Category

Newsletter

The Congruity of the Annuity

By | 2019, Money Moxie, Newsletter | No Comments

Too often we have people come into our office after having just attended a free dinner that preceded the purchase of an annuity. “A guaranteed return with no downside risk” is what they believe they now own. That sounds great. I would purchase that too. However, it isn’t until after a lengthy conversation that they begin to understand how their annuity truly works.

An annuity can be a great financial product if it is congruent with the overall portfolio. There are times we use annuities to accomplish specific objectives and are pleased with how they perform in these situations. The problem we often see with the annuity is not the product itself, but how it is used. In other words, the ambiguity of the annuity can lead to incongruity, and the solution could require some ingenuity.

Annuities can be complicated. If you are considering an annuity, make sure you understand how it fits into your financial plan…and also its policies, fees, expenses, commissions, terms, benefits, exclusions, riders, investment options, and waiting periods. Due to their complexity, they can be easy to misuse, which can create significant financial problems.

An annuity is a contract between you and an insurance company. There are three main types of annuities: fixed, indexed, and variable. Each type has its own objectives and fits into a financial plan differently. Each type also carries its own expenses, level of risk, and earning potential. Even within their individual types, they can vary greatly depending on the insurance company that issues them.

Annuities can be expensive. The average annuity costs approximately 3% per year. It is important to understand that there are often expenses you don’t see. Unfortunately, too many salesmen do not clearly explain the costs, nor how they are applied. I have seen annuities advertised with “No Fees!” In truth, however, these same annuities carry large expenses.

It is also important to understand that annuities are illiquid. This means you can’t access most, if not all, of the money in your annuity without surrender charges for a significant period (usually 7-10 years). Annuities are long-term investment contracts and you’ll pay hefty fees if you take your money out too soon.

Again, we believe annuities are great at doing what annuities do. It just isn’t often we meet with people who have a need for them. If you are wondering whether an annuity is right for you, come and see us. We will always be upfront and honest about the cost and structure of the products we sell. If an annuity does make sense in your financial plan, we’ll help make sure you purchase the most appropriate and cost-efficient annuity for you.

Tags: , , , ,

Year-End Tax Strategies

By | 2019, Money Moxie, Newsletter | No Comments

We are closing in on the holiday season. Before you slip into the holiday mode, let’s talk about a few ways you can wrap up the year!

1. The market has had an incredible run. This is an excellent time to look at your non-retirement accounts to see if you can take advantage of tax harvesting.

If you have an investment that has gained $10,000 and another that has lost $10,000, you can sell both investments and avoid paying tax on the capital gains. This matching of gains and losses is known as tax harvesting.

The gains and losses do not have to match exactly, but your gain and loss have to both be long term or short term. If you have held an investment for more than a year, it is considered a long-term capital gain and would be taxed at capital gains rates. If you have held the investment for less than one year, it is considered a short-term gain and would be taxed at the higher ordinary income tax rates. Either way, the resulting tax savings can be significant.

2. Here’s a win-win strategy. If you don’t have losses to offset your gains, you can still get tax relief by donating to a cause about which you are passionate or your favorite charity: church, school, food bank, hospital, etc. Consider this – donating an appreciated investment directly to your charity of choice will avoid taxes.

To qualify, you must have held the investment for more than one year, and it must have appreciated in value. You avoid paying taxes, and the charity receives the full value of your donation tax-free. The money you would have donated can be used to purchase another investment to start the process over again.

3. Current tax rates are at historic lows. Consider converting money from a traditional IRA to a Roth IRA. You can choose how much to convert. For example, if you have room for another $10,000 of income before you hit the next marginal tax-bracket, make it count.

Before the year ends, convert $10,000 from your traditional IRA to a Roth IRA. If you are under 59 1/2 years old, you will have to pay tax on the conversion with other money – say from a savings account. If you are over 59 1/2, you can have taxes withheld from the distribution.

The benefits of Roth IRAs are tremendous. Roth IRAs grow tax-free, meaning you never pay taxes on the earnings, there are no required distributions at any age, and if you do not use the money during your lifetime, your beneficiaries receive the money tax-free!*

4. If you are over 70 1/2 years old and you have an IRA, you can donate part or all of your Required Minimum Distribution (RMD) to your favorite charity and pay no taxes. This distribution is called a Qualified Charitable Distribution (QCD). The distribution still satisfies your RMD. This cannot be done from a 401(k). If you have a 401(k) and want to take advantage of this next year, you need to roll out your 401(k) before the end of the year.

