2 Areas That Will Make You Revisit Your Retirement Plan

The USS Enterprise stood as a formidable power and deterrent for half a century. She’s almost four football fields in length, has a flight deck that spans four and a half acres and weighed 94,000 tons. The “Big E” sailed a million nautical miles and played a role in major world events from Cuban Missile Crisis, to wars in Iraq and Afghanistan. She even did a cameo in Top Gun. However, she was the oldest active combat vessel in the fleet and readied for retirement in 2012. And she still sits today awaiting her fate of sink, scrap or save.
What’s holding up retirement of the world’s largest aircraft carrier? First is the issue of safely defueling and capping eight nuclear reactors. Budgetary issues arose. And others recommended she be saved – converted to a museum, or remodeled and placed into reserve. Hence, the Navy put on the brakes and studies alternatives.
So what’s holding you up in revisiting your retirement plans? Possibly it’s eyes on Washington watching four key issues. The year started with high hopes from sweeping policy changes – tax overhaul, healthcare reform, infrastructure spending and deregulation. However, as political dysfunctions continue, there are concerns that the anticipated policy changes could be scaled back, if they even happen at all.
However, life continues, we don’t get any younger, and there will be decisions to make often in the haze of uncertainty. Every day brings us closer to retirement, packing up our troubles and sending them to college or vocational training, and the next opportunity or life transition. Here are two actionable areas for your consideration.
How comfortable are you with your retirement spending budget? Cost of funding your future lifestyle is a core element in retirement planning. A big fear is the risk of outliving your wealth. However, MIT AgeLab reminds us of other risks, including inability to access big and little things in life. Don’t overlook something as mundane as “Transportation” in your budget. It plays important roles.

• Part of the glue that holds together many of life’s activities.
• Second largest cost in retirement – Tops for those aged 65-74 include housing                        (32%), transportation (17%), and food and healthcare (tied at 12%).
• Technology extends driving age – smart headlights, emergency response systems,                  etc.
• Alternative transportation modes when keys are “turned in” include friends and                    family, public transportation, van services, Uber and Lyft, etc. They can help reduce              depression and decreased activity level from loss of driving privileges.

Twenty year olds can get a jump on saving and for better future options. IRAs or Roths are convenient places to start. Both offer tax advantages and the details can be found in IRS Publication 590-A and B. I’ll focus on the powers of time value of money and compounding.
Advantages of starting early – It’s cheaper! You’ll be a millionaire (almost) by saving the current IRA limit of $5,500 for forty years (from age 25 to 65) and average a 6% annual return. The actual accumulation is about $902,000. If you delay saving by ten or twenty years (start at age 35 or 45), then your savings need to increase to about $10,800 and $23,000 respectively (2x or 4x original savings rate).
Small increases can have big results. For each $100 additional savings monthly for forty years starting at 25, your accumulated wealth at 65 grows by about $200,000.
And check out the website TheFinancialDiet.com. It’s written by young people, for young people, and discusses a wide range of topics. Recent headlines online read “5 Mistakes I made after college graduation (and what I learned from each)” and “Exactly how you can save $10k this year on a $40k salary.” Note: of course there’s a wide range of cost of living throughout different parts of the country. Key points include (a) making saving a priority, and (b)you’ve got to be more serious about your money than anyone else on the planet – even your financial advisor. Good luck.
Brian M Loy, CFA, CFP         Reno Gazette Journal         July 16, 2017



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Use Your $1.5 Million Wisely

Whaling played an enormous role in American life for almost 200 years. Over two thirds of the world’s 900 whaling ships sailed from American ports and making many East Coast ports rich including New Bedford, Massachusetts and Nantucket. Whale oil lit American homes and streets. Baleen helped shape American culture from umbrellas and buggy whips to corsets. Industries grew including ship building, coppering, sail making, blacksmithing and more. And fortunately for the whales, petroleum oil was discovered in Titusville, Pennsylvania in 1859.

It was also a tough and dangerous life for whalemen. The great ships roamed the Atlantic and Pacific seas. “Thar she blows!” The crews manned their 25-foot whale boats, gave chase with harpoons and lances, and towed their prize back to the ship for butchering and processing. And the process continued until the ships were full.

Ships needed supplies to feed, water and mend her crew and replace lost gear. A voyage would last up to four years. And a well-supplied and captained crew went a long ways to making for a successful trip and avoiding mutiny.

We too need to be well stocked for our financial voyages. The challenge is to support a 30-year retirement with a 40-year career. Headwinds commonly include longevity, inflation, the occasional market correction, health setbacks, raising a family, and others. And accelerants may include “windfalls” such as side gigs, entrepreneurial successes, and inheritances. So here are two related thoughts.

