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Why Is It So Hard to Make a Tax Deductible Contribution to a Traditional IRA?

During tax season, we had dozens of conversation with clients that begin with the client asking, “can I make a tax deductible contribution to my IRA, so I can lower my tax bill?”

Unfortunately, the answer isn’t a straightforward “yes” or “no”. Rather, we have to drill into each client’s specific situation to make sure we follow the in’s and out’s associated with IRA contributions on a case by case basis. The below infographic does a pretty good job at capturing the complexity of answering the question. Bottom line, before making a contribution to your IRA, consult with a financial advisor or tax professional because it’s complicated.

IRA Contribution Flow Chart

Are You Addicted to News?

A recent article by the Guardian discusses 10 reasons why news can harm you. It’s an interesting read, one that reinforces a message that we regularly communicate to our clients: news is sensationalized to draw viewers but it should be taken with a grain of salt and not relied on to make investment decisions without doing your own research.

The article references the sensational and shocking stories we see. These stories are designed to scare us into doing something (or not doing something). The article fails to recognize, that there is a lot of insightful, objective, and thoroughly-researched journalism produced every single day that readers should be reading. Length does not necessarily indicate quality. Long articles can be sensationalized just as much as a tweet. And a tweet can be more insightful than a long article.

The problem becomes: How to determine quality news from an eye catching headline with regurgitated content. Second, where do we find quality news and who can we trust?

We will cover those questions in a later post.

 

A New Strategy. A New Approach.

This is the final part of a series (Part 1, Part 2, Part 3)

If your portfolio is still sitting on the sidelines in cash as you wait for the right time to enter the market, you may want to consider a new strategy. There is always a headline out there to suggest that the market is about to go down. Here are a few strategies we suggest you consider:

1) Turn off the TV. 95% of what you hear and read about the economy is noise. A recent article on the front page of Yahoo.com reports that actress “Mila Kunis Rotates From Cash to Stocks”. We’re not putting the link there, because that’s the noise we’re talking about.

2) Put a multi-year plan together. Step 1 – Decide what the funds will be used for and when you expect to need them. Step 2 – Determine the amount of risk you need to take in order to reach your goals. If not, there are many strategies that can be used to help you. Maybe you need to save more, or maybe you need a new investment portfolio and investment strategies.

3) Stick to it. It’s important to remain committed to the plan, with periodic tweaks and changes. All to often, we see plans used for only a short period of time before old habits come back.

4) Get a second opinion. It’s important to remember to tap the expertise of a financial advisor when developing your plan. When prospective clients ask us for help, we dig deep to make sure all their investments and assets (including their 401(k), IRA, ROTH IRA, bank accounts) are working well together. We look at a few key areas for each portfolio: proper diversification, fees & expenses, performance, and volatility within the portfolio. Each of these is important and is driven by a client’s personal situation and risk tolerance. Most importantly, we look to see if this portfolio could achieve the client’s financial goal.

Growing complexity of retirement

This piece was written about a year ago, but the two statistics from Sloan should be read again. During the past year, we have plenty of anecdotal evidence to support their findings:

There are a lot of options and factors to consider when preparing for retirement. It’s no longer just about the size of your nest egg. It’s about adequate insurance coverage, strategies to maximize your social security benefits (interesting story here), strategies to minimize taxes, and weighing your needs for Long Term Care insurance. And that’s just to name a few.

Of course, another option to consider is when to retire. Given the state of the economy and the fact that people are healthier and living longer than ever before, more and more people are pushing retirement back. Here are a few interesting statistics coming from the Sloan Center on Aging & Work at Boston College:

“Fewer Older Workers Expect to Retire at 62 or 65. According to a 2012 analysis of data from the Health and Retirement Survey, ‘a declining percentage of Americans are expecting to retire at 62 and 65. In 2006, 7.4 percent of people [over the age of 50] said they plan to stop working at 62, but by 2010 it had dropped to 4.9 percent. In 2006, 16.1 percent people expected to retire at 65, but in 2010, 14.6 percent planned to do so. Conversely, expected retirement at 66 has increased from 2.9 percent in 2006 to 4 percent in 2010.'”

