FOUR REALLY GOOD REASONS TO INVEST

Forty-four percent of Americans do not own any stocks or stock-related investments, according to a recent Gallup poll.1

Individuals may cite different reasons for not investing, but with important long-term financial goals, such as retirement, in the balance, the reasons may not be good enough.

Why Invest?

  • Make Money on Your Money

You might not have a hundred million dollars to invest, but that doesn’t mean your money can’t share in the same opportunities available to others. You work hard for your money; make sure your money works hard for you.

  • Achieve Self-Determination and Independence

When you build wealth, you may be in a better position to pursue the lifestyle you want. Your life can become one of possibilities rather than one of limitations.

  • Leave a Legacy to Your Heirs

The wealth you pass to the next generation can have a profound impact on your heirs, providing educational opportunities, the capital to start a business, or financial support to your grandchildren.

  • Support Causes Important to You

Wealth can be an important tool for impacting the world in a meaningful way. So whether your passion is the environment, the arts, or human welfare, you can use your wealth to affect positive changes in your community or around the world.

A Framework for Investing

The decision to invest is an acknowledgment that it comes with certain risks. Not all investments will do well, and some may lose money. However, without risk, there would be no opportunity to potentially earn the higher returns that can help you grow your wealth.

To manage investment risk, consider maintaining a broad diversification of your investments that reflects your personal risk tolerance, time horizon, and the nature of your financial goal. Remember, diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.

Because investing can be complicated, consider working with a financial professional to help guide you on your wealth-building journey.

1. Gallup.com, 2021

Fed Keeps Pushing Rates Higher

Few investors should have been surprised when the Federal Reserve raised interest rates after its May meeting.

Throughout April, Fed Chair Jerome Powell and several Fed Governors talked about the need to keep raising short-term rates to help manage hot inflation. They suggested that a series of rate hikes throughout the summer may be necessary to cool prices.

What should have surprised investors was the reaction by the financial markets.

As the May meeting came to a close, markets cheered as traders expressed confidence the Fed would be able to guide the economy to a “soft landing” and avoid a recession. But in the days that followed, stock and bond market volatility picked up as the reality of higher interest rates started to settle in.

What’s next? Fed Governors have prepared us for higher short-term rates in the coming months. But some economists point out that the bond market has already done some of the work for the Fed, meaning traders have already pushed longer-term interest rates higher. For example, the yield on the 10-year Treasury has doubled this year.

We’re in a transition period with the economy. High inflation is forcing the Fed into a cycle of raising interest rates. It’s best to prepare for more volatility as the markets adjust to what’s ahead. Please reach out if you want some additional insight. We’ll be happy to share more information.

Inflation Creeping into Personal Finances

If you have a balance on a credit card or an adjustable rate mortgage, you might be noticing changes in your payments. Higher interest rates are starting to ripple through the personal finance landscape, and it doesn’t look like that trend will change anytime soon.

The Federal Reserve has indicated it plans to keep raising short-term interest rates to help manage inflation, which is at its highest level in 40 years. You’re likely seeing the effects of inflation when buying gas or groceries, and you’ll notice it if you are shopping for a new or used car.

The Federal Reserve’s job is to control inflation. By raising interest rates, the Fed hopes to slow spending, bringing down consumer prices.

Time will tell whether higher interest rates will prompt us to consider changes to your portfolio. Remember, your overall strategy considers that there will be transition periods in the economy.

In the meantime, you may want to look at I Bonds, which are issued by the U.S. government and earn a fixed interest rate plus a variable interest inflation rate that’s adjusted twice a year. I Bonds have certain purchase limits, restrictions, and tax treatments, so they generally play a limited role in your financial picture.

If you have any questions about inflation or interest rates, please reach out. We’re always here to help put things into perspective.

DISABILITY AND YOUR FINANCES 

The Social Security Disability Insurance program is projected to pay out approximately $133 billion in benefits in 2020. And with new applicants each year, the system is expected to exhaust its reserves at the end of 2035 if changes aren’t made.1,2

Rather than depending on a government program to protect their income in the event of a disability, many individuals prefer to protect themselves with personal disability insurance.3

Disability insurance provides protection by replacing a portion of your income, usually between 50 percent and 70 percent, if you become disabled as a result of an injury or illness. This type of insurance may have considerable benefits since a disability can be a two-fold financial problem. Those who become disabled often find they are unable to work and are also saddled with unexpected medical expenses.

