Why a happy retirement requires a mix of both planning and discipline

It’s one thing to maintain spending discipline when you are still working. You can afford to take a big vacation with the kids or make a major improvement to your house because you are still drawing paychecks on a regular basis to replenish your account.

It all changes when you decide to retire.

“The biggest exercise we go through with clients is retirement income planning,” says Gregg LaSpisa, CLU, executive vice president at AXA Advisors, LLC’s Cleveland Branch.

“You go through your working career and you always contributed money to your 401(k) plan or your retirement plan and you are more in an accumulation mindset. When you retire, you have this big lump sum asset. How do you get income off of that? The retirement income plan is critical. You have to match expenses with income.”

Smart Business spoke with LaSpisa about why it’s never too late to put yourself in a better position to enjoy retirement.

What are the most significant retirement planning challenges?

One of the biggest issues is the fact that we are living longer. Of course, it’s great that we are living longer, healthier lives. But the downside is when you are talking to a financial professional about planning for your retirement, because now you have to plan to live to 90, 95 or even 100. Previous generations were only planning to live to age 75 or 80, so the total money needed for retirement was a lot less.

How do lower interest rates figure in?

It’s huge. If you think back to the 1980s, interest rates were at 12, 13 or 14 percent. Most pension plans invest in government bonds or some sort of bond portfolio. Now many of those rates are at 2 percent or less. Corporations need more capital to generate the income they are guaranteeing. The trend has been to get away from pension plans and push the responsibility for retirement to the employee as opposed to the employer.

What’s the most important thing I can do to plan for retirement?

Have a realistic budget of what it’s going to cost at retirement. How much income do you need to cover your expenses? People will say, ‘My home is paid off, so I won’t have that expense.’ That may be true, but there are expenses you will have, such as health care, that will increase. If you want to help pay for your grandkids to go to college, you’ll need money for that too.

So you need to know what your income sources are going to be and what kind of protection you have against inflation.

We talk about the withdrawal rate in terms of how much you can take out of your portfolio. Some clients want to take 8 to 10 percent out a year. That’s often way too high. On average, you should plan to take maybe 4 percent out a year. That’s the kind of discipline you need to have.

How can I help my financial planner?

Have an understanding or have access to all of your accounts. In other words, be aware of what benefit plans you have from work or the CDs, IRAs or 401(k) plans that you have set up. Take the responsibility to know where your assets are and gather all those documents before you meet with your planner. If you don’t tell your planner what you have, they can’t do their job effectively.

Is it ever too late to start?

It’s never too late to start. There are ways to improve your position and it may not get you to the ideal situation, but it can certainly improve your current situation. If you have done planning, it’s a good idea to review your plan every six months to make sure it is still in accordance with all your objectives and has been updated to include any major changes in your status. The goal of a planner is to make you aware of the issues that are out there because there are too many moving parts to do it alone. Engage a professional and take ownership of your future.

Financial services available to individuals and business owners through AXA Advisors, LLC include: strategies and products for financial protection and investments; asset allocation, college, retirement, business and estate planning strategies; life insurance, annuity and investment products, including mutual funds. Securities products are offered through AXA Advisors, LLC, NY, NY, member FINRA, SIPC, 10104 (212) 314-4600. Insurance and annuity products are available through an affiliate, AXA Network, LLC and its subsidiaries.

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Think about what you want before engaging with a financial professional

It’s never too late to make plans for your retirement, even if you just retired.

“There are plenty of people who choose to wait,” says Matthew Goedde, CFP, a financial professional at AXA Advisors, LLC.

“These are individuals who have been saving for their entire lives and have done a good job. But the next step is the distribution phase and there are so many more pitfalls that can come up during this phase. The professional’s job is to help you navigate through those pitfalls so they don’t become a problem.”

Everyone takes a different approach to retirement planning. But no matter the process, there is almost always something to be gained from sitting down with someone who does it for a living.

“The financial professional’s job is as much about helping you accumulate and protect your wealth as it is about managing it,” Goedde says. “A lot of people think you have to be rich in order to work with a financial professional. But part of the job is to help you define your goals, prioritize your objectives and develop a road map to your definition of wealth.”

Smart Business spoke with Goedde about how to find the right financial professional to suit your needs.

Where is a good place to start when looking for a financial professional?

You have to ask a lot of questions to find out whether or not the professional will be a good fit. What you are trying to figure out is if the professional has the experience, knowledge and skills to best help you. How long has this person been in the financial industry? Is this someone who has advanced skills and the ability to explain complex concepts in everyday terms?

