The Diversified Blog

A wealth management blog dedicated to creating a long lasting sustainable retirement.

Same Sex Marriage Ruling Raises New Tax Issues

In a move that reinforces the rapid shift in public sentiment regarding same-sex unions, the Supreme Court ruled earlier this year that all marriages -- and "the constellation of benefits" that are linked to marriage -- must be recognized and enforced in all 50 states.1

 

While the law brings happiness and relief to those affected, it also introduces new legal, tax, and financial issues that must be navigated. On the matter of income taxes alone, there is much that needs to be reviewed and acted upon. Here is a quick summary of some of the major tax planning issues to consider.

 

Factoring Taxes

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Searching for Yield in Today's Market

Income-oriented investors have had a tough go of it for the past several years. Persistently low interest rates have curtailed traditional sources of yield. Yet, by broadening their search criteria, investors may uncover new ways to diversify their income portfolios with potentially more attractive options.

 

Consider Total Return

 

When evaluating income-generating opportunities investors need to consider total return -- income plus price appreciation, while maintaining a consistent focus on risk reduction. When you think in these terms, certain asset classes can emerge as relatively more attractive. Given these parameters, here are a few equity and fixed-income investments to consider.

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Should You "Fix" Variable Rate Debt?

While investors are keeping a close watch on the Federal Reserve for indications of when it will start raising interest rates, the consensus among economists is that it will begin its credit-tightening cycle at some point this year.

 

Of course there are two sides to the interest rate coin: the investor and the borrower. Rising rates are generally good news for savers and investors, but they represent an expense for borrowers and increase the cost of taking out loans and mortgages.

 

In the current environment, individuals may be evaluating the potential benefits of converting variable-rate loans, including adjustable rate mortgages (ARMs), home equity lines of credit, and student loans, to a fixed rate.

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Understanding Taxable Equivalent Yields

Here is a nice article written by Wealth Management Systems Inc:

 

Municipal bonds have long been considered a haven for high-net-worth investors because their income returns are generally free from federal income taxes and, in some cases, state and local income taxes. However, it would be a mistake to assume that only high-net-worth investors may benefit from investing in municipal bonds or municipal bond funds.  Click here to read more: Understanding Taxable Equivalent Yields.pdf

 

Required Attribution

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Lessons Learned: Staying Invested in the Stock Market

Here is a nice article provided by Wealth Management Systems Inc.:

 

Many investors have learned that stock returns can swing dramatically over the short term. But if you’re investing for the long term, you may want to look at the bigger picture. CLICK HERE to learn more:  Lessons Learned Staying Invested in the Stock Market.pdf

 

Required Attribution

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What Is a Custodial IRA?

A custodial IRA is an IRA managed by a parent or guardian for the benefit of a minor child, as long as that child works and has earned income. As with other types of IRAs, the maximum annual contribution for 2015 is $5,500 (indexed annually for inflation) and the underlying investments can be determined by the person managing the account, in this case the parent or guardian, prior to the child reaching majority age. A custodial IRA can be either a traditional IRA or a Roth IRA. 

 

Although an adult typically oversees the account, the funds belong to the minor child and must be turned over at the age of majority, which varies depending on the state. IRAs present tax benefits, and opening an account when a child is relatively young may enhance these advantages. As long as the money remains invested, contributions and investment earnings may potentially compound free of taxation. The longer the time period when contributions are made and the money can compound, the greater is the opportunity to build wealth. Required minimum distributions (RMDs) from traditional IRAs, which are taxed as ordinary income, are mandatory after age 70½. For Roth IRAs, RMDs are not required, and the assets could potentially compound for a lifetime. Restrictions, penalties, and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

 

Withdrawals

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Understanding Market Capitalization

If you're creating an investment strategy designed to help you pursue long-term financial goals, understanding the relationship between company size, return potential, and risk is crucial. With that knowledge, you'll be better prepared to build a balanced stock portfolio that comprises a mix of "market caps."

 

Market cap -- or market capitalization -- refers to the total value of all a company's shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares. For example, a company with 20 million shares selling at $50 a share would have a market cap of $1 billion.

 

Why is market capitalization such an important concept? It allows investors to understand the relative size of one company versus another. Market cap measures what a company is worth on the open market, as well as the market's perception of its future prospects, because it reflects what investors are willing to pay for its stock.

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Hedge of Darkness

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors.

