Searching for Health Coverage in the Years Before Medicare

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What are your options for insuring yourself prior to age 65?

If you retire before age 65, you must be prepared to address two insurance issues.

One, finding health coverage in the period before you can sign up for Medicare. Two, finding a way to pay for that coverage.

You know it will probably be expensive, but do you realize just how expensive?

A single retiree may pay as much as $500-1,000 per month for private health insurance. For a couple, the monthly premiums can surpass $2,000. These are ballpark figures; fortunately, seniors without pre-existing health conditions can locate some less expensive plans offering short-term coverage, albeit with high deductibles. (1,2)

If you find yourself in this situation, what are your options?

It is time to examine a few.

You could retire gradually or take a part-time job with access to a group health plan.

Ask your employer if a phased retirement is possible, so you can maintain the coverage you have a bit longer. Securing part-time work with health benefits elsewhere could be a tall order, as it may be much tougher to find a job in your early sixties; not all employers value experience as much as they should.

You could turn to the health insurance exchanges.

Purchasing your own coverage could be a first for you, and you may not be optimistic about your prospects at the Health Insurance Marketplace (healthcare.gov) or a state exchange. Your prospects could be better than you assume. As a Miami Herald article points out, a married couple younger than 65 earning around $65,000 could likely get a bronze plan for free through the Marketplace, thanks to federal government subsidies. A couple would be eligible for such aid with projected 2019 earnings in the range of $16,460-$65,840. For the record, the open enrollment period for buying 2019 coverage ends December 15. (2)

You could arrange COBRA coverage.

If you voluntarily or involuntarily retire from a company or organization that has 20 or more employees and a group health plan, that employer must give you the option of extending the health insurance you had while working for up to 18 months (or in some instances, up to 36 months). This is federal law, part of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. (There is a notable exception to this: an employer can legally choose not to offer you COBRA benefits if you were fired due to “gross misconduct,” though the law defines that term hazily.) COBRA coverage is expensive: you effectively pay your employer’s monthly premium as well as your own, plus a 2% administrative fee. If you miss a premium payment by more than 30 days, your COBRA benefits may be canceled. (3,4)

You might be lucky enough to secure retiree health insurance.

Some employers do offer this to retiring workers; if yours does not, your spouse’s employer might. It is not cheap by any means, but it may be worthwhile. (1)

As a last option, you could move to another country (or state).

You could relocate to a nation that has either a universal health care system or much cheaper health care costs than ours does, either temporarily or permanently. If you decide to stay in that nation for the long term, you will really need to think about whether or not you want to sign up for Medicare at 65. Alternately, another state may present you with a cheaper health care picture than your current state does; a little research may reveal some potential savings. (1)

Review these options before you retire.

See how the costs fit into your budget. Have a conversation about this topic with an insurance or financial professional, because you may end up leaving work years prior to age 65.

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▲ Rising annual health care costs in retirement

This chart illustrates the current range of total out-of-pocket health care costs experienced by today’s 65-year-old, and how those costs may increase over time. These costs include traditional Medicare with a supplemental policy. Supplemental policies, called Medigap, fill in gaps in Medicare coverage such as co-pays and deductibles. Part D for prescription drugs and out-of-pocket expenses are also included. Median costs are about $5,210 per person. Median costs are projected to more than triple over 20 years for three reasons: 1) higher than average inflation for health care expenses; 2) increased use of health care at older ages; and 3) Medigap premiums that increase not only with inflation but also due to increased age. It is important to note that these costs do not include most long-term care expenses. (4)

Sources

  1. forbes.com/sites/nextavenue/2018/08/07/shopping-for-health-insurance-before-medicare-kicks-in
  2. tinyurl.com/yccclxmc
  3. bizfilings.com/toolkit/research-topics/office-hr/what-is-cobra-what-employers-need-to-know forbes.com/sites/heatherlocus/2018/10/21/what-you-need-to-know-about-3-key-options-for-health-insurance-after-divorce/
  4. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

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 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.

What Comprehensive Financial Planning Is and How It Can Help You

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Your approach to building wealth should be built around your goals & values.

Just what is comprehensive financial planning?

