The Ideal Age to Start Social Security

 I recently had an opportunity to travel to Chicago to meet with a group of retired airline pilots.  We had a great conversation on areas such as estate planning, investment planning and income tax planning given changes that occurred in January 2013.  However, it was Social Security that garnered the most interest and questions for this group of retirees between the ages of 60 and 70.  Specifically, the question at hand was, “When is the ideal time to start receiving social security retirement benefits?” 

If you think that the IRS Code is complex, then Social Security claiming rules are a close second.  Unfortunately there is a lot of confusion and misinformation.  Moreover, the stakes are quite high.  Perhaps at age 40 social security benefits are a distant thought, but for those aged 60+ the issue is quite ripe. 

Deciding When to Claim

As with most financial planning decisions, general rules get you only so far.  The key is to structure your decision, when to claim in this case, based on your individual goals and circumstances. The reason that most Americans choose to start social security retirement benefits as early as possible is because frankly they need the money now.  However, for those with flexibility in timing, there are strategies that can be employed to maximize benefits, especially for married couples. 

Social Security Simple Math

All kidding aside, if you know the day you will die then the decision is straightforward and is a “simple” math equation.  Barring certainty on that “day” however, certain assumptions must be made.  You see, social security benefits are designed to be actuarially fair or equal. Meaning, if you collect a reduced benefit starting early at age 62 you will have smaller payments lasting for a longer period of time, but if you elect to postpone receiving benefits you will collect a larger amount for a shorter period of time. If you live to normal life expectancy the math is the same.

There are a variety of software programs designed to assist in making the most-educated decision about the optimal time to claim social security retirement benefits.  Please feel free to contact us if you would like assistance in making this important decision.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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The information contained in this report does not purport to be a complete description of the subjects referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making a decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

House Hunting How-To: Deciding on the Best Down Payment

 You have decided to purchase a new home. Now questions start racing through your mind. How much do we put down?  What is our interest rate going to be?  Do we get a fixed loan or a variable loan? Do we finance it over 15 years or 30 years? In today’s historically low interest rate environment the answer to some of these questions may surprise you.

Let’s take a scenario between John Doe and John’s identical twin brother Jack Doe.  John and Jack have the same exact job, the same income, and the same assets.  Everything about them is the same except for how they approach money decisions.  John is a firm believer in staying out of debt. He doesn’t believe in financing anything. He pays cash for cars, houses, vacations etc…  Jack on the other hand believes that responsible use of debt could be a good way to get ahead in life.  He firmly believes that you shouldn’t put more then 20% down on a house, you should finance a car, especially when interest rates are less then 3%, he’ll even put a vacation on a credit card to earn the mileage points, making sure he pays it off within a month or two. 

John and Jack are looking to purchase an identical home in the same neighborhood; same square footage, same interior design, same lawn animals, same everything.  The purchase price of the house is $250,000. They both have identical investment portfolios valued at $250,000. John has the option to finance it with a 30-year fixed loan at 3.5%.  But instead John takes a look at his finances and decides he will take the money out of his investment portfolio and buy the house outright.  John now has no money left in his investment portfolio, but at least this will save him that pesky $1,200 mortgage payment over the next 30 years. He doesn’t like the fact that his investment portfolio now has a 0 balance, but he intends to rebuild his drained investment account by adding $1,200 each month. 

Jack, on the other hand, decides he is only going to put down 20% on the house and keep the rest of his money invested. He needs to come up with 20% of $250,000, or $50,000. After the down payment, Jack will have $200,000 remaining in his investment account.  He won’t be able to add any funds to his investment account because he needs that money to pay the mortgage.

Let’s break down the impact of their decisions after 10 years factoring at a 6% interest rate compounded annually for their investments. Let’s also assume the value of their homes has also appreciated in value at 6%:

Jack has less equity in his house because he put 20% down so, after 10 years, he still owes the bank $150,000 on the original $200,000 mortgage note. From the totals, it might appear that Jack made a slightly better money decision, but life is not quite that simple.  We can’t possibly account for all the “what if’s” that life might throw at the two brothers over that 10 year period. 

