Retirement Viewpoints

Transcription

1 Wealth Management 3500 Winchester Rd Suite 100 Allentown, PA Retirement Viewpoints No, I m Not Retiring!! August 2014 I N S I D E T H I S I S S U E 1 No, I m Not Retiring!! 2 Dividends Matter 3 The Return of Capital Gains Taxes 3 Walking 4 For More Information In the last few weeks a number of clients have asked me if I m retiring. The simple answer is NO! While I recently reached a milestone age (65) and my hair is white/grey, reports of my retirement, to paraphrase Mark Twain, are greatly exaggerated. Simply put, I love my work. Every day I get to talk with the best people I know, my clients, and help them achieve their goals and dreams. I m also continuing to learn new things every day and helping younger advisors begin their careers as well. Just to put retirement ages in perspective, consider the following list of people who are still working and their ages: Supreme Court Justices: Antonin Scalia 78 Anthony Kennedy 78 Stephen Breyer 75 Ruth Bader Ginsburg 81 Every day I get to talk with the best people I know, my clients Politics: Jerry Brown (CA governor) 76 Orrin Hatch (US Senator) 80 Diane Feinstein (US Senator) 81 John McCain (US Senator) 77 Entertainment: Clint Eastwood 84 Betty White 92 William Shatner 81 Cloris Leachman 86 Business: Warren Buffett (Berkshire Hathaway) 83 Charles Munger (Berkshire Hathaway) 90 Compared to them, I m just a youngster!!

2 Page 2 Retirement Viewpoints Dividends Matter Stock dividends don t rise and fall with the whims of the marketplace and the activities of traders.. Last September, S&P Dow Jones Indices published an article by Aye M. Soe, Director of Index Research & Design, Dividend Investing and A Look Inside the S&P 500 Dow Jones Dividend Indices. There were several major points made in the article. Key among them is, Dividend yield is an important component of total return. This is particularly true in light of the financial crisis in 2008, continuing volatility in the equity markets and the current low interest rates. According to Soe, dividends make up about a third of total return form equity investing. From December 1926 to December 2012, dividend income constituted 34% of the monthly total return of the S&P 500. He went on to say that many academic studies show that dividend payers tend to outperform non dividend payers across market cycles. Soe further reports that while stock prices are volatile in both directions (up and down) dividends are by definition positive. Stock dividends don t rise and fall with the whims of the marketplace and the activities of traders and speculators. As such they show very little fluctuation. The report highlights three types of dividend index benchmarks from S&P. these are the Dividend Aristocrats which are designed measure the performance of companies around the world that have consistently raise dividends for long periods of time; the Dow Jones Select dividend Indices, which represent a country s highest yielding securities; and the S&P Global Dividend Opportunities Indices which seek to measure high yield common stocks from around the world but also meet diversification requirements as well as meeting profitability and tradability criteria. As an example of the indices they supervise, the S&P 500 High Yield Dividend Aristocrats is made of companies selected from the S&P 1500 that have consistently raise their dividends every year for at least 20 years. The index is weighted by the annual dividend yield (higher dividend companies carry more weight than lower yield companies. Another index that I find interesting is the S&P 500 Dividend Aristocrats, which is made up of companies that have ( among other criteria) raised their dividend every year for at least 25 years, are included in the S&P 500, and have a market capitalization (float adjusted of at least $3 billion. An investment cannot be made directly in a market index. However, an index can be used as a benchmark to measure how a portfolio performs. Also, a well selected index can be a starting point for constructing a portfolio that has particular characteristics.

3 Retirement Viewpoints Page 3 The Return of Capital Gains Taxes tax management refers to the actions that can be taken to offset, prevent or delay realized gains that occur through the normal course of trading an investment portfolio. Capital gains taxes never really went away, but in the last few years many investors found themselves no paying substantial long term gains taxes for a couple of reasons. First, unfortunately, the major declines in the equity markets in the early 2000s and then in the financial crisis of 2008 left investors with little if any gains, and more likely, losses. Additionally, those long term gains that were subject to tax were taxed at rated of 15% or less. Now, with the equity markets climbing to new highs, and with recent changes in tax law, investors now face the possibility of paying substantial long term gains again. To review, the profits on capital assets such as stocks and bonds are subject to long term gains taxes if held for more than a year. Profitable assets that are sold in less than a year are subject to short term gains taxes which are at the same level as ordinary income taxes. Also, recent changes in the tax law may subject higher income investors to long term tax rates of as much as 20% plus in some cases, an additional 3.8% Medicare surtax. With rates this high, it pays to manage your tax burden. One simple way to avoid paying taxes is to continue to hold as asset as long as it continues to meet your investment objectives. Another tool is to try to hold assets until their gains are taxed at long term rates and not the higher short term rates. Also, you can consider offsetting gains by realizing investment losses. The taxes you pay are only on the net gains you realize in a tax year. Among the services we offer at Morgan Stanley is a tax management overlay on certain managed accounts. As described in our recent white paper, tax management refers to the actions that can be taken to offset, prevent or delay realized gains that occur through the normal course of trading an investment portfolio. For more information on how this works, please call me for a copy of our new white paper, Capital Gains, Taxes and Your Managed Account: They re Back! Walking (an excerpt) by Henry David Thoreau My vicinity affords many good walks: and though for so many years I have walked almost every day, and sometimes for several days together, I have not yet exhausted them. An absolutely new prospect is a great happiness, and I can still get this any afternoon. Two or three hours walking will carry me to as strange a country as I expect to see. A single farmhouse which I had not seen before is sometimes as good as the dominions of the King of Dahomey. There is in fact a sort of harmony discoverable between the capabilities of the landscape within a ten miles radius, or the limits of an afternoon walk, and the threescore and ten of human life I can easily walk ten, fifteen, twenty, any number of miles, commencing at my own door, and without going by any house, without crossing a road except where the fax and the mink do: first along by the river, and then by the brook, and then the meadow and the woodside.

4 Page 4 Retirement Viewpoints For More Information: If you would like more information on some of the topics discussed in this issue, just request any of the the following white papers or brochures, which are available at no cost or obligation: Capital Gains, Taxes and Your Managed Account: They re Back Asset Repositioning Strategies: Planning for Future Generations Retirement Standard: Social Security Benefits Retirement Standard: Health Care Cost Evaluation IRA Beneficiary Reviews: Saving You Life Savings My Investment Philosophy Please feel free to pass along this newsletter to friends and family. If they would like to subscribe, please have them contact me. Philip Segal, CLU, ChFC, RICP Second Vice President Senior Portfolio Manager Financial Advisor Morgan Stanley 3500 Winchester Rd. Allentown, PA phil.segal@morganstanley.com Morgan Stanley Smith Barney LLC ( Morgan Stanley ), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. This material was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters. Various factors, including an economic downturn, may cause a company to reduce or eliminate its dividend. S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index.

5 Retirement Viewpoints Page 5 The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment. The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. Index information is provided for informational purposes only. An investment cannot be made directly in a market index. This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances and objectives. Diversification does not guarantee a profit or protect against a loss. Morgan Stanley Smith Barney LLC, Member SIPC