The Tax-efficient Retirement

Planning a tax-efficient Retirement

Planning a tax-efficient Retirement

Why would anybody pay taxes when they really don’t have to?
This is a question that financial advisors are hearing from their retired clients, who are taking their living expenses out of taxable and tax-deferred accounts like IRAs.

The whole idea of tax planning during retirement is a relatively new one in financial planning circles, and it has created some debates.  No doubt you’ve heard the conventional wisdom from magazines and online web commentators: when you retire, take money out of your taxable accounts first, which allows the money in your conventional IRA and Roth IRA to compound on a tax-free basis for the longest possible time.

When the taxable account finally runs out, start taking money out of your conventional IRA, which will cause you to pay ordinary income taxes, and let the money compound in the Roth IRA.  If there’s any money left over, the Roth IRA is the best vehicle to pass investment assets on to heirs, since the money won’t be taxed when it is taken in distributions that can be deferred over their lifetime.

The conventional wisdom, alas, is much better in theory than in actual practice.

If you take all your income out of taxable accounts, you might end up in a 10% (less than $8,925 in taxable income) or 15% (less than $36,250) marginal tax bracket.  What’s wrong with that?  Retirees who have a significant amount of money in their IRA–and who are growing that pool of assets during the first decade of retirement–will have to start taking mandatory distributions at age 70 1/2, even if they don’t need the income.  Those distributions could push them into significantly higher tax brackets.  And the tax brackets in the future might possibly be higher than they are today.

Raise your hand if you think tax rates are going to go down in the next 10-15 years.  That question was recently posed by an industry speaker to an audience of tax experts and senior financial advisors, and very few hands went up.

Another problem is that retirees who are working with a financial advisor will have very different investments inside and outside their IRA accounts.  Depleting the taxable account first means, for them, selling their stocks first, leaving them with a portfolio comprised mainly of real estate investment trusts, bond funds and commodities futures funds during their later years–which basically means they will fail to get the full benefits of diversification and rebalancing.

A better approach is to gradually let some of the air out of the IRA in the years before mandatory distributions come due–at the lowest possible tax rates.  That might mean taking out enough IRA money to offset your standard deduction and personal exemption and fill up the 15% tax bracket, meanwhile taking the rest of your living expenses from the taxable account.  Paying at a 15% rate today could mean not paying at a 28% or 33%–or higher, depending on the whims of Congress–rate in the future.

Alternatively, for people who don’t need the income, you could make a partial conversion of assets from the IRA account to a Roth IRA–just enough to offset the various deductions and fill up that 15% bracket.  You pay taxes on some of those converted assets at 15% today in order to avoid any future taxation on them down the road.  Since Roth IRAs don’t have any mandatory distributions for the original owner, you’re free to take the money out tax-free or not as you desire in the later retirement years–or leave that money to your heirs.

An advisor who looks at the retiree’s total tax picture might also use your lower tax bracket to sell some stocks that have significant appreciation, taking the capital gains at a 10% rate, and avoiding a 20% or 23.8% (if the Medicare tax is applicable) tax rate if the asset were sold when mandatory distributions are pushing you into the upper brackets.

So the answer to the question: “Why would anybody pay taxes when they don’t have to?” is simple: When they can pay at a lower rate today than they would have to pay in the future, or when they can pay at a low rate today and avoid all future taxation on those assets altogether. Every situation is different, every year is different for every situation, and many professional advisors are beginning to realize that planning for a tax-efficient retirement is more complicated than most of us realized.  But careful planning can also be more beneficial for people who want to get the most value out of their retirement assets.

Asset Location: Handle With Care

Is a Piggy Bank a good asset location

Smart Asset Location Plan

An old question has resurfaced lately.  You have tax-deferred accounts like IRAs and Roth IRAs, and you have accounts that pay taxes every year on the income they receive.  Where do you put different types of assets?

The answer is that you want to put the most tax-inefficient investments inside the tax-deferred accounts.

The most notoriously tax-inefficient investments, historically, have been bond funds, commodities futures funds and real estate investment trusts (REITs), which all generate ordinary income that can be taxed at 39.6% plus the 3.8% Medicare tax for higher-income taxpayers.  The Roth IRA, which shelters all future returns from taxes of any sort, can be a great place for mutual funds that invest in small cap stocks, since they tend to have high turnover and historically have provided the highest gains.

In taxable accounts, you might put growth stocks which, if you hold them for more than a year, will have their price appreciation taxed at a maximum rate of 20% (or 23.8% with the Medicare surtax).  Of course, you can choose to hold individual securities for much longer periods, which gives you tax deferral on its own–and, if the stocks are held until death, the heirs get a step-up in basis, which basically means any rise in value is never taxed.  Municipal bonds which qualify for an exemption from federal taxes are also good candidates for the taxable portion of your investment accounts.

What makes this Asset Location debate new again?

Higher ordinary income tax rates, and potentially higher capital gains tax rates (up from 15% to 23.8% for tax filers who have to pay the new Medicare surtax) have introduced some gray areas, as have the historically low rates on bonds.  When bonds were delivering upwards of 10% on the investment dollar, putting them in an IRA was a no-brainer.  But what if you’re cautious about rising rates, and you’ve shortened maturities in a yield-starved market, finding your return now to be closer to 1%?   Suddenly, these funds are no longer a huge tax concern.

