Stocks Rise For A Third Week – January 2012

Up to date in less than 2 minutes:
Last week U.S. stocks rose for a third week, the longest winning streak since October, as better-than-estimated economic data and company earnings boosted confidence in American growth. For the week, the Dow, S&P 500, NASDAQ, and Russell 2000 rose +2.4%, +2.0%, +2.8%, and +2.7%, respectively.


Equity Performance Table
Last Week
Year to Date
Last 52 Weeks
Dow Jones Industrial
S&P 500 (Large Caps)
NASDAQ (Technology)
Russell 2000 (Small Caps)
Dow Jones U.S. Total Stock Market Index
Dow Jones Global Ex-U.S. Index (International)


Interest Rates
Prime Lending Rate
Interest Rate Bias
Short-Term = Neutral; Intermediate Term = Neutral; Long-Term = Neutral
90 T-bill Rate
90 Day LIBOR
TED Spread
30-Year Mortgage Rate
15-Year Mortgage Rate
5-Year Adjustable Mortgage Rate
30-Year Treasury Yield
10-Year Treasury Yield
5-Year Treasury Yield
2-Year Treasury Yield


Notable Recent Dividend Increases
Lockheed Martin (“LMT”)
Home Depot (“HD”)
Emerson Electric (“EMR”)
Union Pacific Corp (“UNP”)
McDonalds Corp (“MCD”)
Now, all the details……………………
Last week, the S&P 500 advanced +2% to 1,315.38. The S&P 500 has gained +4.6% in 2012, the best start to a year since 1997.  The Dow gained 298.42 points, or +2.4%, to 12,720.48, reaching the highest level since July 21st. The S&P 500 rose all four days U.S. exchanges were open last week as data bolstered confidence in the American economy. Claims for jobless benefits dropped to the lowest level since 2008 and confidence among homebuilders topped forecasts. “The domestic economy is strong and that’s helped the stock market,” Mark Bronzo, who helps manage $23.4 billion at Security Global Investors in Irvington, New York, said in a Bloomberg telephone interview.  “The market’s done pretty well in the face of some good earnings news and it seems to be overcoming some of the fears around Europe.”
Technology and energy companies led rallies by nine out of 10 S&P 500 Index groups, climbing more than +2.7%.  Sears Holdings Corp. (“SHLD”) added +46% amid speculation it may go private. Bank of America Corp. (“BAC”) led Dow Jones Industrial Average gains after posting a profit. International Business Machines Corp. (“IBM”) increased +5.2% after forecasting earnings that beat analysts’ estimates.
Companies from Goldman Sachs Group Inc. (“GS”) to Union Pacific
Corp. (“UNP”) and EBay Inc. (“EBAY”) topped analysts’ income projections.  S&P 500 companies, which beat profit estimates in the previous 11 quarters, will report a +3.4% increase in per-share earnings during the September-December period, analysts’ forecasts compiled by Bloomberg show.  Of the 51 companies in the S&P 500 that reported results since January 9th, 65% posted per-share earnings that beat projections, Bloomberg data show.
Google Inc. (“GOOG”), owner of the most popular Internet search engine, slumped -6.2% to $585.99 as fourth-quarter revenue and profit missed estimates. Chief Executive Officer Larry Page is moving into new markets to ignite growth outside Google’s traditional search-based business.  That effort contributed to an -8% drop in the average price Google gets when users click an ad, because it charges less for ads on mobile devices and in emerging markets, said Herman Leung, an analyst at Susquehanna Financial Group.
Carnival Corp. (“CCL”) tumbled -7.9% to $31.56.  The company owns the Costa Concordia cruise ship that ran aground off the coast of Italy last week, killing at least 11 people.  Carnival halted advertising for its Carnival Cruise Lines and announced a review of safety procedures in the aftermath of the accident.
Last week, the Dow Jones Global Ex-U.S. Index (broad international index) rose +4.0%. The Americas were up +2.3% with Brazil up +5.4%, Canada up +1.4%, and Mexico up +2.3%. Europe was up +2.7% with Germany up +4.3%, France up +3.9%, and Spain up +1.3%. Asia-Pacific was up +3.1% with Australia up +1.0%, China up +3.3%, Hong Kong up +4.7%, India up +3.6%, Japan up +3.1%, and Taiwan up +0.7%.
Treasuries dropped in price with the 10 year yield rising on the week to 2.03% from 1.86% in the week earlier.
The Baltic Dry Index, which tracks transport costs on international trade routes and may be a good leading indicator of economic activity, ended the week at 862, down from the week earlier closing level of 1,053. The index reached a high of 11,793 on May 20, 2008 and a low of 663 on December 5, 2008. The index last peaked at 4,661 set on November 11, 2009.
The TED spread measuring the difference between LIBOR and Treasury bill rates, which rose as high as 464 basis points during the liquidity crisis of 2008, is currently in more of a normal range of 52 basis points, but has increased as of late due to Euro bank concerns. The TED spread is a gauge of the willingness of banks to lend to one another. The lower the TED spread the more willing banks are to lend with each other. The TED spread fluctuates over time but generally has remained within the range of 10 and 50 bps (0.1% and 0.5%) except in times of financial crisis. A rising TED spread often presages a downturn in the U.S. stock market, as it indicates that liquidity is being withdrawn.
Last week, oil dropped -0.2% and closed at $98.46 per barrel. Year to date, oil is down -0.4%. The average price of unleaded gasoline dropped -0.1% last week to end at $3.383 per gallon per January 22nd data provided by AAA. Year to date, unleaded gasoline is up +3.2%. Natural gas was down -12.3% last week and closed at $2.343/MMBtu. Year to date, natural gas is down -21.6%.
Last week, gold rose +2.0% closing at $1,663.70 per troy ounce. Year to date, gold is up +6.3%. Last week the dollar was down -1.6% as measured by the U.S. Dollar Index with that index closing at 80.223. Year to date, the U.S. Dollar is up +0.1% as measured by the Dollar Index. Last week the Euro was up +0.9% against the U.S. dollar closing at $1.2909/Euro. Year to date, the Euro is down -0.2% against the U.S. Dollar.
Look for a slew of earnings in the coming week from the likes of McDonald’s (“MCD”), Regions Financial (“RF”), Kimberly Clark (“KMB”), Apple (“AAPL”), United Technologies (“UTX”), and Lockheed Martin (“LMT”). Look for economic reports this week on 4th quarter 2011 GDP, housing prices, durable goods orders, Fed rate decision (expected no change here), new home sales, and weekly jobless claims data.
Sources: Bloomberg, The Wall Street Journal, Barron’s, The New York Times, ValueLine.

