Lake Norman Magazine

New Year’s evolution

Navigating 2011’s financial waters seemed at times akin to launching a Chris Craft at Lake Norman’s Stumpy Creek Landing. Smooth and problem-free one day, while a patience-testing tangled mess the next. While market volatility may serve to unsettle even the most disciplined investors, those with a solid financial plan seem to be the most comfortable in weathering such turbulence.We reached out to local financial planning experts for their very best advice regarding actions you should consider taking right now coming into the New Year. Here are 10 savvy financial moves that will help you get off to a financially healthy start in 2012.

1. Establish a financial plan you understand and trustHaving an actual plan may seem to be a no-brainer but most of the advisers we spoke with said many people don’t have established plans, nor do they have a solid understanding of what their future financial needs may be. Wake Forest University School of Business professor Sherry Jarrell says, “Some people are actually afraid to look at the balance of their retirement accounts, fearing that they have lost a significant amount. Be honest with yourself, bite the bullet and see where your accounts stand right now. Define realistic financial goals and map out a strategy to achieve them.”Jim Lilley, vice president and Senior Wealth Planning Strategist for Wells Fargo Private Bank, recommends people have a fully coordinated plan that they understand and trust. “People who understand their plan, and trust that plan, will have an easier time weathering the storm,” he says. Merrill Edge’s David Giancola agrees. “Not taking any action at all is by far the greatest mistake people make with respect to their financial planning,” says Giancola. “Making that first step by having a conversation with your local banker, a financial adviser or even your tax accountant is critical in securing your financial future.”

2. Plan for long-term careMary Jo Lyons is a Certified Financial Planner with Preferred Financial Strategies, Inc., in Mooresville. She feels very strongly about her most important planning tip, as it reflects an issue that is very personal for her. “My mother has Alzheimer's and the cost of caring for someone who needs specialized care is daunting,” says Lyons. “I think that most folks are in denial about the very real need to plan ahead for long-term-care costs. This is especially true of women. Few of us are planning for the eventual need for long-term health care. Living longer presents a complex set of issues that the majority of Americans are unprepared to face financially. It’s important to have open and frank discussions among family members in order to understand the best alternatives, ensure that everyone understands our wishes and to develop a financial strategy that will maximize available resources. Taking the time to plan now, before there is a need, will help provide the peace of mind that comes with knowing you are prepared for difficult times.”

3. Take advantage of historically low interest ratesTwo opportunities to do this, according to Kevin O. Moran, vice president of investments and managing partner of the Andover Group at UBS, are by refinancing mortgages and as an estate planning strategy, entering into intra-family loans, or establishing Grantor Retained Annuity Trusts (GRATS).“GRATS are irrevocable trusts designed to transfer the appreciation in an asset to beneficiaries at a nominal gift tax cost,” says Moran. “Hurdle rates are at all-time lows of late, meaning assets in the trust need only grow in excess of the low hurdle rate in order to succeed in transferring wealth estate and gift tax-free.” Moran noted that while the underwriting process for loans has become more rigorous, those who are approved can substantially reduce APR with 30-year fixed rates close to 4.25% and jumbo mortgages less than 5 percent.

4. Diversify your portfolioAdam Boatsman is a principal with Boatsman Gillmore PLLC. Boatsman stressed the importance of having adequate insurance coverage based upon your individual needs and maintaining a truly diversified portfolio.According to Boatsman, “If you have a retirement plan and you are insured properly, I would really look at true diversification in your portfolio, over time. It may take you years to get to a balanced portfolio but having some real estate, some alternative investments and some traditional investments is a good balance that produces stable returns over time.”

5. Be aware of changing tax laws, opportunitiesThe extension of the Bush tax laws “sunset” (read: expire) at the end of 2012. Moran indicated that several strategies exist for those in a position to take advantage of the generation-skipping tax exemption. According to Moran, these include using your gift tax to purchase life insurance and creating a Lifetime Credit Shelter Trust. Lilley advised that clients need to be aware that personal income tax rates – including ordinary income, capital gains rates and taxes on dividends – are at historical lows, so discussions and coordination with their investment and tax advisers will be imperative in 2012 to make sure they are being proactive and all decisions work from a tax and investment perspective.

6. Coordinate your plans, advice“The single biggest overlooked action I see is that people don’t coordinate their planning,” says Wells Fargo’s Lilley. “When this is the case, I typically see an investment adviser doing as good a job as they can in a vacuum without any knowledge of what other advisers are doing for the same client. I see trying to give advice without knowing what is happening in the investment accounts. I see insurance advisers working with clients without connectivity to the estate planner. People who have one central point of contact or full coordination with their advisers typically have a much more cohesive plan than those who work without coordination.”

7. Create a detailed and disciplined savings strategyLyons routinely tells her clients, “You can’t invest your way to a secure retirement; you have to save your way to a secure retirement. In today’s volatile financial markets you can’t rely on investment performance to get you where you want to go. You must develop a comprehensive, disciplined savings strategy to reach your goals.”

8. Have enough cash on hand to avoid dipping into your portfolioAccording to Lilley, people should make sure they have enough cash on hand to allow them to not have to touch their portfolios for a moderately long period of time (12-24 months). This preserves the integrity of plans that people have and keeps their investments working.“Those who need their portfolio to generate income should fully understand where their income is coming from,” says Lilley. “Most people can’t just rely on a solid bond portfolio as they could in the past, so a full understanding of all potential income streams is crucial.”

9. Consider converting your IRA to a Roth IRAUBS’s Moran says with tax rates expected to rise in the future, now may be a good time to convert your IRA. “In converting an IRA to a Roth IRA,” says Moran, “investors will pay income tax on the amount converted. Going forward, however, the assets will grow tax-deferred (as they would in a "regular" IRA) and when withdrawn are free of income tax.”

10. Feel comfortable and confident with your advisers and their adviceHow do you know if the advice you’re receiving is right for you and your situation is a question that is worth asking at least annually. Our experts are in clear agreement here. The key to confidence with financial planning is the ability to fully understand what you are being told and what the implications are behind the advice. Advice needs to pass the common sense test. Never feel intimidated about asking questions or feel as if your adviser is simply pushing an investment product independent of your situation. According to Wells Fargo’s Lilley, “An adviser’s first job is to make sure their client understands the advice they are giving.”

That’s advice you can take to the bank.