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Questions You Were Afraid to Ask: What Differentiates Mutual Funds, Exchange-Traded Funds, and Hedge Funds?

Thu, 08 May 2025 18:27:54 GMT

Welcome back to our continuing series, Questions You Were Afraid to Ask—where we take a deeper look at investment basics that often get skipped or misunderstood.

In our last post, we explored the difference between passively and actively managed funds . This time, we’re diving into three of the most common (or most talked about) types of funds: mutual funds, exchange-traded funds (ETFs), and hedge funds .

This is an especially important topic because most IRAs and 401(k)s give you the option of choosing from at least two of these. Here’s what you need to know:

Questions You Were Afraid to Ask #5:

What Differentiates Mutual Funds, Exchange-Traded Funds, and Hedge Funds?

Mutual Funds

A mutual fund is a company that pools money from many investors and invests that money in a portfolio of securities—like stocks, bonds, and short-term debt. When you invest, you’re buying shares of that fund, and each share represents a piece of the fund’s holdings.

Pros:
- Simplification: The fund does the legwork of selecting and managing a range of investments.
- Diversification: Funds typically spread their investments across industries and sectors, which may help reduce overall risk.

Considerations:
- Mutual funds can vary greatly by strategy, style, and objective—so do your homework.
- They may carry higher expenses, including management fees, purchase/redemption fees, and taxes.
- Mutual fund trades are processed at the end of the trading day, limiting flexibility for timing buys and sells.

Exchange-Traded Funds (ETFs)

ETFs are often similar in structure to mutual funds, but their shares trade on the open market like individual stocks. Many ETFs track market indices (like the S&P 500), although actively managed ETFs also exist.

Pros:
- Liquidity and flexibility: ETFs can be bought and sold throughout the trading day.
- Lower costs: Most ETFs have lower expense ratios than mutual funds.
- Transparency: ETF holdings are typically disclosed daily, making it easier to understand where your money is going.

Considerations:
- Active trading can lead to unexpected fees or tax consequences.
- Thinly traded ETFs may be harder to buy or sell at desirable prices.

Hedge Funds

Hedge funds are often highlighted in the media but remain inaccessible to most retail investors. These funds use a wide range of strategies—including leverage and derivatives—to try to “hedge” against risk and generate outsize

Key Notes:
- Hedge funds invest in non-traditional assets and use complex strategies.
- They are generally only available to accredited investors (with $1M+ in net worth or high income).
- Fees are high, and the risks can be significant.

The Bottom Line

Understanding the differences between mutual funds, ETFs, and hedge funds can help you make smarter investment decisions—especially when selecting options in your retirement accounts. Stay tuned for next month’s final entry in the series, where we’ll answer the most important question of all: How do you know which investment option is right for you?

Your Questions Are Welcome

While we have a list of topics planned, we want this series to be as helpful as possible. Do you have a financial question you’ve been hesitant to ask? Is there a term or concept you’d love to have explained? Let us know—because this series is for you! Simply send us a message with your question or topic idea below.

Disclosure:

Advisory services are offered through Assurance Wealth Management, a Registered Investment Advisor in the State of Texas.

Assurance Wealth Management is not affiliated with or endorsed by the Social Security Administration, Internal Revenue Service, or any other government agency.

Whenever you invest, you are at risk of loss of principal as the market fluctuates. Past performance is not indicative of future results. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.

All written content on this site is for informational purposes only. Opinions expressed herein are solely those of Assurance Wealth Management and our editorial staff. The information contained in this material has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual advisor prior to implementation.

The presence of this website shall in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Texas or where otherwise legally permitted. All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions.

Questions You Were Afraid to Ask: What's the Difference Between Passively Managed and Actively Managed Funds?

Mon, 21 Apr 2025 14:38:27 GMT

Investing can feel overwhelming, especially when faced with so many options. That’s why we created Questions You Were Afraid to Ask—to help break down the complexities of investing and empower you with the knowledge to make informed decisions.

Previously, we discussed the differences between stocks and bonds. But for many investors—especially those using an IRA or 401(k)—choosing individual stocks isn’t practical. That’s why most people invest through funds . But even here, a common question arises:

Questions You Were Afraid to Ask #4:

What’s the Difference Between Passively Managed and Actively Managed Funds?

If you’ve ever browsed through investment options in a retirement plan, you’ve likely seen funds classified as active or passive . But what do these terms mean, and how do they impact your investments?

Actively Managed Funds

An actively managed fund is one where a portfolio manager or team makes investment decisions about which securities to buy and sell, with the goal of outperforming a benchmark index (like the S&P 500) or mitigating market risk.

Considerations for Active Funds:

Potential to outperform the market, but no guarantees.
Portfolio managers may attempt to adapt to market conditions , identifying opportunities or minimizing risks.
Some active funds focus on specific sectors or investment strategies that align with investor objectives.

Potential Risks of Active Funds:

Higher fees due to management expenses and transaction costs.
No assurance of outperformance—many active funds have historically underperformed compared to passive alternatives.
Increased trading may lead to higher tax consequences for taxable accounts.

Passively Managed Funds

In contrast, passively managed funds seek to track a specific index, such as the S&P 500, by investing in the same companies at the same weights.

Considerations for Passive Funds:

Lower costs due to minimal trading and management expenses.
Historically, index funds have performed well over the long term , though past performance is not a guarantee of future results.
Simplicity—investors don’t need to worry about manager decisions or frequent rebalancing.

Potential Risks of Passive Funds:

No opportunity to outperform the market.
Lack of downside protection during market downturns.
May not be ideal for investors seeking specialized or sector-specific investment strategies.

Which One is Right for You?

There is no universal answer—it depends on your investment goals, risk tolerance, and time horizon.

If you prefer lower costs and long-term diversification , a passive fund (like an S&P 500 index fund) may be a suitable option.
If you are seeking active management and strategic opportunities , an actively managed fund could be appropriate, keeping in mind the associated risks and fees.
Many investors diversify by combining both strategies, using passive funds for broad exposure and active funds for targeted investments.

What’s Next?

Now that you understand active vs. passive funds, the next step is to explore different types of funds. In our next post, we’ll discuss mutual funds, hedge funds, and exchange-traded funds (ETFs).

Your Questions Are Welcome

Disclosure:

Advisory services are offered through Assurance Wealth Management, a Registered Investment Advisor in the State of Texas.

Assurance Wealth Management is not affiliated with or endorsed by the Social Security Administration, Internal Revenue Service, or any other government agency.

Markets React to New Tariffs

Wed, 09 Apr 2025 14:00:02 GMT

The first week of April brought more than just spring showers — it delivered a downpour of headlines and a wave of market turbulence.

If you caught the news last Thursday, you likely saw the announcement: sweeping tariffs enacted by President Trump as part of a renewed “America First” push. By the end of Friday, Wall Street had spoken — the Dow dropped over 2,200 points (5.5%), the S&P 500 sank nearly 6%, and the Nasdaq followed closely behind .

While the idea of tariffs isn’t new — President Trump has long hinted at trade reforms — the scale and suddenness of the action caught many by surprise. Here’s a quick breakdown :

10% tariff on most goods from around the world
20% tariff on goods from the European Union
46% tariff on imports from Vietnam
54% tariff on goods from China

The White House dubbed the announcement “Liberation Day,” describing it as an effort to free the U.S. from unfair trade relationships under the ‘America First’ agenda . The goal? Bring more manufacturing back to U.S. soil. Companies like Apple and Honda had already announced new or expanded U.S.-based manufacturing before the announcement.

But Markets Don't Like Surprises

Markets dislike one thing more than bad news: uncertainty. The lack of clear detail about which industries or countries might be affected next has injected guesswork into investment decisions — and that’s reflected in recent swings.

Other nations are already preparing to retaliate , either through their own tariffs or renegotiation efforts

What Happens Next?

Some analysts are warning of economic slowdown or stagflation as a result of the tariff escalation . Others see possible upside if reshoring strengthens the domestic economy long-term.

History suggests that markets often recover once the surprise wears off and uncertainty fades , even if conditions remain imperfect.

So What Should YOU Do?

If you’re feeling uneasy, you’re not alone. But it’s worth remembering: volatility is part of the process — not an anomaly. And sometimes, moments like this create opportunity for thoughtful investors.

If you’re not sure whether your current strategy is built for these kinds of market shifts, we’re here to help. Let’s take a look at your plan and explore ways to move forward with confidence.

Celebrate Financial Literacy Month: Why Financial Education Matters

RDavis@AssuranceWM.com (Rebekah Davis) — Tue, 08 Apr 2025 14:00:01 GMT

April isn’t just about spring blossoms and longer days—it’s also Financial Literacy Month, a time dedicated to encouraging smarter money habits and financial awareness.

Established by the U.S. Senate in 2004, Financial Literacy Month is all about recognizing the importance of financial education in everyday life. As former Federal Reserve Chairman Alan Greenspan once stated:

“Comprehensive education can help provide individuals with the financial knowledge necessary to create household budgets, initiate savings plans, manage debt, and make strategic investment decisions.”¹

What Financial Literacy Can Do for You

According to the National Financial Educators Council, individuals who receive personal finance education tend to:

Save more
Build greater net worth
Contribute more consistently to their retirement accounts

Simply put, financially literate individuals tend to have less debt, more savings, and a stronger sense of control over their financial future.

