Distribution Funds: Putting Income on Autopilot

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Distribution Funds: Putting Income on Autopilot

April 21, 2014

As baby boomers retire, they begin to focus less on accumulating assets and more on how those assets can be converted into an ongoing stream of income. Distribution funds are one way to simplify that process.

Distribution funds are actively managed mutual funds that focus not on maximizing asset growth but on making regularly scheduled payments to investors. Distribution funds were primarily designed to give retirees an easy way to receive income. For example, early retirees might use one to provide income until they reach full retirement age. They also can be used to complement a pension or other income sources.

How distribution funds work

A distribution fund basically functions much like a systematic withdrawal plan. Its annual payout (either a percentage of assets or a specific dollar amount) is divided into equal payments that are scheduled to be made at regular intervals (typically monthly or quarterly).

As with so-called lifestyle or lifecycle funds, distribution funds typically are offered as part of a group. All funds in the group use a similar investing methodology, but each fund has a different payout target or distribution rate. For example, one fund in the group might offer a 3% annual payout. Another fund in the same group might target a 4% payout, and a third might aim for 6%.

One size doesn’t fit all

Even though funds within a given series are consistent in their approach to income distribution, methods used by various families of distribution funds to generate returns and calculate payments vary widely. For example, one series might differentiate its funds based on the annual percentage each one distributes. Another group of funds might determine annual income levels and asset allocation based on how long each fund’s portfolio is intended to last. The shorter a fund’s time horizon, the higher the targeted annual payout.

A fund by any other name

Distribution funds also may be referred to as:

• Managed income funds
• Retirement income funds
• Income replacement funds
• Managed payout funds
• Retirement distribution funds

Some distribution funds are managed so that all capital is exhausted by the end of a designated time period, generally getting more conservative as that end date gets closer. Others are designed to preserve capital and make payouts primarily from earnings; these typically have no time frame attached. Regardless of how the targeted payout rate is derived for a given fund series, it’s based on what is considered a sustainable withdrawal rate given the fund’s objectives, planned asset allocation, and time frame (if applicable). Also, in some cases, the amount of the payout is adjusted to keep pace with inflation.

A distribution fund’s method of providing its targeted income is generally based on historical rates of return for various types of investments in both good and bad markets. Each fund’s strategy is intended to minimize the impact of market fluctuations on its income payout. However, there is no guarantee a fund’s payout will remain the same from year to year. Also, it’s important to remember that all investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Questions to ask about a distribution fund:

• How are monthly payments determined?
• Does the fund make payments from earnings only, or from both earnings and principal?
• What is the proposed withdrawal rate?
• How much risk does the fund take in trying to achieve its targeted distribution rate?
• What are the fund’s underlying investments?
• What is the fund’s current asset allocation, and how may that allocation change over time?

A distribution fund is generally structured as a fund of funds, meaning that it is comprised of other mutual funds. However, some also include other types of investments.

Distribution funds aren’t annuities

Because of their focus on income, distribution funds are designed to fill a role in retirement that is somewhat similar to that of annuity payments. However, there are some key differences. Perhaps the most important is that distribution funds offer no guarantees of the payout levels they offer; annuities generally do (subject to the claims-paying ability of the annuity’s issuer). Also, a mutual fund is not an insurance contract, as an annuity is. And annuities often are designed to ensure an income that lasts throughout an individual’s lifetime, and/or that of a spouse. Though an investor can attempt to provide that with an appropriate distribution fund, no fund can guarantee income for life.

Advantages of distribution funds

A distribution fund can simplify and streamline the process of receiving ongoing income. You don’t have to worry about constructing that diversified portfolio yourself, shifting its asset allocation over time, or rebalancing it periodically. Also, the concept of a distribution fund may be easier to understand than an insurance contract that has many riders and variables. In addition, a targeted payout rate may make it easier to estimate how long your savings will last than if you were to try to manage your portfolio on your own.

Distribution funds also offer a great deal of flexibility. Even though you receive regularly scheduled payments, you can withdraw additional amounts from your principal at any time. That means you can adjust your annual retirement income from year to year, or make withdrawals to take care of unexpected costs. Investments that guarantee a regular income stream typically restrict the use of your principal.
Because distribution funds were intended as low-cost alternatives to annuities, expense ratios tend to be comparatively low.

Tradeoffs with distribution funds

As mentioned previously, a distribution fund may strive to provide a certain level of income, but there are no guarantees that it will do so. Depending on how a fund is structured and managed, a steep or prolonged market decline could affect the amount of the scheduled payments from year to year, or how long your investment will last. If you cannot afford either possibility, a distribution fund may mean more uncertainty–either long term or short term–than you’re comfortable with.

If you are willing and able to structure and administer a systematic withdrawal program independently, you may be able to replicate many of the advantages of a distribution fund with a well-diversified portfolio. That would give you greater ability to customize payouts to your individual situation. For example, you could shift investments based on what’s happening in the financial markets or your own life, and manage your tax situation from year to year.

Distribution funds are designed for individuals who plan to stay invested in a given fund for an extended period of time. If you’re an active trader or might withdraw your money relatively quickly, you may want to think twice; in-and-out investing will undercut the very reason for choosing a distribution fund. And be aware that even though you can withdraw amounts over and above your scheduled payments, those withdrawals will reduce future earnings that would have supported distributions in later years. That could leave you vulnerable to longevity risk–the possibility of outlasting your savings.

