Top Concern for Small Business Owners: Rising Health Insurance Costs

A recent study by the National Federation of Independent Business ranked “Cost of Health Insurance” the number one concern for small business owners.1 This comes as no surprise as there has been much uncertainty over the impact of the Affordable Care Act, AKA “ObamaCare.”

The Wall Street Journal reports that “while ObamaCare won’t take full effect until 2014, health insurance premiums in the individual market are already rising, and not just because of routine increases in medical costs. Insurers are adjusting premiums now in anticipation of the guaranteed-issue and community-rating mandates starting next year.”2 The largest impact will be for individual coverage, where health care costs in Utah are expected to increase somewhere between 65% and 100%.3 Small employers are also expected to feel a disparate impact. Large employers will be impacted the least.

Whether you supply health insurance for your small business employees or you get alone with individual coverage, you can expect premiums to increase.

While understanding that costs will most likely increase, we also need to remember that one of the benefits of ObamaCare is that many small business owners, employees, and individuals can gain access to healthcare where they didn’t have access before.

For small business owners, there are specific rules governing how your business will be impacted next year based on the number of employees you have. For example, if you have less than 25 employees, you may actually qualify for a tax credit if you contribute 50 percent or more toward employee health insurance. Employers with 25-50 employees will have access to SHOP, the Small Business Health Options Program,
where employers can go to find coverage from a selection of providers in the marketplace. Open enrollment begins October 1, 2013.

It isn’t until you have 50 full-time equivalent employees or more that you may be subject to an “employer shared responsibility payment” beginning in 2014. It is important to understand how all of these rules may impact you. For greater detail please visit SBA.gov and IRS.gov and search for the Affordable Care Act.

So, what should you be doing as a small business owner? First, make sure you understand all of the changes and how they will impact you going forward. Then, if you feel like the cost of your insurance is increasing dramatically, shop around. Smedley Financial Services has access to individual and small business health insurance plans. We can give you a second opinion to see if you can save money or if there is a different type of plan that is more suited to your business structure.

There are so many changes happening in health care that it is hard to keep up. However, with a little research and some expert advice you can remove some of the uncertainty in your life.

1. “Uncertainty Dominates Top 5 Small Business Concerns,” National Federation of Independent Business, http://www.nfib.com/research-foundation/priorities.
2. Merrill Mathews and Mark E. Litow, “ObamaCare’s Health Insurance Sticker Shock,” Wall Street Journal, January 13, 2013.
3. Merrill Mathews and Mark E. Litow, “ObamaCare’s Health Insurance Sticker Shock,” Wall Street Journal, January 13, 2013.

Patience is a Rewarding Virtue

What 50 Years of New Highs Looks Like

We have all been taught that the way to make money investing is to “buy low and sell high.” This makes perfect sense, but it is so much easier said than done. The danger in “buy low and sell high” is that it encourages investors to take active risk that may be contrary to their long-term goals. Most investors would do better following a more patient mantra.

Consider the recent highs in the market. On March 5th, 2013, the Dow index closed at a record level: 14,253. The S&P 500 index hit its high on March 28th, 2013, with a close at 1,569. These highs are only exciting to those participating in the growth of the market.

Some may see new highs as a signal to increase risk, others as a reason to decrease it. Keeping in mind that past performance does not guarantee future results, here are some answers to questions asked by the media when such events occur.

Do the new highs matter?
Yes! How else will investors make money? Making new highs is exactly what the market is supposed to do. Sure it doesn’t happen every day or even every year. It took these stock indexes 5½ years to reach their previous highs set on October 9, 2007.

Over the last 50 years, the S&P 500 hit new highs 714 times. It falls frequently, but the long-term trend is up and that is the way it should be.

Can we say that what goes up must come down?
There is always a reason for a rising market, and so a new high is often followed by more highs. The positive momentum and good news often have continued. The average return following a new high is positive for 1, 2, 3, 6, and even 12 months following the high.

Is this time different?
The current bull market is celebrating a birthday this month. (The current bull market began on March 9th, 2009.) It is turning four, which is a long time for a bull to run on Wall Street without interruption.

What could stop the bull?
Consumers are once again financing spending through debt. Their savings have fallen to just 2.6 percent of their income. (See cover story for details.)

Low savings equate to high spending. This is only good over short periods of time. A market rise that goes with it cannot be sustained forever. Eventually, consumers will reach a limit on how much they can borrow and spend.

Human nature is also a constant in the investment world, and it often leads to an over-inflated market as investors become overly optimistic. If it leads to inflation, the Federal Reserve may choose to send interest rates higher on debt.

Are there signs of overheating?
Consumer spending trends may be headed in the wrong direction right now, but they seem far from overextended. In fact, household debt is at historically good levels—the best in over 25 years.