Key Topics to Strengthen Your Financial Know-How

Cash Flow: Tracking and managing your cash flow is the first step toward building wealth and reaching your goals.
Investment Risk: Younger investors often play it too safe, while older investors may take unnecessary risks.
Insurance Coverage: Many people are surprised to learn they could improve coverage or reduce premiums with a simple review.
Fraud Protection: Learn how to protect your personal and financial information.
Estate Planning: Having a will, power of attorney, and medical directives in place provides peace of mind and security for your loved ones.

Take Charge of Your Financial Future

There’s no better way to celebrate Financial Literacy Month than by investing a bit of time in understanding your own finances. Whether you're just getting started or already working with a financial advisor, continuing your financial education is one of the best investments you can make.

If you have questions about anything covered here—or want help evaluating your current financial strategy—we’re here for you.

¹ Greenspan, Alan. 2002. “Prepared Statement.” Hearings on the State of Financial Literacy and Education in America. U.S. Senate Committee on Banking, Housing, and Urban Affairs, February 6.

² Shorb, Vince, “Financial Literacy and the Revival of the American Dream,” National Financial Educators Council, accessed March 29, 2013.

Advisory services are offered through Assurance Wealth Management, a Registered Investment Advisor in the State of Texas. Assurance Wealth Management is not affiliated with or endorsed by the Social Security Administration, Internal Revenue Service or any other government agency.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Assurance Wealth Management and our editorial staff. The information contained in this material has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Investing always involves risk and possible loss of capital.

2025 Q1 Market Recap

Tue, 01 Apr 2025 18:32:54 GMT

There’s an old saying: “If you don’t like the weather, just wait a minute.” Though it’s often attributed to New England, the phrase resonates deeply with anyone familiar with unpredictable spring weather — or, for that matter, volatile markets.

That’s exactly how the first quarter of 2025 felt.

Volatility Was the Only Constant

From January through March, market fluctuations became a daily headline. All three major indices ended the quarter down, and yet, the story wasn’t just about losses. Volatility, by definition, refers to sharp, unpredictable changes — not just declines. Markets struggled to stay pointed in one direction for more than a day or two, creating a state of flux that’s often harder for investors to stomach than an outright bear market.

Still, just as today’s market doesn’t predict tomorrow’s, Q1’s turbulence doesn’t necessarily foreshadow Q2. Let’s look at the key forces behind Q1’s market movements — and why volatility, frustrating as it is, may actually present opportunities.

The Big Three: AI, Tariffs, and Inflation

1. Artificial Intelligence (AI):

Advancements in AI have fueled tech-heavy rallies over the past two years, with investor dollars flooding into companies developing cutting-edge tools to boost productivity. But in January, a Chinese firm, DeepSeek , debuted an AI model rivaling well-known platforms like ChatGPT — reportedly developed with far less capital and computing power. This development stirred investor uncertainty, causing significant price swings in AI-focused companies, including chipmakers and software providers.

2. Tariffs:

Unpredictable trade policy also rattled markets. President Trump enacted a 20% blanket tariff on all Chinese imports and a 25% tariff on steel and aluminum from all countries. Products from Canada and Mexico weren’t spared either. While some tariffs were implemented, many others were delayed, dropped, or left in limbo — contributing to a climate of economic uncertainty.

Tariffs affect the cost structure of companies relying on imported materials, especially in sectors like technology. When investors are unsure which industries will be hit or how severely, they tend to pull back. This ripple of hesitation fuels broader market volatility.

3. Inflation:

Though it’s taken a back seat in headlines, inflation still plays a starring role in economic policy. After dropping to 2.4% in September 2024, the inflation rate climbed back to 3% in January 2025 before easing slightly to 2.8% in February. Persistent infla tion makes it more likely the Federal Reserve will maintain elevated interest rates — a drag on stock prices and a signal to investors to brace for tighter monetary policy.

With all three forces — AI disruption, shifting trade policy, and sticky inflation — overlapping and amplifying one another, it’s no wonder the markets have been on edge.

Volatility Isn’t a Bug — It’s a Feature

Market volatility is uncomfortable, no doubt. But as long-time investors and seasoned financial professionals know, volatility also reveals opportunity.

Here’s an example of what I mean. You remember how I said the phrase “If you don’t like the weather, just wait a minute” probably originated in New England? While he didn’t use those exact words, the famous author Mark Twain once alluded to them in a famous speech he gave to the New England Society in 1876. Here are a few excerpts of what he said:

Just like Twain’s begrudging admiration for a New England ice storm, investors who endure the discomfort of market swings often find beauty at the other end — whether it’s undervalued stocks, resilient businesses, or renewed clarity on long-term goals.

Looking Ahead

The current quarter may have tested our patience. But it also provided moments to reassess, rebalance, and lean into strategies that weather uncertainty well. History has shown that the best investment opportunities often arise not in calm waters, but in stormy seas.

If you have questions about recent market trends or your long-term financial plan, let’s talk. And remember: no one can predict the weather, or the markets — but we can prepare for both.

Because sometimes, all we have to do is… wait a minute.

Disclosures:

All written content is for information purposes only. The information contained herein has been derived from sources believed to be reliable, but is not guaranteed as to accuracy or completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual adviser prior to implementation.

Questions You Were Afraid to Ask: What’s Better, Stocks or Bonds?

Wed, 26 Mar 2025 16:30:00 GMT

When it comes to investing, there’s no such thing as a bad question. That’s why we created Questions You Were Afraid to Ask—to tackle the common yet sometimes intimidating financial questions many people hesitate to ask.

In our last post, we explored why the Dow is valued so much higher than the S&P 500. Now, let’s turn to a question that’s crucial for every investor: What’s better, stocks or bonds?

Questions You Were Afraid to Ask #3:
What's Better, Stocks or Bonds?

When you purchase a bond, you are essentially loaning a company, government, or organization money. When you buy stock, you are purchasing partial ownership in a company. For this reason, stocks are equity investments while bonds are debt investments . Before we answer Question #3, let’s examine how each type works.

How Stocks Work

When you buy a company’s stock, you’re purchasing partial ownership in that company. The more shares you own, the greater your stake. Stocks have the potential for high returns, but they also come with risks.

For example, imagine you invest $5,000 in ACME Corporation at $50 per share, giving you 100 shares. If the company grows and its stock price rises to $75, your investment is now worth $7,500. However, if the company underperforms, your investment can lose value just as quickly.

Pros of Stocks:

Historically, they outperform other asset classes over the long term.
Stocks offer liquidity, meaning they can be bought and sold relatively easily.
Ownership in a growing company can lead to significant wealth accumulation.

Cons of Stocks:

Stock prices are volatile and can change dramatically.
If a company performs poorly or goes bankrupt, you may lose your entire investment.
Selling stocks at a profit can lead to capital gains taxes.

How Bonds Work

Bonds, on the other hand, are essentially loans you give to a company, government, or organization. In return, they agree to pay you back with interest over time. Bonds are generally viewed as safer investments because they provide a predictable stream of income.

For example, if you purchase a bond, the issuing entity agrees to pay you regular interest payments. Once the bond matures, you get your initial investment back. However, bond values fluctuate based on interest rates and market conditions.

Pros of Stocks:
Typically, they are less volatile than stocks.

They provide regular, predictable income through interest payments.
Bondholders have a higher claim on assets than stockholders if a company faces bankruptcy.

Cons of Stocks:

Bonds usually offer lower returns compared to stocks.
Interest rate changes can affect a bond’s value before it matures.
If you sell before maturity, you may receive less than your original investment.

Stocks vs. Bonds: Which is Better?

The answer is: It depends on your financial goals, risk tolerance, and time horizon. Stocks offer higher potential returns but come with greater risks. Bonds provide stability and income but may not grow your wealth as quickly.

Instead of choosing one over the other, many investors opt for a combination of both. Stocks and bonds are considered non-correlated assets , meaning they don’t always move in the same direction. If the stock market declines, bond values may remain stable or even increase. This balance can help manage risk while still allowing for growth.n another company.

The Power of Diversification

Most successful investors don’t put all their eggs in one basket. A mix of stocks and bonds can provide both growth and stability. This strategy, known as diversification, helps manage risk and smooth out market fluctuations over time.

What's Next?

Deciding which stocks and bonds to invest in is an entirely different challenge. That’s why next month, we’ll discuss another common investment question: How do funds work, and why do some investors prefer them?

Until then, remember—there’s no such thing as a bad financial question! If you have one you’d like us to cover, visit our contact page and let us know. Happy investing!

Your Questions Are Welcome

While we have a list of topics planned, we want this series to be as helpful as possible. Do you have a financial question you’ve been hesitant to ask? Is there a term or concept you’d love to have explained? Let us know—because this series is for you! Simply visit our contact page and send us a message with your question or topic idea.