Look at the tools and services that would be available to you and the different investment vehicles that exist through this person.

Would the professional work alone or is he or she part of a team that would help you?

In the middle of all that, you’re going to want to know about the compensation for services that are provided.

If you don’t have a specific person in mind to speak with, look at referrals from family and friends or colleagues at work. Referrals from co-workers can often be very helpful, especially if your employer has specialized benefits such as a pension or bonus plan.

What are some red flags that should make you wary?

Communication is the key. If there is a breakdown and you don’t feel satisfied or don’t understand the advice the financial professional is giving you, it’s probably not a good fit.

If it sounds too good to be true, it probably is. If they are putting pressure on you in any way or hasn’t asked you a single question, but is already going into a sales pitch, it’s probably time to take a step back.

What materials can you bring to your first meeting with a financial professional?

It’s great to have any financial statements on hand from any current accounts that you have. You should also be prepared to share as much information about your attitude and your core beliefs when it comes to investing.

It’s definitely not a cookie-cutter approach. The professional needs to get a feel for what you are trying to accomplish and use the right tools to help.

What if you’re considering a change after years with one financial professional?

You always need to look out for your own best interests, but be sure to keep communications open with your current professional. It might be that he or she doesn’t realize that you want to be contacted twice a year instead of once a year. A communication breakdown is something that potentially can be worked out so you can keep moving forward.

Matthew T. Goedde is a registered representative who offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC and an agent who offers annuity and insurance products through AXA Network, LLC. Investment advisory products and services offered through AXA Advisors, LLC, an investment advisor registered with the SEC.  AXA Advisors and AXA Network are affiliated companies and do not provide tax or legal advice.

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Why it might be a smart move to hold off on starting that college fund

When asked to choose between a college education and their own retirement, parents will often put their children first and focus on saving money for college.

Michael J. Daso, CHFC, a financial consultant at AXA Advisors LLC, understands the thought process, but doesn’t agree with it.

“I believe strongly in flipping it,” Daso says. “Retirement should be the first priority. There are dollars out there for college through loans, grants and scholarships. But there are not dollars available to borrow for retirement. Too often, we focus on our short-term needs first and ignore the long-term financial goals because they seem so far away.”

Whether it’s a college fund or a retirement plan, saving money today for tomorrow has never been an easy thing to do. Determining the best plan to maximize your investment is further complicated by your age and life status.

“Time horizon has the most significant impact on how aggressive or conservative you should be in your investment strategy,” Daso says. “If you have 20 years until retirement, you can afford to be more growth oriented than someone who might be retiring next year. You need to reassess that risk level over time and adjust your strategy as you get closer to the date of your financial goal.”

Smart Business spoke with Daso about how your age and life status can affect your wealth-building strategy.

Which age groups tend to have a more conservative investment strategy?

The baby boomers and millennials both tend to be more conservative. A lot of the millennials entered the workforce during the 2008 financial crisis. It was a really tight job market and a period of historically low returns in the stock market. That made a lot of millennials worry and it carried over into their investment philosophy. It’s the same thing with the baby boomers, so they tend to be more conservative as well.

The challenge for both groups is if you’re too conservatively invested, particularly with the low interest rate environment we’re in now, you won’t even keep pace with inflation. Then we have the middle generation, Generation X. The biggest mistakes made by members of this group are not saving enough money, and then outspending what they make each month.

It isn’t so much a risk concern as a cash flow concern. The best way to combat that problem is to set up automatic monthly savings plans, either through your 401(k) at work or through supplemental savings. One of the best ways to do this is through monthly automatic bank transfers. It forces you to save money and pay yourself first.

How do you know how much you will need to retire?

Two of the biggest questions people have are will I have enough to retire and will I outlive my retirement outcome. It used to be that a three-legged stool was a good metaphor for what you would need in retirement. You had Social Security, your company pension and then your personal savings only had to provide a third of your retirement income.

But these days, fewer and fewer people are retiring with a pension from their company. They have to come up with a larger percentage of their retirement income from their personal savings. That is making them scared to lose their nest egg and it causes them to invest too conservatively.

What are some principles to follow regardless of age?

Establish an emergency fund before you save for other long-term goals. Long-term savings accounts have penalties if you need to access them prior to retirement. Life is definitely unpredictable and having an emergency fund should be the basis of your sound financial plan.