At the same time, REITs offer tax benefits like depreciation, which becomes more valuable at higher ordinary income rates.  And persons in retirement may see their tax rates fall from above 39% down to 15%, which decreases the benefits of astute asset location, and might raise the value of rebalancing each year across all accounts.

Another consideration for retirees is the mandatory withdrawals they have to take from their IRA account after they reach age 70 1/2.  If the IRA is holding all the income-generating investments, then systematically liquidating those holdings means creating a higher exposure to stocks and a generally more volatile portfolio as you age–which may be the opposite of what is desired.

Saving taxes through asset location strategies is one of those rare opportunities to get additional dollars without taking additional risk–but a mindless focus on taxes without looking at the bigger picture can result in unintended consequences.  The rules of thumb need to be informed by your tax bracket and other aspects of your individual circumstances–with an eye on the ever-changing tax and interest rates that Congress and the markets throw at us.

How to Calculate Your Retirement Needs

Calculating the monies needed for retirement

How to calculate how much you need to retire.

Calculating a retirement savings goal is one of the most important steps investors can take to help determine if they are on track to meet that goal. However, less than half of American workers have tried to figure out how much money they will need to accumulate for retirement.1 And the wide majority of those who did admit doing so either guessed or did their own calculations. What about you?

Planning Matters

What’s important to realize is that the exercise of calculating a retirement savings goal does more than simply provide you with a dollars and cents estimate of how much you’ll need for the future. It also requires you to visualize the specific details of your retirement dreams and to assess whether your current financial plans are realistic, comprehensive, and up-to-date.

Action Plans for Retirement

The following five strategies will help you do a better job of identifying and pursuing your retirement savings goals.
1.    Double-check your assumptions. Before you do anything else, answer these important questions: When do you plan to retire? How much money will you need each year? Where and when do you plan to get your retirement income? Are your investment expectations in line with the performance potential of the investments you own?
2.   Understand your projected life span. The average life expectancy for a 45-year-old man today is 78. For a woman, it’s 82. According to pension mortality tables, at least one member of a 65-year-old couple has a 72% chance of living to age 85 and a 45% chance of living to age 90.2
3.    Use a proper “calculator.” The best way to calculate your goal is by using one of the many interactive worksheets now available free of charge online and in print. Each type features questions about your financial situation as well as blank spaces for you to provide answers. An online version will perform the calculation automatically and respond almost instantly with an estimate of how much you may need for retirement and how much more you should try to save to pursue that goal. If you do the calculation on a paper worksheet, however, you might want to have a traditional calculator on hand to help with the math. Remember that your ultimate goal is to save as much money as possible for retirement regardless of what any calculator might suggest.
4.    Contribute more. Do you think you could manage to save another $10 or $20 extra each pay period? If so, here’s some motivation to actually do it: Contributing an extra $20 each week to your plan could provide you with an additional $130,237 after 30 years, assuming 8% annual investment returns. At the very least, you should try to contribute enough to receive the full amount of your employer’s matching contribution (if offered). It’s also a good idea to increase contributions annually, such as after a pay raise.
5.    Meet with an advisor. A financial professional can help you determine a strategy — and help you stick to it.

Retirement will likely be one of the biggest expenses in your life, so it’s important to maintain an accurate price estimate and financial plan. Make it a priority to calculate your savings goal at least once a year.

Class Offered: Investing in Today’s Financial Markets

Investing in Today's Financial MarketsFSCJ Betty P Cook Nassau Center to Offer “Investing in Today’s Financial Markets” Class

Instructor Steve Nicklas is returning to the Betty P. Cook Nassau Center in Yulee to offer his popular Investing in Today’s Financial Markets class. The 4-week class will cover important aspects of the stock and bond markets, including popular investment vehicles such as mutual funds, annuities, and investment and retirement planning.

Tuition for the class is $36.00; the class meets each Tuesday nights from 6:30 PM to 8:00 PM beginning October 8 through October 29, 2013.

For additional information or to register for the class please call the Nassau Center at (904) 548-4432.

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Official Inflation Rates Keep Falling: How Long Can it Last?

When the metal in a coin values higher than the purchasing power

Economists and market watchers have been warning investors about the prospect of increased inflation since the housing bubble burst in 2007. But the inflation rate keeps going lower, not higher.
As of April 30, 2013, the Official Consumer Price Index (CPI) as published by the government stood at a paltry 1.1%, under the Federal Reserve’s target of 2% annually.

Why is low inflation troubling?

For a number of reasons:
•    When companies don’t have any leeway to raise prices, they’re more apt to cut costs, which could mean a cutback in hiring.
•    When inflation is low, it doesn’t offer a large buffer against deflation if an economic shock occurs. Deflation — when prices fall — often freezes up spending. Why would you buy an item now if you expect it to be cheaper in a few months?
And it’s not just the United States that is dealing with lower inflation — or even deflation — rates. Many of the world’s top industrialized nations are in the same boat.

