Social Security: The Spousal Benefit

If you are nearing the age of Social Security benefits, you are probably thinking about how you can maximize your benefit. If you are married, it becomes more complicated because one person’s benefit may affect his or her spouse’s benefit. File and suspend is an optional method that may help you maximize your spousal benefit.

File and suspend is a benefit allowed to those who qualify for Social Security who are full retirement age (FRA). FRA is a technical term determined by the year you were born. For example, if you were born between 1943 and 1954, your FRA is age 66.

Taking Social Security Based on Your Spouse’s Record

If you are married you have the option to take your Social Security benefit, or half of your spouse’s benefit, whichever is higher (there are some technicalities here that we won’t get into for the sake of brevity). If your Social Security benefit is less than what your spousal benefit would be, it would be more advantageous to apply for a spousal benefit. In order to take your spousal benefit, your spouse has to have filed for Social Security. If your spouse is not ready to take Social Security, the file and suspend strategy is the only way to accomplish this. Only one member of a couple can file and suspend so that the spouse can collect spousal benefits.

Why Your Spouse May Not Want to Take Social Security Right Away

If a person chooses not to take Social Security once he or she reaches FRA, those benefits will continue to increase by 8% per year until age 70 (for those born after 1943). This is called delaying retirement credits. Many people choose to delay retirement credits so they will have a larger Social Security payment later, or because they are still working and don’t have a need for the current cash flow.

Your Spouse Must File and Suspend in Order for You to Take a Spousal Benefit

The file and suspend benefit allows your spouse to delay his or her retirement credits, so that his/her Social Security benefit can continue to grow, but at the same time allows you to collect a spousal benefit on your spouse’s record. You cannot take a spousal benefit until your spouse has filed for Social Security (or filed and suspended).

Alternative Options

There are several ways to maximize your spousal benefit. If your spouse is not FRA but you would like to begin receiving benefits, you can take Social Security on your own record. Later when your spouse files for Social Security at his/her FRA, you can switch to take a spousal benefit if it is higher.

Another option is to delay your own credits while you take a spousal benefit. If you have reached FRA, you may take a spousal benefit while you allow your own retirement credits to be delayed so that they continue to grow. At age 70 you may then switch to take benefits based on your own record if they are higher.

A note regarding Medicare: Medicare is not subject to these various timing schemes. Medicare benefits begin at age 65, regardless of your FRA. You should apply three months before reaching age 65.

Consult a Professional

We recommend that you discuss your personal situation with your financial advisor to determine the best option for you. Also, the Social Security Administration is available to help you determine how you may maximize your family’s benefit. There are many details to consider when planning for Social Security benefits and they are certainly not all presented here – so be sure to consult a professional when making decisions.

Harli L. Palme, CFA, CFP®

Partner

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Why Not Use Margin?

Recent data indicate that margin debt has increased significantly over the past 12 years, although it is currently below the peak levels seen in 2000 and early 2014.

Margin is a feature that you can add to a taxable (non-IRA) brokerage account that enables you to borrow money against the value of your investments in the account. Initial margin, or the amount that you can borrow, is generally 50% of the value of the account. On a $100,000 account, you could borrow up to $50,000. The money can be used to buy more investments, or it can be taken out of the account and used for some other purpose.

Say you have an account that contains $100,000 in stocks. You write a check for $50,000 to purchase a new car. You still have stocks worth $100,000 in the account, but you owe the brokerage firm $50,000. Your net equity in the account is $50,000 (the $100,000 market value of your investments minus the $50,000 you owe).

Maintenance margin is the level of net equity which must be maintained in the account. If the equity in the account falls below this level, usually 30% of the account value, then a deposit must be made to the account or investments will be sold to reduce the margin loan balance.

Say the stock market experiences a correction and falls 15%. Your $100,000 in stocks are now worth $85,000. However, you still owe $50,000 to the broker. Your equity in the account is $35,000, or 41%. If the stock market continues to decline and your equity falls below 30%, some or all of your investments will be liquidated by the broker to reduce your margin loan. This is not good timing because you are being forced to sell stocks when they are down.

There are several other disadvantages to borrowing on margin that investors should be aware of. Interest rates are high; particularly when you consider that the lender is fully secured. Currently, the interest rates at major custodians are in the 5.5%-8% range, depending on the amount borrowed. Also, the interest rates are floating, so there is no protection against rising rates. Tax deductibility of margin interest is complex and more restrictive than other interest deductions such as on your home mortgage.

