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Category: Investment Professionals

Prepaid College Savings Plans

[ 0 ] June 4, 2014

Spectrum Financial Solutions, FL, College savingsSaving for college is always challenging and determining how much money to save can be even more of a challenge. One of the unique plans that parents can choose are special 529 plans that allow them to lock in today’s college costs for the future. While these plans offer many benefits, there are some features of these plans that parents should be aware of including:

  • Room and board costs – generally speaking, many of these prepaid plans do not calculate room and board into their tuition lock-in plans. Parents may have to set up separate 529 plans in order to ensure the student has sufficient funds for room and board.
  • Contracts matter greatly – parents who decide a prepaid plan is a good idea should carefully review the contract to ensure they are well-versed on exactly what is offered. There are many schools that offer prepaid plans but not every plan covers the same expenses. Before you sign a contract, make sure you have thoroughly reviewed it with your financial advisor to determine if you need to save additional funds.
  • When students get scholarships – oftentimes students are awarded full academic or athletic scholarships and parents are tempted to close their prepaid plan out for other expenses. However, it is important to review the terms of these scholarships since they may not apply if the student is unable to continue playing sports or suffers a drop in grades. Keeping the prepaid plan in place until the student graduates college is typically a good idea.
  • Ask about tax savings/benefits – before you decide on a prepaid college savings plan make sure you talk to your tax advisor about the tax benefits and savings available to you. In most cases, deposits to the account are tax deductible on a state and federal level and since the funds can only be used for education purposes, growth is typically tax free as well.

There are a number of options parents may use when saving for college including prepaid tuition plans. Since these are still 529 plans, it is important to thoroughly review the plan before you decide it is the right option for your family.

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Why Use College Savings plans

[ 0 ] May 28, 2014

Spectrum Financial Solutions, NJ, College fundWhen parents decide to begin saving for college for their children, they will have to determine what type of account is most suitable. In some cases, parents may prefer 529 plans over Uniform Transfer to Minor Accounts (UTMA) since the 529 plans must be used for higher education purposes while the UTMA accounts may be used for any purpose the child sees fit.

Understanding UTMAs

Under the UTMA plans, the custodian of the account does not have control over how the funds are spent. The funds are designated to the minor child at the time the account is established. Once the child reaches the age of maturity (18 or 21 depending on the state) the account is then fully-owned by the child. Withdrawals are then controlled by the child and may be used for any purpose they wish to use them for including, but not limited to college. While the child is a minor, the custodian has an obligation to use the funds in the account solely for the beneficiary. There is no option for the custodian to change the ownership from one minor to another unlike 529 plans.

Tax benefits are often similar

In most cases, 529 college savings plans allow the funds to grow free from federal taxes. In the event the funds are used for higher-education purposes, the withdrawals are also free from federal taxes. In the case of UTMA accounts, the custodian may gift up to the maximum amount allowed under gifting laws. For federal tax purposes, 529 plan contributions are non-deductible but earnings are excluded from income if they are used for approved educational expenses. With UTMA accounts, earnings and gains are taxable though typically taxed at a lower rate since they are taxed to the minor. The first $1,000 is typically treated as tax-exempt and may be exempt up to $2,000 for certain minors.

When saving for college, 529 plans are often the plan of choice. Custodians have complete control of the funds and if the intended beneficiary elects to not attend college, a new beneficiary may be placed on the account. Your investment advisor can help you decide which plan is most appropriate for your needs.

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College Savings plans

[ 0 ] May 14, 2014

Spectrum Financial Solutions, FL, College 529 Plans

Saving for college has become easier than ever for many families since 529 plans were introduced. These plans allow anyone to open an account for a child and deposit funds into the account on a one-time basis, a monthly basis or an annual basis. Each state has its own 529 plan but in many cases, custodians of these funds may open an account in any state they choose.

Tax benefits of 529 plans

When saving for college, one consideration is the taxes paid on savings growth and at the time of withdrawal. In general, these college savings plans are free from federal taxes while they grow and, if the funds are used for higher-education, may be free from federal taxes upon withdrawal. In many states the same tax benefits are available on state tax reporting.