*Tax-free withdrawals if certain conditions are met: a five-year account aging requirement and attaining age 59½, becoming disabled, using up to $10,000 to buy a first home, or upon death. SFS and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.

Tags: , , , ,

Investment Truth

By | 2019, Money Moxie, Newsletter | No Comments

Just when you think you have things figured out, the world changes.

As investors, we get excited when the markets rise and fearful when they fall. The world is always happy to give us advice. At SFS, our goal is to identify the truth in the cacophony of headlines so we can implement strategies to help you navigate a changing world.

We may be tempted to believe that if we work hard enough, we can predict what will happen. This is not true. The stock market seems to move in the direction that surprises the greatest number of people. Just when investors think they know, the world changes.

Following rules can help us avoid many investment mistakes. Over long periods of time (10+ years), the U.S. markets have almost always been positive. Implementing this rule means this: stay invested.

Warren Buffett described the stock market as a mechanism that transfers money “from the impatient to the patient.” You will feel more patient in difficult times if you have a customized financial plan with your goals and a plan of action.

Volatility is normal. The ups and downs are a part of investing, but they are exactly what leads to poor decisions. Combat this tendency with diversification and risk management.

In theory, good diversification should mean that a portion of your portfolios is making money. In reality, there is no guarantee, but diversification still helps.

Measuring risk begins by accurately determining how much risk you can and should take. Take too much and there is no way you can make good decisions in the storm. Take too little and you won’t reach your goals. Oscillate back and forth between the two, and you are likely moving backwards.

Our advisors at SFS can help you know how much risk is appropriate for you, and we can get you in a portfolio to match that need.

These are just a couple of my rules that help me maintain successful strategies in a world of endless opportunity and obfuscation. We blend all the rules with the economic realities we see in order to give you the best advice and portfolios that we can.

*Research by SFS. Investing involves risk, including the potential loss of principal. S&P 500 time period chosen to display a sample of the timing of government actions. The S&P 500 is an index often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass.

Tags: , , , , ,

The Biggest Threat To Your Retirement

By | 2019, Money Moxie, Newsletter | No Comments

Admit it. Your adult children still live in your basement. Talking about the effects of caring “too much” for adult children by financially supporting them is an uncomfortable conversation, but it is an important one.

When there are no financial boundaries set between parents and adult children, the ensuing relational volatility could be a far greater threat to retirement than market volatility. Now, I’m not talking about helping fund a child’s education or paying for a wedding. The real problem begins when parents pay for their adult children’s cars, insurance, food, or even vacations. This may sound ridiculous to some, but studies suggest that 79% of parents provide some form of financial support to their adult children. In fact, just over 50% of parents say they have even sacrificed their own retirement savings to help their adult children.

So, what should you do??

(1) Separate your retirement money from your other money. Keep it off-limits. Retirement money should only be used for retirement! Try to think about retirement money as untouchable.

(2) Try changing up the way you are helping your adult child. Try to figure out ways to help that don’t include giving money, like helping with a resumé or reviewing their budget with them. Don’t come to the rescue too quickly. Rushing in to fix or solve your adult child’s challenges will hinder their opportunities to develop and practice independent problem-solving skills.

(3) Set clear expectations. Helping your adult children get on their feet when they’re down and out is not a bad thing. Just make sure they know what is expected of them. You could tell your children you will help them for a certain amount of time and during that time you expect them to do things to improve their life situation. Keep reminding them of the deadline, talk with them often about their progress, and keep them accountable.

(4) Don’t take on the blame for their struggles. Irrationally blaming yourself for your child’s struggles will likely lead you to enable them by impulsively solving their problems. Parents, of course, are not perfect, but most try their hardest to be supportive and provide their children with a loving home. It is not uncommon to see children who were raised with many advantages end up struggling to thrive as adults, just as it’s not uncommon to see children who have had adverse family lives achieve impressive things.

(5) Remember to take care of yourself too. Parents of struggling adult children are often wracked by guilt and worry, which leads to poor sleep, unhealthy eating, and problems focusing. Worrying yourself sick will not help your child. Don’t be afraid to reach out for help from a professional counselor, friends, family, or support groups for family members of people with addictions or mental illness.

