Tip of the Month

THE 2% opportunity
The 2011 payroll tax holiday may give you a chance
to boost your financial plan.

What would you do with an extra $1,000 or $2,000? The Tax Relief Act of 2010 will give many of us the equivalent of a 2% raise in 2011. Employee payroll taxes have been cut from 6.2% to 4.2% this year.¹ So if you pay into Social Security, you are looking at a rise in your take-home pay.

What are your plans for that extra money?
How about directing it into your 401(k) or IRA? That 2% “raise” will show up in your paychecks throughout the course of the year – it will come to you incrementally rather than as a lump sum. Still, 2% is nothing to scoff at – if you make $50,000 in 2011, you’re looking at $1,000 of found money.

What could $1,000 do for you over 20 or 30 years? Well, let’s see. If you invest $1,000 today and simply let it sit there for two decades with a 6% annual return, you end up with $3,207.14 in principal and interest. If the initial grand just sits there for 30 years at 6% interest, it turns into $5,743.49.²

Let’s say you take this one step further and direct an extra $1,000 into your 401(k) for 30 straight years beginning in 2011. Let’s be reasonably optimistic and assume an 8% annual rate of return across that time. Under those conditions, your $30,000 aggregate contribution would turn into about $125,000 with compounding – and that’s not even considering the possibility of an employer match to your 401(k) during some or all of those years.³

The money is significant for a couple. If you and your spouse each make $70,000, that’s an extra $2,800 coming to the two of you in 2011 (assuming you and your spouse don’t work for the government, the railroads or in some capacity where you don’t pay into Social Security). Everyone wants a little more retirement income, and directing 2% into your retirement plan for one year or multiple years could help.

While we’re on the subject of retirement income, the White House says that the payroll tax cut will have no effect on a worker’s future Social Security benefits.⁴

Other options for the 2% tax break. Most Americans will simply spend the money resulting from this tax break. That’s not exactly a negative: the Obama administration visualized this as a way to pump up consumer spending.

Yet if you don’t devote the money to your 401(k), you have a number of alternatives besides spending it.

This tax holiday could even be prolonged. In recent decades, we have seen some “temporary” tax cuts stick around. If the jobless rate stays above 8% through 2011 (and it might), voices in Congress might push to extend the payroll tax cut for another year. It could happen, provided the federal government finds a way to direct more money into Social Security.

Citations
1 – content.usatoday.com/communities/theoval/post/2011/01/obama-team-touts-payroll-tax-cuts/1 [1/14/11]
2 – ehow.com/how_5936795_manage-finances_-earned-interest.html [2/4/11]
3 – money.cnn.com/retirement/guide/investing_basics.moneymag/index.htm [2/4/11]
4 – whitehouse.gov/sites/default/files/social_security_payroll_taxes.pdf [12/10/10]
5 – http://montoyaregistry.com/Financial-Market.aspx?financial-market=why-arent-you-maxing-out-your-401k&category=2 [2/6/11]

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.  LD39563-02/11

Tip of the Month Archive

 December 2010

A big difference between real life and the movies is the music. In the movies, whenever something big or important is going to happen, the music changes. In real life there is no music to clue us in that this is important. Although most of us can know when something important has happened, do we take the time to see how this affects other things in our lives, and possibly talk to someone about it?

As the year comes to a close, it can be a great time to reevaluate.  In the past year have you or any member of your immediate family — spouse, children, parents, grandparents or grandchildren — experienced one of the life events listed here? Do you expect any of these events to occur in the upcoming year? If so, it’s time for a review of your financial matters. Call me at 489-2813 to schedule a complimentary consultation.

• Marriage/wedding
• Birth/adoption
  
• Move/relocate/sell your house
  
• New job
  
• Death in family
  
• Retirement
  
• Home refinancing and/or taking an equity line of credit
  
• Divorce
  
• Inheritance/financial windfall
  
• Graduation
  
• Financial setback
  
• Job layoff
  
• Critical illness/injury/disability
  
• Enter a nursing home and/or receive in-home care
  
• Child starts high school
  
• Start your own business
  
• Sell or close your business
  
• Win/lose a lawsuit
  
• Old life insurance policy that hasn’t been reviewed in years
  
• Become the legal guardian for another person
  

If you answered yes to one or more of these items, we should meet soon to help determine if your current financial strategy is still valid in view of these latest life events. Call me at 489-2813 to schedule a complimentary consultation. There is no charge for this consultation, nor is there a requirement to purchase any new products. This is simply to review your plan to ensure that it still meets your financial needs and goals. Don't put it off for another year!

November 2010

Paying attention to taxes in your investment portfolio can help you keep more of your hard-earned money for yourself.  Unfortunately, the average managed portfolio generated tax costs of more than 30% of their total pre-tax returns over the period 1980-2005!¹

The Good News: you can take control of your investment tax burden and slash your tax bill by looking at a few critical areas.  Paying attention to the details in finances pays off.  In the example below,² something as small as a 1% difference in annual tax cost could result in an account balance that is 10% higher!  I can help you evaluate what you can do you in your own portfolio.  Call me today at 489-2813 for a complimentary analysis.

¹ John Bogle, The Little Book of Commons Sense Investing, Exhibit 6.1

² Source: BlackRock. For illustrative purposes only.  Does not include commissions, sales charges or fees.

 October 2010

Feeling jumpy with the market news?  Studies show that overreacting to news in the media can cause us to make poor financial decisions.¹

While it's easy to get caught up in the latest news, short-term approaches don't usually yield the best investment results.  So, plan ahead.  Call me today at 489-2813 to talk about how to stay calm and make a common sense financial plan.

1. Journal of Finance (1985) "Does the Market Overreact?" by Werner De Bondt and Richard Thaler

September 2010

Think you’re too young to think about long-term care?  Your family and parents’ needs could have drastic consequences on your financial well being without proper planning.  Nearly half of Baby Boomer women providing care for a family member reported experiencing financial hardship!¹

Did you know that women provide a majority of long-term care within the family, which can lead to:

• Lower wages in the workplace
• Reduced contributions to retirement plans
• Being passed over for promotions
  

Click here to read more about the impacts of care-giving on women.

Talk to your family and parents today!  Call me at 489-2813 to discuss how you and your family can be prepared for providing long-term care to your loved ones.

¹ National Alliance for Caregiving. (1998). The caregiving boom: Baby boomer women giving care. Washington, DC: Author.

Many people think that planning for long-term care requires expensive insurance.  Others I talk to don’t like the idea of paying insurance premiums for a service they might not ever use.  Fortunately, you don’t have to do either to be prepared.

The Good News: You have choices!  New tax laws and financial products are available that you can use to protect your assets, get tax benefits and maintain control of your hard earned cash.  

For example, through appropriate planning, you may have the opportunity to:

• Get a tax deduction for premiums paid on certain long-term care insurance plans
• Create tax-free distributions for qualified long-term care expenses  - AND you can do this with money that would otherwise have been fully taxable!
• Keep control of your assets in case you want to use the money for other purposes

Like any financial plan, preparing for the financial burden of long-term care requires individual, customized planning.  Call me at 489-2813 today to discuss how you personally can benefit from these changes!

August 2010

Studies show that actively managed portfolios have a greater chance of underperforming a passive portfolio over the long term?!

To read more about the studies, click here.

The Good News: For my clients - we follow the overwhelming volume of academic research and construct your portfolios with as little active management as possible.

For readers who aren't yet clients: I can help you too!  Call for a free consultation and analysis.  Take control of your portfolio today!