By Jerry Lynch, CFP, CLU, ChFC

August 18, 2011

There has been quite a plunge in the market in the past week, followed by somewhat of a rebound. I want to give you my thoughts on what is currently occurring in our economy, what the implications are, and what you need to be doing.

There is a lot of “data” floating around out there, but not a lot of information. I am seeing a lot of conflicting data from very credible sources. For example, Warren Buffett is saying that the U.S. should be AAAA rated, while Bill Gross from PIMCO is agreeing with the issues that Standard and Poor’s has released. Let’s break this down so that everyone understands the prevalent issues right now and the consequential realities of the situation.

S&P’s Analysis
I agree with the S&P analysis, even if it affects the current market. The U.S. currently has too much debt. And our $14.3 trillion debt does not include Medicare and pension payments. Bill Gross has stated these liabilities at 66 trillion dollars! This is an outrageous number and we have to get more control over our spending – no question about it.

Recess 
Are you kidding me? Are we in third grade? Congress is in recess until Sept 5^th. How many of us have worked on vacations, weekends or holidays because we had to get something essential done at work. Congress should get back to Washington and take care of its business: getting a deal that makes financial sense. The current deal is filled with holes and does not provide the reductions that we need to make as a country. I say, get back to work and finish the job right.

Options
There are not many options to U.S. currency. We may be a dog, but we are the best-looking dog out there. The U.S. is still liquid, and in spite of the downgrade, dollars are flooding into U.S. Treasuries. Our corporations have a tremendous amount of cash and are looking for opportunities to invest in corporations and people. They just need the right incentives.

Corporate Taxes
Our tax system is insane and certainly inequitable. Our corporate tax structure is one of the highest in the world. There are U.S. corporations that have billions of dollars oversees and are trapped over there because they take it back without paying a huge tax burden. Let’s give them an incentive to bring it back.

For instance, instead of charging them 35 percent, we charge them 5 percent. This would give us more revenues and dollars for U.S. jobs in the U.S. economy.

How about instead of paying corporate taxes, corporations get a 50 percent credit on their tax bill for hiring new people? This will lead to a higher employment rate, income taxes and, perceivably, better morale.

Individual Taxes
Here comes yet another outlandish area of concern. Forty-seven percent of the population paid no taxes in 2007 and the top 300 families with incomes in excess of $300 million paid an average tax rate of 17 percent. This seems just a bit unfair and the tax issue needs to be analyzed for what it’s worth.

Medicare
Medicare needs to be reformed. It should not be paying out for 20 years as it is now. Medicare was set up in 1965 to start at age 65 because the average life expectancy was 64. Life expectancy is now it is in the mid-80s. This program should be used to help disabled people and those in the last 10 years of their lives, so basically age 75 and on. I realize that this is a sacred cow, but that is how it has to be.

Medicaid & Unemployment
This should be available to people who need it short-term – or in other words, right now. It should not be a permanent fix. People need to work for their money and if they cannot find a job, they should only get a benefit if they work in some capacity. But that can include any service that provides value to society like cleaning parks, child care, teaching kids, helping the elderly – whatever it takes to help our country.

Foreign Aid
Foreign Aid is in excess of $1 trillion dollars. Let’s reduce that and focus on what we need here now. Global concern is fine but not when we are currently facing enough problems at home. As my mom says, “Charity begins at home.”

Military
I respect all of the many individuals who are willing to put their lives on the line for the U.S. I support their efforts. Unfortunately, this is often used as a video game by the leadership and is not considered real as many of the decision-makers have no skin in the game (i.e., their own children). The budget is estimated to be $1.4 trillion. We need to do battle when it is necessary and in the interest of our country and people. That is one tenth of the current national debt. Do we really have to spend that much?

All of us, including myself, have an entitlement attitude. However, we have had these benefits on borrowed money that we can no longer afford. We need to get real.