Here are some things to consider: 

• What if John had a sudden emergency such as an unexpected job loss over that 10-year period?  He has no liquidity to tap into to help him pay the bills because he spent it all on the house. 
• How much mortgage interest can John deduct off his income tax bill annually?  None because he doesn’t have a mortgage! 
• What if house prices in the neighborhood depreciate in value instead of appreciate?  Jack could potentially hand the keys back to the bank whereas John could be stuck with a rapidly depreciating asset.
• What if John isn’t as disciplined as he thought he was and starts spending the $1,200 a month instead of saving it?  Jack might not be as prone to this problem because there is a big consequence to him not paying the bank $1,200 a month which is that he loses the house.   

As you can see, having a mortgage might not be the worst thing in the world. Even though it bucks the traditional value of having a home paid off as quickly as possible, there can even be some advantages to using debt responsibly. Make sure you talk to your financial planner when deciding if you’ll follow Jack or John’s example.

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The example contained herein is hypothetical and for illustration purposes only.  It is not intended to reflect the actual performance of any particular investment.  Actual investor results will vary.  Investing involves risk and investors may incur a profit or a loss.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any financial or mortgage matters with the appropriate professional.

Designating beneficiaries: Don’t Let Your IRA Get Derailed

 Imagine you’ve lined up your will, your trust, all the necessary estate planning documents, thinking you’ve covered your bases. But here’s one you may have forgotten: naming beneficiaries for your IRA. A friend recently found out the hard way that this easily overlooked detail causes huge headaches. You see, her mother wasn’t sure who to name when the account was opened and decided to think about it.  Time went on and her mother passed away before this detail was corrected, sending the IRA to probate. The two intended beneficiaries will eventually get the money, but they will be forced to take the distributions much faster than they want (and absorb the tax implications), rather than stretching the payments over a longer period of time.

Here are some potential problems when a beneficiary is not named on an IRA:

• There is no backtracking by trustees or personal representatives to “fix” the omission
• The account will be distributed according to your will; through the probate process which can be lengthy depending on the complexity of the estate
• The account becomes subject to the creditors of your estate
• The opportunity for tax deferral by spreading out distributions over a longer period of time may be lost.

It seems easy enough to name a beneficiary, but the reality is that this important designation is often overlooked. To prevent unforeseen mishaps, have your IRA beneficiary form reviewed by your financial planner annually to make sure it reflects your wishes and fits with your overall financial planning objectives. 

Laurie Renchik, CFP®, MBA is a Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing information is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal issues with the appropriate professional.

Demystifying the Gift Tax

 Recently we have been receiving quite a few inquiries from parents looking to gift money to their children.  People may give for various reasons, but one of the most common reasons we have heard lately is for a down payment on a first home.  There seems to be a lot of confusion about how much can be gifted annually without being subject to the “gift tax”.

For 2013, the Annual Gift Exclusion Amount is $14,000

What this means is you can gift $14,000 in 2013 to your son, daughter, niece, nephew, neighbor, or a random guy on the street. You can give EACH of them $14,000.  The $14,000 gift does not have to go to a member of your immediate family (they don’t even have to be related to you at all for that matter).  If you are married, then you and your spouse can each give $14,000 to anyone you chose without being subject to gift tax.  Just to be clear, that means if you are married you can gift $28,000 to anyone you want in 2013 and pay nothing in gift tax on that gifted money.  Also, it doesn’t have to be cash. You can also gift stocks, bonds, property, artwork, etc.

Now is where things get a little trickier...

