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Test Your Smarts on Insurance

How much do you know about insurance? Take this WSJ quiz, courtesy of wsj.com

For many consumers, insurance is a confusing maze of possibilities.

There are myriad kinds of policies available, including life, auto, homeowners, health, disability, flood and even pet insurance, that could be appropriate for people, depending on their circumstances and where they live. But many consumers don’t fully understand what each of these policies covers, and they may struggle to find the information they need to make informed decisions.

Insurance professionals recommend consumers review their policies and coverage options yearly to ensure they are properly protected. How much do you really know about insurance?

Take our quiz to find out.

  1. True or false: All disasters are covered under standard homeowners and renters insurance policies.

ANSWER: False. Standard homeowners policies typically cover damages from some potential disasters, including tornadoes, lightning strikes and winter storms, according to the Insurance Information Institute, which helps educate consumers on insurance-related issues. These policies can vary, so read the fine print. What’s more, standard homeowners policies generally don’t cover damages from disasters such as floods, earthquakes or sewer backups; separate endorsements or policies may be needed to protect against these types of problems, according to the institute.

  1. If a policy has a $500 deductible, and the insurance company determines that the insured loss is worth $10,000, the claimant would receive a check for ____________.
  1. $10,500
  2. $9,500
  3. $15,000
  4. None of the above

ANSWER: B. $9,500. The dollar amount of a deductible comes off the top of the claim payment. Deductibles can be specific dollar amounts or percentages, as is generally the case with homeowners insurance. With an auto-insurance or homeowners policy, the deductible applies each time you file a claim. One exception to this is in Florida, where homeowners policies usually require consumers to pay only one hurricane deductible per calendar year, rather than after each storm.

  1. When thinking about the amount of coverage to place on personal possessions, a good rule of thumb is to insure them at ___% to ___% of a person’s dwelling coverage amount.
  1. 10% to 15%
  2. 20% to 30%
  3. 50% to 70%
  4. None of the above

ANSWER: C. Most homeowners-insurance policies provide coverage for personal possessions at about 50%-70% of the insurance on the person’s dwelling, according to the Insurance Information Institute. So, if a person insures a dwelling for up to $150,000, he or she would want to insure personal possessions for at least $75,000.

  1. Usage-based insurance is _______________.
  1. A new type of biometric device.
  2. A type of vehicle insurance where premiums can depend on driving habits such as speed, miles driven and hard-braking incidents.
  3. A policy based on your life expectancy.
  4. A way of measuring how much your personal property is worth.

ANSWER: B. Usage-based insurance, also known as telematics, tracks driving behavior through devices installed in a vehicle or through smartphones. Wireless devices transmit data in real time to insurers, which use the information to help set premiums. The devices record metrics such as the number of miles driven, time of day, where the vehicle is driven, rapid acceleration, hard braking, hard cornering and air-bag deployment. By year-end, 80% of new cars for sale in the U.S. could be equipped with onboard telematics devices, and by 2020, 70% of all auto insurers will use telematics, the National Association of Insurance Commissioners predicts.

  1. Some ___% of households didn’t have life insurance in 2016, according to Limra, an industry-funded research firm.
  1. 5%
  2. 10%
  3. 20%
  4. 30%

ANSWER: D. 30%. The good news is that more households seem to recognize the need for life insurance. Nearly five million more U.S. households had life insurance coverage in 2016 than in 2010, according to the most recent data available from Limra.

  1. When choosing an insurance company, consumers should consider _____________________________.
  1. Whether the insurance company is licensed in their state.
  2. The cost of the insurance policy.
  3. The financial strength of the insurer.
  4. All of the above.

ANSWER: D. There were nearly 6,000 insurance companies to choose from in the U.S. in 2016, according to the National Association of Insurance Commissioners, so consumers should do their homework before choosing one. A good place to start is with their state insurance department, which can help identify which insurers are licensed to do business in the state. The department may even publish a guide that shows what insurers charge for different policies. Independent credit-rating firms—such as A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody’s and S&P Global Ratings—are another source of information. They rate insurers’ financial strength, which can be an important indicator of whether a firm will have the assets and liquidity to pay claims as promised. Consumers should also gauge the level of service insurers are providing and their comfort level with the company’s representatives.

