funds at attractive prices. Never underestimate the value of timing.

Nobody starts a marathon expecting it to be easy. No matter how hard you train and how many injuries you may sustain, it’s important to pick yourself up and keep going. It’s the same with investing—over long periods of time, the financial markets can be remarkably steady, but in the short run, sharp spikes in securities prices can be the norm. This volatility suggests the market can’t seem to make up its mind, which triggers a potentially difficult journey for investors. Many may be tempted to pull out and wait for the market to regain its footing, but moving assets from your current portfolio to what you think is a more stable investment may be a mistake. Amid uncertainty, keep your cool and avoid making potentially costly decisions based on a knee-jerk reaction. It’s important to remember to take a longer-term view when pursuing your financial goals.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Plannerä  professional with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. .You may view the Company’s web site at WWW.TheLegacyGroup.com.

 

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SBJ June 2015 Interest Rates and Your Portfolio

SALEM, OREGON                                               JUNE 2015                                                   VOL. 11, NO. 6

 

Let’s Talk: W. Ray Sagner CFP

Interest Rates and Your Portfolio
 

In this month’s column, we will explore how rising or falling interest rates could affect your investment strategies. First, however, let’s have a little primer on the Federal Reserve.

The central bank of the United States, or the Fed, as it is commonly called, regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, D.C. (the Board of Governors) and 12 regional Federal Reserve Banks in major cities throughout the United States. You can divide the Federal Reserve's duties into four general areas:

1. Conducting monetary policy –buying and selling government securities and setting the federal funds rate.
2. Regulating banking institutions and protecting the credit rights of consumers.
3. Maintaining the stability of the financial system.
4. Providing financial services to the U.S. government.

The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. The federal funds rate is generally only applicable to the most creditworthy institutions when they borrow and lend overnight funds to each other. The federal funds rate is one of the most influential interest rates in the U.S. economy, since it affects monetary and financial conditions, which in turn have a bearing on key aspects of the broad economy including employment, growth and inflation. The Federal Open Market Committee (FOMC), which is the Federal Reserve’s primary monetary policymaking body, telegraphs its desired target for the federal funds rate through open market operations. This is also known as the “fed funds rate.”

The higher the federal funds rate, the more expensive it is to borrow money. Since it is only applicable to very creditworthy institutions for extremely short-term (overnight) loans, the federal funds rate can be viewed as the base rate that determines the level of all other interest rates in the U.S. economy and is currently at historic lows.

The federal funds rate has varied significantly over time. It's a cycle of ups and downs that can affect your personal finances, like what rate you pay for a loan or the interest earned on your bank accounts. Interest rate changes also have an effect on your investments and understanding the relationship between bonds, stocks, and interest rates could help you better cope with inevitable changes in our economy and your portfolio.

Interest rates often fall in a weak economy and rise as it strengthens. As the economy improves, companies experience higher costs (wages and materials) and they usually borrow money to grow. That's where bond yields and prices enter the equation.

Yield is a measure of a bond's return based on the price the investor paid for it and the interest the bond will pay. Falling interest rates usually result in declining yields. As rates decline, businesses and governments "call" or redeem the existing bonds they've issued that carry higher interest rates, replacing them with new, lower-yielding bonds.

Interest rate changes affect bond prices in the opposite way. Declining interest rates usually result in rising bond prices and vice versa, one goes up and the other goes down. This opposing relationship is simply described by an investor’s desire for increased cash flow. When interest rates rise, investors buy new bonds for the higher yields. Therefore, owners of existing bonds reduce prices in an attempt to attract buyers.

Investors who hold on to bonds until maturity aren't concerned with this seesaw relationship, but bond fund investors may see its effects over time.

Interest rate changes can also affect stocks. For instance, in the short term, the stock market often declines in the midst of rising interest rates because companies must pay more to borrow money for expansion and capital improvements. Increasing rates often impact small companies more than large, well-established firms. That's because they usually have less cash, shorter track records, and other limited resources that put them at higher risk. On the other hand, a drop in interest rates may result in higher stock prices if corporate profits increase.

In addition, some stocks increase in value even as interest rates rise, in part because industry or company-specific factors -- such as the development of a new product -- can impact stock prices more than rate changes.

All that said, the market also has its ups and downs due to other factors, as well. Fear and greed lead investors to make poor decisions based on the unknown. People tend to sell when they don’t know what to expect with a change in interest rates or that Ebola is going to sweep the country.

So what’s an investor to do when faced with interest rate uncertainty?  While you have no control over changing interest rates, you can assemble a portfolio that can potentially ride out the inevitable ups and downs. Risk reduction begins with diversifying your investments in as many ways as possible.

As for equities or stocks, investing across different business sectors is a start, because no one knows which of today's industries will fuel the next expansion. Keep in mind that some sectors such as energy are more economically sensitive than others, which can lead to increased volatility. Additionally, consider stocks or stock mutual funds that invest in different market caps, small and large companies, and have different investing styles, such as both value and growth investing.

As for fixed-income investments, review your bond funds holdings, for different maturities -- short- and long-term -- and types, such as government and corporate. Different types of bonds react in their own way to interest rate changes. Long-term bonds, for instance, are more sensitive to rate changes than short-term bonds. Still the bottom line is that most bond mutual funds will lose some value as rates begin to climb. That said, there is plenty of time to make changes, as the Fed is not raising interest rates anytime soon. The U.S. economy is still a bit fragile and the rest of the world is a bit behind.

Interest rates will always fluctuate in response to economic conditions. Rather than trying to guess the Federal Reserve's next move, concentrate on creating a portfolio that will serve your needs no matter which way rates go. And remember: portfolio allocation and diversification is key to portfolio success.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Plannerä  professional with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. .You may view the Company’s web site at WWW.TheLegacyGroup.com.


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SBJ May 2015 The Cost of Doing Business

SALEM, OREGON                                               MAY 2015                                                   VOL. 11, NO. 5

 

Let’s Talk: W. Ray Sagner CFP

 

The Cost of Doing Business

 

For a business owner reading the Guest Opinion in the Statesman Journal on May 16th, one may be surprised to see that Oregon’s economy is not only fine, but it outshines most states by many measures. While the statistics were verifiable they do not tell the whole story about the growth of Oregon businesses, especially the small businesses. If the argument goes that the State as a whole is doing well then we should raise wages; the questions should be are those businesses that will be bearing the burden of higher wages the ones that are doing so well?  True, this State appears to be doing well. We have grown at a greater pace than most others, but it just doesn’t feel that way. Perhaps it’s because only certain sectors of the economy are doing well.

Consider this: according to State Economic Competitiveness Index last year, durable goods manufacturing was responsible for roughly three-quarters of Oregon's GDP rise. Overall, manufacturing made up nearly 28% of Oregon's output in 2012, while one-fourth of the state's output was due to durable goods manufacturing, much of which was in computers and electronics components, often produced by Intel Corp. Thank you Intel! On a sour note,now that Hanjin has pulled out of The Port of Portland, the cost of doing business in Oregon is going up. Remember, 40% of our agricultural products are shipped overseas.

For an employer to read that Oregon’s friendliness towards business is a non-issue is missing a key component of our economy. A business owner’s perspective is a major issue. Business owners take on the risk and investment and put in the long hours to succeed at a dream few citizens are willing to, while providing the jobs and opportunities that support us. According to the State Entrepreneurship Index, Oregon ranked very high in business startups; however, in the same report, income per proprietor was ranked in the bottom third. Maybe it is true that it is easier to start a business here than to keep it going.

With that said, taxes do matter to those that pay them and while Oregon’s is in the middle of the pack, there are more ways to make businesses pay than an income tax. Measure 67, which included S-Corporations where all profits are taxed at the owner’s tax bracket, taxes gross income whether there is a profit or not. So what used to be a $10 fee for filing an informational return is now a tax of several hundred dollars for the privilege of doing business, and in this state the list of fees in lieu of a straight forward tax rate is long. We have one of the highest unemployment taxes in the country.  A single shareholder of an S-Corp pays employment tax on themselves, even though they can never apply for it.

Folks can debate the fairness of a tax into perpetuity, but what gets under the skin of the fiscally conservative is the unapologetic waste in funds. When we are privy to state audits, the news is usually depressing: $60 million on DMV computers, $300 million for a disastrous health insurance program, a one million dollar tax refund, the use and abuse of the Oregon Trail card, and on and on. Any of these events would hold someone accountable in the private sector, and in many cases, put you out of business.

This country has just come out of one of the longest recessions in history and there are many businesses that did not make it. However, since the State is doing well by macro-economic statistics, there are those who believe this is the time to increase the minimum wage by 50%. While it feels good to want all of our fellow citizens to have more, who is it we are really helping and at what expense? While it is important for families to earn a wage they can live on, something this business owner totally agrees with, what does living wage mean and how many folks earning minimum wage are supporting a family? Oregon is one of 29 States that have a minimum above the Federal level. There are few numbers for Oregon, however, the Bureau of Labor Statistics does keep track. Here are a few of their numbers: 2.4% of total US workers earned at or below the Federal minimum wage, below the wage may be accounted for by those also receiving tips and commissions; .08% is the share of full-time workers earning at or below the minimum( 35 hours is now considered full time); 50.4% of minimum wage workers are 16 to 24 years old and while almost a third of all minimum wage workers have never married, less than that are married living with a spouse  and almost 47% are in hospitality and food prep. There are many more figures and ways to look at them but the point is when one suggests that we need to help working families, is raising the minimum wage which is paid to a few the best answer?