Why a Down Market is an Investor's Best Friend

Thu, 20 Mar 2025 21:14:07 GMT

Why a Down Market is an Investor's Best Friend

It’s natural to feel uneasy when the market takes a dip. The financial news turns grim, the headlines scream uncertainty, and it can be tempting to hit the brakes on investing altogether. But here’s the truth: A down market isn’t a disaster—it’s an opportunity.

If you’re a long-term investor, market fluctuations are just part of the journey. Just like you wouldn’t check your home’s value daily and panic over small shifts, there’s no need to obsess over the short-term ups and downs of your investments. What matters most isn’t what happens today or tomorrow—but where you’ll be five, ten, or twenty years from now.

The Hidden Opportunity in a Down Market

When stock prices drop, most people see red. But seasoned investors see something else: a chance to buy in at a discount. Think of it like a sale on high-quality companies and funds that were once priced too high to justify. This is the time when money managers, institutions, and long-term investors take advantage of lower valuations to buy more shares at reduced prices.

And here’s where you come in.

If you have idle cash—such as an old 401(k) from a previous employer or a CD that’s just sitting there—this could be the perfect moment to put that money to work. By moving those funds into the market now, you can buy in at today’s lower prices, setting yourself up for potential future growth when the market rebounds.

While market downturns can feel unsettling, history has shown us that they don’t last forever. But the investors who take action during these periods? They often position themselves for stronger long-term financial success.

Your Investments are Built for the Long Haul

Your financial future isn’t built around short-term headlines or political events. It’s built on time-tested investment strategies designed to grow your wealth over years and decades. Market fluctuations—no matter how dramatic—are just part of the process.

And remember: if we ever believed you needed to make a change, we’d tell you. Our goal is to help you navigate the market with confidence, providing clarity when the noise gets overwhelming.

Now is the Time to Act

The best opportunities often come when fear is high and prices are low. Instead of sitting on the sidelines, consider taking advantage of today’s market conditions to position yourself for long-term success.

We invite you to take the first step. A 30-60 minute complimentary consultation could change your future. Let’s talk about how you can make the most of this moment and set yourself up for success.

�� Email us at info@assurancewm.com

�� Call our office at 281.440.4200

Because in investing, “down” doesn’t mean disaster. It just means opportunity is knocking—are you ready to answer?

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Assurance Wealth Management and our editorial staff. The information contained in this material has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered by Assurance Wealth Management a Registered Investment Advisor in the State of Texas.

Assurance Wealth Management is not affiliated with or endorsed by the Social Security Administration or any other government agency.

Tariff Questions You Should Be Asking: A Guide for Investors

Wed, 05 Mar 2025 17:56:22 GMT

“What should we do about tariffs?”

It’s a question I’ve been hearing a lot lately, often with a hint of concern. Tariffs have been making headlines, and uncertainty is rippling through the markets. In this post, I want to address this concern, not just by looking at the facts but by discussing how we, as investors, should think about volatility and uncertainty.

Understanding the Tariff Impact

If you’ve been following financial news, you know the markets have been on edge. Recently, new tariffs were implemented: a 25% tariff on Canadian and Mexican imports ¹ and an additional 10% tariff on Chinese goods ¹ , adding to the 10% duty from last month. The reaction was swift. On March 4, the Dow plunged over 600 points ² , and the NASDAQ has been teetering on the edge of correction territory.

When events like this happen, fear starts creeping in. Investors begin asking questions: Are we headed for a market correction? Will the economy slide into a recession? Should I change my investments? Should I pull out of the market entirely? These are the questions dominating conversations, both online and in the workplace. But are they the right ones to ask?

The Real Risk of Tariffs

Tariffs are more than just a political bargaining tool. While they can generate revenue and influence trade negotiations, they also increase business expenses, which can reduce corporate profits. More often than not, companies pass these costs to consumers through higher prices, contributing to inflation—something we’re already battling.

But beyond the immediate financial impact, the real issue is uncertainty. Investors don’t know how long these tariffs will last, whether they will increase, or what their full economic impact will be. That unknown is what fuels market volatility. As the writer H.P. Lovecraft once said, “The oldest and strongest kind of fear is always the fear of the unknown.”

Why Fear Can Lead to Costly Mistakes

When fear sets in, our natural instinct is to act. If you know it might rain, you bring an umbrella. If you expect rush-hour traffic, you leave early. These are short-term solutions for short-term problems. But investing isn’t about the short term—it’s about long-term strategy.

One of the biggest mistakes investors make is reacting to fear in ways that can have long-term consequences. Pulling out of the market in anticipation of a downturn might seem like a smart move, but it’s incredibly difficult to time the market correctly. As legendary investor Peter Lynch once said:

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” ³

Time and again, investors sell off assets in panic, planning to reinvest when things “calm down.” But more often than not, they miss the rebound, sitting on cash while the market climbs back up.

A Better Approach: Think Like a Gardener

A more effective way to think about investing is to view it like tending a garden. When you plant a garden, you don’t uproot your tomato plants and replace them with squash at the first sign of bad weather. You don’t move everything into pots because there’s a chance of hail. Instead, you choose the best possible soil, plant with care, water only when necessary, and harvest when the time is right.

Investing should be the same. You don’t make drastic changes based on short-term volatility. You stay patient, stick to a well-thought-out plan, and trust in the process. The market will have ups and downs, but long-term discipline is what leads to success.

The Questions You Should Be Asking

Instead of reacting to market turbulence with fear, consider these questions instead:

If I pull out of the market now, how will I know when to get back in?
Would I rather endure a short-term correction or risk missing out on a long-term recovery?
Do I really want to sell investments I believe in, only to buy them back at a higher price later?

Final Thoughts

Tariffs and trade wars are real concerns, and market volatility can be unnerving. But at Assurance Wealth Management , we don’t let fear drive decisions. We focus on patience, discipline, and consistency—the qualities that lead to long-term financial success.

While we can’t control tariffs or market reactions, we can control our own response. We can remain patient, stay focused on long-term goals, and make informed decisions based on strategy rather than short-term market movements. Market fluctuations are a normal part of investing, and historically, disciplined investors who stick to a well-diversified plan tend to see better outcomes over time.

Rather than reacting to headlines, now is the time to ensure your financial strategy aligns with your individual goals and risk tolerance. Staying invested and maintaining a diversified portfolio can help manage risk, though it’s always important to review your plan regularly and make adjustments as needed.

If you have questions about how tariffs or market conditions could impact your financial future, give us a call at (281) 440-4200 to schedule a time to review your portfolio and discuss strategies tailored to your needs.

Sources ¹ “Trump puts tariffs on thousands of goods from Canada and Mexico,” CNBC, https://www.nbcnews.com/politics/economics/trump-puts-tariffs-thousands-goods-canada-mexico-risking-higher-prices-rcna194542 ² “Dow tumbles again, loses more than 1,300 points in two days,” CNBC, https://www.cnbc.com/2025/03/03/stock-market-today-live-updates.html ³ “From the Archives: Fear of Crashing,” Worth.com, https://worth.com/from-the-archives-fear-of-crashing/

Assurance Wealth Management is not affiliated with or endorsed by the Social Security Administration or any other government agency.

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When you follow a link to one of these sites neither Assurance Wealth Management, nor any agency, officer, or employee of the Assurance Wealth Management warrants the accuracy, reliability or timeliness of any information published by these external sites, nor endorses any content, viewpoints, products, or services linked from these systems, and cannot be held liable for any losses caused by reliance on the accuracy, reliability or timeliness of their information. Portions of such information may be incorrect or not current. Any person or entity that relies on any information obtained from these systems does so at her or his own risk. 

Questions You Were Afraid to Ask: Why is the price of the Dow so much higher than the S&P 500?

Fri, 07 Feb 2025 18:22:54 GMT

When it comes to finances, there’s no such thing as a bad question. That’s why we started our series, Questions You Were Afraid to Ask, to tackle common financial curiosities that many investors hesitate to ask. Last time, we explored the difference between the Dow, S&P 500, and NASDAQ indices. Today, let’s dive into another related question:

Questions You Were Afraid to Ask #2:
Why is the Price of the Dow So Much Higher than the S&P 500?

To understand this, let’s do a quick experiment. Open your browser and search for “S&P 500.” Take note of the number you see. Now, do the same for “Dow Jones.” Notice something? The Dow’s number is significantly higher—by tens of thousands of points! But why? After all, the S&P 500 includes 500 of the largest American companies, while the Dow only tracks 30.

How the Dow Jones is Calculated

The Dow Jones Industrial Average (DJIA) tracks the performance of 30 prominent U.S. companies, such as Apple, Coca-Cola, and Walmart. The index is calculated by adding up the stock prices of these 30 companies and then dividing the total by the “Dow Divisor.”

Originally, this divisor was simply the number of companies in the index, but today, it’s adjusted regularly to account for stock splits, changes in listed companies, and other market events. As of now, the Dow Divisor is 0.15172752595384 . ¹ This means that instead of simply averaging stock prices, the Dow’s final value is essentially a multiplied sum. For every $1 change in a stock’s price, the Dow moves by about 6.59 points (1 ÷ 0.15172752595384). This is one reason the Dow’s overall number is so high.

