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Estate Planning

Retirement-income Planning

By Greg Sheehan

Most working Americans have only one source of steady income before they retire: Their jobs. But when you retire, your income will likely come from a number of sources, such as retirement accounts, Social Security benefits, pensions, and part-time work.

When deciding how to manage your various assets to ensure a steady retirement-income stream, there are two main strategies to consider: the total-return approach and the investment pool — or bucket — approach.

The Total-return Approach

With the total-return approach, you invest your assets in a diversified portfolio of investments with varying potential for growth, stability, and liquidity. The percentage you allot to each type of investment depends on your asset allocation plan, time horizon, risk tolerance, need for income, and other goals you may have.

The objective of your investment portfolio generally changes over time, depending on how close you are to retirement.

• Accumulation phase: During this phase, your portfolio’s objective is to increase in value as much as possible, focusing on investments with growth potential.

• Approaching retirement-age phase: As you near retirement, your portfolio becomes more conservative, moving toward more stable and liquid assets in order to help preserve your earnings.

• Retirement phase: Once you retire, the idea is to withdraw from your portfolio at an even rate that allows you to enjoy a sustainable lifestyle.

A widely quoted withdrawal rate for the first year of retirement has usually been 4%. Ideally, that 4% should be equal to the amount left over after you subtract your yearly retirement income (e.g., pensions, Social Security) from your total cost of living, including investment-management fees. Each year, you will most likely increase your withdrawal percentage to keep up with inflation. Keep in mind, however, that the appropriate withdrawal rate for you will depend on your personal situation as well as the current economic environment.

The Bucket Approach

The bucket approach also begins with a diversified portfolio, following the total-return approach throughout most of the accumulation period. Then, as retirement approaches, you divide your assets into several smaller portfolios (or buckets), each with different time horizons, to target specific needs.

There is no ‘right’ number of buckets, but three is fairly common.

• The first bucket would cover the three years leading up to retirement and the two years following retirement, providing income for near-term spending. It would likely include investments that historically have been relatively stable, such as short-term bonds, CDs, money-market funds, and cash.

• The second bucket would be used in years three through nine of retirement. Designed to preserve some capital while generating retirement income, it would include more assets with growth potential, such as certain mutual funds and dividend-paying stocks.

• The third bucket, designated to provide income in year 10 and beyond, would contain investments that have the most potential for growth, such as equities, commodities, real estate, and alternatives. Although the risk profile of this bucket is typically higher than the other two, its longer time horizon can help provide a buffer for short-term volatility.

As you enter the distribution phase, you draw from these buckets sequentially, using a withdrawal rate based on your specific lifestyle goals in a particular year.

The Big Picture

Many people are familiar with the total-return approach, but the bucket approach has been gaining popularity, thanks in large part to its simplicity. It also accounts for different time periods during retirement, potentially allowing you to allocate money more effectively based on your personal situation.

Perhaps the greatest benefit of the bucket approach is that it can help provide a buffer during times of market volatility. If the value of the investments in buckets two and three fluctuates due to market conditions, your immediate cash income is coming from bucket one, which is likely to be less volatile. This may also alleviate the need to sell investments that have lost money in order to generate retirement income.

While the bucket approach has its advantages, some investors feel more comfortable using the total-return approach. The best strategy for your retirement is unique to you and your personal preferences and needs. However you choose to pursue your retirement dreams, it’s important to work with a financial professional who can help you create the most appropriate strategy based on your goals and situation.

Note that diversification does not assure against market loss, and there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. 

Greg Sheehan is an accredited investment fiduciary and partner at the Wealth Transition Collective, a Northampton-based financial-advisory and planning firm. The firm offer securities and advisory services as a registered representative and investment adviser representative of Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser; (413) 584-1805; [email protected]

Accounting and Tax Planning

Items That Add Up

By Kathryn A. Sisson, CPA, MST

There are many changes that businesses and individuals should be aware of under The Tax Cuts and Jobs Act (TCJA), the most significant tax legislation in the U.S. in more than 30 years. Here are the 10 changes that will have the most significant impact this tax season.