Start small and get something going where you’re saving on a monthly basis. It could be $100 into an investment account on the 15th of each month. That’s really empowering and helps change your mental outlook on saving. It can spill over into changing the way you spend money on a monthly basis. Once you get the account open and started, even if it’s a modest amount, that’s a huge hurdle to clear. 

Securities are offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA/SIPC. Insurance and annuity products are offered through AXA Network, LLC. AXA Advisors and AXA Network do not provide tax or legal advice. AGE 100896 (1/15)(Exp 1/17) 

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Teachers nearing retirement put in a tough spot by new service timetable

Ohio teachers face a new retirement timetable that will go into effect this summer and affect how many years they are required to work, as well as how much they can collect when they retire. It’s creating a lot of stress for all teachers, particularly those close to retirement, says Randy Lupi, a financial professional at AXA Advisors, LLC.

The major change is that instead of being required to work 30 years, teachers will now need to work for 35 years and be at least 60 years of age before they can retire and collect an unreduced pension benefit.

“If a teacher is currently at 35 years with continuous Ohio service credit in the State Teachers Retirement System (STRS), they will receive 77 percent plus an extra bonus of 11.5 percent when they retire,” Lupi says.

“Unfortunately, the 11.5 percent bonus is being dropped after July of this year. A teacher who has less than 35 years as of July will no longer be eligible to receive the bonus. Many teachers decided to work over 30 years due to this incentive.”

Smart Business spoke with Lupi about the STRS changes and what options younger teachers have at their disposal to modify their retirement plans.

What else is changing with the STRS?

The final average salary (FAS) is currently calculated based on the three highest years of earnings. Going forward, the FAS calculation is being changed to cover the average of a teacher’s five highest years of earnings, which can result in a lower base figure. Also, the contribution requirement of a teacher has increased from 10 percent to 14 percent of their current salary, impacting cash flow for all teachers.

These changes were implemented by The State Teachers Retirement Board to make sure the pension system remains solvent.

What is the lesson for teachers?

These changes make it even more important to begin retirement planning several years in advance. Some teachers delay saying, ‘I’ll just go to the STRS and they’ll tell me my options’ or ‘I’ll just choose the highest payout.’

The pension election is irrevocable, so all options should be considered before a final decision is made. Teachers should start planning at least three to five years prior to retirement and consider their pension options based on their lifestyle and that of their spouse. They also should consider how their choices will affect their beneficiaries in addition to themselves.

What is the partial lump sum option (PLOP)?

The PLOP allows the STRS member to receive six to 36 months of their fixed benefit upfront.

The STRS will then pay the member a reduced monthly pension benefit. Teachers have been funding their pension by contributing at least 10 percent of their pay throughout their career. By electing a PLOP, they are essentially receiving part of their initial contribution back in the first year of retirement. Teachers that elect the PLOP typically roll the funds over into another pre-tax retirement plan like a traditional IRA or 403(b).

What are the benefits of the PLOP?

In certain circumstances, the PLOP allows teachers to better manage their taxable income at retirement, maintain control over the money and designate beneficiaries on the money. Some teachers will keep their investment conservative while many will maintain a balanced portfolio in efforts to grow their nest egg.

Many retired teachers still enjoy working and may have income from a new second career. By electing the PLOP, they are able to choose not to receive taxable distributions from their PLOP investment until they are truly ready to stop working and settle into retirement. Not taking distributions may help to better manage their taxable income, especially if their spouse is still working.

There are many variables to be considered before making any decisions regarding retirement plans. Teachers should get all of the facts before making these decisions. Consulting a financial professional may help them better understand the options, and the potential results of those options.

Randy Lupi offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA/SIPC, and offers insurance and annuity products through AXA Network, LLC. AXA Network conducts business in CA as AXA Network Insurance Agency of California, LLC, in UT as AXA Network Insurance Agency of Utah, LLC, and in PR as AXA Network of Puerto Rico, Inc. 
This information is not approved or endorsed by the STRS. Randy Lupi, AXA Advisors and AXA Network do not offer tax or legal advice, and are not affiliated with the STRS.
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 Insights Wealth Management is brought to you by AXA Advisors, LLC



How natural gas is changing Western Pennsylvania’s business climate

Bob Taylor, Senior Corporate Banker, Senior Vice President, First Commonwealth Bank

Bob Taylor, Senior Corporate Banker, Senior Vice President, First Commonwealth Bank

With drilling in both the Marcellus and Utica Shale formations, Western Pennsylvania is sitting on one of the largest U.S. natural gas fields.

