News is spreading that law makers are looking to reduce contribution limits on 401(k) plans. If this occurs you can expect a resurgence in Define Benefits Plans. The following is an article which I am re-posting which highlights how one can fully fund retirement in 10 years.
Your small business clients are faced with the increasing likelihood
of higher taxes in 2013 and beyond; those aiming to reduce the slope of
the fiscal cliff next year will want to take a closer look at the
benefits of a defined benefit plan.
While most small business owners create defined contribution plans to
save for retirement, the defined benefit plan allows for considerably
higher annual contributions. Because taxpayers are permitted to
contribute up to $200,000 for 2012 and $205,000 in 2013, the defined
benefit plan presents a planning opportunity that may be too good for
many of your small business clients to pass up. Contribution limits this
high can allow them to completely fund their retirement accounts in
under a decade—all with pre-tax dollars.
Defined Benefit Plan Basics
The defined benefit plan is essentially a retirement
plan that provides for a fixed monthly retirement benefit, which is
usually based on a percentage of the client’s current income.
The fixed benefit level will help the client determine how much he
should add to the plan each year, but the primary advantage of the
defined benefit plan is that the client can put away upwards of $200,000
a year for 2012 and $205,000 for 2013. The contribution levels for
these plans are determined based on the client’s age; therefore, the
anticipated length of time before he will retire.
While the generous contribution limit alone can provide the small
business owner with a powerful incentive to create a defined benefit
plan, with all eyes focused on today’s fiscal cliff negotiations, these
plans become even more attractive. Contributions to a defined benefit
plan can be deducted as an ordinary and necessary business expense to
reduce the taxable income of your client’s small business.
Which Clients Are Right for a DB Plan?
A defined benefit plan is typically best suited for
the client who is able to contribute at least $50,000 annually toward
the plan. Because there are fees and expenses associated with
maintaining the plan, clients wishing to contribute less would be better
off forming a less expensive defined contribution plan. While the
contribution limits for a traditional 401(k) or IRA are much lower
($17,500 plus $5,500 in catch-up contributions for those age 55 and
older in 2013), the defined benefit plan fees can offset the tax
benefits if actual contribution levels are not high enough.
Additionally, because the defined benefit plan nondiscrimination
rules require that the plan be made available to all of the client’s
employees, these types of plans are best suited for clients who have
very few key employees or who run a small family business.
Further, because the defined benefit plan rules require the client to
meet specific funding levels each year, the plans are best suited for
those planning to retire between five and ten years in the future. Once
formed, the defined benefit plan must be maintained for at least five
years before the client can roll the funds over into a traditional
retirement account.
While the defined benefit plan is not the magic solution for every
client, it can provide a unique opportunity for those high-income small
business owners looking to reduce the sting of possible year-end tax
hikes—with the added bonus of creating a substantial retirement nest egg
in just a few years.
Source article: Fully Funded Retirement in 10 Years: A DB Plan for Now
Friday, December 14, 2012
Tuesday, December 11, 2012
Hidden Inflation
Inflation in the United States has been remarkably low, despite a
lethal combination of extremely loose monetary policy and
trillion-dollar annual budget deficits, which apparently have become a
new normal.
Economic theory suggests that inflation should have spiraled out of control long ago, but after four years of such policies runaway consumer price increases no longer seem to be a real threat.
The U.S. Federal Reserve, whose two-pronged mission requires it to keep inflation in check and stimulate full employment, clearly believes that inflation will remain under control for the foreseeable future and that it needs to concentrate on resolving the problem of sluggish job creation. In early September, it announced another round of unconventional monetary policies known as Quantitative Easing 3, and vowed to keep buying mortgage-backed securities until the unemployment rate declines.
This is an unprecedented open-ended commitment to print massive quantities of money, at a time when the economy is actually growing, albeit slowly. Since 2008, the Fed has dumped some $2 trillion worth of liquidity into the financial system, and many economists expect another $1.2 trillion infusion to result from its current operations. The Fed’s balance sheet could balloon to $4 trillion by the end of 2013.