As you invest and save for retirement, you may hear or read about it – but what does that phrase really mean? Just what does comprehensive financial planning entail, and why do knowledgeable investors request this kind of approach?

While the phrase may seem ambiguous to some, it can be simply defined.

Comprehensive financial planning is about building wealth through a process, not a product.

Financial products are everywhere, and simply putting money into an investment is not a gateway to getting rich, nor a solution to your financial issues.

Comprehensive financial planning is holistic.

It is about more than “money.” A comprehensive financial plan is not only built around your goals, but also around your core values. What matters most to you in life? How does your wealth relate to that? What should your wealth help you accomplish? What could it accomplish for others?

Comprehensive financial planning considers the entirety of your financial life.

Your assets, your liabilities, your taxes, your income, your business – these aspects of your financial life are never isolated from each other. Occasionally or frequently, they interrelate. Comprehensive financial planning recognizes this interrelation and takes a systematic, integrated approach toward improving your financial situation.

Comprehensive financial planning is long range.

It presents a strategy for the accumulation, maintenance, and eventual distribution of your wealth, in a written plan to be implemented and fine-tuned over time.

What makes this kind of planning so necessary?

If you aim to build and preserve wealth, you must play “defense” as well as “offense.” Too many people see building wealth only in terms of investing – you invest, you “make money,” and that is how you become rich.

That is only a small part of the story. The rich carefully plan to minimize their taxes and debts as well as adjust their wealth accumulation and wealth preservation tactics in accordance with their personal risk tolerance and changing market climates.

Basing decisions on a plan prevents destructive behaviors when markets turn unstable.

Quick decision-making may lead investors to buy high and sell low – and overall, investors lose ground by buying and selling too actively. Openfolio, a website which lets tens of thousands of investors compare the performance of their portfolios against portfolios of other investors, found that its average investor earned 5% in 2016. In contrast, the total return of the S&P 500 was nearly 12%. Why the difference? As CNBC noted, most of it could be chalked up to poor market timing and faulty stock picking. A comprehensive financial plan – and its long-range vision – helps to discourage this sort of behavior. At the same time, the plan – and the financial professional(s) who helped create it – can encourage the investor to stay the course. (1)

A comprehensive financial plan is a collaboration & results in an ongoing relationship.

Since the plan is goal-based and values-rooted, both the investor and the financial professional involved have spent considerable time on its articulation. There are shared responsibilities between them. Trust strengthens as they live up to and follow through on those responsibilities. That continuing engagement promotes commitment and a view of success.

Think of a comprehensive financial plan as your compass.

Accordingly, the financial professional who works with you to craft and refine the plan can serve as your navigator on the journey toward your goals.

The plan provides not only direction, but also an integrated strategy to try and better your overall financial life over time. As the years go by, this approach may do more than “make money” for you – it may help you to build and retain lifelong wealth.

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▲ Comprehensive Planning

Planning for retirement can be overwhelming as individuals navigate various retirement factors over which we have varying levels of control. There are challenges in retirement planning over which we have no control, like the future of tax policy and market returns, and factors over which we have limited control, like longevity and how long we plan to work. The best way to achieve a secure retirement is to develop a comprehensive retirement plan and to focus on the factors we can control: maximize savings, understand and manage spending and adhere to a disciplined approach to investing.

Sources

  1. cnbc.com/2017/01/04/most-investors-didnt-come-close-to-beating-the-sp-500.html
  2. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

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.

The Importance of Matching Your Investments to Your Risk Tolerance

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When turbulence hits Wall Street, are you stressed out?

If you have taken on too much risk in your portfolio – which can happen through intention or inattention – stock market volatility may make you anxious. So from time to time, it is a good idea to review how your assets are invested. Your asset allocation should correspond to your tolerance for risk, and if it doesn’t, it should be adjusted.

A balanced portfolio may help you come out of stock market dips in better shape. Stocks and stock funds aren’t the only investment classes you can choose from, and you won’t be alone if you decide to examine other investment options.

Treasuries, bonds and bond funds become attractive to investors when Wall Street turns especially volatile. Certain forms of alternative investments gain attention as well, particularly those with low or no correlation to the equities markets. Bonds tend to maintain their strength when stocks perform poorly. Some cautious investors maintain a cash position in all stock market climates, even raging bull markets.