Inflation could become a major concern, but it isn’t right now. North America is on its way to energy independence, possibly by 2020. Take a look at the price of natural gas on your winter heating bills. Prices have been low for energy.

Everyone is beginning to love stocks again. This is a good sign and a reason for caution. Just remember, patience is a rare virtue in the market, and if you have it then you should expect to do better than average. Of course, there are no guarantees.

The American Dream (and the Cost of Procrastination)

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Most of us hold in our hearts the dream of someday spending our time doing things that bring only fulfillment to our lives and shrugging the requirements outlined by the careers we have chosen. This dream is better known as retirement. Unfortunately, there is a growing trend among Americans—the propensity to “do it tomorrow.”
It is hard to imagine that we unwittingly defeat our own dreams. Here are some insights and a few disturbing facts on how that happens.
Cost of Procrastination
The cost of procrastination
Every year that we fail to put money aside for the future has an impact on our future dreams. For example, let’s say Rich is 25 years old and saves $100 each month for retirement. By the time he is 67 he will have saved over $307,000 (assuming a 7 percent rate of return). Contrast that with Joe who saves the same amount each month and the same growth rate, but waits to start his plan until he is 40. When Joe reaches age 67, he will have saved just over $97,000. That’s a $200,000 difference.
In order for Joe to catch up to Rich by age 67, he would have to save $317 per month. The difference becomes even greater if Rich and Joe contribute to a 401(k) plan where the company matches contributions.
Every year that we delay saving for the future has a significant impact on our ability to reach our financial dream. This is true whether we are 25, 45, or 65. Lack of action thwarts any financial goals.
savings
The result of procrastination
Among U.S. workers, 57 percent said that they have less than $25,000 in total household savings
and investments, excluding the value of their home, according to the Employee Benefit Research Institute.
Since 1973, we have watched the savings rate in the United States drop steadily from its high of 11 percent. In February 2013, the personal saving rate was a paltry 2.6 percent. At this rate it’s no wonder that 28 percent of Americans said they are “not at all confident” that they have saved enough for retirement.
The decline in savings couldn’t come at a worse time. Today’s retirees are faced with longer life spans and higher retirement costs. All of this at a time when only 3 percent of us have a defined benefit plan (pension) through our employers. In addition, we face changes to Social Security benefits. The old three-legged-stool approach to saving for retirement is no longer a viable analogy. The stool has now changed to a pogo stick and we are at the center. The burden to plan and prepare for retirement has been shifted almost entirely to us.
With everyone sounding the alarm, why are we not heeding the call? Simply said, it’s our financial behaviors. Goals are not physically impossible to reach; we simply lack the self-discipline to stick to them.
The battle within
On a daily basis everyone faces the battle between our present self and our future self. We paint a picture of what we want the future to look like, whether it’s retirement, moving to a new home, or building a nest egg. We have a good feeling about the future we’ve projected. But to get to that future point we have to overcome our present self.
Our present self is in power today while our future self is nowhere to be seen. Sure, we want to be happy in retirement, but in order to make that happen we have to feel pain right now. There is only so much money in each paycheck. Saving will require us to give up something we want right now. There’s the pain! We see saving for the future as an immediate loss. It forces us to deviate from our desired lifestyle. We may have to give up something we want now—a bigger home, a new car, or a vacation—to have the lifestyle we want later. We are constantly forced to make decisions that deny us of immediate gratification and quite frankly, it’s hard.
The commitment device
Sticking to our goals first requires us to set goals. We are not generally driven or motivated by facts and figures. Decisions are strongly driven by our emotions.
How do we feel about the outcome of a decision? Incorporating the emotional side of planning with the facts, will help us to create a commitment device. The value of a commitment device is that we can attach a feeling, present and future, to the decisions we make.
What is most important to us today? How do we want the future to look? What lifestyle do we want to live during retirement? These are just a few of the ideas that must be considered when designing our future dreams. Our answers help direct us in creating a template that can be used in our financial plan.
In creating financial and retirement plans for our clients we begin with their personal values and goals. This helps us to match the present self with the future self in mapping out a plan to help reach those goals. By meeting with our clients regularly we help keep them focused on the end result.
The three legged stool approach to retirement savings is no longer a viable analogy.
The three legged stool approach to retirement savings is no longer a viable analogy.
Maybe it’s time for you to create a plan. Maybe it’s time for an update or review. Or perhaps you know someone else who could benefit from having a plan. Contact one of our wealth management consultants and find out how we can help. Your success is our goal.
Research by Smedley Financial Services, Inc.® For illustrative purposes only. Not intended as an actual situation or as a recommendation. Sources: Employee Benefit Research Institute and U.S. Department of Commerce.