I do feel that the U.S. markets have overreacted with the recent news of the S&P downgrade, but the reality is that we must address these issues. We had a very nice run-up in the market and we were due for a correction. Here are my thoughts on what we should be doing, after careful thought and analysis:

• Cash is King! Ensure that you have liquid assets that you can access in the event of an emergency, as it is critical in any good financial plan.
• Asset Allocation. This is still the most important thing in an investment strategy. You need to understand how much pain is associated with any stock portfolio. The more stock, the more potential pain. Select a portfolio that in bad times is still within your pain threshold so you can stay invested and ride it out.
• Stay Invested. Those that stayed invested throughout 2008 and 2009 made up their losses. For those that sold at market lows, they are still below where they started. This has happened consistently throughout many market cycles. The key is stability and a long-term strategy.
• Buy Low, Sell High. Now is a great time to invest! If you felt comfortable 3 weeks ago, you should feel better now as stocks are on sale. Most people are looking to sell when stocks drop and that destroys a long term plan. Systematic investing is the best way to deal with market volatility.
• Buy Quality. Now is not the time to double down. Focus on good companies that haven’t taken a hit and contain solid earnings. 

A mentor of mine has a great line: “It’s tough to watch a movie that you’re in.” That is very true. Most people make investment decisions based on two emotional decisions: fear and greed. I have never made a good emotional decision in my life. For every decision I made based on emotion instead of logic, I was recovering for years afterward. Take some time and evaluate your strategy and investments by asking yourself the following:

• Is your stock allocation appropriate for your risk tolerance? Would you buy the stocks/funds today if you were buying now?
• Have your financial timeframes changed? 
• Do you still have the same investment goals?

After assessing these key financial areas, you can determine if you are on track, as now is the time for financial concern not financial panic, whereas concern can be constructive, while panic can wreak havoc on your financial sensibility. Make a good decision here!
Finance & Investment Archives

Couple wants to retire soon, but college costs await

By Karin Price Mueller/The Star-Ledger

August 21, 2011

Steven and Maria, both age 50, would like to retire in five years — if they can do so without worrying about financial security. But they still have one more college education to pay for, and their child will be in college at the same time they’d like to retire.

Still, the couple is hopeful.

“We want to purchase a summer home with about 10 or 20 acres of land,” Steven says. “And we want enough money to retire earlier while maintaining our current lifestyle.”

The couple, whose names have been changed, saved $730,800 in 401(k) plans, $188,600 in IRAs, $236,600 in mutual funds, $55,000 in a money market, $52,000 in savings and $15,000 in checking. They also have $158,500 set aside in 529 plans.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to see if Steven and Maria will be ready for an early retirement.

“Both have stable jobs with good income and they are saving about $60,000 annually, plus they are getting company matches of about $16,000,” Lynch says. “Generally if someone is saving 25 percent of income, they will be financially successful.”

This couple lives well below their means, which Lynch says is extremely important to growing your money.

“Being financially successful is not a function of how much you make, but rather living below your means on a regular basis, and investing on a systematic basis,” he says.

Lynch took a look at their investments, and he says they have far too many accounts, with several old 401(k) plans still with their old companies. Investors don’t get more diversification by having more investment accounts, he said. Instead, he says Steven and Maria should have one IRA and a Roth each, and possibly an individual or joint account.

“Having a lot of old 401(k) plans and IRAs just makes it harder to manage,” he says, suggesting they roll over and consolidate some accounts.

The couple also needs to take another look at their risk tolerance and their investment choices. They describe themselves as moderate investors, but they have 80 percent of their assets in stocks, and almost a third of that is in international stocks. That would make them aggressive.

“My concern about pure retirement at 55 means that we have to plan for 30 years for life expectancy and probably for 40 or more years, because people are living longer,” Lynch says. “A lot can go wrong in 40 years — like the August meltdown — that can seriously impact a retirement plan, no matter how good that plan is.”

He says being more aggressive generally helps you a lot more when you have a long time until retirement.

For example, $100,000 at 11 percent for 40 years equals $6.5 million, while $100,000 at 9 percent for 40 years equals $3.14 million. The difference is $3.36 million.

But if you’re looking at a shorter time frame — such as the five years this couple has until they’d like to retire — there’s not much of a difference if you’re more aggressive. Lynch says $100,000 at 11 percent for five years is $168,505, compared with a return of 9 percent that would grow to $153,862.

“My point here is simple. There is not much upside and if we have a market correction, there is a tremendous downside,” he says.

For college planning, Lynch said the couple did something very smart. When they were saving for their 24-year-old child, they used 529 plans instead of a UGMA account.

