Summer 2011 Newsletter (Business)


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Summer 2011 Newsletter (Business)

  1. 1. Q uarterl y B E A C O N H I L L I N V E S T M E N T A D V I S O RY Summer 2011A Review of the Markets This Just In —After strong first-quarter gains in line, though it was negative for the Ohio Estate Tax Updatethe stock markets, it was mostly quarter. The Russell 2000 suffereddownhill from there. Following the most as investors preferred the Governor Kasich signed into lawApril’s year-to-date highs, when reassurance of defensive sectors the State budget which repealed thethe Russell 2000 hit its highest and large caps, while the NASDAQ Ohio estate tax beginning Januarylevel on record, week after week escaped with barely a scratch. 1, 2013. Though you will no longerof declines battered all four U.S. Meanwhile, saddled with Greece’s be required to pay Ohio estateindices. However, a rally in June’s woes, the Global Dow continued taxes after 2012, it is necessary tofinal week left the Dow industrials to stagger. continue reviewing and monitoringthe only one of the four major your estate plan. Taxes are onlyindices with a gain for the quarter, Greece’s debt problems caused one aspect of comprehensive estatetaking the lead from the small caps investors to decide that despite planning to ensure your goals andfor 2011’s first half. the United States’ budgetary woes, objectives are satisfied. Treasuries didn’t look so bad afterAfter breaking below 1,300, the all. As demand pushed prices up,S&P 500 barely managed to claw yields on the 10-year fell below 3%its way back to that level just before rebounding a bit.before crossing the quarter’s finish Market/Index 2010 Close As of 3/31 End of Quarter Quarterly Change YTD Change DJIA 11577.51 12319.73 12414.34 .77% 7.23% NASDAQ 2652.87 2781.07 2773.52 -.27% 4.55% S&P 500 1257.64 1325.83 1320.64 -.39% 5.01% Russell 2000 783.65 843.55 827.43 -1.91% 5.59% Global Dow 2087.44 2186.41 2134.29 -2.38% 2.24% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 3.30% 3.47% 3.18% -29 bps -12 bps84 South Fourth Street, Columbus, OH 43215 • (614) 469-4685 • •
  2. 2. Quarterly Economic Perspective• The financial markets heaved of Labor Statistics said volatile • The Federal Reserve’s bond- a sigh of relief as the Greek food and energy costs were buying program, nicknamed parliament agreed to implement responsible for more than half of QE2, came to an end on schedule. a €28 billion, five-year program that. However, oil prices fell back Fed Chairman Ben Bernanke said of spending cuts, tax increases, to roughly $90 a barrel, helped by the Fed will continue to reinvest and asset sales. European the release of some of the world’s the proceeds of existing holdings, leaders said the measures were a strategic reserves in the wake of and that those efforts will end condition for receipt of the next ongoing conflict in oil-rich Libya. before the Fed raises interest rates. slice of existing aid before key It also forecast slower economic bond payments in July. Despite • The nation maxed out its credit growth (2.7%-2.9%) for the rest differences over whether and how card as it went over the current of the year, but said some of the to let bondholders such as banks $14.3 trillion debt ceiling in causes of the sluggishness should suffer losses on Greek debt, the May. Treasury officials warned be temporary. country’s European colleagues that accounting measures could said Greece would likely receive a postpone the day of reckoning • Unemployment rose slightly to new aid package. until August 2, but that after just over 9% during the quarter, that date the Treasury will face consumers were slower to spend,• U.S. economic growth continued, the question of which bills go housing continued to struggle, but at a much slower pace. The unpaid. As the clock kept ticking, and retail sales were hurt by Bureau of Economic Analysis congressional leaders argued supply-chain problems in the auto said gross domestic product over whether spending cuts, tax industry caused by the spring’s (GDP) rose by 1.9% compared to increases, or some combination of Japanese disasters. the previous quarter’s 3.1%. the two would be required before raising the limit on how much• Consumer inflation over the last the Treasury can borrow to pay year hit 3.6%, though the Bureau existing obligations. Source: