September 2011




Jim Oliver & Associates, P.C.
FB Bancorp Building
17300 Henderson Pass
Suite 240
San Antonio, TX 78232

p:210.344.0205
f:210.344.4362

cpa@teamoliver.com
www.teamoliver.com

Financial Life Advisors
FB Bancorp Building
17300 Henderson Pass
Suite 240
San Antonio, TX 78232

p:210.918.8998
f:210.344.4362

advisor@teamoliver.com
www.fladvisors.com

This firm is not a CPA firm.
Four Retirement Financing Risks

As Americans live longer, the task of managing money after retirement gets more complex. A retiree in his or her mid-60s typically has a different risk profile than an individual approaching 90. It may be helpful to look at various types of risk from the vantage point of how they affect retirees at different life stages. Here are four key risks to consider.

1. Investment Risk -- Balancing risk and return takes on a different meaning for individuals as they age. A negative rate of return during the early years of retirement could leave an individual with a significantly smaller nest egg when compared with negative returns later in the retirement life cycle. Your financial advisor can help you craft an investment mix with the goal of smoothing out returns over the long term and increasing the chances that your assets will last throughout your lifetime.

2. Longevity Risk -- Withdrawing too much from a portfolio during the early years of retirement may heighten the chance of depleting your assets during your later years. For this reason, many financial advisors recommend limiting annual withdrawals to 5% or less of a portfolio's value, adjusted for inflation, to make assets last as long as possible.

3. Inflation Risk -- Because younger retirees typically are planning for a time horizon of 20 years or more, it is important that their portfolios include a source of growth that is likely to exceed inflation over the long term. To complement this potential growth, many retirees rely on more conservative investments that may generate income and help to balance risk and potential return.

4. Health Care Risk -- It is not unusual for medical costs to increase as retirees age, and it may be prudent to plan for these costs before the need is immediate. Preretirees and younger retirees may want to explore options for medical insurance that supplements Medicare, as well as long-term care insurance, to reduce the possibility of dipping into personal assets to finance illness- or accident-related expenses. Also, remember that those who retire before age 65 need to find an alternate source of medical insurance prior to becoming eligible for Medicare.

Reviewing these and other challenges associated with retirement planning with your financial advisor may increase your confidence that you have considered all scenarios. While it may not be possible to prepare for every situation, planning ahead may help you cope with financial issues that come your way.

Because of the possibility of human or mechanical error by Financial Communications or its sources, neither Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

August 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Jim Oliver, a local member of FPA.


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A SIMPLE Retirement Plan for the Self-Employed 

Of all the retirement plans available to small business owners, the SIMPLE plan is the easiest to set up and the least expensive to manage.

These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don't want to spend time and high administration fees associated with more complex retirement plans.

SIMPLE plans really shine for self-employed business owners. Here's why...

Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings.

SIMPLEs calculate contributions in two steps:

1. Employee out-of-salary contribution
The limit on this "elective deferral" is $11,500 in 2011, after which it can rise further with the cost of living.

Catch-up. Owner-employees age 50 or over can make a further $2,500 deductible "catch-up" contribution as employee in 2011.

2. Employer "matching" contribution
The employer match equals a maximum of 3% of employee's earnings.

Example: A 52-year-old owner-employee with self-employment earnings of $40,000 could contribute and deduct $11,500 as employee plus a further $2,500 employee catch-up contribution, plus $1,200 (3% of $40,000) employer match, or a total of $15,200.

SIMPLE plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.

If living expenses are covered by your day job (or your spouse's job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE retirement investments.

A Truly Simple Plan

A SIMPLE plan is easier to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules - in investment options, spousal rights, creditors' rights - don't have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible. Your plan's custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit simpler than with other plans.

What's Not So Good About SIMPLEs

Once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE retirement plan.

Example: If you are under 50 with $50,000 of self-employment earnings in 2011, you could contribute $11,500 as employee to your SIMPLE plus a further 3% of $50,000 as an employer contribution, for a total of $13,000. In contrast, a 401(k) plan would allow a $25,500 contribution.

With $100,000 of earnings, it would be a total of $14,500 with a SIMPLE and $35,500 with a 401(k).

Because investments are through an IRA, you're not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will in practice have fewer investment options than if you were your own trustee, as you would be in a 401k.

It won't work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.

If the SIMPLE plan is set up for a sideline business and you're already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE and the 401(k) combined (in 2011) can't be more than $16,500 or $22,000 if catch-up contributions are made to the 401(k) by someone age 50 or over.

