1 year from purchase: Get credit in shape.

Over the last few years, the housing and mortgage industry has changed quite a bit, and lenders are increasingly more stringent on lending standards. With this in mind, it’s important to review your credit report to get an idea of where you stand. Take advantage of annual free reports and look to see if anything raises a red flag to lenders. For those with unsecured debt—such as student loans or credit card bills—use the year to reduce these debts as much as possible. Additionally, for millennials with multiple student loans, consider loan consolidation.

3-6 months from purchase: Be realistic as you begin your search.

Understand that your first home will likely not be your “dream” home. From a financially realistic standpoint, a first home usually is a less expensive starter home. Keep your emotions and finances in check and begin to calculate what you can afford. There are numerous online mortgage calculators available that will gauge monthly payments, and can be helpful in determining “how much house” you can purchase.

Around this time, you’ll also want to determine whether you will work with a private bank or through a federal program when setting up any loans. Shop around and find out which federal program may be best, or whether you have the financial wherewithal to qualify for a private bank loan.

3 months out, and before you actually go shopping for a house, get pre-approved with a mortgage lender. Pre-approval will give you a concrete monetary idea of what loan you can secure, and will ease the process from the real estate agent’s perspective (given he/she will only show you homes within a set price range).

Weeks from purchase: Calculate (commonly overlooked) costs.

Once you have an idea of what you can afford, and as you begin your search, don’t forget to calculate additional costs that are associated with homes. For example, work with your realtor to look in locations that are both ideal geographically and financially. Taxes associated with each neighborhood can fluctuate, and it’s an important cost to consider since you have to pay yearly! Also remember to calculate your monthly mortgage insurance (if you put down less than 20 percent for a down payment) as that will be tacked onto your mortgage payment.

The purchase of a first home is an exciting rite of passage for any millennial. While the process itself may take some time, it’s critical to do your homework before the search begins. By crunching the numbers in advance, you can ensure that you are financially secure to purchase the home, and to maintain, improve, and enjoy it as the years go by.

The post Preparing for the Purchase of a First Home appeared first on Fort Pitt Capital Group.

A recent Pittsburgh Post-Gazette article in which I lent insight addressed this issue. You can read the entire piece here. In essence,  the required minimum distribution rule was put in place to ensure that retirement account owners  who have been accumulating tax-deferred assets will begin to use those assets for their intended purpose: to fund retirement. In the process the government will also begin to collect taxes on these assets, subjecting those withdrawals to ordinary income tax rates.

While retirement accounts permit you to access your retirement assets when you reach 59 ½ years of age, you are not required to do so. This changes in the year in which you turn 70½. At that time – and every year thereafter – you will be required by law to withdraw a specific amount from your retirement holdings. Failing to do so may result in significant penalties.

You do have some flexibility as to when you take the initial withdrawal. If you wish, you may forgo your first distribution until April 1 of the following year. You will, however, be required to take another distribution for the second year before year-end. For that reason, deferring your initial withdrawal is usually worth considering when you anticipate being subject to a lower tax bracket or needing additional income in that following year.

For many people, determining how much you must withdraw each year can be a source of considerable anxiety. We do this for our clients as a matter of course. The amount that must be distributed each year is based on the value of the account at the close of business at year-end divided by a government determined “divisor” that is based on the age of the investor. Fortunately, financial services firms are increasingly making it easier to know how much you have to withdraw each year by noting the amount of your RMD on your statement. However, if you have a spouse who is more than 10 years younger, that number may be overstated. The government recognizes that the money will be needed for a longer period of time and lowers the RMD “divisor” accordingly. It’s essential to check the requisite chart if you fall into this category. Here, too, we calculate this for each client account as part of our management of that account.

If you have multiple IRA accounts, you are permitted to aggregate the value of your various IRAs – in essence “bundling” your accounts to determine the combined value. You can then take the total calculated distribution from any one or more of the accounts as you wish. This approach might be useful when you have an IRA that holds a low yielding investment (such as a CD with a low rate) or, conversely, an investment that has done unusually well and might warrant profit-taking.

If you work for a non-profit and have multiple 403(b) accounts, you can also take the combined distributions from one or more of the accounts. However, if you have a 401(k), 457, 401(a) or profit sharing plan, you MUST take the distribution required from each specific account.

If you are over 70½, you may forgo taking your RMD if the following three criteria apply: 1. you are still working, 2. you are not a 5% or greater owner of the company or 3. you are participating in your company plan. In this case only, you may avoid taking a distribution until you retire.

One last tip: if you do not need the additional income and would like to benefit a 501(c)3 charity, you may want to consider a qualified charitable distribution. By donating your RMD directly to a charity you can eliminate the tax consequences that would otherwise result from taking the distribution while simultaneously supporting an organization or cause that you value. This provision allows you to do well while doing good.