Lifetime earnings versus spending – Some people say “You can always earn more income, but you never get more time” encouraging reckless financial behavior such as living for today and not planning for the future. However, lifetime earnings are generally fixed and most people have 40 years to accumulate (age 25 to 65). (Some people have much greater flexibility in earning power… just humor me for this example). Ignoring inflation for a moment, Average Joe earns $35,000 a year, or $1.4 million over 40 years. The average college graduate earns $46,000, or $1.8 million lifetime. $70,000 a year is $2.8 million lifetime. And $200,000 a year is $3.6 million lifetime. So whether its $1.4 million, or $3.6 or whatever, that’s it… that’s all we have to work with. Use it wisely. Consider that the average “close to retirement” family has $163,000 in savings (Economic Policy Institute) – that’s only 13% of Average Joe’s lifetime savings (not a good saver and/or investor).

However, consider your lifetime spending for 60 years from age 25 to 85. First, you have significant control over it. And second, it generally exceeds your lifetime income. But don’t panic. Planning helps fill the “gap” by pension benefits (Social Security) and savings (401k, rentals, etc.).  It helps define your required savings rate.

Starting or shifting careers – Congratulations to you graduates. Some are planning to attend college in the fall. However, not everyone is meant for (or needs) a four year degree. And for those I encourage trade school to provide you greater career opportunities. First, there are many good paying jobs available. One example is our housing market where the demand for new homes exceeds new housing starts – slow permits are one issue, and another is the lack of skilled construction workers. Second, some skilled jobs pay more than college graduates. Go to BLS.gov and search the highest growth job areas and median salaries –medical assistant $32k, electrician $53k, computer system analyst $87k, software designer $100k, heavy truck driver $41k, RN $68k, sales reps (excluding technical) $57k. Third, trade school is often less expensive than four year college ($98k for moderate in-state and $197k for moderate private per College Board).

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Avoid Complacency – Time Catches Up

Avoid Complacency – Time Catches Up

Stewart Stafford said, “The quickest way to run out of time is to think you have enough of it.” Time catches up. Sometimes it’s a doozy. How can we keep our futures bright?

There are two common reasons we make mistakes. One is we’re rushed in getting all the intel and insights to make smart decisions. The other is when ramifications of our decisions occur down the road. We hesitate in taking corrective action. There’s less sense of urgency. I’ll fix it tomorrow. It’s one of the reasons why people don’t really get serious about their finances until five to ten years from retirement. It may be why about 38 percent of American adults and 17 percent of teenagers are obese says the CDC. And five to ten percent of adults are morbidly obese meaning they’re at a higher risk of disease. Complacency can be an enemy to both our financial and physical health.

America’s nest eggs continue to grow. Retirement assets are estimated to be about $25 trillion or triple that of twenty years ago. And half of that money is in individual accounts. But an interesting phenomena is hidden. While younger generations are falling behind in saving compared to earlier generations, older Americans sit on more and more wealth. Normally retirees should be cashing in on their savings. However, according to 20 years of University of Michigan survey data the average wealth of Americans when they die gradually creeps upward from their 60’s to their 80’s and starts declining in their 90’s. Older Americans, especially the affluent ones apparently have ignored the saying “You can’t take it with you.” Here are a couple reasons.

First is financial – the stock market and real estate booms. Second are behavioral. Few retirees are intentional Jack Benny or George Costanza-like cheapskates. It’s a hard transition to make shifting to “spender” when you’ve been a lifelong and hardcore “saver.” They tell me “Kid, I take my checkbook to the grocery store, not my passbook.” I’ll translate for younger readers… retirees may spend investment earnings, but they’re reluctant to dip into principal. Other concerns are reflected in retiree surveys – they’re nervous about (a) maintaining their lifestyle, (b) not being a burden on anyone, and (c) leaving a large enough inheritance. And finally, behavioral issues are reflected in retiree spending patterns. Retirees generally spend less than they expected – it’s “tightening the belt” and “what-if-I-need-it-tomorrow” concerns. And there’s a phenomena called the ‘Retirement Spending Smile’ coined by David Blanchett that describes the typical spending pattern – high initially as retirees travel more, and catch up on honey-dos and deferred maintenance, then settle down into a groove, then spending escalates as the costs of aging (assistance and medical) start catching up.

So a couple of planning tips:

Careful about complacency and change before you have to – Have you adjusted your investments to the new world, or do you have the same red, white and blue (and possibly overvalued) portfolio? And if you’re the type who likes holding lots of cash, do you have it working for you in insured money market accounts that are paying about a percent versus point-zero-zero-nothing?