Downside risk can particularly sting investors who have devoted too much of their portfolios to momentum/expensive stocks. A stock with a price-earnings ratio above 20 may be particularly susceptible to downside risk. (1)

Underdiversification risk can also prove to be an Achilles heel. Some portfolios contain just a few stocks – in the classic example, someone has invested too heavily in company stock and a few perceived “winners.” If a large chunk of the portfolio’s assets are devoted to five or six stocks, the portfolio’s value may be impacted if shares of even one of those companies plummet. This is why it is wise to own a variety of stocks across different sectors. The same principle applies to stock funds. If the S&P 500 corrects (that is, drops 10% or more in a short interval), the possibility grows that an aggressive growth mutual fund may dive. (1)

Are you retired, or retiring?

If you are, this is all the more reason to review and possibly even revise your portfolio. Frequently, people approach or enter retirement with portfolios that haven’t been reviewed in years. The asset allocation that seemed wise ten years ago may be foolhardy today.

Many people in their fifties and sixties do need to accumulate more money for retirement; you may be one of them. That sentiment should not lead you to accept extreme risk in your portfolio. You’ll likely want consistent income and growth in the absence of a salary, however, and therein lies the appeal of a balanced investment approach designed to manage risk while encouraging an adequate return.

Review the risk in your portfolio?

You may find that you have a mix of investments that matches your risk tolerance. Or, your portfolio may need minor or major adjustments. The right balance may help you insulate your assets to a greater degree when stock market turbulence occurs.

Sources

  1. fc.standardandpoors.com/sites/client/wfs2/wfs/article.vm?topic=6064&siteContent=8339
  2. https://youtu.be/ylJSorjN9PY

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.

Is Generation X Preparing Adequately for Retirement?

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Future financial needs may be underestimated.

If you were born during 1965-80, you belong to “Generation X.”

Ten or twenty years ago, you may have thought of retirement as an event in the lives of your parents or grandparents; within the next 10-15 years, you will probably be thinking about how your own retirement will unfold. (1)

According to the most recent annual retirement survey from the Transamerica Center for Retirement Studies, the average Gen Xer has saved only about $72,000 for retirement. Hypothetically, how much would that $72,000 grow in a tax-deferred account returning 6% over 15 years, assuming ongoing monthly contributions of $500? According to the compound interest calculator at Investor.gov, the answer is $312,208. Across 20 years, the projection is $451,627. (2,3)

Should any Gen Xer retire with less than $500,000?

Today, people are urged to save $1 million (or more) for retirement; $1 million is being widely promoted as the new benchmark, especially for those retiring in an area with high costs of living. While a saver aged 38-53 may or may not be able to reach that goal by age 65, striving for it has definite merit. (4)

Many Gen Xers are staring at two retirement planning shortfalls.

Our hypothetical Gen Xer directs $500 a month into a retirement account. This might be optimistic: Gen Xers contribute an average of 8% of their pay to retirement plans. For someone earning $60,000, that means just $400 a month. A typical Gen X worker would do well to either put 10% or 15% of his or her salary toward retirement savings or simply contribute the maximum to retirement accounts, if income or good fortune allows. (2)

How many Gen Xers have Health Savings Accounts (HSAs)?

These accounts set aside a distinct pool of money for medical needs. Unlike Flexible Spending Accounts (FSAs), HSAs do not have to be drawn down each year. Assets in an HSA grow with taxes deferred, and if a distribution from the HSA is used to pay qualified health care expenses, that money comes out of the account, tax free. HSAs go hand-in-hand with high-deductible health plans (HDHPs), which have lower premiums than typical health plans. A taxpayer with a family can contribute up to $7,000 to an HSA in 2019. (The limit is $8,000 if that taxpayer will be 55 or older at any time next year.) HSA contributions also reduce taxable income. (2,5)

Fidelity Investments projects that the average couple will pay $280,000 in health care expenses after age 65. A particular retiree household may pay more or less, but no one can deny that the costs of health care late in life can be significant. An HSA provides a dedicated, tax-advantaged way to address those expenses early. (6)

Retirement is less than 25 years away for most of the members of Generation X.