Individuals

1. Tax Rates. The 2018 tax brackets have changed, resulting in lower tax rates for most individuals. For example, the 15% tax bracket has been reduced to 12% and the 25% bracket to 22%.

2. Income-tax Withholding. As a result of the lower taxes rates, income-tax withholding during 2018 also decreased for most individuals. This could result in underpayment of taxes for 2018, depending on your tax situation. Taxpayers should carefully review their withholding going into 2019 and discuss it with their tax professional.

3. Itemized Deductions. TCJA made several changes to itemized deductions as noted below.

Medical Expenses: TCJA lowered the threshold for the medical-expense deduction to 7.5% of AGI for 2017 and 2018. The threshold for 2019 is 10% for most taxpayers.

State and Local Taxes: TCJA limits the deduction for state and local taxes to $10,000 per year. This includes payments for state income tax, property tax, and excise tax. The same $10,000 limit applies regardless of whether you are a single taxpayer or if you are married and file a joint return. The deduction for taxpayers who are married and filing separate returns is limited to $5,000.

Kathryn A. Sisson

Kathryn A. Sisson

Mortgage Interest: Interest is generally deductible on original home acquisition debt up to $750,000. Home-equity interest is deductible only if the funds were used to improve the mortgaged property.

Charitable Donations: Donations are generally deductible up to 60% of AGI, up from 50%, for most donations. You could also consider giving directly from your IRA if you are over age 70 1/2 or gifting appreciated stock directly to a charity. Discuss with your tax professional in order to maximize your benefit.

Miscellaneous Itemized Deductions: TCJA has eliminated miscellaneous itemized deductions. These include deductions for unreimbursed employee business expenses, tax-preparation fees, and investment-advisory fees.

4. Increased Standard Deduction. One of the most significant provisions of TCJA is the near-doubling of the standard deduction for all taxpayers. For 2018, the standard deduction amounts are $24,000 for joint filers, $18,000 for head of household, and $12,000 for all other filers. The limitations on itemized deductions as noted above and the increased standard deduction amounts may make it less advantageous to itemize deductions.

5. Personal Exemptions. TCJA eliminated personal exemptions for 2018. For 2017, taxpayers received a personal exemption deduction of $4,050 per person. Therefore, a family of four received a deduction of $16,200 in 2017 that is no longer available under the new tax act.

Businesses

6. Tax Rates. A flat tax rate of 21% replaces the graduated tax rate brackets for C corporations that ranged from 15% to 39% in prior years.

7. Qualified Business Income (QBI) Deduction. A deduction of up to 20% of business income may be available to owners of pass-through entities. There are limitations based on several factors, including income of the taxpayer as well as the type of trade or business. The purpose of the deduction is to provide some parity between the new flat 21% corporate rate and the tax rates paid by owners of pass-through entities on their individual income-tax returns.

8. Depreciation. TCJA made significant changes to encourage businesses to expand and invest in new property; 100% bonus depreciation is now available for federal purposes, and the limitation on expensing certain assets has been increased to $1 million, with a $2.5 million investment limitation.

9. Business Credits. TCJA created a Family Leave Credit for employers making family-leave payments to employees. The credit is available only to employers who have a written policy in place for the payment and credit.

10. Deductions. Previously, the deduction for meals and entertainment was limited to 50% of expenses incurred. For 2018, 50% of meals are still deductible; however, entertainment expenses are no longer deductible.

Many of these changes are significant and warrant your full attention. As you approach tax season this year, seek the assistance of tax professionals, and do not follow your neighbor’s tax advice.

Kathryn A. Sisson, CPA, MST is a tax manager in the Commercial Services Department of Melanson Heath in Greenfield. She has 20 years of experience in public accounting and has been with Melanson Heath for 10 years. She has extensive experience in corporate and individual income-tax planning and review as well as financial-statement compilations and reviews. Her corporate experience includes working with businesses doing business in multiple states. She is also a QuickBooks ProAdvisor assisting many clients with general ledger systems and software training.

