The government just closed a very attractive Social Security loophole that used to give folks, if they used the rule correctly, what amounted to be an interest free loan. It essentially allowed you to take advantage of what I call a “do-over.”  You could start collecting Social Security before your full retirement age, which for most people right now is age 65. You could take early Social Security benefits as early as age 62, at, I’ll say, $750 a month.  Which would allow you to get $750 a month for three or four years before you would otherwise start collecting Social Security benefits.

The disadvantage was that you would be locked into the lower, early payment (that I’m saying is $750 a month) instead of the full payment, which I’ll say is $1,000 a month. Except that there was a fairly simple way out.  If you wanted to do-over your Social Security benefit and start collecting that $1,000 a month, all you needed to do is pay back the money that you had collected before you started your new Social Security benefit.

Now some people, obviously, may not be financially able to pay back three or four years of $750 a month payments, because it would add up to one big, fat check.  But for other people who are in a position to do it, and then reapply for their $1000 a month social security benefit, it amounts to an interest-free loan.  They could even defer collecting Social Security until age 70, when, using the scale I’m using here, their Social Security benefit would be a little over $1,300 a month.

You used to be able to do as many of these do-overs as you needed or wanted to.  You could started collecting $750 at age 62, pay it back at 65 and collect $1,000 a month, then pay that money back at age 70 and start collecting $1,300 a month.

Unfortunately, Social Security realized that some people were taking advantage of that very opportunity, and they closed that door.

From now on, you still can do a “do-over,” but only if you’ve been receiving Social Security benefits for less than 12 months.  So the attractiveness of this strategy has been severely cut back and limited. Now if you start collecting Social Security benefits at age 62 at $750 month, before you turn 63, you have to decide whether you’re  going to pay those funds back and reapply either then or at some point in the future, or if you’re just going to stick with the reduced Social Security benefit.

What this really means is that, now more than ever, folks need to determine the optimum time to start receiving Social Security benefits.  It’s important to do proper planning to make sure that you make a choice that’s right for you.

This really is an individual situation — there really is no right or wrong way when it comes to selecting your individual Social Security benefit, because everybody’s situation is different.  Are you working or not?  What other income sources might you have?  How will that affect your taxes?

The bottom line is that planning is always the key.  You need to make smart choices about your money to give you the best shot towards a worry-free retirement.

Read This If you Have Money in Annuities or Mutual Funds

Have you ever heard a stock broker, financial advisor, maybe even an insurance agent say something like, “Don’t worry the investment company pays me, or the annuity company, or the mutual fund, or the insurance company pays me, so you don’t have to?”

That’s the answer one of our clients got from their former financial advisor when they asked a real simple question.  They had just bought an annuity from their prior financial advisor.  And their question simply was, “how are you getting paid?” The answer? “Don’t worry; the annuity company is going to pay me.”

You might not see anything wrong with that.  But I sure do.

We all know there is no such thing as a free lunch.  So where is the annuity company getting the money to pay this advisor?  From you.  They might camouflage it and hide it, but at the end of the day, bottom line, that money is coming out of your pocket.

In this particular situation, our client was shocked. They had over $15,000 a year in hidden fees and expenses coming out of their annuity contract, and yet they were getting statements from the annuity company that said their administrative fees were zero.  That’s a pretty big difference.

Is the annuity company lying?  Well, yes and no.  The annuity company may not exactly be lying, but they certainly are misleading their customers.  It’s true there are no administrative fees — as defined by the annuity company — being charged or assessed to the annuity contract.  However, there is a boatload of hidden fees and expenses that aren’t being properly disclosed, to the tune of over 2-3 percent per year.

What does that mean?  Well, say you put money, $100,000, into a variable annuity.  Most annuity companies charge hidden fees and expenses of around $3000 a year that you don’t see!

Are they breaking the law?  No.  Are they meeting the current disclosure requirements?  Yeah.  Are they treating their customers in an honorable and ethical manner?  I’ll let you be the judge.

But let’s get back to that $100,000 variable annuity. You now know you’re paying $3000 a year in hidden fees and expenses that you didn’t even know about.  Now, on top of that, the annuity also comes with a surrender charge or withdrawal penalty that could amount to another $5000!

So what should you do?

Since you’re going to pay the fee one way or the other, my advice is that you stop the bleeding now.  By that I mean, your best move is probably to go ahead and pay the surrender charge and move on to a lower cost investment vehicle.  You could put the same $100,000 into low cost, no load index mutual funds.