For some, it is less than a decade away. Is this generation prepared for the financial realities of life after work? Traditional pensions are largely gone, and Social Security could change in the decades to come. At midlife, Gen Xers must dedicate themselves to sufficiently funding their retirements and squarely facing the financial challenges ahead.

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▲Retirement savings checkpoints

Achieving a financially successful retirement requires consistent savings, disciplined investing and a plan, yet too few Americans have calculated what it will take to be able to retire at their current lifestyle. This chart helps investors to quickly gauge whether they are “on track” to afford their current lifestyle for 30 years in retirement based on their current age and annual household income. This analysis uses an appropriate income replacement rate, an estimate of how much Social Security is likely to cover and the rate of return and inflation rate assumptions detailed on the right to determine the amount of investable wealth needed today, assuming a 10% gross annual savings rate until retirement. It is important to note that this analysis assumes a household with the primary earner who plans to retire at age 65 when the spouse is assumed to be 62. If an investor’s current retirement savings falls short of the amount for their age and income, developing a written retirement plan tailored to their unique situation with the help of an experienced financial advisor is a recommended next step. (6)

Sources:

  1. businessinsider.com/generation-you-are-in-by-birth-year-millennial-gen-x-baby-boomer-2018-3
  2. forbes.com/sites/megangorman/2018/05/27/generation-x-our-top-2-retirement-planning-priorities/
  3. investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator
  4. washingtonpost.com/news/get-there/wp/2018/04/26/is-1-million-enough-to-retire-why-this-benchmark-is-both-real-and-unrealistic
  5. kiplinger.com/article/insurance/T027-C001-S003-health-savings-account-limits-for-2019.html
  6. fool.com/retirement/2018/11/05/3-reasons-its-not-always-a-good-idea-to-retire-ear.aspx
  7. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

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 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.

The Risks of Putting Too Much Money Into an Annuity

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Although annuities can be a useful piece of a retirement strategy these private income contracts do have potential flaws.

It may not be good to have all your eggs in an annuity basket.

Or even a majority of your eggs, financially speaking.

Fundamentally, an annuity contract means handing over your money to an insurer.

In turn, the insurer pays out an income stream to you from that lump sum (or from the years of purchase payments you have made). The insurance company holds the money; you do not. From one standpoint, this arrangement has some merit; it relieves you of the burden of having to manage that money. From another standpoint, it has a few significant drawbacks. (1,2)

Annuities are often illiquid.

If you run into a situation where you need cash in retirement (a major home repair, a legal settlement, big medical expenses), do not expect to withdraw that cash from your annuity. If you have owned the annuity for some time, you may have to pay a hefty withdrawal penalty to access the money. From the insurer’s point of view, you are violating a contract. Should you have buyer’s remorse and decide you want out of your annuity contract soon after its inception, you will probably face a surrender charge. If you back out after the initial year of the contract, the surrender charge is commonly about 7% of your account value; it usually declines by a percentage point for each subsequent year you have spent in the annuity contract before surrendering.(2)

Annuities come with high annual fees.

A yearly management fee of 1.25% or more is not uncommon. Then there are mortality and expense (M&E) fees, fees for add-ons and guarantees, and up-front charges. If you have a variable annuity, throw in investment management fees as well. The “fee drag” for variable annuities may effectively eat away at their annual returns. (2)

Annuity joint-and-survivor income provisions may not be as beneficial as they seem.

Many annuities feature this payment structure, whereby the income payments continue to a surviving spouse after the death of one spouse. The downside of this arrangement: from the start, the income payments are less than what they ordinarily would be. If you are the annuity holder and you think your spouse may pass away before you do or are already confident that your spouse will be in a good financial position after your death, then a joint-and-survivor annuity payment structure may be nice, but not really necessary. (3)

If you do not yet own an annuity, consider that you may not need one.

The federal government basically gives you the equivalent of a deferred annuity: Social Security. Like an annuity, Social Security provides you with a reliable income stream – and your Social Security income is adjusted for inflation. (4)

Think of an annuity as one potential piece of a retirement strategy.