Chuck unnecessary expenses – Should I make XYZ discretionary expenditure? What about reviewing recurring expenses for possible savings? For example, insurance (shop coverage periodically or cancel unneeded life insurance (or put on minimum payment)), transfer the timeshares (and maintenance) to the kids, etc.

Know what you can spend (and gift) safely – I’m not encouraging you to be a spendthrift, but maybe your kids are right. “Why aren’t you more comfortable in retirement?” Or maybe you’re just fine. This exercise can give you better confidence about not running out of money.

Finally, here are three simple rules. Spend less than you make, save more and earlier, and don’t make dumb mistakes. And sometimes it helps to have a trusted advisor help you along the way.

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The Art of Retirement Cash Flow

Part of the Oakland skyline is slowly vanishing as the demolition of the east span of the Bay Bridge continues. The bridge was built in the Great Depression. It was a “double decker” with two spans – western section connecting SF and Yerba Buena Island, and the eastern section to Oakland. The bridge closed for a month when the east span partially collapsed in the 1989 Loma Prieta quake. Construction for the new east span commenced in 2002. It is a single deck, and was the world’s widest bridge when it opened in September 2013.

Demolition of the old span will take four to five years – almost twice as long as construction took in the early 30’s. They’re essentially dismantling the old bridge, section by section, in reverse order. Why the complicated un-building process? Factors include engineering, safety and environmental. The high-tension pieces are like a highly strung bow of 50 million pounds of steel. You don’t simply cut it or you risk a nasty “boom.” Tension needs to be controlled. 80 year old steel doesn’t handle like modern steel. And you want to avoid contaminating the choppy bay waters below. Tearing down a bridge can be a dangerous art.

And so can converting your wealth into monthly paychecks in retirement that will last your lifetimes. Original instructions were simple –save early and be a smart investor. You shift at retirement and draw income. But how? Life’s complicated – costs of living rise, Uncle Sam wants a cut, an unexpected emergency, markets correct, lose your wingman, or your perspectives change. I’ll share four withdrawal strategies to discuss with your family and advisors.

Be flexible – Heard of the 4 percent withdrawal rate? It’s a standard for calculating how much to save (25 times your annual cash flow needed after pensions and SS) or the “safe” withdrawal rate for a 65 year old retiree (4 percent of your IRA accounts). However, be flexible. Most retirees spend less than they expect, and spending is not a straight line – often higher in the early years, then settle lower into a groove, then crank up like we do as we age (healthcare). What if your retirement is beyond 30 years, want a safety cushion or inheritance for heirs, or want “sure things” (what are CD’s paying now?), then a 2 or 3 percent factor may be prudent.

Fill tax brackets – Most dislike paying taxes and are taught to defer taxes (spend after-tax accounts first, then IRAs, and save Roth’s for last – see next note). But beware getting trapped with insufficient liquidity (and face a big repair bill, etc.) or significant tax increases from IRA required minimum distributions at age 70-1/2. Consider filling tax brackets in early retirement years. If you’re married, the 15% bracket runs from about $18,651 to $75,900, and the 25% runs $75,901 to $153,100. If your taxable income is $60,000 (or $130,000), then consider additional IRA withdrawal of $15,000 (or $23,000) and avoid creeping to the next bracket. Similar concept is when you need significant cash and only have IRA monies. Say you’re contemplating an RV purchase. Consider splitting tax years with IRA withdrawals in December and January, and/or finance a portion and payoff with future withdrawals.

Hit the Roth early? Conventional wisdom is reserve the Roth IRA for last, and pass it on to your spouse or your kids. (People generally do Roth’s when they believe tax brackets are higher when they withdraw than when contributed). But what if you want to gift to your kids now (versus inheritance), you’ve only got IRA and Roth money, and likely you won’t deplete wealth in retirement. (And ignore tax reform rumblings about 5-year withdrawals for non-spousal beneficiaries). Why would you take IRA monies, pay taxes, and gift your kids the balance? That’s expensive. Instead, consider withdrawing non-taxable Roth funds. You have more money to gift. And of course, consult your CPA on all tax matters.

Income is nice, but balance is better – Some thought the retirement ticket was owning real estate and collecting rent. Others focused on high dividend stocks or interest income. They make sense – they’re income-oriented. If you earn $20,000 on a $500,000 portfolio, that’s 4 percent. But if you’re getting the same $20,000 income ten years from now (don’t increase the rents, or rising expenses), then you’re losing to inflation. Hence balanced investing (diversification). On average, you may earn more than 4% withdrawals and can reinvest for future withdrawals. Hopefully, you’ve got a dependable monthly paycheck that grows with inflation, with less worry about the ebbs and flows of markets, interest rates, and sketchy tenants.