They also have hidden fees and expenses that aren’t clearly disclosed.  But for an index mutual fund, those fees on $100,000 might be $500-$600, not $3000.  That’s a huge difference — especially when you multiply the savings over the next 5, 10, 15, or 20 years.

Think of all that extra money that could be in your pocket instead of sending it off to an insurance, annuity, or mutual fund company.

Make sense?  I hope so.

We have a client who, before coming to us, was using another financial advisor.  Why did this person leave and come to us? The issue was a complete lack of follow up and on-going advice.

Unless the advisor was calling to recommend another investment purchase, they never heard from them.  This proved to be a big problem when they suffered through the 2008 market meltdown without any proactive action or advice from their prior advisor.

There’s a good reason why this happened – at least in my opinion.  When advisors receive payment from transactions or commissions, I believe their business model is flawed.  After all, you would expect your financial advisor to give you ongoing advice, management and oversight of your investment accounts.

But the reality is, they’re in business.  They need to make money.  They have to pay their bills.

So if they’re in a transaction-oriented environment, they’ve got a tough decision to make.  Do they spend time looking after your account and giving you advice – which pays them nothing since they already made their money when you bought something from them? Or do they go out looking for other people with money to invest so that they can collect another commission or transaction fee?

Only one of these approaches is going to put money in their pocket.  And it might not be the one that puts more money in yours.

That’s what I see as the problem with commission-oriented advice relationships.  It’s not because the advisors themselves are bad, or don’t necessarily know what they’re talking about.  It’s simply because the advisor’s business model is broken in terms of allowing them the time to take care of the clients they already have.

Something to think about before you make your next investment decision.

I’m talking about something called year-end capital gain distributions.  And if you have money in mutual fund, even if it’s a fund that you’ve owned for years and years and years, you could be affected.

Every year, mutual funds have to declare capital gains ‘activity’.  That can affect you even if you have not sold your mutual fund.

The internal buying and selling activity that goes on in your mutual fund has to be reconciled, if you will, on a yearly basis. If your mutual fund did any buying or selling during the year, you can wind up with a year end 1099 for capital gains, even though you didn’t sell your fund!

This is the sort of thing that creeps up on you and catches you off guard.

Every fund family is a little bit different, but most usually declare their capital gain distribution December. Find out what that is and see how it’s going to affect and impact your taxes.

You might be surprised — unfortunately on the negative side.  It can even happen if your mutual fund hasn’t gone up in value.  Yes, you could very well see a long-term capital gain distribution that you need to pay tax on, even if your fund is worth less money than what you started the year out with. This may not be great news, but it’s always best to be prepared.

By now you’ve probably heard that North and South Korea started shooting at each other – which served as a reminder to me (and I hope you as well) that what we call “the economy” is no longer a US economy. It’s a global economy, and it becomes more and more global every day.

Soon after the Korean event, the Dow dropped 150 points in one day. But the irony is, the very next day, the market closed up 150 points.

What that tells me at least in the near term; is that there hasn’t been much of an impact from what’s happening in Korea.  There’s also been additional volatility connected to concerns about the debt levels of various countries across the world.

Unfortunately, no amount of planning can ever take into account what we call “life events.”  “Stuff” that comes at you from left-field, that you just can’t fathom or factor into a planning scenario.

After all, who on earth ever would have thought something like 9/11 could possibly happen before it happened?   The bottom line is, we still live in a world of uncertainty. Which means when it comes to your investment strategy, you need to have to have a strategy or game plan that you have faith, trust and confidence in.

At the same time, you must remember that no investment strategy, even ours, is perfect. But you have to be able to trust that strategy when the unexpected happens.

The problem is, without a plan and absent an investment strategy you have trust and confidence in, your emotions do take over, especially when you’re in a heightened level of stress and anxiety.  And when emotions take over they tend to lead to poor choices and poor decisions.

So it’s best to have a system in place NOW that you have trust and confidence in, whether it’s handled by a trusted professional like me or your own system. That’s really one of the central guiding posts of all successful investors. If you look at people like Warren Buffet, they all have a system that they have trust and confidence in, even when it temporarily makes them ‘look stupid’.

I remember back in the internet .com heyday, Warren Buffet was criticized and chastised when he didn’t buy the first Internet stock.  He was made out to be a sort of “industry tool” who was past his prime, not keeping up with the times.  But he stuck with his system. And even though on a short-term basis it made him look ‘stupid’, look where he is today — right back on top.

So when it comes your investments, you need to have a system that you have trust and confidence in.  Because unfortunately, there will always be periods of uncertainty.