History is replete with good ideas that have unforeseen, and often not considered, consequences that are damaging. The local Union President recently said something to the affect that the Union supported the raise not because they had a vested interest but because it would raise their base. A raise for a small percentage of workers will not only increase their pay but everyone around them. When a restaurant employee’s wage goes up, so does that of the folks processing the food, loading the truck and delivering the food to the restaurant. Food cost will go up with wages. An employer pays taxes for employees on a percentage of wages, Social Security, Medicare, unemployment, and workers comp. Nothing happens in isolation.

The consequences of raising the minimum wage will not affect this business or its employees significantly; however, it may affect whether we buy our turkey sandwich at Big Town Hero or bring it from home.

The problems of government and the plights of our fellow citizens are more complicated than one solution that places the burden on small business owners by raising the wages of a small percentage of our workforce that will have far reaching affects.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Plannerä  professional with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

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SBJ April 2015 Countdown to Retirement

SALEM, OREGON                                               APRIL 2015                                                   VOL. 11, NO. 4

 

Let’s Talk: W. Ray Sagner CFP

 

Countdown to Retirement

 

Ideally, one should plan well ahead of their chosen retirement date so that everything they plan for would simply fall into place when the day comes; however, there are a few items to consider before you get close to pulling the plug on work and begin full or even semi-retirement. In this article, we will review some of the things that need to be given careful thought when getting ready to leave an employer and then what to look for if you roll over your employer retirement plan to your IRA.

When you plan to leave your job, an obvious question to ask yourself is what to do with your retirement plan? In most cases, the best answer is to roll those benefits over to an IRA. Compared to most employer plans, public or private, the IRA offers wider investment choices, more control, and better options for beneficiaries than those in a qualified plan; however, if you are a PERs Tier One or Two employee and an advisor suggests you roll the pension into an IRA, be extremely cautious. Within a span of 25 years, this office has only seen a couple of instances where it made sense to take the lump sum option. Even though a rollover may be best option, there are still some issues that need to be addressed.

While most employer retirement plans are plain and straightforward, the plan should be reviewed for any special options. If there is employer stock in the plan, then you are eligible for a special tax treatment on the "net unrealized appreciation" (NUA) in that stock. It's possible to pay no current tax on the benefits while segregating the untaxed NUA outside the plan for later long-term capital gain treatment on sale.

Another option in some plans is subsidized annuities. The plan may offer the employee an annuity deal they cannot replace for the same price outside the plan. It is very important to review the plan document with your financial advisor prior to making any decisions that can’t be undone.

If you are leaving employment between the ages of 55 and 59 1/2, there may be an advantage to leaving the money, or at least a portion of it, in the employer plan until you reach 59 1/2: during that interim you can withdraw funds penalty-free from the employer plan, however unless the withdrawal is under the "early retirement" exception, it will include a 10% penalty on the "premature distribution” from an IRA.

While employer ROTH 401(k) plan options are not widely used by employers, be cautious if you have one and plan on moving it. If you are under 59 1/2 and have money in a "designated Roth account" in the 401(k) plan, the money must be settled in the Roth plan for five years (and the you must be over 59 1/2 or disabled) before you can become eligible for a tax-free qualified distribution.

Do you have after-tax contributions in the employer plan? If so, this is a great opportunity to have that portion rolled directly into a ROTH IRA, while the pre-tax contributions are rolled over directly to a Traditional IRA. The only reason NOT to take advantage of this is if you need the cash immediately, in which case new IRS rules allow you to have the after-tax money paid to you directly (tax-free of course), while sending the pre-tax money via direct rollover to a Traditional IRA. Think about this for a moment: if you are a few years away from retirement and can afford after-tax contributions, you could plan to roll them into a ROTH in future years, while taking advantage of the tax deferred growth now.

What if you have life insurance in your employer’s plan? A life insurance policy normally must be removed from the plan when you retire. This event is called the "rollout," leaving you with three options. First, you can take the policy out of the plan as a distribution. Its fair market value (minus any "basis" or "investment in the contract") will be treated as a taxable distribution to you. Second, the plan can surrender the policy to the insurance company so that your account gets its cash value, which can then be rolled to an IRA. Of course, this does mean that you lose your life insurance coverage. The final option is for you to buy the policy from the plan, which requires you to come up with enough cash to pay the plan for the policy. Complications and special rules apply to each alternative, so a deeper review is required for your specific approach than what we have space for here.

As a final piece of advice, to do a direct rollover, unless you already have an IRA, set up a new account FIRST before requesting a distribution from the plan. Typically, you will receive the plan's check, even though the check is payable to the IRA custodian or trustee. You then have the responsibility to get the check to your advisor to complete the direct rollover.

Lastly, it is strongly advised that you get professional help to complete the rollover. The HR person in your company or government department is not a trained financial advisor; financial planners can relay lots of “bad advice stories” from clients relying on what they were told at work. A financial planner should really oversee the process and make sure it is done correctly and if mistakes are made, you have some recourse. Even at that, keeping the above information in mind ask questions and be actively involved. It is your money and your future we are talking about.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagneris a Certified Financial Plannerä  professional with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

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SBJ February 2015 Diversity is the Key to Stability

SALEM, OREGON                                               FEBRUARY 2015                                                   VOL. 11, NO. 2

 

Let’s Talk: W. Ray Sagner CFP

 

Diversity is the Key to Stability

 

The articles in this column are usually a result of a current event or something we have been seeing a lot of in this office. Recently, we have been reviewing investment statements of potential clients referred to us from other professionals or current clients. The folks we see usually find their way here because they have been managing things on their own or are not entirely comfortable with their current financial advisor and often have never worked with a Certified Financial Planner. What we are finding is that contrary to the research and the pervasive amount of information on basic investing, there still seems to be a disconnect between what should be and what is when it comes to investment portfolios.

When an astute Financial Planner reviews an investment statement, he should be asking himself, “Are these investments congruent with the stated goals and risk tolerance of the client?” The overwhelming answer we get is no. Most portfolios are a collection of stocks, mutual funds, a bond or two, maybe even an annuity and rarely are the investments working together toward some goal. Rather than lament over poorly-designed portfolios in the rest of this article, we will cover a couple of fundamentals to keep in mind when looking at your investments.

There are a few steps to building and maintaining a portfolio to achieve an investor’s goals and for our purposes, we will review three: asset allocation, diversification and rebalancing. While the terms asset allocation and diversification are sometimes used interchangeably, we will describe asset allocation as choosing different asset classes, i.e. stocks, bonds, and commodities; whereas, diversification is the broadening within the asset classes.

First, let’s start with a more formal explanation. Asset allocation blends uncorrelated assets in a portfolio in an effort to reduce risk without changing return expectations. The concept has been around for a long time, but gained prominence in 1986 with the publication of “Determinants of Portfolio Performance.” The authors, Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, found that asset allocation was responsible for 93.6% of the variance between portfolio returns. Security selection and market timing were seen as playing only minor roles. After the study was published, it was widely misquoted to have stated that 93.6% of a portfolio’s returns were due to asset allocation, making active management appear undesirable. Some also criticized the model for its reliance on historic relationships to extrapolate potential future outcomes. In a 2010 study, Roger Ibbotson further examined the impact of asset allocation. His study showed that 75% of a typical mutual fund’s variation comes from general market movement — as a rising tide lifts all boats — with the remaining 25% split evenly between asset allocation and active management. Both studies demonstrate the importance of being in the financial markets and the critical role of asset allocation in determining a portfolio’s risk and potential returns.

A diversification strategy blends “uncorrelated” asset classes — those that move up and down at different times — in a portfolio to help prevent significant losses while not limiting potential gain. With a diversified portfolio, you have the potential of a better risk-adjusted return. Risk can be described in statistical terms as a range of returns, our point being to narrow the range without sacrificing too much of our potential gain.

Uncorrelated assets are essential to getting the full potential benefits of diversification. However, correlations have increased over the years. Stocks and bonds are more correlated than they once were. Emerging markets equities, high-yield bonds, and real estate investment trusts (REITs) often move together. This is why the investment industry continues to create new asset classes that are, in theory, less correlated. Examples include mortgage-backed securities, asset-backed securities, managed futures, alternative investments, private equity, hedge funds, and exchange-traded funds. Some even newer examples include climate bonds, home rental asset-backed securities, and biofuels funds. All these securities may have investment potential in their own right and may enhance diversification.

Whether you manage your own investments or have a Financial Advisor, you are ultimately responsible for knowing what is going on with your investments and why. Start by determining your tolerance for risk - if you work with an advisor you should have taken a questionnaire to determine what it is and to guide the investment process. If you are on your own, you should be able to find a risk tolerance questionnaire online. Looking at life-style or a something like Fidelity’s Freedom Funds will give you an idea of what a diversified portfolio looks like. Next, pick your investments - for most folks, we would recommend using funds or investment managers. While you allocate between stocks, fixed income, and commodities, diversifying would be including more than a large Cap mutual fund for your stock portion. It means choosing growth and value funds, large and small funds, and international and emerging markets.  Precious metals are a commodity; however it may be wise to look a bit broader into other metals that are used in manufacturing and a host of other goods.

Finally, at least once a year, rebalance. Rebalancing is very important to the long term health of your portfolio. If you took a risk tolerance test and then based on your goals and time horizon determined that a mix of 50% stocks, 40% fixed income and 10% commodities was the right mix, the numbers will change over time. If stocks have a really good year they may end up more than 50% of the mix and in that case you sell some of the stock funds and buy fixed income and commodities.