You also may need to consider any projected distribution fund payouts in the context of other retirement income concerns, such as the tax consequences of those payouts, or required minimum distributions from a qualified retirement plan or IRA.

One of many choices

Before investing in a distribution fund, carefully consider its investment objectives, risks, charges, and expenses, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing. As with most investment options, a distribution fund may not fill all your retirement income needs. Don’t hesitate to get expert advice on whether one might be useful for part of your portfolio, or for a specific purpose.

Note: Past performance is no guarantee of future results and asset allocation alone can’t guarantee a profit or prevent a loss.

IMPORTANT DISCLOSURES
Altum Wealth Advisors does not provide investment, tax, or legal advice via this website. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.

Prepared for Altum Wealth Advisors, Steven Cliadakis, MBA, CWS®, Managing Director, Wealth Strategist.

2013 Year-End Tax Planning Basics

March 24, 2014

You don’t want to pay any more in tax than you have to. That means taking advantage of every strategy, deduction, and credit that you’re entitled to. However, the window of opportunity for many tax-saving moves closes on December 31, so it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2013 tax year.

Timing is everything

Consider any opportunities you have to defer income to 2014. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to put off paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Similarly, consider ways to accelerate deductions into 2013. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or, you might consider making next year’s charitable contribution this year instead.

What if you’ll be in a higher tax bracket in 2014?

If you know that you’ll be paying taxes at a higher rate in 2014 (say, for example, that an out-of-work spouse will be reentering the workforce in January), you might take the opposite tack. Consider whether it makes sense to try to accelerate income into 2013, and to postpone deductible expenses until 2014.

Factor in the AMT

Make sure that you factor in the alternative minimum tax (AMT). If you’re subject to AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That’s because the AMT–essentially a separate federal income tax system with its own rates and rules–effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2013, prepaying 2014 state and local taxes won’t help your 2013 tax situation, but could hurt your 2014 bottom line.

AMT triggers

You’re more likely to be subject to the AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. Other common triggers include home equity loan interest when proceeds aren’t used to buy, build, or improve your home, and the exercise of incentive stock options.

Landscape has changed for higher-income individuals

Most individuals will pay federal income taxes for 2013 based on the same federal income tax rate brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for 2012. The same goes for the maximum tax rate that generally applies to long-term capital gains and qualifying dividends (for those in the 10% or 15% marginal income tax brackets, a special 0% rate generally applies; for those in the 25%, 28%, 33%, and 35% brackets, a 15% maximum rate will generally apply).

Starting this year, however, a new 39.6% federal income tax rate applies if your taxable income exceeds $400,000 ($450,000 if married filing jointly, $225,000 if married filing separately, $425,000 if filing as head of household). If your income crosses that threshold, you’ll also be subject to a new 20% maximum tax rate on long-term capital gains and qualifying dividends.

You could see a difference even if your income doesn’t reach that level. That’s because, if your adjusted gross income (AGI) is more than $250,000 ($300,000 if married filing jointly, $150,000 if married filing separately, $275,000 if filing as head of household), your personal and dependency exemptions may be phased out this year, and your itemized deductions may be limited.

Two new Medicare taxes need to be accounted for this year as well. If your wages exceed $200,000 this year ($250,000 if married filing jointly or $125,000 if married filing separately), the hospital insurance (HI) portion of the payroll tax–commonly referred to as the Medicare portion–is increased by 0.9%. Also, a new 3.8% Medicare contribution tax now generally applies to some or all of your net investment income if your modified adjusted gross income exceeds those dollar thresholds.

Required minimum distributions

Once you reach age 70½, you’re generally required to start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules apply if you’re still working and participating in your employer’s retirement plan). You have to make the required withdrawals by the date required–the end of the year for most individuals–or a 50% penalty tax applies.

Absent new legislation, 2013 will be the last year that you’ll be able to make qualified charitable contributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity if you’re 70½ or older. Such distributions may be excluded from income and count toward satisfying any RMDs you would otherwise have to receive from your IRA in 2013.

IRAs and retirement plans a key part of planning

Make sure that you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2013 taxable income. Contributions you make to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible, so there’s no tax benefit for 2013, but qualified Roth distributions are completely free from federal income tax–making these retirement savings vehicles very appealing.

For 2013, you can contribute up to $17,500 to a 401(k) plan ($23,000 if you’re age 50 or older), and up to $5,500 to a traditional IRA or Roth IRA ($6,500 if age 50 or older). The window to make 2013 contributions to an employer plan typically closes at the end of the year, while you generally have until the due date of your 2013 federal income tax return to make 2013 IRA contributions.

Big changes to note

Home office deduction rules: Starting with the 2013 tax year, those who qualify to claim a home office deduction can elect to use a new simplified calculation method; under this optional method, instead of determining and allocating actual expenses, the square footage of the home office is simply multiplied by $5. There’s a cap of 300 square feet, so the maximum deduction under this method is $1,500. Not everyone can use the optional method, and there are some potential disadvantages, but for many the new simplified calculation method will be a welcome alternative.