Becoming Financially Aware

Dear Valued Clients and Friends,

Over the years, people I randomly see will almost always ask my opinion about the market, gold, the economy, etc. They might say that they successfully got out of the market, but they never knew when to get back in. As a result they never did get back in the market.

I simply tell these good folks that “making those tough decisions is exactly what we do for our clients at Smedley Financial.”

Our best clients are those that have a good financial education. By that I mean they understand what we are striving to do for them in terms of protecting and growing their wealth. This is all done with respect to our clients’ goals, resources, ages, and risk tolerances. We don’t want our clients to outlive their resources. We want their money to last as long as they do!

Investment management and financial planning are not simply one-time events, but rather they are ongoing, living, and dynamic processes. Regular communications and visits are more essential than ever with respect to life’s events, financial and otherwise.

We invite you to come in and see us or call us so that we can be of the most service and benefit to you.

Bullish Best Wishes,

Roger M. Smedley, CFP®
President

IRA Charitable Distributions Are Back!

For those of you over age 70 ½, a very beneficial tax law is back in the books thanks to the agreement reached by Congress on January 1, 2013. The tax break allows you to donate IRA money directly to a charity and avoid paying any tax on the distribution. Even better, the distribution still counts toward your Required Minimum Distribution.

This tax break was off the books for all of 2012 and then retroactively added in January of 2013 (too little too late). Those who took advantage of it in 2011, or before, will be glad it is back. Officially it is called a Qualified Charitable Distribution or QCD.

So, what is the difference between making a QCD directly to a charity or taking the money and then donating it to the charity personally? Let’s look at an example.

Let’s say Henry decides to withdraw the money first and then donate to a charity. If his required minimum distribution was $10,000, he would have to take the distribution and withhold taxes. For this article, let’s assume Henry must withhold 15% for federal tax and 5% for state tax, or $2,000 in taxes. That means he would get a check for $8,000. Henry would then deposit that check in his checking account and write out a personal check to his charity. Next year Henry would get to include the $8,000 as a deduction on his taxes. However, the deduction only reduces his taxes a fraction of the $8,000.

The other option is for Henry to donate the $10,000 directly to a charity. He doesn’t have to pay anything in taxes and his charity is benefited by the full $10,000. The decision seems to be fairly easy.

If you plan to donate money to a charity and you have to take a Required Minimum Distribution this year, give us a call so we can help you take full advantage of this reinstated tax law.

Elections Over. Fiscal Cliff in Focus.

Stocks started 2012 with solid gains and then added to them during the year. Most major asset classes made money during the year.
Despite being three years into the current economic recovery, stocks and many other risky assets started 2013 with a bang. Small cap stocks, international stocks, and high yield bonds have been particularly good thus far. Resolution of the Fiscal Cliff was clearly the initial factor, but there are other fundamental contributors to current optimism as well.  The following data points are available from the Federal Reserve Bank of St. Louis.
• Oil production continues to grow within the United States thanks to hydraulic fracturing or “fracking.” Natural gas production, which is growing from the same process, is also likely to continue at its elevated levels. This industry has provided jobs to approximately 50,000 workers in the last three years and is still increasing its employment numbers at a rate of 6.5 percent.
• The growth in the supply of natural gas and oil has also provided lower energy costs for consumers and manufacturing. After 10 straight years of job losses in manufacturing, this industry is now experiencing three years of employment growth around 2 percent.
• Consumers are in a better position to increase spending and saving. Household debt is 10.5% of disposable income, which is the best level since the early 1980s.
• The housing market is improving. Prices of existing homes rose over 4% (Case-Shiller 20 City Index) in the last year. Housing starts and permits are each up 20%.
• Even after the recovery began in 2009, state and local governments were reducing their work force. This placed a short-term drag on the economy by reducing consumer confidence and spending. Half a million workers lost their jobs. Now it appears that many of these governments have their fiscal house in order.
The hemorrhaging may have run its course. The negative factors may now turn positive.
• Inflation, measured by CPI, is just below 2 percent. This will provide the Federal Reserve the flexibility to continue to focus on stimulating the economy in order to create more jobs. The efforts of the Federal Reserve are certainly a large part of the current recovery and will likely continue to play a role in 2013.
Of course, all this opportunity for growth comes with a price. Investors don’t have to love risk, but they do have to live with it. It is a tool to be managed carefully in order to participate in the long-term benefits of investing.
Many of the positive factors that drove the market upward last year are still in place this year. Indeed, the current year started off with a similar jump as that in 2012. While history will not repeat itself exactly, hopefully it will rhyme.