Economic Predictions for 2012

This past year included a lot of excitement but not much progress from an economic or stock market perspective. Extraordinary events included the near shut-down of our government; the downgrading of U.S. treasuries from AAA status; the near default of Greece; as well as a highly volatile stock market that could rise or fall several hundred points a day. In the end our economy showed only marginal improvement and the stock market, as measured by the S&P 500 Index, had a 0% return.

So what’s ahead for 2012 and how should you position your portfolio to produce the best results? This is the time of year when market analysts and economists make their predictions for the year ahead. A few will gain ‘fame’ for their uncanny accuracy but the truth is that no one knows or can predict the future. At best we make educated guesses. Think of it as a target being laid on the ground 200 yards away and then 10,000 arrows shot up in the air in the general direction of the target….one or two may very well hit the bulls-eye but it would be a mistake to declare the flinger of that arrow as the greatest archer of our time. Still it’s a lot of fun to make predictions if only to allow your detractors the opportunity to say, “I told you so!” Here are my predictions for 2012:
Stock & Bond Market
·        The stock market will rise by double digits. Publicly traded corporations continue to deliver strong earnings and I expect those earnings to rise 10% or more in 2012. Stock prices should follow. Stock prices did not follow earnings this past year but I believe the reason was that events in the U.S. and Europe continued to scare investors away from the stock market.
·        U.S. Blue Chip Dividend-Paying stocks will continue to be the ‘sweet spot’ of the stock market. All last year I touted these stocks citing both the quality of their yields and the Baby Boomer retirement dynamics. This turned out to be the bright spot for the stock market last year with returns of 8%-12%. I expect this trend to continue in 2012.
·        Little-to-no opportunity in bonds. Bonds have been on a decade-long bull market run. With interest rates hovering near historical lows, I believe there is little opportunity for returns in bonds, CDs or money market accounts. There is a greater risk that interest rates will begin to rise sometime this year, causing bond values to fall. Having said this, some allocation to bonds in your portfolio is a prudent strategy. If there is a big jolt in the stock market, your bonds will tend to help counteract the negative volatility.
Interest Rates
·        Interest rates on bonds, CDs and Money Market accounts will remain low. The 10-year treasury is yielding less than 2% while the 30-year treasury is yielding 3%. 5-year CDs are yielding about 2% while most money market accounts are yielding less than 1%. The low interest rate trend will continue throughout 2012, however, at some point, interest rates will begin to rise…maybe this year or next.
·        Mortgage rates will remain low. Currently mortgage rates are hovering between 3.25% and 3.75% depending on your credit score and the term of the mortgage you choose. Mortgage rates will remain low but these rates could well mark the bottom.
U.S. Economy
            Our economy will continue to improve throughout 2012 but at a very slow pace. Inflation will rise but not at an alarming rate. The housing market is in a five to ten year workout cycle but I expect we have seen the bottom of the housing market and it will continue to improve throughout 2012. Expect the government to intervene with some type of support program…perhaps a rental program for foreclosed mortgages owned by Fanny Mae and Freddie Mac. The unemployment numbers will improve but overall unemployment will remain above 8%.
What should you do to position yourself for financial success in 2012?
·        Review your current investment allocation and decide if you are willing to increase your stock allocation. If you are retired or near retirement, be sure to maintain a minimum of three to five years’ worth of living expenses in your fixed income portfolio (bonds, CDs, and money market accounts). Review your stock strategy and consider adding blue chip dividend-paying stocks. You’ll receive nice comparative yields with upside opportunity.
·        Compare your mortgage rate to current rates. Would you benefit from refinancing? It’s still a great time to buy a home. Consider whether this year would be a good time to downsize.
