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Financial Planning Optimism

It’s back to school for students all across the country, and whether it’s the first week in kindergarten, high school, or college, parents and students alike are excited yet probably nervous at the same time. What will the new school year bring—and can it live up to our hopeful expectations? This is likely how many investors may feel about the markets right now, with reasons for excitement and some causes for concern. Overall, when it comes to market fundamentals, the positives may outweigh the negatives—and hopefully the same will be the case for the 2018–19 school year.

Strength in several economic and market indicators is driving optimism among consumers and businesses. The Institute for Supply Management manufacturing index has soared to a 14-year high, while the job market also continues to show robust growth. As we await the figures for August, the economy has produced an average of 215,000 new jobs during the first seven months of the year. These positive economic indicators cement expectations of an additional interest rate increase at the Federal Reserve’s (Fed) September meeting; given the Fed’s gradual and transparent rate hike campaign, however, investors in U.S. markets have thus far taken these increases in stride.

Along with a steady economy, corporate America continues to deliver solid performances, as second quarter earnings season delivered very strong profit growth. Meanwhile, generally upbeat forward-looking guidance, along with high business and consumer confidence, helps support the outlook for earnings over the balance of the year and into 2019. With this backdrop, the now longest bull market in history may have further to go.

Although stocks have been performing well, there are some areas of concern. September is historically the weakest month of the year for stocks. There are also some trouble spots in emerging markets, including Turkey and Argentina, which have led to year-to-date losses in emerging market investment strategies. Policy risk remains in the background with the ongoing trade tensions and the upcoming midterm elections. These factors may lead to a pickup in near-term market volatility, but stocks still have the potential to push higher from current levels over the rest of the year.

The longest bull market, and one of the longest economic expansions, means investors may worry that the good times will soon come to an end. But it appears that both the bull market and expansion have room to run. The U.S. economy is enjoying solid momentum, bolstered by the new tax law; business spending is picking up; the manufacturing sector is healthy; and the latest earnings season was one of the strongest on record. So although there are areas to keep a close eye on, and the potential for some ups and downs in the market, we can retain a positive outlook for the final months of 2018. Let’s hope that students, teachers, and parents can also put their worries aside and enjoy their return to another school year.

As always, if you have any questions, I encourage you to contact me.

Sincerely,

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

This research material has been prepared by LPL Financial LLC. Tracking #1-768037

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Guarding Against Identity Theft

Take steps so criminals won’t take vital information from you.

America is enduring a data breach epidemic. The latest annual study of the problem from Javelin Strategy & Research, a leading financial analytics research firm, says that 16.7 million people across the nation were impacted by I.D. theft in 2017 – an all-time high.1

The problem is getting worse – much worse. Last year, 30% of U.S. consumers were alerted about data breaches by firms holding their personal information. In 2016, just 12% of consumers were so affected.1

Social Security numbers were compromised in 35% of I.D. crimes last year; credit card numbers, in 30% of breaches. Account takeovers tripled in 2017. About 1 million smartphone and computer users had phony intermediary accounts established for them at Amazon, PayPal, and other commerce websites.1

Tax time is prime time for identity thieves. They would love to get their hands on your 1040 form, and they would also love to claim a phony refund using your personal information. In 2016, the I.R.S. had spotted 1 million bogus returns; in 2017, the number dropped to 900,000. This spring, initial data suggested even fewer cases of fraud would be identified, but the numbers are still too large.2

E-filing of tax returns is smart; just make sure you use a secure Internet connection. When you e-file, you aren’t putting your Social Security number, address, and income information through the mail. You aren’t leaving Form 1040 on your desk at home (or work) while you get up and get some coffee or go out for a walk. If somehow you just can’t bring yourself to e-file, then think about sending your returns via Certified Mail. Those rough drafts of your returns where you ran the numbers and checked your work? Shred them.

The I.R.S. doesn’t use unsolicited emails to request information from taxpayers. If you get an email claiming to be from the I.R.S. asking for your personal or financial information, report it to your email provider as spam.3

Use secure Wi-Fi. Avoid “coffee housing” your personal information away – never risk disclosing financial information over a public Wi-Fi network. (Broadband is susceptible, too.) It takes little sophistication to do this – just a little freeware.

Sure, a public Wi-Fi network at an airport or coffee house is password-protected – but if the password is posted on a wall or readily disclosed, how protected is it? A favorite hacker trick is to sit idly at a coffee house, library, or airport and set up a Wi-Fi hotspot with a name similar to the legitimate one. Inevitably, people will fall for the ruse, log on, and get hacked.