See it as a component or a supplement of that strategy, not the core.

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▲Understanding annuities: Which annuity may be right for you?

Annuities come in all shapes and sizes, which can often confuse investors. This chart helps to identify the type of annuity that aligns to specific income needs and tolerance for investment risk, and provides information about how the annuity growth and payout amounts are determined, as well as other key characteristics to know.

Sources

  1. tinyurl.com/y9mukmp3
  2. annuitieshq.com/articles/annuities-good-bad-depends-actually
  3. forbes.com/sites/forbesfinancecouncil/2018/03/29/five-reasons-not-to-buy-an-annuity/
  4. ssa.gov/oact/cola/latestCOLA.html
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

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.

When Will the Current Business Cycle Peak?

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As the bull market lengthens further, this is a natural question to ask.

This decade has brought a long economic rebound to many parts of America.

Any investor must recognize two indisputable facts. One, expansions eventually give way to recessions. Two, bull markets are punctuated by bear markets. The question is when we will see the next recession, the next bear market, or both.

All business cycles have four phases.

The first phase – expansion – is often the longest. It is characterized by two phenomena: a bull market and annualized GDP of 2% or greater. This expansion culminates at a peak, which is phase two. The peak is characterized by irrational exuberance on Wall Street, economic growth of 3% or more, a distinct acceleration of consumer prices, and the emergence of asset bubbles. (3)

Then – perhaps, imperceptibly – supply begins to exceed demand. Fundamental indicators begin to weaken; yet, the economy still grows – just not at the pace it previously did. Then, the growth diminishes altogether, and the business cycle enters phase three – contraction. GDP goes negative for two or more successive quarters, which defines a recession. Corporate earnings take a major hit, depressing investors. Equities enter a bear market. Finally, things come to a trough – a bottom. On Wall Street, institutional investors reach a point of capitulation – a moment when they decide there is more potential upside than downside to stocks. Investors and consumers start to become less pessimistic. Suddenly, supply has to keep up with demand again. Things brighten, and a new business cycle begins. (3)

How will we know precisely when the business cycle has peaked?

Without seeing the future, we cannot know. We can make an educated guess based on fundamental economic indicators and earnings, but we will really only know looking back.

How can we prepare for the later phases the business cycle?

Some healthy skepticism and some diversification may help. Investors who tend to get burned the most in an economic downturn (or bear market) are those who have fallen in love with one sector or one asset class. Their portfolios have become unbalanced, perhaps just because of the gains seen in the bull market.

Some investors opt for active portfolio management in recognition of business cycles, and their heavy influence on stock market cycles. Others choose to buy and hold, feeling that it is all too easy to mistime cycles while getting in and out of this or that investment class.

▼ Phases of the Business Cycle

Citations.

  1. inc.com/associated-press/jobs-report-october-2017.html
  2. instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm
  3. thebalance.com/where-are-we-in-the-current-business-cycle-3305593
  4. Economics for Investment Decision Makers: Micro, Macro, and International Economics 1st Edition by Christopher D. Piros (Author), Jerald E. Pinto (Author), Larry Harris (Foreword)

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.

End-of-the-Year Money Moves for 2018

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Here are some things you might want to do before saying goodbye to 2018.

What has changed for you in 2018?

Did you start a new job or leave a job behind? Did you retire? Did you start a family? If notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and 2019 begins.

Even if your 2018 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth.

Do you practice tax-loss harvesting?

That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust. (1)

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years. When you live in a high-tax state, this is one way to defer tax. (1_

Do you want to itemize deductions?

You may just want to take the standard deduction for 2018, which has ballooned to $12,000 for single filers and $24,000 for joint filers because of the Tax Cuts & Jobs Act. If you do think it might be better for you to itemize, now would be a good time to get the receipts and assorted paperwork together. While many miscellaneous deductions have disappeared, some key deductions are still around: the state and local tax (SALT) deduction, now capped at $10,000; the mortgage interest deduction; the deduction for charitable contributions, which now has a higher limit of 60% of adjusted gross income; and the medical expense deduction. (2,3)

Could you ramp up 401(k) or 403(b) contributions?

