6 Ways to Protect Your Retirement from a Double Dip Recession - Have a written retirement plan II. Have a "red-button" plan III. Revisit your ...

6 Ways to Protect Your Retirement
from a Double Dip Recession

                         I.   Have a written
                              retirement plan

                         II. Have a “red-
                             button” plan

                         III. Revisit your tax
                              strategies

                         IV. Choose your
                             Social Security
                             options wisely

                         V. Manage your risk

                         VI. Do not panic

I. Have a Written Retirement Plan

It would be crazy to set out on a round-the-world sailing expedition without a
plan, but that is exactly what many people do when they embark on their
retirement journey! A quality written retirement plan helps take you from point
A to point B with the least amount of risk possible. It should “stress test” for all
of the possible events that could interrupt your retirement: volatile markets,
increased taxes, an unexpected death or medical event, and more.

With all of the free “quick retirement calculators” available today, many
investors are asking why they need the assistance of a financial advisor to
prepare a complete financial plan. Unfortunately, many people who decide to
use a free calculator to plan for their retirement will find out too late that those
calculators are simply not designed to be a financial plan, but merely to give a
“starting point” or “wake up call”.

A quality financial plan should cover the following areas:

Basic Personal Information
Although it may seem obvious, many professionals and software packages that
claim to do “planning” don’t even gather your basic personal information.
Information you should expect to provide includes:

          •   Your full name
          •   Marital Status
          •   Your spouse’s full name (if applicable)
          •   Your date of birth
          •   Your spouse’s date of birth
          •   Your citizenship status
          •   Your spouse’s citizenship status
          •   Your mailing address and permanent residence address
          •   Previous marriages

•   Children/Dependent Information
            •   Employer Information

Current Situation
In order to create a roadmap to get where you want to go, you must know where
you are starting from. Your current situation covers many areas of your
finances and is not “optional” when creating your plan. Your current situation
will cover the following areas:

            •   Your current income (both spouses)
            •   Your current expenses
            •   Your current financial position
            •   Current Savings
            •   Current Insurance
            •   Employer-paid benefits

Goals
Most people have many different goals in life, including home purchase,
education, retirement, travel, and legacy goals. However, vague goals can make
financial planning next to impossible. Sure you want to buy a vacation home;
but what does it look like? Where is it at? Most importantly, what is the cost?
Assigning a dollar value to your goals can be a difficult task, but is absolutely
critical.   When defining life goals, such as new cars, education, new homes,
vacations, and other large purchases, keep the following in mind:

            •   How much will this cost? You need to have a good idea, if not an
                exact dollar amount.
            •   When will this expense take place? It is easy to determine education
                goals, since it is based on the age of the child. It can be much more
                difficult to put a date on a new home.
            •   How often will this occur? Do you want to take a vacation every
                year? Every 3 years? Be specific.

Your final goal should look something like this: In 2015, we would like to
purchase a vacation home in Florida with the approximate cost being $350,000.
OR, starting in 2009, we would like to spend $3,000 every year on a vacation to
the Caribbean.

Similarly, retirement goals will vary from person to person. When you are
thinking about retirement, ask yourself the following questions:

          •   What age do I want to retire?
          •   Will my spouse retire at the same time?
          •   What will I do with my free time? (Remember to factor hobbies into
              your income needs!)
          •   How much net, spendable income will I need every year? Always
              plan in net (of taxes) dollars. Taxes will change, so specifying a
              gross income need is simply not a good way to plan.

Resources
One of the most frustrating parts of financial calculators like the example given
earlier is that they fail to take into account all of the resources available to you
at retirement. Here is a partial list of resources that you may have to help you
reach your goals:

          •   Current Assets
          •   Social Security
          •   Pensions
          •   Rental Income
          •   Business Sale/Income
          •   Part-time Employment
          •   Inheritance

Outside Variables
There are many things beyond your control that you will want to consider in
your planning. Some planners will call these “What-Ifs” and a quality financial
plan will address each of them.

•   Inflation
          •   Taxes
          •   Investment Risk and Returns
          •   Early passing of you or your spouse
          •   Long-term care

To protect your retirement from a double-dip recession, you must start with a
written financial plan.   Remember, a quality financial plan is an intricate
creation, and should be “alive”. This means that as your life, or economic
conditions, change, the plan should change as well.