Accounting and Tax Planning

2018 Tax Planning (in 2019)

By Brendan Healy, CPA

Brendan Healy

Even though we’re into 2019, there are still tax-saving opportunities available for the 2018 tax year.

This article summarizes a number of options that businesses and taxpayers should consider to help minimize their tax burden when they file their 2018 tax returns. As with any tax-savings strategy, you should discuss these post-2018 year-end planning techniques with your tax advisor before implementing them.

Retirement-plan Contributions

Although some retirement plans needed to have been in place before Dec. 31 to be used for the 2018 year, there are plans that could be set up in 2019, funded, and then used as deductions for the 2018 tax return.

A simplified employee pension (or SEP) IRA, for example, can be set up after year-end and funded up to the due date (including extensions) of the taxpayer’s business.

New Opportunity-zone Funds

The new tax law created a significant tax incentive to encourage capital investment in certain locations that need development. If you sell an asset with a large capital gain, you may be able to defer that gain if you essentially reinvest that gain into an “opportunity-zone fund” within six months of that sale. If done properly, you wouldn’t recognize the tax gain until the latter of when your new investment is sold or Dec. 31, 2026. You can also get up to 15% of the deferred gain forgiven entirely for holding the investment for specified time period. And if you held the investment for an additional 10 years, you’d pay no tax on subsequent capital gains.

Capital-expenditure Tax Writeoff

The new tax law allows businesses to write off (or expense) larger amounts of fixed-asset purchases. The new law not only applies to personal property (machinery, equipment, computers, office furniture, etc.) but also increases the ability to write off certain real-estate improvements. It also increases the amount of tax deduction available for business-owned automobiles. These capital-expense writeoff elections are made at the time you file the tax return.

State Tax Planning

If you ship product to different states or if you sell over the internet across the country, there may be state tax-planning strategies available for your business. Certain businesses can take advantage of apportioning their revenue across several states. And if they do not have to file tax returns in those states, that apportioned revenue may never be subject to state income tax.

There have been significant changes this past year in the way states are allowed to (or not allowed to) tax out-of-state shipments entering their state. You should review your state income tax plan as well as your state sales tax reporting process in light of these new and significant changes.

Tax Credits

The tax law provides certain incentives to businesses by offering tax credits. The research and experimentation tax credit, for example, allows a business to convert a dollar of deduction into a dollar of tax credit. Since tax credits reduce taxes on a dollar-for-dollar basis, a tax credit is more valuable to the business than a tax deduction. So if the business is allowed to convert an expenditure into a credit, the tax savings could be substantial.

Many businesses (such as manufacturers or software companies) are not taking advantage of this tax credit that may be available to them.

Estate Planning and Gifts During Lifetime

The new tax law significantly increases the ability for families to transfer wealth upon death as well as allowing gifts during lifetime on a tax-free basis. Although estate and gift planning can get very complicated, the limits available today (which will expire in about seven years) are substantially higher than they have been in the past and allow for great flexibility in wealth-transfer planning.

Bottom Line

Just because 2018 is over does not mean we should stop thinking about tax-planning strategies for 2018 tax returns that will be filed over the next several months.

There are many tax incentives written into the tax law to encourage business and individual taxpayers to reinvest. It is up to you to make sure you are taking advantage of every one available to you and your business.

Brenden Healy, CPA, a partner at Whittlesey, is an expert in state and federal tax matters who consults with businesses and individuals and focuses his practice on closely held businesses in the real-estate, manufacturing and distribution, and retail industries.

Holiday Party Planner

’Tis the Season

The Bellagio ballroom at MGM Springfield

The Bellagio ballroom at MGM Springfield is among the region’s newest option for parties and banquets.