Inflation Rates Around the World (as of April 30, 2013)

China    2.40%
France    1.00%
Germany    1.15%
Italy    1.10%
Japan    0.90%
South Korea    1.20%
Spain    1.40%
United Kingdom    2.80%
United States    1.10%

Stay Diversified

For investors, whether inflation continues to remain low or starts to rise, a well-rounded portfolio may be your best weapon. The key is to consider your time frame, your anticipated income needs, and how much volatility you are willing to accept, and then construct a portfolio with the mix of investments with which you are comfortable.
•    CDs and Other Cash Instruments — The Fed is still keeping a tight lid on interest rates, forcing investors who hope to keep pace with inflation by investing in cash instruments face a harsh reality. Average rates on a 1-year CD are hovering around 0.25%, while a 5-year CD is yielding an average of 0.78% nationwide, according to Money market accounts are averaging a microscopic 0.11%.3
•    Bonds — Historically, investors have turned to shorter-term corporate and high-yield bonds for protection in rising-rate environments.4 There are two types of bonds that receive a lot of investor interest when inflation starts to rise: Treasury Inflation-Protected Securities (TIPS) and I Savings Bonds. Both TIPS and I bonds are types of fixed-interest rate bonds whose value rises as inflation rates rise.
•    Domestic Stocks — Although past performance is no guarantee of future returns, historically, stocks have provided the best potential for long-term returns that exceed inflation.5 An analysis of holding periods between 1926 and December 31, 2012, found that the annualized return for a portfolio composed exclusively of stocks in the S&P 500® index was 9.90% — well above the average inflation rate of 2.98% for the same period. The results are almost as good over the short term as well. For the 10 years ended December 31, 2012, the S&P 500 returned an average of 7.10%, compared with an average inflation rate of 2.41%.6
•    International Stocks — During the same 10-year span that ended December 31, 2012, the Morgan Stanley Capital International (MSCI) EAFE, which is composed of established economies such as Germany and Japan, outpaced the S&P 500 with an average return of 8.70%. The MSCI Emerging Markets index — which tracks developing world economies such as Brazil and China, and is even more risky than MSCI EAFE — was even more stellar, returning an average of 16.89%.8

Remember, diversification does not ensure a profit or protect against a loss. Consult a financial professional to discuss your specific needs and options.

A Long-Awaited European Recovery?

Is Euro enjoying an economic recovery

Is Euro enjoying an economic recovery?

You may be enjoying this long respite from reading about the European debt problems, which just a year ago still scared many observers into thinking that the world was on the edge of a deep economic malaise.  The last time Europe made headlines, Greece was going bankrupt, France had its pristine AAA credit rating downgraded, Spain was wrestling with unemployment north of 20%, Italy was insolvent and everybody south of Germany was mired deep in economic recession.

So where are we now?  The Financial Times of London recently took a hard look at the current situation in Europe, and found that the reports of Europe’s demise may have been exaggerated.  In fact, it says that when the Eurozone’s gross domestic product data are released in the coming week, we will see positive figures after 18 months of gloomy negative growth rates.

Among the hopeful signs: manufacturers in the 17 countries that use the euro currency have reported their biggest increase in output since 2011, and Greece, the epicenter of the original crisis, has qualified for its next batch of rescue loans totaling 5.8 billion euros as it sells off (or privatizes) government-owned corporations to pay its debtors.  Spain’s unemployment rate has recently fallen for the first time in two years and even troubled Portugal, where political opposition to austerity threatened its ability to receive a global bailout, now seems to be back on the tracks of economic reform.  Perhaps the best news is that France’s finance minister recently announced the end of recession in the Eurozone’s second-largest economy, with second quarter 2013 growth of 0.2%.

Of course, there are still problems that could derail this still-fragile recovery.  Perhaps the biggest is the continent’s banking industry, where banks are still avoiding having to fess up to their losses on sovereign debt, still cleaning up their balance sheets and are slow to make much-needed loans to regional businesses.  Greece and Spain are still burdened with 27% jobless rates, and Italy is still mired in recession after a 2.4% GDP decline in 2012.

Those of us who have read more about the Greek economy can finally dare hope that the break from scary headlines continues.  Interestingly, most of the reports that talk about rays of hope in Europe also mention, in passing, that the U.S. economy has been the sole engine of growth in an otherwise troubled global economy.  That, in itself, is something to cheer about.

Six Tips on How to Manage an Inheritance Well

Six Tips to Manage an Inheritance

A sizeable inheritance can represent a life-changing opportunity. Here are six tips to help you prudently manage your windfall.

Tip 1: Consult With a Financial Professional and Tax Professional
Depending on the type of inheritance (e.g., investments, life insurance, retirement account), you could be dealing with substantial federal and/or state inheritance taxes. Working with a financial advisor and/or a tax professional could help you plan the sale of any assets and deal with the tax implications. For example:

•    If your inheritance was from your spouse, there may be no taxes due.
•    Life insurance proceeds are usually tax free.
•    Non-retirement assets are taxed when sold, and those assets typically receive a “step up” in cost basis. That means that any capital gains tax you owe will be based on the asset’s fair market value at the date of death of the benefactor.

If you inherit an annuity or traditional workplace retirement account or IRA, you will have to pay taxes on the distributions. Be very careful when taking your distributions. For example, if you cash out your uncle’s IRA and roll the money over into your own IRA, the entire amount of the rollover will be subject to ordinary income taxes.

Note too that there are considerations for spouses rolling over their deceased spouse’s retirement account.