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Payoffs of Working Beyond 65

Working and collecting Social Security is a taxing problem. “Why should I work if I’m going to lose benefits to taxes, or even get my benefits reduced?” The rules are complex. However, they’re important because working during retirement is becoming more and more a trend. We’ll talk about the impacts of drawing a paycheck during retirement. However, first, let’s review how retirement is being redefined.

What do you consider to be normal retirement age? Somewhere around age 65? And there might be a few groaning “Never.” It’s generally labeled as when Social Security retirement benefits commence and essentially an artificial goal line. There was a time when people spoke in hushed terms as if working later was a bad thing. However, there are several reasons why Americans work past “retirement age.”

Supplement retirement income. We need to fund longer retirements and the responsibility has shifted to us. AARP’s Life Reimagined Survey of people 35 years-plus expect to work beyond age 65. It’s not that they want to get work forever – 87 percent say they want to retire someday but they don’t feel they will be able to stop. Some are non-financial. However, 70 million Americans suffer from sleepless nights and the primary culprit is money worries. According a CreditCards.com survey, 68 percent of women and 56 percent of men lose sleep occasionally. Retirement tops the list (49%) with “haven’t saved enough.” It’s the biggest purchase in life – 2.5 times the average price of a home – yet 80 percent don’t know what retirement will cost. Other concerns include education expenses (30%), health care (29%), mortgage/rent (26%) and credit card debt (22%).

The Merrill Lynch and Age Wave Retirement Study illustrates differing expectations by age groups. Three sources of retirement income are Government (SS), Employer pensions and Personal sources (savings/investments, employment and family). The Silent Generation (born 1925 – 45) counts on roughly half of their income from SS, and roughly a quarter each from the other two. Younger and younger generations expect less from Government and Employer, and rely more on Personal – Millennials expect 65% of their income to come from personal sources). And there’s a growing expectation for employment income – Millennials expect a quarter of their retirement funding to come from continued work.

Motivation, engagement and sense of purpose. Satchel Paige is one of the great baseball players. He took the mound for the last time at age 60, and pitched a three inning shutout for the KC Athletics. Among his many quotes is “How old would you be if you didn’t know how old you were?” And I recall a discussion in Mitch Anthony’s “The New Retirementality” asking “how many 25-year olds does it take to replace someone with forty years of work experience, insights and relationships?” Retirees work for many non-financial reasons. Age Wave/Merrill studies categorize four types of retirees: Driven Achievers (15%) keep right on working and accomplishing, Caring Contributors (33%) find ways to give back, often working for nonprofits, Life Balancers (24%) work largely for friendships and social connections, and Earnest Earners (28%) keep working primarily to pay the bills.

Working during retirement has two key drawbacks. First, if your start drawing SS benefits early your benefits can be reduced (1) for starting early (up to 20% to 30% reduction versus waiting for full retirement age 65 – 67) and (2) if you work (SS benefits reduced $1 for every $2 your earnings exceed $16,920 if you’re under the FRA, $1 for every $3 earnings exceed $44,880 in year you reach FRA, and no earnings limit after FRA). Second, SS benefits can be taxable depending on your income. If you’re married filing jointly and your “Provisional Income” (AGI excluding SS + tax-exempt interest + 50% of SS benefits) is under $32,000, then none of your SS is taxable. Between $32,000 and $44,000, then up to 50% is taxable. And over $44,000, then 85% is taxable.

However, do consider working despite the hits. “Don’t let the tax tail wag the dog” goes the saying. A
tax attorney explained the tax code to me on a golf course… “Brian, if I offered you this crisp $100 bill on the condition you had to give me $50 back, would you take it?” Wouldn’t you? And your future SS benefits may increase from the additional earnings. And of course, don’t take this as gospel. I don’t know your situation, and advise you to seek expert tax advice by your CPA and talk with Social Security.

So if money can’t buy you happiness, then possibly it buys you a good night’s sleep. May you plan and rest well.

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Why Isn’t There a Hug Your CPA Day?

Some surprises bring great joy – a call from an old friend, a door opened, or an unsolicited “You’re awesome!” But walking into your CPA’s office and saying “Oh, one more thing… Did I tell you about something that happened last year?” is likely to test her or his humor. Two types of CPAs are historians and advisors. The first might say “Yes, you’re hemorrhaging. Here’s your tax bill.” The other offers “Here are some ways to stop the bleeding.”

Use the conversations now as you work on your 2016 tax preparation and get a jump on the year ahead. It benefits both – you may save money, make more money and reduce surprises; and your CPA is engaged, informed and can better employ his or her talents.