Same-sex married couples: Same-sex couples legally married in jurisdictions that recognize same-sex marriage will be treated as married for all federal income tax purposes, even if the couple lives in a state that does not recognize same-sex marriage. If this applies to you, and you’re legally married on the last day of the year, you’ll generally have to file your federal income tax return as a married couple–either married filing jointly, or married filing separately. This affects only your federal income tax return–make sure you understand your state’s income tax filing requirements.

More health-care reform changes take effect in 2014: Beginning in 2014, you’ll generally be required to have adequate health-care coverage or face a penalty tax (a number of exceptions apply). A new premium tax credit will also be available to qualifying individuals.
Expiring provisions

A number of key provisions are scheduled to expire at the end of 2013, including:

Increased Internal Revenue Code (IRC) Section 179 expense limits and “bonus” depreciation provisions end.

The increased 100% exclusion of capital gain from the sale or exchange of qualified small business stock (provided certain requirements, including a five-year holding period, are met) will not apply to qualified small business stock issued and acquired after 2013.

The above-the-line deductions for qualified higher education expenses, and for up to $250 of out-of-pocket classroom expenses paid by education professionals, will not be available after the 2013 tax year.

If you itemize deductions, 2013 will be the last year you’ll be able to deduct state and local sales tax in lieu of state and local income tax.

Talk to a professional

When it comes to year-end tax planning, there’s always a lot to think about. A financial professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine if any year-end moves make sense for you.

IMPORTANT DISCLOSURES

Altum Wealth Advisors does not provide investment, tax, or legal advice via this website. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Prepared for Altum Wealth Advisors, Steven Cliadakis, MBA, CWS®, Managing Director, Wealth Strategist. Chico, CA, San Francisco, CA.

Protect Yourself against Identity Theft

January 24, 2014

Whether they’re snatching your purse, diving into your dumpster, stealing your mail, or hacking into your computer, they’re out to get you. Who are they? Identity thieves.

Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. If they give your personal information to the police during an arrest and then don’t show up for a court date, you may be subsequently arrested and jailed.

And what will you get for their efforts? You’ll get the headache and expense of cleaning up the mess they leave behind.

You may never be able to completely prevent your identity from being stolen, but here are some steps you can take to help protect yourself from becoming a victim.

Two types of identity theft

Account takeover is what happens when a thief gets your existing credit or debit cards (or even just the account numbers and expiration dates) and goes on a shopping spree at your expense
Application fraud is what happens when a thief gets your Social Security number and uses it (along with other personal information about you) to obtain new credit in your name

Check yourself out

It’s important to review your credit report periodically. Check to make sure that all the information contained in it is correct, and be on the lookout for any fraudulent activity.

You may get your credit report for free once a year. To do so, contact the Annual Credit Report Request Service online at www.annualcreditreport.com or call (877) 322-8228.

If you need to correct any information or dispute any entries, contact the three national credit reporting agencies:

Equifax: www.equifax.com (800) 685-1111
Experian: www.experian.com (888) 397-3742
TransUnion: www.transunion.com (800) 916-8800

Secure your number

Your most important personal identifier is your Social Security number (SSN). Guard it carefully. Never carry your Social Security card with you unless you’ll need it. The same goes for other forms of identification (for example, health insurance cards) that display your SSN. If your state uses your SSN as your driver’s license number, request an alternate number.

Don’t have your SSN preprinted on your checks, and don’t let merchants write it on your checks. Don’t give it out over the phone unless you initiate the call to an organization you trust. Ask the three major credit reporting agencies to truncate it on your credit reports. Try to avoid listing it on employment applications; offer instead to provide it during a job interview.

Don’t leave home with it

Most of us carry our checkbooks and all of our credit cards, debit cards, and telephone cards with us all the time. That’s a bad idea; if your wallet or purse is stolen, the thief will have a treasure chest of new toys to play with.

Carry only the cards and/or checks you’ll need for any one trip. And keep a written record of all your account numbers, credit card expiration dates, and the telephone numbers of the customer service and fraud departments in a secure place–at home.

Keep your receipts

When you make a purchase with a credit or debit card, you’re given a receipt. Don’t throw it away or leave it behind; it may contain your credit or debit card number. And don’t leave it in the shopping bag inside your car while you continue shopping; if your car is broken into and the item you bought is stolen, your identity may be as well.

Save your receipts until you can check them against your monthly credit card and bank statements, and watch your statements for purchases you didn’t make.

When you toss it, shred it

Before you throw out any financial records such as credit or debit card receipts and statements, cancelled checks, or even offers for credit you receive in the mail, shred the documents, preferably with a cross-cut shredder. If you don’t, you may find the panhandler going through your dumpster was looking for more than discarded leftovers.

Keep a low profile

The more your personal information is available to others, the more likely you are to be victimized by identity theft. While you don’t need to become a hermit in a cave, there are steps you can take to help minimize your exposure:

To stop telephone calls from national telemarketers, list your telephone number with the Federal Trade Commission’s National Do Not Call Registry by calling (888) 382-1222 or registering online at www.donotcall.gov
To remove your name from most national mailing and e-mailing lists, as well as most telemarketing lists register online with the Direct Marketing Association at www.dmachoice.org
To remove your name from marketing lists prepared by the three national consumer reporting agencies, call (888) 567-8688 or register online at www.optoutprescreen.com
When given the opportunity to do so by your bank, investment firm, insurance company, and credit card companies, opt out of allowing them to share your financial information with other organizations
You may even want to consider having your name and address removed from the telephone book and reverse directories

Take a byte out of crime

Whatever else you may want your computer to do, you don’t want it to inadvertently reveal your personal information to others. Take steps to help assure that this won’t happen.