A diversification plan may add value to your portfolio. When your portfolio is broadly diversified, stronger performing asset classes can potentially offset weaker performing asset classes, helping to minimize portfolio volatility. Furthermore, as economic and market conditions change, uncorrelated, temporarily out-of-favor investments may become your portfolio’s top performers. Of course, diversification does not eliminate all risk. Just as a rising tide lifts all boats, a falling tide may negatively affect securities across entire markets. In other words, diversification works over time, not all the time. All this underscores the importance of taking a big-picture approach to your investment plan. A well-diversified portfolio should be based on short-term and long-term financial goals, tolerance for risk, and individual tax and income circumstances. And the point is to be able to answer the question, “Are these investments congruent with my stated goals and risk tolerance?”

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagneris a Certified Financial Plannerä  professional with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

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SBJ January 2015 Take the Wheel

SALEM, OREGON                                               JANUARY 2015                                                   VOL. 11, NO. 1

 

Let’s Talk: W. Ray Sagner CFP

 

Take the Wheel

 

It is that time of the year again when many people decide that this is the year to start (____) fill in the blank. Whatever resolution that the majority of people fill in the blank with may last a couple of months or just remain a nice idea. There is no magic incantation or pill to take to make positive changes in our lives. The things we want to take on to make those changes may be small or large and over whelming, the trick is to do the little things and break down the big things into smaller bits and get started.

A reader may wonder what any of this has to do with financial planning; well getting ones financial life in order is similar to any other life improving quest we need to get started. Like New Year resolutions most people may have given a little thought to estate planning and their finances and just didn’t follow through. When it is reported that there are indications that droves of people are saving for retirement, seeing estate planning attorneys and so on this writer will gladly abandon this theme. However as it stands the majority of folks have done little more than name a beneficiary on their retirement plan or life insurance policy and have probably not reviewed those in some time. That is not to say that most people don’t care, but perhaps the details have grown and escaped us over the years. This article is meant to help you get an idea about where to start taking control of your financial life.

I have written before that “one of the strongest tonics for easing your mind is having ‘things in order.” Upon reflection and experience, it is not true that everyone feels better when their financial lives are organized, or when the garage is finally cleaned up. While the a cluttered garage or messy house may not be that important, having your financial documents and information in a form that you can readily access will give you a clearer picture of what you’re dealing with, thereby making your financial decisions easier. Also, having your financial information in one place will aid those who will take care of your affairs when you are not able to. I am fully aware of how difficult it is for us to think about not being able to take care of ourselves or to think about our demise; it is, however, a reality and should be planned for.    

In this first article of 2015, we will cover strategies for getting financial documents and other personal information in an orderly format. We will also discuss the benefits of a letter of intent for those of you who may need to use the information that you have gathered. Don’t just think about it -- ten good intentions do not equal one good deed. At some point we must act, so why not now?

Step one: for your convenience, you should have a file folder or folders for your monthly bills and statements, as well as folders or binders for such documents as your insurance policies, investment statements, current year tax information, etc. If you don’t have a desk or file cabinet, you can get a milk crate or the like at an office supply store and create your own file.

Step two: make a list of all your personal information: the professionals you deal with, and all of your account details.  Keep in mind that the data listed on this sheet of paper or thumb drive will provide easy access to the information -- for you, and/or for the person who may have to deal with your financial affairs for you. This paper should be kept in a safe place. Begin with the date the document was completed and include such personal information as your full name, SS number, date of birth, and drivers’ license number. If you can navigate Microsoft Excel, you can create headings across the top for the institution, the type of account, the account number, how the account is titled, a contact person and that person’s phone number. You should also include any passwords for online access. Include in the list all of your single, joint, and business accounts, and indicate both assets (i.e. checking, savings, and investment accounts) and liabilities (i.e. credit cards and mortgages). It may be helpful, as well, to create a separate sheet which lists your beneficiaries for your various accounts.

If you would like an example, email me ( This email address is being protected from spambots. You need JavaScript enabled to view it. ) and I will send you a template that can help you get started. You may then want to encourage your parents and children to complete a similar form. Once the form is completed, make a copy and give it to whomever you have designated as the executor of your estate. You may want to have them keep it in a sealed envelope until they need it and let them know that you may be updating it periodically and exchanging envelopes. Compiling all of this information may seem like a time-consuming task at first, but it is an important step in simplifying your future, and it is time well spent. And really, it doesn’t have to be done in one sitting.

Now, let us go a step further to address the issue of considering those who you leave behind when you pass. I know death is something most of us choose to ignore, but it is one thing we know that is certain. I encourage clients to write a letter of intent to those who may be managing their affairs in the event of their deaths. A letter of intent spells out the specifics concerning the “who, what, where, why, and how” of financial documents, of special disposition of assets, and of desired funeral arrangements the client might have. The point is to not leave your loved ones confused, hurt or burdened. And if you engage an Estate Planning Attorney the letter of intent should be included in the documents.

As one who has gone through this process, I know it can be uncomfortable and I understand why people are reluctant, but it is a valuable process. Not only does it help you clarify what you value, but it also shows that you value those that must act on your behalf or those you leave behind. If you have had to care for or lost a loved one, you know what chaos the experience can be -- especially if you must dig up documents and attempt to infer what they would like you to do concerning their assets and liabilities. I know there are those who say, “Hey, I will be gone -- what do I care?” We wouldn’t do that to our people, would we?

Now, to end on a more pleasant note, getting organized may be a bother, but being organized is as comforting as a deep breath on that first nice day of spring. Once you’ve done it, all you have to do is update once in a while.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Plannerä  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

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SBJ December 2014 Year-End Retirement Planning

SALEM, OREGON                                               DECEMBER 2014                                                   VOL. 10, NO. 12

 

Let’s Talk: W. Ray Sagner CFP

 

Year-End Retirement Planning

 

With 2014 coming to an end, it's time to review those year-end retirement plan deadlines. In the following paragraphs, we will review the steps you can or must take by Dec. 31st to maintain or augment your retirement savings. Keep in mind that these are summaries of what can be complex tax rules and that you should consult your advisor prior to taking any steps that may not be reversible.

If you turned age 70 ½ before 2014, or hold an inherited retirement plan: the deadline for taking the 2014 required minimum distribution from your plan is Dec. 31, 2014. This applies to every traditional IRA owner who reached age 70 ½ in 2013 or earlier, every qualified plan participant who turned age 70 ½ and retired prior to 2014, and every beneficiary who holds an inherited IRA (Roth or Traditional) or other inherited plan. Check with your Advisor and make sure you take the full required distribution before the end of the year. If you don’t take the required amount the penalty can be a hefty 50% of the amount required to be taken.

If you turn age 70 ½ in 2014 and you own an IRA, you also have a required minimum distribution due for the year 2014, but you have a choice. This first year's distribution can be postponed until as late as April 1, 2015. Your decision to take (in 2014) or postpone (until 2015) your first required distribution becomes irrevocable once we ring in the new year so you should really make a decision by mid-December.

During the past several years, IRA owners and beneficiaries that are age 70 ½ or older could make a "qualified charitable distribution" (QCD), a transfer directly from your IRA to a public operating charity. Such transfers could be applied to satisfy the minimum distribution requirement but are not includible in gross income.

Unfortunately, as of this date, QCDs have not been extended past 2013 by the current congress. You’re not really surprised are you? That said at least four times in the past decade Congress has, late in a taxable year, reauthorized QCDs retroactively to the beginning of the year. No one knows if that will happen again in 2014, however as popular as the scheme has been in the past most observers agree that the law will be extended again. If you qualify and the strategy fits your intentions you have three choices right now:

1. Hold off on taking your 2014 required distribution until the very last minute to see whether Congress will reauthorize QCDs. If they don't, you'll take your required distribution in the usual way on Dec. 31, 2014 (keeping in mind that your advisor may need a few days lead time to make the deadline; or

2. Don't wait for Congress to act. Simply take your required distribution now in the usual way and forget about a QCD for 2014; or

3. Transfer your 2014 required distribution amount, now, directly to your chosen qualifying charity. If Congress does later reauthorize QCDs, they will almost certainly do so retroactively, as they have done in the past, and you will have satisfied your required distribution in a tax-advantaged way. If QCDs are not reauthorized for 2014, you will have a taxable distribution and an itemized charitable contribution deduction--exactly as if you took the required distribution in cash and donated it to charity.

Small business owners and those that are self-employed and do not have a qualified retirement plan must adopt one by the end of the year if they want to make a contribution to the plan for 2014. A qualified plan (such as a 401(k), "Keogh," profit-sharing, or pension plan) can be funded after the calendar-year end but only if it has been "adopted" (signed by the employer and plan trustee and administrator) before year-end. IRAs and SEP IRAs can be adopted and receive 2014 contributions any time up to April 15, 2015, but SIMPLE IRAs needed to be adopted by October of the current year. If you want to shelter the maximum amount of 2014 business income possible, work with your advisor to adopt a plan before year-end.

Multiple individual beneficiaries of a 2013 decedent have until Dec. 31, 2014 to divide up their inherited IRA into multiple inherited IRAs, one payable to each beneficiary. If the beneficiaries miss the Dec. 31st deadline, then the "applicable distribution period" (ADP) for the inherited IRA will be the life expectancy of the oldest beneficiary. If the beneficiaries "establish" their separate accounts by the Dec. 31st deadline, then the ADP for each beneficiary's separate inherited IRA will be his or her own life expectancy. This is one that people tend to make the most mistakes on, so check with your financial planner and CPA before make any moves.