Look for the “https” & the padlock icon when you visit a website. Not just http, https. When you see that added “s” at the start of the website address, you are looking at a website with active SSL encryption, and you want that. A padlock icon in the address bar confirms an active SSL connection. For really solid security when you browse, you could opt for a VPN (virtual private network) service which encrypts 100% of your browsing traffic.4,5

Check your credit report. Remember, you are entitled to one free credit report per year from each of the big three agencies: Experian, TransUnion, and Equifax. Historically, asking these bureaus to freeze your credit file in case of suspicious activity has cost a fee. Beginning in fall 2018, you will be able to request a freeze from all three at no charge, thanks to a change in federal law.6

Don’t talk to strangers. Broadly speaking, that is very good advice in this era of identity theft. If you get a call or email from someone you don’t recognize – it could tell you that you’ve won a prize; it could claim to be someone from the county clerk’s office, a pension fund, or a public utility – be skeptical. Financially, you could be doing yourself a great favor.

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 – cbsnews.com/news/identity-theft-hits-record-high/ [2/6/18]
2 – nextgov.com/cybersecurity/2018/04/irs-stopping-fewer-fraudulent-returns-and-s-good-thing/147305/ [4/9/18]
3 – forbes.com/sites/kellyphillipserb/2018/03/22/irs-warns-on-dirty-dozen-tax-scams/ [3/22/18]
4 – nytimes.com/2018/05/04/technology/personaltech/staying-safer-on-public-networks.html [5/4/18]
5 – cntraveler.com/story/how-to-keep-your-data-safe-while-traveling [6/7/18]
6 – nbcnews.com/business/consumer/credit-freezes-will-soon-be-free-everyone-n883146 [6/14/18]

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Financial Considerations When Buying a Car

Things to think about before heading to a dealership.

Time to buy a car? Short of buying a house, this is one on the most important purchases you will make. It’s also one that you might be making several times through your life, comprising of thousands – sometimes tens of thousands – of dollars.

If you think about it, you can probably imagine other things that you might want to prioritize, ranging from saving for retirement, buying a home, or even some lifestyle purchases, like travel. Not to mention that having more money on hand will likely be handy if you have sudden need of an emergency fund. Thankfully, there are many options for saving money by avoiding spending too much on your next car. Here are some things to think about.

Buying a new car? It may not be the best value; a brand-new car loses roughly 20% of value over the first year and about 10% of that happens the moment you drive it off the lot. Buying used might require more research and test driving, but under the right circumstances, it can be a considerably better value.1

A trade-in might not always favor you. A dealership has to make a profit on the vehicle you are trading in, so you will often receive far less than the Blue Book value. A better value may be to try to sell your vehicle, yourself, directly to another person. If you do attempt a trade-in, avoid any major expenditures on the old car beforehand, like major repairs or even a detailing. Focus on getting the best price for the new car and leave the trade-in for the end of your negotiation.2

Leasing vs. buying. Leasing a car may only be advantageous if you are a business owner and able to leverage the payments as a tax deduction. While you can get a brand-new car every few years, there are many hoops to jump through; you need excellent credit, and there are many potential fees and penalties to consider when leasing, which you don’t face when buying. In many ways, it’s akin to renting a car for a longer period of time, with all of the disadvantages and responsibilities.3

Shop around for interest rates, but consider credit unions. Credit unions tend to have more favorable rates as they are member owned. At the average American bank, the interest rates are 4.5%, according to Bankrate.com. Meanwhile, you can often get rates in the neighborhood of 2.97% through the typical credit union. There are a number of other benefits to credit unions, including being based locally as well as user-friendly practices, such as options to apply to a credit union at the dealership. There are many financing options, though, so make credit unions only part of your research.4

An automobile is a big-ticket purchase. It’s worth taking your time and making sure that you’ve covered your bases in terms of making the most responsible purchase.

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 – marketwatch.com/story/8-things-youre-better-off-buying-used-2018-08-02 [8/2/18]

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When to Ignore the Crowd and Shun a Roth IRA

‘Stealth’ taxes and financial aid implications are among the factors savers should consider when switching accounts

The following article is Courtesy of Laura Saunders and The Wall Street Journal, and makes some very good points on why funding a Roth Conversion could have a negative impact to an overall financial plan. For many of our clients who are high income earners, the worse possible time for a Roth Conversion may be when they are in their peak earning years – the same period of time most people think about this for the first time.