What About Workers Comp?

Many people think of workers compensation as a disability safety net. But workers compensation pays benefits only to individuals who become disabled while at work. If your disability is the result of a car accident or other off-the-job activity, you may not qualify for workers compensation.

Even with workers compensation, each state makes its own rules about payment and benefits, so coverage may vary considerably. You might consider finding out what your state offers and plan to supplement coverage on your own, if necessary, especially if you have a high-risk profession. Likewise, if you have an active lifestyle that puts you at a higher risk of disability, considering an extra layer of protection may be a sound financial decision.

If you become disabled, personal disability insurance can be structured to pay a benefit weekly or monthly. And benefits are not taxable, if you have paid the premiums in full.4

When you purchase a policy, you may be able to tailor coverage to suit your needs. For example, you might be able to adjust benefits or elimination periods. You might opt for comprehensive protection or decide to define coverage more specifically. Some policies also offer partial disability coverage, cost-of-living adjustments, residual benefits, survivor benefits, and pension supplements. Since coverage is designed to replace income, most people choose to purchase protection only during their working years.

Even as changes are made to federal disability programs, they typically provide only modest supplemental income, and qualifying can be difficult. If you don’t want to rely solely on Uncle Sam in the event of an unforeseen accident or illness, disability insurance may be a sound good way to protect your income and savings.

Out of Commission

According to the most recent data available, about 19.2 percent of working-age disabled Americans are employed.

Source: ACLI Life Insurers Fact Book, 2019

1. Social Security Administration, 2020
2. Barron’s.com, 2019
3. Disability insurance is issued by participating insurance companies. Not all policy types and product features are available in all states. Any obligations are dependent on the ability of the issuing insurance company to continue making claim payments.
4. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Federal and state laws and regulations are subject to change, which would have an impact on after-tax investment returns. Please consult a professional with legal or tax experience for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2021 FMG Suite.

We Believe

“We believe that any advisor can manage your investment portfolio—but not every advisor can help you navigate all the aspects of life that your investment portfolio influences.” 

“We believe that investing for upside has a tremendous downside—more volatility, missed expectations, a poor investment experience, and ultimately bad investor decisions.” 

“We believe that the only way to receive quality financial advice is by working with an advisor who truly knows you and your unique challenges.

Keystone Habits: The Simple Way to Improve All Aspects of Your Life

by James Clear

There are certain habits and routines that make success easier, regardless of the circumstances you face.

In fact, you may already practice some of these habits, even though you are unaware of it right now.

But most importantly, if you understand how to harness these habits, then you can drastically improve your health, your work, and your relationships … and start living the life you deserve.

The Keystone Habit

In Charles Duhigg’s book, The Power of Habit, he discusses the idea of keystone habits.

We have habits everywhere in our lives, but certain routines — keystone habits — lead to a cascade of other actions because of them.

For example…

A few months ago, I started to notice a funny thing.

When I worked out, I wanted to eat better. Even though I could have rewarded myself with chocolate bars and ice cream, I felt like eating real, healthy foods.

I also slept better. And when I was awake, I seemed more productive. Especially in the hour or two after working out, when my mind seemed to think clearer and my writing was crisper. Thoughts flowed easily.

When I didn’t exercise, however, I was more prone to eating junk food. I would stay up later working on unimportant tasks. I started to feel tension in my back. I didn’t check it, but my guess is that my blood pressure raised as a result of additional stress and no place to release it.

In other words, fitness is the keystone habit the puts the rest of my life in place. When I workout, other things naturally fall into place. I don’t have to think about eating better. I don’t have to force myself to focus on getting things done. Exercise naturally pushes me towards my best self.

What Are Your Keystone Habits?

I’m not always on top of my game, but on the days that I work out everything seems to come a little bit easier. And I’ll take all the help I can get as I continue my quest to become better.

Imagine how much easier and more fulfilling your lifestyle could be if you discovered one or two keystone habits that naturally put the rest of your life in place.

So often, we struggle to live the way we want to simply because we don’t have the willpower to make different decisions. Whether it’s having the discipline to eat healthy or the courage to take a risk or the energy to volunteer more often or the drive to perform better at work, we delay these choices — even though we know they are important — simply because we don’t have the willpower to make something new happen today.