Some economists—and Fed Chairman Ben Bernanke is among them—clearly believe that there have been structural changes in the economy that will continue to keep inflationary pressures in check.
More Efficiency
There are many definitions of inflation, the most descriptive of which is as follows: the situation when an increasing amount of money chases after an unchanged quantity of goods and services. In other words, inflation is a measure of efficiency in the economy. If consumers have more money to spend, this could result in an inflationary spike in an inefficient economy, since producers will not be able to satisfy extra demand quickly. In an efficient economy, on the other hand, producers will promptly increase supply to meet extra demand.
In the 1970s, the U.S. economy was inefficient and companies couldn’t respond promptly enough to changes in input prices or consumer demand. Higher prices for oil and other commodities translated into price hikes at consumer levels and demands for higher wages. Since the 1980s, however, deregulation, structural and technological changes, the spirit of entrepreneurship, improved management techniques and intensified foreign competition greatly increased economic efficiency. Companies have become more flexible; they have been able to anticipate and respond to various changes in market conditions swiftly.
Whenever there is an increase in demand, a number of producers increase production to harvest consumer dollars. This kind of heightened competition has made price hikes very difficult to implement and sustain, putting a premium on cost control. There simply is no room left for inflation in this highly efficient, saturated business environment.
As a result, official consumer price inflation has been quite low, measuring no more than 2-2.5%. Moreover, a serious debate has been raging in academia and among economic policymakers, some of whom have been encouraging the Fed and other central banks to tolerate higher levels of inflation in order to spur worldwide economic growth. The problem is that based on traditional economic assumptions, lax fiscal and monetary policy and zero percent interest rates should have long ago resulted in high inflation. Central bankers simply don’t have any other tools at their disposal to make price levels rise.
Measurement Problem
In reality, whether we have inflation or not depends on how price increases are measured. Inflation can also be defined as a loss of value of money in terms of goods and services.
In this regard, money has retained its value well in terms of generic goods and services, which comprise the typical basket used by the government to measure inflation. However, when measured against natural resources, for instance, the picture changes. In dollar terms, the commodities index of The Economist magazine has doubled since 2005, while the food component of the index has increased even faster, by 2.5 times. Moreover, despite a substantial global economic slowdown, the index of industrial commodities rose by 50% during the same time.
Gold has increased some 4.5 times against the dollar since 2005. Gold prices are important, because gold is, on one hand, a benchmark for commodity prices and, on the other, a store of value and a universal currency backed by a history spanning several thousand years. Going back to 1833, gold prices in London stayed steady until the 1970s, the first significant period of the rapid destruction of the value of money. It rose during the inflationary 1970s and declined in the 1980s and 1990s, when the value of money stabilized once more. Then, it rocketed from under $300 per troy ounce in the late 1990s to around $1,750 currently.
Another way to gauge the decline in the value of money is with silver. The silver George Washington quarter was valued under a dollar at the start of the 21st century. Today, it is worth around $6, which makes for a 24-fold jump in nominal price since 1964.
Finally, let’s look at the price of oil. Oil came into widespread use in the late 19th century and since then it has been the most aggressively extracted and universally used industrial commodity. Unlike gold, oil is a poor store of value and means of exchange, but it can be used to provide an adequate measure of the value of money. Even though the consumption of oil rocketed in the modern era, and the past century has been marked by wars, revolutions and technological change, the price of oil has been steady in inflation-adjusted terms, fluctuating in a tight range of around $30-40 dollars per barrel in today’s money. That was approximately how much oil fetched in 2005. Since then it has increased to around $90-100 per barrel, or some 2.5 times.
When the price of a particular good or commodity goes up, it is not yet inflation, which is defined as an increase in the overall price level. Oil could have become more expensive simply because it costs more to pump it out or because the political situation in the Middle East has been volatile. But many other goods and services have actually kept pace with oil, including luxury goods, works of art and the cost of education and health care. The cost of education, for example, is up by more than 50% since the mid-2000s.
Selective Deflation
Oil and gold have become considerably more expensive not only in terms of dollars, but relative to generic consumer goods and low-skilled services. But what if such goods and services are actually experiencing price declines, which are taking place alongside a broadly based decline in the value of paper money?