II. Have a “Red-Button” Plan

Do you know what you would do in the event of a single-day decline of 3%, 5%,
10% or more? What about a drop of 15% in the matter of a few days? Waiting
until the event happens to decide what to do can cause many investors to make
emotional decisions. Fear and greed are the most influential emotions when it
comes to investing; these cause many investors to buy at the top and sell at the
bottom—NOT a sound investing strategy.

The last several years have shown many investors that the old “buy and hold”
approach simply doesn’t work when you are retired OR within a few years of
retirement. You cannot be expected to stomach large losses in your portfolio
when you are so close to retirement. Every drop in total market value could
mean a drop in your annual retirement income; if you are like many retirees,
and your number one fear is “running out of money”, a drop in portfolio value
could mean many sleepless nights.

The purpose of investing is to build and grow wealth, not to lose it. The purpose
is not to take high risk without a defensive strategy to protect your money from
loss. We believe the real goal of investing should be the antithesis of gambling
and taking high risk. The goal should be to seek a high rate of return with
relatively low risk. That would require a more scientific approach to investing. It

would take strategic thinking, a coordinated effort, certain assets, and certain
types of advisors to help make it work.

As an investor, you need to make sure your financial advisor has a “red-
button”, in-case-of-emergency plan to protect you from substantial market
declines.   The plan needs to be spelled out in advance, with specific “action
points”: IF this, THEN this. IF the market has a single-day drop of more than
5%, THEN we will sell positions X, Y, and Z and buy treasuries.

This “red-button” plan may mean making some tough decisions ahead of time
so that emotions don’t get in the way. Perhaps you have a volatile stock that
you inherited; unfortunately it has a low basis and it makes up a large part of
your portfolio.   You need to decide in advance whether you are willing to
potentially pay taxes on a large gain in order to protect the value of your
portfolio. To take it further, what loss are you willing to accept in order to avoid
taxes? Does it make sense to take that loss just to avoid taxes?

III. Revisit Your Tax Strategies

Perhaps one of the least understood risks retirees face is taxes.

Revamp Your Investment Portfolio While Cutting Taxes
With a potential double-dip recession on the horizon, it’s likely time to revamp
and rebalance your portfolio. The silver lining of the first “dip” is that the tax
cost of revamping your portfolio is probably not so bad. So, while it’s not
generally wise to let tax implications drive investment decisions, you should not
ignore them either.

As you know, the current maximum federal income tax rate on long-term
capital gains from selling stock and mutual fund shares held in taxable
brokerage firm accounts is only 15%, which is pretty good by recent historical
standards. However, 0% is even better, and 0% may be all you’ll owe if you see
this as a good time to revamp your taxable brokerage account’s stock and
equity mutual fund portfolio. Let’s assume the revamping would involve selling

some winners (current market value above what you paid), as well as some
losers (shares currently worth less than what you paid). As long as the losses
from the losers fully offset the gains from the winners, you’ll owe nothing to the
IRS as a result of your revamping efforts.

But why stop there if it’s appropriate for your situation? You can continue
trimming unwanted loser shares until you’ve generated a $3,000 net capital
loss for the year. You can then deduct that $3,000 loss against this year’s
income      from   other   sources—salary,   self-employment   income,   interest,
dividends, alimony received, and so on. If you are married and file separately
from your spouse, the annual net capital loss deduction limit is only $1,500
versus the usual $3,000 limit.

If you happen to be one of the lucky ones who has profited from this year’s
market up ticks, you may not have enough unwanted losers in your taxable
brokerage firm account to fully offset gains from your taxable account. As you
now adjust your portfolio by selling some winners, you may still be able to avoid
or minimize the tax hit. Try to sell winners mainly from your tax-advantaged
retirement account (traditional or Roth IRA, 401(k), variable annuity account,
and the like). Sell losers mainly from your taxable account.

Revisit Your Gifting Strategies
Say you want to make some gifts to favorite relatives (who may really be hurting
financially) and/or charities (ditto). You can make gifts in conjunction with an
overall revamping of your holdings of stocks and equity mutual fund shares
held in taxable brokerage firm accounts. Here are some tax strategies for your
generosity.

Gifts to Relatives. Don’t give away loser shares (currently worth less than what
you paid for them). Instead sell the shares, and take advantage of the resulting
capital loss as explained earlier. Then, give the cash sales proceeds to the
relative.