 

It’s true. Big money can be made from hedge funds. If you run one, that is.  To read the full article CLICK HERE: Hedge of Darkness.pdf

 

 

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Beneficiary of a Trust? What You Need to Know

If you have been named as a beneficiary of a trust, you probably have many questions about what comes next. Trusts can take many forms and may be governed by unique provisions established by the creator of the trust or "grantor." As a trust beneficiary, you have certain rights. But to ensure that your financial and other interests are fully protected, you need some basic information about different trust structures and their management.

 

Trust Basics

 

At their most basic, trusts can be grouped into two broad categories -- living trusts and testamentary trusts. A living trust is created by an individual during his or her lifetime. The grantor transfers property to a trust that is managed for the trust beneficiaries by a trustee. The grantor may act as trustee, or he or she may appoint another family member or family advisor, such as an attorney or accountant to be the trustee. A testamentary trust is established by will upon the death of the person whose assets it represents. Testamentary trusts can be used for many purposes; chief among them to provide for current and future beneficiaries.

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Home Equity Loans Versus Lines of Credit: What's the Difference?

Thinking of tapping the equity in your home to do a renovation, buy a second home, or consolidate debt? Before you decide which borrowing option is right for you, it's important to understand the main differences between the two options.

 

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Comparison Shop

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Funding Challenges of Women-Owned Businesses

Female entrepreneurs are an undeniable force in the global economy. Yet businesses owned by women have historically attracted much less capital than those of their male-owned counterparts.

 

Facing Challenges

 

Although the number of women who apply for and obtain equity capital has increased in the past few years, progress has been slow. According to the U.S. Department of Commerce, women are less likely than men to use venture capital as a source of business funding.* Why this disparity exists isn't entirely clear. Experts have suggested various possible reasons.

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Earn Tax-Free Income With Municipal Bonds

Nobody likes to pay taxes. That's why investors naturally are interested in earning tax-free income. Municipal bond issues are a very popular way to earn tax-free income and, if income is reinvested, achieve tax-free compounding of returns.

 

Municipal bonds (also known as "munis") are fixed-income investments that can provide higher after-tax returns than similar taxable corporate or government issues. In general, the interest paid on municipal issues is exempt from federal taxes and sometimes state and local taxes as well.

 

Municipal Bonds Defined

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Can Investors Predict

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

Can Investors Predict when to buy and sell securities? Jim Davis, PhD, of Dimensional runs more than 780 tests on data from 15 stock markets to test this theory.

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Making the Grade: Test Your Knowledge of Key College Planning Facts

The latest report on college costs published by the College Board brought some good news: The increases in tuition and fees for the 2014-2015 academic year were lower than the average annual increases in the past 30 years across all sectors included in the study.

 

Yet even though college price increases are not accelerating, the report's authors affirmed that, in real terms, college costs have been rising for decades. For instance, the report, "Trends in College Pricing 2014," revealed that the inflation-adjusted average published price for in-state students at public four-year universities is 42% higher than it was 10 years ago and more than twice as high as it was 20 years ago. In the private nonprofit four-year sector, the increases were 24% over 10 years and 66% over 20 years.

 

Given this reality, it is easy to see why devising a plan to pay for college is a major stressor for many American families. Underlying that anxiety are numerous misconceptions about the financial aid process and how a family's savings might affect a student's eligibility to receive aid.

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The Financial Crisis in Greece

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

The Financial Crisis in Greece - Weston Wellington of Dimensional offers useful perspectives on the financial crisis in Greece in this video.

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Brush Up on Your IRA Facts

If you are opening an IRA for the first time or need a refresher course on the specifics of IRA ownership, here are some facts for your consideration.

 

IRAs in America

 

IRAs continue to play an increasingly prominent role in the retirement saving strategies of Americans. According to the Investment Company Institute (ICI), the U.S. retirement market had $24.7 trillion in assets at the end of 2014, with $7.3 trillion of that sum attributable to IRAs.1 Today, some 41 million -- or 34% -- of U.S. households report owning IRAs.2

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Make Sure It Isn't An Old Idea in Disguise

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

Make Sure It Isn't an Old Idea in Disguise - Eugene Fama and David Booth describe how Dimensional scrutinizes new research to ensure that it is robust, sensible, and applicable in real world portfolios. They point out that the addition of new dimensions to a portfolio brings higher constraints on implementation, which is why Dimensional carefully weighs how the application of new research may impact expected returns or risk management of a portfolio.

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Definitions and Explanations of Services - Investment Management vs Wealth Management

In our most recent blog post, we covered the Services We Offer.   In this post we would like to review the Definitions and Explanations of those services. 