How the S&P 500 is Calculated

Unlike the Dow, which is price-weighted , the S&P 500 is a capitalization-weighted index. Instead of simply adding stock prices, the S&P considers each company’s market capitalization (stock price × total shares available). This method gives larger companies more influence over the index’s movements.

Because of this difference, the S&P 500 uses a much higher divisor—currently over 8,000 ² —to keep its value at a more manageable level. This prevents the price movements of a few companies from disproportionately affecting the index.

Weighted vs. Unweighted Indices

Most stock market indices are weighted because not all companies are equal. Some have higher market capitalizations, meaning they have more shares available and contribute more to the overall index. Here’s a simple way to understand this:

Unweighted Index Example: Imagine an index with three companies. If one goes up 15% , another goes up 10% , and the last one goes up 5% , the index would rise 10% on average.

Weighted Index Example: If the first company is much larger than the other two, its stock price movement will have a greater effect on the index’s performance.

Since the S&P 500 weighs companies based on market cap, larger companies like Microsoft or Amazon move the index more than smaller ones. Meanwhile, the Dow’s simple price-based approach means a company with a high stock price (like Goldman Sachs) has a greater influence, even if it’s smaller in market cap than another company.

Key Takeaways

The Dow is price-weighted , meaning its value is influenced by stock price changes, not company size.
The S&P 500 is capitalization-weighted , meaning larger companies have more influence over its value.
The Dow’s divisor is much smaller than the S&P’s, making the Dow’s total price significantly higher.

Why This Matters

Understanding how indices are calculated helps investors make sense of financial news. The next time you hear, “The Dow finished at 35,000 today,” or “The S&P 500 is up to 4,675,” you’ll know why the numbers are so different and what they really mean.

Next time in Questions You Were Afraid to Ask, we’ll take on another common financial question: What’s the difference between stocks, bonds, funds, and other types of investments? Stay tuned!

Your Questions Are Welcome

While we have a list of topics planned, we want this series to be as helpful as possible. Do you have a financial question you’ve been hesitant to ask? Is there a term or concept you’d love to have explained? Let us know—because this series is for you! Simply visit our contact page and send us a message with your question or topic idea.

¹ Barrons.com, “Market Lab”, https://www.barrons.com/market-data/market-lab ² “S&P 500 Divisor”, YCharts, https://ycharts.com/indicators/sp_500_divisor

Questions You Were Afraid to Ask: What’s the Difference Between the Dow, S&P 500 and NASDAQ?

Tue, 14 Jan 2025 15:28:56 GMT

When it comes to personal finances, investing, and the markets, everyone has questions. Some are basic, others more complex, but all are important. Yet, how often do we hesitate to ask?

Maybe it’s because we feel we should already know the answer. Perhaps we’re worried the question might seem too simple or even embarrassing. But let me tell you something: there’s no such thing as a bad question when it comes to your finances.

As a financial advisor, I’ve been asked everything from “What does the stock market even do?” to “How can I plan for my retirement while still paying off debt?” Over the years, I’ve realized that the most meaningful conversations often start with a question someone was initially afraid to ask.

That’s why I’m thrilled to introduce a new blog series: "Questions You Were Afraid to Ask." Each month, we’ll tackle a common question that investors and individuals often ponder but hesitate to ask. These blogs will be your chance to explore the “whys” and “hows” behind financial concepts in an approachable, jargon-free way.

Let’s get started!

Questions You Were Afraid to Ask #1:
What's the Difference Between the Dow, S&P 500 and NASDAQ?

Understanding Indexes

The Dow, S&P 500, and NASDAQ Composite are all indexes. An index tracks the performance of a group of securities, such as stocks or bonds. Indexes serve as benchmarks, helping investors measure how specific segments of the market are performing over time.

What sets these indexes apart is what they measure and how they’re structured. Here’s a closer look:.

The Dow Jones Industrial Average (The Dow)

The Dow is perhaps the most famous index. It tracks 30 of the most prominent companies in the U.S., such as Apple, Coca-Cola, and Walmart. These companies represent major industries, making the Dow a useful—albeit narrow—indicator of the stock market’s performance.

However, because the Dow only includes 30 companies, it’s not the best snapshot of the overall economy. Instead, it reflects how large, established companies are doing. Despite its limitations, the Dow’s iconic status ensures it receives significant media attention.

The S&P 500

The S&P 500 measures the performance of 500 of the largest publicly traded companies in the U.S. It’s much broader than the Dow, encompassing a wide range of industries. As a result, the S&P 500 is often considered a more reliable indicator of the economy’s overall health.

Think of the S&P 500 as a thermometer for the market—it tells you how well large-cap companies are performing on average. Many investors use it as their primary benchmark.

The NASDAQ Composite

The NASDAQ Composite tracks nearly all the companies listed on the NASDAQ Stock Exchange. What makes it unique is its heavy focus on technology and innovation. Companies like Tesla, Amazon, and Microsoft carry significant weight in this index.

Because of its tech focus, the NASDAQ tends to be more volatile than the Dow or S&P 500. When tech stocks soar, the NASDAQ often leads the charge. Conversely, when the tech sector struggles, the NASDAQ feels the brunt of the impact.

Other Important Indexes

While the Dow, S&P 500, and NASDAQ Composite are the most widely recognized, there are other indexes worth noting:

Russell 3000: This index represents nearly the entire U.S. stock market, covering 3,000 of the largest publicly held companies.
S&P/TSX Composite: Canada’s equivalent to the S&P 500, tracking the 250 largest companies listed on the Toronto Stock Exchange.

Why Do Index Values Differ So Much?

One common question is why these indexes have such vastly different values. For example, the Dow’s value is always much higher than the S&P 500—even though the S&P includes many more companies. The answer lies in how the indexes are calculated. (Spoiler: It has to do with something called weighted averages.)

We’ll cover that in next month’s post!

Your Questions Are Welcome

While we’ve got a list of topics planned, we also want to hear from you. What’s a question you’ve been hesitant to ask about your finances? What’s a term or concept you’ve always wanted someone to explain? Let us know—because this series is for you.

So, welcome to Questions You Were Afraid to Ask! Together, let’s turn those uncertainties into understanding and those questions into confidence.

2024 Election Aftermath

Fri, 08 Nov 2024 14:22:29 GMT

The dust has settled, the votes have been counted, and Donald Trump is once again president-elect of the United States. The question now is, “What does that mean for us?”

As happens after every election, some people are elated by the result. Some are upset, and some indifferent. All these emotions are understandable. As a financial advisor, however, I feel it’s important to reiterate that investing and emotions do not mix. That’s why I am currently reminding my clients not to make dramatic changes to their investment strategy based solely on how they’re feeling about the election results.

With all that said, let’s examine some of the ways that a second Trump term may affect the economy – and by extension, the markets. Think of these not as predictions, but simply as storylines my team and I will be keeping a close eye on. Let’s start with:

Trump's Tax Policy

In 2017, Congress passed the Tax Cuts and Jobs Act, the most significant update to the tax code in decades. Among other things, the bill reduced tax rates for most corporations and individuals and doubled the estate tax exemption. These tax cuts are currently set to expire on December 31, 2025. However, with Trump once again back in the White House, it’s a safe bet that he will look to extend these cuts further.

But Trump’s tax proposals don’t end with simply renewing the TCJA. He has also proposed lowering the corporate tax rate to 15%.1 (It’s currently at 21%.) Eliminating taxes on Social Security benefits was also a hallmark of his campaign. Should that happen, it would be a major boon to retirees. So, look for more information from us in the future if this proposal starts making its way through Congress.

What does all this mean for the economy and the markets? Well, lower taxes are a good way to juice economic growth, as they can prompt increased consumer spending. Lower corporate taxes also help companies invest, expand to new markets, and boost profits. This, in turn, could propel the stock market to new heights. As investors, that’s exciting!

However, changing the tax code is rarely as simple as it may seem on paper. Even if Republicans end up in control of both branches of Congress — which, as of this writing, is not yet certain — it’s not a guarantee this would lead to expanded tax cuts. Why? Three words: The national debt.

Our country’s debt is a bipartisan problem that has swelled under both parties. Since the pandemic, however, the national deficit, which is the amount by which the government’s spending exceeds its revenue, has shot up relative to its historical average. It currently sits at $1.8 trillion for the 2024 fiscal year.2 When you couple that with higher-than-average interest rates, it makes it even harder to pay down the national debt.

Many economists project that new tax cuts will only cause the deficit to balloon further.1 For that reason, even some Republicans in Congress may not have the stomach for more cuts. Only time will tell here, but it’s an issue we will watch closely as we factor taxes into our clients’ overall financial plan. (And if you would like any assistance with this, please let me know!)

Tariffs

One of the ways president-elect Trump has proposed to offset those tax cuts is through the use of tariffs. It's a familiar tactic for anyone who remembers his first term in office. The tariffs he proposes this time, however, are on a different order of magnitude altogether.

Put simply, a tariff is a tax on imported goods. Tariffs have historically been used to make buying foreign goods more expensive so that people would buy local products instead. Think of it as a way of protecting certain American industries from outside competition.