Install a firewall to prevent hackers from obtaining information from your hard drive or hijacking your computer to use it for committing other crimes. This is especially important if you use a high-speed connection that leaves you continuously connected to the Internet. Moreover, install virus protection software and update it on a regular basis.

Try to avoid storing personal and financial information on a laptop; if it’s stolen, the thief may obtain more than your computer. If you must store such information on your laptop, make things as difficult as possible for a thief by protecting these files with a strong password–one that’s six to eight characters long, and that contains letters (upper and lower case), numbers, and symbols.

“If a stranger calls, don’t answer.” Opening e-mails from people you don’t know, especially if you download attached files or click on hyperlinks within the message, can expose you to viruses, infect your computer with “spyware” that captures information by recording your keystrokes, or lead you to “spoofs” (websites that replicate legitimate business sites) designed to trick you into revealing personal information that can be used to steal your identity.

If you wish to visit a business’s legitimate website, use your stored bookmark or type the URL address directly into the browser. If you provide personal or financial information about yourself over the Internet, do so only at secure websites; to determine if a site is secure, look for a URL that begins with “https” (instead of “http”) or a lock icon on the browser’s status bar.

And when it comes time to upgrade to a new computer, remove all your personal information from the old one before you dispose of it. Using the “delete” function isn’t sufficient to do the job; overwrite the hard drive by using a “wipe” utility program. The minimal cost of investing in this software may save you from being wiped out later by an identity thief.

Be diligent

As the grizzled duty sergeant used to say on a televised police drama, “Be careful out there.” The identity you save may be your own.

IMPORTANT DISCLOSURES

Altum Wealth Advisors does not provide investment, tax, or legal advice via this website. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Prepared for Altum Wealth Advisors, Steven Cliadakis, MBA, CWS®, Managing Director, Wealth Strategist. Chico, CA, San Francisco, CA.

Women and Money: Taking Control of Your Finances

January 16, 2014

As a woman, you have financial needs that are unique to your situation in life. Perhaps you would like to buy your first home. Maybe you need to start saving for your child’s college education. Or you might be concerned about planning for retirement. Whatever your circumstances may be, it’s important to have a clear understanding of your overall financial position.

That means constructing and implementing a plan. With a financial plan in place, you’ll be better able to focus on your financial goals and understand what it will take to reach them. The three main steps in creating and implementing an effective financial plan involve:

Developing a clear picture of your current financial situation
Setting and prioritizing financial goals and time frames
Implementing appropriate saving and investment strategies

Developing a clear picture of your current financial situation

The first step to creating and implementing a financial plan is to develop a clear picture of your current financial situation. If you don’t already have one, consider establishing a budget or a spending plan. Creating a budget requires you to:

Identify your current monthly income and expenses
Evaluate your spending habits
Monitor your overall spending

To develop a budget, you’ll need to identify your current monthly income and expenses. Start out by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support.

Next, add up all of your expenses. If it makes it easier, you can divide your expenses into two categories: fixed and discretionary. Fixed expenses include things that are necessities, such as housing, food, transportation, and clothing. Discretionary expenses include things like entertainment, vacations, and hobbies. You’ll want to be sure to include out-of-pattern expenses (e.g., holiday gifts, car maintenance) in your budget as well.

To help you stay on track with your budget:

Get in the habit of saving–try to make budgeting a part of your daily routine
Build occasional rewards into your budget
Examine your budget regularly and adjust/make changes as needed

Setting and prioritizing financial goals

The second step to creating and implementing a financial plan is to set and prioritize financial goals. Start out by making a list of things that you would like to achieve. It may help to separate the list into two parts: short-term financial goals and long-term financial goals.

Short-term goals may include making sure that your cash reserve is adequately funded or paying off outstanding credit card debt. As for long-term goals, you can ask yourself: Would you like to purchase a new home? Do you want to retire early? Would you like to start saving for your child’s college education?

Once you have established your financial goals, you’ll want to prioritize them. Setting priorities is important, since it may not be possible for you to pursue all of your goals at once. You will have to decide which of your financial goals are most important to you (e.g., sending your child to college) and which goals you may have to place on the back burner (e.g., the beachfront vacation home you’ve always wanted).

Implementing saving and investment strategies

After you have determined your financial goals, you’ll want to know how much it will take to fund each goal. And if you’ve already started saving towards a goal, you’ll want to know how much further you’ll need to go.

Next, you can focus on implementing appropriate investment strategies. To help determine which investments are suitable for your financial goals, you should ask yourself the following questions:

What is my time horizon?
What is my emotional and financial tolerance for investment risk?
What are my liquidity needs?

Once you’ve answered these questions, you’ll be able to tailor your investments to help you target specific financial goals, such as retirement, education, a large purchase (e.g., home or car), starting a business, or increasing your net worth.