·        Pay down debt. If you have debts with relatively high interest rates, consider using any cash resources to pay down your most expensive debts.

What Should You Do With $1,000?

With the holiday season finally behind us and the year of 2012 dead ahead, a reader asked me, “Stewart, What would you suggest I do with a $1,000?” You may have year-end bonus money, be expecting a tax refund or simply just have a few bucks burning a hole in your pocket. To get a broad spectrum of answers, I turned to my associates for their suggestions and just to make it fun, I offered to buy lunch for anyone whose idea I used. Here are their responses:
  • Invest in a 529 college savings plan. This is my vote if you plan to help a child or grandchild pay for college. Your investment grows tax deferred and withdrawals for qualified education expenses are tax free…and you control the money the entire time. Yep, I’ll buy my own lunch!
  • Update your wardrobe. Beth suggested updating your professional wardrobe keeping in mind to ‘Dress for the job you want, not the one you have’. She also suggested taking a course that will help advance your current career or help you get that job you want.
  • Get in shape. Beth, Hugh and Michael all opted for investing in better health by hiring a personal trainer and joining a gym. Medical research indicates that even being moderately overweight is a leading cause of many health problems and health problems are a leading cause of financial problems!
  • Add to your emergency fund. Melissa and Michael both thought it is important to build emergency reserves in what continues to be a shaky economy. You’ll want to keep this money safe by investing in a money market account, credit union savings account or short-term CDs even though you’ll earn near-zero interest.
  • Help a charity. If there’s a charity you are passionate about, Melissa suggested not waiting until the end of the year to give, rather, “Do it now!” It’ll be your first tax deduction for the New Year!
  • Invest in a Roth IRA. Hugh, Michael and Woodard all liked the idea of investing in a Roth IRA if you qualify (couples filing jointly with modified adjusted gross income in excess of $179,000 for 2011; $183,000 for 2012 and single filers with MAGI of $122,000 for 2011; $125,000 for 2012 are not eligible for a Roth IRA contribution). Michael points out that, “You never have to pay taxes!” Woodard adds a twist suggesting that if you have a young child with earned income, consider contributing to a Roth IRA for him or her. A $,1000 contribution today for a 19-year-old earning an average of 8% would be worth over $50,000 at his or her age 70…a nice start to retirement!
  • Capture a tax credit. Kimberly reminded us that joint filers with incomes less than $56,500 (single filers with less than $28,250) may be eligible for a 2011 tax credit of up to $2,000 ($1,000 for single filers) for contributions to your IRA, Roth IRA, 401k, and certain other retirement plans. It’s called the Savers Credit.
  • Pay down a credit card. Hugh and Woodard both recommended paying down on credit card debt. In this low interest rate environment, paying down a high interest credit card balance represents an equally high return on your investment. They suggest applying all the money on the card with the highest interest rate.
  • Make an extra mortgage payment. Ramona would like to make an extra mortgage payment. If you can find a way to do this every year, you’ll cut years off your mortgage schedule and save thousands in interest payments.
  • Pay down your student loans. Kelly says she uses any extra money to reduce student loans. Even though the interest rate might be relatively low, the psychological benefits are great!
  • Save for your daughter’s wedding. Wedding expenses were on Wendy’s mind since her daughter’s engaged to a soon-to-be Navy Seal. Most people don’t plan for wedding expenses and even a modest wedding can put a serious dent in your future finances.
  • Create a lasting memory. Melissa suggested you could do something you’ve never done before like take a balloon ride!
Use these suggestions to get your own creative juices flowing and make a decision what to do with your ‘found’ money. If you don’t make a conscious decision, you will likely find that it ‘vanished’ over the next several weeks or months.