“Their oldest daughter is finished college and there is still over $60,000 left in the account,” he says. “If it was a UGMA account, it would belong to the daughter. Since it is a 529 plan, they can just change the beneficiary — not a taxable event — and this can now be used for their younger daughter’s college.”

Lynch says the tax benefits of a 529 plan — they’re tax-deferred and have tax-free withdrawals if used for education expenses — are much better than the a UGMA accounts and you have more control over your money.

Steven and Maria had their estate-planning documents drawn up a few years ago, but they skipped the very important step of retitling some assets.

“For example, not counting life insurance and their home, their total net worth is about $1.5 million,” Lynch says. “Out of that $1.5 million, only $80,000 would have the ability to go through a will — their cars and personal belongings. The rest would go based upon the titling or beneficiary designation of the assets.”

Life insurance, IRAs and 401(k) plans are distributed based on beneficiary designations. Joint owner property, if you die, will go to your spouse.

“To spend all your time and money on a good estate plan and not address the titling or beneficiary designations means that you spent a lot of money for nothing,” he says.

Get With the Plan is designed to illuminate personal-finance concepts and isn’t a substitute for financial planning or dedicated professional advice. To participate, contact Karin Price Mueller at kmueller@starledger.com.

Karin Price Mueller/The Star-Ledger

August 15, 2011

Q. My dad owns six stocks purchased more than 20 years ago, and the brokerage firm he originally purchased them through has been sold to other companies several times. He doesn’t use the brokerage service for advice and he’d like to get the stock shares in his own control. The broker told us the only way to get the brokerage company out of the picture is to have them sell the stock, and then we could repurchase it on our own. If we have the broker sell them, we would pay hefty transaction fees. Is there another way to have the certificates changed to my father’s name and control?
– Something doesn’t sit right

A. Yes. Absolutely yes.

“The broker is an idiot,” said Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield. “Securities can be transferred to another firm by using what is known as an ACAT,” or automated customer account transfer, Lynch said. “This allows securities to be transferred to a new custodian such as a discount broker generally at no or a very low cost.”

Lynch said you’d simply establish a new account, complete the transfer forms asking for the securities to be transferred over “in kind,” and include a copy of your most recent statements. Actual certificates, Lynch said, are not generally ACATed, but you’d instead just need to sign the back of the certificates and send them to the new firm. Lynch isn’t fond of holding the actual certificates because they can be damaged or lost, and then you’d face a charge to get replacements.

If selling the stock is something you’re considering, find out if the current broker will apply any “account closure” fees, said James Ciprich, a certified financial planner with RegentAtlantic Capital in Morristown. “These are tough to avoid, and can be costly as well — up to $100 per account,” Ciprich said.

The other thing you’ll want to do prior to the sale of the stock is to accurately calculate the stock’s cost basis, he said.

“If your dad has original trade confirmations with the date the stocks were purchased and the price he paid for them, you’ll be able to then be able to determine the amount of taxable gain or loss,” he said.

If dividends from your dad’s stocks were used to purchase additional shares, Lynch suggests you go to BigCharts.com, which will help you track down the cost basis. If not, your dad could end up paying more in taxes than he needs to. “Make sure you know the tax issues before you sell,” Lynch said. “If your father is in a 10 or 15 percent tax bracket, he can possibly get the gain tax-free.”

-Karin Price Mueller

E-mail your questions to askbiz@starledger.com.

August 15, 2011

Jerry Lynch CFP® CLU ChFC will be a featured guest at the 10th Annual Road to Personal Wealth Financial Conference sponsored by the Star-Ledger/NJ.com and TD Bank.

Keynote Speakers include Suze Orman, Michael Corbett, Steve Adubato and other established financial experts.

Date: Saturday, November 5th 2011
Location: Harwood Arena - Kean University, Union NJ
Time: 7:30 am to 2:30 pm
Tickets: $20/person (http://rtpw.eventbrite.com/)

There will be a JFL Consulting, Total Wealth Management booth at the event, complete with giveaways and up-to-date economic articles.

For more information on the event, please click the following link: http://www.roadtopersonalwealth.com/index.html. For Jerry Lynch’s complete biography, please click the following link: http://www.roadtopersonalwealth.com/breakout.html.

If you have any questions, please call our offices at (973) 439-1190.