Managing your debt and credit

Whether it is debt from student loans, a mortgage, or credit cards, it is important to avoid the financial pitfalls that can sometimes go hand in hand with borrowing. Any sound financial plan should effectively manage both debt and credit. The following are some tips to help you manage your debt/credit:

Make sure that you know exactly how much you owe by keeping track of balances and interest rates
Develop a short-term plan to manage your payments and avoid late fees
Optimize your repayments by paying off high-interest debt first or take advantage of debt consolidation/refinancing

Understanding what’s on your credit report

An important part of managing debt and credit is to understand the information contained in your credit report. Not only does a credit report contain information about past and present credit transactions, but it is also used by potential lenders to evaluate your creditworthiness.

Some credit traps to avoid:

When using revolving credit, avoid spending more than you can pay off at the end of each billing cycle
Be aware of hidden interest and fees
When transferring balances to take advantage of low interest rates, be sure to pay off outstanding balances before the teaser rate expires
Be sure to make payments on time; otherwise it could negatively affect your credit report

What information are lenders typically looking for in a credit report? For the most part, a lender will assume that you can be trusted to make timely monthly payments against your debts in the future if you have always done so in the past. As a result, a history of late payments or bad debts will hurt your credit. Based on your track record, if your credit report indicates that you are a poor risk, a new lender is likely to turn you down for credit or extend it to you at a higher interest rate. In addition, too many inquiries on your credit report in a short time period can make lenders suspicious.

Today, good credit is even sometimes viewed by potential employers as a prerequisite for employment–something to think about if you’re in the market for a new job or plan on changing jobs in the near future.

Because a credit report affects so many different aspects of one’s financial situation, it’s important to establish and maintain a good credit history in your own name. You should review your credit report regularly and be sure to correct any errors on it. You’re entitled to a free copy of your credit report from each of the three major credit reporting agencies once every 12 months. You can go to www.annualcreditreport.com for more information.

Working with a financial professional

Although you can certainly do it alone, you may find it helpful to work with a financial professional to assist you in creating and implementing a financial plan.

A financial professional can help you accomplish the following:

Determine the state of your current affairs by reviewing income, assets, and liabilities
Develop a plan and help you identify your financial goals
Make recommendations about specific products/services
Monitor your plan
Adjust your plan as needed

Tip: Keep in mind that unless you authorize a financial professional to make investment choices for you, a financial professional is solely there to make financial recommendations to you. Ultimately, you have responsibility for your finances and the decisions surrounding them.

IMPORTANT DISCLOSURES

Altum Wealth Advisors does not provide investment, tax, or legal advice via this website. The information presented here is not specific to any individual’s personal circumstances.

Prepared for Altum Wealth Advisors, Steven Cliadakis, MBA, CWS®, Managing Director, Wealth Strategist. Chico, CA, San Francisco, CA.

Bonds vs. Bond Funds: Which Is Better When Interest Rates Rise?

January 10, 2014

The Federal Reserve has said it expects to begin raising its target rate sometime in 2014. Since bond prices fall when interest rates rise, it may be a good time to pay increased attention to any fixed-income investments you have. Here are some factors to consider when you review your portfolio.

Maturity dates and duration

One way to address the threat of rising rates is through maturity dates. Long-term bonds may pay a higher coupon rate than short-term bonds, but when rates rise, long-term bond values typically suffer more. That’s because investors may be reluctant to tie up their money for long periods if they expect a bond’s interest payments may suffer by comparison when newer bonds that pay higher rates are issued. The later a bond’s maturity date, the greater the risk that its yield eventually will be surpassed by that of newer bonds.

A bond fund doesn’t have a maturity date, and your shares may be worth more or less than you paid for them when you sell. However, there is another way to gauge the sensitivity of either a bond or a bond fund to interest rates: its duration, which takes into account not only maturity but also the value of future interest payments. The longer the duration, the more sensitive a security is to interest rate changes.

To estimate the impact of a rate change, simply multiply a security’s duration by the percentage change in interest rates. For example, if interest rates rise by 1%, a bond or bond fund with a duration of 3 years could be expected to lose roughly 3% in value, while one with a 7-year duration might fall by 7%. (Though interest rates currently have little room to fall, the same principle would apply; a 1% decline in rates should result in a 3% gain for a bond fund with a 3-year duration.) Though this hypothetical example doesn’t represent the return of any specific investment, you can apply the general principle to your own holdings.

Diversification

Since rising rates affect most bonds, diversification provides only limited protection against rate increases. To balance yields with the threat of rising rates, you can diversify across various segments of the bond market (for example, investment-grade corporate, high-yield, Treasuries, foreign, short/intermediate/long-term, and municipal debt). Bonds don’t respond uniformly to interest rate changes. The differences, or spreads, between the yields of various types can mean that some categories are under- or over-valued compared to others. Funds may offer greater diversification within each segment at a lower cost than individual bonds, providing greater protection against the impact of a potential default by a single issuer. However, diversification alone doesn’t ensure a profit or prevent the possibility of loss, including loss of principal.

Flexibility

Holding individual bonds allows you to sell a specific bond on your own timetable or hold it until it matures. That flexibility has two advantages. First, if you hold to maturity, unless a bond’s issuer defaults, you know how much you’ll receive when the principal is repaid. Rising interest rates may cause a bond’s market value to fluctuate in the meantime, but if you hold it to maturity, that fluctuation may not be an issue for you, especially if predictable income is your highest priority.