In his first term, President Trump famously enacted a wide range of tariffs on Chinese goods. China retaliated with tariffs of their own. This launched a so-called “trade war” that dominated much of the economic discourse until COVID came along. For his second term, however, Trump has proposed raising tariffs to anywhere from 60% to 100% on Chinese goods…along with a universal tariff of 10-20% on all imports in general.3 Trump believes this will create enough revenue to cover lower taxes and bring down the deficit.

Make no mistake – tariffs do raise revenue. (In fact, for most of our country’s history, tariffs were actually the government’s prime source of income. This began changing around the turn of the 20th century when income taxes started becoming permanent.) The Tax Foundation estimates that a 10% blanket tariff would raise $2 trillion between 2025 and 2034.4 A 20% tariff could lift that number to $3.3 trillion.4 Whether that’s enough to offset the revenue lost with lower taxes, however, is an open question. You can easily find arguments for and against it if you look long enough.

There’s another aspect to tariffs, though, which is probably even more important: How they may impact inflation.

Historically, higher tariffs do lead to higher consumer prices. Let’s use the fictional ACME Company to explain why. Imagine that, in order to make roadrunner trappers, ACME frequently imports aluminum from abroad. If they are forced to pay a high tariff on that aluminum, they would have little choice but to raise the price on their traps to continue making a profit. When these price hikes happen across the board, we call that inflation.

Now, it’s nearly impossible to predict exactly how much tariffs would drive inflation. Republicans have a vested interest in saying the effect will be minimal. Democrats have a vested interest in decrying tariffs as amounting to a 20% sales tax, or higher. But the truth is much more complicated because economics are rarely so simple. We know that consumer prices did rise modestly during President Trump’s first term. However, because the inflation rate was so low when he was first elected, at just 1.7%, the overall effects were minimal.5 The same could hold true again.

Of course, things are a bit different this time. As you know, consumer prices have been the main economic problem facing our country for the last several years. While the inflation rate has now fallen to 2.4%, people are still dealing with sticker shock — and the Federal Reserve has only just begun cutting interest rates.6 Should tariffs cause inflation to spike, it could lead to both lower spending and a delay in future rate cuts. Both would likely have a negative impact on the economy.

That said, it’s important to remember that all these potential impacts are both theoretical and months-to-years away. There’s no reason to overreact to any of this. We simply must remain informed about what’s going on, so if the situation changes, we can adapt accordingly.

Oil

Many people fondly remember an era of lower gas prices during President Trump’s first term. For his second, Trump has promised to reduce restrictions on crude oil production. That would have the effect of increasing the total oil supply, which could bring down gas prices again.

I mentioned above that economics are rarely simple. That’s true here, too. For example, Trump has also proposed leveling new sanctions against Iran and Venezuela – two major oil producers. That could actually decrease the world’s oil supply and drive prices higher. It's also unclear how much the U.S., which is already the world's largest oil producer, can actually increase production. While decreased regulation would raise the ceiling of what could be produced, the floor is determined by processing and shipping infrastructure. That doesn’t get built overnight. And some oil companies may not actually want to increase supply, as lower prices could decrease profits.

Oil prices, like that of all commodities, are governed by many factors beyond just presidential policy. In general, though, less government regulation typically boosts the energy industry. That, in turn, could have a positive impact on certain sectors of the market.

Two Caveats

As you can see, certain aspects of a second Trump term could be net positives for the economy. Others could bring unintended consequences. But there are two caveats here. Two reasons why you should be wary of making wholesale changes to your plans just because of the election.

As of this writing, it’s not yet clear which party will control the House of Representatives. Should the House revert to the Democrats, it would mean a divided government. As a result, some of Trump’s policies could be watered down or shelved. But even if Republicans control both chambers, change usually comes slow in Washington. There are so many opinions, so many stakeholders, that proposals get diluted or tabled. Just because a politician proposes X in order to achieve Y does not mean it will necessarily happen. That’s why we should adopt a wait-and-see attitude when it comes to Trump's second term.

Here's the second reason we need not overreact to the election results. History has shown us that the presidency has far less of an impact on the markets than people think. From 1945 through 2020, the S&P 500 has risen an average of:

6% with a Democratic president and a split Congress ⁷
13% with a Democratic president and Republican Congress ⁷
9% with a Republican president and Republican Congress ⁷
8% with a Democratic president and Democratic Congress ⁷
8% with a Republican president and a split Congress ⁷
9% with a Republican president and Democratic Congress ⁷

SOURCES

1 “The 2024 Trump Campaign Policy Proposals, Budgetary, Economic, and Distributional Effects,” Penn Wharton Budget Model, University of Pennsylvania, budgetmodel.wharton.upenn.edu/issues/2024/8/26/trump-campaign-policy-proposals-2024

2 “What is the national deficit?” United States Department of the Treasury, fiscaldata.treasury.gov/americas-finance-guide/national-deficit/

3 “Trump tariff threats will trigger import ‘rush’,” CNBC, www.cnbc.com/2024/09/11/trump-trade-policies-will-fuel-freight-rates-consumers-pay-price.html

4 “Revenue Estimates of Trump’s Universal Baseline Tariffs,” The Tax Foundation, taxfoundation.org/blog/trump-tariffs-revenue-estimates/

5 “Consumer Price Index, November 2016”, U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/archives/cpi_12152016.pdf

6 “Consumer Price Index Summary,” U.S. Bureau of Labor Statistics, www.bls.gov/news.release/cpi.nr0.htm

7 “What a contested election means for the economy,” The Washington Post, www.washingtonpost.com/business/2020/11/04/economic-impact-election/

Credit Freeze

Wed, 04 Sep 2024 14:45:10 GMT

Recently, a background check company called National Public Data confirmed they had experienced a data breach earlier in the year. As a result, the personal information for millions of Americans had been compromised – including, in some cases, Social Security numbers. ¹

Now, it appears the breach was perhaps not quite as devastating as initial headlines made it sound. (It appears most of the data was inaccurate, incomplete, or mixed up, and many of the records belonged to deceased people. ^2&3 ) But still, the news serves as a valuable wakeup call. Data breaches occur fairly frequently in the United States. They subject consumers to possible identity theft, financial fraud, cyberstalking, and more.

What are you doing to protect your data?

If you’re like most Americans, the answer is probably, “not much.” According to a survey by the Identity Theft Research Center and DIG. Works, only 3% of adults chose to freeze their credit after receiving a data breach notice – even though freezing your credit is one of the best ways to prevent identity theft. ³

One possible reason for this is that credit freezes have traditionally cost money. But many don’t realize that you can freeze your credit for free!

Thanks to a 2018 law called the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” credit reporting bureaus like Equifax, TransUnion, and Experian must offer free credit freezes. ⁴

SEC. 301. PROTECTING CONSUMERS’ CREDIT.

“(A) IN GENERAL.— Upon receiving a direct request from a consumer that a consumer reporting agency place a security freeze, and upon receiving proper identification from the consumer, the consumer reporting agency shall, free of charge, place the security freeze not later than…1 business day after receiving a request by telephone or electronic means…[or] 3 business days after a request that is by mail.” ⁴

– Economic Growth, Regulatory Relief, and Consumer Protection Act

What is a credit freeze?

To calculate your credit, agencies like Equifax store important data like loan and payment history, birth dates, Social Security numbers, and more. Whenever you apply for a loan or approval on a credit card, banks and other lenders will request that information from a credit reporting agency.

When you apply for a credit freeze, the agency will essentially lock, or freeze, your file so that it can’t be accessed. That way, even if a lender requests your information, the agency will not release it until you “thaw” the freeze first. It’s away to keep your personal information from falling into the wrong hands. That’s because it restricts access to your credit report. Creditors cannot access your report which keeps them from approving any new credit account in your name — fraudulent or legitimate. ⁵

In many cases, you can safely keep your credit frozen year-round unless you need to apply for a loan. Unfortunately, many people don’t take advantage of this. Some may think it still costs money, while others find the process too arduous. And some, likely, don’t think identity theft will ever happen to them. That’s despite the fact that, in 2023 alone, 1.4 million Americans fell victim to identity theft! ⁶

In my opinion, freezing your credit is an option to consider.

A few things to know:

To get the most protection, you should freeze your credit at all three of the major credit reporting agencies. Visit these websites to learn how:

TransUnion: transunion.com/credit-freeze

Experian: experian.com/freeze/center.html

Equifax: equifax.com/personal/credit-report-services/credit-freeze

The law also enables parents to freeze their children’s credit for free if they are under age 16. While a child’s identity is usually not as vulnerable as an adult’s, it still can be protected, and it’s a terrific way to teach children about the dangers of identity theft!
While a credit freeze is a valuable weapon in the fight against identity theft, it won’t protect you from everything. That’s why you should also check your credit report regularly. (You can still request a credit report even if your credit is frozen.)
Freezing your credit will not affect your credit score.

To learn more, visit the Federal Trade Commission’s website at https://www.consumer.ftc.gov/articles/0497-credit-freeze-faqs.