If you are considering converting a Traditional IRA to a Roth IRA, the deadline for a 2014 Roth conversion is Dec. 31, 2014. As a reminder, the IRA is usually a tax deductible contribution and when distributions are made from the account they are added to taxable income. Contributions to a Roth IRA are not deducted from your income, however they are not taxed if distributions are taken after 59½ and there is no Required Distribution at 70½ as there is for a Traditional IRA.

There are a myriad of reasons for making a Roth conversion and it is something that you should bring up to your Financial Planner during your review meeting. If you decide that there may be a compelling reason(s) to implement the strategy, review it with your CPA first.

What if the reason(s) to make a conversion turns out to be less compelling with a little hindsight? The 2014 conversion of a traditional plan or IRA to a Roth IRA can be re-characterized or it can be partially re-characterized (undone, reversed) any time up until Oct. 25, 2015.

The year-end conversion of a Traditional IRA to a Roth IRA is a very low-risk strategy, but if the conversion is not done prior to year-end, it's too late. Don't wait until early 2015, when you assemble your 2014 income tax return, to review the things that may impact your taxes in the coming year. As with the rest of your financial life planning, this means planning ahead.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagneris a Certified Financial Planner professional with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

 

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SBJ November 2014 Charitable Intentions

SALEM, OREGON                                             NOVEMBER 2014                                                 VOL. 10, NO. 11

 

Let’s Talk: W. Ray Sagner CFP

 

 

Charitable Intentions

 

As a rule, Americans tend to be generous.  From dropping our change in those Plexiglas containers at the grocery store to the Gates Foundation’s contributions around the world, we have the intention of helping those who are less fortunate than we are.

It is that time of year when those of us that can will gather with family and share food, drink and fun, but we will also be hearing and seeing more about those that are less fortunate. In this article, we will focus on the spectrum of charitable giving. The way in which one gives will depend upon your intention and upon the amount you want to give. If you are putting money into a change box because you don’t like to carry change and like to feel that you may be helping someone, that may be a good enough reason to donate that change; however, if it is something you do on a regular basis you may want to know if the money donated is really meeting its stated purpose. A simple web search may tell you if the charity is really doing what it advertises and what portion of the donations really reach the folks in need. 

When we consider donations larger than loose change, there are several things to consider. Our tax system is based on incentives -- we receive deductions and credits because Uncle Sam would like us to behave in a certain way. With that in mind, donations to a qualified charity are deductible. That is, they are deductible if you itemize rather than take the standard-deduction, which means you’ll need to have deductions greater than $6,200 if you are single and $12,400 if you are married and filing jointly in 2014. What’s more, your deduction can’t be greater than 50% of your taxable income, no matter which tax bracket you fall into.

For tax purposes, donations under $250 should be accounted for with a written receipt showing the organization’s name, the date, and amount donated. You should also have access to the cancelled check. For non-cash donations, you need all of the above minus the check of course, but include a detailed description of the item(s) on the receipt.

For donations in value above the $250 amount, you must have written documentation from the charity by the time you file your tax return. If you do not have this and you are audited, the deductions will be disallowed. For non-cash donations over $500, you must file Form 8283 (Non-cash Charitable Contributions) with your 1040. It can get a bit more complicated with contributions over $5,000. Unless you are contributing publicly traded securities, you must obtain a written appraisal (no older than 60 days) of the value and complete Section B of Form 8263, where both the appraiser and representative from the charity must sign the form. In addition to getting dollar-for-dollar deductions for your donations, people who own appreciated stock that they have held for longer than one year can donate the shares to their preferred charity and avoid any long-term capital gains taxes. If you give directly to the charity you’ll get a charitable deduction for the fair market value.

For those folks over 70 ½ required to take the minimum distribution, you may give the distribution directly to a charity. The IRA Charitable Rollover provision allows individuals who have reached age 70½ to donate up to $100,000 to charitable organizations directly from their IRA, without treating the distribution as taxable income. While this provision is still awaiting approval to be extended for 2014, it will likely pass in the 11th hour as most federal tax bills.

Some of the more sophisticated techniques for charitable giving will be integrated with your estate plan, and may include a trust of some kind. In a Charitable Remainder Trust, the donor receives an immediate tax deduction and an income stream for a period of time with the remainder in the trust going to the charity. A simple alternative to the Remainder Trust would be a Charitable Gift Annuity, where the donor enters into an agreement with the charity to receive payments for a specific period of time with the balance staying with the charity. A Charitable Lead Trust works the other way, in that the charity receives payments for a fixed period and the remainder goes to the beneficiaries of the trust. There are several variations of these trusts, so selection should be based on the donor’s needs, and the trust should be drafted by the donor’s estate planning attorney.

There are a couple of planning vehicles that may accomplish family goals, as well as benefit a charity. A family foundation may provide the opportunity to involve several generations in the decisions on how to best distribute the money and allow values to be handed down from one generation to the next. Family foundations can be expensive to set up, but they do allow for more flexible giving than the trust mentioned above. Another method to involve the family is to set up a donor advised fund. These funds can be turn-key, meaning most financial institutions offer them and there is no need to have your attorney draft the documents. The Donor Advised Fund can provide a family an excellent opportunity to engage children in the value of giving and instill family values.

There are many good local organizations that benefit our community. Should you have a specific charity that you would like to support, your advisors can help you make the most of your gifts and perhaps introduce you to organizations that help in areas you are passionate about.

Happy Thanks Giving and thanks for sharing what you can.  This sounds a little odd. Maybe change it to: “Give thanks and share what you can.”

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagneris a Certified Financial Planner  professional with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

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SBJ October 2014 The Kids are Back in School

SALEM, OREGON                                               OCTOBER 2014                                                   VOL. 10, NO. 10

 

Let’s Talk: W. Ray Sagner CFP

 

 

The Kids are Back in School

 

With the cost of attendance for one year at either of the two Universities just south of Salem reaching the $25,000 mark, it becomes clear that saving money now is paramount. That is, if your child is a new born this year, you must add 5% per year. By the time your child is ready to attend college, you are looking at over $200,000, assuming he/she makes it out in four years. Whether the child is learning to crawl or to drive, there is never a wrong time to be putting money away for the big day. That cost may also be the reason that a lot more high school grads are heading to community colleges for their first couple of years. Taking the first two years of a higher learning program at a local Community College is a good strategy to ease into a new environment and save money. A lot of us could have skipped that first social year at the University without much damage to our learning experience.

Similar to the way in which the Federal Government structures IRAs and retirement plans that allow us to save tax deferred, and in some cases deduct the contribution, they have also structured a vehicle to save for college -- the 529 plan. The 529 plan is so named after a section of the Internal Revenue Code and is administered by state agencies and organizations. The plan grows tax-deferred and distributions come out tax-free on the federal level; plus 34 states offer state income-tax deductions. 

Any relative can open a 529 plan and name a beneficiary of the account, and if for some reason you want to change the beneficiary you may do so without much fuss. As long as the distributions are made for qualifying educational expenses the money is not taxed. When it comes time to make distributions, I would suggest reviewing IRS publication 970 and chatting with your CPA to coordinate with any other educational deductions. There are few drawbacks to the 529 plan, however, because if you do not use the 529 plan for college expenses, you will likely have to pay a 10% penalty and income tax on the earnings when you withdraw the money.

In Oregon, we have two savings plans -- the MFS 529 sold by Investment Advisors and the Oregon College Savings Plan (OCSP) which you can set up directly with the state. The OSCP is easy to set up online and the cost is significantly less, so you can open an account for as little as $25 a month. If you have an advisor, they should be willing to help you choose the investments and set the plan up without a fee. This Advisor’s bias would be to opt for the static portfolio and review it each year. The age-weighted options become very conservative over a period of time in the Oregon plan, and plans tend to vary from one state to another. For example, the Oregon plan is weighted 75% bonds by age 15 and 100% by age 18. In my opinion, there are better strategies -- most of us would not have wanted to be in a portfolio allocated to 75% bonds during the last for years.

In 2014, you can deduct $2,265 to the plan as a single person and $4,530 as a married couple. If the deduction is not important, then I would suggest reviewing plans in other States as well. You can also contribute up to $310,000 (maximum) to the account and for the well-healed; that contributions which you still have control over is removed from your estate for tax purposes. You can also front load the account with the maximum annual gift exclusion of $28,000. The IRS allows you to contribute up to 5 years’ worth of annual exclusions ($28,000 X 5 = $140,000) without paying any gift tax, so a flush grandparent could open an account for each grandchild.

As a Certified Financial Planner™ professional, my general guidance is to have an emergency fund of 3-6 months of living expenses to cover your cash needs, fund your retirement plans and then save for college. It may seem crass but your children will have decades to pay off college loans-- you won’t have extra decades to save for retirement.

You may want to make saving for college a family affair.There’s no reason why birthday, confirmation, bar/bat mitzvah, graduation and other miscellaneous cash gifts can’t be deposited in a 529 account, or even some of the child’s job earnings. At some point, you may decide that your child has more than enough toys, clothes, etc., and it’s not unsavory to ask relatives to give cash for college instead of a gift they don’t want or need. Why not use a least half of your gift budget to go the 529 plan instead of more stuff? Get the kids involved and review the account with them -- what a great lesson in saving now for something so important in the not-so-distant future.