Do give away winner shares to relatives. They may pay lower tax rates than you
would pay if you sold the same shares. In fact, relatives who are in the 10% or
15% federal income tax brackets will generally pay a 0% federal tax rate on

long-term gains from shares that were held for over a year before being sold.
Caveat: gains recognized by a younger relative who is under age 24 may be
taxed at his or her parent’s higher rates under the so-called Kiddie Tax rules (be
sure to check with your tax advisor if you’re concerned about this issue.)

Gifts to Charities. It turns out the strategies for gifts to relatives works equally
well for gifts to IRS-approved charities. So, sell loser shares and claim the
resulting tax-saving capital loss on your return. Then, give the cash sales
proceeds to the charity and claim the resulting charitable write-off (assuming
you itemize deductions). As you can see, this idea results in a double tax benefit
(tax-saving capital loss plus tax-saving charitable contribution deduction).

With winner shares, give them away to charity instead of giving cash. For
publicly traded shares that you’ve owned over a year, your charitable deduction
equals the full current market value at the time of the gift. Plus, when you give
winner shares away, you walk away from the related capital gains tax. Because
the charitable organization is tax-exempt, it can sell your donated shares
without owing anything to the IRS.

Consider Converting Your Traditional IRA into a Roth IRA
The traditional IRA has been nicknamed by Ed Slott, CPA: “The Retirement
Savings Time Bomb.” Your IRA is laden with taxes; most people don't
understand when they look at their statements that the value of their IRA is not
all theirs: part of that may belong to Uncle Sam! Think of it as a lien against
your IRA. The calculations on whether or not an individual should convert to a
Roth IRA are extremely complex and should be done by a professional who
understands both investment and tax implications.

Factors to consider when converting your IRA to a Roth IRA are:
   •   Investment timeline
   •   Availability of funds to pay taxes (from retirement or taxable accounts)
   •   Current income tax bracket and whether or not itemized deductions or
       the AMT will come into play
   •   Anticipated income tax bracket in retirement

Of course, conversion is not a no-brainer. You have to be satisfied that paying

the up-front conversion tax bill makes sense in your circumstances. Converting
a big account all at once could push you into a higher tax bracket, which may
or may not make sense for your situation. You must also make assumptions
about future tax rates, how long you will leave the account untouched, the rate
of return earned on your Roth IRA investments, and so forth.

Reduce taxation of Social Security benefits
Social Security has unique issues when it comes to taxes. To determine the
taxability of your Social Security you must take into consideration your
provisional income, which is arrived at by taking 50% of your Social Security
benefits and adding that to all other taxable income and tax-free income from
municipal bonds*. If your provisional income exceeds $32,000 per year for a
married couple, up to 50% of your soul security income will be included in your
adjusted gross income. If your provisional income exceeds $44,000 for a
married couple, up to 85% of your Social Security benefits will be included in
your adjusted gross income.
By strategically planning how you spend assets during retirement, it’s possible
to spend more than your provisional income during retirement; this keeps your
Social Security assets untaxed or taxed at a lower rate.

Many investors have found that by selling specific positions and spending from
taxable accounts during the early years of retirement, they are able to defer
withdrawals from retirement accounts (IRAs and 401ks) and prevent taxation of
their social security.

Of course, this strategy should not be undertaken without the advice of a
financial advisor and tax professional to ensure that it improves the long-term
chances of your plan’s success.

IV. Choose Your Social Security Options Wisely

As a married couple, you have an important decision to make: which one of the
81 possible social security strategies will you choose to take you through
retirement? Are you willing to make that decision without knowing which
combination of benefits could provide you with the highest lifetime benefit? If

so,       you   could   be   leaving    up   to   $100,000   or   more   on   the   table.
(SocialSecurityTiming.com)

Many retirees simply choose one of three strategies:
      •    Both file at 62 because they need the income or because they are afraid
           social security won’t last
      •    Both file at 70 to get the “maximum” benefit
      •    Both file at 66 because that is the age for “full” retirement benefits

There are several strategies that hinge on two little-known and little-understood
techniques: “Restricted Applications” and “File and Suspend”. These
techniques are explained well on www.SocialSecurityTiming.com:

Restricted Applications
Once you reach Normal Retirement Age, you have the option to restrict your
application to exclude certain benefits. If a benefit is excluded, it will continue to
build delayed retirement credits.
As an example, a higher-earning spouse, who may want to wait until age 70 to
collect his own benefit may be able to file at 66 for only the benefit available
under his spouse's work record, while still allowing his own benefit to build
delayed retirement credits. At age 70, he would switch to his own benefit.
Alternatively, a lower-earning spouse could restrict his or her application to only
spousal benefits while continuing to claim delayed credits on his or her own
earnings record.