Tis the Season of Giving

No doubt about it, December has everyone in the giving mood. People are busy buying and exchanging gifts, acknowledging friendships and the love of family members. Giving can also be smart tax planning while providing much needed support for those less fortunate in our community. Here’s a summary of the most popular ways people give and get a tax deduction:

  • Cash. Cash remains the most often way people give to tax-exempt organizations (charities and religious organizations). In order for you to receive a tax deduction for 2011, the postmark for checks mailed must be dated no later than December 31st. Deductions are limited to 50% of your Adjusted Gross Income. Any excess contributions above this limit can be carried forward for up to five years.
  • Clothing. This is an easy way to create a tax deduction and help a lot of people who could use additional clothing during the remaining winter season. My rule of thumb is … ‘if you haven’t worn it in the past 24 months, give it away’. To secure your tax deduction, be sure to create a detailed list of items and their value and get a receipt from the charity indicating the gift was made before the end of the year.
  • Appreciated property. A gift of appreciated assets such as stocks, bonds or real estate that you have held for more than one year allows you to save taxes two ways. First, you get a deduction for the full current market value of the gift. You also ‘give away’ the embedded capital gains taxes on the appreciation of the asset. With stock, if you want to continue to hold the stock, simply use cash to replace your shares. You’ll now have a tax deduction and the same number of shares but with a new, high cost basis. The stock gift and properly endorsed stock power must be postmarked by December 31st to qualify for a 2011 tax deduction. Note that due to falling interest rates, you may be holding appreciated bonds in addition to appreciated stocks. Gifts of appreciated assets held for more than a year are limited to 30% of adjusted gross income. Deductions in excess of that amount can be used in future tax years for up to 5 years.
  • Retirement accounts. For 2011, Congress has extended The Pension Protection Act which allows anyone who is age 70 ½ or older to gift up to $100,000 of their Traditional IRA directly to a public charity or charities without having to report any income. While the donor does not receive a tax deduction, he or she avoids receipt of income from the transfer. The transfer does qualify for the Required Minimum Distribution for 2011 if completed by December 31st. This strategy could help drop your income below thresholds for Medicare income adjusted premiums for Part B & D and save you hundreds of dollars.
  • Life income gifts. With a gift annuity, you make a gift to a charity or religious organization in exchange for a monthly life income. At your death, the unused portion of the gift reverts to the charity. As the donor, you can be the income beneficiary or you may designate someone else. The amount of the deduction is based on the present value of the gift and your income stream is guaranteed by the charity so you’ll want to choose a charity in solid financial condition. To count for 2011, the gift must be made by December 31st.


Are Bonds More Risky than US Stocks & Is Bernanke In Trouble?

Here are three questions from our readers:

Question: Are investment grade bonds riskier than the stock market? V. F.

This reader commented, “As we all know the stock market has both gyrated and gone sideways in the last decade. Yet when I seek to invest in A to BBB corporate bonds I am asked if I am aware of how risky my (Bank of America, Genworth, BP, Southwest Airlines etc.) bonds are. My reply is, ‘You wouldn’t tell me that my investment was risky if I invested in an S&P 500 Index mutual fund.’ I find this more risky than BBB bonds in the current environment. To me the risk in these relatively high yield (yet investment grade) bonds are primarily that of default. What’s wrong with my thinking?”