References for studies mentioned:
https://www.cnbc.com/2018/10/02/parents-spend-twice-as-much-on-adult-children-than-saving-for-retirement.html
https://www.bankrate.com/personal-finance/financial-independence-survey-april-2019/

Tags: , , , , ,

Who Do You Trust?

By | 2019, Money Moxie, Newsletter | No Comments

We like to think of our families, particularly our children, as centered individuals who understand the value of maintaining important family relationships. If you don’t think your family fits into this blissful picture, don’t take it to heart. Family dynamics can be challenging, and relationships can be fragile. This is especially true when there are difficult circumstances.

It’s not uncommon to have family members struggling with drug dependency, divorce, mental health, poor spending habits, or lack of financial independence. The list is inexhaustible. Sometimes there are family members who cannot get along. However, rather than sidestepping these sensitive issues, they should be addressed.

These emotionally consuming issues can become roadblocks when it comes to designing your estate plan. So much so that many take the position, “I’m not going to worry about it. I’ll let my kids handle it when I’m gone.” Unfortunately, rather than bringing families together during times of crisis, this approach can have the opposite effect. It can pit one family member against another.

It is common for families to name one or two of their children to act as trustee or co-trustees and personal representatives. This works well in families where children get along, there are no special circumstances, and your estate is straightforward. In these situations, you may feel confident your children can handle your estate the way you intend.

In our visits with clients, we often hear that they don’t want to burden their children. However, making them trustees when there are difficult circumstances may do just that–create a burden. Luckily, the situation can be remedied by using an independent trustee when designing your family trust. Upon your death, as trustee, they handle all distributions from the trust and assist in the sale of assets when needed. Their responsibility is to handle your estate the way you want. They deal with your family in a kind and understanding way, but they are also diplomatic. They can make hard decisions, something that may be hard for a family member who wants to take care of others or could be easily manipulated.

Avoiding conflicts of interest is critical when it comes to finding an outside trustee. You want things handled your way, not the bank or brokerage firm’s way. When researching an outside trustee, we recommend finding one that is independent. This means he or she is not affiliated with a large company.

Let us help you maintain healthy family relationships. If you think you may need the service of an independent trustee, give us a call. We can share our research and advise you on a trustee that may work well with your family.

Tags: , , , , , ,

Sharing Your Financial Stories With The Next Generation

By | 2019, Money Moxie, Newsletter | No Comments

We have the delightful opportunity to work with multi-generation clients. The difference in each generation surrounding what they value, how they view money, and where they place importance on things versus experiences is fascinating. Each generation has a different outlook on life and their opinions surrounding happiness.

In our work with multi-generations, we find it exciting to see how youth gain a different perspective when they hear what their grandparents or parents did to earn money when they were young. It provides them with a sense of understanding and appreciation for the sacrifices of older generations. I believe it also deepens the relations between the generations. I certainly value the stories I have heard about the financial challenges, successes, and failures of my parents and grandparents.

We are preparing for a youth financial summer camp next year. It will provide young people the opportunity to learn about money while they are still forming ideas and habits they can take into adulthood. One of our presentations will focus on ways they can make money through creative summer jobs. For this purpose, we are compiling information to share with the next generation and would love to learn about your experience as a youth. In the next month, we will be sending an email asking a few basic questions such as:

As a teenager, what did you do for summer work?
How much did you earn doing that job?
How many hours did you work each day?
What time did you go to work?
How did you get to and from work (walk, bus, parent, bike)?
What did you love about that job?
What valuable lessons did you learn?

Please help us by answering the questions. Your response will be anonymous unless you wish to be recognized. Thank you in advance for helping us guide future generations to financial success! Thank you for your business and your friendship.

Tags: , , , , ,

Are you feeling anxious about the market?

By | 2019, Money Matters, Newsletter | No Comments

If your answer is yes, you are not alone. We are emotional creatures. When things get rocky, or we perceive they are rocky, we can make decisions that feel good at the time, but in the long run, are not in our best interest. Let me share an example you may relate too.

You have worked hard and saved diligently for years, and finally, you have reached your financial goal, be it: saving for retirement, building a nest egg for a future purchase, or another purpose altogether. You feel a sense of relief – I did it! Once you reach this target number, every emotion you have regarding the market going forward may be tied to that target number.