  1. True or false: While not required, business-interruption insurance is a good idea for entrepreneurs and startups.

ANSWER: True. After a catastrophe or disaster, about 40% of businesses don’t reopen and an additional 25% fail within a year, according to data from FEMA and the U.S. Small Business Administration. Business-interruption insurance can help compensate small-business owners for lost revenue due to closure. This type of insurance can also help owners cover the cost of fixed expenses such as rent and utilities, as well as mitigate the expense of operating from a temporary location.

  1. True or false: People who don’t have health insurance in 2018 will still face a penalty when they file their taxes in early 2019.

ANSWER: True. While the penalty under the Affordable Care Act for not having health insurance has been repealed, the change doesn’t take effect until 2019, according to Louise Norris, a health-insurance broker who has been writing about health insurance and health-law overhaul since 2006. People who are uninsured in 2019 and beyond won’t be subject to a penalty, she says.

 

 

When a Lost Wallet Comes Back Empty

A behavioral economist answers questions on why people steal while returning lost property, the cost of news making rescues, and the value of do-it-yourself labor.

Written by Dan Ariel for the Wall Street Journal

I recently lost my wallet while shopping at the mall. Once I got it back, I realized that the person who returned it had stolen all the money and returned only my driver’s license and credit card. Here’s what I don’t get: How could a person doing such a kind act also do something so immoral? —Jessie

The basic principle operating here is what psychologists call “moral licensing.” Sometimes when we do a good deed, we feel an immediate boost to our self-image. Sadly, that also makes us less concerned with the moral implications of our next actions. After all, if we are such good, moral people, don’t we deserve to act a bit selfishly?

Moral licensing operates across many areas of life. After we recycle our trash from lunch, we’re more likely to buy non-green products. After we go to the gym, we’re more likely to order a double cheeseburger. This is probably why the person who found your wallet and decided to return it felt justified in taking your cash.

Dear Dan,

A thought occurred to me during recent coverage of the rescue of the Thai soccer team trapped in a cave. It seemed that no expense was spared in bringing out the 12 boys and their coach alive. But there are plenty of ways that, for a fraction of the cost, we as a society could save and improve the lives of far more people—for example, by spending more on public health measures.

I’m not criticizing the rescue of the soccer players. But what makes us care so much about these episodes and so little about other issues? —Stanley

You are correct in your observation. We’re much more motivated to take drastic measures to help others when we see suffering on a specific human face, rather than in abstract numbers. This is what’s known as the “identifiable victim effect.”

Consider, for example, the recent stories about immigrant children separated from their parents at the border. Most of us were aware of immigration problems before, but when the harm became more individual and visible, it seemed intolerable. We should be aware of this effect and, as you say, shouldn’t necessarily let it dictate where we focus our effort and resources.

Hi, Dan.

I recently decided to remodel my bathroom myself instead of hiring a contractor to do it. It took up my weekends for nine months, time that I otherwise would have spent in advancing my career. I enjoy the hands-on work, but would I have been better off focusing on my job and trying to earn more money? —Will

While it’s certainly more time-efficient to hire a contractor, and you could have used the time to further your career, it sounds like you got a lot of satisfaction out of remodeling the bathroom yourself. Several colleagues and I conducted research a few years ago on what we called the “IKEA effect.” It turns out that when we assemble something ourselves, we end up taking a lot of pride in it, and for a long time. So I wouldn’t just think about money and time. Think also about the pleasure of taking pride in your craftsmanship.

 

 

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Are Changes Ahead for Retirement Accounts

A bill now in Congress proposes to alter some longstanding rules.

Most Americans are not saving enough for retirement, despite ongoing encouragement to do so (and recurring warnings about what may happen if they do not). This year, lawmakers are also addressing this problem, with a bill proposing big changes to IRAs and workplace retirement plans.

The Retirement Enhancement and Savings Act (RESA), introduced by Senator Orrin Hatch, would amend the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA) in some significant ways.1

Contributions to traditional IRA accounts would be allowed after age 70½. Today, only Roth IRAs permit inflows after the owner reaches this age.2

An expanded tax break could lead to more multiple-employer retirement plans. If small employers partner with similar companies or organizations to offer a joint retirement savings program, the RESA would boost the tax credit available to them to offset the cost of starting up a plan. The per-employer tax break would rise from $500 to $5,000. A multiple-employer plan could be attractive to small companies, for it might mean lower plan costs and administrative fees.2

Portions of federal tax refunds could even be directed into workplace plans. The RESA would allow employees to preemptively assign some of their refund for this purpose.2