When a child decides against college

Perhaps one of the more unique features of a 529 savings plan is the options available should the child elect not to attend college. The custodian (the person who set up the account) has the option to change the beneficiary (the child) or to allow the funds to continue to grow in the account. Another available option, subject to taxes, is to withdraw the funds into another account. Because the new account would not be considered a qualified account, earnings on the growth portion of the funds would be subject to taxes and a penalty of up to 10 percent is also payable to the federal government. Before making this type of change it is important to speak with a tax advisor.

Saving for college is never easy although 529 plans make it easier than ever. One single child may have multiple accounts set up for them by different people. Before you decide which college savings plans are right for your needs, it is a good idea to speak with a financial advisor who can help you determine what benefits are available to you based on your individual financial needs.

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The Policy Review and Pandora’s Box

[ 0 ] April 30, 2014

Spectrum Financial Solutions, FL, Life insuranceIt all started as a simple question during a round of golf with friends.  I don’t discuss business on the golf course ordinarily… it gets in the way of the jokes, jibes, witnessing good and bad play and my near manic pursuit of par.

On this day, my playing partner asked me a question about his and his wife’s life insurance policies with a major mutual life insurance company (policies I didn’t place for my friends).  I said that I couldn’t answer his question adequately at that time but would be happy to meet with him at a later date.  Because of scheduling issues, we met several months later.

In advance of the meeting, I requested a great deal of material:  pre-sale illustrations, copies of policies, annual statements, trust agreements, if any, and any communication regarding original concept backing up the policies.  This information was critical to the face-to-face with my friend and his wife.

The dialogue at our meeting indicated that the policies were purchased in order to provide interim death benefits for income replacement but more importantly, the substantially overfunded policies were meant to provide tax advantaged post-retirement benefits many years down the road.  The policies on my friend and his wife were owned by irrevocable life insurance trusts, which raised a question in my mind as to proper ownership.

It should be noted that this couple are Non-Resident Aliens (NRA) but intend to gain US citizenship, when possible, in several years time.  It was stated that the trusts were designed to mitigate any estate tax issues that an NRA might experience from ownership of a U.S. life insurance policy at his or her death.

The policies (one on each of couple), when issued, were designed to become Modified Endowment Contracts (MEC), which runs counter to the goal of creating the most efficient post-retirement, tax advantaged income stream for the couple.  Under the current policies, should the client choose to receive payments (if even possible under the trust agreement), they would be taxable as ordinary income until such time as all accumulation in excess of cost basis is consumed.  Add to that the potential for a 10% penalty for distributions prior to age 59½… serious structural issues emerge and the hinges of a Pandora’s Box started to loosen.

Whereas the policy review was intended to determine whether the life insurance policies were the best means of providing for the clients’ long term goals, it uncovered a number of issues that, left unattended to, would impact, if not undermine their primary goals and planning.

Many questions emerged… Were irrevocable life insurance trusts appropriate in light of the stated goal of providing living benefits for my clients?  Were Crummey Letters sent out to beneficiaries as mandated in the trust document?  Did the Trust document(s) apply for and receive Federal Tax ID numbers?  Was the wife’s trust actually signed and witnessed?  The answers were all no or maybe, at best.

As to the life policies that were the focus of my review, they were rather uncomplicated and straight forward.  The current policies were compared to alternatives and shown to be less advantageous than new policy designs.  And correction the MEC issues only complimented the situation.

This note wasn’t meant to be a case study… I could go on for many pages commenting on various aspects of the program.  Rather, it only serves to illustrate that a second or third set of eyes reviewing older life insurance programs, revisiting goals and objectives and the documents supporting them is a prudent exercise that makes a great deal of sense.

What would have been a much larger issue as time went on is being addressed currently. And, Pandora’s Box never opened.

Written by Nunya Bidness.


