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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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