Retirement income projections could become a requirement for plans. Not all monthly and quarterly statements for retirement accounts contain them; the RESA would make them mandatory. It would oblige financial firms providing investments to employer-sponsored plans to detail the amount of cash that the current account balance would generate per month in retirement, as if it were fixed pension income. Plans might also be permitted to offer insurance products to retirement savers.2,3

A new type of workplace retirement account could emerge if the RESA passes. So far, this account has been described vaguely; the phrase “open-ended” has been used. The key feature? Employees could take loans from it without penalty.2,3

Whether the RESA becomes law or not, the good news is that more of us are saving. In the 2016 GoBankingRates Retirement Survey, 33.0% of respondents said that they had saved nothing for retirement; in this year’s edition of the survey, that dropped to 13.7%, possibly reflecting the influence of auto-enrollment programs for workplace plans, the emergence of the (now absent) myRA, and improved economic ability to build a retirement fund. (In the 2018 edition of the survey, the top reason people were refraining from saving for retirement was “I don’t make enough money.”)4

Could the RESA pass before Congress takes its summer recess? Good question. Senate and House lawmakers have many other bills to consider and a short window of time to try and further them along. The bill’s proposals may evolve in the coming weeks.

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 – congress.gov/bill/115th-congress/senate-bill/2526 [7/3/18]
2 – fool.com/retirement/2018/07/22/heres-what-the-proposed-retirement-savings-changes.aspx [7/22/18]
3 – marketwatch.com/story/proposed-changes-to-your-401k-retirement-plan-could-be-promising-or-not-2018-07-18 [7/18/18]
4 – gobankingrates.com/retirement/planning/why-americans-will-retire-broke/ [3/6/18]

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Leaving a Legacy to Your Grandkids

Now is the time to explore the possibilities.

Grandparents Day provides a reminder of the bond between grandparents and grandchildren and the importance of family legacies.

A family legacy can have multiple aspects. It can include much more than heirlooms and appreciated assets. It may also include guidance, even instructions, about what to do with the gifts that are given. It should reflect the values of the giver.

What are your legacy assets? Financially speaking, a legacy asset is something that will outlast you, something capable of producing income or wealth for your descendants. A legacy asset might be a company you have built. It might be a trust that you create. It might be a form of intellectual property or a portfolio of real property. A legacy asset should never be sold – not so long as it generates revenue that could benefit your heirs.

To help these financial legacy assets endure, you need an appropriate legal structure. It could be a trust structure; it could be an LLC or corporate structure. You want a structure that allows for reasonable management of the legacy assets in the future – not just five years from now, but 50 or 75 years from now.1

Think far ahead for a moment. Imagine that forty years from now, you have 12 heirs to the company you founded, the valuable intellectual property you created, or the real estate holdings you amassed. Would you want all 12 of your heirs to manage these assets together?

Probably not. Some of those heirs may not be old enough to handle such responsibility. Others may be reluctant or ill-prepared to take on the role. At some point, your grandkids may decide that only one of them should oversee your legacy assets. They may even ask a trust officer or an investment professional to take on that responsibility. This can be a good thing because sometimes the beneficiaries of legacy assets are not necessarily the best candidates to manage them.

Values are also crucial legacy assets. Early on, you can communicate the importance of honesty, humility, responsibility, compassion, and self-discipline to your grandkids. These virtues can help young adults do the right things in life and guide their financial decisions. Your estate plan can articulate and reinforce these values, and perhaps, link your grandchildren’s inheritance to the expression of these qualities.

You may also make gifts with a grandchild’s education or retirement in mind. For example, you could fully fund a Roth IRA for a grandchild who has earned income or help an adult grandchild fund their Roth 401(k) or Roth IRA with a small outright gift. Custodial accounts represent another option: a grandparent (or parent) can control assets in a 529 plan or UTMA account until the grandchild reaches legal age.3

Make sure to address the basics. Is your will up to date with regard to your grandchildren? How about the beneficiary designations on your IRA or your life insurance policy? Creating a trust may be a smart move. In fact, you can set up a living irrevocable trust fund for your grandkids, which can actually begin distributing assets to them while you are alive. While you no longer own assets you place into an irrevocable trust (which is overseen by a trustee), you may be shielded from estate, gift, and even income taxes related to those assets with appropriate planning.4