 

Definitions and Explanations of Services

 

We are a fiduciary for all clients which means we act in the best interests of the client. 

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The 200th Draft

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

The 200th Draft - Eugene Fama describes his special working relationship with Kenneth French and their rigorous approach to research. While their papers are available in the public domain, what distinguishes Dimensional's application of that research is the firm's close working relationship with Eugene and Ken and the ability to tap into their underlying thought processes and broader insights.

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Services We Offer- Investment Management vs Wealth Management

In our most recent blog post, we covered the definition of Investment Management and Wealth Management.  Wealth Management, which entails Investment Consulting (IM), Advanced Planning (AP) and Relationship Management (RM) is what Diversified Asset Management, Inc. offers to our clients.

 

In part two of the post, we wrote about the different definitions and explanations of the services that were mentioned to help give you a better understanding of what our firm handles under the umbrella of “Wealth Management”. 

 

In this post we would like to introduce you to the different service packages that we offer to our various clients.  It is our hope once you’ve read three articles, you will have a better understanding of exactly what we deliver in Wealth Management and if we are right for you. 

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The Power of the Markets

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

The Power of the Markets - This video explains how security prices are set-and change-based on the collective knowledge of buyers and sellers. Armed with this information, investors can be more confident about the power of the financial markets.

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Investment Management vs Wealth Management, There is a Difference!

The majority of the consumers probably view Investment Management and Wealth Management as one in the same or very similar.  However, that couldn’t be farther from the truth.  If you believe they are the same or similar, allow me a moment to share their differences. 

 

Investment Management 

 

Investment Management primarily involves advising and managing client investments based on reaching their financial goals.  Services include client meetings and communications, making recommendations and implementing investment decisions, trading, rebalancing and preparing and processing all the paperwork for the client.   

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Weston Wellington on Dimensional's Philosophy

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

Weston Wellington on Dimensional's Philosophy - Vice President Weston Wellington explains how he came to embrace Dimensional's belief in markets and approach to investing.

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Low Expense Ratios Are Not All They Are Cracked Up to Be…

Investors tend to focus on low expense ratio funds, but sometimes they miss the forest for the trees. A lot of mutual funds and exchanged traded funds (ETF’s) tout their low expense ratios but many trail the slightly more expensive passively managed funds. The reason for this lack of performance can be due to many factors:

 

1.  A lot of times the mutual funds and ETF’s with the low expense ratios focus on the larger markets around the world. They can keep their expense ratios low because they are buying stocks in the largest companies in the world. These companies typically have the lowest performance over the long haul. While “more expensive to buy”, small company stocks tend to have the best performance over longer time frames. 

 

2.  Many of the “low cost” funds are index funds. They have problems because their goal is to track the index as perfectly as possible. Index funds must buy all of the stocks in the index in the same proportion as the index. At designated times of the year, stocks move into and out of the index and the index funds must make the same changes at the same times. In other words the fund managers are all buying the stocks coming into the index at high prices and selling the stocks going out of the index at low prices. This is done to avoid tracking error and the additional expenses created, known as, reconstitution costs.  

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Myron Scholes on Dimensional

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

Myron Scholes on Dimensional - Nobel prize winning economist Myron Scholes reflects on the beginnings of Dimensional and its unique approach to investing.

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Mutual Funds and Hedge Funds – The Survivorship Bias Problem – Returns Are Worse Than You Think!!!

Survivorship bias is a problem with the way that mutual fund returns are reported. Funds that are liquidated or merged into other funds are eliminated from the averages. Only the surviving funds are included when the aggregate returns are reported by the mutual fund reporting services or the newspapers. Understanding survivorship bias is important because it overstates the returns of the surviving funds by 1% or more per year as stated by Mark Carhart and others in their paper titled Mutual Fund Survivorship.

 

Let’s look at a specific example. Say 10 funds are started by a fund company. After 3 years the average annual returns of the 10 funds are as follows:

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Let’s say the market return during this time was 7% annually. Funds A - C under performed the market return of 7%, by a wide margin. Funds D - F performed slightly worse than the market return of 7%. Funds G - J performed the same or better than the market. The average return of the 10 funds is 5.5%, while the market returned 7%. Now let’s say the fund company that created all these funds was unhappy with the performance of funds A - C. They decide to merge funds A - C into funds H - J respectively. Specifically, fund A is merged into H, fund B is merged into fund I, and fund C is merged into J. After funds A - C are merged (eliminated), the records of the surviving funds are as follows:

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How Much Should You Save for Retirement?