How do you feel when you see that number going down? For some, the feeling is panic! All we can think is, “It took me forever to get to this point and I cannot afford to lose anything.” This is an emotional response. You have abandoned future perspective and are focusing only on the here and now. We often see this response to market volatility when someone is getting close to retiring or has retired. Suddenly, our long-term perspective is tomorrow afternoon. We have completely discounted the value of market performance over time.

I realize you may not enjoy looking at charts but bear with me for just a minute. Look at the two charts below. How do you feel about the chart on the left? How do you feel about the chart on the right? Believe it or not, the chart on the left is merely a subsection, representing a 90-day period, from the chart on the right, which illustrates a 5-year period. The difference is when viewing volatility over a longer time period it feels more comfortable than it does when viewed in a short period of time.

It is so easy to adopt a myopic view when emotionally, we feel like we should flee to safety. What the two charts teach us is that volatility is subjective and can be controlled by how often we look at our account balance. Now, look at the next two charts showing the exact 5-year period. The chart of the left represents the market value at the end of each quarter. The chart the right represents the market value each day. My guess is you feel better about the smoother chart to the left.

Managing your emotions during times of increased market volatility is challenging but can be done. Here are a few tips to help you through the volatile times.

1) Try to review your account no more than quarterly.

2) When you hear concerning news in the media remember; their job is to sell headlines and stories not to give personalized investment advice to you.

3) If you are feeling concerned, reach out to us. That is why we are here.

We have information regarding your financial situation, your financial plan, your investments, and the markets. We will give you advice and perspective that will help you stay on track.

*The illustrations are for educational purposes and are not indicative of an actual investment return. The Standard and Poor’s 500 (S&P 500) index is often considered to represent the U.S. stock market. Investments cannot be made directly into an index. Historical performance does not guarantee future results.

Tags: , , , ,

Are You Retired and Have a 401(k)? Read This!

By | 2019, Money Moxie, Newsletter | No Comments

As financial advisors, our job is to help clients create wealth. Most people expect us to accomplish this through market investments. Although that does play an important role, advice regarding financial decisions outside of the market can often amount to significant savings and wealth creation. The topic covered here is one that has amounted to significant savings for many of our clients. If you are currently retired or are approaching retirement and have a 401(k), this article is for you.

When talking about financial planning, there are two main phases of life: the accumulation phase (pre-retirement) and the distribution phase (post-retirement). The 401(k) is a fantastic savings vehicle for those in the accumulation phase. If you are currently working, a 401(k) is great! Employers often contribute to this type of account by way of a company match or profit-sharing because the 401(k) annual contribution limit is higher than that of other retirement accounts. Plus, paycheck deductions make saving easy.

If you are already retired, a 401(k) has some weaknesses that you should be aware of. The cost associated with these may be a lot more than you realize.

• When you take a distribution from a 401(k), you do not have the ability to choose which assets you sell. A distribution will require selling from all investments equally. This is a huge disadvantage as you may be forced to sell from the wrong investment at the wrong time. Proper distribution planning requires one to analyze the individual investments and sell those that make sense based on current market conditions and performance expectations. Unfortunately, the 401(k) does not give you this ability.

• If you have Roth 401(k) contributions, you will be forced to take a distribution at age 70.5. This can have large negative consequences to both future tax-free earnings and your ability to pass on wealth tax free. Roth IRA accounts will not force a distribution regardless of age.

• If you are over age 70.5 and donate to 501(c)(3) organizations, you cannot take advantage of a great tax-savings strategy called a Qualified Charitable Distribution (QCD). The tax savings from QCD’s can be thousands of dollars every year. Examples of qualified organizations are churches, universities, humane societies, hospitals, etc.

In many cases, we recommend that clients roll their 401(k)’s into IRA’s at retirement. An IRA is a much better retirement distribution vehicle given its flexibility and its greater selection of investment options. It also does not suffer from the weaknesses mentioned above. 401(k) rollovers are tax-free and easy.

We work hard to ensure our clients make good financial decisions. Often, small changes have a large impact. We have seen investors greatly benefit from a 401(k) rollover. If you have a 401(k) that you can’t contribute to due to separation of service or retirement, we highly recommend you meet with us to discuss if a rollover is in your best interest.

