The spring issue of “Financially Speaking” focuses on growth and renewal. There is always room to grow in our lives and through that growth we reshape ourselves into something better than before. Whether you’re cutting a rug to fight off dementia or taking small steps to improve your savings and/or lower debt, it’s important to focus on your future and personal well being. Have a bright and sunny spring season!
“Though no one can go back and make a brand new start, anyone can start from now and make a brand new ending.”
–Carl Bard, Author and Poet
Dancing and Dementia
As people age, they worry about dementia. Statistics can be frightening. One in every eight people over 65 has Alzheimer’s disease. An American is diagnosed with dementia every 20 seconds. There are drugs that can slow the progression of the disease for a few months or years, but ultimately Alzheimer’s is fatal.
Interestingly, the number one recommendation to forestall dementia is to dance. People who dance several times a week reduce the risk of Alzheimer’s by an almost unbelievable 76%! This was confirmed in a number of studies conducted at both Mayo Clinic and the Albert Einstein College of Medicine in New York City, and results were published in the illustrious New England Journal of Medicine. While the underlying reason remains unclear, scientists suspect a combination of aerobics and the necessity of relatively complex mental decisions. In fact, the significant impact of dancing on Alzheimer’s prevention is higher than for any other activity, whether physical, mental, or cognitive.
You may have heard, for instance, that doing crossword puzzles and board games reduces Alzheimer’s. Studies found that if you do them at least four times a week, they decrease the chances of Alzheimer’s by 47%. Reading regularly can reduce incidence by 35%. Other factors with less individual significance are common sense: quit smoking, lower cholesterol and blood pressure, eat a healthy diet, control diabetes, and stay socially involved.
A related, fascinating read on the general subject is “Spark: The Revolutionary New Science of Exercise and the Brain” by Dr. John Ratey. You may wish to especially note chapter 9, an excellent exposition of the effect of light exercise on aging and dementia. We cannot recommend this book too highly.
So if you want to stay as sharp mentally as possible, think about taking some dance lessons. It may be the best “investment” you can make.
Special thanks to Amy Florian for sharing this.
Beware of Bogus IRS Emails
The IRS is warning taxpayers and practitioners about potential e-mail scammers who claim to be the IRS. Scammers use the IRS name or logo to make the message appear authentic so you will respond to it. In reality, it’s a scam attempting to trick you into revealing your personal and financial information. The IRS does not initiate contact with taxpayers by e-mail or social media channels to request personal or financial information. Never share confidential information via e-mail with someone alleging to be the IRS. If you receive a suspicious e-mail claiming to be from the IRS, or directing you to an IRS site, do not reply, do not open any attachments, and do not click on any links. For more information on these scams and what to watch for, go to:
From The Data Bank
34 is the percentage of financial decision makers planning to retire before age 65, down from 50 percent in 1997, according to a national survey released by the Consumer Federation of America and CFP Board (Household Financial Planning Survey)
38 is the percentage of adults who are not confident they will have sufficient income and assets for retirement, up from 25 percent at the close of the Great Recession in 2009. (Pew Research Center)
40.3 million is the number of individuals age 65 or older as of 2010 Census Bureau figures. Someone in America ages into Medicare every eight seconds. (Broker World)
75 is the percent of millionaire investors surveyed who say working with a financial adviser improves their knowledge of investing. Fifty-seven percent claim working with an adviser “gives me peace of mind.” (Spectrem’s Millionaire Corner)
10,000 is the estimated amount of people that are retiring every day, and this unprecedented surge of new retirees is expected to last for the next 17 years!
“The great thing in this world is not so much where we stand, as in what direction we are moving.”
–Oliver Wendell Holmes, Physician, Professor, Author and Poet
Estate Planning Relief
The conventional wisdom among the attorneys and CPAs who plan for estate taxes, right up until the new Fiscal Cliff legislation was signed into law, was that the $5 million exemption was probably too good to be true. Couples could gift up to $10 million to their heirs without paying any gift taxes, and if you died with less than $5 million in your estate, your spouse could pick up the remainder and add it to his/her exemption, meaning that any family with less than $10 million in assets passing on to heirs could, with virtually no planning, escape federal estate taxes altogether.
A deal like that won’t last in this age of budget deficits, right? During calendar 2012, the assumption was that Congress would set a lower exemption of anywhere from $1 million to $3 million per individual. So estate planning professionals busied themselves drafting irrevocable grantor trusts and advising their clients to put millions of dollars out of reach of the anticipated new estate tax realities.
Then something funny happened: when it passed the American Taxpayer Relief Act of 2012, Congress not only made the $5 million exemption permanent, it also indexed those historically-high exemption amounts to inflation, so that this year the personal estate tax exemption climbs to $5.12 million. And contrary to virtually every professional expectation, Congress also kept the gift tax exemption at the same level as the estate exemption–and made THAT permanent. Many were speculating over the past couple of years that the linkage between the gift tax and estate tax exemption had been a careless mistake by the committee members who had drafted prior legislation.