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

How Much Should You Save for Retirement? - How much should you be saving for retirement? Massi De Santis, PhD, explains that the answer should be customized for each individual, based on how their income grows prior to retirement.

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The 2015 Dalbar Study - Why Does the Average Investor Underperform?

Each year Dalbar publishes their Quantitative Analysis of Investor Behavior, which analyzes the effects of investor decisions to buy, sell and switch into and out of mutual over short and long-term timeframes. The results consistently show that the average investor earns less – in many cases, much less – than the mutual fund performance reports would suggest. 

 

For the 20-year period ending in Dec 2014, the average equity (stock) mutual fund investor earned 5.19% annually while the S&P 500 Index return 9.85%; a gap of 4.66%. The underperformance was even worse for bond funds. The average fixed income (bond) fund investor earned 1.16% during the 20-year period ending Dec 2014 and the Barclays Aggregate Bond Index returned 5.97% annually during the 20-year period; a gap of 4.81%. 

 

The reasons for the underperformance by the average investor are numerous:

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How Much Income Do You Need in Retirement?

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

How Much Income Do You Need in Retirement? - How much retirement income is enough? In this client-ready video, Marlena Lee, PhD, explains that the answer should be customized for each individual, based on their lifestyle and their income prior to retirement.

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Yield vs. Total Return

Here is a nice article written by Dimensional Fund Advisors:

 

In this brief, we explore the yield vs. total return approaches to generating income in a portfolio and address misconceptions about the benefits of emphasizing dividend and interest income at the expense of other portfolio issues.  CLICK HERE:  Yield vs. Total Return.pdf

 

 

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Eugene Fama: Building a Life

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

Eugene Fama: Building a Life - A look into the personal life of Nobel prize winning economist Eugene Fama and how he became an economist.

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Greece is the Word

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:

 

In recent weeks, the world’s markets and media financial pages have focused intensely on the standoff between debt-laden Greece and its international lenders over the conditions of any further bailout.  Click here to read full article:  Greece is the Word.pdf

 

 

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Applying Science to Investing

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

Applying Science to Investing - An introduction to Dimensional for investors, this video underscores how science has transformed every aspect of our lives, including investing.

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The China Syndrome

Here is a nice article provided by Jim Parker of Dimensional Fund Advisors:

 

The recent severe volatility in China’s share markets has raised questions among many investors about the causes of the fall and the wider implications for the global economy and markets.  Click here to read full article:  The China Syndrome.pdf

 

 

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Dimensional Origins

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

Dimensional Origins - Chairman and Co-CEO David Booth and others talk about the firm's founding and its close ties to the academic community.

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Shielding Retirement Assets From Taxes

As hard as it is to believe, today's tax-advantaged plans -- including individual retirement accounts IRAs, 401(k)s, and rollover IRAs -- have the potential to make many employees millionaires. A 401(k) contribution of $433 per month, at 8% compounded monthly, would be worth more than $1 million after 35 years.1

 

These plans are also highly vulnerable to tax losses, if they are not bequeathed properly. For instance, a $1 million IRA inheritance could be whittled to almost nothing under worst-possible circumstances, such as a combination of estate taxes, top income tax brackets, and missed withdrawal deadlines.

Saving your heirs thousands of tax dollars on your retirement money often hinges on the decisions you make before you retire. Therefore, it's important to take a look now at how to save heirs tax headaches later on.

 

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Dimensional Introduction

Here is a nice video provided by Dimensional Fund Advisors:

 

This is just one in a series of videos which explain the reasons why we choose Dimensional Funds.

 

Dimensional Introduction - A brief introduction to Dimensional, this video highlights the firm's academic roots and unique offering to clients. 

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Business Succession Issues: Understanding Buy-Sell Agreements

Running into financial troubles isn't the only reason that some closely held businesses fail to succeed. Their untimely demise may result from the lack of a formal plan providing for the orderly succession of management and ownership of the business. Such a plan frequently incorporates a buy-sell agreement as the tool for ensuring that the business will continue even after the departure, death, or disability of an owner.

 

To head off future problems, it pays to understand the uses and structures of these agreements. Although they can be adopted at any time, it is best to decide whether to put a buy-sell agreement in place as early as possible in the life of a business.

 

Legal Blueprint 

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I'm a Single Parent. How Can I Get Ahead Financially?