And coming from the same outfit:

“One-fifth of U.S. Workers Say They Don’t Plan to Stop Working According to the 2011 Sun-Life Unretirement Index, when asked at what age they plan to stop working, 20% of American workers stated ‘Never. I think I’ll always work in some capacity.'”

Bad News Begets Bad Behavior

This is the third part of a series (Part 1Part 2Part 3Part 4)

For many investors, the bad news was cause for them to pull their money out, sit on the sidelines and wait for conditions to improve. They waited for the situation to turn around and to feel confident again in the markets.

We all remember the infamous day of September 29, 2008 when the markets dropped so much. But the very next day, the markets had one of the best days ever.

And for the past three years, the economy has been growing and growing. Many investors who stayed invested are back to where they were before the 2008 recession.

Unfortunately, many are still sitting on the sidelines watching the news and seeing one headline

The Search for Bad News: Instinct or Addiction

This is the second part of a series (Part 1Part 2Part 3Part 4)

Numerous studies suggest people are more interested in bad news than good news. It’s easier to scare someone into reading or watching a news story than any other way. But some psychologists think they can explain why we have a desire to learn more about the bad, rather than the good.

Scientists suggest this search for bad news can be traced back to our hunter-gather roots since anything that was perceived as threatening had to be dealt with immediately for survival.

But in today’s environment, when we hear about bad news we hop on Twitter, the internet, or the TV. Take September 29, 2008 when the markets faced one of the worst days in decades. CNBC had the highest ratings ever on that same day. Or take a few months earlier – January 22, 2008, the day the Fed cut interest rates by the highest amount in its history. On that day, the search term “Recession” was searched at a rate of more than five times the day before!

There is something, possibly instinctual, that pulls us to learn more about the negative news.

History Doesn’t Repeat Itself. Headlines Do!

This is the first part of a series (Part 1Part 2Part 3, Part 4)

We’ve seen these headlines in the news over the course of the last few months:

“The U.S. Is Going Broke”

“Social Security’s Coming Crisis”

“There’s No Way Out of this Unemployment Crunch”

“Exploding Federal Debt – Why so Dangerous”

From an economist’s standpoint, these problems aren’t new. We’ve seen these exact problems before in our lifetime. In fact, these headlines aren’t new either – they were all written between 1972 and 1984!

Sure the details may be different, but the overall issues have always been there, percolating on the back burner. Once the media picks up on the problem, they package it up in a way to grab your attention so you buy the publication, see the banner ad, or watch the advertisement.

Overcoming Volatility in Confidence

Some refer to the past decade as “the lost decade” due to market volatility that seemed to send many investors back to where they started.

It also marked tremendous volatility in confidence, with investors finding it difficult to believe in their investments and in the market itself. As a result, investors faced a new risk – allowing fear to stand in the way of capturing future market gains.

These concerns can vary in degree and change depending on the state of the market. The following stages reflect a common progression of mindset during most economic cycles, while suggesting a way to rebound from volatilities in returns and in confidence.

1. Herding: Confidence builds. Doing what everyone else is doing creates the feeling of safety in numbers.

2. Anchoring: Confidence is high. As investors fixate on a high-water portfolio value, confidence can hinder the ability to rationalize a normal cyclical decline.

3. Information Overload: Confidence is questioned. Investors cannot stop listening to news reports and opinions which, more often than not, feed into doubts and pessimism.

4. Straight Line Projections: Confidence wanes. Investors sometimes forget that most broad markets are cyclical and never go in a single direction forever.

5. Despair: Confidence is shattered. Conclusion that the financial markets, government oversight and the global economy are broken beyond repair.

6. Change of Strategy: Confidence returns. Investors begin to again feel positive about market participation when they are confident their strategy is built from knowledge gained through past downturns and reasonably promises to avoid similar outcomes.

Stages of volatility