Let’s say that you want to give your son $50,000 for whatever reason.  So you and your spouse each gift $14,000 for a total of $28,000.  That leaves $22,000 remaining that you need to transfer to your son.  How can you get him that money without being subject to gift tax? Simply gift him the additional $22,000 and file IRS form 709 and potentially pay no tax on the additional gift!  Notice I did say “potentially” no gift tax.  For those of you that intend to give more then $5.25 million there could be some gift tax liability. However, for those of you reading this who never intend to give away that much, you shouldn’t be subject to any gift tax on the additional $22,000. 

A little history on why this works: Prior to 1976 wealthier people that were looking to avoid paying estate taxes at their death found a way to circumvent the estate tax by simply gifting assets to their heirs while they were still alive. In 1976 congress “unified” the estate and gift tax law so that any gifts you made during your lifetime over the annual exclusion amount ($14,000 in 2013) would count towards your lifetime exclusion amount. In 2013 the lifetime exclusion amount is $5.25 million per person.  So a married couple could gift $10.5 million over their lifetime without paying gift tax. 

So, John and Jane Doe could gift $50,000 to their son outright and not pay any gift tax on the entire amount. The first $28,000 would fall under the annual exclusion amount and the remaining $22,000 would be applied to their lifetime exclusion amount of $10.5 million. Based on the current laws of 2013 John and Jane would have $10,478,000 left of their lifetime exclusion.

Consult with a qualified tax professional and your financial advisor for help navigating the gift tax.

For additional information please refer to IRS publication 950. The link is included below: http://www.irs.gov/uac/Publication-950,-Introduction-to-Estate-and-Gift-Taxes-1

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The information contained in this report does not purport to be a complete description of the subjects referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  The example provided is hypothetical and for illustration purposes only.  Actual investor results may vary.  Please not, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.

College Savings 101: The 529 Plan

 It doesn’t quite seem possible, but yet another summer is quickly coming to an end and before you blink, the leaves will have changed and Christmas products will be on the shelves.  Very soon, school will be back in session and those who are of college age will begin the seemingly daunting task of getting their ducks in a row before another semester begins.  Deep sigh……

One of the top priorities on that list for parents should be to consider using a 529 account for college savings.   529 plans are tax-deferred accounts (like an IRA) that are an excellent way to save and invest for various higher educational expenses. 

Features:

• Potential state tax deduction on contributions up to certain annual limits
• Tax deferred growth potential
• No taxation upon withdrawal if funds are used for qualified educational expenses (such as tuition, books, certain room and board, computers, etc.)
• The owner, generally the parents have control over the account and can transfer the account to another beneficiary
• Not subject to “kiddie tax rules,” unlike UGMA accounts (Uniform Gift of Minors Act) and UTMA accounts (Uniform Transfer to Minors Act)

Items to be aware of:

• No guaranteed rate of return – subject to market risk
• Certain taxes and penalties may apply if funds are withdrawn for non-qualified expenses
• Keep records of how money was spent that was withdrawn from the 529 account in case of an audit
• Review the asset allocation/risk profile of the account periodically.  Typically, the closer the child is to entering college, the more conservative the account should become

In one of our staff meetings this week, one of The Center planners reminded us all, “there are certain aspects in life that are humanly impossible to control.  It is, however, the factors that we do have control over that we must focus on, to better ourselves and the service we provide to our clients.”  Although college expenses have risen by almost twice the rate of inflation, this is something we truly cannot control.  What we do have control over, however, are the tools we can use which can assist us in creating a solid educational financial plan – something a 529 account can help provide.

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Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing.  More information about 529 college savings plans is available in the issuer’s official statement, and should be read carefully before investing.

The information contained in this report does not purport to be a complete description of the subjects referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Prior to making an investment decision, please consult with your financial advisor about your individual situation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Favorable state tax treatment for investing in Section 529 college savings plans may be limited to investments made in plans offered by your home state.  Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.

Old Habits Die Hard: Are You Spending Enough?