Outliers And Retirement Income

[ 0 ] April 23, 2014

Spectrum Financial Solutions, FL, Retirement PlanningYou are age 65 and it’s your first day of retirement. You are about to tap a putt into the ninth hole. Based on your experience, you believe you will sink the putt.

Just to make it interesting, let’s make a little bet. If you sink the putt, you are guaranteed that you can take out an ever-increasing amount of money from your retirement assets and you’ll never run out of money in retirement—even if you live past age 100. However, if you miss the putt and the ball winds up on a completely different fairway, your money runs out before you’re age 80. Do you take the bet?

Wall Street makes a lot of investment projections calculating sustainable rates of withdrawal in retirement. Depending on the mix of stocks and bonds—and the initial withdrawal rate used—these predict that the invested money will last at least 30 years 90, 94 or 98 percent of the time. In golf terms what the projections are saying is you can move your ball closer or farther from the pin to wherever you think you’re pretty sure you could sink it, and the farther you go back from the hole, the larger the withdrawals promised. Essentially you are controlling the risk and the game because it is your decision on how much to withdraw and how to invest guided by the Wall Street model.

Let’s go back to the golf course and consider this: Unbeknownst to you, a hawk has mistaken the ball for prey and will swoop it up before it hits the hole, or a miss-hit ball from the adjacent fairway is arcing toward your green, smashes into your ball and sends it ricocheting onto the next fairway. In both cases you have lost your bet, and instead of enjoying a long and prospering retirement you will experience one with financial hardships.

We have all heard of black swans—disruptive events that cannot be predicted—but the situations mentioned above are not black swans because they could be predicted. The hawk and the ricochet are outliers in that they were possible, but extremely unlikely. Unfortunately, almost all retirement income models simply ignore outliers—therefore, retirees should not.

The 4 percent inflation-adjusted portfolio withdrawal rate assumed a 50/50 mix of stocks and bonds and provided a 94 percent confidence level that it would last at least 30 years; however, it also assumes that the long term returns of stocks and bonds continues into the future. Instead, if we assume that this current low-bond yield environment hangs on for a decade before rates return to their historic “norm,” our confidence in the retirement money lasting 30 years drops to 68 percent, and if bond yields never recover, our confidence in producing that 4 percent payout rate drops to 43 percent.1

The previous example looked at an outlier of very low bond rates. Sequence of returns risk means starting withdrawals during a period of losses. This risk is not an extreme outlier, because the bear markets of the 1970s showed what could happen. Yet it wasn’t until after we had two severe bear markets within eight years of each other that Wall Street considered reducing the suggested levels of sustainable withdrawals below 4 percent.

Another outlier is if a medical breakthrough in longevity results, where living to age 100 or 105 becomes commonplace; to get retirement income confidence levels over 90 percent would require investment portfolio withdrawals to drop below 2 percent.

If any of these three outliers occur, the options are to save much, much more for retirement (impossible for one already at retirement age); to withdraw much, much less; or to die early.

Another way is to transfer the risk of these outliers to a third party—an annuity carrier.

A guaranteed lifetime income—whether it comes from an income annuity, a deferred income annuity or a lifetime withdrawal benefit—provides protection from retiring at the wrong time, living too long or earning too little. It assures that whether you sink your putt or not, you can go on with your game.

A guaranteed annuity income won’t help if the world gets destroyed by an asteroid, nor will it stop someone who chooses playing slot machines as their new retirement activity. However, when it comes to retirement income, fixed annuities lower the risk from many outliers and eliminate others. Perhaps the biggest risk with fixed annuities is that retirees won’t learn about them until it is too late.


 1. “The 4 Percent Rule is Not Safe in a Low-Yield World,” Finke, Wade and Blanchett, January 2013,

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Understanding Your Own Investment Risk Tolerance

[ 0 ] April 9, 2014

Spectrum Financial Solutions, FL, RisksMost people, once they get safely past their teenage years, have a pretty concrete list of risks they don’t care to take.

Skydiving, for instance, is either on your bucket list or not. After a certain age, you’re either itching to do it or itching to avoid it.