This Grandparents Day, think about the legacy you are planning to leave. Your thoughtful actions and guidance could help your grandchildren enter adulthood with good values and a promising financial start.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – forbes.com/sites/danielscott1/2017/09/04/three-common-goals-every-legacy-plan-should-have/ [9/4/17]
2 – wealthmanagement.com/high-net-worth/key-considerations-preparing-family-legacy-plan [3/27/17]
3 – marketwatch.com/story/whats-next-after-planning-your-retirement-help-your-children-and-grandchildren-plan-for-theirs-2017-10-17 [10/17/17]
4 – investopedia.com/articles/pf/12/set-up-a-trust-fund.asp [1/23/18]

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The Sequence of Returns

A look at how variable rates of return do (and do not) impact investors over time. 

What exactly is the “sequence of returns”? The phrase simply describes the yearly variation in an investment portfolio’s rate of return. Across 20 or 30 years of saving and investing for the future, what kind of impact do these deviations from the average return have on a portfolio’s final value?

The answer: no impact at all.

Once an investor retires, however, these ups and downs can have a major effect on portfolio value – and retirement income.

During the accumulation phase, the sequence of returns is ultimately inconsequential. Yearly returns may vary greatly or minimally; in the end, the variance from the mean hardly matters. (Think of “the end” as the moment the investor retires: the time when the emphasis on accumulating assets gives way to the need to withdraw assets.)

An analysis from BlackRock bears this out. The asset manager compares three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years. In two of these scenarios, annual returns vary from -7% to +22%. In the third scenario, the return is simply 7% every year. In all three scenarios, each investor accumulates $5,434,372 after 25 years – because the average annual return is 7% in each case.1

Here is another way to look at it. The average annual return of your portfolio is dynamic; it changes, year-to-year. You have no idea what the average annual return of your portfolio will be when “it is all said and done,” just like a baseball player has no idea what his lifetime batting average will be four seasons into a 13-year playing career. As you save and invest, the sequence of annual portfolio returns influences your average yearly return, but the deviations from the mean will not impact the portfolio’s final value. It will be what it will be.1

When you shift from asset accumulation to asset distribution, the story changes. You must try to protect your invested assets against sequence of returns risk.

This is the risk of your retirement coinciding with a bear market (or something close). Even if your portfolio performs well across the duration of your retirement, a bad year or two at the beginning could heighten concerns about outliving your money.

For a classic illustration of the damage done by sequence of returns risk, consider the awful 2007-2009 bear market. Picture a couple at the start of 2008 with a $1 million portfolio, held 60% in equities and 40% in fixed-income investments. They arrange to retire at the end of the year. This will prove a costly decision.

The bond market (in shorthand, the S&P U.S. Aggregate Bond Index) gains 5.7% in 2008, but the stock market (in shorthand, the S&P 500) dives 37.0%. As a result, their $1 million portfolio declines to $800,800 in just one year. Its composition also changes: by December 31, 2008, it is 53% fixed income, 47% equities.2

Now comes the real pinch. The couple wants to go by the “4% rule” (that is, the old maxim of withdrawing 4% of portfolio assets during the first year of retirement). Abiding by that rule, they can only withdraw $32,032 for 2009, as compared to the $40,000 they might have withdrawn a year earlier. This is 20% less income than they expected – a serious blow.2

Two other BlackRock model scenarios shed further light on sequence of returns risk, involving two hypothetical investors. Each investor retires with $1 million in portfolio assets at age 65, each makes annual withdrawals of $60,000, and each portfolio averages a 7% annual return over the next 25 years. In the first scenario, the annual portfolio returns for the first eight years of retirement are +22%, +15%, +12%, -4%, -7%, +22%, +15%, +12%. In the second, the returns from year 66-73 are -7%, -4%, +12%, +15%, +22%, -7%, -4%, +12%. (For simplicity’s sake, both investors see this 5-year cycle repeat through age 90: three big advances of either +12%, +15%, or +22%, then two yearly losses of either -4% or -7%.)1

At the end of 25 years, the investor in the first scenario – the one characterized by big gains out of the gate – has $1,099,831 at age 90, even with yearly $60,000 drawdowns gradually adjusted 3% for inflation. In that scenario, the portfolio losses are fortunately postponed – they come three years into retirement, and six of the first eight years of retirement see solid gains. In the second scenario, the investor sees four bad years out of eight from age 66-73 and starts out with single-digit portfolio losses at age 66 and 67. After 25 years, this investor has … nothing. At age 88, he or she runs out of money – or at least all the assets in this portfolio. That early poor performance appears to take a significant toll.1

Can you strategize to try and avoid the fate of the second investor? If you sense a market downturn coming on the eve of your retirement, you might be wise to shift portfolio assets away from equities and into income-generating investments with little or no correlation to the weather on Wall Street. If executed well, such a shift might even provide you with greater retirement income than you anticipate.2

If you are about to retire, do not dismiss this risk. If you are far from retirement, keep saving and investing knowing that the sequence of returns will have its greatest implications as you make your retirement transition.