Tags: , , , ,

Identity Protection Services–Worth the Cost?

By | 2019, Money Moxie, Newsletter | No Comments

It feels like every other week another company announces that their systems were hacked and personal information has been stolen. We are then inundated with ads for identity theft protection services. Do these services really protect our personal information, and are they necessary?

(1) Identity theft protection companies promise to watch over our personal information, usually for a fee. Though many companies offer limited services for free, a service that provides alerts, watches all three credit bureaus, includes identity theft insurance, or offers identity restoration services often charge between $9 and $30 a month, depending on the services.

These services alert you to a potential problem so you can hopefully get it resolved before it gets out of hand. They may also provide restoration services, which can save you many hours and phone calls to clear up your name.

(2) You could monitor your own personal information by keeping an eye on your credit reports and tracking your credit score through various websites for free. This needs to be done often to be effective.

(3) The only thing that can truly help prevent identity theft is freezing your credit with each credit bureau: Experian, Equifax, and Transunion. This helps prevent new loans or accounts in your name, and there is now no cost to do it. However, if you have a freeze on your credit and are applying for a loan (home, car, cell phone, etc.), it can take several days to “thaw” your credit before you can apply.

Are these services worth it? Well, it depends on your situation. Check with organizations that you are already doing business with. Costco, AAA, banks, credit unions, credit card companies, and the credit bureaus themselves offer free or discounted solutions. Whatever you choose to do, do something to watch your credit.

Tags: , , , , ,

Medicare Open Enrollment

By | 2019, Money Moxie, Newsletter | No Comments

Medicare open enrollment is right around the corner. If you are already using a Medigap Plan or a Medicare Advantage Plan, now is the time to make a change if you want. The open enrollment period is October 15th through December 7th every year.

Who needs to pay attention?
Those currently using a Medigap Plan, Medicare Advantage Plan, prescription drug plan, or if during your initial enrollment period, you opted not to purchase additional coverage up and above traditional Medicare Parts A & B.

What is Medicare?
Traditional Medicare is composed of three parts: A, B, and D. Part A is coverage for hospitals and doesn’t have monthly premiums. Part B is coverage for doctor visits, etc. and the base cost is $135.50 per month for most people. This typically comes out of your monthly Social Security check. Part D is prescription drug coverage, which is purchased through a third party and costs around $35 per month.

What is the difference between a Medigap and Medicare Advantage Plan?
Medigap is a supplemental insurance that complements traditional Medicare. It covers most of the “gaps” or holes that are not covered by parts A & B. You can go to any doctor that accepts Medicare.

Medicare Advantage Plans combine Parts A, B, D, and Medigap into one package. They operate like traditional insurance where you are tied to a specific network.

What else should I know about Medigap?
Medigap Plans are lettered from A-N with costs that vary depending on the benefits provided. The most popular plan has been F. However, Plans F and C are being phased out in 2020 as plans are no longer allowed to cover the Part B deductible of $185. If you are currently on one of those plans, you can stay on it, but new enrollees will have to choose a different plan. Plan G is gaining in popularity because it covers everything Plan F covers, except for the Part B deductible. In many instances, the Plan G costs are lower and can be a better value than Plan F anyway.

People that have comprehensive Medigap Plans typically pay more on a monthly basis, but usually don’t have to pay very much out of pocket. If your health is ok to poor and you see a doctor regularly, then this may be a good option for you.

What else should I know about Medicare Advantage plans?
Medicare Advantage Plans, also called Part C, will often cost less than Medigap Plans. It typically has deductibles and co-insurance like traditional insurance through an employer. How it works is Medicare gives an insurance provider a certain amount per year to manage your expenses. If the insurance provider manages your expenses for less, then they make money. Because of that, monthly costs vary significantly with some plans as low as $0 per month.

People that use Medicare Advantage Plans usually pay less monthly, but typically have more out of pocket expenses. If you are in good health and don’t regularly see a doctor, then this may be a good option for you.

What resources could help me research my options?
The website www.medicare.gov has a plethora of information. You can use it to sign up for Medicare or any of its Parts A, B, C, or D. You can also find contact information for Medigap providers. If you would like to speak to a person, you can call 1-800-Medicare (1-800-633-4227).

Tags: , , , , ,