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The 2008 financial crisis culminated a long and sad story. Perverse financial incentives (largely driven by mortgage guarantees from the Federal government in the name of expanded home ownership), combined with cheap money from the Fed to get the party started early in the last decade. This moral hazard was then levered to stratospheric heights by the major investment banks, as they bundled hundreds of billions in dicey mortgages for sale around the world. Home “ownership” boomed, and newly purchased houses became ATMs. When the entire edifice collapsed of its own weight in late 2008, the resulting economic damage was so widespread, deep and systemic that politicians thought the consequences of letting the market adjust on its own would be too great for the Republic to bear. TARP (the Troubled Asset Relief Program) and at least a dozen other hastily-assembled financial relief programs were implemented in the fall of 2008. Then, in order to backstop all these programs, the Federal Reserve got down to serious money creation—QE1—in late November. By the end of March 2009, $1.425 trillion of newly-created cash had been given to the banks in exchange for mortgage-backed and agency debt securities. This amount represented 13% of the face value of all single-family mortgages outstanding in the U.S. at the time.

It worked. QE1 succeeded in stabilizing the system. Created in 1913 as a bulwark against the exact risks that appeared 95 years later, the Fed acted when serious deflation loomed in the fall of 2008. It flooded the system with liquidity when financial markets were frozen, thereby short-circuiting the cycle of fear and mistrust that threatened to crush the economy. Both the economy and the financial markets stabilized in the spring of 2009, and a brief (but scary) chapter in U.S. financial history was closed.

We have no dispute with the first tranche of Quantitative Easing; our beef is with the effectiveness of the next 2 stages. Beginning in November of 2010, the Fed bought $600 billion of U.S. Treasuries over an 8-month period. This was QE2. After a 14 month interregnum, it instituted QE3 in the fall of 2012, which padded the total by another $1 trillion. To this day, Bernanke continues to buy about $85 billion in bonds each month. Our question: What have we gotten in return for this latest $1.6 trillion in purchases?

We certainly didn’t get robust economic growth. Since QE2 commenced in the fall of 2010, U.S. economic growth has averaged 2.1% per year. This is about half the average rate of all post-WWII recoveries. We didn’t get much wage growth either. Real wages have actually fallen at a 0.3% annual rate since the fourth quarter of 2010, continuing a very weak trend which goes back over a decade.

Unemployment has fallen from low double-digits to just over 7 percent, but much of this gain is due to millions of discouraged job-seekers leaving the labor force.

The economy, employment and wages remain weak because the vast majority of the money the Fed has created since 2008 remains on deposit at commercial banks, waiting to be lent. As of the second quarter of 2013, aggregate loan balances of the 25 largest U.S. banks are 5 percent smaller than the day Lehman Brothers failed. It’s as if Bernanke is gunning the engine, and the rest of the Federal Reserve Open Market Committee can’t find the gear shift. Economists agree that the U.S. economy will not begin to grow at rates anywhere near historic averages until the banks begin to lend these massive reserves.

Instead of better economic growth, we’ve seen a giant stock and bond rally, along with a budding recovery in home prices. This combination of weak growth and rising asset prices has further aided the banks, but also exacerbated wealth disparities and further squeezed an already stressed middle class. As a result, the average (particularly young) person without significant equity in their home or a 6-figure investment portfolio feels like they’re falling further and further behind. Add the burden of rising taxes, education and health care costs, and they are!

Our conclusion: Monetary policy is not the solution for creating long-term investment and risk-taking. The proof is in the numbers laid out above. There are two reasons for this. First, markets know that at some point the money the Fed has created must be withdrawn from the system, and behave accordingly. They’re therefore forever on alert for any sign of reduced accommodation. We saw this in May and June of this year, when interest rates spiked on the mere hint of reduced bond purchases by the Fed. Any sign that the punchbowl might be removed is a signal to sell first and ask questions later.

Secondly, extended rescue operations (we think $3 trillion added to the system over 5 years qualifies as “extended”) have driven rates of return throughout the economy so low that investors are unwilling to take risk for such meager returns. As we’ve seen, low rates are a magic elixir for the banks, helping to keep funding costs low. But low rates are a two-edged sword. The flip side of low returns throughout the economy is that new projects are simply not worth the effort. The banks aren’t lending because there is no urgency to lend when the time value of money (and inversely, the money value of time) has been reduced to zero. A shopping mall or factory opened tomorrow is just as valuable as one opened a year or even 5 years from now given the drastically low level of interest rates and almost dead-flat yield curve. The steadily eroding velocity of money (basically the number of times each dollar turns over in the economy each year) is testament to this troubling trend.