Second, it can help you manage your tax liability; if a specific bond has lost value, you can sell it and declare the loss on your federal income tax return. You may be able to instruct your broker to sell specific shares of a bond fund to harvest losses for tax purposes, but in general it’s more challenging to manage tax liability as precisely with bond funds. For example, capital gains or losses generated by a fund manager’s trading are passed through to individual shareholders each year, which can affect your tax liability. Also, a bond fund’s value can be affected by your fellow investors. Since an open-end fund must redeem investors’ shares daily, strong selling can force a fund to sell holdings to meet redemption demands, which can have implications for other shareholders.

Laddering individual bonds also can help provide flexibility to adjust to rising rates. Laddering involves buying a portfolio of bonds with varying maturities; for example, a five-bond portfolio might be structured so that one of the five matures each year for the next five years. As interest rates rise, each bond that matures can be reinvested in a newer instrument that offers a higher yield.

Liquidity

A mutual fund will redeem your shares at the end of every business day. An individual bond traded on the open market may not have the same liquidity, and you could have difficulty finding a buyer who’s willing to pay the asking price. However, individual bonds are priced and traded throughout the day; only closed-end funds and exchange-traded funds have that flexibility, not open-end mutual funds.

IMPORTANT DISCLOSURES

Altum Wealth Advisors does not provide investment, tax, or legal advice via this website. The information presented here is not specific to any individual’s personal circumstances.

Prepared for Altum Wealth Advisors, Steven Cliadakis, MBA, CWS®, Managing Director, Wealth Strategist. Chico, CA, San Francisco, CA.

The Impact of Health-Care Costs on Social Security

January 10, 2014

For many retirees and their families, Social Security provides a dependable source of income. In fact, for the majority of retirees, Social Security accounts for at least half of their income (Source: Fast Facts & Figures About Social Security, 2013). However, more of that income is being spent on health-related costs each year, leaving less available for other retirement expenses.

The importance of Social Security

Social Security is important because it provides a retirement income you can’t outlive. In addition, benefits are available for your spouse based on your benefit amount during your lifetime, and at your death in the form of survivor’s benefits. And, these benefits typically are adjusted for inflation (but not always; there was no cost-of-living increase for the years 2010 and 2011). That’s why for many people, Social Security is an especially important source of retirement income.

Rising health-care costs

You might assume that when you reach age 65, Medicare will cover most of your health-care costs. But in reality, Medicare pays for only a portion of the cost for most health-care services, leaving a potentially large amount of uninsured medical expenses.

How much you’ll ultimately spend on health care generally depends on when you retire, how long you live, your health status, and the cost of medical care in your area. Nevertheless, insurance premiums for Medicare Part B (doctor’s visits) and Part D (drug benefit), along with Medigap insurance, could cost hundreds of dollars each month for a married couple. In addition, there are co-pays and deductibles to consider (e.g., after paying the first $147 in Part B expenses per year, you pay 20% of the Medicare-approved amount for services thereafter). Your out-of-pocket yearly costs for medical care, medications, and insurance could easily exceed thousands of dollars.

Medicare’s impact on Social Security

Most people age 65 and older receive Medicare. Part A is generally free, but Parts B and D have monthly premiums. The Part B premium generally is deducted from your Social Security check, while Part D has several payment alternatives. In 2013, the premium for Part B was $104.90 per month. The cost for Part D coverage varies, but usually averages between $30 and $60 per month (unless participants qualify for low-income assistance). Part B premiums have increased each year and are expected to continue to do so, while Part D premiums vary by plan, benefits provided, deductibles, and coinsurance amounts. And, if you enroll late for either Part B or D, your cost may be permanently increased.

In addition, Medicare Parts B and D are means tested, meaning that if your income exceeds a predetermined income cap, a surcharge is added to the basic premium. For example, an individual with a modified adjusted gross income between $85,000 and $170,000 may pay an additional 40% for Part B and an additional $11.60 per month for Part D.

Note: Part C, Medicare Advantage plans, are offered by private companies that contract with Medicare to provide you with all your Part A and Part B benefits, often including drug coverage. While the premiums for these plans are not subtracted from Social Security income, they are increasing annually as well.

The bottom line

The combination of rising Medicare premiums and out-of-pocket health-care costs can use up more of your fixed income, such as Social Security. As a result, you may need to spend more of your retirement savings than you expected for health-related costs, leaving you unable to afford large, unanticipated expenses. Depending on your circumstances, spending more on health-care costs, including Medicare, may leave you with less available for other everyday expenditures and reduce your nest egg, which can impact the quality of your retirement.

IMPORTANT DISCLOSURES

Altum Wealth Advisors does not provide investment, tax, or legal advice via this website. The information presented here is not specific to any individual’s personal circumstances.

Prepared for Altum Wealth Advisors, Steven Cliadakis, MBA, CWS®, Managing Director, Wealth Strategist. Chico, CA, San Francisco, CA.

Common Factors Affecting Retirement Income

January 9, 2014

When it comes to planning for your retirement income, it’s easy to overlook some of the common factors that can affect how much you’ll have available to spend. If you don’t consider how your retirement income can be impacted by investment risk, inflation risk, catastrophic illness or long-term care, and taxes, you may not be able to enjoy the retirement you envision.