Tip 2: Park the Cash
Before you make any plans or major purchases, stop. Deposit the inheritance or investments in a bank or brokerage account. If you are married, you need to determine whether to put the account solely in your name or jointly with your spouse. Note that inheritances are considered separate property, in case of divorce. However, once they are commingled in a joint account, those assets lose that protection.

Tip 3: Cut Down/Eliminate Your Debt
Your inheritance may allow you the ability to pay off your debt, including your mortgage. But first consider paying off those loans with higher interest rates, such as credit cards, personal loans, and car loans. Then consider paying off your mortgage. Also fund an emergency account with at least six months’ worth of living expenses.

Tip 4: Think About Your Other Goals
Identifying your financial goals can help you determine what types of investments to make or other types of accounts to open. These goals could include:
•    Contributing to charity
•    Setting up a trust or foundation
•    Paying for a family member’s education
•    Helping out loved ones
•    Adding to your retirement savings

Tip 5: Review Your Insurance and Estate Planning Needs
If you’ve inherited a significant sum, it may be wise to increase the liability limits on your homeowners and automotive policies. If you inherited jewelry, artwork, or real estate, you may need to increase your property and casualty coverage. Consider an umbrella policy. Does the inheritance inflate the size of your estate so that it will be subject to estate taxes? Are you thinking about setting up a trust to provide for family or charity?

Tip 6: Do Something Nice for Yourself
Set aside a small percentage — no more than 5% to 10% — of your inheritance for “splurges.” Take a trip. Buy a new car. Just be sure to keep it small. After all, inheritances don’t grow on trees.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation.

Dividends: A Bird in the Hand

A Bird in the Hand is certainty

A Bird in the Hand Spells Certainty, or does it?

There’s a lot of focus on the dividend component of investment returns these days–for a variety of reasons.  First, dividends represent money in hand, which is more of a sure thing than stock price appreciation.  Many investors still have a wary eye on the 2008 meltdown, and are having trouble convincing themselves that today’s record stock values represent real money in their portfolios.  As the old saying goes, a bird in the hand is worth two in the bush.

On the other hand, there are taxes to consider.  Since the passage of the new tax law last January, higher-income taxpayers (those in the 39.6% tax bracket) have to pay 20% on the money that is paid out by the corporations in our taxable accounts–up from 15% for tax years 2003 to 2012.  The new Medicare tax will pile on an additional 3.8% tax burden for people with more than $200,000 (individuals) or $250,000 (joint) of taxable income.  You can forestall the tax bite by putting dividend-paying stocks in your IRA, but in doing so, you eliminate another tax-saving measure: the ability to harvest capital losses whenever any of your stock holdings decline in value, share the pain with Uncle Sam and shelter some of your gains.

As recently as last year, dividend investing strategies were considered to be something of a fad, as mutual funds and ETFs that invested in stocks paying the highest dividend percentages were raking in record investor inflows.  But naively investing in companies giving the most money back to their shareholders has not proven to be the ideal strategy.  For one thing, because these rates are calculated as the dividend divided by the share price, the highest dividend payers are sometimes companies that have recently experienced the highest drop in share value.  If a stock valued at $100 is paying a 4% dividend before it plummets to $67, the dividend is suddenly up to 6% of the share price–and becomes a screaming buy at a time when you might worry about the health of the company.  Meanwhile, companies whose dividend rates look low may have recently experienced a surge in their stock value.  Buying simply based on dividend rates may result in a portfolio that resembles a kennel.

In addition, some stocks, like utilities, act more like bonds than stocks; that is, they are built more for income than growth.  Buying the highest dividend stocks could lead to lower overall growth in share value.

Finally, it should be remembered that the dividend rate is never guaranteed, and in fact is paid at the whim of the company’s board of directors.  In 2012, after suffering through an earnings decline, the J.C. Penney company stopped paying its 4% dividend altogether.  Looking in the other direction, late in 2012, anticipating higher taxes on dividends, more than 175 companies made the list of highest dividend payers when they sent “special dividends” out to their shareholders–which were to be paid out of future earnings this year.

When you sort out all the various issues, the best lesson is not to ignore dividends–they have, after all, provided 34% of the monthly total return on the S&P 500 since the beginning of 1927–but not to get carried away by them either.  You’re probably being paid to hold the stocks you own regardless of your strategy.  Just over 82% of the stocks in the S&P 500 are now paying some form of dividends to their shareholders, which is the highest rate since September of 1999.

Instead of looking for the highest dividend yields, a more workable strategy is to identify funds or ETFs that invest in stocks that have a track record of growing their dividends consistently over time, and which are only paying out a portion of their earnings in the form of dividends–what is called the “dividend cover ratio.”  The historical average of earnings paid out as dividends is 52%, but that may go up in the months and years ahead.  Companies are sitting on record amounts of cash–an estimated $1.1 trillion in the 500 stocks making up the S&P 500–and are still reporting record earnings.  That money has to go somewhere, and some of it will eventually find its way into the pockets of patient investors.

August 2 to 4th is Florida’s 2013 Tax Free Holiday

August 2 to 4th is Florida's 2013 Tax Free HolidayAs a parent, one of America’s fastest growing holiday is Tax Free Shopping Days! In 2013, Florida shoppers will be celebrating this money saving occassion August 2nd through August 4th.