After threatening to reduce Quantitative Easing early last summer, the Federal Reserve Board recently caught the market off guard by refusing to “taper” at their September meeting. (See Jay Sommariva’s piece elsewhere in this issue.) We think they made a mistake. After doing the heavy lifting of prepping financial markets for a change of direction, they lost their nerve at the last minute. Just like the debt ceiling debate, the fight over unlimited money printing will return, perhaps in conjunction with a stronger economy, though we’re skeptical. When that day comes, will the newly-installed Ms. Yellen have the monetary chops to reverse QE-infinity? We’ll see.

The post Quantitative Easing: To Infinity & Beyond! appeared first on Fort Pitt Capital Group.

In order to pass the torch– without getting burned — we recommend that owners consider the following key tenets of successful transitions.

• Give yourself plenty of time. We typically suggest starting the process about two years before you think you will want to sell or transfer the business. Within that time frame, you will be able to determine the proper valuation for the business, assess the company’s strengths and weaknesses, address any risks that need to be remedied (such as potential staffing issues, debt restructuring, recordkeeping, earnings outlook, etc.) and work to position the company as needed to maximize its value. Selling a business is comparable to selling a house — many homeowners will proactively fix any issues to make the home more appealing, seeking to increase its price potential. Allow yourself enough time, and remember to keep your ultimate intentions strictly confidential.
• Work with a trustworthy team. There are a number of professionals you will likely need to work with during this process, including an accountant, a financial advisor and a business transfer specialist. Make sure that team members are experienced, knowledgeable, accessible (you may need to meet regularly) and dedicated to your needs. Given that the selling of the company reflects a lifetime worth of work, make certain you are getting good, trustworthy advice.
• Choose a successor. If you choose to sell or transfer the business to a family member, your ultimate goal will likely differ that of an outright sale. In this case, continuity and a concern for the continued success of the business may be as important, if not more so, than seeking the highest potential value. If the transition involves a multi-year payout, ensuring the ongoing success of the enterprise becomes even more important. However, even if you plan to sell outright and are solely concerned to seek the highest potential sales price, it is important to keep in mind that the buyer must see it is as a fair price. An unreasonable price, even if agreed to by the buyer, can result in litigation. The time and cost of litigation can quickly erode the value of those additional proceeds. It will be especially important to rely on your business transfer specialist to avoid this pitfall.
• Think long-term. After the business has been sold, owners face a different challenge: what to do with the proceeds. Of course, this will depend on what you want to do with your time after the sale. Will you travel, take on a new business venture, develop hobbies, become involved with charities? Do you have anticipated projects or long-deferred endeavors that you would like to pursue?

Once you have some idea of what you want to do, it will be vital to work with an experienced financial advisor who can help you to structure the proceeds from the sale in order to help you realize your retirement goals. To accomplish this, it is essential to develop a carefully designed plan. This plan will look at your entire financial picture – including non-portfolio sources of income, anticipated expenses, any other holdings you may have, short-term needs, long-term goals, and the risks – in order to develop a comprehensive and disciplined investment strategy that can help you to make the most of your assets.

While there are many factors that go into selling a business, if a plan is carefully laid out with a solid time frame in mind, the transition from one owner to the next can be much easier.

Check back to Ramparts, as we will touch on other succession planning tips soon.

The post Preparing a Business for Sale appeared first on Fort Pitt Capital Group.

Eligible Pennsylvania business owners (see the below eligibility requirements from The Pennsylvania Departments of Community and Economic Development) can contribute to an opportunity scholarship organization and apply for a tax credit of up to 75 percent of their tax liability. Business owners who commit to donating the same amount for two consecutive years can apply for a credit of up to 90 percent of their tax liability. The tax credits must be applied to the same year the contribution was made.

Eligibility

Organizations authorized to do business in Pennsylvania who are subject to one or more of the following taxes:

• Corporate Net Income Tax
• Capital Stock Franchise Tax
• Bank and Trust Company Shares Tax
• Title Insurance Companies Shares Tax
• Insurance Premiums Tax
• Mutual Thrift Institution Tax
• Insurance Company Law of 1921
• Personal Income Tax of S corporation shareholders or Partnership partners

It’s important to note that there is a limit to the amount of funding this program allows, so ultimately it’s first come, first serve for business owners who want to take advantage.

Essentially, this is ideal for qualified business owners who feel they want to have more control over where their tax dollars are being put to work.

Check back to Ramparts regularly as we continue to cover issues that matter to business owners.

The post Little Known Tax Credit for Charitably-Inclined Business Owners appeared first on Fort Pitt Capital Group.

For our business owner clients we recommend that they plan for retirement just like their employees. Invest in your own company’s 401(k) plan and it may also make sense to install a profit sharing component to allow contributions over and above the allowable contribution limit. Also, invest substantial assets in a personal portfolio. If you have built a successful business, you are likely generating a considerable income. Too many times we see this “excess” income plowed back into the business. While we understand this may be necessary to fund the business’ growth, we highly recommend that some of this be used to build a personal portfolio. The goal is to build a personal portfolio that could fund your retirement without depending on the eventual sale of the business.

