FinArc offers the following articles to the general public for educational and informational benefit.  Please contact us to learn more about these topics or to discuss alternative financial interests.

1) Collecting Benefits Early
2) Understanding Risk
3) Retirement Planning for the Small Business Owner
4) How Does FinArc Manage Capital Gains?
5) What’s the Buzz about Long Term Care
6) Performance Measurement

Collecting Benefits Early

If you've earned enough credits to do so, you can start collecting Social Security benefits as early as age 62. The number of credits you need is determined by the year you were born. If you were born in 1929 or later, you need 40 credits (or about 10 years of work). If you were born before 1929, you need fewer credits.

Starting early may sound great, but there's a catch: If you take early retirement, your benefits will be permanently reduced based on the number of months you will receive checks before you reach full retirement age. If your full retirement age is 65, the reduction for starting your Social Security at age 62 is about 20 percent; at age 63, it is about 13 and 1/3 percent; and at age 64, it is about six and 2/3 percent.  Here is the chart that shows the full retirement ages:

Source: Social Security Administration

Consider the following in your decision making - the earlier you receive benefits, the less money you will receive on a monthly basis.  If you begin taking Social Security early, your payments will be reduced by approximately 1/2% for each month you take benefits before your full retirement age.  For example, if you begin taking social security at age 62 and your full retirement age is 65, your payments will be reduced by 20%.  The number decreases to 13 1⁄2 % and 61/2% at ages 63 and 64 respectively. If you enjoy your job and/or are able to work beyond your full retirement age (prior to age 70), you stand to get credit.  The following chart shows what you might gain by delaying payments.

Source: Social Security Administration

You can find out more about the effects of early or delayed retirement by visiting the Social Security website at http://www.ssa.gov/. You can also review your Social Security statement that you receive in the mail.

When examining your financial situation, determine what your cash needs are.  If you have sufficient resources and can delay payments, it would most likely be in your best interest to do so.  However, if you are cash strapped and are uncomfortable or uncertain about your financial future, you may need to consider taking payments earlier.

Life expectancy is another consideration.  One of the reasons the full retirement age has increased is due to the fact that people are living longer.  And when people live longer, the length of time for which one needs financial security increases.  By postponing payments, your monthly checks will be larger.

Of course, if you take benefits early, you will receive checks for a longer period of time.  This brings into question, at what age will one break-even and come out ahead when delaying benefit payments.  According to the Social Security Administration, the following are break-even ages for someone with monthly benefits at ages 62, 66 and 70 of $1,346, $1786 and $2,358 respectively.

age 62 vs. age 66 - Break-even age is 78

age 62 vs. age 70 - Break-even age is 80, 6 mos. age 66 vs. age 70 - Break-even age is 82, 5 mos.

If your life expectancy is beyond the break-even age, it makes more sense to delay your payments.

Other areas of consideration are whether or not you have a spouse and his/her employment history, in addition to taking payments while still earning income.  The latter may reduce your benefit.

Before making any decision or if you just have questions, please contact Catherine Friend White to review your current situation. She can be reached at (781) 449-8989.

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Retirement Planning for the Small Business Owner

In order to stay competitive in today’s business world, successful businesses of all sizes are creating retirement plans. The owner’s plans for retiring, the history and future of the company, budgetary constraints, and the number and type of employees, all impact the choice of plan. Here are the highlights of common plans as a guide.

Defined Benefit Plans
Most people associate defined benefit (DB) plans with large, rustbelt companies like those of the automobile manufacturers. DB Plans often are thought of as a benefit that has lost favor, unsustainable due to the aging workforce and higher contributions. Although this may be true in part, DB plans can be a fantastic way to ramp up savings quickly. Computerization has made actuarial services more affordable for small businesses and sole proprietors. For high-earning sole proprietors, this could be the best way to gear up for retirement.

DB plans let employers shelter the maximum amount of income allowable compared to other types of retirement accounts. The annual contribution cannot exceed the firm’s profits, but can be any percentage, constrained by actuarial assumptions, up to $180,000 per year. For example, if a self-employed person earns a healthy $400,000, they can sock away an enormous amount of money compared to other tax-deferred investment vehicles.

Not only does the employer add to the retirement fund, they also reduce their federal and state income tax. This aspect of DB plans has become especially valuable with the advent of the Alternative Minimum Tax (AMT). For 2007, the exemption for single filers is $33,750 and for joint filers it is $45,000. If a person can write off $180,000 in one year, all taxed at 33% (federal) plus 5.3% (state), the tax would be lowered by $69,300 plus whatever the avoided AMT would be. If an actuary charges between $1,250 and $1,750 for a single employee plan, it is obviously beneficial to use one of these accounts. It is important to know that if an employer decides to open a DB plan, it must fund all employee’s accounts as well. The amount funded is a function of the employee’s age and salary. You can customize the eligibility requirements for participation including the minimum annual salary as well as the length of service required to be vested (able to take the money with you when you leave) in the plan. This would be important if you, as the employer, want to retain valued employees or at least not have to pay them out if they leave after a year or two. Employees are frequently vested after five years of employment, but this tenure can be longer or shorter, depending on the business needs. The salary minimum also allows you to avoid paying for part-timers, if that is what you prefer.