Answer: This reader is correct in thinking that, theoretically, investment grade bonds are less risky than investing in the stock market.  As with any investment, it’s important to diversify your holdings so that you don’t have too much money in any one bond or stock.  There have been plenty of cases where investment grade bonds have, in fact, defaulted and the investors lost all of their money.  I would be particularly concerned about holding bonds of the big banks as it appears investors are not being fully informed of their true financial condition as I discussed in last week’s column.

Question: What’s the best tax strategy for the Alabama 529 plan? R. J.

This reader has about $50,000 in the New Mexico 529 plan and understood that if he transferred the funds to the Alabama plan, he’d receive a tax benefit of $500.  His idea was to transfer all of the money before the end of the year.  His question was, “Is that the right thing to do?”

Answer:  The great news is that Alabama now has one of the best 529 college savings plans in the country when you use Vanguard as your option as the custodian.  Alabamaalso provides a tax incentive in the form of a state tax deduction for the deposit or transfer of up to $10,000 per year.  My advice to this reader is to transfer $10,000 before the end of this calendar year; then transfer another $10,000 in January of next year; then $10,000 each following January until all the funds have been moved.  By doing this, he’ll increase his tax benefits from $500 to $2,500 or more.

Question: Is Federal Reserve Chairman Ben Bernanke in trouble?  G.C.

In last week’s column, I discussed that the Federal Reserve had secretly loaned the big banks $7.7 trillion of bailout money in addition to the $700 billion granted by Congress.  One reader was outraged and asked, “What is being done about this situation and is (Federal Reserve Chairman) Bernanke in trouble over this situation?”

Answer:  First, I do not believe Chairman Bernanke exceeded his authority even though this was by far the greatest extension of lending in the Federal Reserve’s history…so he’s not in any legal trouble.  By keeping the loans a secret from members of Congress, he may very well be in political trouble and his days may be numbered.  In truth, he may have saved the world from a global financial meltdown.  What’s most troubling is that the big banks took advantage of the near interest-free loans to ensure their way of life was essentially unchanged and today they’re one-third bigger than when they were ‘too big to fail’.  Finally, don’t expect our congressional representatives to do anything about this until there is a very public outpouring of outrage or until there is another crisis.

If you’d like to have your financial question answered here and in The Birmingham News, email me at and place ‘Bhm News’ in the subject line.

Surviving the Holidays … Financially Speaking

Black Friday…the biggest shopping day of the year. Thanksgiving officially kicks off the holiday season that will be filled with parties, gathering of friends and family and the sharing of gifts. It’s also a time to remain vigilant over your personal finances so that you don’t begin the new year with new debt. A recent survey suggests that nearly 30% of shoppers are planning on using credit cards to fund holiday purchases. It’s way too easy to get caught up in the shopping mania of this season and find yourself in a freshly dug hole in January. Here are my tips for surviving the holidays…financially speaking:

  1. Decide how much you’ll spend. Take a moment to decide just how much you’re willing to spend, overall, on gifts during this holiday season. I strongly suggest that you focus on cash that you already have in savings, money market or checking accounts. Avoid thinking in terms of credit card spending that must be paid off from future paychecks. Your goal should be to begin the new year with no new debt as a result of holiday spending.
  2. Make a list. Now that you have your budget, make a list of all the people you’d like to give gifts to and then, beside each person’s name, put a dollar limit on the maximum amount you plan to spend taking care to make certain your individual totals don’t exceed your overall budget. It’s ok to use credit cards for your purchases as long as you have the cash to pay off the full balance when it arrives the following month.
  3. Focus on the children. With the current state of the economy, many families are being very conservative with their finances. If your resources this year are more limited, consider establishing a ‘moratorium’ on gifting between spouses and focus on gifts for your children for they are the people who are most excited and have the greatest expectations during this holiday.
  4. Give something back. The economic turmoil of the past couple of years has spawned financial hardship on more families than any time in our lifetime. Use this holiday season to teach your children the importance of giving to others who are in need. There are many ways to accomplish this. You can donate clothing, food, money or you can spend some time working in one of the many shelters located in your home town.
Don’t forget that there are lots of gifts that show you care without spending a fortune. Some of my favorite gifts are a spicy cheese ball one friend gives us each Christmas and home baked sugar cookies from another. Or it can be as simple as a personal note expressing what one’s friendship has meant to you.
If you’d like to have your financial question answered in The Birmingham News, email me and place Bhm News in the subject line.