While we tend to get better at assessing risk as we get older, we don’t seem to learn as much about financial risk. In the markets, we seem to be perpetual teenagers, always stepping in too deep for our own good.

Unless the market moves against us once, hard. Then the opposite tends to happen. We get over-concerned about risk to the point that we stop investing completely.

Understanding where you are on this curve is important. If you take too little risk as a young investor, you might leave a lot of money on the table. Failing to realize the advantage of time means your money compounds at a lower rate or not at all. That’s very hard to overcome later in life.

The late saver then tries to do exactly that — to turn back the clock and make up for missing time. That investor then tends to take on too much risk for his or her own good, always pushing the envelope on their investments.

A few early successes is even worse. It’s easy to become convinced of your own investing acumen and to then confuse skill with blind luck. Until, of course, the luck runs out. Even then, we tend to blame the markets, or the government, or the banks, anyone but the person making the actual investments — ourselves.

How can you learn your own risk tolerance? It’s not that hard, really. Here are four basic questions any financial advisor would ask:

1.      How long until you need this money?

If you have 30 years to save and invest, it’s likely that you can handle a few market setbacks along the way. This assumption changes a lot if you are just five years away from retirement.

2.      How long do you expect to work? To live in retirement?

Many people get to retirement age unready to quit working or unable to do so, having saved too little. If work is part of your retirement plan, you might be able to take on a little more risk than most investors your age. Also, consider how long you might live in retirement. Running out of money in your later years is an avoidable outcome.

3.      How do you react when markets go up?

Joy? Champagne? Shopping sprees in celebration? Remember that you haven’t actually made any money until you sell those assets, and that might not be for decades to come. Likewise, some investors take a rising market as a sign to invest more heavily, even if stocks seem expensive.

4.      How do you react when markets go down?

Dread? Depression? Fear? Remember, you also haven’t lost any money unless you sell at a bottom. Likewise, investors tend to avoid investing as stock prices fall, which is contrary to the whole concept of “buy low and sell high.”

Correctly measuring investment risk tolerance is an important part of the any long-term retirement plan. Get it right, and you can insulate yourself from the kinds of emotional trading mistakes that plague retirement savers.

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Investment Alternatives: Basics of investing in mutual funds

[ 0 ] March 19, 2014

Spectrum Financial, FL, Mutual fundsBetter understand and learn how to invest in mutual funds with these informative tips.

1. What exactly is a mutual fund?

A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to its charter.  Each investor in the fund gets a slice of the total pie.

2. Mutual funds make it easy to diversify.

Most funds require only moderate minimum investments, from a few hundred to a few thousand dollars, enabling investors to construct a diversified portfolio much more cheaply than they could on their own.

3. There are many kinds of stock funds.

The number of categories is dizzying.  Some examples: growth funds, which buy shares of burgeoning companies; sector funds, which buy shares of companies in a particular sector, such as technology or health care; and index funds, which buy shares of every stock in a particular index, such as the S&P 500.

4. Bond funds come in many different flavors too.

There are bond funds for every taste.  If you want safe investments, consider government bond funds; if you’re willing to gamble on high-risk investments, try high-yield bond funds; and if you want to keep down your tax bill, try municipal bond funds.

5. Returns aren’t everything – also consider the risk taken to achieve those returns.

Before buying a fund, look at how risky its investments are.  Can you tolerate big market swings for a shot at higher returns?  If not, stick with low-risk funds.  To assess risk level, check these three factors: the fund’s biggest quarterly loss, which will help you brace for the worst; its beta, which measures a fund’s volatility against the S&P 500; and the standard deviation, which shows how much a fund bounces around its average returns.

6. Low expenses are crucial.

In order to cover their expenses – and to make a profit – funds charge a percentage of total assets.  At no more than a few percentage points a year, expenses may not sound substantial, but they create a serious drag on performance over time.