Another major characteristic of DB plans is that they must be funded unless there are no profits. They are wonderful for bulking up retirement savings and can help make up for lost time for procrastinators. Business owners should speak with an experienced financial advisor and their tax advisor before venturing into these plans.

SIMPLE-IRAs
Self-employed individuals, sole proprietors, partnerships, LLCs, sub-chapter S corporations, and professional corporations are all eligible. The plan is funded by employer and employee contributions. The employer’s contribution is set between 1% and 3% of the employee’s salary. The employer has to match any employee’s contribution up to that limit, and makes no contribution if the employee doesn’t save. Employees, including the business owner, can add up to $10,500 per year ($13,000 if you will be age 50 or older in 2007), as long as they earned that much. This type of plan is low-cost, easy to set up and administer yourself, and there is no annual IRS reporting. It is an ideal way to get started with a plan. If you find that as your business grows you want to change the type of retirement plan you have, you can simply journal all of the holdings in the SIMPLE IRA into a rollover IRA.

Profit-sharing Plans
Contributions are based on the firm’s profits. The company only has an obligation to pay during good years, giving them flexibility. All types of companies are eligible. The plan is funded by employer contributions. You can make a tax-deductible contribution up to 15% of earned income with a maximum of $45,000 per participant. Flexible eligibility and vesting schedules are allowed in this type of plan. Testing to make sure the plan doesn’t favor the highly-compensated employees unfairly and filing Form 5500 annually are required so most firms will hire an outside expert such as an actuary or CPA to help. Therefore you should take these costs into consideration when choosing your ideal plan. Profit sharing plans are good ways to encourage employee participation in a growing or expanding business. The contribution rewards them for helping increase the company’s revenues while keeping down costs.

401(k)s
Firms with over 30 professionals should consider qualified retirement plans, such as 401(k)s. They have higher administrative costs but can be less expensive per employee than the plans mentioned above. In 401(k)s, the employee may contribute up to 100% of their salary with the maximum contribution per year at $15,500 ($20,500 if the employee will be age 50 or older in 2007). Employer contributions are discretionary. It is also important to educate your employees on the value of participating. It is illegal to do this yourself: you must have an outside organization do the education. If not enough of the lower-paid employees participate, the higher-paid employees won’t be able to maximize their own investments. Another constraint is that most plans will have a limited number of mutual funds to choose from. They must represent a diverse risk spectrum and be suitable for your employees. As with profit-sharing plans, you will need to have an actuary do testing and have someone, usually an actuary or accountant, file a Form 5500 for the plan each year.

By taking the steps to choose the right retirement plan for your business, you can give yourself and your employees a much brighter retirement picture at a reasonable cost.

Individual 401(k) Plans and Conversion to Roth IRAs in 2010
There have been increased new choices for small businesses, such as the Individual 401(k) plan. A little foresight and continued active planning may benefit you significantly for upcoming regulatory changes and in your retirement years.

For a self-employed or a small business owner, the Individual 401k plan might make sense. These are also known as solo 401(k) plans or uni 401(k) plans.  If you have considered using a SEP-IRA or a SIMPLE IRA, but would like to defer more income, consider using the Individual 401(k) plan to meet that goal. The Individual 401(k) plan has a profit-sharing component. Unlike a regular 401(k) plan, it can be implemented only by self-employed or small business owners. If you have employees other than your spouse, you may set it up but you will have to include the other employees in the plan. That might be too costly for a small organization in order to pass the nondiscrimination tests and the company would have to contribute to all employees.

If you do qualify the benefits are very advantageous. You may contribute, depending on your compensation or net business profit, up to $45,000 in tax deferred income. If you are age 50 or greater in 2007, you may add an additional $5,000 for a total contribution of $50,000 per year. If your spouse is also an employee and 50 years or older, they also can contribute $50,000. This would mean your family could save up to $100,000 in deferred taxable income and invest it on a tax deferred basis. This is a significant savings tool and should be considered by your financial professional and tax advisor. Below is a chart showing the advantages of higher contributions level of the individual 401(k) plan over other retirement accounts for various income levels.

Under current tax laws, if a married couple or individual has more than $100,000 in taxable income, they cannot convert a Traditional or Rollover IRA into a Roth IRA. The reason you would want to convert to a Roth IRA is to minimize taxes in retirement. Required minimum distributions are not part of the Roth IRA seeing that the government already got their tax money before you contributed to the Roth. By law, owners of a Traditional IRA must take a distribution each year beginning at age 70.5. This is ordinary income and therefore will increase your tax bill. Unfortunately, the ordinary income recognized by converting raises income above the $100,000 threshold and thus prevents them from converting to a Roth IRA. If you plan to have significant income after age 70, it would make financial sense to convert. In 2010 the income restrictions will be lifted for only that year. Anyone will be able to convert, pay the tax (over 2011 and 2012), and have income tax-free in retirement. One potential tool is to contribute now to an after-tax IRA and plan to convert in 2010 into a Roth IRA. The new prorata rule, which will make only a percentage of the conversion tax free, will make the conversion not entirely tax friendly. Yet it does seem to make sense for everyone to plan appropriately for 2010 if you cannot fund a Roth today. I strongly suggest any plan be reviewed by a knowledgeable advisor. They will help you determine the best plan now, for 2010, and beyond.  