This weekend no sales tax will be collected in Florida on sales of footwear, clothing and certain accessories for $75.00 or less per item. Other school related items such as computers and related accessories, up to $750 or less per item, and used for personal use only will be tax free, too.

The exemption does not apply to any item of clothing selling for more than $75, to any school supply item selling for more than $15, or to any personal computer or related accessory selling for more than $750.

Of course certain restrictions apply such as:
Clothing sold at theme parks, hotels or airports will NOT be tax free.

Some items within a category will be exempt, while others won’t such as:
Ponytail holders, scarves and ties are exempt, but handkerchiefs, jewelry and watches are NOT.

You can read the full pamphlet, including an item by item breakdown, by clicking HERE.

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Is Gold a New Asset Class?

Gold is a safe nest egg if diversified properly

Gold can be a very safe nest egg if diversified properly.

Should gold be considered as a new asset class or as an instrument of financial speculation? Down from its 2011 high of $1,920.30, Gold sits at $1,333 per ounce today, a $60 jump from $1,277.80 an ounce two Friday’s ago. Many investors view gold these days as an essential part of their portfolio. And a trending obsession for this metal has brought new ideas as well as challenges to the financial planning table. While some advisors refuse to enter the conversation, others are beginning to engage their clients.

With so many opinions on the matter, what is a serious investor to do? Steve Forbes, publishing magnate and chief executive officer of Forbes Magazine said, “The fact that gold is now seen as an investment vehicle reflects the poor state of the U.S. global economy.” He added that only jewelers and gold miners should be buying gold. “When [gold] has to be bought as an asset class it tells you that the politicians are making a hash of things, central bankers are making a mess,” he said.

Wondering if this statement is fueled by political aspirations, one should question if Mr. Forbes stands alone in this belief? Turns out that he is not. For the last decade investors have participated in one of the biggest “buy-ups” in recent history. Mostly prompted by fear, this action has driven up prices and handed some a nice return. The question remains, is it sustainable, and if so, for how long? I’m not sure that anyone can reasonably answer that question so I would approach Gold like any other investment, with much consideration.  One consideration is this. Even though heralded as Gold’s all-time high, the September 2011 high was not its true peak. Adjusted for inflation, Jan. 21, 1980, remains gold’s highest level. At one point in trading on the New York Commodity Exchange, gold touched an intraday level of $875 per ounce, which would be the equivalent of $2,438 in 2012 dollars.

When it comes to the markets, there are some principal strategies that have proven favorable for the investor. First, you should talk to your advisor about your goals. Next, examine your time horizon. In other words, how long do you need this money to work for you? Then you should talk about suitability.  Ask him or her, “Does this investment really make sense for me?” Some advisors are even proponents of Asset Allocation. And by all means, diversify. A reasonable percentage of your portfolio in precious metals is a hedge against long term inflation risks.

Whatever your choice of strategy, understand, there are no guarantees. And as a general rule, when everyone is running in one direction, caution would tell you to consider the other direction.

¹ July 12, 2013 -“Steve Forbes Talks Gold on Kitco News” by Neils Christensen and Daniela Cambone of Kitco News
By Ronnie Stoots
Ronnie Stoots is the President of Amelia Wealth Management.

Fernandina Accepting Housing Rehabilitation Grant Applications

Fernandina Accepting Housing Rehabilitation Grant ApplicationsFernandina Beach, FL – The City of Fernandina Beach will be accepting applications for the Community Development Block Grant (CDBG) Housing Rehabilitation Program from Friday, June 7, 2013 at 8:00 AM through Friday, June 21, 2013 at 5:00 PM. Applications will be available on the City’s website at, or can be picked up at the Community Development Department in City Hall (204 Ash Street) starting 8:00 AM on Friday, June 7, 2013. The Community Development Department is open from 8:00 AM – 5:00 PM Monday through Friday.

Specific information about the Housing Rehabilitation Program is available on the application form. Some important information that potential applicants should know before submitting an application include the following:
• This is for single family, owner-occupied homes within the City of Fernandina Beach municipal limits only;
• The applicant must fall within the income limits (below) and will be required to provide personal and financial information about themselves and members of their household. The total household annual gross income (before taxes and deductions) cannot exceed the maximum income for the household size;
• There is a limitation on what components may be rehabilitated, replaced or added as part of the rehabilitation project. This list is available on the application and on the website;
• The limit on individual rehabilitation projects is $59,500;
• Participants will be required to sign a mortgage and promissory note (deferred payment loan) in an amount equal to the cost of the work before construction begins. This deferred payment loan will be secured by a lien and the payments will be deferred for ten (10) years; and
• Participants must have comprehensive homeowners insurance on the property before the end of the rehabilitation work and will be required to maintain the coverage for the term of the deferred loan.

Household Size Maximum Income
1 $35,850
2 $41,000
3 $46,100
4 $51,200
5 $55,300
6 $59,400
7 $63,500
8 $67,600

If you have questions about the City’s Housing Rehabilitation Program, please visit the City’s website at or contact Jennifer Gooding at (904) 277-7325.