Contribution to these retirement plans lower your yearly gross income. If you lower your gross income enough, you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so contributions to those accounts are not deductible and will not lower your taxable income for the year. They will, however, help to strengthen your retirement savings. (4)

Are you thinking of gifting?

How about donating to a qualified charity or non-profit organization before 2018 ends? In most cases, these gifts are partly tax deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.5

If you donate publicly traded shares you have owned for at least a year, you can take a charitable deduction for their fair market value and forgo the capital gains tax hit that would result from their sale. If you pour some money into a 529 college savings plan on behalf of a child in 2018, you may be able to claim a full or partial state income tax deduction (depending on the state).2,6

Of course, you can also reduce the value of your taxable estate with a gift or two. The federal gift tax exclusion is $15,000 for 2018. So, as an individual, you can gift up to $15,000 to as many people as you wish this year. A married couple can gift up to $30,000 in 2018 to as many people as they desire.7

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and workplace retirement plan? If you haven’t reviewed them for a decade or more (which is all too common), double-check to see that these assets will go where you want them to go, should you pass away. Lastly, look at your will to see that it remains valid and up-to-date.

Should you convert all or part of a traditional IRA into a Roth IRA?

You will be withdrawing money from that traditional IRA someday, and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are not taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. A Roth IRA conversion can no longer be recharacterized (reversed). (8)

Can you take advantage of the American Opportunity Tax Credit?

The AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels.9

See that you have withheld the right amount. The Tax Cuts & Jobs Act lowered federal income tax rates and altered withholding tables. If you discover that you have withheld too little on your W-4 form so far in 2018, you may need to adjust your withholding before the year ends. The Government Accountability Office projects that 21% of taxpayers are withholding less than they should in 2018. Even an end-of-year adjustment has the potential to save you some tax.10

What can you do before ringing in the New Year? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

Sources

  1. nerdwallet.com/blog/investing/just-how-valuable-is-daily-tax-loss-harvesting/
  2. marketwatch.com/story/how-to-game-the-new-standard-deduction-and-3-other-ways-to-cut-your-2018-tax-bill-2018-10-15
  3. hrblock.com/tax-center/irs/tax-reform/3-changes-itemized-deductions-tax-reform-bill/
  4. investopedia.com/articles/retirement/06/addroths.asp
  5. investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp
  6. savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-worth
  7. fool.com/retirement/2018/06/28/5-things-you-might-not-know-about-the-estate-tax.aspx
  8. marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26
  9. fool.com/investing/2018/03/17/your-2018-guide-to-college-tuition-tax-breaks.aspx
  10. money.usnews.com/money/personal-finance/taxes/articles/2018-10-16/should-you-adjust-your-income-tax-withholding

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.

How to Tolerate Market Turbulence When Investing For The Long Term

crashing waves

Photo by Ray Bilcliff on Pexels.com

Look beyond this moment and stay focused on your long-term objectives.

Volatility will always be around on Wall Street, and as you invest for the long term, you must learn to tolerate it. Rocky moments, fortunately, are not the norm.

Since the end of World War II, there have been dozens of Wall Street shocks.

Wall Street has seen 56 pullbacks (retreats of 5-9.99%) in the past 73 years; the S&P index dipped 6.9% in this last one. On average, the benchmark fully rebounded from these pullbacks within two months. The S&P has also seen 22 corrections (descents of 10-19.99%) and 12 bear markets (falls of 20% or more) in the post-WWII era. (1)

Even with all those setbacks, the S&P has grown exponentially larger. During the month World War II ended (September 1945), its closing price hovered around 16. At this writing, it is above 2,750. Those two numbers communicate the value of staying invested for the long run. (2)

This current bull market has witnessed five corrections, and nearly a sixth (a 9.8% pullback in 2011, a year that also saw a 19.4% correction). It has risen roughly 335% since its beginning even with those stumbles. Investors who stayed in equities through those downturns watched the major indices soar to all-time highs. (1)

As all this history shows, waiting out the shocks may be highly worthwhile.

The alternative is trying to time the market. That can be a fool’s errand. To succeed at market timing, investors have to be right twice, which is a tall order. Instead of selling in response to paper losses, perhaps they should respond to the fear of missing out on great gains during a recovery and hang on through the choppiness.