Examples are hypothetical and are not representative of any specific situations. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

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 – blackrock.com/pt/literature/investor-education/sequence-of-returns-one-pager-va-us.pdf [6/18]
2 – kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html [7/3/18]

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The Turkish Currency Crisis

A look at why it matters so much to the world, and the risk of a domino effect.

The collapse of the Turkish lira has become a major financial story. You may wonder why the financial media is devoting so much space to this, as Turkey is not exactly China or Japan or Germany. The fear is that Turkey’s problem hints at a greater crisis.1,2

Globally speaking, Turkey is not all that minor. Its economy is the world’s seventeenth largest, and while it is seen as an emerging market, it is also in the trade orbit of the European Union. Turkey does not yet belong to the E.U., but it trades heavily with E.U. countries: it ranks fifth among importers to the E.U. and represents the fourth-largest E.U. export market.1,2

Stubbornness. Nepotism. Incompetence. These are the words associated with Turkish monetary policy of late. After his reelection, Turkish President Recep Tayyip Erdogan called interest rates the “mother and father of all evil” and made his brother-in-law the nation’s finance minister. Stunningly, the nation’s central bank then announced it would not raise interest rates, bucking a global trend. (A rate hike finally happened in July.) The Turkish lira has lost 40% of its value versus the dollar this year, and it fell 18.5% in a day following President Trump’s August 10 vow to double U.S. tariffs on Turkish steel and aluminum imports.3,4

Turkey’s current monetary policy is ill-timed. The dollar is getting stronger and stronger versus other currencies, mainly because the Federal Reserve is raising interest rates and unwinding its $4.5 trillion portfolio of government securities in response to a healthier economy. The majority of Turkey’s debt is dollar-denominated – and like many developing nations, it uses local currency to pay off dollar-backed debts.3,4

What if Turkey’s currency implosion is just the tip of the iceberg? This is the major question bothering economists and institutional investors. Argentina owns a great deal of debt priced in dollars. Did you know that the International Monetary Fund gave Argentina a $50 billion bailout in June? Did you know that the benchmark interest rate in Argentina is currently 45%? Its peso dropped to a record low in early August. South Africa, Russia, and Mexico have also seen their currencies slip recently.3

In the worst-case scenario, something like the 1997-98 global currency crisis occurs. In July 1997, Thailand had to devalue its currency, the baht, to a record low. Over the next year-and-a-half, Malaysia, the Philippines, China, Hong Kong, Indonesia, and South Korea all faced financial emergencies; the Dow had its two worst trading sessions in history, with drops of 554 and 512 points; leading Japanese banks and brokerages collapsed; the IMF had to loan $23 billion to Russia, $57 billion to South Korea, and $40 billion to Indonesia; Russia’s stock market cratered; Japan went into a recession for the first time since 1975; and according to the IMF, world economic growth was reduced by about 50%.5

You can see why investors, economists, and journalists might be concerned about the currency crisis in Turkey. It is worth pointing out that the U.S. came through that 1997-98 global crisis relatively unscathed, though, as always, past performance is no guarantee of future results.5

Hopefully, what is happening in Turkey will not prove to be the first act of a drama for the global economy. If it is, fast action may be required by the IMF, the World Bank, and central banks to restore confidence in the markets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

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 – nasdaq.com/article/market-slides-on-turkeys-troubles1-cm1007145 [8/14/18]
2 – ec.europa.eu/trade/policy/countries-and-regions/countries/turkey/ [4/16/18]
3 – money.cnn.com/2018/08/14/investing/turkey-lira-emerging-market-crisis/index.html [8/14/18]
4 – marketwatch.com/story/3-reasons-why-the-selloff-in-turkeys-lira-matters-to-global-markets-2018-08-10 [8/10/18]
5 – pbs.org/wgbh/pages/frontline/shows/crash/etc/cron.html [11/17/15]

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Financial Fraudsters Preying on Boomers & Elders

If something sounds too good to be true, it probably is.