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The Survival of Crypto Currencies

The Market Madness in its Comic Reality

Click to enlarge: The Market Madness in its Comic Reality

At first I wanted to just write a comment to Mark Dennis’ article yesterday about Bitcoins and Tulips, but as I started hammering away on the keyboard, I realized that a comment would not suffice because there is so much more to consider when talking about the Bitcoin effort to pull currency transfers away from direct government control into cyberspace.

For example there is a lot of confusion out there about money supply and inflation/deflation. There is also the diminishing role of the US dollar as the global reserve currency. Then there is inflation and deflation and the notion that the Feds are printing money, which in reality is probably not the case, but since their operations are so murky and contradictory that not even congress gets an honest answer, rumors accelerate among hoi polloi – since this term was officially used in the hit TV series “The Big Bang Theory” by Sheldon Cooper’s character- I can now safely use it to better describe the populace than the somewhat degrading word ‘sheeple’.

So before turning to Bitcoin and its, in my humble opinion at least, inevitable demise and subsequent replacement by a better protected e-currency option, I would first like to address some of the currency concerns that have surfaced in the past five years or so.

First the money supply issue and the Federal Reserve

For a long time I walked in the camp that professed that the Feds were printing money in such absurd quantities that it would ultimately bankrupt us all into Armageddon. By applying logic however and some hints from a top banker friend in London I am now inclined to think that “the Fed is printing money” is a broad misconception and that the Fed doesn’t really have control over growth in the money supply.

Mind you there is no disagreement that the Fed controls the monetary base, though it is important to distinguish the difference between the “monetary base” and the “money supply.”

The monetary base increases when the Fed buys government securities (like in the various QE programs) increasing the nation’s debt by letting government indiscriminately borrow for programs we cannot afford. This process creates currency units in the form of bank reserves that have the potential to be loaned out. However, this does not translate into an increase in the money supply until these new bank reserves are actually loaned out. And here is a major confusion embedded in people’s thinking: stimulating economic growth requires financial injections on the work floor (Main Street), but that is not happening, except for some very limited bubble niche markets.

So the next debate is centered around whether or not the Fed controls the money supply. One side claims that the Fed does not control the money supply, but rather banks and their customers control it since their actions are the ones that determine whether the new bank reserves created by the Fed get loaned out and added to the money supply.

The other side however argues that the Fed does indeed control the money supply by paying higher interest on the currency unit reserves that commercial banks keep on deposit with the Fed. Remember, it is these reserves that are created when the Fed buys government securities, but which don’t become part of the money supply until they are loaned out by the banks. By paying the banks a relatively high interest rate on these reserves, higher than what they can get from us, the case can be made that the Fed is in fact controlling the money supply through incentives to the banks to keep this cash on reserve and not loan it out – because if loaned out, it would cause an increase in the money supply, thus inflation and the likes.

What’s important to remember here is that we’re talking currency units, just like bitcoins. The US dollar currency unit is only as good as our Government’s promise to back it. It has no gold reserves or anything of value or than a promise backing it. Whose promise however is not quite clear, as your dollar notes clearly state on the top FEDERAL RESERVE NOTE, and the Federal Reserve is NOT an electable government function. The Federal Reserve is not a US Government institution but a private banking initiative.

The diminishing role of the US dollar as the global reserve currency

Something very interesting happened two weeks ago. Japan, the world’s third largest economy, sold off more than 7% off its market in one day, a fact that had virtually no impact on the US markets. In 2008, during the crash and afterward, it seemed that all of the world’s economies were joined at the hip – the slightest disturbance in even a peripheral country such as Greece or Iceland would send markets around the world reeling.

Analysts were delighted by this as it seemed that the US markets were more defined that day by the Federal Open Market Committee comments than by Japan’s drop. Wrong way to look at it in my opinion, it’s not that events in Japan don’t matter anymore in the US market, it’s more that the rest of the world including Japan are in the process to become much less dependent on the US currency.

Traditional investors still think that the USD is the ultimate safe haven, but a rapidly growing number of contrarians are moving cash and assets into diversified international markets and currencies, which is one of the reasons Bitcoin all at once became an investment option, rather than just a digital currency exchange. Another reason was probably that many Liberty Reserve users saw the writing on the wall and moved into Bitcoin, suddenly making it a household word to at least financial insiders.

What is Bitcoin?

In its simplest explanation it is electronically exchanged money – an e-cryptocurrency, backed, like the US dollar, the Euro, the Yen, by an authority’s promise to uphold the value. Many E-currencies have been developed, tested and most often discarded since the Internet changed the financial playing field. Some of the more prominent ones are Webmoney, Moneybooker , SolidTrustPay, Okpay, Cosmic Pay, Egopay, Instaforex funds , C-gold and of course Bitcoin. The problem governments have with Cryptocurrencies is that they are generally designed to have no inflation (once all the currency has been produced), in order to keep scarcity and hence value. Cryptocurrencies are also designed to ensure that funds can neither be frozen nor seized. Existing cryptocurrencies are all pseudonymous, and Bitcoin additions such as Zerocoin which employs cryptographic accumulators and digital commitments to eliminate trackable linkage in the Bitcoin blockchain, which makes Bitcoin anonymous and untraceable.

And yes Mark Dennis is his article points at the fact that Bitcoin works in favor of money launderers and criminals as a negative side effect. But to be honest, the biggest criminals in history usually had and have their own banks and transfer systems.