Is Your Retirement Money Safe?

This week, readers continue to search for answers to their most pressing financial questions. Here are the ones that I felt could benefit a cross-section of our readers:

Question #1
My wife and I are both retired and have our retirement savings in the Alabama RSA1 and federal TSP programs, both of which claim to have low expense ratios. Is it safe to have our retirement tied up in government sponsored programs? J.L.
J.L. is referring to Retirement System of Alabama’s deferred compensation plan which is available to state employees and the federal thrift savings plan which is similar to a 401k plan but for federal employees. Thousands of Alabamian’s are participating in these plans and I suspect many folks have heightened concern about how safe their money is in the aftermath of Jefferson County’s $3 billion default on their sewer bonds. Both programs do a great job of keeping expenses low and both plans are a ‘safe’ place for your money if you are concerned about a default or bankruptcy of some sort. What you should be concerned about under either plan is the type of investments you have chosen. Both programs offer a range of investment options including stock, bond and fixed rate-oriented securities. Both bond and stock-oriented investments can fluctuate significantly so J.L. should review his allocation and make certain it’s appropriate under his and his wife’s retirement status.
Question #2
A few weeks ago I answered a reader’s question about whether, since he is retired, should he keep his 401k with his former employer or roll it over to an IRA? I suggested he could possibly cut expenses and certainly increase his investment options by doing the rollover. Another reader asked this follow up question:
“Are they equally protected legally?  I believe a 401-k is classified as a pension and hence not subject to legal suits.  Is an IRA? I am retired, and understand that only an active employee can get a loan from a 401-K, so that means no advantage over an IRA as to taking a loan out.” M.G.

M.G. does bring up a good point. Defined contribution plans such as 401k’s and 403b’s; Simplified Employee Pension Plans (SEP) and SIMPLE IRAs; defined benefit pensions and profit sharing plans all fall under the Employee Retirement Income Security Act (ERISA) of 1974 and are fully protected against legal judgments except the Internal Revenue Service or a judgment in a divorce (called a qualified domestic relations order or QDRO). Historically, traditional IRAs have fallen under state law for purposes of legal protection. In 2005, congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act which provides that up to $1 million of traditional IRA (or Roth IRA) funds are protected under federal law if you file bankruptcy and 100% of funds rolled over from an ERISA plan are protected as well. However, if you don’t file for bankruptcy, it appears that state law will determine the level of protection for your IRA. State laws can vary widely. For example, according to a bankruptcy attorney I spoke with, Alabama provides for protection for a traditional IRA but not for a Roth IRA (legislation is pending for Roth IRA protection). So, depending on your state laws, leaving your money in your 401k may offer better asset protection. One suggestion is to review your umbrella liability policy and consider increasing the amount of coverage.

If you’d like to have your financial question answered, email me at and place Bhm News in the subject line.

Social Security Tax Strategies

Last week I discussed several strategies for maximizing your social security benefits. This week I’ll examine some of the nuances of how your Social Security benefits are taxed and how you might be able to reduce those taxes.