If you are in or near retirement, it is a safe bet that you would like more yield from your investments rather than less. That truth sometimes leads liars, scammers, and fraudsters to pitch any number of too-good-to-be-true “investment opportunities” to retirees. Given all that and the classic money scams perpetrated on elders, you have good reason to be financially skeptical as you get older.

Beware of unbelievable returns. Sometimes you hear radio commercials or see online ads that refer to “an investment” or “an investment opportunity” that is supposedly can’t miss. Its return beats the ones achieved by the best Wall Street money managers, only the richest Americans who know the “secrets” of wealth know about it, and so forth.

Claims like these are red flags, the stuff of late-night infomercials. Still, there are retirees who take the bait. Sometimes the return doesn’t match expectations (big surprise); sometimes their money vanishes in a Ponzi scheme or pyramid scheme of sorts. Any monthly or quarterly statements – if they are sent to the investor at all – should be taken with many grains of salt. If they seem to be manually prepared rather than sent from a custodian firm, that’s a hint of danger right there.

Beware of equity investments with “guaranteed” returns. On Wall Street, nothing is guaranteed.

Beware of unlicensed financial “professionals.” Yes, there are people operating as securities professionals and tax professionals without a valid license. If you or your friends or relatives have doubts about whether an individual is licensed or in good standing, you can go to finra.org, the website of the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers) and use their BrokerCheck feature.1

Beware of the “pump and dump.” This is the one where someone sends you an email – maybe it goes straight to your spam folder, maybe not – telling you about this hot new microcap company about to burst. The shares are a penny each right now, but they will be worth a thousand times more in the next 30 days. The offer may be entirely fraudulent; it may even promise a guaranteed return. Chances are, you will simply say goodbye to whatever money you “invest” if you pursue it. Brokers pushing these stocks may not even be licensed.2

Watch out for elder scams. In addition to phony financial services professionals and exaggerated investment opportunities, we have fraudsters specifically trying to trick septuagenarians, octogenarians, and even folks aged 90 and above. They succeed too often. To varying degrees, all these ploys aim to exploit declining faculties or dementia. That makes them even uglier.

You still see stories about elders succumbing to the “grandparent scam,” a modern-day riff on the old “Spanish prisoner” tale. Someone claiming to be a grandson or granddaughter calls and says that they are in desperate financial straits – stranded without a car or return ticket in some remote or hazardous location, in jail, in an emergency room without health insurance, could you wire or transfer me some money, etc.  A disguised voice and a touch of personal information gleaned from everyday Internet searches still make this one work.3

Would you believe some crooks prey on the grieving? Elders can be targeted by funeral scams, in which a criminal reads new obituaries, and then calls up widowers claiming that the deceased spouse or partner had an outstanding debt with them. Occasionally, the crook even attends the funeral and presents the bogus claim to the bereaved in person. Identity thieves may present themselves as official representatives of Medicare – they are calling from Washington D.C. or the local Medicare office, they have detected an error, and they need a senior’s personal information to make things right. In reality, they aim to do wrong.4

Everyone wants to look younger, and unsurprisingly, new scams have surfaced pitching bogus anti-aging products. One Arizona-based scam pushing fake Botox brought in $1.5 million in just over a year before its masterminds were arrested. Expect to see more of this, with the cosmetics or medicines offered either amounting to snake oil or resulting in physical harm.4

A little healthy skepticism can’t hurt. If you are recently retired or approaching retirement age, be aware of these scams and schemes – and inform your elderly parents about them, too.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – finra.org/investors/about-brokercheck [7/9/18]
2 – money.usnews.com/investing/stock-market-news/articles/2018-03-08/penny-stocks-5-ways-to-spot-a-pump-and-dump-scam [3/8/18]
3 – tickertape.tdameritrade.com/retirement/elderly-financial-scams-16236 [12/25/17]
4 – ncoa.org/economic-security/money-management/scams-security/top-10-scams-targeting-seniors/ [7/9/18]

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The Snowball Effect

Save and invest, year after year, to put the full power of compounding on your side.

Have you been saving for retirement for a decade or more? if so, something terrific may likely happen with your IRA or your workplace retirement plan account in the foreseeable future. At some point, its yearly earnings should begin to exceed your yearly contributions.