Identity theft is one of the biggest threats to reaching your financial goals. Take steps to protect your identity as soon as possible. Please let me know if you have any questions – and be sure to visit the links listed above to learn more!

1 “Hackers may have stolen your Social Security number in a massive breach,” CNBC, https://www.cbsnews.com/news/social-security-number-leak-npd-breach-what-to-know/

2 “The weirdest ‘3 billion people’ data breach ever,” The Verge, www.theverge.com/2024/8/14/24220212/national-public-data-breach-social-security-3-billion | “The massive SSN breach is actually a good thing,” Vox, www.vox.com/technology/367986/freeze-credit-equifax-experian-transunion-ssn-breach

3 Identity Theft Resource Center, “New Identity Theft Research Shows Consumers Know About Credit Freezes But Rarely Use Them,” www.idtheftcenter.org/post/new-identity-theft-resource-center-research-shows-consumers-know-about-credit-freezes-but-rarely-use-them/

4 “Text of TheEconomic Growth, Regulatory Relief, and Consumer Protection Act,” www.congress.gov/bill/115th-congress/senate-bill/2155

5 “How to place or lift a security freeze on your credit report” USA.gov www.usa.gov/credit-freeze

6“2024 Identity Theft Facts and Statistics,” IdentityTheft.org, https://identitytheft.org/statistics/

Unsinkable

Wed, 14 Aug 2024 14:49:23 GMT

As investors, there is a lot to learn from “Miss Unsinkable.”

At the age of 24, Violet Jessop was employed as a steward on board the RMS Olympic when it collided with the HMS Hawke. While both ships were heavily damaged, the Olympic made it into port. As her first crash at sea, with no need to abandon ship, it seemed to have been a non-event in her memoirs.

In 1912, she was part of the crew that boarded and set sail on the Titanic. While in her quarters, she heard a loud crash and then some crunching noises. Then she heard the announcement that they were sinking. Believing there was a plan in place, she calmly gathered her passengers, even taking her time to find the right hat to wear, before boarding the lifeboats.

Hers was one of the last lifeboats pulled from the water.

That harrowing experience didn’t stop her from going back to sea. She wanted the adventure and needed the income. Just four years after her experience on the Titanic, Violet was aboard the HMHS Britannic (a hospital ship being used during WWI). As this ship was on its way to the Greek town of Moudros, it struck a deep sea mine. Everyone felt the explosion but still reacted with a sense of calm. Not due to blind trust or denial of the situation, but due to experience in war.

Again, Miss Unsinkable was able to get to a lifeboat and, despite the captain's horrible decision-making, survived another shipwreck at sea.

As I read her story, I found two lessons for us as investors so we can be unsinkable.

First, market volatility can be dramatic and scary. Proper planning and a focus on the destination can inform our decisions about how we can get to port.

Second, while Violet was able to survive the Titanic disaster despite faulty guidance, every investor should be fully aware of their situation so they can make the best decisions possible when markets appear to be crashing. Proper guidance and education should allow you to focus on things in life that are far more important than the markets (like finding the right hat).

I’m sure you can see other lessons here, too. Most importantly? Miss Jessop successfully retired and had plenty of stories to tell until her passing in 1971.

That is my goal for the families I work with: to make it to and live a happy retirement. I do that with proper education and guidance.

Source: https://explorethearchive.com/violet-jessop

Navigating Market Fluctuations: Why It's Time to Focus on the Long Game

Tue, 13 Aug 2024 14:54:46 GMT

Recent fluctuations in the stock market may have caught your attention. It’s natural to feel uneasy during times like these, but it’s crucial to remember that we’ve been here before. Historically, such moments have presented valuable opportunities for investors to acquire shares in strong companies at prices much lower than just a few weeks ago.

To better understand this, let’s consider a simple analogy: imagine a basket filled with both golf balls and eggs. From a distance, it’s hard to tell them apart. If you were to turn the basket upside down, the eggs would break, but the golf balls would bounce back. In the investment world, these golf balls represent resilient opportunities that can rebound from tough times.

Think back to the dotcom bubble and the story of Pets.com. It was one of many online companies that crashed spectacularly, while Amazon, which started around the same time, initially flew under the radar but eventually emerged as a retail giant. This is a classic example of identifying “golf balls” amidst all the eggs.

But what about today’s market movements? Do they signal a looming recession? Not necessarily. A recession is technically defined as two consecutive quarters of GDP decline, and we haven’t seen that yet. Even if we do enter a recession, it doesn’t mean financial doom. We’ve weathered recessions before, including those in 2022 and 2020, which, while challenging, ultimately paved the way for subsequent growth.

It’s also possible that what we’re seeing now is simply a market correction. Historically, since World War II, the market has corrected by 10% or more about every 14 months. It’s been roughly that long since the last market adjustment. Remember, the market doesn’t move in a straight line upward; it fluctuates, rising and falling on its way to long-term growth.

So, what should we do in light of this perspective? Now, more than ever, it’s essential to stick to the well-considered plans we have in place for your investments. Our team has always accounted for fluctuations—there’s no way to avoid them entirely. We have great confidence in our investment partners and the strategies we’ve chosen.

And let’s not forget, we’re less than 100 days away from the next presidential election. Both candidates will ramp up their rhetoric, trying to convince us that the sky is falling and will continue to do so unless they’re elected or re-elected. This is political theater at its finest, adding more noise to an already noisy environment.

As I’ve reiterated in the past, the foundations for future growth are often laid on days like these. It’s essential to set aside emotions and focus on the long-term plan designed around your dreams and goals. In times of market uncertainty, having a solid financial plan is more important than ever. If recent fluctuations have you questioning your strategy, or if you simply want to ensure your plan is on the right track, we're here to help.

We’re offering a complimentary consultation to review your financial plan and provide personalized guidance tailored to your unique goals. Whether you're looking to navigate current market conditions or plan for long-term growth, our team is ready to support you every step of the way.

Don’t wait—secure your peace of mind today. Call our office at 281.440.4200 to schedule your complimentary consultation. Let’s work together to build a plan that helps you achieve your financial dreams, no matter what the market does.

4 Mistakes Entrepreneurs Make About Retirement

Tue, 07 May 2024 14:57:30 GMT

Owning a business might be part of your American dream. For some baby boomers, entrepreneurship is also a part of their retirement. A report from the Kaufman Foundation1 found that baby boomers are twice as likely to plan on starting a business as millennials, and the percentage of businesses being started by Americans 55 and older is steadily increasing.

The problem is that retirement planning is not a priority for many entrepreneurs and saving for retirement as a small business owner isn't as simple as being automatically enrolled in a company 401(k) plan. Here are some of the biggest mistakes entrepreneurs are making when it comes to retirement planning:

Not having a plan: It takes a lot of time and energy to start and keep a business running. It’s certainly not an eight-hour-a-day venture. Self-employed professionals have a lot on their plates, including financial obligations like business taxes and payroll. So, saving for retirement often gets pushed down to the bottom of their priority list.

Putting every cent back into the business: Entrepreneurs are sometimes hesitant to put their money into retirement accounts because they worry they will lose quick access to the funds if they need them for the business. Diversifying your assets can help you to better cope with emergencies and save for the future.

Selling the business is the retirement plan: Most entrepreneurs overestimate the value of their business and their ability to sell it when they are ready to retire. Many business owners fail to obtain periodic outside assessments of the value of their business, which can cause surprises later.

Using retirement savings to start a business: Make sure you know what investments you own and how they are performing. Each investment and fund you’ve paid into needs to produce enough to help you reach your objectives. Check that you understand and are comfortable with the costs, risks, and liquidity of your portfolio

1Ewing Marion Kauffman Foundation 2019, 2018 National Report on Early-Stage Entrepreneurship

Estate Planning

Fri, 12 Apr 2024 15:01:25 GMT

Everyone hears ‘estate planning’ and usually one of three thoughts likely come to mind.

I am not old enough to need an estate plan yet.

I am not a millionaire; my estate is pretty simple, so I don’t need one.

I took care of it already…I know it’s around here somewhere.

Fun fact: All conclusions are giant red flags to me.

Why? Because for one thing, life happens, and as grim as it may be to say it, you never know what life has in store for you. And secondly, an estate plan goes well beyond your house and bank accounts.

Here are 6 things to consider when creating your estate plan:

Inventory everything - Watches, jewelry, electronics, vehicles, bank accounts, land, collectibles, and honestly the list could go on. (An estate planner or estate attorney would be able to help you create the full list.)

Write down your family’s needs. Think beyond food and shelter. Will your kids need college education? What about a daughter’s wedding? No kids yet? What will your parents need so you don’t burden them and their retirement plans? Be thorough.

Establish directives. Who will get guardianship of your children? Will there be a trust set up? What happens if you end up in the hospital and can not make your wishes known? Who will be power of attorney? Write it out. Leave nothing open to interpretation.

Make sure your beneficiaries are up to date. You should make it a habit to check these at least annually. Sometimes family dynamics change, or new additions come into the family.

Consider your state’s estate tax law. Nothing is simple when it comes to money, or the government. So, make sure that you know your state’s laws (or work with someone who will proactively help you with it) and be prepared for them. Unfortunately, many people are not, and the ramifications aren’t pleasant.