100 Taxing Years Later (Many Times Greater)

In 1913, the 16th Amendment to the Constitution, in an effort to fund a war, made the income tax a permanent fixture in the U.S. tax system. The amendment gave Congress legal authority to tax income and resulted in a revenue law that taxed incomes of both individuals and corporations.

Over the last one hundred years the tax code has become much more complicated. The number of words in the first tax law was 9,337. In 2010, the number was 3,800,000. Our leaders have obviously been busy!

To further complicate a complex system, the Senate waited until January 1, 2013 to pass a tax law that affects every American in some way. Here’s a recap of what to expect.

Affecting the majority of working Americans.
The elimination of the temporary payroll tax cut means you will take home a smaller paycheck. The payroll tax cut reduced the employee portion of the Social Security tax to 4.2 percent in 2011 and 2012. This year the employee portion reverts back to 6.2 percent. A worker earning $50,000 can expect to take home $1,000 less
in 2013.

Affecting the wealthy.
If you are fortunate enough to have a taxable income greater than $450,000 (or single filers above $400,000) you can expect a higher marginal income-tax rate. The top marginal income-tax bracket has increased to 39.6 percent. Previously the highest bracket was 35 percent. These same filers will also pay more in capital gains taxes. The top capital gains rate has increased to 23.8 percent. This is up from last year’s 15 percent.

The wealthy are hit again on deductions. Those making more than $300,000 ($250,000 for single filers) will see their deductions and personal exemptions phased out. On a positive note, the Alternative Minimum Tax (AMT) threshold will now be adjusted for inflation.

The Alternative Minimum Tax was originally designed to make sure wealthy Americans were not using loopholes to avoid paying taxes. AMT knocks out a lot of exemptions, deductions, and credits forcing those affected to pay a minimum amount of tax. Previously the law was not automatically updated for inflation and every year more and more Americans were being hit by this limiting tax.

Estates over $5 million can expect to pay 40 percent in estate taxes. Last year the estate tax rate was 35 percent. This is of course after the $5 million Estate Tax Exemption.

Some good news.
The child tax credit has been extended. This is a great benefit to families with children and can mean up to $1,000 in tax credits.

Unemployed workers will continue to receive benefits.

Contribution limits.
There are few ways for wage earners to reduce their tax liability. One way to help now and when it comes to retirement is making contributions into qualified retirement plans. If you have a company sponsored retirement plan such as a 401(k) or 403(b) you can make a maximum contribution of $17,500 in 2013. If you are 50 years or older, you can make an additional contribution of $5,500.

Traditional IRA and Roth IRA contributions have also increased this year. You can make a maximum contribution of $5,500. Those over 50 can make an additional contribution of $500.

It took a great deal of political posturing and arguing for our elected officials to come to agreement on this recent tax law. Let’s hope they are more open minded and courageous when it comes to what may be this country’s greatest hurdle—reducing spending. This is only a short recap of the recent tax changes. Please contact our office for additional information or to discuss your individual situation.

Celebrating 100 Years of Taxes!

Dear Valued Clients,

Motivating the citizens of the United States to pay their Federal Income Tax has always been a struggle. Various strategies have been implemented over the years to improve tax collection. Some meant to force tax payers and others to encourage them.

The first income tax in our nation was enacted by Congress in 1862 to help support the Civil War. (Blockades against the ports of the North limited supplies and cut off tariffs.) President Lincoln himself paid $1,296 in 1864 for his income tax. In order to encourage ordinary citizens to pay the government made tax returns public. Americans were encouraged to turn in those they suspected of not paying their fair share.

This Civil War Era income tax was removed ten years after it began, only to be brought back in 1894 until the Supreme Court voted in 1895 that it was unconstitutional.

In 1913, Congress passed the 16th amendment of the U.S. Constitution. This new law created the first permanent income tax in our country. At that time, the highest rate was 7 percent. Five years later the top bracket was at 77 percent. (See the full history of the top brackets in the graphics on pages 3 and 4.)

By the time World War II came, the nation had a serious problem with deficits. Congress was not about to make tax returns public. Instead, the nation turned to Donald Duck who explained to Americans their duty to pay the government: “Taxes to bury the Axis.”

Today, most of us might relate more to Arthur Godfrey who said, “As an American I am proud to pay my taxes. But I’d be just as proud for half as much.” Nevertheless, our nation needs us and so, taxes are here to stay. I hope you enjoy this issue of the Money Moxie® as we “celebrate” the 100th anniversary of the U.S. Income Tax.

James R. Derrick
SFS Chief Investment Strategist

Source: David Kestenbaum, “From Abe Lincoln to Donald Duck: History of the Income Tax,” NPR, 3/22/2012.