To determine if your Social Security benefit is taxable then you have to calculate what is called your “combined income.” “Combined income” is defined as your adjusted gross income (commonly referred to as your AGI) plus nontaxable interest (for example, interest on muni bonds) plus half of your social security benefit. Note that only half of your social security benefit is used to calculate your “combined income.” Here are the categories:
  • No taxes on Social Security. For joint filers with combined income below $32,000 ($25,000 for single filers) there is no federal taxation of Social Security benefits.
  •  Taxes on up to 50% of Social Security. Joint filers with combined income between $32,000 and $44,000 ($25,000 to $34,000 for single filers) may have to pay income taxes on up to 50% of their Social Security benefits.
  • Taxes on up to 85% of Social Security. For joint filers with combined income above $44,000 ($34,000 for single filers) then you may pay taxes on up to 85% of your benefit. No one pays federal income tax on more than 85% of his or her Social Security benefits.
Are there strategies you can use to reduce taxes on your Social Security benefits?
Strategy #1: Draw retirement benefits; postpone Social Security benefits. Let’s say you are retired at age 62 and you have the option of taking your Social Security benefit now or deferring until age 70. This strategy involves you deferring your social security benefit until age 70 and taking your current income need from your 401k or IRA. Your Social Security benefit is increasing each year you delay. You will be required to take Required Minimum Distributions at age 70½ from your retirement accounts but typically the initial amount is only about 3%. The advantage is a much higher Social Security benefit for you (and your spouse should he/she outlives you). For example, if your age 62 benefit was $750 per month; by waiting until age 70 to claim benefits they would rise to $1,320 per month. Remember that if your spouse survives you, he/she can choose to take 100% of your benefit. The goal of this strategy is once you start taking social security to keep your combined income below the taxable social security thresholds therefore receiving social security at little or no tax. The risk of this strategy? If you (and your spouse) die before or shortly after age 70, you will have spent retirement plan assets that would have gone to heirs and you would have received little to no Social Security benefits. This strategy works best if you expect your spouse and/or you to live well into your eighties or beyond.
Strategy #2: Reduce your ‘combined income’ by paying off debt. One strategy is to reduce your income by paying off debt. Say you take savings that was producing taxable interest and pay off your home mortgage. Mortgage interest is not used in the ‘combined income’ calculation for Social Security taxes but you will have reduced your AGI. While your income has gone down, so have your expenses as well as potentially reducing taxes on your Social Security, especially if you are on the borderline of the 50% or 85% threshold discussed earlier.
Strategy #3: Convert to a Roth. Roth income or distributions are not part of the combined income calculation for Social Security income tax purposes. The year that you convert from a traditional IRA to a Roth will likely cause higher taxation on your Social Security benefits that year, but in the years that follow you may have substantially reduced taxes on your Social Security benefits. An alternative would be to do your Roth conversions over several tax years. It’s worth noting that the Roth conversion may also trigger a higher Medicare Part B premium for the year of conversion.
Your particular circumstances will dictate which of these strategies may be appropriate and I recommend that you seek the advice of your tax advisor.
If you’d like to have your financial question answered, email me at and place Bhm News in the subject line.

Best Social Security Strategies

Eighty million Baby Boomers are headed for retirement and for many, Social Security will be the centerpiece of their retirement income plan. Today, I’ll reveal three little-known strategies that just might put thousands of dollars in your pocket.

First, let’s begin with a few basics. If you were born between 1943 and 1954 you can claim a full Social Security benefit at age 66. Beginning at age 62, you can take a reduced benefit equal to 75% of your full benefit. If you choose to wait beyond your full benefit age, your benefit increases 8% per year until age 70 (called Delayed Retirement Credits). A spouse can choose to receive his or her own benefit based on his or her own work record or he or she can choose to receive a spousal benefit equal to one-half of his or her spouse’s benefit. It’s worth noting that a divorced spouse, who was married at least ten years, also retains both of these options. Finally, a widow or widower may receive his or her deceased spouses’ benefit or he or she may elect to receive his or her own benefit based on his or her own work record. This widow/widower benefit can be taken as early as age 60. It’s within these multiple choices that lay the secret strategies.
Strategy #1: The Widow/Widower Strategy. By way of an example, let’s assume we have a couple where the husband is age 62 and the wife is age 60 and both have worked and therefore each has Social Security benefits. Assume the husband dies at age 62. Should the wife claim a widow benefit or wait and claim benefits based on her own earnings? As a widow she is eligible for 100% of her husband’s benefit if she waits until his full retirement age (age 66). She could begin her widow benefit as early as age 60 but the benefits will be reduced.
She should consider taking her widow benefit, perhaps as early as age 60 and then switch to her own benefits once she turns age 70. This strategy allows her to begin receiving income early while delaying her own benefits thus allowing her own benefit to increase to the maximum amount. It also allows her to make use of both her husband’s benefit and her benefit verses just her benefit.
Strategy #2: The 62/70 Strategy. In this example, let’s assume that our couple is both age 62 and we anticipate that both will live until or beyond their normal life expectancy. Instead of each taking their own benefit early at age 62 or waiting until their age 66 full benefit, the wife takes her early benefit at age 62 and the husband takes a spousal benefit at age 66. Once he turns age 70, he switches to his full benefit and she switches to a spousal benefit equal to one-half of his age 66 full retirement benefit or she continues her benefit, whichever is higher. Remember that if the husband were to die first, the wife would then step-up to 100% of the husbands age 70 benefit! Under these case facts, the earliest the husband can take a spousal benefit is age 66.
Strategy #3: The File and Suspend Strategy. In this example, let’s assume only the husband worked while the wife stayed home to raise the children. Here, the husband could begin his full benefit at age 66 then immediately ‘suspend’ his benefit. The wife then begins a spousal benefit equal to one-half of his full (but suspended) benefit. At age 70, he ‘un-suspends’ his benefit which has now grown to the maximum benefit amount including the 8% per year ‘Delayed Retirement Credits’ from age 66 to age 70.
It’s important to note that in each case example, the individual facts are vital to choosing the best strategy. Particularly in strategies one and two, case facts might drive you to reverse the order of which spouse’s benefit you choose to begin first. You need to ‘run the numbers’ under various options or have your financial advisor assist you in making this decision. Making the right choice could mean tens of thousands of dollars of additional Social Security benefits.
If you’d like to have your financial question answered, email me at and place Bhm News in the subject line.