After all, volatility creates buying opportunities. Shares of quality companies are suddenly available at a discount. Investors effectively pay a lower average cost per share to obtain them.

Bad market days shock us because they are uncommon.

If pullbacks or corrections occurred regularly, they would discourage many of us from investing in equities; we would look elsewhere to try and build wealth. A decade ago, in the middle of the terrible 2007-09 bear market, some investors convinced themselves that bad days were becoming the new normal. History proved them wrong.

As you ride out this current outbreak of volatility, keep two things in mind.

One, your time horizon. You are investing for goals that may be five, ten, twenty, or thirty years in the future. One bad market week, month, or year is but a blip on that timeline and is unlikely to have a severe impact on your long-run asset accumulation strategy. Two, remember that there have been more good days on Wall Street than bad ones. The S&P 500 rose in 53.7% of its trading sessions during the years 1950-2017, and it advanced in 68 of the 92 years ending in 2017. (3,4)

Sudden volatility should not lead you to exit the market.

If you react anxiously and move out of equities in response to short-term downturns, you may impede your progress toward your long-term goals.

MI-GTM_4Q18-HIGH-RES-63

▲ Time, diversification and the volatility of returns

This chart shows historical returns by holding period for stocks, bonds and a 50/50 portfolio, rebalanced annually, over different time horizons. The bars show the highest and lowest return that you could have gotten during each of the time periods (1-year, 5-year rolling, 10-year rolling and 20-year rolling). This page advocates for simple balanced portfolio, as well as for having an appropriate time horizon.

Sources

  1. marketwatch.com/story/if-us-stocks-suffer-another-correction-start-worrying-2018-10-16
  2. multpl.com/s-p-500-historical-prices/table/by-month
  3. crestmontresearch.com/docs/Stock-Yo-Yo.pdf
  4. icmarc.org/prebuilt/apps/downloadDoc.asp
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets/viewer

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 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.

 

Here’s Why Your Diversified Portfolio is Underperforming The Market

photo of person holding black pen

Photo by rawpixel.com on Pexels.com

How global returns and proper diversification are affecting overall returns.

Your Portfolio vs. the S&P 500

“Why is my portfolio underperforming the market?” This question may be on your mind. It is a question that investors sometimes ask after stocks shatter records or return exceptionally well in a quarter.

The short answer is that while the U.S. equities market has realized significant gains in 2018, international markets and intermediate and long-term bonds have underperformed and exerted a drag on overall portfolio performance. A little elaboration will help explain things further.

A diversified portfolio necessarily includes a range of asset classes.

This will always be the case, and while investors may wish for an all-equities portfolio when stocks are surging, a 100% stock allocation is obviously fraught with risk.

Because of this long bull market, some investors now have larger positions in equities than they originally planned. A portfolio once evenly held in equities and fixed income may now have a majority of its assets held in stocks, with the performance of stock markets influencing its return more than in the past.(1)

Yes, stock markets – as in stock markets worldwide.

Today, investors have more global exposure than they once did. In the 1990s, international holdings represented about 5% of an individual investor’s typical portfolio. Today, that has risen to about 15%. When overseas markets struggle, it does impact the return for many U.S. investors – and struggle they have. A strong dollar, the appearance of tariffs – these are considerable headwinds. (2,3)

In addition, a sudden change in sector performance can have an impact.

At one point in 2018, tech stocks accounted for 25% of the weight of the S&P 500. While the recent restructuring of S&P sectors lowered that by a few percentage points, portfolios can still be greatly affected when tech shares slide, as investors witnessed in fall 2018. (4)

How about the fixed-income market?

Well, this has been a weak year for bonds, and bonds are not known for generating huge annual returns to start with. (3)

This year, U.S. stocks have been out in front.

A portfolio 100% invested in the U.S. stock market would have a 2018 return like that of the S&P 500. But who invests entirely in stocks, let alone without any exposure to international and emerging markets? (3)

Just as an illustration, assume there is a hypothetical investor this year who is actually 100% invested in equities, as follows: 50% domestic, 35% international, 15% emerging markets. In the first two-thirds of 2018, that hypothetical portfolio would have advanced just 3.6%. (3)

Your portfolio is not the market – and vice versa.