Just when could this happen? The timing depends on several factors, and the biggest factor may simply be consistency – your ability to keep steadily investing and saving. The potential for this phenomenon is apparent for savers who start early and savers who start late. Here are two mock scenarios.

Christina starts saving for retirement at age 23. After college, she takes a job paying $45,000 a year. Each month, she directs 10% of her salary ($375) into a workplace retirement plan account. The investments in that account earn 6% per year. Thirteen years later, Christina is still happily working at the same firm and still regularly putting 10% of her pay into the retirement plan each month. She now earns $58,200 a year, so her monthly 10% contribution has risen over the years from $375 to $485.1

The ratio of account contributions to account earnings has tilted during this time. After eight years of saving and investing, the ratio is about 2:1 – for every two dollars going into the account, a dollar is being earned by its investments. During year 13, the ratio hits 1:1 – the account starts to return more than $500 per month, with a big assist from compound interest. In years thereafter, the 6% return the investments realize each year tops her year’s worth of contributions to the principal. (Her monthly contributions have grown by more than 20% during these 13 years, and that also has had an influence.)1

Fast forward to 35 years later. Christina is now 58 and nearing retirement age, and she earns $86,400 annually, meaning her 10% monthly salary deferral has nearly doubled over the years from the initial $375 to $720. This has helped her build savings, but not as much as the compounding on her side. At 58, her account earns about $2,900 per month at a 6% rate of return – more than four times her monthly account contribution.1

Lori needs to start saving for retirement at age 49. Pragmatic, she begins putting $1,000 a month into a workplace retirement plan. Her account returns 7% a year. (For this example, we will assume Lori maintains her sizable monthly contribution rate for the duration of the account.) By age 54, thanks to compound interest, she has $73,839 in her account. After a decade of contributing $12,000 per year, she has $177,403. She manages to work until age 69, and after 20 years, the account holds $526,382.2

These examples omit some possible negatives – and some possible positives. They do not factor in a prolonged absence from the workforce or bad years for the market. Then again, the 6% and 7% consistent returns used above also disregard the chance of the market having great years.

Repeatedly, investors are cautioned that past performance is no guarantee or indicator of future success. This is true. It is also true that the yearly total return of the S&P 500 (that is, dividends included) averaged 10.2% from 1917-2017. Just stop and consider that 10.2% average total return in view of all the market cycles Wall Street went through in those 100 years.2

Keep in mind, when the yearly earnings of your IRA or employer-sponsored retirement plan account do start to exceed your yearly contributions, it is still prudent to continue making them. You should keep the momentum of your savings effort going to maintain your compounding potential.

These are a hypothetical examples and are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

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/5204859/retirement-investments-savings-compounding/ [3/21/18]
2 – fool.com/investing/2018/05/16/how-to-invest-1000-a-month.aspx [5/16/18]

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Financial Steps to Take Before a Divorce

Wise moves to make before things are finalized.

Before your divorce goes through, it will be wise to check up on financial matters. It will be better to assess the state of your financial life before the split rather than after.

Find out where you stand financially. Beyond your salary and your bank accounts, how much do you have in the way of retirement savings? What will your monthly income be? What investments do you hold? Will you retain ownership of any real estate, and assume the mortgage payments yourself? Will you be selling any assets or ownership interests?

You should document everything about your personal finances. Everything you can think of. Whether you scan it or copy it, you should have as complete a picture of your financial life as possible.

The picture of your financial life should also detail your credit & insurance. Do you know your credit score? Today, a good credit score is considered anything north of 690. If you have a score in the mid-600s, you have fair credit. Below 630, you have poor credit.1

Track your credit before & after your divorce. There are three major credit reporting agencies that assign you credit ratings: Equifax, TransUnion, and Experian. Through Credit.com, you can see two of these three credit scores for free, updated each month. You may also request a copy of your credit report every 12 months from the three reporting agencies; you are entitled to it, by law. Ask all three for such a report, if you haven’t already. If your ex-spouse attempts to add some unauthorized debt in your name, this is one way to know about it.1

Do you have your own health insurance? If so, how much do you pay for it per month? If not, you may have a challenge to secure it – hopefully, your health or employment situation allows you to get coverage without many obstacles. Apart from health coverage, other types of insurance have no doubt protected other people and important items in your household. Who owns these policies? The beneficiary designations on the policies will undoubtedly need to change.