So someone under age 50 who puts $8,000 in her 401(k) can't put more than $8,500 in her SIMPLE in 2011. The same limit applies if you have a SIMPLE while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

How to Get Started with a SIMPLE Plan

You can set up a SIMPLE account on your own, but most people turn to financial institutions.

SIMPLES are offered by the same financial institutions that offer IRAs and 401k master plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an "effective date" - the beginning date for payments out of salary or business earnings. That date can't be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.

401k, SEPs, and SIMPLES Compared


Please contact us if you are a business owner interested in exploring retirement plan options, including SIMPLE plans.


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Mutual Fund Sales Charges, Fees, and Expenses

With thousands of mutual funds to choose from, selecting the funds appropriate for your needs can be a challenge. Many investors choose to work with qualified financial advisors who can assist them in choosing funds to pursue their financial goals.

Before you begin making investment selections, you should review your situation. What is your investment goal? How long do you plan to keep your money invested? How comfortable are you with changes in the value of your investment over short and long periods? You should also familiarize yourself with the principles of asset allocation and diversification. And finally, before you invest in a mutual fund, carefully examine its performance, fees, and any sales charges.

Know the Costs

All funds have annual fees and expenses, which are used to compensate their professional managers and cover operating expenses. These fees may include a 12b-1 fee, which is collected to cover marketing and distribution costs and is periodically deducted from the fund's earnings each year.

Some funds also apply a sales fee. These funds are known as "load" funds. The sales load, or fee, compensates the broker who helps you determine which fund is right for you (if you buy the fund from a broker or registered representative). If you are working with a fee-based financial advisor to select your investments, you may want to avoid buying shares that charge a front-end sales load unless the fund offers exceptional performance potential. When evaluating load funds, which charge either a front-end load (A shares), a back-end load (B shares), or a level load (C shares), consider your investment goals and time frame as they relate to how and when the fees are paid.

Glossary of Terms

Contingent-Deferred Sales Charge (CDSC) -- A fee that may be charged when a shareholder sells fund shares.

12b-1 Distribution Fee -- An annual asset-based sales charge that is used to pay for sales-related expenses.

Income Distribution -- Payments to shareholders resulting from interest or dividend income earned by a fund's portfolio.

Service Fee -- Payments by a fund for personal service to investors and/or for maintenance of shareholder accounts by the distributor or a financial representative

A Shares: The Front-End Load

Front-end loads are deducted from your initial investment, thereby reducing your immediate purchasing power. Investors in these shares are likely to have an extended time frame for their investment goals. These investors expect to remain in the fund for several years. If circumstances change, however, the shares can be redeemed at any time without additional charges.

One advantage of a front-end load is that it is based upon the fund's net asset value at the time of purchase, and not on any appreciated value. In addition, some funds with front-end loads do not charge an annual 12b-1 fee. Investors should remember, however, that a front-end load could result in slower growth for your money than an investment in a level-load or back-end load fund.

B Shares: The Back-End Load

Back-end load funds typically charge what is known as a "contingent-deferred sales charge" if you sell your shares within 7 to 10 years of purchase. The sales charge may be collected on either the existing net asset value at the time you withdraw the funds or on the net asset value at the time of purchase, depending on the fund.

For many funds, the sales charge is reduced gradually over time, and after several years, no sales charge is collected. Of course, this declining fee schedule depends on the individual fund. Back-end load funds may be an appropriate choice for investors who intend to hold the investments for four to six years. But because these funds often charge a 12b-1 fee (as much as 1.00%), a fund with a lower 12b-1 fee may be a better choice for longer-term investors.

The advantages of a back-end load are that all of your money goes to work for you immediately, and if you hold the shares long enough you will not pay a sales charge.

C Shares: The Level-Load Funds

Level-load funds may collect a sales charge based on the net asset value each year, and some may also include a small front-end or back-end load. They can also charge a 12b-1 fee. These somewhat higher costs may result in lower income per share than income earned on Class A shares. Therefore, these funds may be appropriate for an investor with an investment time frame of less than five years.

No-Load Funds

"No-load" funds do not charge sales fees but may incur 12b-1 fees. The maximum 12b-1 fee a no-load fund can charge is 0.25%.



 
Which Type of Fund Is Right for You?