Ask Stewart: Retirement & College Funding Questions

I recently wrote about investment alternatives for retirees who are seeking higher income in today’s challenging investment environment. A younger reader wrote me with a question from his age group’s particular perspective:

“My question is what do you recommend for someone that still has around 25 years left in the workforce. I’m maxing out my 401(k) at work. However, I’ve just had my third child and have not yet started a 529 college fund for any of my children (ages 8, 5, and 6 weeks). 
Basically, I’d like to know your recommendation on maximizing my funds’ growth over my remaining working life for retirement (I am weighted heavily in equity stocks in my 401(k) currently with some balance of bond funds) and what 529 plan / funds do you recommend? There was a time over 5 years ago that Utah’s 529 fund was all the rage, but I’m now seeing some recommendations for Alabama’s 529 plans.”
Signed: Saving for Retirement and Kids’ Education
First, I want to applaud ‘Saving for Retirement’ for thinking well ahead about the important issues of retirement and college funding. Most families don’t do this and the results, particularly related to retirement, are devastating with less than 5% of all retirees being financially prepared. On the education front, many parents realize too late the mammoth costs of putting a child through college. Four years of in-state college can easily cost $80,000 in today’s terms and you can expect at least $160,000 for a four-year private college. While this reader did not provide his retirement income goals, if he wanted to maintain an inflation adjusted retirement income based on $75,000 in today’s dollars, he’d need approximately $3,000,000 of investment capital at retirement. Most people are very surprised by the size of these numbers and one of the keys to success is developing a success strategy as early as possible so that you have time working on your side.
To answer this reader’s questions, I’ll start with the college funding. Yes, we used to recommend the Utah 529 Plan to our clients but last summer Alabama adopted a new plan run by Vanguard which is as competitive as any in the nation and you’ll receive a state income tax deduction of up to $10,000 per year for new deposits, including transfers from other plans. Currently, for Alabama residents, we recommend all new deposits go to the Alabama 529 Plan and we are systematically transferring in money from out-of-state plans to capture the $10,000 state income tax deduction. In particular, we often recommend one of Vanguard’s Age-Based investment options. These plans automatically become more conservative by shifting money out of stocks into bonds as your child approaches college age. Visit the Resource Center at; click on ‘Links’; the ‘College Costs Calculator’ and run projections on how much you’ll need to invest to fund your child’s college education. For more information on the Alabama 529 Plan, visit
As to the question about retirement, I would start with a retirement analysis in order to get some idea of how much you’ll need to be investing in order to reach your retirement goal. Visit the Resource Center; click on ‘Links’; then ‘Retirement Planning Calculator’ for a quick estimate. If you are investing primarily through your company’s 401k plan, I think you’re on the right track having your investments weighted heavily towards stocks. If your goal is large and you have 25 years, we might typically recommend 80% to stock mutual funds with the balance in bond funds. The last decade in stocks has been quite challenging but I expect stocks to outperform bonds over the next five years or more. If you are investing additional money outside your 401k, you could consider a similar no-load mutual fund strategy. If you’re inclined towards individual stocks versus mutual funds, I still like blue chip dividend-paying stocks. As the 80 million Baby Boomers retire over the next dozen or more years they’ll seek income investments with an opportunity for conservative growth….and these stocks are a near perfect fit.