Investment risk

Different types of investments carry with them different risks. Sound retirement income planning involves understanding these risks and how they can influence your available income in retirement.
Investment or market risk is the risk that fluctuations in the securities market may result in the reduction and/or depletion of the value of your retirement savings. If you need to wi

thdraw from your investments to supplement your retirement income, two important factors in determining how long your investments will last are the amount of the withdrawals you take and the growth and/or earnings your investments experience. You might base the anticipated rate of return of your investments on the presumption that market fluctuations will average out over time, and estimate how long your savings will last based on an anticipated, average rate of return.

Unfortunately, the market doesn’t always generate positive returns. Sometimes there are periods lasting

for a few years or longer when the market provides negative returns. During these periods, constant withdrawals from your savings combined with prolonged negative market returns can result in the depletion of your savings far sooner than planned.

Reinvestment risk is the risk that proceeds available for reinvestment must be reinvested at an interest rate that’s lower than the rate of the instrument that generated the proceeds. This could mean that you have to reinvest at a lower rate of return, or take on additional risk to achieve the same level of return. This type of risk is often associated with fixed interest savings instruments such as bonds or bank certificates of deposit. When the instrument matures, comparable instruments may not be paying the same return or a better return as the matured investment.

Interest rate risk occurs when interest rates rise and the prices of some existing investments drop. For example, during periods of rising interest rates, newer bond issues will likely yield higher coupon rates than older bonds issued during periods of lower interest rates, thus decreasing the market value of the older bonds. You also might see the market value of some stocks and mutual funds drop due to interest rate hikes because some investors will shift their money from these stocks and mutual funds to lower-risk fixed investments paying higher interest rates compared to prior years.

Inflation risk

Inflation is the risk that the purchasing power of a dollar

will decline over time, due to the rising cost of goods and services. If inflation runs at its historical long term average of about 3%, the purchasing power of a given sum of money will be cut in half in 23 years. If it jumps to 4%, the purchasing power is cut in half in 18 years.

A simple example illustrates the impact of inflation on retirement income. Assuming a consistent annual inflation rate of 3%, and excluding taxes and investment returns in general, if $50,000 satisfies your retirement income needs this year, you’ll need $51,500 of income next year to meet the same income needs. In 10 years, you’ll need about $67,195 to equal the purchasing power of $50,000 this year. Therefore, to outpace inflation, you should try to have some strategy in place that allows your income stream to grow throughout retirement.

(The following hypothetical example is for illustrative purposes only and assumes a 3% annual rate of inflation without considering taxes. It does not reflect the performance of any particular investment.)

Equivalent Purchasing Power of $50,000 at 3% Inflation

Long-term care expenses

Long-term care may be needed when physical or mental disabilities impair your capacity to perform everyday basic tasks. As life expectancies increase, so does the potential need for long-term care.

Paying for long-term care can have a significant impact on retirement income and savings, especially for the healthy spouse. While not everyone needs long-term care during their lives, ignoring the possibility of such care and failing to plan for it can leave you or your spouse with little or no income or savings if such care is needed. Even if you decide to buy long-term care insurance, don’t forget to factor the premium cost into your retirement income needs.

The costs of catastrophic care

As the number of employers providing retirement health-care benefits dwindles and the cost of medical care continues to spiral upward, planning for catastrophic health-care costs in retirement is becoming more important. If you recently retired from a job that provided health insurance, you may not fully appreciate how much health care really costs.

Despite the availability of Medicare coverage, you’ll likely have to pay for additional health-related expenses out-of-pocket. You may have to pay the rising premium costs of Medicare optional Part B coverage (which helps pay for outpatient services) and/or Part D prescription drug coverage. You may also want to buy supplemental Medigap insurance, which is used to pay Medicare deductibles and co-payments and to provide protection against catastrophic expenses that either exceed Medicare benefits or are not covered by Medicare at all. Otherwise, you may need to cover Medicare deductibles, co-payments, and other costs out-of-pocket.

Taxes

The effect of taxes on your retirement savings and income is an often overlooked but significant aspect of retirement income planning. Taxes can eat into your income, significantly reducing the amount you have available to spend in retirement.

It’s important to understand how your investments are taxed. Some income, like interest, is taxed at ordinary income tax rates. Other income, like long-term capital gains and qualifying dividends, currently benefit from special–generally lower–maximum tax rates. Some specific investments, like certain municipal bonds, generate income that is exempt from federal income tax altogether. You should understand how the income generated by your investments is taxed, so that you can factor the tax into your overall projection.

Taxes can impact your available retirement income, especially if a significant portion of your savings and/or income comes from tax-qualified accounts such as pensions, 401(k)s, and traditional IRAs, since most, if not all, of the income from these accounts is subject to income taxes. Understanding the tax consequences of these investments is vital when making retirement income projections.

Have you planned for these factors?

When planning for your retirement, consider these common factors that can affect your income and savings. While many of these same issues can affect your income during your working years, you may not notice their influence because you’re not depending on your savings as a major source of income. However, investment risk, inflation, taxes, and health-related expenses can greatly affect your retirement income.

IMPORTANT DISCLOSURES

Altum Wealth Advisors does not provide investment, tax, or legal advice via this website. The information presented here is not specific to any individual’s personal circumstances.