Getting organized saves you money. Where do you prefer to have your accountant’s billable time being applied… sorting through a shoe box of receipts and invoices, or confirming your neatly compiled financial information and helping you pay the least amount of taxes legally required? Tax organizers provided by your CPA or enrolled agent are provided for a purpose. And there’s a broad range of tools for organizing – including filing systems (online receipt apps like Expensify and Shoeboxed or organizers like Evernote) and accounting software (QuickBooks, FreshBooks, Zoho, Xero, AccountEdge, Outright.com, etc.).

Compare your information. Ideally, you’re reporting roughly what you forecasted at the beginning of the year. Does it look reasonable? Did you forget something for 2016 you reported in 2015 (e.g. bank account 1099, retirement payment, or charity)? Did you do something different in 2016 (e.g. dog walking business, medical event, new vehicle)?

Patience. Waiting for 1099’s or K-1’s? Should you wait for corrected 1099’s from investment accounts (anxious early tax filers face the possibility of filing amended returns and/or additional tax preparation fees)? And mistakes can happen when you rush.

Common “surprise” areas

Social Security retirement benefits may be taxable – Despite your payment of FICA taxes, a portion of your retirement benefits may be taxable depending on your income. If provisional income (AGI before SS + muni bond income + half of SS) exceeds $32,000 (married, $25,000 if single), then 50% or 85% may be taxable.

A bumper income year for retirees may result in higher Medicare premiums the following year. Part B premiums are based on your modified adjusted gross income, and Part D may have an income adjustment. B premiums generally range $134 to $429 a month, so heads up in case you have a significant gain from selling an asset sale, redeemed an annuity or Series E bonds, etc.

Significant event you didn’t communicate to your CPA. Examples of tax version of “Ripley’s Believe it or Not” are abundant and often result in missed opportunities. These include sales of property; family, job or business change; employee benefit (e.g. stock options), or a tax law change to name a few.

Get a jump on 2017

Update savings and spending plans. Modify withholding and estimated taxes accordingly. Retirement contribution limits remain generally the same as 2016 – IRAs and Roth $5,500, 401k deferrals $18,000, SIMPLE $12,500. However, you may be eligible to make “catch up” contributions that up your limits to $6,500, $24,000 and $15,500, respectively (note: defined contribution plan limit jumps from $54,000 to $60,000).

Plan for 2017 transactions. Is a business acquisition, relocation, or significant life event is on the chalk board, and have you circled at the fire with your advisors? What are the planning opportunities?

Tax reform issues were abundant this past election cycle from Federal down to local levels. Pay attention and be flexible in your planning.

And finally, bring a smile and a cup of cheer to your tax accountant. They’re the ones wrestling with 74,000 pages of the Tax Code and hopefully keeping you from harm’s way. You’re just writing the check.

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Your Guiding Angel

Frank Capra’s film “It’s A Wonderful Life” was released in the winter of 1946. It would take almost three decades before it became a classic. The finer things in life tend to take time.

Senior Angel: “A man down on earth needs our help.”

Clarence: “Is he sick?”

Senior Angel: “No, worse. He’s discouraged.”

The story’s about a desperately frustrated banker, father, husband and community man who was thinking about throwing away God’s greatest gift – his life. And Clarence who hadn’t yet earned his wings in 200 years was sent to be George Bailey’s guiding angel.

We’re about to leave 2016 which may go down as one of the most eventful years for investors since the Financial Crisis. The year started with a tumultuous market sell-off, then major geopolitical events including Brexit and the surprise Trump victory. The US stock markets (S&P and Dow Jones) have sky rocketed, the US dollar has soared to its highest level in 14 years, and interest rates are on the rise.

Some people are concerned. Others may be peering over the bridge’s edge into the icy waters below. There are reasons for nervousness. Maintain control and don’t be discouraged for 2017. Here are three areas all focused on the theme “Be Flexible.”

Goals and Financial Plan – Are you planning for the “right” goals? Consider both big goals (retiring in 20 years or funding a 30 year retirement) and easy win goals (create a budget, a 2-year credit card payoff plan, or update beneficiary designations). Stay motivated using “eat an elephant one bite at a time” and recognize your progress.