7. Taxes take a big bite out of performance.

Even if you don’t sell your fund shares, you could still end up stuck with a big tax bite.  If a fund owns dividend-paying stocks, or if a fund manager sells some big winners, shareholders will owe their share of Uncle Sam’s bill. Investors are often surprised to learn they owe taxes – both for dividends and for capital gains – even for funds that have declined in value. Tax-efficient funds avoid rapid trading (and high short-term capital gains taxes) and match winning trades with losing trades.

8. Don’t chase winners.

Funds that rank very highly over one period rarely finish on top in later ones. When choosing a fund, look for consistent long-term results.

9. Index funds should be a core component of your portfolio.

Index funds track the performance of market benchmarks, such as the S&P 500.  Such “passive” funds offer a number of advantages over “active” funds: Index funds tend to charge lower expenses and be more tax efficient, and there’s no risk the fund manager will make sudden changes that throw off your portfolio’s allocation.  What’s more, most active mutual funds underperform the S&P index.

10. Don’t be too quick to dump a fund.

Any fund can – and probably will – have an off year.  Though you may be tempted to sell a losing fund, first check to see whether it has trailed comparable funds for more than two years.  If it hasn’t, sit tight. But if earnings have been consistently below par, it may be time to move on.

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How Inflation Will Cut Your Taxes in 2014

[ 0 ] March 12, 2014

Spectrum Financial Solutions, NJ, FL, Inflation will help taxesMost of the time, inflation is one of the most serious financial threats people face, propelling slow but steady price increases that erode the purchasing power of your savings and make it harder to make ends meet.

But when it comes to your taxes, inflation’s bite need not be too painful: The government makes annual adjustments to the tax code to reflect the higher cost of living, which should help you save on your taxes in 2014.

1. Higher Standard Deductions

The standard deduction allows taxpayers to earn income up to a certain amount without paying any taxes — and without going to the trouble of itemizing deductions. For 2014, the figure for single filers will rise by $100 to $6,200, with joint filers getting a $200 increase to $12,400. Those who qualify as heads of household split the difference, with their standard deduction jumping $150 to $9,100. Depending on your filing status and tax bracket, these increases could save you anywhere from $10 to $80 on your 2014 tax return.

2. Higher Personal Exemptions

Most taxpayers get to take a personal exemption for each member of their families, including dependents. The personal exemption amount will climb by $50 to $3,950 in 2014. The increase could boost tax savings anywhere from $5 to $20 per person depending on your tax bracket, although high-income taxpayers begin to have personal exemptions phased out once their income goes above certain levels.

3. Higher Tax Brackets

The boundaries of the various tax brackets get an inflation adjustment in 2014, allowing taxpayers to earn more money while getting taxed at a lower rate.

For instance, single filers will see the upper end of the 10 percent tax bracket rise from $8,925 to $9,075, while the top of the 15 percent tax bracket will rise from $36,250 to $36,900. By taxing more of your income at lower rates, these shifts will produce tax savings of $72.50 for a single filer earning $40,000 in taxable income. Higher-end earners will reap more substantial savings: Joint filers with taxable income of $250,000 will see a drop of more than $400 in their taxes.

4. Higher Earned Income Tax Credits

Millions of working low-income taxpayers are eligible to receive the Earned Income Tax Credit. The maximum credit amount rises $99 in 2014 for joint filers with three or more qualifying children, with an $88 increase for those with two children, $54 for one-child families, and $9 for eligible individuals with no children.

5. Higher Exclusions for Foreign Workers

If you work abroad, you’re entitled to exclude money you earn in wages or salaries from your foreign job. The amount of money you’re able to exclude will rise in 2014 by $1,600 to $99,200, producing savings of $160 to $640 depending on your tax bracket. The exclusion is designed to offset the taxes that foreign workers typically pay in the countries in which they work.

6. Higher Exemptions for Alternative Minimum Tax

The Alternative Minimum Tax was originally designed to apply only to the richest taxpayers — its purpose being to prevent the wealthy from gaming the system and paying no taxes at all. But over time, thanks to inflation, the tax gradually started capturing more upper-middle-class taxpayers, especially in states that have high taxes that aren’t deductible for AMT purposes. In 2014, the exemption amount of AMT will rise by $900 to $52,800 for single filers and by $1,300 to $82,100 for joint filers. With AMT rates at 26 percent and 28 percent, those increases can save between $234 and $364 in potential AMT liability.