Using the official consumer price index, the average consumer basket has increased in price by no more than 10-15% since 2005. But when measured in terms of oil, it is down by 35%. This makes sense, given increased efficiency of production, stringent cost control, relocation of manufacturing to China and other low-cost countries and lower demand in the U.S. and Western Europe as a result of the anemic economic recovery. Unskilled services and other nontradable goods are actually closely correlated with the price of tradable goods, as described by the Balassa-Samuelson effect. They also experienced a deflationary effect in recent years.
Hidden inflation helps explain the stock market’s performance. The Dow Jones industrial average, which was inching toward its 2007 all-time high recently, has actually been flat compared to 2000. In the inflationary late 1960s and 1970s, the Dow similarly had trouble rising. It hovered around the 1,000 barrier, experiencing several sharp corrections during that period.
Inflation wreaks havoc with the value of money. It discourages savings and investment, and it undermines the robustness of corporate profits. The overall effect of inflation is to whittle away economic efficiency. If what we’re currently witnessing indeed constitutes hidden inflation, then an open inflationary explosion, with a sharp increase in all prices, is only a matter of time.
Original article link Hidden Inflation .
Economic theory suggests that inflation should have spiraled out of control long ago, but after four years of such policies runaway consumer price increases no longer seem to be a real threat.
The U.S. Federal Reserve, whose two-pronged mission requires it to keep inflation in check and stimulate full employment, clearly believes that inflation will remain under control for the foreseeable future and that it needs to concentrate on resolving the problem of sluggish job creation. In early September, it announced another round of unconventional monetary policies known as Quantitative Easing 3, and vowed to keep buying mortgage-backed securities until the unemployment rate declines.
This is an unprecedented open-ended commitment to print massive quantities of money, at a time when the economy is actually growing, albeit slowly. Since 2008, the Fed has dumped some $2 trillion worth of liquidity into the financial system, and many economists expect another $1.2 trillion infusion to result from its current operations. The Fed’s balance sheet could balloon to $4 trillion by the end of 2013.
Some economists—and Fed Chairman Ben Bernanke is among them—clearly believe that there have been structural changes in the economy that will continue to keep inflationary pressures in check.
More Efficiency
There are many definitions of inflation, the most descriptive of which is as follows: the situation when an increasing amount of money chases after an unchanged quantity of goods and services. In other words, inflation is a measure of efficiency in the economy. If consumers have more money to spend, this could result in an inflationary spike in an inefficient economy, since producers will not be able to satisfy extra demand quickly. In an efficient economy, on the other hand, producers will promptly increase supply to meet extra demand.
In the 1970s, the U.S. economy was inefficient and companies couldn’t respond promptly enough to changes in input prices or consumer demand. Higher prices for oil and other commodities translated into price hikes at consumer levels and demands for higher wages. Since the 1980s, however, deregulation, structural and technological changes, the spirit of entrepreneurship, improved management techniques and intensified foreign competition greatly increased economic efficiency. Companies have become more flexible; they have been able to anticipate and respond to various changes in market conditions swiftly.
Whenever there is an increase in demand, a number of producers increase production to harvest consumer dollars. This kind of heightened competition has made price hikes very difficult to implement and sustain, putting a premium on cost control. There simply is no room left for inflation in this highly efficient, saturated business environment.
As a result, official consumer price inflation has been quite low, measuring no more than 2-2.5%. Moreover, a serious debate has been raging in academia and among economic policymakers, some of whom have been encouraging the Fed and other central banks to tolerate higher levels of inflation in order to spur worldwide economic growth. The problem is that based on traditional economic assumptions, lax fiscal and monetary policy and zero percent interest rates should have long ago resulted in high inflation. Central bankers simply don’t have any other tools at their disposal to make price levels rise.
Measurement Problem
In reality, whether we have inflation or not depends on how price increases are measured. Inflation can also be defined as a loss of value of money in terms of goods and services.