Using margin always increases your portfolio risk, particularly if you use the proceeds to buy more stock. Let’s go back to the previous example of the $100,000 account, but this time you take a $50,000 margin loan and use it to increase your stock holdings. You now have $150,000 in stock and owe the broker $50,000. Your net equity is $100,000. Say the stock market falls 20%; your stocks are now worth $120,000. You still owe $50,000 to the broker, and you’ve lost 20% of 150,000 instead of 20% of 100,000. In other words you have a $30,000 loss instead of a $20,000 loss. You’ve lost 30% of your initial $100,000 on a 20% market decline. Your loss was 1.5 times that of the overall market, plus you paid interest on the margin loan. Not a good outcome.

There are some situations where margin can be appropriate, say for short- term needs where the amount borrowed is a small percentage of the account value. We generally advise against using margin on a longer term basis.

Bill Hansen, CFA

Managing Partner

Bill

2014 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2014 is April, 15 2015.  The maximum contribution is $5,500 of earned income or $6,500 for those 50 and over.   These amounts will stay the same in 2015.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution.  The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your   Traditional IRA contribution?

If   your income is less than the beginning of the phase-out range, you qualify.  If your income is over the phase-out range, you do not.  If your income falls inside the range, you partially qualify.

Modified   Adjusted Gross   Income  Phase-Out   Range
Single,   participates in an employer-sponsored retirement plan: $61,000-$71,000
Married (filing jointly), participates in an employer-sponsored retirement plan: $98,000-$118,000
Married (filing jointly), your spouse participates in an employer-sponsored retirement plan, but you do not: $183,000-$193,000

Do you qualify to contribute   to a Roth IRA?

Single: $116,000-$131,000
Married, filing jointly: $183,000-$193,000

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®
Partner

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Market Update through 12/31/2014

as of Dec 31, 2014
Total Return
Index 12 months YTD QTD Dec
Stocks
Russell 3000 12.56% 12.56% 5.24% 0.00%
S&P 500 13.69% 13.69% 4.93% -0.25%
DJ Industrial Average 10.04% 10.04% 5.20% 0.12%
Nasdaq Composite 14.75% 14.75% 5.70% -1.09%
Russell 2000 4.89% 4.89% 9.73% 2.85%
MSCI EAFE Index -4.90% -4.90% -3.57% -3.46%
MSCI Emerging Markets -2.19% -2.19% -4.50% -4.61%
Bonds
Barclays US Aggregate 5.97% 5.97% 1.79% 0.09%
Barclays Intermediate US Gov/Credit 3.13% 3.13% 0.89% -0.32%
Barclays Municipal 9.05% 9.05% 1.37% 0.50%
Current Prior
Commodity/Currency Level Level
Crude Oil $53.27 $91.16
Natural Gas $2.89 $4.12
Gold $1,184.10 $1,211.60
Euro $1.21 $1.26

Gift Stock Yields Better Returns Than Gift Checks

 This article was originally published on NerdWallet.com

When thinking of giving a gift, most people immediately consider writing a check, giving a gift card to a favorite restaurant, or ordering something online.

However, from a financial planning perspective, this is a very inefficient method of giving. Unfortunately, the method that gets you the biggest bang for your buck is usually the most complex, impersonal and inconvenient, as is often the case in financial planning.

Let’s take a look at a few ways to get a little more “bang for your buck” with a gift.

Consider what the alternatives to giving cash might be. It is pretty hard to think of ways to give a gift without using cash.

One way to do so is to gift stock, preferably appreciated stock. It is very common for the individual giving (grantor) to be in a higher tax bracket than the individual receiving the gift (grantee). For this reason, the grantor is able to give more to the grantee because they don’t have to sell the stock, pay the taxes, then give the cash. To make the situation even better, the grantee may not even have to pay taxes when they sell the stock, if they are in the 0% to 15% tax bracket. This isn’t your traditional heart-warming gift from Grandmother, but the tax savings sure are heart-warming to me.

Another play on the same technique is to gift appreciated stock to young children in a custodial account. This allows either the grantor or a parent to act as a custodian over the account until the child reaches age 18 or 21, depending on state law. Appreciated stock can be directed into this account and sold over time with minimal tax consequences. However, you have to be aware of the “Kiddie Tax” for unearned income over $2,000 attributed to the child. Any amount over $2,000 is then taxed at the parents’ highest tax bracket! To extend this gifting strategy, cash produced by dividends and sales from this account can be transferred to a 529 savings plan in the name of the beneficiary. Just don’t forget to give the child something useful or fun at the same time.