Events you can’t predict are going to pop up out of nowhere.  That’s when you have to have a solid investment system that you trust. Because that will see you through the uncertain times and keep you on solid ground.

Have you heard the reports about how the government is looking at giving 401(k) plans and their participants the option of moving some of your money into a guaranteed income annuity? If you’re wondering whether this type of annuity makes sense for you …keep reading.

I should be specific, as there are many kinds of annuities out there — deferred annuities, fixed annuities, equity index annuities and variable annuities. Those are all essentially accumulation or saving annuities, which means they are not the specific type of annuity the government is talking about in this case. What the government is talking about here is what is called an immediate annuity – here’s how it works.

You deposit (or give up) a lump sum of money, and in return, the annuity company guarantees you an income stream for a period of time, or even for life.

Who wouldn’t want income that you can’t outlive?

It sounds great, but there are some reasons for concern. This type of annuity can be a double-edged sword – and what edge of the sword you get depends on how long you wind up living.

For example, if you give up a large, lump sum of money in favor of an immediate annuity payment — and then you’re killed in an accident a month or two later. Guess what happens then? There will be nothing left to transfer over to your heirs — unless you select a slightly different variation of the income annuity option.

The fact that unexpected things tend to happen in life is one reason a lot of folks shy away from so-called income annuities. The concern is that if they meet with any unexpected premature demise, their family is not going to get back even what they originally paid to purchase the annuity income stream in the first place.

To counteract that, there are some income annuities that allow you to purchase a guaranteed income stream “plus lifetime,” which usually means for life with 10 years certain. What that means in English is that the income payments will continue for the remainder of your life or for 10 years, whichever is longer. So if you meet with an untimely demise before your 10 years are up, and if you haven’t collected 10 years of payments, your family members or your beneficiaries will.

Of course, there is a drawback to that extra measure of protection. You can probably imagine what it might be, if you think about it. Your monthly annuity check is not going to be as large as the check would be on a life only annuity without any guaranteed time period of payments. That just make sense – the bigger risk means the bigger reward. So if you want the highest monthly income stream possible, the better option is going to be a life only annuity. On the other hand, if you want to make sure your payments keep coming in even if you pass away prematurely, then a life with a certain period of time guaranteed is a safer bet. In that case, 10 years is the most common option.

Interest rates also determine how big your monthly annuity payment will be. For the same amount of money, you’ll get a higher monthly payment during a period of higher interest rates. You’ll end up with a much smaller monthly payment in times of low interest rates…like now.

So even if you like the idea of guaranteed annuity payments, you’ll probably be better off waiting to make this purchase when interest rates have gone up.

In a previous article I talked about lifetime annuities – where you give up access to a lump sum of money in return for monthly payments, which can last as long as you live.

One significant drawback with an income annuity is inflation. Inflation hasn’t been that high recently, but over the next decade and beyond, most experts expect it to start picking up. And when you apply that to annuities, what looks attractive today may not look quite as good 5-10 years from now.

You’ll be locked into the monthly income payment you set up now for the life of your life (or the term you picked for annuity income). But if prices go up due to inflation, that monthly payment will lose its purchasing power.

But here’s the primary reason why I’m not recommending income annuities to my clients today – interest rates are at all-time historical lows. And the annuity company has to factor in the current interest rate environment to determine what your monthly annuity payment will be.

All that really means is that the higher the interest rate environment, the higher your monthly payment. When you’re looking at an interest-rate environment of 1%- 2% — it’s not the ideal time.

Your annuity payment is going to be much lower than if you bought an annuity income stream in an interest-rate environment where interest rates are 6% or 7%.

So if the idea of using some of your money for an income that is guaranteed for life is appealing, you might want to defer that investment while we are in a low point in the interest-rate cycle, and revisit it as a potential opportunity when interest rates have gone back up or are rising.

Also remember not to use all of your money. My recommendation is that probably no more than 15% -20% of your money should be allocated to an income annuity. Again, I would not recommend this in today’s low interest rate environment, but rather I recommend you consider it once interest rates are starting to move back up.

A stock-option basically gives an employee the right, but not the obligation or requirement, to purchase a certain number of shares of company stock at a set price at any time in the future before the option expires. Usually a stock option grant is good for 10 years, so if your company gives you an option to buy 1000 shares of company stock today and it’s trading at $50, you’ve got 10 years to decide whether or not you want to buy those 1000 shares.  Whenever you choose to buy down the line, your cost is $50 — even if the company stock is trading at $100 or $150. That’s the value of a stock-option.