We don’t completely ignore the projected windfall from the business sale in the financial plans we create. However, we don’t want clients to depend on this liquidity event to fund their entire retirement. There are various reasons why:

1. Often times the business you developed and cultivated has a personal price tag that might not be achievable at sale. Business owners tend to over-value their business due to an emotional connection.
2. Today’s economy and marketplace are volatile. A successful business today could be in trouble tomorrow. Simply put, putting all your eggs is one basket is never a good idea.

When the eventual sale does occur, the proceeds can be deposited into the personal portfolio that we have already structured. We have pre-determined the asset allocation and how that money is going to be diversified. We don’t need to reinvent the wheel; we just need to plan to incorporate that money into the already established personal portfolio.

As a business owner it’s easy to pump money into your company and assume that it will provide you a secure retirement upon sale. But, taking a disciplined and prepared approach to planning will ensure that you aren’t gambling with you and your family’s future.

Stay tuned for a follow-up post offering advice to business owners who are planning a family succession.

The post Business Owners Could Be Gambling With Their Retirement appeared first on Fort Pitt Capital Group.

Typically, an inheritance is money that you did not initially factor into your life, so it’s essential that you consider what this money means and how it can impact your life for the better.

At Fort Pitt we recommend that when formulating a financial plan clients think about their short, medium and long-term goals. Managing and creating a plan for an inheritance is no different. Some items that might fill each bucket include:

1. Short-term: First, make sure that you have an emergency fund. If you do not have a cushion it’s necessary to allot some funds here. You have to also consider paying off debt, with the caveat of identifying good debt vs. bad debt. Some might think paying off their mortgage would be wise, but if you have a low interest rate, you should allocate the money elsewhere, particularly any high-interest credit card debt!
2. Medium-term: Depending on your age, this area could include a number of items. If you are close to retirement, amp up savings. Alternatively, if you have children, this could be an opportunity to start a college fund or increase contributions to an already established 529 plan.
3. Long-term – Retirement is often in this bucket. Maximize contributions to employer-sponsored retirement accounts and if you are already maxing out, consider starting a Roth or Traditional IRA as a supplementary vehicle. Lastly, if you have already checked all your financial obligation boxes, look at items like the vacation home you have always wanted to purchase or the European adventure you have fanaticized about.

Managing a sudden windfall is about taking full advantage of the benefit it offers you and your family, but it’s also about balancing. Make sure you have a plan and are making smart decisions, but it’s ok to budget in a family vacation or home item that is needed.

Ultimately, people achieve the greatest success when working through a plan. Creating a roadmap will help you reach your goals successfully, but remember to form a balance and have some fun along the way!

The post Maximize an Inheritance appeared first on Fort Pitt Capital Group.

Ted offered his thoughts to Reeves, explaining that families often underestimate their life insurance needs. He says, “Most people don’t bother to do the math. It’s uncomfortable to dwell on issues like mortality or bad financial decisions.”

To read the full article, click here.

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Plan sponsors can consider the use of a 3(21) investment advisor or a 3(38) investment manager. The primary benefit of hiring at 3(38) over a 3(21) is the 3(38)’s ability to be the investment manager, not just the fiduciary advisor. When only utilizing a 3(21), the plan sponsor is still responsible for the selection of assets. Taking the extra step with a 3(38), a plan sponsor gains an investment manager, who has the power to acquire and dispose of plan assets. The 3(38) has discretion, while the 3(21) can only recommend funds and changes and it’s up to the plan sponsor to make the alterations.

Consider the following items that an investment manager can help a plan sponsor accomplish:

1. Selection of the investment options for the plan.
2. Construct model portfolios, which may be offered to plan participants.
3. Build qualified default investment alternatives (QDIA) in accordance with U.S. Department of Labor (DOL) guidelines, which may be used as default investment selections for participants who fail to make an affirmative investment election.
4. Monitor the investment options and models and make appropriate changes.
5. Provide the plan sponsor with a semi-annual overview regarding the selection of the investment options offered to plan participants and the advisor’s management of the models. This should enable the plan sponsor to fulfill its fiduciary responsibility regarding the sponsor’s engagement of the manager.

Through the LT Trust platform, Fort Pitt is providing a 3(38) investment manager service and creating custom models on the platform that also satisfy QDIA. In this capacity, we evaluate and mitigate a plan sponsor’s risk while enhancing plan participants’ potential retirement outcome and helping achieve financial security. Our services, and those of other 3(38) advisors, are designed to save time, potentially reduce fiduciary liability exposure and address both IRS and DOL compliance requirements.

Ultimately, a 3(38) investment fiduciary will help plan sponsors responsibly meet the needs of their retirement plan participants, while also satisfying DOL regulations.

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