Why do people tend to make decisions they later regret? Some pay to remove tattoos they once thought were great ideas, and others divorce the ones they rushed to marry. Are you possibly saving for something you won’t want in the future? The concept called “The End of History Illusion” was published in an article by Quoidbach, Gilbert and Wilson (Science, January 2013). They surveyed people asking them how much they had changed in the past decade, and to predict their changes over the next decade. Surprisingly, people predicted minimal change in the future despite the significant changes they’ve made in the past “…leading people to overpay for future opportunities to indulge their current preferences.” This has significant planning implications. Will you sell the second home or downsize main home? Live longer than you think? (Inflation is a hidden menace – SS recipients get a measly pay raise of 0.3% or $5 a for the average recipient). What if SS isn’t fixed and benefits are reduced by 20% (or 30%) for future retirees? Will your family dynamics change? You dream that assisted living is for other people, not you? Be flexible.

Investment Plan – The year ends in about a week, and looks like US stocks outperform foreign stocks for fourth year in a row. S&P is up about 13% for 2016, DJIA up 16%, Russell 2000 up 22%, EAFA (foreign developed) up 1%, and EM (foreign emerging) up 8%. And interest rates are on the rise. What’s ahead for 2017?

A recent report in Barron’s summarized 2017 forecasts by 12 strategists from major Wall Street firms (Goldman, JP Morgan, BofA/Merrill, Blackrock, etc.). They’re forecasts, not guarantees, but predict returns to be slightly higher. The average GDP growth is about 2.6%, S&P up 5.4%, and 10 year Treasuries up slightly to 2.7%. Second, capital markets tend to have a permanent upward trend, but it’s not a straight line. The S&P is triple its March 2009 lows, and some argue we’re due for a correction. Third, there’s a saying “You drive like hell and you’re going to get there.” So diversify and trade the opportunity of ever making a killing for never getting killed. Look at your right hand as a reminder – five fingers representing a form of diversification – US stocks, foreign stocks, real estate, bonds and commodities. And fourth, all the hoopla about Dow hitting 20,000 – it’s just a number. It stood about 496 when I was born 59 years ago, and my daughter will see it hit 650,000 (that’s 6% growth over 60 years). Be flexible.

Tax and Estate Plans – The US elections marked a 9.0 policy earthquake. Four of Trump’s main issues were infrastructure, tax reform, immigration, and Obamacare. Policy changes mean adapting our financial plans. However, it’s too early to know what campaign rhetoric is ultimately enacted as policy. That process will take time, and as my partner Kirstin says “Breathe… if a wall’s going up, it won’t be built overnight.” Take tax reform as an example. Most agree that simplification makes sense. However, people differ on the details. Talk includes cutting corporate tax rates and eliminating estate taxes. For individuals, Trump’s and the GOP’s plans take 7 brackets down to 3, but they differ significantly on deductions, and thus impact on the deficit. And it’s a good sign there are dissenters among his cabinet nominees – expect healthy debate. For planning, a general idea is to accelerate losses into 2016 and defer income to 2017. However, it’s not prudent to make drastic changes or speculate on the outcome of tax reform. Be flexible.

May your list of worries be shorter than your New Year resolutions.

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A Christmas Eve Truce

A cross stands in a field in Saint Yves, Belgium, commemorating a site of something special. The plaque reads “1914 – The Khaki Chum’s Christmas Truce – 1999 – 85 years – Lest we forget.”

Withering machine gun and artillery fire shredded the battlefields of “The Great War to End All Wars.” Soldiers dug in for shelter and to survive. The era of static trench warfare had begun. The most famous was the Western Front which consisted of lines of trenches stretching from the Belgian Coast through northern France to Switzerland. Millions of German, French and British troops battled from those trenches.

On Christmas Eve, British troops were surprised by sounds coming from the German trenches – “Stille nacht, heilige nacht.” One British troop recognized the melody and joined with “Silent night, holy night.” More soldiers started singing. Another Brit cautiously popped his head and saw German soldiers with hands waving. He waved back. No shots were fired. His buddy waved. And the two dropped their weapons climbed from their trenches, crossed no-man’s land, and met in the middle shaking hands with their enemies who hours before were locked in battle.  More soldiers followed suit. An informal truce fell upon a section of the Western Front. Upwards of 100,000 soldiers in khaki and grey were having fellowship on grounds of shredded tree stumps, barbed wire, and uniform remnants.  They shared cognac, tobacco, tinned meat, family photos, song and stories. Others took on a more somber duty of retrieving their fallen comrades from the field.

And for a moment, humanity and peace overwhelmed the brutality of war.

So as you gather this holiday season with family, friends and loved ones, may you have a special toast for peace, happiness and success. And here are some topics you might want to include in those “how are you doing” one-on-one conversations with your adult kids, grandkids and nieces and nephews before they hustle back to their busy lives.