Even if you’re not directly affected, Bob Taylor, Senior Corporate Banker and Senior Vice President at First Commonwealth Bank, says the multiplier effect ripples out into the economy.

Each well site has about 250 different jobs associated with it, and Marcellus alone has about 6,378 active wells.

“It’s an engine that is going to drive the region here for the next 20 years,” he says.

Smart Business spoke with Taylor, an energy lender, about where Western Pennsylvania’s natural gas industry is going.

What is the current situation with Marcellus and Utica?

Small companies first explored Marcellus, finding the sweet spots to de-risk the field. Then larger companies like Exxon Mobil Corp., CONSOL Energy and Chevron Corp. bought up these companies and their acreage to move into steady production drilling. Three years ago, more then 45 operators were drilling in Marcellus. By 2013 that was down to 33, according to the Pennsylvania Department of Environmental Protection.

With Utica, the large companies stepped in first to acquire acreage. This consolidation has impacted area service providers that supply the well operators in Utica.

Overall, there has been a strong impact in counties like Washington and Greene. Pittsburgh will be affected now that an agreement has been reached to drill under the airport, bringing in $50 million upfront and $450 million in royalties over the next 20 years.

How are natural gas prices impacting the rig count and service providers?

Marcellus has been ranked as one of the lowest cost fields; operators can get a 10 percent ROI with prices as low as $2.75 per 1,000 cubic feet (mcf) for dry gas and $2.25 per mcf for wet gas. With today’s price around $3.50 to $4.25 per mcf, Marcellus is profitable.

Wet gas is more valuable because it has additional liquids that can be separated out and sold, such as ethane used to make plastics. Utica is principally dry gas in Pennsylvania, but Marcellus has both wet and dry gas.

Several years ago prices were high, but supply began to exceed demand, depressing prices. Therefore, some rigs moved to the wet gas in Ohio’s Utica play. Marcellus went from 100 rigs last year to around 53. Many service companies also have crossed the border.

However, each region has a field manager — service companies that supply products in Pennsylvania have to re-qualify for Ohio. The overriding factor is safety. For example, a service provider’s truck can’t be within 100 feet of the wellhead and must have fire extinguishers.

In the future, the volatility of price should moderate to around $3 to $7 per mcf, with increased demand from export, vehicles, manufacturing and electric generation.

What gas-gathering infrastructure is developing?

Many wells have been drilled and completed, so the next push will be to lay pipe to gather the gas and bring it to production facilities. It costs about $1 million per mile to lay pipeline, and about $3 billion to $5 billion is being spent in Pennsylvania alone.

Just like drilling, laying pipe has a number of associated jobs from engineers, steel pipe manufacturers, excavators and welders to safety inspectors who monitor pipelines.

Why is wastewater treatment the wild card?

Water is injected into the ground at high pressure to frack the shale rocks and release natural gas. Flow-back water that comes up has salt brine, minerals, dirt, sand, etc. Originally, the solids were removed and the water was reused for fracking.

With the drilling slowdown, there is excess wastewater. The cheapest elimination method is deep injection wells, but there are environmental concerns. The Environmental Protection Agency (EPA) may stop or limit deep injection wells sometime in the future. The EPA could require an evaporation and crystallization technique that distills the wastewater, but cost estimates for these reclamation facilities vary from $2.5 million to $100 million.

Bob Taylor is a Senior Corporate Banker and Senior Vice President at First Commonwealth Bank. Reach him at (412) 690-2214 or [email protected]

To learn more, call (800) 711-BANK (2265), or visit fcbanking.com.

Insights Wealth Management is brought to you by First Commonwealth Bank

How to ensure your estate plan is doing things for you, not to you

Geoffrey M. Zimmerman, CFP®, senior client advisor, Mosaic Financial Partners, Inc.

Geoffrey M. Zimmerman, CFP®, senior client advisor, Mosaic Financial Partners, Inc.

Estate planning is more than just having documents. It needs to be tied to long-term intent and aligned with your goals. What works for one person may not work well for the next, and what worked 10 years ago may not work now.

Geoffrey M. Zimmerman, CFP® practitioner, senior client advisor at Mosaic Financial Partners Inc., says many treat their estate plan like a transaction, even though the moving parts may have changed.