Because of their lower fees, no-load funds may seem most appealing at first glance. But before choosing these funds, consider your goals, your level of investment expertise, and how much time you can devote to making investment decisions. If you feel that you need assistance in selecting and investing in mutual funds, then load funds may be the more appropriate choice unless you are working with a fee-based financial planner. Before buying a fund that collects a sales charge, consider its performance record net of sales charges.

No matter what your decision, remember to evaluate your specific goals and personal investment style. With a long-term strategy, you'll be more prepared to select the alternatives that can offer you the best value over time.

Points to Remember

  1. Before you invest in a mutual fund, consider the fund's performance, fees, and any sales charges.
  2. All funds have annual fees and expenses.
  3. These fees may include a 12b-1 fee. In addition, funds may charge a sales fee, known as a load. 
  4. Load funds are classified as either A shares, B shares, or C shares.
  5. A shares -- front-end loads -- means the sales charge is deducted from your up-front investment. This reduces the amount of money that goes to work for you. These funds are more appropriate for long-term investors. 
  6. B shares -- back-end loads -- typically charge a contingent-deferred sales charge, usually at the time you withdraw the funds. These funds may charge a higher 12b-1 fee; therefore, they are more appropriate for an investor with an intermediate investment time frame.
  7. C shares -- level loads -- may collect a sales charge based on net asset value each year and may include a small front- or back-end load or a 12b-1 fee. These funds are more appropriate for time frames of less than five years. 
  8. No-load funds do not charge a sales fee but may charge an annual 12b-1 fee of up to 0.25%. 
  9. Before you invest in no-load funds because of their lower fees, consider if it would be more beneficial to you to take advantage of the assistance that a financial advisor can offer.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

August 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Jim Oliver, a local member of FPA.


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Understanding and Managing Risk in a Bond Portfolio

Bonds and bond mutual funds offer a sound way to add diversification to a long-term investment portfolio and help generate a steady stream of income. But even fixed-income investments -- generally considered less volatile than stocks -- pose an element of risk. Understanding the different types of risks can help you manage your portfolio's downside exposure and enhance your potential for income.

Diversification and Income

Generally, there are two reasons for considering investments in bonds: diversification and income. Bond performance does not typically move in tandem with stock performance, so, for example, a downturn in the stock market may be offset by increased demand for bonds. Some investors view the bond market as a safer haven for their money during periods of stock market uncertainty. Bonds also offer the potential for higher income than more conservative investments like money market mutual funds.

Essentially, a bond represents a loan to a corporation, municipality, or government agency. For lending them money, bond issuers promise to pay the bondholder a specific amount of interest, usually quarterly or semiannually, and repay the full amount of principal on the maturity date. The level of income potential depends on several factors, including the type of bond and tax classification. In addition to the potential rewards, bond investors should be aware of the risks, including credit, market, interest rate, reinvestment, and call risk.

Understanding the Risks

Credit risk refers to the possibility that a bond issuer will default on a payment before a bond reaches maturity. To help investors make informed decisions, independent firms such as Moody's Investors Service and Standard & Poor's publish credit-quality ratings for thousands of bonds. The upside of a poor rating is greater reward potential. Issuers of lower-rated bonds usually reward investors with higher yield potential for accepting the relatively greater risks. As a rule of thumb, bonds issued by corporations or municipalities with a triple-B rating or higher are called investment-grade bonds. Non-investment-grade bonds, with ratings as low as D, are sometimes referred to as junk or high-yield bonds because of the higher interest rates they must pay to attract investors.

If an investor is unable to hold an individual bond through maturity -- when full principal becomes due -- market risk comes into play. If a bond's price has fallen since acquisition, the investor will lose part of his or her principal at sale. To help mitigate exposure to market risk, investors should evaluate their overall cash flow projections and fixed expenses between the time they plan to purchase a bond and its maturity date.

Bond prices tend to drop when interest rates rise, and vice versa. This inverse relationship is referred to as interest rate risk, which may be a particular concern to investors who don't plan to hold a bond to maturity. A premature sale while rates are rising could result in a loss of principal. Exposure to interest rate risk increases with the length of a bond's maturity. Issuers generally pay higher yields on longer-term bonds than on those with shorter maturities.

A low interest rate environment also exposes bondholders to call risk, the right of an issuer to redeem a bond before its stated maturity. Issuers typically call bonds when interest rates drop, allowing them to pay off higher-cost debt and issue new bonds at a lower rate. Bonds paying higher yields are most susceptible to call risk. Changes in interest rates also may give rise to reinvestment risk -- the chance that an investor may not be able to reinvest at the same level of return and risk.