Having said that, as a true libertarian who endorses the “keep government out of our lives” mantra, I am fairly certain that the next phase of government control will see government do everything in its power now to crush Bitcoin as part of deterring the average person from wanting anything to do with Bitcoin, or, for that matter, any other non-sanctioned e-currency. The snag here of course is that Bitcoin, contrary to Liberty Reserve is a massively distributed system with no obvious individuals readily available for perp-walking. This fight will probably rally around scaring away heretofore vocal and visible champions of a new e-currency, who helped Bitcoin gaining rapid market share.

So while cyberspace is continually developing new and improved currency structures, the scenario on the ground is that the government is preparing to wage war on Bitcoin for some of the right and all the wrong reasons.

For now this war will scare off merchants who accept Bitcoin, or who were contemplating it. And while individuals may be able to fly below the radar, merchants who need to advertise their willingness to deal in bitcoins offer up a fixed target.

It has been the experience in all my years and travels that any government – not just the American government – will simply do whatever it thinks it needs to do to keep the status quo intact, with no moral or ethical considerations.

For now fate for e-currencies, especially Cryptocurrencies, is pretty much defined by how much time it will take technology and the internet to break the status quo dictated by the past, and the inevitability of new paradigms to be implemented. I give it no more than 5 years.

But for more perspective I’m closing with the words of a good friend: “While it’s hard to tell how Bitcoin will ultimately fare… I think the right questions we as possible consumers of the e-currency have to ask is, (a) whether its value is intrinsically linked to its ability to operate in the open, and (b) whether it can withstand a full-on government assault.
And never for a minute lose sight of the fact that the government defines the rules. If your permanent government file might be amended to flag you as a possible anti-government revolutionary solely for visiting a Bitcoin-related website, would you take the risk?
Though I certainly appreciate the effort to launch an alternative, anonymous currency – I see Bitcoin as Prototype 1 in that regard and very much susceptible to being mugged by the monetary mafia (Federal Reserve) that came into power exactly 100 years ago,
Maybe I would buy some for entertainment purposes, but for anything resembling real value, I’ll take things more tangible”.

Bitcoins and Tulips

If you want a little excitement in your investing life, consider this market capitalization graph.  It shows the remarkable growth in price, and then the remarkable fluctuation (mostly down in recent weeks), not of a hot internet startup, or a bond issued by Zimbabwe’s central bank, or a mutual fund, but a kind of currency.  As you can see from the chart, the cumulative value rose from essentially zero to over $2.5 billion, and then lost more than half its value in a few trading days.

Welcome to the strange world of bitcoins, the alternative currency that exists on the web, favored by a small number of techno-geeks, libertarians, drug dealers and the occasional legitimate business.

Bitcoins are a digital currency that has been getting a lot of press coverage, especially recently, with that price spike and subsequent collapse, along with news that people in Cyprus are converting their savings into bitcoins to avoid government confiscation.  The actual coins are, of course, not coins at all; they are essentially records in a digital archive stored on servers throughout the web, in the form of digital signatures, timestamps and public keys, all created in open-source computer code in a way that is designed to foil hackers.  Because a Bitcoin transaction can be processed easily in any currency, anywhere in the world, without banking or transaction fees, some economists think that they represent an early version of what currencies will look like in the future.

Libertarians like bitcoins because they allow you to buy and sell (with those few business who will accept them in payment) totally anonymously, without the government being able to assess taxes or track your activities.  (This is also the attraction for drug dealers.)  People who are suspicious of central bank policies like them because bitcoins are not tied to any traditional banking system; no government can print more of them and debase the currency.

Hackers like them because once bitcoins are stolen, there is no way to recover your losses or trace the thieves.  It’s like stealing the money out of your wallet.

The phantom money received a measure of credibility when Forex, a financial news online portal, recently began offering minute-to-minute Bitcoin news to traders and investors.  However, some of the most astute commentators believe that it is inevitable that bitcoins will eventually wind up worthless.

Why?  First of all, there is nothing backing the bitcoins in your digital wallet.  Unlike dollars, pesos, euros or yen, no government guarantees that bitcoins will have value in the marketplace.  For bitcoins to become a stable reservoir of value, they would have to be accepted by the mainstream business community.

That can’t happen.  Under the protocol that established the digital currency, the global supply of bitcoins can never exceed 21 million.  At a recent (probably inflated) conversion value of $141 per bitcoin, that comes to just under $3 billion, which sounds like a lot until you realize that the foreign exchange markets routinely experience trading volumes of $4 trillion a day, and the global value of all commercial transactions is many times that amount.

Of course, you would solve this problem if the value of individual bitcoins could rise dramatically, to, say, $100,000 each (global value: $2.1 trillion), but this is where the economists point to a fatal flaw.  Suppose your $141 bitcoin suddenly started trading at $200, and then $500, and the value was growing as the need for bitcoins expanded to encompass a broader share of global trade.  That’s great for your paper wealth, but it represents massive deflation of the things you’ll be purchasing.  That iPhone you purchased with one bitcoin would soon be worth half a bitcoin, then a quarter of a bitcoin, and eventually less than a thousandth of a bitcoin–and just like consumers during the Great Depression, you (and millions of other bitcoin holders) would have no incentive to actually do any transactions with your precious hoard.  There’s a reason why currencies are not supposed to be terrific investments; you want them circulating into the economy, rather than hiding in the mattress or an encrypted digital wallet.