In this regard, money has retained its value well in terms of generic goods and services, which comprise the typical basket used by the government to measure inflation. However, when measured against natural resources, for instance, the picture changes. In dollar terms, the commodities index of The Economist magazine has doubled since 2005, while the food component of the index has increased even faster, by 2.5 times. Moreover, despite a substantial global economic slowdown, the index of industrial commodities rose by 50% during the same time.
Gold has increased some 4.5 times against the dollar since 2005. Gold prices are important, because gold is, on one hand, a benchmark for commodity prices and, on the other, a store of value and a universal currency backed by a history spanning several thousand years. Going back to 1833, gold prices in London stayed steady until the 1970s, the first significant period of the rapid destruction of the value of money. It rose during the inflationary 1970s and declined in the 1980s and 1990s, when the value of money stabilized once more. Then, it rocketed from under $300 per troy ounce in the late 1990s to around $1,750 currently.
Another way to gauge the decline in the value of money is with silver. The silver George Washington quarter was valued under a dollar at the start of the 21st century. Today, it is worth around $6, which makes for a 24-fold jump in nominal price since 1964.
Finally, let’s look at the price of oil. Oil came into widespread use in the late 19th century and since then it has been the most aggressively extracted and universally used industrial commodity. Unlike gold, oil is a poor store of value and means of exchange, but it can be used to provide an adequate measure of the value of money. Even though the consumption of oil rocketed in the modern era, and the past century has been marked by wars, revolutions and technological change, the price of oil has been steady in inflation-adjusted terms, fluctuating in a tight range of around $30-40 dollars per barrel in today’s money. That was approximately how much oil fetched in 2005. Since then it has increased to around $90-100 per barrel, or some 2.5 times.
When the price of a particular good or commodity goes up, it is not yet inflation, which is defined as an increase in the overall price level. Oil could have become more expensive simply because it costs more to pump it out or because the political situation in the Middle East has been volatile. But many other goods and services have actually kept pace with oil, including luxury goods, works of art and the cost of education and health care. The cost of education, for example, is up by more than 50% since the mid-2000s.
Selective Deflation
Oil and gold have become considerably more expensive not only in terms of dollars, but relative to generic consumer goods and low-skilled services. But what if such goods and services are actually experiencing price declines, which are taking place alongside a broadly based decline in the value of paper money?
Using the official consumer price index, the average consumer basket has increased in price by no more than 10-15% since 2005. But when measured in terms of oil, it is down by 35%. This makes sense, given increased efficiency of production, stringent cost control, relocation of manufacturing to China and other low-cost countries and lower demand in the U.S. and Western Europe as a result of the anemic economic recovery. Unskilled services and other nontradable goods are actually closely correlated with the price of tradable goods, as described by the Balassa-Samuelson effect. They also experienced a deflationary effect in recent years.
Hidden inflation helps explain the stock market’s performance. The Dow Jones industrial average, which was inching toward its 2007 all-time high recently, has actually been flat compared to 2000. In the inflationary late 1960s and 1970s, the Dow similarly had trouble rising. It hovered around the 1,000 barrier, experiencing several sharp corrections during that period.
Inflation wreaks havoc with the value of money. It discourages savings and investment, and it undermines the robustness of corporate profits. The overall effect of inflation is to whittle away economic efficiency. If what we’re currently witnessing indeed constitutes hidden inflation, then an open inflationary explosion, with a sharp increase in all prices, is only a matter of time.
Original article link Hidden Inflation .
Friday, December 7, 2012
What Is The Fiscal Cliff - A Simple Explanation
Late night comedian David Letterman joked, “Everybody is talking about the fiscal cliff. And I'd be talking about the fiscal cliff too, if I knew what the hell it was.”
OK what Exactly is the Fiscal Cliff?
The phrase “fiscal cliff” refers to federal spending cuts and federal tax increases that will automatically take effect on January 1, 2013. If Congress takes no action, the higher federal tax rates are projected to increase tax revenue in 2013 and beyond, while federal spending is mandated to fall for the next several years.
In order to sidestep the cliff, President Obama and Congressional leaders will have to compromise on a wide range of issues. These include reductions in defense and non-defense spending, deciding whether to extend the Bush tax cuts, whether to raise the payroll tax, and how to deal with extended unemployment benefits and reimbursement cuts to Medicare doctors.