File and Suspend
The second technique is the ability to file and suspend. Spousal benefits are not
available until the primary earner has filed for his or her own benefits. The Senior
Citizens Freedom to Work Act of 2000 allows a worker to earn delayed retirement
credits after filing for benefits if he requests that he not receive benefits during a
given period. As a result, a higher-earning spouse can file for benefits, then
immediately suspend the benefit, and continue to earn delayed credits. In the
process, he will have made his spouse eligible for spousal benefits under his
earnings record.

While these techniques are often part of the strategies which provide retirees
the highest lifetime benefit, they may not be right for you. To help ensure you
will have a successful retirement, you need to choose the best option for your
situation; no one combination is right for every married couple! Make sure you
are working with a qualified financial advisor to calculate which option is best
for you.

V. Manage Your Risk

Beyond investment risk, you have risks from premature death and major
medical events that could require a stay in a long-term care facility. A double-
dip recession can magnify these risks exponentially—the more your nest egg
shrinks, the fewer resources you have available to cushion you from one of
these events.

Although life insurance is typically viewed as an income-replacement guarantee
for those currently employed, it can be critical for retirees as well. The most
common use of insurance for retirees is to replace the loss of pension income if
the worker chose a “life only” option, meaning that they received a higher
monthly benefit over their lifetime only, and it ends at death, leaving the spouse
without pension income.

Although this can be devastating for a spouse if not properly planned for, this
option, when used in conjunction with life insurance, can actually be the most
advantageous for some retirees.         Financial advisors call this “Pension
Maximization”: they look at the difference between the “life-only” option and
the “joint and survivor” option, and if insurance to replace the lost pension
income costs less than the difference between the two options, it makes more
financial sense to take the higher benefit and purchase insurance.

Life insurance can also be used as part of a wealth-transfer strategy. As life
insurance proceeds are income-tax free, it is often more efficient to transfer
wealth to children by way of insurance than other asset classes.        This also

allows for a guaranteed legacy:       as long as you pay the premium on a
guaranteed, permanent policy, the face value of the policy will transfer to your
beneficiaries, regardless of market performance.     You simply can’t have that
kind of guarantee with stocks, mutual funds, and other market-based
investments.

Finally, long-term care insurance can be the difference between financial
devastation and success in retirement. Just as no one likes to plan to die, no
one likes to plan to be confined to a long-term care facility.     However, with
nursing home costs easily hitting $7,000 per month or above, it doesn’t take
long to run through a lifetime of savings, especially if there is still one spouse
living outside of the long-term care facility. If a double-dip recession hits and
pulls retirement account values down, the funds will run out even sooner.

VI. Do Not Panic

The absolute biggest mistake you can make in the event of a double-dip
recession is to panic. Although it can be tempting to sound like “Chicken Little”
(the sky is falling!) the American economy has been through many up and down
swings in its history, and we will see brighter days. Your goal as an investor
should be to protect your retirement and your investment portfolio from as
much downside as possible while still providing for growth. When the market
rises, and eventually it always does, you want to “rise” from a higher point—
meaning that you have minimized your losses.

Should we enter a double-dip recession, you need to take a step back, take a
deep breath, and make educated, strategic decisions.       Review your financial
plan, your “red button” plan, and your overall retirement strategy to make sure
it is still in line with your goals. Before making any rash decisions, consult
your professional advisory team: your financial advisor, your tax advisor, your
insurance agent, and your attorney.

If you’ve followed the steps above, you should be on solid ground and have a
well-thought-out plan to follow with the help of your professional advisory team.

Although there should always be room to change the plan based on the
situation, make sure that you stick to the plan when emotions are running
high. If you are feeling “sick to your stomach” afraid or greedy as can be, it’s
time to call in your advisory team to help you follow your game plan.

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