Are you saving enough? – Money is a tool that provides security, freedom and choices. And people have at least three reasons to “stash cash:”

  • Emergency Reserves – “Rainy day” funds for possible job change, an unexpected bill, etc.
  • Planned Expenditures – Big ticket expenses such as vacations, remodeling, repairs, vehicle replacement, education, etc.
  • Retirement – Prudent savers fund after-tax and retirement accounts – plus real estate and business investments. Retirement accounts are convenient (forced savings) and have barriers to keep you away from the funds until retirement (taxes, penalties, etc.). Build after tax savings into your budget – you’ll be happier when a portion of your future retirement checks aren’t fully taxable.

And if saving has been challenging (e.g. job cutbacks or unexpected bills), increase your savings next year. An additional savings of $100 per month over 20 years means about $46,200 at 6% return; 30 years of savings grows to about $100,400.

Debt makes life more expensive – The Feds increased federal funds rate by 0.25% and are hinting of three rate hikes in 2017, and three more in 2018. And bond market interest rates are higher. Higher rates are a double-edged sword.  It benefits savers with higher yields. But they also affect the price of bonds, size of federal debt, and the cost of anything financed. It stresses the affordability of homes. And rising debt, and/or higher costs to service that debt reduces the amount you can spend (grow economy) or save (grow wealth). Meet with your lenders and “fix” adjustable rate debt (ARM mortgages, equity lines, credit cards, student loans, etc.) where possible.

Celebrate your accomplishments and check your course – Many businesses have updated their budgets and strategic plans for the New Year. And households benefit from running their finances like a business as well. Uncertainty will always persist (economic, political, markets, your longevity, etc.). However, the stakes are high best you get all stakeholders at the planning table (your spouse and advisors) to help you think things through.

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Changing Your Game with Trump Cards on the Table

We’re taught two “don’ts” – don’t talk politics and don’t throw stones. However, we have a new reality, and for many, Trump’s victory was a surprise. Client conversations involve the elephant in the room – “What changes should we make” or “We’re scared… are we going to be okay?”

Regardless of who won this highly contentious and nasty election cycle, half the country was going to be unhappy with election results. It’s an unfortunate reflection of our deeply divided country. Late night show hosts each had their unique delivery of emotions and hopes. Seth Meyers captured it whether you’re red or blue – “I felt a lot of emotions last night and into today. Some sadness, anger and fear. And I’m aware those are the same emotions a lot of Trump supporters felt… emotions that led them to make their choice. It would be wrong to assume my emotions are more authentic than theirs.”

We’ve heard acceptance, concession and transition speeches. Underlying all were the themes of working together for a brighter future. There’s lots of uncertainty on how the cards will be turned over. However, the man hasn’t yet taken office or his “first one hundred days.” Why not give him and the process a chance to work? And why not focus on things we can control? Let’s look at a couple areas in your financial plan for you to consider under the new administration and Congress.

Estate Tax Repeal?

The so-called “death tax” is unpopular as a double tax. The estate tax affects few Americans and accounts for less than 1%of the total annual Federal tax revenue. Nevertheless, repeal of the estate tax has been in the cross-hairs.

The prospects and impacts of repeal are uncertain. However, some insights by estate planning gurus Jonathan Blattmachr and Marty Shenkman are as follows:

  • Repeal could reform the focus of estate planning to family and asset protection, and income tax planning.
  • Permanent repeal is uncertain, and more likely we’ll see a ten year sunset provision (Byrd Rule) unless the Republicans can get sixty votes in the Senate.
  • Uncertainty suggests it may be premature to make substantial changes to existing estate plans. Better clarity may come in three to six months. Consult your estate counsel.

Income Tax Reform?

Trump campaigned on tax reduction ($6.2 trillion in a decade) and “simplification.” The tax code and regulations have expanded. They’re equivalent in volume to ten Harry Potters (entire series) or seven King James bibles. However, it’s uncertain what Congress approves (e.g. closing the budget deficit and reducing federal debt which has roughly doubled the past eight years) and how long those changes are effective. Tax policy changes over time and Congress giveth and taketh away.  For example, I started my career in 1980. The Economic Recovery Tax Act of 1981 (Regan tax cuts) provided a 25% across the board cut in rates. The government wanted some of it back. They eliminated $30 billion in loopholes (deductions and credits) and targeted tax shelters with the Tax Reform Act of 1986.

Talk to your CPA and advisor regarding potential tax planning moves. Generally with potential reform – lower future taxes – consider deferring income and accelerating deductions. Some ideas:

  • Deferring income – You sell a stock or rental property in December and you’ll owe taxes four months later. If you wait until January, the bill is due in over a year. However, the risk is price fluctuation.
  • Deductions – Maximize retirement and HSA contributions by year end. Accelerate your eligible medical and dental procedures, prepay property taxes and mortgage payment, and make your charitable donations. Review lax loss harvesting in investment accounts.
  • Business owners and contractors – Defer income to January, and buy needed equipment and pay employee bonuses by Christmas.
  • Don’t go overboard – The strategies need to make economic sense. Don’t be a spendthrift or trigger alternative minimum tax with excessive deductions.