“They may have a document that is doing things to them and to their beneficiaries, and not really working well for them,” he says. “That’s why it’s important to review the plan periodically. It might take a visit to your attorney and the cost of several hours of time to update it. But in terms of relieving the headache on a surviving spouse or beneficiaries, those can be dollars well spent.”

Smart Business spoke with Zimmerman about why your estate plan should be continually adjusted.

What recent changes make updating your estate plan important?

Although the estate tax exemption did not reset as many feared, there are new items to consider. Undistributed income from an irrevocable trust can reach the top federal income tax bracket of 39.6 percent plus the Medicare tax of 3.8 percent after only $11,950. Those trusts can also see capital gains rates increase from 15 to 20 percent. This might impact a surviving spouse with capital gains assets in a credit shelter trust (also called a bypass trust) and assets in a marital trust.

How could outdated plans create problems?

In 1996, a couple with a $3 million estate would typically use a bypass trust to allow both spouses to use their respective $600,000 exemption to non-spouse beneficiaries, effectively allowing $1.2 million to pass to heirs free of estate tax. The remaining $1.8 million — plus any additional growth — was taxed at the death of the surviving spouse at rates up to 55 percent. A common planning strategy at the death of the first spouse was to put growth assets into the trust, as there would be no estate taxes on those assets. Heirs would still pay capital gains taxes, but capital gains taxes were (and still are) lower than estate taxes.

Today, the estate tax exemption has increased to $5.25 million per person. In our example above, the surviving spouse’s estate of $2.4 million worth of property could more than double before reaching $5.25 million and triggering any estate taxes.

Also, with the new laws, there is a now a new feature called ‘portability,’ which allows the surviving spouse to use the deceased spouse’s unused exemption amount. So in theory, a surviving spouse could pass up to $10.5 million worth of assets to heirs free of estate tax without using a bypass trust.

Older trusts that call for the creation and funding of a bypass trust may incur other unintended consequences. For example, formulas that call for funding the bypass trust to the maximum amount available without triggering an estate tax could leave the surviving spouse at a disadvantage with little or no assets in the survivors trust. Subtrusts that contain highly restrictive conditions for distributions to the survivor can create further complications. Finally, estates that contain large amounts of illiquid  assets that would need to be split between multiple trusts may also be problematic.  Periodic reviews, including a flowchart to understand what assets are going where, may be particularly helpful.

Also, as mentioned earlier, undistributed income in the bypass trust can hit top tax rates at very low levels of income, whereas the surviving spouse may not reach top tax brackets until he or she reaches $400,000 in taxable income.

Does this mean subtrusts are no longer useful?

They are still useful in cases where control over the disposition of assets is important, such as preventing a surviving spouse from disinheriting children from a previous marriage. You must balance the need for control against the surviving spouse’s needs, and your goals for your non-spouse beneficiaries. The surviving spouse and beneficiaries may have different interests — income versus growth. Proper planning, which includes a good understanding of goals and motivations, can help improve the odds of a successful outcome.

Geoffrey M. Zimmerman, CFP® practitioner, is a senior client advisor at Mosaic Financial Partners Inc. Reach him at (415) 788-1952 or [email protected]

Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.

What in-laws should know before going to work in the family business

Ricci M. Victorio, CSP, CPCC, managing partner, Mosaic Family Business Center

Ricci M. Victorio, CSP, CPCC, managing partner, Mosaic Family Business Center

As an in-law coming into a family business, you’re stepping into one of the hardest working environments imaginable. A family member is held to a higher standard than regular employees, but an in-law has to work even harder than a family member.

“It really takes someone with vision and purpose because there will be a lot of extra challenges,” says Ricci M. Victorio, CSP, CPCC, managing partner at the Mosaic Family Business Center.

If you lay the right groundwork, establish clear expectations, and work with an adviser familiar with the challenges that will occur, she says it can be a productive and joyous experience.

Smart Business spoke with Victorio about how in-laws can successfully enter the family business and thrive.

What challenges do in-laws face when coming into the family business?

The hardest thing to overcome is perception. It doesn’t matter if you have an MBA from Cambridge or a Ph.D. from Harvard. When it comes to in-laws, the fact that you married into the business downgrades any credentials in the eyes of non-family managers or employees. People will tend to judge you harshly, so be patient and don’t take it personally.

How can an in-law successfully enter into the business?