What should you do about taxes? If you are divorcing after April, should you and your spouse file one more joint return? This calls for a chat with your tax professional. Filing jointly could of course save you money compared to filing singly, but it also means you are jointly responsible for everything on that 1040 form.

If you remain legally married and living with each other when a calendar year ends, the two of you must file your federal tax return for that year as a married couple – your filing status will either be married filing jointly or married filing separately. If you think you will receive a refund, you and your former spouse will have to communicate to see how it will be divided – the IRS does not allocate refunds to divorced spouses by any kind of formula.2

If you will have primary custody of your children, the IRS expects that you will claim the exemption for dependent children on your 1040 form. If you have multiple children, it is allowable for you and your former spouse to divide the per-child exemptions as you see fit. If you paid some or all of the medical expenses for one of your children, you can deduct those expenses even if your ex-spouse has primary custody of that child.2

Most importantly, assess what your financial potential will be after the divorce. An “equal” settlement is not always an equitable one, as one spouse may be left with much greater potential to build and retain wealth than the other. That is the most important long-term issue to address, and it should be addressed well before a divorce is finalized.

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 – ajc.com/feed/business/personal-finance/the-important-financial-lesson-you-wont-learn-in/fCRRNr/ [8/21/16]
2 – irs.com/articles/filing-your-taxes-after-divorce [9/15/16]

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Tax Changes Around the Home

How the Tax Cuts & Jobs Act impacted three popular deductions.

Three recent tax law changes impact homeowners and home-based businesses. They may affect your federal income taxes this year.

The SALT deduction now has a $10,000 yearly limit. You can now only deduct up to $10,000 of some combination of (a) state and local property taxes or (b) state and local income taxes or sales taxes, annually. (Taxes paid or accumulated due to trade activity or business activity are exempt from the $10,000 limit.)1,2

If you have itemized for years and are continuing to itemize this year, this $10,000 cap may be irritating, especially if there is no state income tax or a very high state income tax where you live. In the state of New York, for example, taxpayers who took a SALT deduction in 2015 deducted an average of $22,169.1,2

Connecticut, New Jersey, and New York all recently passed laws in reaction to the new $10,000 limit, essentially offering taxpayers a workaround – cities and townships within those states may create municipal charities through which residents may receive property tax credits in exchange for charitable contributions.2

So far, the Internal Revenue Service is not fond of this. I.R.S. Notice 2018-54, released in May, warns that “despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.” Both the I.R.S. and the Department of the Treasury are preparing rules to respond to these state legislative moves.2,3

The interest deduction on home equity loans is not quite gone. The Tax Cuts & Jobs Act seemed to suspend it entirely until 2026, but this winter, the I.R.S. issued guidance noting that the deduction still applies if a home equity loan is arranged to help a taxpayer “buy, build or substantially improve” the involved house. So, you may still deduct interest on a home equity loan if your receipts show that the borrowed amount is used for a new 30-year roof, a kitchen remodel, or similar upgrades. Keep in mind that the Tax Cuts & Jobs Act lowered the limit on the total home loan amount eligible for the interest deduction each year – it is now set at $750,000. That cap applies to the combined home loans a taxpayer takes out for both a primary and secondary residence.1,4,5

The home office deduction is gone, unless you are self-employed. Before 2018, if you dedicated an area of your home solely to business use and defined it as your principal place of business to the I.R.S., you could claim a home office deduction on Schedule A. This was considered a miscellaneous itemized deduction. Unfortunately, the Tax Cuts & Jobs Act did away with miscellaneous itemized deductions. If you work for yourself, though, you can still claim the home office deduction using Schedule C, the form used to report income or loss from a business activity or a profession.5

Are you strategizing to maximize your 2018 federal tax savings? Are you looking for ways to legally reduce your federal and state tax obligations? Talk to a financial professional to gain insight and plan for this year and the years ahead.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. 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 – investopedia.com/taxes/how-gop-tax-bill-affects-you/ [1/3/18]
2 – cnbc.com/2018/05/23/irs-treasury-have-set-their-sights-on-blue-states-tax-workarounds.html [5/23/18]
3 – irs.gov/pub/irs-drop/n-18-54.pdf [5/23/18]
4 – nytimes.com/2018/03/09/your-money/home-equity-loans-deductible.html [3/9/18]
5 – fool.com/taxes/2018/05/20/say-goodbye-to-the-home-office-deduction-unless-yo.aspx [5/20/18]