Final Thoughts

There’s plenty of uncertainty (and unturned cards) – Keep politics away from personal finance. Be flexible and adapt your financial roadmap as greater clarity emerges. And until then be patient and stick to the plan. You saw the markets’ boomerang on election night. And the wall isn’t going to be built overnight.

Here’s to dieting another day. Happy Thanksgiving.

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Worst President Ever

Who will be the better President, or who will be worse? Historians also argue who was the worst? Perhaps Warren G. Harding for the scandals that plagued his short term or Woodrow Wilson who lead us into WWI. However, James Buchanan is most often saddled with the title of “worst US President.” When a fork in the road appeared, he typically took the wrong path. Buchanan took little interest in battling the recession that struck before the Civil War. And his attitudes and blunders about slavery helped divide the country and his party.

The American economy was robust in the early 1850’s. Twenty years of expansion had been fed by Manifest Destiny, the discovery of gold and silver, and westward expansion by railroads, settlers and commerce. Manufacturing boomed from strong overseas demand. And the number of banks doubled from 1850 to 1857.

But the economy strained and the Panic of ’57 ensued. US farming profits plunged from bumper crops and overseas competition. Investors worried about speculative railroad and land loans. US gold reserves declined $20 million from trade imbalances and withdrawals. Ohio Life & Trust’s bankruptcy signaled trouble. Credit collapsed, building and railroad construction froze, and unemployment skyrocketed. (Sound familiar… the cycle of bubbles?).

The President said the government would do nothing…” the speculators in land and slaves deserved their gambler’s fate.” The government would continue to pay its obligations and complete existing projects, but little else. He did take anemic action with the Treasury. The size of coins was halved to reduce the silver and gold.

Buchanan also took little action to avert civil war and head off secession. He supported slavery and the Dred Scott decision which denied citizenship to African Americans. He addressed territorial slavery in his inaugural speech as “happily a matter of but little practical importance.” He backed the admittance of Kansas with its pro-slavery constitution and further divided his party ensuring Lincoln’s victory. And he took no action as seven states seceded on his watch.

He and Lincoln rode together to the new President’s inauguration. Buchanan said “If you’re as happy entering the presidency as I am leaving it, then you are a very happy man.” Who would have criticized the gent with the stovepipe hat who may have thought “Don’t let the carriage door hit you on the way out.”

We were taught two “don’ts” – don’t talk politics and don’t throw stones. However, the elephant in the living room deserves some attention. Some are voting for a candidate, and others are voting against the opponent. What and can they deliver? How will campaign promises differ from his or her policy decisions after the election? How will the markets react?

I’m no political expert. I join others pondering is the process flawed? How to encourage the best candidates to run? What to do with the shift in US values and beliefs? However, two things (1) not every position has supporting data and not every point will be swayed by the facts, and (2) it’s important to control what we do control.

Historically, election outcomes and market performance have little statistical relationship. However, in past elections, the S&P has seen more positive performance than negative. There’s less uncertainty – somebody won vs who won. Goldman Sachs analyzed the S&P index for 12 months following presidential elections since 1988. Average return was about 11% with the worst in 2008; there’s a typical post-election bounce, regardless of the winning party. First Trust studied 22 election years since 1928 and 82% (or 22 years) were positive returns. And Goldman also concluded that despite campaign rhetoric, longstanding checks and balances tend to mute grandiose campaign promises.

There are other important questions relevant to your financial health, and less likely to get you into a brawl. What’s important about money to me? What are my goals with my finances and my life? What obstacles do I face? How can I be more involved in the process?

We enter the fourth quarter. It’s crunch time and time to buckle up for the opportunity and challenges ahead. Here are some calendar items for you and your advisors:

  • Maximize deductible retirement and HSA contributions for 2016.
  • Adjust payroll/pension tax withholdings to avoid underpayment penalties.
  • Accelerate earnings to 2016 (or defer to 2017).
  • Make required minimum distributions from retirement accounts.
  • Execute year-end charitable giving and capital gains minimization strategies.
  • Medicare open enrollment runs until 12/7 (Affordable Care Act (the Exchange) runs later 11/1 to 1/31/17).
  • Final quarterly estimated taxes are due 1/17/17.
  • Review and update estate plans and beneficiary designations.

And vote on 11/8. Good luck.

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