Buoyed by a strong economy, these are good days for area venues that host year-end company parties — and any other type of event, really. But with so many options, it’s a competitive environment — one that has become even more so with the emergence of MGM Springfield on the scene. Yet, new players might also be boosting interest in party bookings in general, raising the fortunes of everyone who promises to bring fun and flexibility to the season’s many gatherings.

In the eight years since she opened her event-planning business, Tanya Costigan has seen plenty of changes in corporate party planning. In fact, launching her enterprise, Tanya Costigan Events, at the tail end of the Great Recession was a challenge in itself.

“There was definitely a downshift in the year-end parties, but I do feel like they are picking up a bit,” she told BusinessWest. “I think part of it has to do with some of the new venues that are here, like GreatHorse and MGM; these heavy hitters are playing a role in getting people excited. A friend of mine was looking elsewhere, and is now thinking about a client-appreciation event at MGM next month. So I think it’s triggering some excitement in the industry in general.”

Anthony Caratozzolo is certainly excited. As vice president of food and beverage at MGM Springfield, he’s been pleased with early bookings in the casino resort’s banquet space, which encompasses the Aria and Bellagio ballrooms and can host groups from 15 to 540 people.

“Each of the ballrooms comes fully themed out with holiday décor, and we have different menus to accommodate different groups,” he said. “If they want a more reception-style event, we can accommodate that. If they want a lunch or sit-down dinner, we can do a custom menu for that. We’re very versatile. All of our ballrooms can be broken into smaller rooms to accommodate smaller parties at the same time. Most places can’t accommodate different groups as well as we can.”

As an integrated resort, MGM arrived on the scene with the aim of raising the bar for entertainment and events of all kinds, including holiday parties, because attendees can move right from a party to the casino floor, the Commonwealth Bar and Lounge, a movie, bowling, ice skating, or shopping — not to mention staying overnight at the hotel.

Tanya Costigan

Tanya Costigan said she enjoys helping clients hone their vision for a broad range of parties and other events.

“Clients can also book extracurricular activities,” he said. “If they want a suite at Topgolf or want to go bowling, they can book all that with the catering manager. They just have to figure out what they want to do with their night.”

Like other event organizers who have spoken with BusinessWest leading up to the holiday season in previous years, Caratozzolo has seen a healthy mix of party requests.

“Every group is different. Some of the companies have been around a long time and tend to enjoy a formal, sit-down dinner, while the younger generations may enjoy a reception style — and both of these are built into our catering package,” he said. “We’ve had a lot of inquiries, and we’ve had some bookings.”

At a time when businesses seem to be investing in holiday parties, MGM offers another high-profile option that, at the very least, has people talking about how they want to celebrate the season and thank their employees.

Planning for Fun

Costigan told BusinessWest that sometimes a venue brings her in to plan an event, while other times the client hires her, and she might help choose the location. Describing her job as “planning, design, and management,” she has a role to play from the initial idea through the big day, helping everything run smoothly.

“I do everything from birthday parties and weddings to holiday parties,” she noted, with recent events including Square One’s annual tea party at the Starting Gate at GreatHorse, and the Link to Libraries gala at the Log Cabin.

“I might be doing the design, the planning … there’s a wide scope of things I do,” she said, noting, as Caratozzolo did, that clients are calling for a range of styles when it comes to social gatherings.

“It does vary, but I find that a lot of the people are going for the stand-up, cocktail-hour feel, with passed apps and drinks. Sometimes they do a fun, themed signature drink. And sometimes the holiday parties are not necessarily Christmas-related — I had someone do a year-end party that had the feel of a street carnival, but it was inside the venue. It’s not always winter-themed.”

Anthony Caratozzolo

Anthony Caratozzolo says many venerable companies still prefer formal sit-down dinners, while younger clients tend to opt for reception-style events.

Reasons for holiday parties vary as well, Costigan added. “I find a lot of them are for client appreciation, but, for example, I did the Keller Williams holiday party, and it was all of their different branches coming together and having a fun party. So I think sometimes it’s a bonding thing for the employees.”