Education is the best gift we can give our young people, so let’s start thinking about it today.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Planner  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

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SBJ September 2014 On Making Financial Decisions

SALEM, OREGON                                               SEPTEMBER 2014                                                   VOL. 10, NO. 9

 

Let’s Talk: W. Ray Sagner CFP

 

On Making Financial Decisions

 

The old saying that hind sight is 20/20 means that we made a decision that we would have made differently given some insight into the consequences. Perhaps if we understood the process of forming a course of action our foresight might be a little clearer. In this article we will focus on a general overview of behavioral finance, which found its roots in behavioral economics and studies the emotional factors involved in economic decision making. It seems natural, then, to branch out and study the factors or bounds of rationality (selfishness, self-control) related to investment decisions. Stick with me -- this is fascinating stuff, and any time we can get a glimpse into what makes us tick we can make, hopefully, more informed and rational decisions.

Behavioral economics is where economics and psychology meet. Traditional economic theory assumes that people are perfectly rational, patient and know objectively what makes them happy and make choices that maximize this happiness. Traditional economists may acknowledge that people don’t make rational and objective economic decisions, yet they still argue that the deviations are random rather than showing evidence of consistent biases. Behavioral economists, on the other hand, aim to develop models which account for the facts that people procrastinate, are impatient, aren’t always good decision-makers when those decisions are hard and sometimes even avoid making them altogether.

There have been some 20 behavioral biases identified when it comes to our economic decision making and they fall into two broad categories, cognitive and emotional, with both varieties yielding irrational judgments. A cognitive bias can be defined as information processing, or memory error common to all human beings. Cognitive biases result from subconscious mental procedures for processing information. In other words, it is our decision making process that we have honed over our life time that is distorted for the decision at hand. The process, or what works, for those who make rational decisions (most of the time) is to ask yourself, “Why do I believe this will work?” A person who employees critical thought (thinking about your thinking) is constantly asking themselves why.

On the opposite side of the spectrum, for illogical or distorted reasoning we have emotional biases. Investors can be presented with emotionally based investment decisions, and may make poor decisions by having emotions affect these decisions. Usually, because emotional biases originate from impulse or intuition, rather than on conscious calculations, they are difficult to correct.

Let’s look at some common biases and a brief explanation of how they tend to work. If a light bulb goes off, you may want to slow down the next time you have an economic or investment decision to make and simply ask yourself why you believe what you believe at this moment.

Anchoring Bias is a cognitive bias that occurs when investors are influenced by purchase points or arbitrary price levels, and tend to cling to these numbers when facing questions like "should I buy or sell this investment?" Frequently, a client will be resistant to sell a stock that is down until its price rebounds, which could be never.

Confirmation bias and hindsight bias are both cognitive biases that affect our perceptions and subsequent decisions. It can be difficult to encounter something or someone without having a preconceived opinion. This first impression can be hard to shake because people also tend to selectively filter and pay more attention to information that supports their opinions, while ignoring or rationalizing the rest. Investors observe, overvalue, or actively seek out information that confirms their investment ideas, while ignoring or devaluing evidence that might discount their investment ideas. Also, some people tend to be susceptible to hindsight bias, which occurs when an investor perceives investment outcomes as if they were predictable--even if they weren't. The result of hindsight bias is that it gives investors a false sense of security while making investment decisions, and thus excessive risk is taken.

One bias or behavior that investors hurt themselves with is inappropriate extrapolation, which refers to the human tendency to look at recent market performance and to assume that this performance will continue for months or even years into the future.

On the emotional side of the bench, we have the status quo bias which predisposes investors, when facing an array of choice options, to elect whatever option keeps conditions the same. Some investors tell themselves "things have always been this way" and thus keep things the same. We should know better than that or we will never be prepared for change. Another emotional bias is regret aversion, where the investor will avoid taking decisive actions because they fear that, in hindsight, whatever course they select will prove less than optimal. Regret aversion can cause investors to be too conservative in their investment choices because of lossessuffered in the past. Deer in the headlights: if you can’t move, get some help! Making no decision is making a decision.

And, lastly, endowment bias occurs when investors assign greater value to a security that he or she possess and is faced with its loss, than when he or she doesn't possess the security and has the potential to acquire it. In other words, people place a higher value on objects they own than objects they do not. The lesson here is, it is an investment, not a child; don’t fall in love with it.

We humans are odd creatures. We are the only animal on the planet with the capacity for rational and critical thought; yet so often we behave in irrational ways and come to erroneous conclusions in spite of the evidence. The action for this month: before coming to an investment decision, ask yourself what beliefs you hold and what evidence you have gathered to support them. Beware; your beliefs could be your biases.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Plannerä  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

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SBJ August 2014 My Precious

SALEM, OREGON                                                   AUGUST 2014                                                       VOL. 10, NO. 8

 

Let’s Talk: W. Ray Sagner CFP

 

My Precious

 

Warren Buffett, the Chief Executive Officer of Berkshire Hathaway, is one of the most famous investors of all time, and while his investment holdings are fairly diverse there is one asset class that he has made several disparaging remarks about. The following are some of his most famous quotes I have come across while searching the internet.

"The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn't going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time… Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

Mr. Buffett has a way with words. I began the search to acquire information to answer a question emailed to me regarding precious metals. Being the inquisitive kind, I found all sorts of interesting things while sifting through a lot of hype and unsubstantiated statements, some of which I will share in this column.

One of the most interesting things I found was a recent academic research paper by Claude B. Erb, CFA, and Dr.Campbell R. Harvey of Duke University titled, “The Golden Dilemma.” The paper is long and deep, so for the sake of brevity, I will summarize a couple of the classic arguments they addressed.

Gold provides an inflation hedge. Gold as an inflation hedge means that if, for instance, inflation rises by 10% per year for 100 years, then the price of gold should also rise by roughly 10% per year over a century. The problem with this argument is that the volatility of gold prices moves above and below the Consumer Price Index, or otherwise known as the CPI. The researchers state that given the most recent value for the CPI index, this version of the “gold as an inflation hedge” argument suggests that the price of gold should currently be around $780 an ounce. That would indicate that the price may be driven by momentum rather than a reflection of real value. The authors have a more recent paper on determining the value of gold by comparing the market price and the CPI of 23 countries. They write, “Given that the trailing ten-year real gold return was negative from 1988 to 2005, it is obvious that gold might have failed to live up to investor expectations as an effective long-term inflation hedge.”

Gold also serves as a currency hedge. In this case, the expected return of gold should offset the expected decline in the value of one’s own currency. If, for instance, the U.S. dollar declines 10% against the Japanese yen, then the “gold as a currency hedge” argument would suggest that the price of gold should rise by 10%.  In fact, the research indicates that the change in the real price of gold seems to be largely independent of the change in currency values.

Buffett is fun to read, but research definitely has its merits. I also came across a couple of articles in Financial Planning by Donald Jay Korn, in one of which he noted that from 2004 to 2011, the price of gold soared from under $400 an ounce to more than $1,900. Then gold turned to lead, dropping by more than 40% to less than $1,200 in 2013. The price is up a bit this year, but what a ride!

Last month, Korn interviewed Andy Kapyrin, director of research at Regent Atlantic Capital, who had the following to say. “When gold reached its highest price, it was largely because of concerns about the United States, the largest economy and largest pool of wealth in the world. Washington seemed to be dysfunctional, and there was a real possibility that the U.S. could default on its debt.”

Well, that didn’t happen, so the world’s economy never underwent the consequences, whatever they might have been. “The federal government has appeared more effective lately,” says Kapyrin. “Another debt ceiling deadline came this year and the issue was resolved as a matter of routine. Other factors seem to be positive, such as a housing market that’s stabilizing.” Without such a steep wall of worry to confront, gold prices recently have slid back from an early 2014 climb and now stand a few percentage points higher for the year.

In a separate article, Korn wrote about the tax consequences of selling gold. Of this, I was previously unaware, and I have not done any further investigation, so I would suggest speaking with your Tax Professional before acting on anything written here. In the article, he spoke with Tom Scanlon, president of accounting and consulting firm Borgida & Company, about the difference that arises when gold investments are sold at a gain after a holding period of more than one year. “Some types of gold don’t qualify for the low tax rates on long-term capital gains,” says Scanlon. “Instead, they’re taxed as collectibles.” Gold bars and coins (even non-numismatic coins) are considered collectibles; the same is true for Exchange Traded Funds (ETFs) that hold physical gold, such as SPDR Gold Trust (GLD) and iShares Gold Trust (IAU). No worries about GLD -- it lost over 28% in 2013.

All that said, this Advisor is not against owning gold. Many professionals suggest having 1%-5% of your investments in gold or commodities. I would suggest that if one is to make the decision to add gold to your net worth, do your research and have realistic expectations. A study by the World Gold Council predicts that demand for gold in China will increase around 19% by 2017 as the middle class grows and the demand for shinny things increases. China is the largest producer of gold jewelry and the demand in India was strong last year. Does that mean the price will continue to rise? Who knows, but I remember when those in real estate thought that the market would keep going up, just as the tech investors did in 2000. Is your home worth what it was in 2007? Maybe this time it is different.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Planner  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

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SBJ July 2014 Considerations for Taking Social Security

SALEM, OREGON                                                   JULY 2014                                                       VOL. 10, NO. 7

 

Let’s Talk: W. Ray Sagner CFP

 

Considerations for Taking Social Security

 

The Social Security system turns 80 next year and during that time it has become an integral portion of our retirement planning. Just 60 years ago, the concept of retirement entered our national consciousness. This was also the time when our nation’s soldiers were returning from WWII and jobs were in high demand. While the system seems paternalistic in its introduction, the real impetus for the program was to move older workers out of the job market to allow younger workers to take their places.  In 1935, Franklin D. Roosevelt settled on 62 as the retirement age, at a time when life expectancy was 63.  Were the retirement age set today, linked to life expectancy as it was in 1935, we would be in our mid 80’s before we ever left the workforce.