Although these techniques are not as easy and straightforward as writing that check, there are some significant tax savings available for those who choose to use them. For individuals who are trying to play catch up on funding 529 plans or gifting to children or grandchildren, the annual gifting limit is $14,000 per year per person for 2014 and 2015.

Daniel Johnson, III CFP®

Financial Advisor

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Call Me….Maybe

I recently saw an article titled, “Use Puts and Calls to Finance Your Holiday Gift Shopping.” It proceeds to explain how you can employ certain options strategies (shorting puts and covered calls), to generate portfolio income – in this case, a little extra cash for purchasing holiday gifts.

“My Parsec advisor hasn’t suggested this to me,” you think. In fact, your Parsec advisor hasn’t suggested any options or derivatives strategy to you! What gives? Aren’t we supposed to be looking out for our clients’ best interests?

Yes, we are. And that is why we typically won’t suggest such a strategy to you. Not that there is anything wrong with it, per se, but most derivatives strategies are short-term in nature, and one of our main tenets is investing for the long-term.

Even though the author of this article is suggesting relatively safe (rather than speculative) strategies, there is risk involved, and the upside is limited. When you short (a.k.a. sell or write) a covered call, you give someone the option to purchase a stock that you own at a predetermined (strike) price, in exchange for payment (known as the option premium). Shorting (selling or writing) puts involves giving someone the option to sell you a particular stock at a predetermined price, also in exchange for a premium. If you enter into one of these contracts, you are obligated to either sell or buy the underlying stock if the owner exercises the option. If the option expires unexercised, you keep the premium without having to sell or buy the underlying.

The objective is to enter into contracts that you think are unlikely to be exercised based on your prediction of the underlying stock’s price movement, and earn income by pocketing the premium. Of course, there’s always the chance that the market will move in such a way that the owner will choose to exercise the option, and you will be forced to make a trade.

So let’s think about this – why would someone exercise a call option? Obviously because the market price has moved above the strike price and they can buy it for less, then turn around and sell it for a profit. So you’re selling a stock that’s going up (at a below-market price), and giving up any potential upside in that stock.

And why would someone exercise a put option? Because the current price of the underlying stock has dropped below the strike price, so they can sell it to you for more than it’s worth in the market. Even assuming that it’s a stock that you want to own, wouldn’t it be better to buy it at the lower market price? If you calculated the breakeven correctly, the premium earned on the option would offset the difference in strike and market price, but then you’re effectively at zero, having earned nothing (such as dividend income) in the interim.

Our philosophy is that the best results occur over a long time period, in portfolios consisting of a well-diversified array of carefully chosen, quality investments. We make buy and sell decisions based on in-depth research of underlying company fundamentals, rather than market predictions. In this way, we seek to avoid the pitfalls of human behavior and emotion, as well as the likelihood of inaccurate predictions. We like to be owners of companies with real earnings and dividends, and participate in long-term, profitable investments because this is how we help you attain your financial goals…such as a long, comfortable retirement as well as the perfect gift for everyone on your list.

Sarah DerGarabedian, CFA  Portfolio Manager

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Top 10 rules to a frugal life:

Those that know me well can vouch for the fact that I am a frugal person.  I feel that there is much that is virtuous about living a frugal life.  Learning about delayed gratification and the important limits to set upon our role in a consumption based economy is a great path to happiness and peace.  The famous economist and philosopher John Stuart Mill once said, “I have learned to seek my happiness by limiting my desires, rather than attempting to satisfy them.”  This simple phrase rings true to me.  This is especially evident as you stand witness to the constant bombardment of consumerism in our media and markets.  Take stock of what you have and the blessings of life and you might not fall prey to the treadmill of consumption that will always be tempting you.

Top 10 rules to a frugal life:

  1. Budget – know where your money goes.
  2. Be guarded against lifestyle inflation; try to keep income growing faster than expense growth.
  3. Don’t be wasteful. Consider gently used items when buying cars, and other depreciating assets.
  4. Find discounts whenever possible.
  5. Trips and vacations are about experiences, not necessarily lavish accommodations.
  6. Frugal people rarely eat out, preferring to prepare their own food.  I find it better and healthier, not to mention less costly.
  7. While there are many worthwhile private schools, there is a great value to be found in many of our public schools as well. Consider whether public schools, for both young children and college, may be right for your family.
  8. Frugal people care less about fads and trends; keeping up does not matter to them.
  9. Know the value of a dollar, if there is a lower interest rate find it.
  10. Don’t be cheap, stay generous.  It is ok to part with money to help others.

Richard Manske, CFP®                                                                                                                                      Managing Partner

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