Related Content
As Fiscal Cliff Nears and Debt Ceiling Looms, Year-End Deadline Could Slip
Wall Street Job Cuts to Continue After Citigroup Cuts
SEC’s General Counsel to Leave Commission
With the world watching, the White House and Congress are expected to act quickly to resolve the uncertainty about the country’s fiscal future. If Congress and the White House agree on a deal in early 2013, lawmakers could retroactively restore the prior tax rates and approve additional federal spending.
How should an investor react?
One must make decisions that will be advantageous to them long-term, and avoid overreacting.
“As seasoned investors one knows, financial markets can rise and fall with the latest cover story, whether from Washington or abroad. The best approach may be to keep your eyes fixed on your destination and not get sidetracked on day-to-day market fluctuations.
Your investments should reflect your financial goals, time horizon, and risk tolerance. And remember: when uncertainty grips the markets, it may be a great time to take advantage of new opportunities, rather than overreact to short-term events.
Source Article
OK what Exactly is the Fiscal Cliff?
The phrase “fiscal cliff” refers to federal spending cuts and federal tax increases that will automatically take effect on January 1, 2013. If Congress takes no action, the higher federal tax rates are projected to increase tax revenue in 2013 and beyond, while federal spending is mandated to fall for the next several years.
In order to sidestep the cliff, President Obama and Congressional leaders will have to compromise on a wide range of issues. These include reductions in defense and non-defense spending, deciding whether to extend the Bush tax cuts, whether to raise the payroll tax, and how to deal with extended unemployment benefits and reimbursement cuts to Medicare doctors.
Related Content
As Fiscal Cliff Nears and Debt Ceiling Looms, Year-End Deadline Could Slip
Wall Street Job Cuts to Continue After Citigroup Cuts
SEC’s General Counsel to Leave Commission
With the world watching, the White House and Congress are expected to act quickly to resolve the uncertainty about the country’s fiscal future. If Congress and the White House agree on a deal in early 2013, lawmakers could retroactively restore the prior tax rates and approve additional federal spending.
How should an investor react?
One must make decisions that will be advantageous to them long-term, and avoid overreacting.
“As seasoned investors one knows, financial markets can rise and fall with the latest cover story, whether from Washington or abroad. The best approach may be to keep your eyes fixed on your destination and not get sidetracked on day-to-day market fluctuations.
Your investments should reflect your financial goals, time horizon, and risk tolerance. And remember: when uncertainty grips the markets, it may be a great time to take advantage of new opportunities, rather than overreact to short-term events.
Source Article
Wednesday, December 5, 2012
Tax Share of the Top 25% vs Income
Below is a re-post from an article I just read that provides some interesting insight on the top 25% income earners and the taxes paid. (article link)
The IRS recently released data on individual income taxes, and the Tax Foundation has nicely summarized the data, and I've put the data in the chart below. The story hasn't changed: upper-income earners continue to pay a hugely disproportionate share of total income taxes.
In 2010, it took $370K adjusted gross income to make it into the top 1% of income earners, and they paid almost 40% of all federal income taxes. The top 5% of income earners made at least $162K and paid almost 60% of all federal income taxes. The top 10% paid made at least $17K and paid a little over 70%. The top 25% included all those making $69K or more, and they paid over 87% of all federal income taxes. Meanwhile, the bottom 50% of income earners (those making $34K or less) paid only 2.4% of all federal income taxes, and the vast majority of them either paid no income tax or received money on net from the IRS.
One other important thing to note is that the share of total income taxes paid by the top 10% of income earners today has risen by 40% since the early 1980s, despite the fact that the top income tax rate has been cut in half. This is powerful evidence that the tax code remains highly progressive despite big cuts to top tax rates.
Let's talk "fairness:" The top 10% of income earners in this country already pay over 70% of federal income taxes, and the top 1% (the rich) already pay almost 40%. Is that not enough? Almost half of those who work pay no federal income taxes. Is that fair? Is it healthy for so few to pay so much, and for so many to pay nothing? When almost half the population has no skin in the game, and another quarter pay only a very small share of total taxes, it is easy to demonize or exploit the rich—it's called the "tyranny of the majority."