To determine if a Roth IRA is the right strategy for you and your family, or perhaps to learn when might be the right time to explore this strategy, feel free to reach out to Cornerstone.

Switching your traditional individual retirement account to a Roth IRA is often a terrific tax strategy—except when it’s a terrible one.

Congress first allowed all owners of traditional IRAs to make full or partial conversions to Roth IRAs in 2010. Since then, savers have done more than one million conversions and switched more than $75 billion from traditional IRAs to Roth accounts. (Source: The Wall Street Journal September 2018)

The benefits of a Roth conversion are manifold. A conversion gets retirement funds into an account that offers both tax-free growth and tax-free withdrawals. In addition, the account owner doesn’t have to take payouts at a certain age.

While traditional IRAs can also grow tax-free, withdrawals are typically taxed at ordinary income rates. Account owners 70½ and older also must take payouts that deplete the account over time.

IRA specialist Ed Slott and Natalie Choate, an attorney in Boston, say that Roth IRAs also yield income that is “invisible” to the federal tax system. So Roth payouts don’t raise reported income in a way that reduces other tax breaks, raises Medicare premiums, or increases the 3.8% levy on net investment income.

Yet both Ms. Choate and Mr. Slott agree that despite their many benefits, Roth conversions aren’t always a good idea. IRA owners who convert must pay tax on the transfer, and the danger is that savers will give up valuable tax deferral without reaping even more valuable tax-free benefits. For tax year 2018 and beyond, the law no longer allows IRA owners to undo Roth conversions.

Savers often flinch at writing checks for Roth conversions, and sometimes there are good reasons not to put pen to paper. Here are some of them.

  • Your tax rate is going down. In general, it doesn’t make sense to do full or partial Roth conversions if your tax rate will be lower when you make withdrawals. This means it’s often best to convert in low-tax-rate years when income dips. For example, a Roth conversion could work well for a young saver who has an IRA or 401(k) and then returns to school, or a worker who has retired but hasn’t started to take IRA payouts that will raise income later.
  • Those who will soon move to a state with lower income taxes should also consider waiting.
  • You can’t pay the taxes from “outside.”  Slott advises IRA owners to forgo a Roth conversion if they don’t have funds outside the account to pay the tax bill. Paying the tax with account assets shrinks the amount that can grow tax-free.
  • You’re worried about losses. If assets lose value after a Roth conversion, the account owner will have paid higher taxes than necessary. Ms. Choate notes that losses in a traditional IRA are shared with Uncle Sam.
  • A conversion will raise “stealth” taxes. Converting to a Roth IRA raises income for that year. So, benefits that exist at lower income levels might lose value as your income increases. Examples include tax breaks for college or the 20% deduction for a pass-through business. Higher income in the year of a conversion could also help trigger the 3.8% tax on net investment income, although the conversion amount isn’t subject to this tax. The threshold for this levy is $200,000 for singles and $250,000 for married couples, filing jointly.
  • You’ll need the IRA assets sooner, not later. Roth conversions often provide their largest benefits when the account can grow untouched for years. If payouts will be taken soon, there’s less reason to convert.
  • You make IRA donations to charity. Owners of traditional IRAs who are 70½ and older can donate up to $100,000 of assets per year from their IRA to one or more charities and have the donations count toward their required payouts. This is often a highly tax-efficient move. But Roth IRA owners don’t benefit from it, so that could be a reason to do a partial rather than full conversion.
  • Financial aid will be affected. Retirement accounts are often excluded from financial-aid calculations, but income isn’t. If the income spike from a Roth conversion would lower a financial-aid award, consider putting it on hold.
  • You’ll have high medical expenses. Under current law, unreimbursed medical expenses are tax deductible above a threshold. For someone who is in a nursing home or has other large medical costs, this write-off can reduce or even wipe out taxable income. If all funds are in a Roth IRA, the deduction is lost.
  • You think Congress will tax Roth IRAs.Many people worry about this, although specialists don’t tend to. They argue that Congress likes the up-front revenue that Roth IRAs and Roth conversions provide and is more likely to restrict the current deduction for traditional IRAs and 401(k)s—as was considered last year.

Other proposals to limit the size of IRAs and 401(k)s to about $3.4 million, to make non-spouse heirs of traditional IRAs withdraw the funds within five years, and to require payouts from Roth IRAs at age 70½ also haven’t gotten traction so far.

Withdrawals from a Roth IRA may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

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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.

 

 

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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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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]