Bistro 63 in Amherst has become a popular event site for area colleges and businesses, Event Manager Alyssa Blumenthal said. Business tends to pick up starting in October, not only with the approaching holidays, but because it tends to be a hot season for convention business — and those events tend to spur further bookings. “The end of October is the busiest time of year to receive holiday party bookings. We also get a lot of reunions this time of the year — high school and college.”

Because it easily transforms from a banquet space to a nightclub — often during the same event — many business owners in the area recognize it as a place where they can complement their party with an evening of dancing as well.

“That’s been fantastic; we’ve really been working on training the staff to cross-sell services,” Blumenthal said.

Bistro 63 is also known for its elaborate — and creative — cocktail program. In addition to a rotating list of custom cocktails, the venue creates unique concoctions for specific events. For example, attendees of the International Conference on Soils, Sediments, Water and Energy at UMass Amherst, which books an event at Bistro 63 each year, recently enjoyed a ‘sediment sour,’ which was made to look like dirt garnished with rosemary.

“The soil convention group is all middle-aged men, 40s and 50s, who come up to the bar with a smirk on their face, asking, ‘what smart-aleck cocktail do you have for us this year?’ And I’ll get them to try these ridiculously frilly drinks,” Blumenthal said. “We try to have fun with our events because so many people do associate us with the nightclub.”

Caratozzolo agreed that fun should be at the heart of any party.

“MGM is all about entertainment — that’s what we do, whether it’s an elaborate party or just a small get-together,” he said. “That’s what we’re good at, what we love to do; we work with clients to find out what they want. At the end of the day, they’re our guests, and every group is different.

“We’ve had large conventions, we’ve had expositions, we just booked our first wedding about two weeks ago, and we have small association groups — maybe bridge clubs or chamber events,” he went on. “We have all the capabilities to really do anything, because we’re MGM. We can open a lot of doors.”

Reasons to Party

Likewise, Bistro 63 hosts parties of all types — holiday events, corporate dinners, cocktail parties, rehearsal dinners, reunions, and more — ranging from small gatherings to large events up to 240 people. A large room can be divided into smaller spaces, including a covered deck outside.

“Last year we had the highest number of rehearsal dinners booked, and we’re super excited to continue that trend,” Blumenthal said. Also on the rise are companies hosting recruitment and networking events for students at the Five Colleges.

“We’ve hosted Google, PwC, Newell Brands, and some other regional corporations, as well as a handful school-sponsored events this year,” she added. “More than half our staff are students — UMass, mostly — and we love hosting these events because it speaks to the strength of the academic programs in the area, and it has directly resulted in increased business for our establishment.”

But holiday parties, too, have been on the rise, with bookings increasing each year as the economy continues to chug along, she told BusinessWest.

“Many companies had annual gatherings and stopped doing it for budgetary reasons, and have since put it back in the budget,” she noted, adding that Bistro 63 markets its flexibility and quick turnaround times to plan events — and that has become a key element in its growth.

Alyssa Blumenthal says being flexible and nimble with turnaround times

Alyssa Blumenthal says being flexible and nimble with turnaround times can lead to bookings that later become repeat customers.

“Those short-notice events have lots of times turned into annual events for us. Clients say, ‘maybe we do have the budget for a small dinner for our core team,’ then it goes really well, we provide service better than they expected, and they come back year after year.”

Costigan enjoys those success stories, too, like the recent Square One tea, which boasted a vintage golf theme.

“I love the design part. The planning and management are great, but the design is my favorite part,” she said, recalling the reaction of Kristine Allard, Square One’s chief development and communication officer, to Costigan’s initial designs for the event.

“When she saw my design board for what vintage golf means to me, she said, ‘oh my God, you climbed right into my head.’ It was amazing. I love that part — as well as installing the whole design, when they’re like, ‘this is great.’”

It’s a reaction any event planner or venue hopes for, when it comes to holiday parties or any other event — because it’s those reactions that keep businesses coming back, year after memorable year.

Joseph Bednar can be reached at [email protected]