These are very sobering statistics. Instead of asking the rich to pay even more, we should be thinking about how everyone should pay at least something. Just paying your social security taxes doesn't count, because in theory—if not in practice, since the rich will undoubtedly subsidize the social security income of a great many people in the future when social security revenues fail to cover expenditures—that is money you will get back when you retire. Income taxes, in contrast, go into the general fund.
UPDATE: The chart below shows the share of total income earned by each of the groups in the chart above. Not surprisingly, top income earners make a large share of total income. However, if you compare the two charts, you see that the share of total taxes they pay is much larger than the share of income they earn. Our tax code is very progressive no matter you look at it. In 2010, for example, the top 1% of income earners made 19% of the country's total adjusted gross income and paid 37% of total income taxes. The top 5% earned 34% of total income and paid 59% of total taxes. The top 10% earned 45% of total income and paid 71% of total taxes. The top 25% earned 68% of total income and paid 87% of total taxes.
Friday, November 30, 2012
Is the U.S. Stockmarket Overpriced
Interesting insight from Charles Biderman. He is direct and to the point.
Tuesday, November 27, 2012
Fiscal Cliff Will Force Estate Tax Changes, Andy Friedman Predicts
The following linked story Fiscal Cliff Will Force Estate Tax Changes, Andy Friedman Predicts
discuss how the Fiscal Cliff will impact the Estate Tax Code. The article predicts the exclusion amount will be between $3.5 million and $5 million with the tax rate increasing from 35% to 45%. The life time gift tax amount is open for much debate. Currently it is $5.12 million per person. If nothing is done by year end it drops to $1 million.
The administration and congress are also looking to eliminate or curtail more sophisticated strategies. Said to be in the site hairs are intentionally defective grantor trusts (IDGTs), grantor retained annuity trusts (GRATs), and family limited partnerships (FLPs).
Wednesday, November 21, 2012
A 25-point retirement age checklist
I just read A 25-point retirement age checklist on MSN.com. It provides all readers with insight to consider as they look to retirement. All too often, this is put off until it is upon you voluntarily or involuntarily. By then it might be too late to retire the way you have always dream of.
For the reason I go to a mechanic to change my oil in my car, even though I know how to do it; it is well worth your time to seek out a professional advisor to help you work through this process. In addition, don't stop when you find the professional, educate yourself. It makes for better judgment when selecting the advisor and your ongoing relationship with the advisor. The advisor should always be willing to educate you during the relationship, it is paramount for success.
Below are the 25 bullet points:
For the reason I go to a mechanic to change my oil in my car, even though I know how to do it; it is well worth your time to seek out a professional advisor to help you work through this process. In addition, don't stop when you find the professional, educate yourself. It makes for better judgment when selecting the advisor and your ongoing relationship with the advisor. The advisor should always be willing to educate you during the relationship, it is paramount for success.
Below are the 25 bullet points:
- Calculate available retirement income and assess adequacy
- Consider life expectancy, expenditures and risks
- Perform analysis to model plan functionality
- Evaluate the impact of your debt
- Determine the availability of health insurance
- Examine the impact of various Social Security claiming-age options
- Assess the type of retirement plan and the plan's features
- Analyze the financial status of investments
- Examine earnings prospects if you remain employed
- Appraise the availability of phased retirement
- Factor in early retirement incentives
- Consider your willingness to compromise financial goals
- Assess whether you are and/or will be healthy enough to continue working
- Examine whether your situation will require caregiving for a loved one
- Are you concerned that future health limitations will interfere with personal retirement goals?
- Evaluate whether you will need to retire to raise grandchildren
- Appraise the likelihood of your job ending suddenly and prematurely
- Assess job satisfaction and potential changes in job satisfaction
- Understand how to determine an appropriate retirement date and broaden your expectation
- Evaluate your ability to adapt to retirement
- Assess the identity, fellowship and status you receive from working
- Determine your willingness to work
- Determine your desire for leisure
- Weigh the balance between work satisfaction and retirement satisfaction
- Examine the potential for joint retirement
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