Improving your lifestyle and becoming the type of person who “has their act together” isn’t nearly as hard as you might think. In fact, you might need just one keystone habit before the dominoes start falling everywhere.

What are you doing when everything falls into place? What is your keystone habit?

Find it and do more of it.

P.S. If you want more practical ideas for how to build new habits (and break bad ones), check out my book Atomic Habits, which will show you how small changes in habits can lead to remarkable results.

Savings Rates Decline

by Bob Veres

You don’t hear much about America’s personal savings rate these days, and the reason may be because the news is discouraging: collectively, the percentage of our income that we save is trending downward again, and may be about to hit record lows.  The Federal Reserve Bank of St. Louis tracks the U.S. personal savings rate, going back to the late 1950s, when when people were setting aside a thrifty 11% of what they made.  Americans achieved a record 17% savings rate in the mid-1970s (see chart) before a long decline set in.  In 2013, the rate briefly spiked again above 10%, but as you can see from the chart, Americans have become less thrifty since then.  The most recent data point shows Americans saving just 3.6% of their income.

How does this compare to the rest of the world?  A chart on the Trading Economics website shows that most countries fall in the 4.5% to 10% range, but with considerable fluctuation.  For instance, Spain experienced a negative savings rate just last quarter, but this quarter reports a rate of more than 14%.  Japan and Mexico seem to be consistently the thriftiest of the reporting nations, each with savings rates above 20%.  (India’s rate on the chart appears to be in error.)

Does any of this matter?  Economists will tell you that when the savings rate is high, it cuts into consumption, which lowers economic activity.  But at the same time, countries with high savings rates have more capital to invest in their future, and their citizens tend to be less vulnerable to economic downturns.  On the whole, we should probably prefer more savings to less.

Sources:

https://tradingeconomics.com/united-states/personal-savings

https://fred.stlouisfed.org/series/PSAVERT

 

Common Estate Planning Mistakes

by Bob Veres

The most common way to transfer assets to your heirs is also the messiest: to have a will that is so out of date that it doesn’t relate to your property or estate, to have your records scattered all over the place, to have social media, banking and email accounts whose passwords only you can find—and basically to leave a big mess for others to clean up.

Is there a better way?

Recently, a group of estate planning experts were asked for their advice on a better process to handle the transfer of assets at your death, and to articulate common mistakes.  The list of mistakes included the following:

Not regularly reviewing documents.  What might have been a solid plan 15 or 20 years ago may not relate to your estate today.  The experts recommended a full review every three to five years, to ensure that trustees, executors, guardians, beneficiaries and healthcare agents are all up-to-date.  You might also consider creating a master document which lists all your social media and online accounts and passwords, so that your heirs can access them and close them down.

Using a will instead of a revocable trust.  This relates mostly to people who want to protect their privacy.  When assets pass to heirs via a will, the transfer creates a record that anybody can access and read.  A revocable trust can be titled in your name, and you can control the assets as you would with outright ownership, but the assets simply pass to your designated successor upon death.

Failing to fund the revocable trust.  You’ve set up the trust, but now you and your team of professionals have to transfer title to your properties out of your name and into the trust, with you as the trustee.  If you forget to do this, then the entire purpose of the trust is wasted.

Having assets titled in a way that conflicts with the will or trust.  You should always pay close attention to the beneficiary designations, because they—not your will—determine who will receive your IRA assets.  Meanwhile, assets (like a home) owned in joint tenancy with rights of survivorship will pass directly to the surviving joint tenant, no matter what the will or trust happens to say.

Not using the annual gift exemption.  People can gift $14,000 a year tax-free to heirs without affecting the value of their $5.49 million lifetime gift exemption.  That means a husband and wife with four children could theoretically gift the kids $112,000 a year tax-free.  That can reduce the size of a large estate potentially below the gift exemption threshold, and in states where there is an estate tax, it can help there as well.

Not understanding the generation-skipping transfer tax.  A husband and wife can each leave estate values of $5.49 million to any combination of individuals.  But if there’s anything left over, there’s a 40% federal estate tax on those additional assets left to heirs in the next generation (the children), and an additional 40% on assets left to the generation after that (the grandchildren).  Better to transfer $5.49 million out of the estate before death (tax-free, since this fills up the lifetime gift exemption) into a dynastic trust for the benefit of the grandchildren.  You can also transfer that annual $14,000 to grandchildren.

