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Enjoy the Rally, But Prepare for the Retreat

Investors may be lulled into a false sense of security by this market.

   
Will the current bull market run for another year? How about another two or three years? Some investors will confidently say "yes" to both questions. Optimism abounds on Wall Street: the major indices climb more than they retreat, and they have attained new peaks. On average, the S&P 500 has gained nearly 15% a year for the past eight years. 1
 
Stocks will correct at some point. A bear market could even emerge. Is your investment portfolio ready for either kind of event?
   
It may not be. Your portfolio could be overweighted in stocks – that is, a higher percentage of your invested assets may be held in equities than what your investment strategy outlines. As your stock market exposure grows greater and greater, the less diversified your portfolio becomes, and the more stock market risk you assume. 
 
You know diversification is important, especially when one investment sector that has done well for you suddenly turns sideways or plummets. When a bull market becomes as celebratory as this one, that lesson risks being lost.
   
How do bear markets begin? They seldom arrive abruptly, but some telltale signs may hint that one is ahead. Notable declines or disappointments in corporate profits and quickly rising interest rates are but two potential indicators. If the pace of tightening speeds up at the Federal Reserve, borrowing costs will climb not only for households, but also for big businesses. A pervasive bullishness – irrational exuberance, by some definitions – that helps to send the CBOE VIX down to unusual lows could be seen as another indicator.
 
How long could the next bear market last? It is impossible to say, but we do know that the longest bear market on record lasted 929 days (calendar days, not trading days). That was the 2000-02 bear.   A typical bear market lasts 9-14 months. 1,2
 
Enjoy this record-setting Wall Street run, but be pragmatic. Equities do have bad years, and bears do come out of hibernation from time to time. Patience and adequate diversification may make a downturn more tolerable for you. You certainly do not want the value of your portfolio to fall drastically in the years preceding your retirement, when you will have a narrow window of time to try and recoup that loss. Remember, the market does not always advance.
   
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
      
Citations.
1 – cnbc.com/2017/09/19/what-investors-should-do-before-the-bull-market-gets-gored.html [9/19/17]
2 – investopedia.com/news/how-do-bear-markets-start/ [10/14/16]
LPL Tracking# 1-659038

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Health Care Costs Are Cutting into Retirement Preparations

This is happening in subtle and not-so-subtle ways.

You may have seen this statistic before or one resembling it: the average 65-year-old retiring couple can now expect to pay more than $250,000 in health care expenses during the rest of their lives.

In fact, Fidelity Investments now projects this cost at $275,000, up 70% from its initial estimate in 2002. The effort to prepare for these potential expenses is changing the big picture of retirement planning.1

Individual retirement savings strategies have been altered. How many people retire with a dedicated account or lump sum meant to address future health costs? Very few. Most retirees end up winging it, paying their out-of-pocket costs out of income, Social Security benefits, and savings.

The older retirees are, the heavier this financial burden seems to be. According to a study from the Employee Benefit Research Institute, people aged 85 and older devote an average of 19% of their household expenses to health care, compared to 11% of household costs for those 65-74.1

People are starting to wonder if they should assign specific retirement assets to health care. The average man retiring today at 66 is projected to receive $280,000 in Social Security benefits over the balance of his lifetime. That would cover the $275,000 in projected costs referenced above. Fidelity notes that the average workplace retirement plan balance for someone in their sixties is $123,000. Right now, that would approximately cover one retiree’s projected health care costs.1

Few people approach retirement with savings large enough to permit these assignments. For the rest of us, the takeaway is to save even more. Some of us may want to consider a Health Savings Account (HSA), which is routinely used in tandem with a high-deductible health plan (HDHP). Contributions to HSAs are tax free, and withdrawals are tax free when used for qualified medical expenses. Money in an HSA may also be invested, and the accounts feature tax-free growth. Current annual HSA contribution limits are $3,400 for individuals (with a $1,000 catch-up contribution allowed for those 55 and older) and $6,750 for families.1,2

While households have begun adjusting their retirement expectations in light of projected health care expenses, businesses have also quietly made some changes.

Employer matching contributions have been affected. A new study from employee benefits giant Willis Towers Watson says that company matches to retirement plan accounts decreased about 25% between 2001 and 2015 (from 9.1% of worker pay to 6.8% of worker pay). Why? It appears at least some of those dollars were shifted into health care benefits. In the same period, employer allocations to company health care programs more than doubled, rising from 5.7% to 11.5% of employee pay.3
             
There is no easy answer for retirees preparing to address future health care costs. Staying active and fit may lead to health care savings over the long run, but some baby boomers and Gen Xers already have physical ailments. Barring some sort of unusual economic phenomenon or public policy shift, the question of how to pay for hundreds of thousands of dollars of medical and drug expenses after 65 will confound many of us.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    
Citations.
1 – marketwatch.com/story/how-to-plan-for-health-care-in-retirement-without-going-broke-2017-08-25/ [8/25/17]
2 – goerie.com/business/20170824/picking-right-health-savings-plan [8/24/17]
3 – towerswatson.com/en/Insights/Newsletters/Americas/Insider/2017/07/shifts-in-benefit-allocations-among-us-employers [7/14/17]
LPL Tracking 1-649969

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The Financial Toll of Addiction

Opioid abuse threatens to wreak havoc on family finances and retirement plans.