 I received an intriguing question from a client recently.  His query: “We who are savers struggled initially as young earners to develop the discipline to pay ourselves first.  We have spent the first two thirds of our lives making spending decisions based on debt avoidance rather than conspicuous consumption; all with the goal to make sure we would achieve financial independence in our retirement years.  But now that we’re retired, that deep-rooted discipline comes back to haunt us as we transition into our spending years.  I'm finding it difficult to spend the money now, even though we are financially secure.  Any advice?”

Actually, this is not an uncommon issue with our retired clients at the Center.  There is an element of self-selection that occurs for our long-time clients—they tend to be both forward-thinking “planners” by nature and they have generally demonstrated excellent self-discipline over the years.  It is not unusual that this results in having more financial resources than they might have expected or imagined, and the careful spending habits developed over decades don’t change quickly.

For many, many years, I have defined “financial planning” as the process of finding an appropriate balance between spending now and investing for the future to ensure that all of your financial goals are accomplished throughout your life.  Most people tend to err on one side or another—they either spend so much now that they jeopardize their future goals; or they have far too aggressive savings goals, giving up current quality of life unnecessarily.  In planning, we can quantify what it takes to meet future financial goals, and making sure that we are doing what is needed to help reach those goals—whatever is left can be spent freely and without guilt on those things that are of highest priority.

There are some that find themselves in the enviable position of having more than they need at retirement. Here again, we can quantify what it takes to maintain financial security with some cushion for unforeseen contingencies—

The excess is available for other priorities, which can include:

• Gifting: to family members or to charities
• Creating a meaningful financial legacy
• Increasing one’s annual income to incorporate some “luxury” items or experiences
• Pursuing passionate interests such as collecting art, fine wine, or extensive travel

My advice to you, if you are in this position, is not to “deny yourself” if there is something you would like to do.  This is not to recommend spending money frivolously; but on the other hand, if there is an expenditure that would improve the quality of your life or the lives of those you care about, don’t hesitate to spring for it—even if it seems “unnecessary”.  The ultimate goal here is to pursue those areas of interest because they are meaningful and important to you, unconstrained by financial concerns.  That, friends, is true financial freedom.

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Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Keys to Weight Loss Can be Keys to a Successful Financial Plan

 For the last several months, I have been watching my weight with the goal of improving my long-term health.  I have been following the Weight Watchers plan, which has helped me to create some solid habits for weight loss success. 

These same healthy habits can help individuals achieve financial planning success:

1. Track – Much like dieters should track what they eat, it is important for individuals to track where they spend; this helps to identify areas where overspending might be occurring.
2. Maintain Discipline – Like dieters need to stick to a plan, individuals with long-term financial goals should have a plan for saving and be committed to it.
3. Splurge Once in a While – Like a dieter who deprives him or herself for too long and then binges, individuals that have been disciplined at savings should occasionally spend on something fun to enjoy the present … but as a reward rather than a binge.
4. Be Accountable – Like a dieter should weigh in regularly and be honest with the results, individuals should meet with their financial planner at least annually to check progress and to make any needed adjustments to the plan.

If you have already formed these habits for your financial life, don’t be afraid to meet with your financial planner to check the scale.

Sandra Adams, CFP® is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constituteinvestment advice.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Breaking the Mold of a Broke College Kid

 

This blog is contributed by the Center’s summer intern, Zach Gould, who is a senior at the University of South Carolina. He shares his take on how students can take charge of their finances:

Let’s face it, college students are notoriously broke. During the school year, I don’t have a job because I plan and budget so I can focus all my attention on school. That means, when summer rolls around, I work at least 40 hours a week for 10 weeks or more, which is what I’m doing at the Center this summer. While I’m working, I try not to spend much money. My goal is to save at least 80% of my summer earnings so I’ll have it to spend during the school year. Because who wants to eat cafeteria food for 9 months? And you have to have cash for dates, movies, and a very occasional trip to the bars (wink).  So, once school starts I see how much money I have left from summer and budget that over the 9 months that I’m in school. I also plan for extra spending in December because of the holidays. Can you tell one of my majors is finance?