Not taking action because of the possibility of estate tax repeal.  Yes, the Republican leadership in Congress includes, on its wish list, the total repeal of those estate taxes.  But what if there’s no action, or a compromise scuttles the estate tax provisions at the last minute?  Federal wealth transfer taxes have been enacted and repealed three times in U.S. history, so there’s no reason to imagine that even if there is a repeal, the repeal will last forever.  Meanwhile, dynastic trusts and other estate planning tactics provide tangible benefits even without the tax savings, including protecting assets from lawsuits and claims.

Leaving too much, too soon, to younger heirs.  Nothing can harm emerging adult values quite like realizing, as they start their productive careers, that they actually never need to work a day in their lives.  The alternative?  Create a trust controlled by a trusted family member or a corporate trust company until the beneficiaries reach a more mature stage of their lives, perhaps 30-35 years old.

The Economic Myth-Destroyer gets his due

by Bob Veres

Imagine a person who always, in every circumstance, makes rational decisions with his money.  He saves when he ought to and spends exactly as he should spend, in order to maximize the “utility” of whatever wealth he happens to possess.  He defers gratification with ease.  When he invests, he has instant and total access to all possible information related to every item in his, including the details of every company’s financials and any impactful world events, even if they haven’t reached the news media yet.  If he found a $100 bill on the sidewalk, he would immediately go out and invest it in a steel mill.

Most of us have never met a person like that, but this is how most economists, when they build their models, assume that normal humans behave.  All of us—and especially professional financial planners—know that these assumptions are far from what we see in the real world, which makes us question whatever economists tell us about group behavior like the financial and economic markets, laws and regulation, or what consumers will do next.

All of this is why a silent cheer went up around the professional investing world when University of Chicago economist Richard Thaler was awarded the 2017 Nobel Prize in Economics by the Royal Swedish Academy of Sciences.  Thaler spent his entire career exploring the differences between these unrealistically idealized economic assumptions and actual human behavior.  He demonstrated that people take mental short-cuts—called “heuristics”—when they make what they believe to be logical decisions.  He showed that in the real world, their decisions are often impulsive, and self-control is more of an aspiration than a reality.

Thaler also developed a theory of “mental accounting,” which explained how people make financial decisions by creating separate accounts in their minds—one for college funding, say, and another for retirement, and still another for vacations or a new car.  He explored those mental short-cuts and found that people tend to expect more in the future of what they’ve recently experienced (recentcy bias) and uncomfortably often they believe themselves to have more knowledge about their decisions than they actually do.

An experiment with a lost ticket uncovered the “sunk cost” effect.  Thaler found that if people purchased a $100 opera ticket and lost it on the way to the show, they would be unlikely to buy another ticket, reasoning that $200 was too much to pay.  But if we were perfectly logical, the only choice upon approaching the ticket counter should be whether it was actually worth $100 to hear the opera, and we had already made that decision when we bought the first ticket.

This is actually the second time that the Nobel Prize in Economics has been awarded to behavioral theorists who strayed from the economic party line. Daniel Kahneman won the prize in 2002 for his work with fellow psychologist Amos Tversky on human behavioral biases and systematic irrational behaviors.

In the models that economists produced out of their assumptions of perfectly rational, all-knowing investors and consumers, we could never have market bubbles or market crashes, since every market price is right and fair at every moment.  In that strange world, nobody would ever pay more than anybody else for a product or service.  Thaler’s prize—and Kahneman’s before him—suggest that the world of economics is starting to catch on to the messy decision-making that actually goes on in the real world.

Tax Reform—or Not?

by Bob Veres

You can be forgiven if you’re skeptical that Congress will be able to completely overhaul our tax system after failing to overhaul our health care system, but professional advisors are studying the newly-released nine-page proposal closely nonetheless.  We only have the bare outlines of what the initial plan might look like before it goes through the Congressional sausage grinder:

We would see the current seven tax brackets for individuals reduced to three — a 12%, rate for lower-income people (up from 10% currently), 25% in the middle and a top bracket of 35%.  The proposal doesn’t include the income cutoffs for the three brackets, but if they end up as suggested in President Trump’s tax plan from the campaign, the 25% rate would start at $75,000 (for married couples), and joint filers would start paying 35% at $225,000 of income.

