Madison, NJ – Nov. 15, 2010 – Brinton Eaton, a wealth advisory firm based in New Jersey, today announced its “Top 11 for 2011” – eleven moves investors should make in the coming year to preserve and grow wealth, as well as successfully adapt to changing income tax and estate tax policy. Brinton Eaton’s Top 11 include staying away from excessive cash investments, ensuring your portfolio is risk-managed, preparing for tax-law changes, and maxing out tax-advantaged savings plans.
“Next year offers investors great opportunities, but the risks are real and haven’t diminished,” said Brinton Eaton president Robert DiQuollo, CFP®, CPA. “We expect volatility to continue; smart investors will look to maximize upside potential by exploiting that volatility, while taking measures to protect their downside,” adds principal and chief investment officer Jerry Miccolis, CFA, CFP®. At the same time, they say, investors must keep a sharp eye on how changes in tax law affect their situations.
Brinton Eaton’s Top 11 for 2011 are:
#1 – Get Invested – Excessive Cash Is a Guaranteed Loser
Low interest rates punish savers. If you’re sitting on excessive amounts of money-market funds or CDs, you are earning almost nothing and most likely will fall behind inflation over the long term. Get invested, but do it according to a well thought out asset allocation plan. Keep only a few (and typically no more than 12) months’ worth of spending needs in cash, or run the risk of seeing your portfolio lose purchasing power over time. An excellent guide is Asset Allocation For Dummies® (Wiley, 2009), co-authored by Mr. Miccolis.
#2 – Ensure Your Portfolio is Properly Risk-Managed, With Traditional and Newer Hedges
Putting all your eggs in one or two baskets is never smart, especially today as more geopolitical and other risks proliferate. The May 2010 “flash crash” was just another stark reminder of the need to combine a traditional, scientifically-based asset allocation model — that includes true alternative investments such as commodities, real estate, and managed futures — with new risk-management techniques such as cost-efficient portfolio protection.
#3 – Keep an Eye Out for “Contagion”
The biggest problem in the market collapse of late 2008/early 2009 was that asset classes which traditionally “zigged” as others “zagged” all tanked together — there was nowhere to hide. This phenomenon is called “contagion”; it is rare but devastating. In late 2010, markets started to show signs of modest contagion again, as everything but the safest of bonds tended to move in lockstep. Investors should keep a close eye out for this phenomenon, as it renders even the best-designed diversification temporarily useless. It is for these times that explicit portfolio protection is necessary. Talk to your advisor if you don’t have such a safety net in place.
#4 – Take Advantage of Hedge Fund-Type Investments Becoming Consumerized, but Caveat Emptor
More investment managers are now providing hedge-fund style investments via mutual funds. They use the same strategies as hedge funds, but offer greater transparency, third-party custodians, daily liquidity, and lower costs. This trend will bring the “chasing alpha”-type investment style to the masses, but fees will still be higher than most traditional mutual funds or ETFs. “And many of these funds could be very risky if investors do not fully understand the underlying strategies,” Miccolis says.
#5 – Prepare for Possible Changes in Tax Rates
If Congress doesn’t act, Bush-era tax cuts for high-earners will expire in 2011. Consult your financial advisor and tax professional to plan your taxable income for 2011 — especially if you are self-employed or have executive compensation options to consider. The maximum long-term capital gains tax rate could go from 15% in 2010 to 23.8% in 2013, and the top rate on ordinary income could go from 35% in 2010 to 43.4% in 2013. The estate tax is also scheduled to come back with a vengeance in 2011. High earners would be wise to consult an estate planner and tax expert to try to mitigate the short and long-term impacts of these changes.
#6 – Max Out Tax-Advantaged Savings, Especially Since Your Tax Rate May Jump
It’s common knowledge that employees, regardless of income level, should take full advantage of their 401(k) plans, particularly those with matching contributions from the employer. However, some highly-paid employees do not realize that they will fail to get their full employer match if their contributions are “front-loaded,” i.e., condensed into the first few months of the year. Max out your 401(k) plan contributions, but do it over 12 months to make sure you get your full match by spreading payroll deductions evenly. All 401(k) plans are different, so read yours carefully.
#7 – Evaluate Whether Long-Term Care Insurance Is Right for You
It’s estimated that 70% of the population will need long-term care at some point. If you have to put a spouse in a long-term care facility, you would need enough funding to essentially run two households. Long-term care insurance can offer valuable protection. “Evaluating your needs and purchasing the right policy while you’re relatively young (in your 50s, for example) can save you money in the long run, and secure benefits that might not be available in the future as insurers grow more cautious and cut back on policy options,” DiQuollo says.
#8 – Annuities: If You’re Worried About Longevity, Weigh the Benefits Against the Additional Costs
Could living longer be a source of worry? It could be if you run out of retirement savings. According to the latest actuarial tables, a couple at age 65 have a 50% chance that at least one spouse will survive to age 92 and a 25% chance that one will survive to age 97. If this is a concern, you may want to look into annuities. However, annuities come at a significant cost. Ask a financial advisor for the pros and cons.
#9 – Seek Out Estate Planning Opportunities That Take Advantage of Low Interest Rates
If Congress doesn’t act, the estate-tax exemption will revert to $1 million, causing more estates to be subject to tax; but low interest rates provide superb planning opportunities. The low interest rate environment can be used to your advantage, for example, by allowing you to provide low-interest mortgages to adult children and using grantor retained annuity trusts to pass tax-efficient asset appreciation to your heirs. “Unprepared individuals will provide unnecessary funds to the IRS – wouldn’t you rather make sure that your family is the beneficiary of your legacy?” DiQuollo says.
#10 – Consider a Roth IRA Conversion
A Roth conversion can be a sensible move for someone who not only wants to see assets grow tax free, but be able to withdraw, or keep their money in a tax-free environment indefinitely, with no tax consequences or penalties. Although your non-spouse heirs are subject to withdrawal requirements, it is a great vehicle for inheritance because it can provide your heirs a stream of tax-free income. However, to do the conversion, you must pay taxes on the amounts converted, which can have a hefty price tag; it’s best to consult a financial planner and/or a tax advisor.
#11 – Complete a Due Diligence Review of Your Advisor
The end of the year is always a good time to reassess those you are trusting to invest and manage your assets. Good questions to ask are: 1) Where are my assets custodied? Be wary of an advisory firm that acts as its own custodian, and be sure your assets are housed with an established third party. 2) Does my advisor use the lowest-cost suitable alternatives for each investment? 3) Does the firm receive any compensation from any parties other than their clients? And, 4) Does my advisor have me protected against severe market declines?
About Brinton Eaton:
Based in Madison, NJ, Brinton Eaton is an advisory firm with a long history of serving individuals and their families across multiple generations. The firm helps its clients protect, grow, administer, and ultimately transfer their legacy of wealth through a full range of integrated services, including lifetime cash flow projections, financial/tax/estate/retirement planning, investment management, charitable giving, and business succession planning. Brinton Eaton’s clients tend to be corporate executives, professionals, entrepreneurs, retirees, and multi-generational families. For more information, visit www.brintoneaton.com.
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