The two most common types are non-qualified stock options (NQSO) and incentive stock options (ISO). The most common is the non-qualified stock option – what that means is when you decide to buy the stock, you are going to be taxed at ordinary income tax rates on the paper profit, whether you buy the stock and hold it or immediately sell it.

From a purely tax planning point of view, it generally makes sense to simply buy and immediately sell the non-qualified stock option.   Especially since most publicly traded companies have a mechanism that creates a cashless stock option exercise, so you don’t even have to come up with the money to buy the stock if you’re going to immediately turn around and sell it.

(ISO) incentive stock options are even better – because incentive stock options can qualify for long term capital gain tax treatment.

Say you’ve got a grant for a 1000 shares of stock at $50. It’s trading now at $150. You decide to exercise your option. Well, if you exercise and sell, that $100,000 profit is still treated as ordinary income.

However, with an incentive stock option you have the option or the choice to hold the stock for 12 months. If you hold it for 12 months and a day and then sell, that stock receives long-term capital gain tax treatment. So that $100,000 of profit is now taxed at long-term capital gain rates instead of ordinary income tax rates. A potential tax savings of $20,000. Assuming of course the stock price doesn’t go down. But that’s a topic for another time.

Successful investors have a system. They have rules that they follow and that they don’t deviate from. Take Warren Buffett. In the 1990’s, he did not get into the Internet companies. People thought he was nuts. And what happened? The Internet bubble popped. Now, Warren’s back on top, well ahead of where he was back in the 1990’s when he seemed like the only person not making money on the Internet.

When I ask folks about their stock, “When do you know when to get out?” a lot people just answer, “I don’t know! I’m just going to keep it. It’s going to keep up isn’t it?” For some people, that’s their system — buy and hold or as I call it buy and hope.

But sometimes, like 2008 — that’s not the most productive way to invest your money. I heard of a lot of people who lost thirty, forty, fifty, sixty percent in 2008 through the buy and hold way of doing things.

Once you’re in retirement, your time frame is going to seem short. So to protect yourself, what do you do?

You set rules. Create and follow a system.

Number one, I always tell people, is avoid big losses. If demand is falling, it’s time to get out.
Number two is to periodically take profits off the table. Generally speaking, we take profits when a position has gone up 30%. Then again when the position is up50% and/or when demand starts to weaken. You’re not in the investment to own the company, you’re in it to make money. And one way to make sure you do is to take profits off the table from time to time. Set a level – a percentage — then live by it and invest by it. And don’t deviate from it. That’s your system. That’s the best way to do anything with investments – to remove the emotion out of your investing.

We’ve kind of joked with some of our clients about being married to their stocks – even when growth stops for years and years. If it stopped, or went backwards, why do you want to hold it? It’s all because it’s an emotional attachment. You bought it because you liked it. You loved it. It did well for you. But honestly, who cares? It’s a stock, it’s a company. Move on to something else. Find something different. Having a set of rules, and setting goals for your investments, is the best way to keep emotion out of your financial life.

It Could Save You Thousands Of Dollars In Taxes

We’re getting to the time year when people start thinking about making a charitable contribution.  It’s also time to think about strategies that not only can get you a tax deduction for your charitable contribution, but can save you even more — sometimes thousands and even tens of thousands of dollars in taxes.

Before you write a check to charity, look and see if you have assets, typically stocks, mutual funds or real estate, that are up in value.  For example, say you bought a stock for $10 it’s now worth $100. Instead of writing a check to charity, give charity the stock. They get a stock worth $100. They don’t have to pay tax on your $90 profit. And neither do you.

You get the tax deduction of $100 as if you had written a check to the charity.  So you avoid having to pay tax now or in the future on that $90 capital gain. Just keep in mind that it takes time to transfer ownership of investments, so you’ll want to move on this as soon as possible.

Here’s what you could do if you want to give a large holding to charity, either in a stock or mutual fund or even a piece of real estate, but maybe not all at once.  You can set up a charitable gift fund.  You donate the asset to the fund, the fund sells the asset and you get a tax deduction. There’s no time limit to distribute the proceeds, but you get the tax deduction this year.

Two other good strategies for charitable giving are a charitable remainder trust or a charitable gift annuity.   These are somewhat similar — you make a future gift of assets to charity and in doing so, you get a tax deduction now while still getting a current income for a period of time, even lifetime!

Depending on your situation, any of these strategies could easily benefit you and your favorite charity (or charities) more than simply writing a check.  So you might want to look into them before making any end-of-year donations.