Prepared for Altum Wealth Advisors, Steven Cliadakis, MBA, CWS®, Managing Director, Wealth Strategist. Chico, CA, San Francisco, CA.

Financial Planning – Helping You See the Big Picture

January 7, 2014

Do you picture yourself owning a new home, starting a business, or retiring comfortably? These are a few of the financial goals that may be important to you, and each comes with a price tag attached.

That’s where financial planning comes in. Financial planning is a process that can help you reach your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources.

Why is financial planning important?

A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you’ll be better able to focus on your goals and understand what it will take to reach them.

One of the main benefits of having a financial plan is that it can help you balance competing financial priorities. A financial plan will clearly show you how your financial goals are related–for example, how saving for your children’s college education might impact your ability to save for retirement. Then you can use the information you’ve gleaned to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you’ll have the peace of mind that

comes from knowing that your financial life is on track.

The financial planning process

Creating and implementing a comprehensive financial plan generally involves working with financial professionals to:

Develop a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, your investment portfolio, your tax exposure, and your estate plan
Establish and prioritize financial goals and time frames for achieving these goals
Implement strategies that address your current financial weaknesses and build on your financial strengths
Choose specific products and services that are tailored to meet your financial objectives
Monitor your plan, making adjustments as your goals, time frames, or circumstances change

Some members of the team

The financial planning process can involve a number of professionals.

Financial planners typically play a central role in the process, focusing on your overall financial plan, and often coordinating the activities of other professionals who have expertise in specific areas.

Accountants or tax attorneys provide advice on federal and state tax issues.

Estate planning attorneys help you plan your estate and give advice on transferring and managing your assets before and after your death.

Insurance professionals evaluate insurance needs and recommend appropriate products and strategies.

Investment advisors provide advice about investment options and asset allocation, and can help you plan a strategy to manage your investment portfolio.

The most important member of the team, however, is you. Your needs and objectives drive the team, and once you’ve carefully considered any recommendations, all decisions lie in your hands.

Why can’t I do it myself?

You can, if you have enough time and knowledge, but developing a comprehensive financial plan may require expertise in several areas. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered.

Staying on track

The financial planning process doesn’t end once your initial plan has been created. Your plan should generally be reviewed at least once a year to make sure that it’s up-to-date. It’s also possible that you’ll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:

Your goals or time horizons change

You experience a life-changing event such as marriage, the birth of a child, health problems, or a job loss
You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
Your income or expenses substantially increase or decrease
Your portfolio hasn’t performed as expected
You’re affected by changes to the economy or tax laws

Common questions about financial planning

What if I’m too busy?

Don’t wait until you’re in the midst of a financial crisis before beginning the planning process. The sooner you start, the more options you may have.

Is the financial planning process complicated?

Each financial plan is tailored to the needs of the individual, so how complicated the process will be depends on your individual circumstances. But no matter what type of help you need, a financial professional will work hard to make the process as easy as possible, and will gladly answer all of your questions.

What if my spouse and I disagree?

A financial professional is trained to listen to your concerns, identify any underlying issues, and help you find common ground.

Can I still control my own finances?

Financial planning professionals make recommendations, not decisions. You retain control over your finances. Recommendations will be based on your needs, values, goals, and time frames. You decide which recommendations to follow, then work with a financial professional to implement them.

IMPORTANT DISCLOSURES

Altum Wealth Advisors does not provide investment, tax, or legal advice via this website. The information presented here is not specific to any individual’s personal circumstances.

Prepared for Altum Wealth Advisors, Steven Cliadakis, MBA, CWS®, Managing Director, Wealth Strategist. Chico, CA, San Francisco, CA.

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Distribution Funds: Putting Income on Autopilot

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How distribution funds work

One size doesn’t fit all

A fund by any other name

Distribution funds also may be referred to as:

Questions to ask about a distribution fund:

Distribution funds aren’t annuities

Advantages of distribution funds

Tradeoffs with distribution funds

One of many choices

Timing is everything

What if you’ll be in a higher tax bracket in 2014?

Factor in the AMT

AMT triggers

Landscape has changed for higher-income individuals

Required minimum distributions

IRAs and retirement plans a key part of planning

Big changes to note

A number of key provisions are scheduled to expire at the end of 2013, including:

Talk to a professional

Two types of identity theft

Check yourself out

Secure your number

Don’t leave home with it

Keep your receipts

When you toss it, shred it

Keep a low profile

Take a byte out of crime

Be diligent

Developing a clear picture of your current financial situation

Setting and prioritizing financial goals

Implementing saving and investment strategies

Managing your debt and credit

Understanding what’s on your credit report

Working with a financial professional

Maturity dates and duration

Diversification

Flexibility

Liquidity

The importance of Social Security

Rising health-care costs

Medicare’s impact on Social Security

The bottom line

Investment risk

Inflation risk

Long-term care expenses

The costs of catastrophic care

Taxes

Have you planned for these factors?

Why is financial planning important?

The financial planning process

Some members of the team

Why can’t I do it myself?

Staying on track

Your goals or time horizons change

Common questions about financial planning

What if I’m too busy?

Is the financial planning process complicated?

What if my spouse and I disagree?

Can I still control my own finances?

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