Forefield Inc.401(k) Corner - Contribute $260,000 every year!Ok, so it’s not technically a 401(k) Enter the Cash Balance Plan taxes on just his portion alone, hethat you can defer income into, Upon further review of his would have had a tax expenditurebut many are surprised by just company’s employees, an often of approximately $60k!how much can be deferred into overlooked plan made perfect senseretirement plans by using advanced for him. The design allowed him to What is a Cash Balance Plan?planning. defer an additional $150k per year A cash balance plan is technically“I know I need to create retirement and also grant an additional $35K a defined benefit plan; however,savings, but I’m starting late and to a highly valued employee, which it looks and feels like a definedcontributing only $22,000 per year he used instead of a raise. In total, contribution plan.into my 401(k)... that isn’t going he had to give an additional $20Kto cut it.” Mr. Johnson complained to other employees. All in all, us. Even the Profit Sharing Johnson and his valued employeecomponent, which increased savings received 90% of the benefits ofto $54,000, wasn’t adequate. the plan. If Mr. Johnson had paid Summer 2011
  3. 3. “I know I need to create my retirement savings, Can I exclude certain employees? but I’m starting late and contributing only $22,000 per Yes. There is a lot of flexibility in the initial plan design. year into my 401(k)... that isn’t going to cut it.” Why haven’t I heard of this before?Who is a candidate How are the While all advisors do “retirementfor Cash Balance? investments handled? planning” many do not focus onGenerally, cash balance plans will While details are beyond the scope the intricacies involved with ERISAbe good for companies with stable of this article, the investments should and non-ERISA based plans. Inprofits. It works best if the people be designated as the client’s “safe addition, an actuary experiencedyou are trying benefit are highly money” and invested conservatively. in cash balance plans is requiredcompensated and older than the in the initial analysis and ongoinggeneral employee population. It How long do maintenance.can work very well for closely held I need to keep the plan?businesses, law firms, medical While most corporate retirement How do I seepractices, etc. The benefits of a cash plans are technically intended to be if this is right for me?balance plan are the ability to defer permanent, most experts recommend We conduct an initial interview tosignificant sums and the ability to that you should maintain the plan for determine if this type of plan is rightrecruit and retain highly qualified at least three years. for you or if a different plan benefitscandidates with specialized skills. you more. We then collect an employee census (includes employeeHow much could I potentially payroll information and birthdefer into a Cash Balance Plan? dates) and work up an analysis for aWhile it depends on the demographics potential plan, including how muchof your company, the maximum you could save in taxes and howcontributions are in the chart below. much would be given to employees. Age 401(k) Profit Sharing Cash Balance Total Tax Savings 60-65 $22,000 $54,500 $209,000 $263,500 $105,400 55-59 $22,000 $54,500 $164,000 $218,500 $87,400 50-54 $22,000 $54,500 $125,000 $179,500 $71,800 40-44 $16,500 $49,000 $96,000 $145,000 $58,000(Daniel Kravits, 2010, p. 8)Assuming a 40% combined federal, state, and local tax. Savings shown are deferred taxes. Taxes are required to be paid upon withdrawal from the plan. w w w. b e a c o n h i l l a d v i s o r y. c o m
  4. 4. Business Wealth Management Process TM This Quarter: Protection Protection This quarter’s topic, Protection, uncovers gaps within our clients’ insurance needs. Going beyond a simple life insurance snapshot, Life Insurance we analyze scenarios in which disability could occur or potential longterm care needs arise. As you can imagine, it’s burdensome for Disability the family, not to mention potentially devastating to the business if these issues are not addressed. If additional needs are required, we Umbrella/Liability take it to competitive bid from multiple providers. Long-term Care Next Quarter: Tax Efficiency 84 South Fourth Street Columbus, OH 43215Mark Fissel, RFC Clint Edgington, CFA w w w. b e a c o n h i l l a d v i s o r y. c o m