It is not impossible to maintain a job during the school year. A lot of my friends work part-time while going to school and are, in many cases, more organized than me because they are forced to be. This also provides income during the school year, which if you are paying for college yourself, certainly is necessary. If you’re not paying for college out of pocket, it is simply more expendable income. But holding down a job while going to school does have drawbacks, like limiting your ability to be a part of a lot of clubs or teams. Either way, after three years of making ends meet on a college student budget, I've learned a few things.

This is what I’ve learned:

1. Start saving early for spending money in college. You are on your own and expenses previously covered by your parents are now funded by you.
2. Budget the money you make while working during summer so it can last you throughout the school year, especially if you don’t plan to have a job while in school.
3. It is possible to work and attend school, which will give you more flexibility with income. You must, however, be very organized and limit your hours to make sure you are achieving social and academic balance as well.

I’ll head back to college in a month with most of my summer earnings in the bank. It takes budgeting and careful planning not to blow it before the end of the first semester, but I know the skills I’m using now will really pay off in May when I graduate and am truly on my own.

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Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

3 Lessons Investors Can Learn from Miguel Cabrera

 I grew up in a sports-loving household – playing sports and watching sports was a large part of my youth.  It should not be surprising that many of my key life lessons have been learned through sports analogies.  As I watch Miguel Cabrera -- one of the greatest hitters in Major League Baseball --  I can’t help but notice how investors might learn from three of his key skills:

1. Always keep your eye on the ball – Remember that your investments are tools to get you to your planning goals; don’t let the ups and downs of the market cause you to lose sight of your long-term goals.
2. Swing for a base hit – Keep your investment strategy balanced and stick to the fundamentals.  Taking big “swings” with trendy investment vehicles or making big shifts in your allocations may put you at risk for striking out.
3. Hit for average – The goal of your investment portfolio should be to return what is needed to reach your financial planning goals within your tolerance for risk.  Maintaining a moderate, but positive, average return over your financial life can get you farther than those who try to swing for the fences, but strike out more times than not.

As you are watching your favorite baseball team this season, keep in mind that the best hitters, like the best investors, stick to the fundamentals.  And don’t forget, your financial planner can be your most valuable hitting coach.

Sandra Adams, CFP® is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute investment advice.  Prior to making an investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of Center for Financial Planning, inc., and not necessarily those of RJFS or Raymond James.  Investing involves risk, and investors may incur a profit or a loss.

Signs Say Housing is Back

 If you haven’t noticed here locally, the housing market has really changed.  A client told me of a house they tried to purchase in the Detroit suburbs that had 70 offers last week. It was just two or three years ago when you couldn’t give these places away.

A recent well-known gauge for housing, the S&P/Case-Shiller 20-City Composite Home Price Index, which was released in May, posted the biggest gain in seven years.

The 20-city index--one of several S&P/Case-Shiller housing indices--showed a 10.9% gain between March 2012 and March 2013, the highest increase since 2006. In addition, all 20 cities tracked by the index had gains for three straight months. But not all markets are equal. Consider that San Francisco and Phoenix saw large price jumps of more than 20%. However, New York and Boston had smaller gains of 2.6% and 6.7%, respectively.

Also consider that all economic assets are eventually just a supply/demand equation. Prices should be rising given the low supply of homes, less new construction, relatively low prices, and low mortgage rates.

As for the economy as a whole, rising home prices often serve as an indicator that the economy is performing better since it generally demonstrates increased consumer confidence. And while this latest report is good news for homeowners looking to sell, it also provides welcome news to underwater homeowners who may now see an increase in their home equity.

Another gauge of the housing market is that a large number of institutional investors are buying properties to rent—suggesting that there is still a ways to go in terms of a full-fledged housing recovery.

You may hear people worry that another housing bubble is in the cards. Well not so fast! Consider that this economy is built on different terms than the one that led to the housing bubble burst in 2006. Those differences include a tighter mortgage lending environment and houses that may still be undervalued at prices that are significantly lower than they were at their 2006 peak.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.