Considering how and when we can begin taking Social Security, it would seem that the current retirement age is arbitrary. Prior to the 1930s, our mind set was to work until you couldn’t any longer and while that prospect does not look so inviting now, perhaps living in retirement for 30 years is  not the best solution either. The right time to retire is a topic for another article, so let us deal with what we have today. In this article we will cover some of the options and rules for taking Social Security.

Given our trending demographic, the Social Security Board of Trustees project that by 2035 payroll, taxes will be enough to pay for only 75% of scheduled benefits. While the future of the program as it remains may be in jeopardy, those approaching retirement age in the next few years are likely to collect their full benefits.

 

How it works

Benefits are based on a combination of your earnings and the age at which you file. Your full retirement age (FRA), is the date when you are eligible to receive 100% of your benefit. There is flexibility to begin your benefit as soon as age 62, but at a reduced amount. Alternatively, you may postpone the benefit start date to age 70 and receive a 32% higher benefit.

If you're married, you're entitled to receive the higher of the benefit you earned or 50% of the benefit your spouse earned (the "spousal benefit"), even if you've never earned income. At the first spouse's death, the survivor receives the higher of his/her benefit or 100% of the deceased spouse's benefit.

One of the greatest sources of confusion as it relates to Social Security is the aftermath of divorce. Surveys suggest that less than half of participants are aware of their rights as a divorced spouse.

To put it simply, subject to three basic rules, a divorced spouse is eligible for the same benefits as a current spouse. The rules are as follows: The marriage lasted for at least 10 years, you haven’t remarried, and you are age 62 or older. Subject to these conditions, a divorced spouse can earn up to 50% of their former spouse's benefit. If they have their own work record, they can also restrict their claim to just the divorced spouse benefit and accumulate delayed retirement benefits which they can switch to at a later date (not past age 70) to maximize their overall benefits.

 

Taxation of Benefits

Social Security benefits used to be exempt from federal income tax. However, beginning in 1984, as much as 50% of one's Social Security benefit became subject to tax. In 1993, a new 85% level was added. The amount of tax depends on the amount of your provisional income, which is your adjusted gross income, plus ½ of your Social Security benefit, plus any tax exempt interest you received. The IRS then has a table of the exempt amount to determine if you owe tax or not.

The taxable amount on Social Security seems to be a source of confusion for many but keep in mind that the earnings test only applies to those younger than full retirement age.In 2014, anyone under full retirement age and has already claimed Social Security benefits will lose one dollar in Social Security for every two dollars they earn over $15,480. It is important to realize that the earnings test doesn't apply to earnings after your full retirement age.

 

Your  Decision

Like other financial decisions made by married couples, the Social Security choice made by one spouse usually impacts the other. Here are some general guidelines to follow when deciding how and when each of you should file for benefits:

  • The higher earning spouse should usually wait until age 70 to take benefits. This ensures the highest joint lifetime benefit if either spouse lives into their 80s.
  • The lower earning spouse should usually wait until age 66 to take his/her own benefits or, if higher, spousal benefits.
  • If both spouses are high earners, both should wait until age 70 to take benefits, and the lower earner of the two should take spousal benefits at age 66, and then flip to his/her own benefit at age 70.

Many people elect to start Social Security payments at 62, locking in a permanently discounted benefit. By age 66, virtually all those that are eligible elect to receive benefits. If you have planned and are in a position of not needing Social Security to make ends meet, you have more options for maximizing your benefit.

It all seems simple enough right? Your decision on how and when to take your Social Security may be something that once done cannot be undone and if you can wait until you turn 70 do so. It is important to work with your financial planner long before the final decision is made to begin the payments and to work them into your post retirement cash flow plan.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Planner  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. and you may view the Company’s web site at WWW.TheLegacyGroup.com

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SBJ June 2014 How to Avoid the Top Ten IRA Rollover Errors

SALEM, OREGON                                                   JUNE 2014                                                       VOL. 10, NO. 6

 

Let’s Talk: W. Ray Sagner CFP

 

How to Avoid the Top Ten IRA Rollover Errors

 

People are drawn to advice being broken down into small, digestible pieces (and for good reason), i.e. Top 5 Diet Tips. Simple steps make things easy to follow and remember. If we forget or ignore the diet tips, it might mean a few pounds one way or the other, but we can recover.  On the other hand, making little mistakes with an IRA can cost a lot and once you make a mistake, it might be impossible to undo. Individual Retirement Accounts (IRAs) are complex and the laws are ever-changing. Unforeseen taxes and penalties can be severe, so watch out for these top ten most common errors.

Error 1: Leaving Assets in a Former Employer’s Retirement Plan 

When leaving an employer, you typically have the right to roll over your entire balance into an IRA. Here are a couple of good reasons, access to more investment options, working with a Financial Planner should help with your overall financial picture and he or she can help you avoid the following 9 errors.

Error 2: Missing the 60-day Rollover Deadline 

If you receive the funds from your plan as an Indirect Rollover, you have 60 days to complete a rollover back to an IRA. You must replace the full amount, including the 20% that was withheld for taxes. Failure to complete the rollover within this time frame will result in the IRS treating your funds as ordinary income, and if the distribution occurs prior to age 59 ½, you may face a 10% early withdrawal penalty. Fortunately, this can be avoided by completing a direct trustee-to-trustee transfer of your rollover assets.

Error 3: Failing to Follow IRS Rule 72(t) When Taking Penalty-Free Early Withdrawals

Rule 72(t), implemented by the IRS, allows for penalty-free withdrawals from an IRA account prior to turning 59.5 years old. The rule requires that, in order for the withdrawals to be penalty-free, they must be taken as “substantially equal periodic payments” (SEPPs). Failing to calculate the proper amount and duration can lead the IRS to assess a 10% penalty on all withdrawals. 

Error 4: Making Spousal Rollover Errors

Although you are allowed to treat your deceased spouse’s IRA as your own, or roll over your spouse’s assets into your own IRA, you should look at all the options first. If you don’t need  the money it may be more tax-efficient to disclaim the assets and allow them to pass to your spouse’s contingent beneficiary. In other words don’t be hasty in making a decision until you have explored all of your options.

Error 5: Not Naming a Beneficiary 

As an IRA owner, you are not required to name a beneficiary; however, failure to do so affects who receives your assets and the long-term value of the payout after your death. This error could lead to issues with estate planning and distribution.

Error 6: Not Updating Beneficiary Designations

If you established your IRA several years ago and your circumstances have since changed, it is important to update your beneficiary designation. Life events arise – such as divorce, birth of a child, or death of a beneficiary – and failure to review and update your beneficiaries could put your retirement assets into the wrong hands. 

Error 7: Mishandling Transfers of Inherited IRAs to Non-Spousal Beneficiaries 

If you are a non-spousal beneficiary, your taking receipt of IRA assets incurs an immediate taxable distribution. If you intend to transfer the assets directly to an Inherited IRA from one institution to another, you must do a direct trustee-to-trustee transfer. There are also IRS rules that allow non-spousal beneficiaries to stretch out the required minimum distributions (RMDs), which mean that you can inherit IRA assets and receive RMDs based on your own life expectancy. 

Error 8: Naming a Trust Rather Than a Spouse as Primary Beneficiary 

If you have a living or grantor trust, you can name it as the beneficiary of your IRA, but naming a surviving spouse instead may give you more flexible options. The death distribution rules for trust beneficiaries are more restrictive than those for spouse beneficiaries, who can move the IRA assets into their personal IRA, and can name their own beneficiaries. As your IRA’s beneficiary, your spouse can choose to move the assets into an Inherited IRA and take distributions based on their own life expectancy — an option that may not be available to a trust beneficiary. 

Error 9: Depositing Rollover Assets into the Wrong Account 

The account you deposit your assets into must be eligible to receive rollover assets in order to maintain their tax deferral. Moving assets into the wrong type of account (i.e., Roth Assets to Traditional IRA) can result in penalties or permanent loss of future tax deferral.

Error 10: Missing a Net Unrealized Appreciation (NUA) Opportunity 

This last one is a bit obscure, but can be very beneficial for the right person. By taking advantage of (NUA) rules, it may be possible to significantly decrease the taxes owed on highly appreciated company stock held in a company-sponsored retirement plan. NUA can allow you to remove your company stock when rolling your plan over into an IRA. How does NUA work? Your company stock is deposited into a taxable account (non-IRA), and your 401(k) assets are transferred into an IRA. You pay taxes on the stock based on its original cost. The tax owed on the difference is paid when you sell your shares. Once you roll over your assets, this tax-saving strategy is no longer available, so make sure to discuss this one with a Financial Planner that understands the process.

Be Proactive in Seeking Advice

IRAs are the largest single asset owned by Americans. Even small mistakes can prematurely cut off the tax-deferred growth of IRAs, which may be worth millions and create huge income-tax bills for those who inherit.  If you are going to err, do so on the side of caution by seeking advice before rolling over or transferring your assets. 

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Planner  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

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SBJ May 2014 Par, Coupons and Maturity, and the Inside of the Bond

SALEM, OREGON                                                   MAY 2014                                                       VOL. 10, NO. 5

 

Let’s Talk: W. Ray Sagner CFP

 

Par, Coupons and Maturity, and the Inside of the Bond

 

If you read last month’s article then you have a good understanding of what a bond is and why they are bought and sold. You should also be congratulated for getting through a pretty dry subject! This month’s article will cover the fun and interesting side of bonds and the things you really ought to know before you purchase one.

