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With stagnant incomes and roller-coaster investment returns over the past decade, individuals on the brink of retirement might wonder what became of all those “rules of thumb” affecting how they handle their nest egg once they walk away from their jobs.

They’re still there. But the question of how well they work comes down to the individual.

Chief among them is the “Four Percent Drawdown Rule” first revealed by CERTIFIED FINANCIAL PLANNER™ professional William Bengen in the October 1994 issue of the Financial Planning Association’s Journal of Financial Planning. Bengen wrote that retirees who took out no more than 4.2 percent of their mostly stock-based portfolio in the initial year and adjusted their remaining portfolio toward a 60/40 split in stocks and bonds each year, that money could last an average of 30 years. That approach made Bengen’s work a gospel in the financial planning industry.

But after this decade, which ended with the worst recession in 70 years, some experts are taking a new look at the 4 percent rule.

1990 Nobel Laureate William Sharpe of the Stanford Graduate School of Business reported last month that this particular rule can be harmful to many simply because of its level of risk tied to stocks and other assumptions including lifespan. He suggests that planners and investors need to do a better job of assessing client risk tolerance and consider more stable investment choices like TIPS (treasury inflation protected securities) among other low-risk options as a foundation for post-retirement draw downs.

In other words, consider client risk tolerance and the content of the portfolio more, a standard percentage of drawdown less. In fact, Sharpe points out that investors actually risk wasting money by adhering to a percentage drawdown that actually could leave more money behind after a few good investment years – in essence, the annual strict drawdown concept could lower a retiree’s standard of life unnecessarily.

So what do you do? You work on the big questions first, not the numbers, and the best time to do this is as far in advance of your retirement date as possible. Here are some conversation starters for key discussions you should have with your financial planner as well as your tax and estate experts:

Set a vision of retirement and revisit it every year before and after you’re retired: If you’ve already been working with a good investment manager or financial planner, you might have already done this. But retirement goals change as most life goals do, so treat the subject organically. Talk about the fun stuff, but state your objectives for a post-retirement work picture if you want to create a new career or simply want healthier finances. Set your lifestyle expectations now and revisit them as necessary.

Track your working-life expenses for 3-6 months and examine how well your current retirement nest egg and other resources could support that spending: This is where your imagined vision of retirement becomes real – or falls apart. A thorough examination of your current spending habits is a great first step in determining how realistic your preparation for retirement has actually been. It will also provide a picture of what else has to be done.

Consider worst-case scenarios: For many retirees, increasing healthcare expenses and the cost of end-of-life-care account for significant spending. As a result, many retirees may pay for expensive experimental treatments to fight disease or long-term home or nursing home care. Current statistics from AARP show that the average home health care aide makes $18 an hour and a private nursing home room costs $78,000 a year. While public aid picks up medical expenses for those who exhaust their assets in most states, most of us desire more than minimal standards of care. Health care reform is not even close to solving this problem, so it’s time to plan.

Build a phased-in retirement: Many companies are becoming more open-minded about keeping older workers on the payroll or actually hiring more workers over age 60. Keep appraised of such opportunities and the skills it will take to take advantage of them – a successful phased-in or post-retirement work plan will require more than sensible financial planning. It may also require training and other personal investments, so keep your ear to the ground and always be ready to consider a fresh perspective on your value in the workplace.

This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Dev Goswami, CFP®, a member of FPA in Jacksonville, who offers securities through The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way, Cincinnati, OH-4524, and Investment Advisory Services through O.N. Investment Management Company. He can be reached at (904)565-2969, email at, or


Don’t miss HIRE Act tax breaks

By Kamlesh H. Patel, CPA

As the end of the year approaches, employers should not forget about the two new tax breaks for hiring “previously unemployed workers.” Under the Hiring Incentives to Restore Employment (HIRE) Act, signed into law back on March 18, 2010, an employer may be entitled to a payroll tax exemption and a special tax credit for new hires. But both provisions are scheduled to expire soon.

Here’s a quick review of these two key tax breaks in the HIRE Act.

Payroll tax exemption. Normally, an employer must pay its share of the FICA tax on the wages paid to employees, including the 6.2 percent Social Security tax on the first $106,800 of wages paid in 2010. But employers are exempt from the 6.2 percent tax on wages paid to newly hired qualified workers. A “qualified employee” is defined as someone who:

Business tax credit. An employer may also claim a tax credit if it retains a new hire for at least 52 consecutive weeks. The credit equals the lesser of $1,000 or 6.2 percent of the employee’s wages paid during the 52-week period. However, if the employee quits or is fired within this time frame, no credit is allowed.


A valuable business tax break expires at the end of December. That’s the special bonus depreciation allowed on the purchase of new business equipment.

Now you shouldn’t run out and buy new equipment just to earn a tax break. But if you’re already planning some purchases for early next year, you might want to consider accelerating the purchase date to capture the bonus.

The bonus depreciation applies to most new equipment you purchase, provided you place it in service before year-end. If your purchase qualifies, you can deduct 50 percent of the cost as a bonus depreciation expense in 2010. The bottom line is that you’ll have an extra deduction against this year’s taxable income. Most new business equipment and certain leasehold improvements qualify for the bonus. In a few limited situations, the bonus period extends until the end of 2011.

Another expanded tax break for business purchases continues through 2011. That’s the provision that allows you to immediately expense the entire cost of some of your equipment purchases. Expensing allows you to write off the full cost against your taxes immediately, instead of deducting it as depreciation over several years. This year, you can potentially expense up to $500,000 of business equipment, subject to certain limitations. Most new or used tangible personal property you buy for your business qualifies.

Note that bonus depreciation applies only to new property, while expensing may be taken on new or used property. Also, the two benefits can be combined; the expensing option can be taken for a purchase, and the bonus depreciation can be used on the remaining basis if the property qualifies.

These tax breaks are two good reasons to do some careful planning. Figure out your business equipment needs for the next year or so.


Under the new health care legislation, the Patient Protection and Affordable Care Act of 2010, a small business may be entitled to a special tax credit to offset rising health care costs. Unlike most other provisions in the new law, the credit is available to qualified employers this year. The IRS recently issued guidance on the methodology for claiming the credit.

Current rules. For tax years beginning in 2010, a small employer is eligible for the credit if it makes contributions to purchase health insurance for its employees. A “small employer” is generally defined as an employer with fewer than 25 full-time employees with annual wages averaging less than $50,000. The employer must cover at least half of the cost of health care coverage for workers based on its single rate.

The credit is equal to 35 percent of the employer’s contributions (25 percent for tax-exempt organizations) in any tax year beginning in 2010, 2011, 2012 or 2013. But the full credit may be claimed only if the employer has ten or fewer full-time employees with average annual wages of no more than $25,000. Otherwise, the credit amount is gradually phased out.

According to the new IRS guidance, the maximum health insurance credit is reduced by 6.667 percent for each full-time employee over 10 employees. The credit is also reduced by 4 percent for each $1,000 that average annual wages paid to full-time employees exceeds $25,000.

In the future. For tax years beginning after 2013, the credit will be available for just a two-year period and only if the health insurance is purchased through a state-operated exchange. However, the credit percentage is increased to 50 percent of a qualified employer’s contributions (35 percent for tax-exempt organizations).

Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail or

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