The position, pay scale and responsibility must match the in-law’s experience and education. Thrusting an unqualified in-law upon people, no matter how great he or she is, makes it a much harder road. For example, an in-law was a sales manager making six-figures who was downsized. Now, he’s in trouble financially, and the family is worried. The family can bring the in-law into the business, which might be in another industry, but he shouldn’t start as the head of the sales division. He needs to learn the business and earn his way up the corporate ladder. If parents are still concerned about the financial gap, they can consider gifting additional monies from outside of the business — to help until he earns his way up.

It can be helpful to have the in-law candidate interview with the executive management team to gain support.

How can in-laws overcome the assumption that they have the boss’s ear?

You can’t expect the employees to be your friends, because they are going to assume that anything they reveal will get back to the boss. It can feel isolating and you have to be above reproach. Stay professional and never assume to be the heir apparent.

Also, if you have a problem, resolve things through the proper chain of command. If you’re not reporting to your father-in-law, don’t go to him when you have an issue.
Remember when you come home and complain to your spouse about work that you’re talking about a family member. Your spouse may get defensive, run to whomever you’re complaining about or start disliking that person. Try to share more than just the bad days.

What documentation is needed to protect the business, and the in-law?

Families with a high net worth business typically will require a prenuptial agreement that protects the stock from leaving the family in the case of divorce or death of the blood relative. However, there are incentives such as restricted or phantom stock for high-performing managers, which can provide financial incentives that feel like ownership for growing the company.

It’s also critical to create family member employment and stock qualification policies. These policies define the benchmarks and requirements for all family members, whether an in-law or not, as to how they can become stockowners or hold key executive positions, clarifying the pathway and making family employees more accountable.

Why is having a succession coach valuable?

Engaging a coach who specializes in succession transitions to help employed family members can smooth the predictable challenges along the way. Family employees, including in-laws, need a safe place to talk, and guidance to strategize through the maze of issues that will occur. The coach also can facilitate a family business council, which provides a venue for family members to talk about business related topics, questions and issues that would normally feel inappropriate to bring up in a productive environment.

Ricci M. Victorio, CSP, CPCC, is a managing partner at the Mosaic Family Business Center. Reach her at (415) 788-1952 or [email protected]

Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.

How to construct passive portfolios to offset large wealth concentrations

Nina M. Baranchuk, CFA, senior vice president, chief investment officer, First Commonwealth Advisors

Nina M. Baranchuk, CFA, senior vice president, chief investment officer, First Commonwealth Advisors

Business owners and corporate executives tend to overinvest in their businesses, often ending up with a large portion of their wealth at risk to the fortunes of one company. However difficult, these owners need to diversify their financial assets to better survive periods of stress. The rules of prudent investing tell us that any more than 10 percent of one’s wealth invested in any one company is too much.

“Diversifying is not natural to individuals so closely connected to one business, but it can be a serious risk to their underlying wealth and the financial health of their entire family,” says Nina M. Baranchuk, CFA, Senior Vice President and Chief Investment Officer at First Commonwealth Advisors.

Smart Business spoke with Baranchuk about how to structure portfolios to diversify or offset these concentrated risks.

Why do corporate executives or business owners need to diversify?

Even regular employees get a company paycheck and buy company stock in the 401(k) or the employee stock purchase plan, so the concentration risks for all employees can be severe. Senior executives often accumulate additional large holdings of company stock and options as part of their compensation.

A business owner’s company may also be a disproportionately large part of his or her portfolio as well. An owner bears the risk of the entity and any economic, competitive or regulatory forces that might impact it. Like putting all your chips on red, there are serious consequences to holding so much ‘concentrated’ wealth if things don’t go well. In addition, these holdings can be illiquid — there is no easy exit under times of stress.

How should business owners construct their passive investment portfolios?

In some cases, it may not be possible to diversify much. If an owner can take cash out of the business, he or she should work with a qualified portfolio adviser to ensure that all of his or her passive investments are built to complement or offset the risk. A qualified adviser can craft a portfolio that helps to mitigate your specific concentration risks and manage your overall exposures.

For example, a local Pittsburgh businessperson might be concentrated in a steel or metal fabrication business. So, he or she would share exposure to the fates of this or other industries as well their end markets in the U.S. or overseas. He or she also may have significant risks to things like geography, interest rates, significant product input costs, etc.

You can easily have issues of exposure based on subtle or indirect connections. Some risks to a firm are really in your supply chain or the financial health of a customer’s industry. Maybe you have one or two dominant clients that represent a large percentage of your revenue stream. Geographical risks loom large for some companies as well.