Imagine your retirement dreams put on hold or compromised, your savings and investment accounts reduced, and your loved ones incommunicative or at odds with each other. This terrible state is reality for families ravaged by addiction.  

OxyContin, heroin, and other opioids can cost an addict hundreds of dollars per day. Where will an addict find the thousands of dollars needed, over time, to pay for their habit? No family wants to consider the possibilities.1

Treating opioid addictions can take money equivalent to a year’s salary. A stay at a first-class treatment center can cost $30,000-$65,000 a month. Even outpatient counseling can cost $5,000-$10,000. The drugs may still exert their grip on the addict afterwards.2,3

Investment News, a trade publication for investment advisors, recently polled more than 400 of these financial industry professionals and found that 36% had clients struggling with an opioid addiction or clients whose families were dealing with such a problem. Raiding retirement savings accounts, arranging a second mortgage, borrowing against the death benefit of a permanent life insurance policy – these are all potential responses to the pull of the addiction or the bill for its treatment.1

Addictions can require major treatment costs. The financial wreckage from a gambling addiction, for example, may exceed even that from an opioid problem.

The more personal or business wealth an addict can access, the more the addiction may run amok. The sad thing is, there is little, if any, way to undo the financial impact. What does a financial professional tell a retired couple in their early seventies who may foot some or all of the bill for a son or daughter’s $100,000 of rehab? What kind of uplifting message can be told to a client whose ex-husband has gambled away $250,000 and embezzled from a corporation? It is a matter of "adapt and adjust."

So often, the affected party is over 50: approaching retirement or retired, with little time to try and restore those lost assets through saving and investing. The financial professional does what their can to help clients plan for a new reality.

Some people see addiction as a personal and individual issue, while others see it as a societal one. Regardless of which viewpoint one happens to take, there is no easy financial answer for its aftermath.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
   
Citations.
1 – tinyurl.com/y9xq88sw [8/5/17]
2 – ocregister.com/2017/06/16/addiction-treatment-the-new-gold-rush-its-almost-chic/ [6/16/17]
3 – mydaytondailynews.com/news/costs-drug-treatment-skyrocket-ohio/0EwivX28nkhh978SaX5DHL/ [6/10/17]
LPL Tracking 1-646249

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Tax-Loss Harvesting

A useful year-end move to counteract capital gains. 

It looks like 2017 will end up being a very good year for the stock market. Consequently, you may realize short-term capital gains. What will you do about them? You could do what many savvy investors do – you could "cash in your losses" and practice "tax-loss harvesting."

Selling losers to offset winners. Tax-loss harvesting means taking capital losses (selling securities worth less than what you first paid for them) to offset the short-term capital gains you have amassed. 

While this doesn’t get rid of your losses, it can mean immediate tax savings. It can also help you diversify your portfolio. It may even help you to position yourself for better long-term, after-tax returns.

The tax-saving potential. Sure, you can use this technique to put your net gains at $0, but that’s just a start. Up to $3,000 of capital losses in excess of capital gains can be deducted annually, and any remaining capital losses above that can be carried forward to offset capital gains next year.1

So, by taking a bunch of losses this year, and carrying over the excess losses into 2017, you can potentially shelter some (or maybe all) of your long-term and short-term capital gains next year. This gives you a chance to shelter winners you’ve held (even for less than a year) from being taxed at up to 39.6%.2

The strategy in action. It is really quite simple. Step A is to pick out the losers in your portfolio. Step B is deciding which losers to sell. Step C is giving the green light to those transactions.