There are three important things to understand about a bond before you buy it: the par value, the coupon rate, and the maturity date. Knowing these three components gives an investor a good grasp of what he/she is buying and the ability compare it to other potential investments.

Par value is the amount of money the investor will receive once the bond matures, meaning that the entity that sold the bond will return to the investor the original amount for which it was loaned, called the principal. As mentioned last month, par value for corporate bonds is normally $1,000, although for government bonds it can be much higher.

The coupon rate is the amount of interest that the bondholder will receive expressed as a percentage of the par value. Thus, if a bond has a par value of $1,000 and a coupon rate of 10%, the person holding the bond will receive $100 per year. The bond will also specify when the interest is to be paid, whether monthly, quarterly, semi-annually, or annually. We all long for the days of a 10% coupon rate.

The maturity date is the date when the bond issuer has to return the principal to the lender. After the debtor pays back the principal, they are no longer obligated to make interest payments. Sometimes a company will decide to "call" its bond, meaning that it is giving the lenders their money back before the maturity date of the bond. All corporate bonds specify how soon they can be called, if they can be called at all. Federal government bonds are never called, although state and local government bonds can be.

The key piece of information to know about a bond in order to compare it with other potential investments is the yield. You can calculate the yield on a bond by dividing the amount of interest it will pay over the course of a year by the current price of the bond. You can also just ask your Financial Advisor to do it.

Why not just look at the coupon rate to determine the bond's yield? Bond prices fluctuate as interest rates change, so a bond can trade above or below the par value based on what interest rates are. If you hold the bond to maturity, you are guaranteed to get the par value back, which may be more or less than what you paid. However, if you sell the bond before it matures, you will have to sell it at the going rate, which may be above or below par value.

Say you bought a $1,000 bond with a coupon rate of 10% that matures in 10 years. This bond would pay you $100 per year for a decade, at which time you will get back the $1,000 in principal. Now say you still own that bond seven years later, when long-term interest rates touch 5%. Newly issued bonds (paying that interest rate) would only pay $50 a year. As a reflection of the fact that interest rates have dropped since the coupon rate was set on the bond, you would actually be able to sell your 10% bond for more than the $1,000 par value. This is because an investor would be willing to pay a premium rate for a bond that paid 10%.

Because you can buy a bond above or below par value, bond investors often use another kind of yield called "yield to maturity." The yield to maturity includes not only the interest payments you will receive all the way to maturity, but it also assumes that you reinvest that interest payment at the same rate as the current yield on the bond and takes into account any difference between the current par value of the bond and the actual trading price of the bond at that time. If you buy a bond at par value, then the yield to maturity will be very close to the current yield, which is exactly the same as the coupon rate.

Those are the basics that investors should have some familiarity with, so take this knowledge and use it to the best of your ability. The phrase “knowledge is power” appeared in writing for the first time in Thomas Hobbes Leviathan in the 1600s and has been used ever since. Hopefully the bit of knowledge presented here will give you a bit more power and better control over your own investment decisions.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Planner  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

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SBJ April 2014 What Is A Bond, Really?

SALEM, OREGON                                                   APRIL 2014                                                       VOL. 10, NO. 4

 

Let’s Talk: W. Ray Sagner CFP

 

What Is a Bond, Really?

 

Most of us that own an asset of some kind have borrowed money from a bank, auto dealer, mortgage company, or even for our education. Money is borrowed and loaned every day for all kinds of reasons.

Much like the rest of us, large organizations such as corporations and governments on federal, state, and local levels, all need to borrow money occasionally; sometimes more than they should. While we may borrow cash for a purchase over a relatively short period of time and usually secured by the purchase, i.e. your home or car; these large organizations that require large sums of money offer a bond that pays interest and will pay back the original loan amount at some date in the future, which could be five, 10, or even 30 years from the time they are offered. Deficit-laden governments across the world use bonds as a way to finance their operations and companies sell debt in order to get the money they need to expand.

Bonds are a form of indebtedness that is sold to the public in set increments, usually around that of $1,000. In return for loaning the debtor the money, the lender gets a piece of paper that stipulates how much was lent or purchased, the interest rate offered, how often interest will be paid, and the length or term of the loan.

The term bond is often interchangeable with the term "fixed-income" security because the amount of income the bond will pay each year is "fixed," or set, when the bond is sold. No matter what happens in the market, if the bond is sold for more or less than it was at the original issue date or who holds the bond, it will pay exactly the same amount of money each year.

All well diversified investment portfolios have some or different types of bonds as part of their allocation. If you have read this column over the years you know we are big on diversification. So what are the types of bonds available?

There are four basic kinds of bonds, all defined by who is selling the debt.

The federal government: U.S. government bonds are called Treasuries because they are sold by the Treasury Department. Treasuries come in a variety of different "maturities," or lengths of time until maturity, ranging from three months to 30 years. Various types of Treasuries include Treasury notes, Treasury bills, Treasury bonds, and inflation-indexed notes or TIPS. These all vary based on maturity and the amount of interest paid. Treasuries are guaranteed by the U.S. government and are free of state and local taxes on the interest they pay.

Other government agencies: Some government agencies and quasi-government agencies like the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Loan Corp. (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae) sell bonds backed by the full faith and credit of the U.S. for specific purposes, such as funding home ownership.

State and local governments (munis or municipals): Because state and local governments can go bankrupt (ask the holders of Detroit, Michigan bonds if you doubt that one), they have to offer competitive interest rates just like corporate bonds. Unlike corporations, though, the only way that a state can get more income is to raise taxes on its citizens, always an unpopular move. As a way around this problem, the federal government permits state and local governments to sell bonds that are free of federal income tax on the interest paid. State and local governments can also waive state and local income taxes on the bonds, so even though they pay lower rates of interest, for borrowers in high tax brackets the bonds can actually have a higher after-tax yield than other forms of fixed-income investments.

Corporate bonds: Companies sell bonds through the securities markets just as they sell stock. While a company has flexibility as to how much debt it can issue and what interest rate it will pay, it must make the bond attractive enough to interest investors or no one will buy them. Corporate bonds normally offer higher interest rates than government bonds because there is a risk that the company could go bankrupt and default on the bond, unlike the government, which can just print more money if it really needs it. High-yield bonds, also known as junk bonds, are corporate bonds issued by companies whose credit quality is below investment grade. Some corporate bonds are called convertible bonds because they can be converted into stock if certain provisions are met.

Now you know basically what a bond is and you may even own some, but there is more. There are many factors not mentioned here that will determine many of a bond's features, such as the type of lender. Want to know more? You will find those juicy details in next month’s article.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Planner  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at www.TheLegacyGroup.com

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SBJ March 2014 What’s The Fed, Where’s Ben and Who’s Yellen?

SALEM, OREGON                                                   MARCH 2014                                                       VOL. 10, NO. 3

 

Let’s Talk: W. Ray Sagner CFP

 

What’s The Fed, Where’s Ben and Who’s Yellen?

 

The first thing you learn about writing a story is to capture the reader’s attention with your opening line, so here goes. “The Fed” is a term that we often hear on news programs, that most viewers don’t know what they do other than print money.  If that line does not keep you going just stick with it, there is a payoff at the end. The following is a quick summary of the Fed created in 1913, with the enactment of the Federal Reserve Act. The Federal Reserve System, often referred to as the Federal Reserve or simply "the Fed," is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.

The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and today, according to official Federal Reserve documentation, include conducting the nation's monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and releases numerous publications, such as the Beige Book we hear about. The Beige Book, more formally called the Summary of Commentary on Current Economic Conditions, is a report published by the United States Federal Reserve Board eight times a year.

The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils. The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time (the president of the New York Fed and four others who rotate through one-year terms). If you have been watching the news lately you know that Ben Bernanke has finished his stint as the Chair of the FOMC and Janet Yellen a member of the board was chosen to the chair position, more about them in a moment. The Federal Reserve System has both private and public components, and was designed to serve the interests of both the general public and private bankers. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the United States Department of the Treasury, creates the currency used. According to the Board of Governors, the Federal Reserve System "is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms."

There is no question that Chairman Ben Bernanke has made his mark at the Federal Reserve (Fed). Over the years, there have been a variety of terms used to describe Bernanke’s behavior and mindset. Journalists and investment professionals were given plenty of fodder to aid in the process. During the course of two terms as Chairman of the Federal Open Market Committee (FOMC), Bernanke had to orchestrate his way through varying scenarios—including some that a right-minded person would not wish upon your worst enemy.

“Helicopter Ben” was an early label, referring to his ease with printing money. At other times, song titles were used as labels. “When Doves Cry” was popular at a time when there was heightened rhetoric around the low-interest-rate policy, as the Fed made efforts to keep rates down for an extended period of time. “Where Have all the Good Times Gone” was a title used in referring to policy actions and market activity following FOMC announcements.

It is unquestionable that Bernanke set a new precedent as chairman, acting in a unique and ground-breaking manner that had significant impact on the economy and markets. There were multiple goals that he floated across the markets from his desk. First was an effort to keep the U.S. economy (and, depending on how you look at it, the global economy) afloat. In conjunction with this, there were three iterations of quantitative easing, including Operation Twist (which was just a fancy way to say the FOMC was repositioning bond holdings along the yield curve). Following that, there were a variety of facilities crafted to maintain market liquidity and keep everything working in an orderly fashion. Increased transparency was also a key initiative. The goal was to provide investors the best possible insight into the FOMC’s mindset. This was accomplished by holding regular press conferences following the Committee’s meetings.