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How Does FinArc Manage Capital Gains?

For capital gains management, we do our analysis each year the week after Thanksgiving. Of course we keep an eye on taxes during the year. It is impossible to forecast where the market will be at that time, so I can't comment on tax management. We do this automatically for all clients, so they don't have to worry about it. If you have a taxable event outside of this portfolio, please let us know to take it into account (selling a house is the most common occurrence).

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What’s the Buzz about Long Term Care
Susie Caspar, Senior Long Term Care Specialist

Here’s another item for your “to do” list: plan for long term care needs. Have you had a family member or friend who had a prolonged illness, catastrophic accident or failing health? Who paid for their care and where was it provided? Was it stressful?

Long term care is one of the largest risks most Americans face. It is important to recognize the possibility that you or a loved one will need long term care.

A long term illness could wipe out your life savings and impoverish your healthy spouse. Sobering facts, to be sure, yet many of us stubbornly cling to the belief that we will never need long term care. Above all, this shows how vital it is that we become better educated. Most people buy long term care insurance for one of the following reasons: 

Your standard health/medical insurance does not cover long term care costs, nor does the government, unless you go on Medicaid or have separate LTC insurance. Unfortunately, Medicaid does not pay for daily home care, only for nursing home care. You lose the ability to choose where you receive your care if you rely on Medicaid. Quality of care in nursing homes heavily dependent on Medicaid financing may have lower standards. More importantly, will the government be able to pay for all the Baby Boomers?

Times have changed and family members are not always able to quit their jobs to care for a loved one. They may live too far away, or perhaps they too, have declining health. Long term care coverage used to provide only for nursing home care. The good news is that today, most people are using their long term care insurance to also pay for home care services. This means individuals with long term care insurance are choosing to receive quality care in the comfort of their own homes, surrounded by loved ones who are able to keep an eye on things.

When should you buy long term care insurance? Once you are over age 40, it is time to educate yourself about your options. You need to have reasonably good health, rates are based on your age, and the policy value grows each year. Simply stated, it doesn’t pay to wait. Compare the cost of long term care insurance premiums paid over 30 or 40 years to as little as one year in a nursing home, and you’ll see how valuable long term care insurance protection can be in terms of dollars and cents.

Susie Caspar, GE LTC is a Senior Long Term Care Specialist with GE.  She can be reached at (508) 785-3559 or via email at .

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Performance Measurement
By Liv Nash, MBA, Client Service Liaison

For many investors, performance is looked at as merely a gain or loss. However, behind these numbers there are many factors; factors that are important for an investor to be aware of and to understand.

The simplest performance calculation compares the percentage change between an ending market value and a beginning market value for any given time period. This simple calculation, however, does not take into consideration deposits and/or withdrawals that may have occurred in the portfolio during the specified period. If the deposit or withdrawal is more than 10% of the value of the portfolio, the impact on performance could be significant.

More than any other influence, performance is affected by the asset allocation of a portfolio. Asset allocation refers to the mix of stocks, bonds and cash equivalents in a portfolio. This allocation is typically determined by a person’s risk tolerance, time horizon, age, income needs and asset level.
On average, an individual who is risk averse, older or has lower return needs will have a higher percentage of fixed income (bonds) and cash equivalents in his/her portfolio. Individuals who have a higher tolerance for risk, are younger, or may require more growth will tend to have a higher percentage of stock holdings. The assumption is that stocks carry more risk than fixed income instruments, and with more risk one can expect higher returns in up markets. Unfortunately, the opposite tends to be true when the market performs poorly.

Risk is measured by standard deviation, the volatility of returns around the average return. The more volatility, the higher the standard deviation, the greater the risk. Stocks with higher earnings growth will tend to rise and fall more than the market, however overall returns are typically higher with stocks than with other types of investments.

Beta is another measurement of risk. Beta is a stock’s sensitivity to movement of the whole market. The S&P 500 has a Beta of one. A stock with a Beta of 2.0 is two times more sensitive to market movements. For example, if the market rises by 5%, a stock with a Beta of 2.0 would be expected to increase by 10% (2 x 5%). If the market were to fall by the same amount, you would anticipate the stock to fall by 10%.

FinArc shows client portfolio performance vs. a given benchmark. Most domestic stock portfolios are measured against the S&P 500 as this index represents the 500 largest public companies in the United States. Portfolios that consist of fixed income instruments and/or foreign securities are measured against a combination of indices that may include the Lehman Government Credit Bond Index or Morgan Stanley EAFE (Europe, Australasia, Far East).

As we all know, performance numbers themselves leave a reader with a strong first impression. By providing an overview of the factors affecting performance measurement, these numbers can become more personalized as we consider that our own needs, desires and investments are all part of the equation.

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