You must watch out for the IRS "wash-sale" rule, however. You can’t claim a loss on a security if you buy the same or "substantially identical" security within 30 days before or after the sale. (The window is actually 61 days wide in some instances.) In other words, you can’t just sell a security to rack up a capital loss and then quickly replace it.3

But you may be able to avoid the wash-sale rule by using an ETF to make a tax swap: an ETF for a stock or mutual fund, or perhaps an ETF for another ETF, as long as the ETFs are linked to different indices. Although these tax swaps are widely done, this is still something of a gray area, so consult a qualified tax professional first.1

Watch the fine print on wash sales. The wash-sale rule applies to your entire taxable portfolio, not just one taxable account within it. So, as an example, if you sell individual holdings of stock in a company, you still must wait for the wash-sale window to close before you can purchase shares of that same firm for your IRA. Also, the wash-sale rule applies to multiple taxable accounts – worth remembering if you and your spouse file your taxes jointly. If you sell a loser and your spouse or a corporation you control purchases the same investment within the time frame, you could violate the rule.3,4

The (minor) drawbacks. You may not wish to alter a carefully chosen portfolio to the degree that you must for tax-loss harvesting, especially if it has been built for the long term. Also, you could end up missing a rally in which an investment you have sold might take off.

You can only practice tax-loss harvesting in taxable accounts; tax-advantaged accounts are ineligible for this strategy. Transaction costs do add up, so think about those costs versus the potential savings before you begin – or alternately, harvest losses within a fee-based account.5

Not just a year-end tactic, but also a year-round strategy. Some investors harvest losses throughout the year, not just in December. You may want to ask the financial professional you know and trust how you can harvest losses this holiday season and beyond.
         

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    
Citations.
1 – smartasset.com/taxes/all-about-tax-loss-harvesting [4/15/17]
2 – marketwatch.com/story/how-to-pay-less-in-taxes-on-your-investments-2017-05-31/ [5/31/16]
3 – thebalance.com/wash-sale-rule-3192972 [5/31/17]
4 – cnbc.com/2016/12/08/what-to-know-before-you-harvest-your-2016-tax-losses.html [12/8/16]
5 – doughroller.net/reviews/schwab-intelligent-portfolios/ [7/11/17]
LPL Tracking 1-645276

Questions After the Equifax Data Breach

How long should you worry about identity theft in the wake of the Equifax hack? The correct answer might turn out to be "as long as you live." If your personal data was copied in this cybercrime, you should at least scrutinize your credit, bank, and investment account statements in the near term. You may have to keep up that vigilance for years to come.

Cybercrooks are sophisticated in their assessment of consumer habits and consumer memories. They know that eventually, many Americans will forget about the severity and depth of this crime – and that could be the right time to strike. All those stolen Social Security and credit card numbers may be exploited in the 2020s rather than today. Or, perhaps these criminals will just wait until Equifax’s offer of free credit monitoring for consumers expires.

Equifax actually had its data breached twice this year. On September 18, Equifax said that their databases had been entered in March, nearly five months before the well-publicized, late-July violation. Its spring security effort to prevent another hack failed. Bloomberg has reported that the same hackers may be responsible for both invasions.2
   
Should you accept Equifax’s offer to try and protect your credit? Many consumers have, but with reservations. Some credit monitoring is better than none, but those who signed up for Equifax’s TrustedID Premier protection agreed to some troubling fine print. By enrolling in the program, they may have waived their right to join any class action lawsuits against Equifax. Equifax claims this arbitration clause does not apply to consumers who sought protection in response to the hack, but lawyers are not so sure.1
   
Should you freeze your credit? Some analysts recommend this move. You can request all three major credit agencies (Equifax, Experian, TransUnion) to do this for you. Freezing your credit accounts has no effect on your credit score. It stops a credit agency from giving your personal information to a creditor, which should lower your risk for identity theft. The only hassle here is that if you want to buy a home, rent an apartment, or get a new credit card, you will have to pay a fee to each of the three firms to unfreeze your credit.1

Three other steps may improve your level of protection. Change your account passwords; this simple measure could really strengthen your defenses. Choose two-factor authentication when it is offered to you – this is when an account requires not just a password, but a second code necessary for access, which is sent in a text message to the accountholder’s mobile device. You can also ask for fraud alerts to be placed on your credit reports, but you must keep renewing them every 90 days.1

What other tools can help watch over your statements? If your bank, credit union, or credit card issuer does not offer identity theft protection and credit monitoring, consider free apps such as Credit Karma, Credit Sesame, and Clarity Money. Apart from simply protecting your credit and bank accounts, programs like EverSafe, Identity Guard, and LifeLock have the capability to scan the "dark web" where personal information is sold in addition to monitoring your credit reports. (You may be able to take advantage of a free, 30-day trial.)1

When a pillar of worldwide credit reporting has its data stolen twice in five months, the trust of the public is shaken. The lesson for the consumer, as depressing as it may be, is not to be too trusting of the online avenues and vaults through which personal information passes.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – time.com/money/4947784/7-questions-you-must-keep-asking-about-the-equifax-hack/ [9/20/17]
2 – bloomberg.com/news/articles/2017-09-18/equifax-is-said-to-suffer-a-hack-earlier-than-the-date-disclosed [9/18/17]
 LPL Tracking 1-649955