Inflation risk is the danger that the income produced by a bond investment will fall short of the current rate of inflation. (For example, if your fixed-income investment is yielding 3% during a period of 4% inflation, your income is not keeping pace.) The comparatively low returns of high-quality bonds such as U.S. government securities are particularly susceptible to inflation risk.

Bonds May Help Reduce Portfolio Risk


This chart illustrates how a combination of stocks and bonds would have helped reduce overall portfolio risk without potentially sacrificing too much in the way of returns during the period from January 1, 1926, through December 31, 2010.

Sources: Standard & Poor's; the Federal Reserve; Barclays Capital. Stocks are represented by the total returns of Standard & Poor's Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by a composite of the total returns of long-term U.S. government bonds, derived from yields published by the Federal Reserve, the Barclays Long-Term Government Bond, and the Barclays U.S. Aggregate index. Individuals cannot invest directly in any index. Past performance is not a guarantee of future results. (CS000026)

Risk Management Options

To counter the risk of inflation, individuals can purchase inflation-protected government securities and bonds convertible into stock. Inflation-protected securities include 10-year Treasury notes whose redemption value is subject to adjustment every six months based on changes in the Consumer Price Index. Because of the inflation-protection feature, the interest paid on the notes is likely to be less than that paid on fixed-rate 10-year Treasury notes issued at the same time.

Convertible bonds offer the holder the option to exchange the bond for a specified number of shares of the company's common stock. In return for the ability to share in possible appreciation of its stock, the bond issuer offers a lower rate than those available on nonconvertible bonds.

Other risk management approaches are more likely to suit investors with substantial income-producing assets. Laddering is one such strategy to help smooth out the effects of interest rate fluctuations. "Laddering" involves setting up a portfolio of bonds with varying maturity dates ranging from shorter to longer term. For example, you might purchase equal amounts of Treasury issues maturing in one, three, five, seven, and nine years, giving you an average maturity of five years. As the principal comes due every two years, you would reinvest that amount in Treasuries due to mature in 10 years, preserving the five-year average maturity. Such a rolling portfolio not only helps to limit reinvestment risk, its staggered maturities provide liquidity at specific intervals without having to sell into the market.

Another strategy is to construct a "barbell" in which a portfolio is invested primarily in short- and long-term bonds with few intermediate maturities. In theory, the barbell structure allows the longer-term portion of the portfolio to take advantage of higher yields while the shorter-term portion limits risk. Some sophisticated investors also employ hedging vehicles such as options and futures to help protect against loss of value due to market risk.

Alternatives to Consider

In addition to maintaining a diversified portfolio, investors may want to consider insured bonds -- typically municipal bonds whose issuer has bought insurance to pay off bondholders in the event of default. Similarly, investors can manage call risk by knowing each bond's first call date and avoiding bonds with call dates in the near future, especially if interest rates are falling.

Of course, not everyone has the time or knowledge to manage a portfolio of individual bonds. With so many bond options to choose from -- Treasury, federal agency, municipal, corporate, and mortgage, among them -- and with individual bonds requiring initial investments ranging from $1,000 to more than $25,000, many investors opt for the ease of bond mutual funds. Bond mutual funds offer instant diversification, professional management, and daily liquidity. However, bond funds may also trigger taxable events.

The bond market provides a wealth of fixed-income products to suit virtually every investment goal and risk level. Online resources such as the Bond Market Association's www.investinginbonds.com Web site can aid research. Still, choosing bond investments that pursue your specific financial needs often isn't easy, and the assistance of investment and tax professionals is advisable when managing the risk and reward potential of your bond investments.

Points to Remember

  1. Understanding bond risks can help investors limit the downside exposure of their portfolio and increase its income potential.
  2. Bonds may expose investors to credit, market, interest rate, reinvestment, inflation, and call risk. 
  3. To compensate for their higher risk, bonds with lower credit quality ratings generally pay investors higher interest rates than bonds with higher ratings. Also because of their greater risk, longer-term bonds typically pay higher rates than bonds with shorter maturities. 
  4. Laddering, the barbell approach, and hedging are among the risk management strategies used for larger fixed-income portfolios. 
  5. The diversification, professional management, and daily liquidity of bond mutual funds make them suitable for many investors.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

August 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Jim Oliver, a local member of FPA.

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