The dreaded alternative minimum tax, which was created to ensure that upper-income Americans would not be able to finesse away their tax obligations altogether, would be eliminated under the proposal.  But there is a mysterious notation that Congress might impose an additional rate for the highest-income taxpayers, to ensure that wealthier Americans don’t contribute a lower share than they pay today.

The initial proposal would nearly double the standard deduction to $12,000 for individuals and $24,000 for married couples, and increase the child tax credit, now set at $1,000 per child under age 17.  (No actual figure was given.)

At the same time, the new tax plan promises to eliminate many itemized deductions, without telling us which ones other than a promise to keep deductions for home mortgage interest and charitable contributions.  The plan mentions tax benefits that would encourage work, higher education and retirement savings, but gives no details of what might change in these areas.

The most interesting part of the proposal is a full repeal of the estate tax and generation-skipping estate tax, which affects only a small percentage of the population but results in an enormous amount of planning and calculations for those who ARE affected.

The plan would also limit the maximum tax rate for pass-through business entities like partnerships and LLCs to 25%, which might allow high-income business owners to take their gains through the entity rather than as income and avoid the highest personal brackets.

Finally, the tax plan would lower America’s maximum corporate (C-Corp) tax rate from the current 35% to 20%.  To encourage companies to repatriate profits held overseas, the proposal would introduce a 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10% stake, and imposes a one-time “low” (not specified) tax rate on wealth already accumulated overseas.

What are the implications of this bare-bones proposal?  The most obvious, and most remarked-upon, is the drop that many high-income taxpayers would experience, from the current 39.6% top tax rate to 35%.  That, plus the elimination of the estate tax, plus the lowering of the corporate tax (leading to higher dividends) has been described as a huge relief for upper-income American investors, which could fuel the notion that the entire exercise is a big giveaway to large donors.  But the mysterious “surcharge” on wealthier taxpayers might take away what the rest of the plan giveth.

But many Americans with S corporations, LLCs or partnership entities would potentially receive a much greater windfall, if they could choose to pay taxes on their corporate earnings at 25% rather than nearly 40%.  (Note: The Trump organization is a pass-through entity.)

A huge unknown is which deductions would be eliminated in return for the higher standard deduction.  Would the plan eliminate the deduction for state and local taxes, which is especially valuable to people in high-tax states such as New York, New Jersey and California, and in general to higher-income taxpayers who pay state taxes at the highest rate?

Currently, about one-third of the 145 million households filing a tax return — or roughly 48 million filers — claim this deduction.  Among households with income of $100,000 or more, the average deduction for state and local taxes is around $12,300.  Some economists have speculated that people earning between $100,000 and around $300,000 might wind up paying more in taxes under the proposal than they do now.  Taxpayers with incomes above $730,000 would hypothetically see their after-tax income increase an average of 8.5 percent.

Big picture, economists are in the early stages of debating how much the plan might add to America’s soaring $20 trillion national debt.  One back-of-the-envelope estimate by a Washington budget watchdog estimated that the tax cuts might add $5.8 trillion to the debt load over the next 10 years.  According to the Committee for a Responsible Federal Budget analysis, Republican economists has identified about $3.6 trillion in offsetting revenues (mostly an assumption of increased economic growth), so by the most conservative calculation the tax plan would cost the federal deficit somewhere in the $2.2 trillion range over the next decade.

Others, notably the Brookings Tax Policy Center (see graph) see the new proposals actually raising tax revenues for individuals (blue bars), while mostly reducing the flow to Uncle Sam from corporations.

These cost estimates have huge political implications for whether a tax bill will ever be passed.  Under a prior agreement, the Senate can pass tax cuts with a simple majority of 51 votes — avoiding a filibuster that might sink the effort — only if the bill adds no more than $1.5 trillion to the national debt during the next decade.

That means compromise.  To get the impact on the national debt below $1.5 trillion, Congressional Republicans might decide on a smaller cut to the corporate rate, to something closer to 25-28%, while giving typical families a smaller 1-percentage point tax cut.  Under that scenario, multi-national corporations might be able to bring back $1 trillion or more in profit at unusually low tax rates, and most families might see a modest tax cut that will put a few hundred extra bucks in their pockets.

Alternatively, Congress could pass tax cuts of more than $1.5 trillion if the Republicans could flip enough Democratic Senators to get to 60 votes.  The Democrats would almost certainly demand large tax cuts for lower and middle earners, potentially lower taxes on corporations and higher taxes on the wealthy.  Would you bet on that sort of compromise?