Reassess periodically. Like mentioned above with beneficiaries, life happens, things change. People move, change jobs, children are born, children get older, and so on and so forth. Making sure you have all your bases covered keeps things out of the courts and out of litigation. And nothing can tear a family apart quicker than legal disputes.

The best piece of advice someone can give you is to consult a professional. Best to coordinate it between an estate attorney and a good financial advisor. Make sure you are getting all the information you need to make the best decision for you, and your family.

Assurance Wealth Management does not offer tax planning or legal services but may provide references to tax services or legal providers.

Common IRA & 401k Mistakes: Part 2

Mon, 16 Oct 2023 15:17:39 GMT

Common IRA and 401(k) Mistakes to Avoid (Part II)

Our last article looked at some of the biggest mistakes future retirees make when planning their investment goals. We looked at:

How the 2022 SECURE Act impacts your retirement accounts.
How RMDs affect your retirement cash flow planning, and how missing an RMD can cost you.
How improperly managing beneficiaries impacts your estate planning goals.
Managing rollover taxation.
How risk tolerance drives asset allocation.

In this article, we’ll cover more of the most (unfortunately) common mistakes we see investors making while planning their retirement and financial future – and how to avoid them.

Mistake 6: Paying Hidden Fees

The simplest way to explain hidden fees' impact on your retirement goals is through a simple exercise. After all, the difference between 1% and 2% fees seems negligible but adds up massively throughout a retirement account's lifecycle. Let's assume:

You're 30 and worked in a high-paying tech job for the past five years.
You’re ready to strike out on your own.
Your 401(k) is worth $50,000, and you’re rolling over the balance into a SEP-IRA.
You’ll fund your SEP-IRA with business proceeds from your new endeavor, but your primary goal is business growth – so you’ll contribute “just” $1,000 monthly to the account.
You’re weighing three options:
A self-directed account
A local wealth manager and retirement planner charging 1% of your total assets under management (AUM)
A brand-name global asset management firm charging 2% AUM

After 35 years, contributing $1,000 monthly and assuming 7% annualized returns*, you’re sitting at:

Self-Directed

Assuming you’re investing in low-fee mutual funds with an expense ratio in the 0.2% range, your SEP-IRA is worth $2.1 million.

Local Wealth Manager and Retirement Planner

Working with the local wealth manager providing personalized service and upfront fee disclosures nets you $1.8 million.

The “Globo-Planner”

If you entrust your retirement to a big-name, impersonalized asset manager eating 2% annually, you're at $1.4.

Want to run the numbers? Here is one free calculator to see for yourself, or to compare other scenario variables like starting amount, monthly contribution, and return rates.

The difference between the high-fee, faceless corporate asset manager and self-directed retirement investing is nearly three-quarters of a million dollars. That cash is critical to retirement, especially once you factor in inflation 35 year's worth of inflation.

And, of course, the difference between self-directed retirement planning and working with a local wealth manager – about $360,000 – isn't nothing. However, many average retirement planners see that comparatively slim fee as a small price for not stressing over managing their account and its day-to-day fluctuations.

In addition, smaller wealth managers usually go above and beyond to earn their fees, offering a suite of retirement planning services or advisory offers that span income planning, healthcare education, and tax management. Research shows that more active retail investors lose money over their investment lifecycle compared to market indices, so make sure you execute due diligence to determine whether you have the inclination and time to manage your retirement account or whether forking a small fee is worth it1.

In either case, dig deep into the agreements and disclosures before deciding on third-party retirement help. Hidden fees are common and can cut deeply into your retirement bottom line. One research study indicates the average retirement account management fee is in the 2.5% range, so, if you can find assistance below that target, you're doing better than average!

*These are hypothetical examples for illustrative purposes only. These values are based on a 7% year over year annualized return which is not based on past performance, or future results of any investment vehicle.

Mistake 7: Not Turning Your Retirement Account into Tax-Free Income

This is less a mistake and more of a “hidden secret” most retirement investors don't know. But, like the other mistakes on our list, it could end up costing you in retirement. Remember that tax-deferred retirement accounts like a Traditional IRA come with a caveat. They're essentially bundled with an IOU to the IRS, where you promise to pay Uncle Sam income tax on your withdrawals, whether you begin as soon as you're eligible or wait until you take RMDs.

Government debt is ballooning yearly, and Uncle Sam will do everything possible to use your retirement income to pay that national debt load down. The good news for most retirees is that (speaking generally) you'll be in a lower tax bracket come retirement than you were during your working life. That's the core value proposition of a tax-deferred retirement account. So, even if you pay taxes, your burden will be lower today when you're actively contributing to the account.

But you can get away with paying even less if you know this information. You can convert your tax-deferred account to a Roth IRA, which has a key benefit* over a traditional account:

As the primary account holder, you aren't forced to take RMDs on a Roth IRA, so your asset value can continue growing until you need to withdraw a portion – and you dictate how much you take out, not the government.

You will have to pay income tax on a portion of the account when you convert, but here’s the hidden secret not many know: you can stagger your conversion across 5, 10, 15 years, or more – meaning you're taking control of your tax and can accurately predict just how much you'll owe during conversion. A competent wealth manager or retirement advisor can help manage that conversion process to maximize your asset transfer while minimizing your tax burden.

The bottom line is that when you leverage this newfound knowledge, dealing with a small tax hit today means you'll save a fortune in taxes tomorrow.

* Roth IRAs have income ceilings. If your earnings are high, you might not qualify. The cap on yearly IRA contributions is substantially lower than the cap on yearly 401(k) contributions. You can withdraw your contributions tax- and penalty-free. But early withdrawals of earnings could trigger taxes or penalties if you’re younger than 59½ or the account is less than five years old. Unlike traditional IRA contributions, Roth IRA contributions aren’t tax-deductible. *

Mistake 8: Keeping Your Cash in a 401(k)

Americans increasingly job-hop in today's economy. Before, staying with one company for the duration of your working life wasn't uncommon. Today, Americans (on average) hold 12 jobs throughout their lifetime2! If each job offers a 401(k) or similar employer-sponsored retirement plan, you can easily have a dozen different accounts spread across as many management companies. One in five Americans has a legacy 401(k) they don't access regularly, according to a financial services survey – they may not even remember they have the account in the first place3.

Of course, maximizing your 401(k) or other sponsored plan while employed is nearly always a good idea, particularly if the company offers a free match incentive. If you don't capitalize on the matching, at least, you're leaving literal cash on the table. But that free money ends when you leave the employer, and the more accounts you have floating in the ether, the more likely you are to forget one exists.

That's why rolling legacy plans into an IRA can make sense for some future retirees, but there are other benefits beyond the ease of access you get by consolidating. 401(k)s have critical limitations, potentially making keeping capital in a legacy account a losing proposition. For example, many plan guidelines dictate or restrict your access to the account. Employer-sponsored plans are also often frustratingly difficult to manage during estate planning, as plans typically have limited distribution flexibility for extended family members like grandchildren.

Furthermore, 401(k) and similar plans usually have limited investment options. They're usually restricted to "big name" mutual funds, many of which come bundled with hidden fees and artificially cap your diversification and risk management planning.

Finally, the biggest downside is that you can't directly convert a 401(k) to a Roth IRA within its existing plan structure. And, since these 401(k) plans usually come bundled with fees close to the national average (2.2% or more4), you could lose real purchasing power if you maintain a legacy account sans-matching. If you migrate legacy accounts to a self-managed Traditional IRA, you could save in fees – even if you find a local wealth manager charging 1%, you've cut your fees in half. There could also be an option to roll over right into a Roth IRA if you meet requirements.

Mistake 9: Having Too Many Accounts

This closely aligns with our previous point but bears repeating. We recently onboarded a new client with seventeen accounts, including a Thrift Savings Plan from military service, multiple 401(k)s from traditional employment, and self-directed plans alongside a SEP-IRA. Seventeen is a lot, but (like we mentioned above) having new clients come in with double-digit accounts isn't uncommon.

Now, this isn’t to say that too much retirement money is a problem – on the contrary. But avoiding any of the mistakes we've covered here is hard enough, and juggling 10+ accounts compounds the complexity. Retirement planning is already stressful, so don’t make things harder for yourself by leaving legacy accounts drifting in the wind.

Mistake 10: Not Getting a Second Opinion

Picture this – you go to the doctor for a minor cold, only to be told, "I'll pencil you in for heart surgery next week. Just stop by the nurse's station to confirm the appointment time." You wouldn’t undergo a costly and dangerous procedure like that on no-notice without a second opinion, right?

Retirement planning is no different.

Too many wealth managers bundle hidden fees or want to use your retirement portfolio as a testing ground for the next big thing. Even if you love the first one you speak with, getting a second opinion never hurts. It's free, and getting a second (or third, or fourth) opinion gives you a range of perspectives on wealth management and retirement planning that can help cover gaps in your knowledge.

What Now?

Hopefully, you've learned a few common mistakes to avoid. If everything we covered was old hat, then congratulations. You're better prepared than 99% of Americans with limited idea of effectively planning and managing their retirement prospects.