A portfolio built to offset these risks might exclude many other holdings in the industrial arena and overinvest in industries that often do well when industrials/metals do not — think consumer-purchase staples like food and household products or utilities.

What’s another example of offsetting your risk?

One family we worked with had made its wealth in the real estate business — owning everything from apartment complexes to high-rises. Our analytic work found that two good offsets for these holdings were private equity and financial stocks. Thus invested, whatever happens to interest rates, private equity and financials will react in opposition to the direction of real estate, counteracting one of its most impactful environmental factors.

What should executives consider?

While many executives have limited ability to divest their options or stock, they should certainly not invest their 401(k) in the company stock or buy additional shares. Remember that the executives at Enron and WorldCom went down together, along with their options, pensions, paychecks and other compensation.

In this world of heightened competitive and financial risks, no business is immune from potentially negative outcomes. We urge our clients to make sure they have done everything possible to ensure their family’s financial health by planning for worst-case scenarios.

Nina M. Baranchuk, CFA, is a senior vice president and chief investment officer at First Commonwealth Advisors. Reach her at (412) 690-4596 or [email protected]

To learn more, call (855) ASK-4-FCA, or visit ask4fca.com.

Insights Wealth Management is brought to you by First Commonwealth Bank

How corporate executives can navigate the 2013 tax minefield

Geoffrey M. Zimmerman, CFP®, senior client advisor, Mosaic Financial Partners, Inc.

Geoffrey M. Zimmerman, CFP®, senior client advisor, Mosaic Financial Partners, Inc.

There’s a popular metaphor referred to as “the boiled frog.” Simply put, it says if you drop a frog in boiling water it will quickly try to escape. But if you place a frog in tepid water that’s slowly heated to a boil, the frog will “unresistingly allow itself to be boiled to death.”

With the 2013 tax changes, this metaphor may apply to taxpayers, married and filing jointly, with wages of taxable income of $223,000 to $450,000, says Geoffrey M. Zimmerman, CFP®, Senior Client Advisor at Mosaic Financial Partners, Inc. These households could see their federal marginal tax rate go from 28 to 45.5 percent.

“Executives in this income range may soon find that they are in hot water with the heat on as the marginal tax rates ramp up fairly quickly,” Zimmerman says.

Smart Business spoke with Zimmerman about key tax changes as well as possible planning and investment strategies.

Why are $223,000 to $450,000 income earners unaware of the danger?

The increases come from moving up tax brackets, new Medicare taxes of 0.9 percent on payroll and 3.8 percent on unearned income, and the phase-out of itemized deductions. People earning more than $450,000 have a good idea of what’s coming, but others aren’t as prepared for 1 to 2 percent increases that can add up. For example, if each spouse earns less than $200,000, their employers aren’t required to withhold additional taxes from their paychecks for the 0.9 percent increase in Medicare. But, if their combined income pushes them over the $250,000 threshold in household wages, they may be surprised by an unexpected tax bill.

Additionally, if you live in a state like California where state income taxes have gone up, combined federal and state income tax rates can exceed 50 percent, with capital gains rates reaching 33 percent or more.

What should these taxpayers be doing?

First and foremost, don’t let the tax tail wag the dog. Tax strategies that look great in a silo may actually be detrimental to the big picture. If your strategy puts you in a concentrated position or triggers undue risk, then a sudden bad market movement can be worse than paying the taxes.

This is an opportunity for people to update their financial plan and review how the tax changes affect their goals. Make sure your advisers are talking with one another and coordinating their work and advice.

How can some key planning strategies mitigate these increases?

Look for opportunities related to the timing of cash flows. If you have a big income year where up to 80 percent of your itemized deductions might be lost, defer some itemized deductions to the following year where the income might be lower. In a low income year, look at doing IRA to Roth conversions, realizing capital gains and/or accelerating income.

Take the initiative to engage in tax loss harvesting in taxable accounts, which means you sell a security, harvest the loss and then use that loss to offset a gain in either the current year or carry forward for use in future years. This can be attractive, particularly for investing styles that offer similar but not identical alternatives. One example might be to sell an S&P 500-index fund and reinvesting with a Russell 1000-index exchange traded fund to capture the loss while remaining invested.

Review the use of asset location strategies to improve tax efficiency. Strategically place securities that produce ordinary income or that generally don’t receive favorable tax treatment into a tax-deferred account, while putting tax-efficient investments that generate long-term capital gains or qualified dividends in taxable accounts.