Leadership will now transition to Janet Yellen, and the change at the helm should be seamless. Yellen was involved in the quantitative easing process. She and Bernanke hold similar views; some say she may even be a bit more dovish—which, as a bond investor, is welcomed.

It can be said with certainty that the removal of accommodation (reducing the amount of treasury bonds being bought) will happen; the unresolved question is the pace at which it will occur. Choppy economic data suggests that a slow, methodical removal of bond buying is likely. This type of tapering should fall in line with Yellen’s dovish tilt. It is important to remember that tapering does not equal tightening. It is the view of some financial analyst that neither the markets (both equity and fixed) nor, more importantly, the economy are ready for tightening to commence. The last thing anyone at the FOMC wants to accomplish is uncertainty among investors, as there is enough of that going around already. So farewell Ben; may your policies, precedents and perspectives remain in place.

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Planner  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. . You may view the Company’s web site at www.TheLegacyGroup.com.

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SBJ February 2014 Five Strategies for the Long Haul

 

 

 

SALEM, OREGON                                                      FEBRUARY 2014                                                          VOL. 10, NO. 2

 

Let’s Talk: W. Ray Sagner CFP

 

Five Strategies for the Long Haul

 

 

Maybe you’re just a few years away from retirement or perhaps you’ve already stopped working. If you’ve been diligent in setting aside funds to sustain you through your golden years, congratulations are in order; you are one of the few. Still being comfortable in the beginning of retirement doesn’t mean you can quit planning.  If you are 65 years old today you have a high probability of living until 82. As life expectancies continue to increase, it’s more important than ever to address concerns that you might outlast your money. As the rebound in the economy and stocks has demonstrated, you need to take steps to plan for the long haul and stick with that plan through downturns. Although there are no guarantees when it comes to investing, consider the following advice for planning for the long term:

 

1. Be able to ride out stock market downturns. Even if investing in equities helped get you where you are today, you may decide that the inherent volatility of the stock market means you should get out of it altogether during retirement. That might not be the best approach.

 

Instead, try to stay on a path for sustained growth that  factors in your personal tolerance for risk. For instance, a conservative investor embarking on retirement might allocate 40% of a portfolio to equities and 60% to fixed-income investments. A more aggressive investor likely would choose a higher percentage—perhaps 50% or 60%—to keep in stocks. But the important thing is to find a balance between risk and reward that helps you meet your goals and that won’t send you fleeing from stocks when they decline sharply. If you have a well thought out plan stick with it unless something changes in your life to warrant the change.

 

2. Plan for the monthly income you will need and the length of time you think it needs to last.  The idea that one can live off of interest from bonds is an old idea and a rare individual.  Assume you have a $1-million portfolio that produces 3% in annual income ($30,000), plus you and your spouse receive Social Security benefits of $2,000 a month each. That gives the two of you a total of $78,000 annually before taxes, and that may not be enough to support the lifestyle you have in mind.

 

Depending on your situation, you could arrange to do some consulting work in retirement, wait until age 70 to begin drawing Social Security—a delay that will earn you a higher monthly benefit—or seek higher investment returns. In any event, look for ways to avoid drawing down your savings too quickly.

 

3. Weigh the 4% solution. That’s a rule of thumb for the percentage of a nest egg you might withdraw annually to take income to fund a 30-year retirement. The idea is to take 4% of your total portfolio during the first year of your retirement and then to adjust that amount in subsequent years to account for inflation…or not.

But like any rule of thumb, this doesn’t factor in unusual circumstances, like the economic conditions you may face. You might decide a lower or higher percentage would be appropriate depending on your situation. And there is little in the financial planning world that is as frequently debated as the magic 4% withdrawal rate.

 

4. Let the IRS determine your income. Once you reach age 70½, you’ll have to begin taking “required minimum distributions” from 401(k)s and other employer-sponsored plans (if you’re no longer working) and IRAs. The size of each year’s RMD depends on your account balances and your life expectancy. A simple way to determine how much income to draw from your portfolio during retirement is to use the IRS calculation for your RMDs. Most planners would not count this as a planning but more of a do it yourself default.

Suppose that you are age 70½ and have $500,000 in an IRA. The IRS says your first distribution would be about $18,800. Will that be sufficient to supplement your other sources of income? In some cases, such an approach might work well, but it doesn’t take all of your personal circumstances into account.

 

 

5. Make a “bucket list.” A good way to plan for market downturns and make your savings last is to divide your money into various “buckets.” One bucket might be earmarked to supplement Social Security and other reliable income in covering your basic expenses, with the funds kept in conservative, liquid accounts. You could have a second bucket of money for discretionary expenses, such as travel, that you put into short- and intermediate-term bonds. The remainder could go into a third bucket, invested in a mix of stock and bond funds. As you rebalance the portfolio for the third bucket, you could use proceeds from investment sales to replenish the first two buckets.

 

All of these ideas are for illustrative purposes only. What you do will depend on your personal situation and goals. The important thing is to consider all of your options and come up with a plan that is realistic and based on the long haul.

 

 

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Planner  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

 

 

 

 

 

 

 

 

 

 

 

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SBJ January 2014 Getting a Grasp on your Financial Life

 

SALEM, OREGON                                           JANUARY 2014                                              VOL. 10, NO. 1

 

Let’s Talk: W. Ray Sagner CFP

 

Getting a Grasp on your Financial Life

 

 

Statistically, the majority of folks reading this column has done zero estate planning and/or don’t really have a good grasp on their big financial picture. That is not to say that most people don’t care, perhaps the details have grown and escaped us over the years. This article is meant to help you get an idea about where to start taking control of your financial life.

 

One of the strongest tonics for easing your mind is having “things” in order. Having your financial documents and information in a form that you can readily access will give you a clearer picture of what you’re dealing with, thereby making your financial decisions easier. Also, having your financial information in one place will aid those who will take care of your affairs when you are not able to. I am fully aware of how difficult it is for us to think about not being able to take care of ourselves or to think about our demise; it is, however, a reality and should be planned for.  

 

In this first article of 2014, we will cover strategies for getting financial documents and other personal information in an orderly format. Also, we will discuss the benefits of a letter of intent for those of you who may need to use the information that you have gathered. Don’t drag your feet -- getting organized can be fun.

 

Step one:  for your convenience you should have a file folder or folders for your monthly bills and statements, as well as folders or binders for such documents as your insurance policies, investment statements, estate planning files, etc. If you don’t have a desk or file cabinet, you can get a milk crate or the like at an office supply store and create your own file.

 

Step two: make a list of all your personal information, the professionals you deal with, and all of your account details.  Keep in mind that the data listed on this sheet of paper will provide easy access to the information -- for you, and/or for the person who may have to deal with your financial affairs for you. This paper should be kept in a safe place. Begin with the date the document was completed and include such personal information as your full name, SS number, date of birth, and drivers’ license number. If you can navigate Microsoft Excel, you can create headings across the top for the institution, the type of account, the account number, how the account is titled, a contact person and that person’s phone number. You should also include any passwords for online access. Include in the list all of your single, joint, and business accounts, and indicate both assets (i.e. checking, savings, and investment accounts) and liabilities (i.e. credit cards and mortgages). It may be helpful, as well, to create a separate sheet which lists your beneficiaries for your various accounts.

 

If you would like an example, email me ( This email address is being protected from spambots. You need JavaScript enabled to view it. ) and I will send you a template that can get you started with. You may then want to encourage your parents and children to complete a similar form. Once the form is completed, make a copy and give it to whomever you have designated as the executor of your estate. You may want to have them keep it in a sealed envelope until they need it and let them know that you may be updating it periodically and exchanging envelopes. Compiling all of this information may seem like a time-consuming task at first, but it is an important step in simplifying your future, and it is time well spent. And really, it doesn’t have to be done in one sitting. Plus, doesn’t it feel good to be organized?

 

Now let us go a step further to address the issue of considering those who you leave behind when you pass. I know death is something most of us choose to ignore, but it is one thing we know that is certain. While getting their estate planning in order, I encourage clients to write a letter of intent to those who may be managing their affairs in the event of their deaths. A letter of intent spells out the specifics concerning the “who, what, where, why, and how” of financial documents, of special disposition of assets, and of desired funeral arrangements the client might have.

 

As one who has gone through this process, I know it can be uncomfortable and I understand why people are reluctant, but it is a valuable process. Not only does it help you clarify what you value, but it also shows that you value those that must act on your behalf or those you leave behind. If you have had to care for or lost a loved one, you know what chaos the experience can be -- especially if you must dig up documents and attempt to infer what they would like you to do concerning their assets and liabilities. I know there are those who say, “Hey, I will be gone -- what do I care?” We wouldn’t do that to our people, would we?

 

Now, to end on a more pleasant note, getting organized may be a bother, but being organized is as comforting as the sun on your face on that first nice day of spring. Once you’ve done it, all you have to do is update once in a while. Remember, if you want help getting started, I would be happy to send you my template or answer any questions.

 

The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding particular situations from a trained professional. Ray Sagner is a Certified Financial Plannerä  with The Legacy Group, Ltd, a fee only Registered Investment Advisory Firm, in Salem. Ray can be contacted at 503-581-6020, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. You may view the Company’s web site at WWW.TheLegacyGroup.com

 

 

 

 

 

 

 

 

 

 

 

 

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