Your investments might be returning 3% or less so far this year. Yes – this year. Will the financial markets behave in this exact fashion next year? Will the sector returns or emerging market returns of 2018 be replicated year after year for the next 10 or 15 years? The chances are remote.

The investment markets are ever-changing.

In some years, you may get a double-digit return. In other years, your return is much smaller. When your portfolio is diversified across asset classes, the highs may not be so high – but the lows may not be so low, either. When things turn volatile, diversification may help insulate you from some of the ups and downs you go through as an investor.

MI-GTM_4Q18_November_HIGH_RES-60

Asset class returns

This chart shows the historical performance and volatility of different asset classes, as well as an annually rebalanced asset allocation portfolio. The asset allocation portfolio incorporates the various asset classes shown in the chart and highlights that balance and diversification can help reduce volatility and enhance returns. (5)

Sources:

  1. seattletimes.com/business/5-steps-to-take-if-the-bull-market-run-has-you-thinking-of-unloading-stocks/
  2. forbes.com/sites/simonmoore/2018/08/05/how-most-investors-get-their-international-stock-exposure-wrong/
  3. thestreet.com/investing/stocks/dear-financial-advisor-why-is-my-portfolio-performing-so-14712955
  4. cnbc.com/2018/04/20/tech-dominates-the-sp-500-but-thats-not-always-a-bad-omen.html
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets/viewer

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 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.

6 Tips for Getting Your Personal Finances in Shape for 2019

person writing on white book

Photo by rawpixel.com on Pexels.com

Fall is a good time to assess where you stand and where you could be.

You need not wait for 2019 to plan improvements to your finances.

You can begin now. The last few months of 2018 give you a prime time to examine critical areas of your budget, your credit, and your investments.

You could work on your emergency fund (or your rainy day fund).

To clarify, an emergency fund is the money you store in reserve for unforeseen financial disruptions; a rainy day fund is money saved for costs you anticipate will occur. A strong emergency fund contains the equivalent of a few months of salary, maybe even more; a rainy day fund could contain as little as a few hundred dollars.

Optionally, you could hold this money in a high-yield savings account. A little searching may lead to a variety of choices; here in September, it is not hard to find accounts offering 1.5% or more annual interest, as opposed to the common 0.1% or less. Remember that a high-yield savings account is intended as a place to park money; if you make regular deposits and withdrawals to and from it and treat it like a checking account, you may incur fees that diminish the savings progress you make. (1)

Review your credit score.

Federal law entitles you to a free copy of your credit report at each of the three nationwide credit reporting firms (Equifax, TransUnion, and Experian) every 12 months. Now is as good a time as any to request these reports; visit annualcreditreport.com or call 1-877-322-8228 to order them. At the very least, you will learn your credit score. You may also detect errors and mistakes that might be harming your credit rating. (2)

Think about the way you are saving for major financial goals.

Has your financial situation improved in 2018, to the extent that you could contribute a little more money to an IRA or a workplace retirement plan now or next year? If you are not contributing enough at work to receive a matching contribution from your employer, maybe now you can.

Also, consider the way your invested assets are held.

What are your current and future allocations? Some people have heavy concentrations of equities in their workplace retirement plan, IRA, or brokerage account due to Wall Street’s long bull market. If this is true for you, there may be some pain when the next bear market begins. Check in on your portfolio while things are still bullish.

Can you spend less in 2019?

That might be a key to saving more and putting more money into your rainy day or emergency funds. If your pay has increased, your discretionary spending does not necessarily have to increase with it. See if you can find room in your budget to possibly cut an expense and redirect the money into savings or investments.

You may also want to set some near-term financial goals for yourself.

Whether you want to accomplish in 2019 what you did not quite do in 2018, or further the positive financial trends underway in your life, now is the time to look forward and plan.

The Financial Planning Pyramid (3)

PlanningPyramid

Sources

  1. thesimpledollar.com/best-high-interest-savings-accounts/
  2. ftc.gov/faq/consumer-protection/get-my-free-credit-report
  3. The American College of Financial Services

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 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.