Municipal bonds/bond funds in taxable accounts now may be more attractive, and you also can review opportunities to take advantage of ‘above the bar’ deductions, such as contributions to qualified plans like your pension, 401(k), etc. For senior executives, contribution to nonqualified deferred compensation arrangements may be more attractive, particularly if a transition, such as retirement, is on the horizon.

With the help of good advisers who understand these moving parts and how they fit together, executives can use these strategies and others to make better decisions to move toward the things that are really important to them.

Geoffrey M. Zimmerman, CFP®, is a senior client advisor at Mosaic Financial Partners, Inc. Reach him at (415) 788-1952 or [email protected]

Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.

How to tailor trusts to meet your needs and care for beneficiaries

Susan L. Nelson, CTFA, senior trust executive, senior vice president, First Commonwealth Advisors

Susan L. Nelson, CTFA, senior trust executive, senior vice president, First Commonwealth Advisors

Whether you are looking to manage your own assets, control how your assets are distributed after your death, plan for incapacity or enable your business to continue uninterrupted should something happen to you, trusts can help you accomplish your estate planning goals. By establishing a trust, you ensure that the assets gathered during your life will not disappear because of the inexperience or inability of beneficiaries. A byproduct of that is the peace of mind that comes from knowing your loved ones will continue to be financially protected.

“One of the benefits of a trust is that it’s established based on the unique needs and objectives of the individual and the individual’s family, and tailored to meet those needs,” says Susan L. Nelson, CTFA, Senior Trust Executive and Senior Vice President at First Commonwealth Advisors.

Smart Business spoke with Nelson about the benefits and management of trusts.

What are the different types of trusts?

There are many types of trusts, the most basic being the revocable and irrevocable.  The type of trust you use will depend on what you are trying to accomplish. A revocable trust, often referred to as a living trust, allows the individual establishing the trust to remain in control of the assets and allows them to change the beneficiary, the trustee, the trust terms and even end the trust. The grantor can use the trust for investment management, bill paying, tax planning and avoidance of probate. It can continue on in the event of incapacity, providing seamless financial management for the grantor, and can continue on after death for the benefit of others. Once the grantor dies, the trust becomes irrevocable.

An irrevocable trust is where the grantor gives complete control to an independent trustee who manages the assets for the grantor and beneficiaries. You cannot easily change or revoke this type of trust. It’s frequently used to minimize potential estate taxes by reducing the taxable estate of the grantor because the assets transferred to this trust, plus any future appreciation, are removed from the grantor’s gross estate. Additionally, property transferred through an irrevocable trust will avoid probate and may be protected from future creditors.

What are the benefits of trusts?

Some benefits are:

  • Continuous financial management in the event of incapacity.
  • Professional investment management.
  • Financial privacy — a trust isn’t public like a will.
  • Probate avoidance with no lapse in asset protection and investments — probate can take a year or more, depending on the complexity.
  • Asset management for inheritances.
  • Creditor protection for heirs. If a beneficiary is going through bankruptcy, money in the trust cannot be touched.

Trusts can provide lifetime financial protection for a surviving spouse or disabled child, an inheritance for children from an earlier marriage, can minimize estate taxes and provide a future legacy for charity. Trusts can be used in order to protect, preserve and transfer wealth for the benefit of individuals, families and organizations. While trusts can be used for myriad circumstances, they are not for everyone. Discuss the advantages and benefits of a trust for your situation with a financial adviser.

How should a trust be managed?

Every trust is based on your needs and objectives. When setting up the trust, determine what you’re trying to accomplish so you and your financial adviser can decide how to reach those objectives. One of the first things looked at are tax implications and how to reduce pain points. Providing for future beneficiaries should also be examined. After the trust is established, you’ll need to meet periodically to discuss the investment portfolio and life changes to be certain the trust still meets your needs.

Why choose a professional trustee?

Institutional fiduciaries are pros at what they do, have professionals on staff with years of experience, and are on the cutting edge of regulatory and tax law changes.  They may be the best option for reliability, experience, responsiveness, neutrality and arms-length objectivity with beneficiaries, objective investment guidance, convenience and consistency over time. An institutional fiduciary doesn’t age or die.

Susan L. Nelson, CTFA, is a senior trust executive and senior vice president at First Commonwealth Advisors. Reach her at (724) 832-6062 or [email protected]

Follow up: To learn more, call (855) ASK-4-FCA, or visit ask4fca.com.


Insights Wealth Management is brought to you by First Commonwealth Bank