As a single parent, you need to understand the financial strategies that can stretch your income and help you lay the groundwork for a secure future. Consider the following lessons to help improve your family's bottom line:

 

Identify Your Goals

 

You can't have a financial plan without first defining your financial goals. Start by recording all of your short-, medium-, and long-term financial goals.

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Investors: Don't Let Fear Keep You on the Sidelines

While the U.S. stock market, as represented by the S&P 500 Index, has risen a stunning 205.66% as of March 31, 2015, since its low on March 9, 2009, some investors are still reluctant to participate after the near market collapse that accompanied the 2007-2008 financial crisis.1

 

Fleeing the market certainly may have felt like the right thing to do at the height of the financial crisis. But history shows that making investment decisions based on emotion has never proven successful. For instance, greed may have led an investor to own too many technology stocks when the bubble burst on that industry in 2000. Alternatively, fear may have caused investors to cash out of stocks following the crash of 1987 and miss some or all of the subsequent rebound.

 

Fast forward to 2015, and the reality is that investors who missed the extraordinary rally that has occurred since March 2009 may have helped to put their long-term accumulation goals at risk. This is especially true for investors with shorter time horizons, such as those approaching retirement. Consider this: From 2010 through 2014, U.S. stocks recorded an average annualized return of 15.5%, compared to 0.1% for money market securities.2 The nearly nonexistent returns associated with cash-like investments could have a powerful impact on investors' purchasing power over time.

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Financial Wellness Programs: Taking Employee Benefits to the Next Level

Financial wellness. On the surface, it sounds like an elusive "trend du jour." But when it is considered in relation to the workplace, the idea takes hold. Employees are asked to make important financial decisions about retirement plans and health, life, and other insurance coverages as well as other benefits -- all of which may have a lasting impact on their overall financial outlook. Yet often workers make these decisions "on the fly" without fully understanding their options or how their choices may affect their financial life today and into the future.

 

For their part, employers invest considerable resources in benefits programs, and while many provide educational support to employees, such support is typically targeted to a specific planning need -- such as retirement -- and often lacks the holistic approach that financial wellness programs seek to achieve.

 

Documenting the Need

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Intergenerational Wealth Planning: A Win-Win for the Whole Family

Discussing the transfer of wealth from parents to children can be uncomfortable for both parties. Yet by introducing children to the wealth management process from a young age, affluent families may be able to reduce family tensions later in life and help ensure that the planning tradition passes intact to future generations.

 

Closing the Communication Gap

 

Opening the dialogue about wealth transfer is a complicated, personal decision that is influenced largely by how wealth holders themselves have been brought up to view money and the responsibilities that come with it. For instance, some individuals may fear that discussing wealth with their children will lead to feelings of expectation and entitlement. Others may simply prefer to control all money issues themselves. Still others with young children may be uncertain about their future wealth and reluctant to discuss it until their children are older and have proven how well -- or poorly -- they handle money.

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Your Credit Report: Can You Afford to Ignore It?

When was the last time you obtained a copy of your credit report? If your answer is "never" you are not alone. A recent survey found that one in four Americans have never checked their credit report. The simple reason? They don't think it is important.1

 

Credit reports ARE important to every consumer. They typically are a major factor in determining if you will be approved for a loan, be able to rent an apartment, or even get hired at a new job. They qualify your creditworthiness and are one of the first places to detect whether you have become the victim of identity fraud.

 

If all of those reasons are not enough to convince you that monitoring your credit report is a good idea, the no-brainer fact you can't deny is: It's free and has been for more than a decade!

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Retirement Confidence: It's All in the Plan

Americans' confidence in the ability to afford a comfortable retirement continues to rebound from the lows reported between 2009 and 2013. The increasing optimism is coming largely from workers who indicate they and/or their spouse have a retirement plan, such as a defined contribution (401(k)-type) plan, defined benefit (pension) plan, or individual retirement account (IRA). This is one of the key takeaways from the 25th annual Retirement Confidence Survey (RCS) -- the longest-running survey of its kind, conducted by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald & Associates.

 

According to the 2015 RCS, among workers with access to some type of retirement plan, more than one in five (22%) are "very confident" they will have enough money to live comfortably in retirement, up from 13% in 2009 -- a time when devastating losses to retirement plan assets caused by the financial crisis of 2007-2008 crushed investor confidence. This year an additional 36% reported being "somewhat confident" in their ability to live comfortably in their later years, while 24% are "not at all confident" in their retirement prospects. This percentage has remained statistically the same for the past two years.