These are just a sampling of the many ways that cost-of-living inflation adjustments will lower taxes for millions of Americans. For more information, be sure to visit the IRS website and get the comprehensive list of inflation adjustments for 2014.

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7 Alternatives to Investing in the Stock Market

[ 0 ] March 5, 2014

Spectrum Financial Solutions, NJ, InvestmentThe stock market is a great investment if you have a long time horizon.  But should you continue to invest in stocks once you retire?  When you start withdrawing from your retirement portfolio, you will be a lot more sensitive to stock market fluctuations.  Most financial advisers recommend reducing stock market investments as you get older, but you don’t want to just stick the money under the mattress either.  Inflation will erode cash savings over the years, and we need to continue to invest.  Here are seven investment alternatives to the stock market:

Annuities.  There are many types of annuities, but the basic idea is that we pay an insurance company a lump sum in exchange for a guaranteed monthly payment for life.  Annuity payouts are primarily tied to interest rates, so it’s probably a good idea to wait until rates improve.  You probably don’t want to put all of your savings into an annuity because you really don’t know how long you will live.  If your pension and Social Security payments aren’t enough to pay your minimal monthly expenses, then it’s a good idea to buy an annuity to fill that gap.

Bonds.  The classic alternative to the stock market is bonds.  You can lend money to the government or a corporation and receive some interest.  When the stock market goes south, investors turn to bonds as a good diversification from the stock market.

CDs.  CDs are not very attractive at the moment because the yields are very low. However, the return is guaranteed and the risk is also very low. Building a CD ladder is a good way to guarantee stable returns. Once interest rates improve, it will be a good idea to invest in a long-term CD.

Real estate.  Rental properties are a great way to generate some income, but they can be a lot of work. If you don’t want to deal with tenants, then a property management company can be a huge help.  If you really don’t want to be a landlord, consider a real estate investment trust (REIT) instead.  Investing in a REIT is much easier than owning rental properties, and the dividend payout is usually very good compared to other dividend stocks.

Gold.  Gold is another diversification from the stock market.  When economic turmoil hits, the price of gold goes up.  Gold represents stability, and a small portion of your portfolio might benefit from that.  Investing in gold is easier than ever.  You can invest in gold ETFs without having to worry about stashing gold jewelry in the freezer.

Peer-to-peer lending.  Peer-to-peer lending is a great way to generate extra income.  You lend money to individual borrowers and you’ll be paid an interest rate.  The good thing about peer-to-peer lending is that you can lend in $25 increments and diversify your lending portfolio.  Some percentage of borrowers will default, but your lending portfolio should be able to handle some losses because the interest rate is so high.  One big caveat is if we have a big recession and many people lose their jobs, then the default rate will skyrocket.

Long-term care insurance.  The cost of long-term care can put a big dent into any retirement portfolio.  A good nursing home can cost over $10,000 a month depending on where you live.  Long-term care insurance can offset that cost.  If your family has any history of Alzheimer’s, dementia, or Parkinson’s disease, long-term care insurance might be right for you.  However, the cost of long-term care insurance is quite high, so if your family doesn’t have any history of needing long-term care, it might be better to invest the money elsewhere.

Retirees shouldn’t pull out of the stock market completely because it is still a great investment over the long term.  Retirement can last over 30 years, and we need some growth in our retirement portfolio.  However, retirees need to take a close look at their portfolio and ask themselves if they can handle the volatility.  Most people think they can handle a big drop in the stock market, but when it happens, they often sell at the wrong time and lose out on the recovery.  Choosing some alternative investments outside the stock market may bolster your finances during such an event.

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Here we are!

[ 0 ] January 22, 2014

Spectrum Financial has made it more convenient for you to to reach us!  You can find us on our blog  LinkedIn page,  Facebook page, and of course our website.

Check us out!