The result? Assuming these thresholds stay permanent, the overwhelming majority of American citizens won’t have to face an estate tax ever again. They won’t have to consult with an expert to concoct a lot of fancy strategies, like putting their investment assets in an LLC and then gifting shares of the LLC at a “minority interest valuation discount” (don’t ask), or buying permanent life insurance inside a carefully-crafted insurance trust, or creating a grantor trust that is defective under IRS rules so that the grantors also pay the taxes on those assets on behalf of their heirs.
Meanwhile, a lot of trusts that were set up in the last two years to avoid taxes are probably unnecessary under the new tax regime, and a lot of estate tax experts and life insurance professionals are looking for a new service model. They might look into finding ways to minimize the tax consequences of the new trusts they created–which are often not the most tax-efficient vehicles on the planet. The new 39.6% top tax rates affect taxpayers with more than $400,000 (individual) or $450,000 (joint) in income. But that highest rate kicks in at just $11,950 in non-distributed income for a trust. A trust’s capital gains are hit almost immediately at the highest possible rate–20% plus the 3.8% Medicare tax. This is true even if the beneficiaries are in a much lower tax bracket.
For many people, these permanent higher thresholds are great news, and will greatly simplify their lives. Millions of dollars will no longer have to be spent on trusts and creative strategies, streamlining the economy. Now, we just need to figure out something that the attorneys and accountants who crafted fancy ways to reduce the tax bite can do with all their free time…
I love spring anywhere, but if I could choose I would always greet it in a garden.”
–Ruth Stout, Garden Legend and Author
The Surprisingly Large Impacts of Small Savings
There’s an eternal debate about whether you should use an unexpected amount of free cash (bonus? inheritance? lottery winnings?) to pay down your mortgage or to put the money into a retirement investment account. The numbers on a spreadsheet tend to favor investing the money if the investment returns are higher than the mortgage interest rate (currently in the 3.5% range). But of course there is absolutely no guarantee that this will happen. And some people sleep better when they’re debt-free. Can you put the value of THAT on a spreadsheet?
A more interesting discussion is whether you can use some of your lifestyle expenses to pay down your mortgage and what the value of even small budget cuts would be over time. You can explore this surprisingly fascinating subject on a new website: www.mortgagenudge.com, which lets you look at relatively modest shifts from the expense side of your ledger to your mortgage, and see the long-term results.
As an example, suppose you have a $250,000 mortgage at a 4.5% interest rate. You enter this information into the website, along with your monthly principal and interest payment.
Then you move a little slider that determines how much extra you might be willing to put down on your mortgage each month. For instance, suppose you discover that you’re spending $60 a month at Starbucks, when you could be brewing moderately decent coffee at home before your commute to work. Let’s say you want to kick the habit gradually, so you start out putting $20.29 extra on your monthly mortgage payment. You agree to find an additional $20.29 a month the following year, which means a little over $40.50 will be paid monthly the next year. Your Starbucks habit will be gone in the third year, when you find those same additional savings to pay down your mortgage. If you get a raise the following year, some of that is added to this payment, and so forth.
When the slider moves, you discover that this modest diversion of lifestyle dollars, over time, pays off your mortgage 7 years and 9 months early, saving you $48,531 in total interest. If you want to be more aggressive, and start off with $26.29 a month–with graduated increases thereafter–your mortgage is paid off nine years and a month early, at an interest savings of $57,131. The slider takes you all the way up to an aggressive $64.29 additional monthly payment in the first year, with increasing payments thereafter. That cuts the 30 year mortgage almost in half, saving more than $92,000 in interest.
The key to making this interesting exercise work in the real world, of course, is discipline; making those additional payments each year like clockwork. You can take some money out of eating out, or the cost of an unnecessary cable TV premium channel that you never watch, or some other service you no longer use. Or, instead, when you receive an increase in salary, you can put some of that on the monthly mortgage check. The point here is how substantial some of these smaller incremental adjustments can become over time; a few pennies saved can become big dollars later on.
Beth will be taking a trip to Boston in April to see her 3rd cousin, Chelsea, graduate from college at Mount Holyoke. They’re very close—when Chelsea was sixteen, Beth took her on a trip to London to fulfill a childhood promise.
Speaking of new homes, Evelyn and Mark’s indoor renovations are complete and they are enjoying the fruits of their labor with their dog, Rusty.
They’re also looking forward to a cruise on the Danube River (Munich to Budapest!) on their annual, post-tax season vacation.
Inspired Financial celebrates its 10th anniversary this year. Stay tuned for special events to celebrate with us!
We hope you have a wonderful spring season this year filled with growth and renewal. We remain grateful for your trusted relationship and welcome your calls anytime.
Your Team at Inspired Financial
Note: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategy may be appropriate for you, consult with your attorney, accountant, financial advisor, or tax advisor prior to investing or taking action.