 

Paying the Bills

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Tips for Retooling Your Portfolio

Like a closet that isn't reorganized from time to time, a portfolio that isn't reviewed regularly can leave you feeling like the pieces no longer fit. Last year, for example, stocks, as measured by the S&P 500 had annualized returns of 13.69%.1  U.S. investment grade bonds gained 5.97%, while international stocks declined -4.49%.1  Given this diverse composite of returns, a portfolio than began 2014 carefully allocated between stocks and bonds could now have shifted away from your intended asset allocation.2

 

Getting your portfolio back on track is critical because studies have confirmed that asset allocation is the single most important determinant of investment success.

 

Restoring Balance

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Where You Live Matters: Counting the Cost of Long-Term Care

It probably comes as no surprise that the cost of long-term care services -- including nursing homes, assisted-living facilities, and home-based care -- continues to rise steadily across the country.

 

Among the various services tracked by Genworth's annual Cost of Care Survey, home-based care costs are rising at a slower pace than other forms of care. Specifically, Genworth's most recent report found that, on a national basis, home-based care rose just 1% to 1.5% over the last five years, while costs at nursing homes and assisted-living facilities have increased 2.5% to 4% over the same five-year period.1

 

Genworth also tracks long-term care cost data on a regional and state-by-state basis. For planning purposes -- either your own or for an aging parent or other loved one -- this is vital information to know and discuss with your financial professional when forecasting retirement income scenarios.

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It's 2015: Do You Know Who Your Beneficiaries Are?

Many investors have taken advantage of pretax contributions to their company's employer-sponsored retirement plan and/or make annual contributions to an IRA. If you participate in a qualified plan program you may be overlooking an important housekeeping issue: beneficiary designations.

 

An improper designation could make life difficult for your family in the event of your untimely death by putting assets out of reach of those you had hoped to provide for and possibly increasing their tax burdens. Further, if you have switched jobs, become a new parent, been divorced, or survived a spouse or even a child, your current beneficiary designations may need to be updated.

 

Consider the "What Ifs"

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Advanced Strategies for Managing Volatility

Investors are exposed to financial risk in two ways: company-specific risk or market risk. Long-term investors can virtually eliminate exposure to company-specific risk by diversifying among many different securities in the same asset class.1 Market risk is managed -- but not eliminated -- by holding investments in several different asset classes. Both types of risk may also be reduced by employing "hedge" strategies that provide temporary protection against market volatility.

 

Managing Single-Security Risk

 

Modern portfolio theory is founded on the assumption that investment markets do not reward investors for taking on risks that could be eliminated through diversification. In the 1970s, a landmark study by University of Chicago researchers found that more than 90% of company-specific risk could be diversified away by holding a broad basket of 15 to 20 stocks. However, a subsequent analysis of stock market data found that at least 50 stocks may now be required for adequate diversification.2

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Are There Any Disadvantages Associated With Paying off a Mortgage Early?

The disadvantages, if any, may stem from the financial trade-offs that a mortgage holder needs to make when paying off the mortgage. Paying it off typically requires a cash outlay equal to the amount of the principal. If the principal is sizeable, this payment could potentially jeopardize a middle-income family's ability to save for retirement, invest for college, maintain an emergency fund, and take care of other financial needs.

 

If you have the financial means to pay off a mortgage, consider the following:

 

• Your feelings about debt -- Some homeowners like the feeling of security that comes with owning a home free and clear. If this describes you, it may be to your benefit to pay off or reduce the size of your mortgage. Should conditions in your local real estate market decline, there's less of a chance of owing more than you own.

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Is a Health Care Flexible Spending Account a Good Idea?

A flexible spending account (FSA), offered as an elective benefit by many employers, permits workers to contribute, through payroll deduction, to accounts that are designated for specific qualifying medical or dental expenses. If your employer makes an FSA available, the account typically is used in conjunction with your employer-sponsored medical plan for out-of-pocket costs not covered under the plan. All amounts contributed are pretax and funds are not taxed when spent on qualifying health care costs.

 

Eligibility

 

FSAs are employer-based; Self-employed individuals are not eligible. To participate, you usually must enroll through your employer each year, even if you do not want your deduction amounts to change from year to year. (Some plans vary.) Employers generally offer enrollment during open enrollment periods when you enroll for the entire plan year. If you want to change or revoke your election before the end of the plan year, you typically can do so only if your plan permits a change due to circumstances in your employment or family status.

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