Nevertheless, as business (and, yes, people doing business with drug dealers online) learn how to navigate this new digital currency, economists and others say we’re learning how to construct a better global transaction system.  Bitcoins will be an interesting part of the future history of commerce.  They may also become one of the great financial cautionary tales, right alongside the Dutch tulip bulb mania as portrayed by 19th century British Charles Mackay in his book “Extraordinary Popular Delusions and the Madness of Crowds” , as people with thousands of bitcoins valued at millions suddenly find their digital wallets empty of value.

Federal Deficit Ballooning Out of Control – or Is It?

Federal deficits are shrinking says Goldman Sachs

Federal deficits are shrinking says Goldman Sachs

America’s budget deficit is ballooning out of control, right?

As it happens, while Congress and certain pundits scream that we need to cut government spending to the point where we can drown the executive branch in a bathtub, analysts are discovering something surprising: the U.S. government budget deficit this year and next appears to be shrinking.  The Wall Street firm Goldman Sachs has issued a report which lowered fiscal 2013’s estimated red ink from $900 billion to $775 billion, or about 4.8% of total U.S. economic output.

How did this happen? Spending is down as a result of the sequestration ($85 billion this year) and prior spending cuts, plus tax revenues are up 12% over last year, the report tells us.  It says that the deficit may come in even smaller than currently anticipated, due to the higher payroll taxes that are only now starting to be counted on the government’s balance sheet.  If the economy grows faster than expected, that, too, could bring in higher-than-anticipated revenues.  Goldman now projects the budget deficit to fall to just 2.7% of economic output by the 2015 fiscal year, which many economists believe is a sustainable level.

Interestingly, some global economists are not happy about this optimistic budget news.  Senior members of the International Monetary Fund are criticizing Washington policymakers for imposing too much budget austerity, too soon, arguing that it is preventing the unemployment rate from coming down more quickly.

Meanwhile, one of the most influential arguments for bringing the overall deficit down before it reaches 90% of American GDP has taken a serious hit to its credibility.  In an astonishing development, three professors from the University of Massachusetts have looked over spreadsheet data behind a highly influential book published by professors Carmen Reinhart and Ken Rogoff, which purports to show that throughout history, nations have typically foundered when their debt level reached certain thresholds.  The UMass professors found that in their calculations, Reinhart and Rogoff inadvertently omitted data for three countries: Australia (1946-1950), New Zealand (1946-1949) and Canada (1946-1950).  An embarrassing coding error in the spreadsheet also excluded other data from five countries: Australia, Austria, Belgium, Canada and Denmark.

When the missing information was correctly included, it painted a very different picture of the dangers of high government debt levels.  In the original report, whenever countries reached overall government levels of 90%, they experienced negative GDP growth–essentially, a recession–in aggregate over the countries studied.  With the new data, countries crossing that threshold, in aggregate, actually experienced 2.2% positive growth levels.

This revisionist view is actually being confirmed in the real world.  Japan has the highest debt-to-GDP ratio in the world, well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low (as, to be fair, has its economic growth).  Southern European countries that have embraced austerity–like Greece, Spain and Portugal–have endured multiple recessions, the opposite of what the original (flawed) Reinhart/Rogoff data suggested.  The United States, which opted for a stimulus approach to the 2008 meltdown, is recovering faster than any developed country in the world.

Getting the economy healthy accomplishes two things: it lowers the budget deficits by bringing in more tax revenues, and it further lowers the debt-to-GDP ratio by expanding the GDP number in the equation.  Nobody argues that America can’t keep piling up debt forever.  But it seems clear, from the data on the ground and from the corrected data in the influential report, that the stimulus efforts after the Great Recession weren’t quite the terrible decision that they are sometimes made out to be. What is not always so clear is how to cut through the political hyperbole – from both sides – and drill down to the facts of the matter.


Marriage & Money: A Balancing Act

Searchamelia financial commentary

Marriage has a lot of financial consequences

Marriage affects your finances in many ways, including your ability to save money, invest, prepare for retirement, manage your estate, or make decisions about tax and insurance-related benefits. If you are planning to get married or have recently tied the knot, here are some thoughts to consider.

Saving & investing –If both you and your spouse are employed, two incomes can be a considerable benefit toward saving money, investing, and building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans, your joint contributions are double the individual maximums ($17,500 for 2013). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which may make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement benefits –Some (but not all) pensions provide benefits to surviving spouses following a pensioner’s death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to 100% of the benefit earned by a deceased spouse.

Estate planning –Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate tax consequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire to structure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estate planning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition of an estate take effect. Also, certain types of trusts, such as QTIP trusts and marital deduction trusts, are restricted to married couples.

Tax planning –When filing federal income taxes, filing jointly typically results in lower tax payments when compared with filing separately.

Debt management –In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse. Couples wishing to guard against this practice may do so with a prenuptial agreement. Be sure to consult an attorney regarding legal documents and advice specific to your situation.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said, there are financial and legal benefits that you may want to explore with your betrothed before you tie the knot and take the leap into the abyss of marital bliss.

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