So, what’s next?

When we run discovery calls with prospective new clients, we like to use a “Predictable Retirement Outline.” Since you now know what not to do, our Predictable Retirement Outline helps show you where you stand and what you should do based on your unique life circumstances.

During follow-on visits, we look into the big-picture topics in our Predictable Retirement Outline, including investment planning, retirement income forecasting, healthcare considerations, and more. We also help determine your individual risk tolerance, something many investors need help pinning down on their own.

If you’re comfortable knowing what not to do with your retirement planning, now is the time to find out what you should do – give us a call or send an email to schedule your free 15-minute discovery call and get the ball rolling on your financial future.

1 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9105963/

2 https://www.bls.gov/news.release/nlsoy.t01.htm

3 https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/

4 https://info.employeefiduciary.com/hubfs/assets/docs/Fee_study_-2M.pdf ; https://www.employeefiduciary.com/blog/are-your-401k-fees-reasonable-benchmark-them-to-find-out

Common IRA And 401k Mistakes To Avoid: Part 1

Thu, 28 Sep 2023 15:39:48 GMT

Common IRA and 401(k) Mistakes to Avoid

Unless commitment is made, there are only promises and hopes – but no plans.

-Peter Drucker

Everyone dreams of retirement. Sitting on a beach, making up for missed time with family, or just getting well-deserved rest after decades of hard work – all and more make up most of our post-retirement dreams.

But, like business legend Peter Drucker says above, we’re building a future on promises and hopes unless we commit to that vision. To achieve those dreams and ideas, we need to develop a comprehensive retirement plan today and commit to it.

Everyone has their preferred retirement planning methods. If you ask me or anyone else on my team about any of our core retirement competencies – income and tax planning, investing, healthcare, and more – we could talk your ear off about different strategies and maximizing your opportunities today and after retiring.

But that’s not what we’re covering today. We realize that some prefer self-directing their retirement journey or aren’t yet ready to start working with us to help develop and realize a vision. Instead, we want to cover some guiding principles for managing an IRA or 401(k). We’ve seen these mistakes repeatedly during client onboarding, and if we can help you avoid any of them, you’ll be better positioned today for your retirement – no matter how far away that day may be.

Mistake 1: Missing Out On New Opportunities

The 2022 SECURE Act offers greater flexibility in managing your tax-advantaged retirement accounts. Here are a few key benefits investors often miss1:

You can keep contributing to your retirement accounts as long as you're earning income. Previously, you had to stop new contributions when you turned 70 ½.
Required minimum distributions, or withdrawals you must begin taking from your retirement account, aren’t in effect until you turn 73. That’s almost three more years to keep growing your retirement nest egg compared to past rules.
You can withdraw up to $5,000 if you have or adopt a child, penalty-free.

These are just a few of the new unique benefits offered by the new SECURE Act. There are more for specific circumstances, so talk to a retirement planner to see what other opportunities are available in the new legislation.

Mistake 2: Don’t Miss Your RMDs

We mentioned RMDs in the previous section – if you miss a required minimum distribution, you must pay a 50% excise tax on the amount not withdrawn. So, if your RMD for a particular year is $10,000 and you miss that year’s withdrawal, you’ll pay the standard income tax on that distribution ($3,000) and 50% of the total RMD as an excise tax. 80%, or $8,000, of that year’s allocation goes right into the IRS’ pocket instead of funding your retirement when needed most.

This is one common mistake retirees make when managing their accounts, and extensive research shows that a range of RMD missteps leave account holders with less livable income during their golden years2 . At the same time, proactively projecting your RMDs is easy with enough planning for foresight, especially if you’re leveraging a wealth manager’s professional toolkit.

Mistake 3: Not Properly Designating Beneficiaries

Estate planning is complex because it’s difficult to objectively consider all the possibilities impacting your wealth after you pass (that’s why a comprehensive wealth management plan is critical). Still, one of the easiest parts of estate planning – designating beneficiaries – is also one of the most common mistakes we see.

A common mistake retirees make is not updating their beneficiary paperwork. Many assume other legal documents, like divorce decrees or marriage certificates, supersede older beneficiary designation documents. This isn’t the case. Even if your spouse waives their right to your retirement account, they’re still entitled to the balance if you pass unexpectedly – if you don’t update your beneficiaries.

Remember to deliberately designate your beneficiaries, too. Research shows that the average inheritance doesn’t last beyond a single generation3. An estate planner can help structure your beneficiaries by developing your designation document to avoid spendthrift problems, divorce, bankruptcy, disinheritance, and plain old bad choices.

We recommend getting a beneficiary checkup and following up on that annually – it’s a quick process when working with a professional planner that could save tons of time and trouble.

Mistake #4: Not Knowing that Rollover Rules Can Trigger Immediate Taxation

This mistake catches investors off-guard often and can devastate your retirement plan. Rollovers are common and often triggered by account consolidation or when you leave an employer.

When you execute an indirect IRA rollover, in which you get a check for your account balance, deposit it, and then write a check for that balance to your new account platform, you have 60 days to complete the transaction – and can only do one indirect rollover every 365 days4. That isn’t calendar year, either. It’s a rolling 365-day window, and any additional indirect IRA rollovers are 100% taxable and subject to an additional 20% tax withholding from the former custodian.

If you have multiple accounts spread across several custodians from past jobs, carefully planning consolidation is tricky and can trigger a huge tax burden. For this reason, direct rollovers are better. For direct rollovers, your existing custodian goes directly to the new custodian and cuts them a check – you’re no longer a middleman in the transaction. You can execute as many of these as you want annually.

Mistake #5: Risking Too Much

Risk is part of investing, but balancing portfolio risk and your retirement goals is difficult. It's especially tough when managing your portfolio because (like estate planning) it's difficult to be objective when it's your own money at stake.

At the same time, everyone's circumstances are different, which drives different risk tolerances. Because of these two factors, working with an established retirement planner is preferred. They'll help you remain objective and deliver the context you're missing based on their years of work with clients of all types.

Remember, bad wealth managers apply broad rules to all their clients, like allocating stocks and bonds based purely on age. Before working with a wealth manager, ensure they take the time to understand your unique situation and not simply use a cookie-cutter approach.

...to be continued...

1 https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf

2 https://web.archive.org/web/20230912212530/https://am.jpmorgan.com/us/en/asset-management/adv/insights/retirement-insights/retirement-portfolio-allocation/

3 https://www.kiplinger.com/article/saving/t021-c000-s002-5-strategies-keep-heirs-from-blowing-inheritance.html

4 https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

Retirement Rebalancing Rationale

Tue, 12 Sep 2023 10:52:44 GMT

Retirement Rebalancing Rationale: How Often Should You Rebalance Your Portfolio?

Rebalancing a standard portfolio can be a nightmare. Asset classes, like bond funds and stock market indices, move increasingly out outside of historical expectation – that is, both asset classes tend to correlate with one another in recent years rather than move in opposition, rendering legacy diversification defunct1 . Throw things like Bitcoin ETFs into the mix and trying to best balance your cash allocations is a multi-week process of research before you’re ready to pull the trigger.

But if your carefully crafted 60/40 portfolio in a taxable brokerage account is out of whack, you could suffer tax implications on realized gains if you sell off stock to boost your bonds, or throw some money at something more speculative.

Luckily, your retirement accounts can avoid this dilemma – both the 401(k), 401(b), and both IRA types can be rebalanced (meaning active selling and buying equities in the account) without tax implications.

Why Rebalance?

Regardless of your life stage or distance from retirement, you should have an investing goal and risk profile assigned to your account. Closer to retirement usually means fewer stocks and more-fixed income assets, while younger investors keep a more aggressive and risk-on portfolio.

If there is significant market fluctuation, or if you haven’t rebalanced for a long time, you might see your capital allocations misalign with your goals and risk. You’d hate to be close to retirement, and a running bull market brings your stock allocations to >75% of your portfolio without a rebalance. If that happened, you could be in danger of having to work a few extra years if the economy quickly fell back to Earth, as we’ve seen recently.

So, How Often Should I Rebalance?

There’s no hard rule, so it’s essential to understand your goals and risk profile while also watching the account and economy.

I know, it’s a lot. But we feel managing your retirement is one of the most critical financial jobs, and it doesn’t take much time to stay on top of your future.

If you do want a general guideline, it’s best to set aside time once or twice a year to:

Review your investing goals and risk profile.
Check the account status: what was your original allocation proportion, your current goals, and how does the portfolio’s breakdown compare? You should also know the threshold tolerance for misallocation- i.e., you’re OK with a 5% difference between the assigned proportion, but anything beyond is a red line. This will also drive rebalancing frequency.
Rebalance as needed. This means selling and buying across equity asset types to reset the required allocation proportion.

Pretty simple, with one catch – when the market is incredibly volatile, greater inter-month or quarter swings could quickly throw off your balance, and a swing in the other direction could knock out unrealized gains.

A Helping Hand

Active portfolio management isn’t for everyone. Maybe you’d prefer to let the money work for you with minimal involvement. In that case, there are a few options.

Target-date funds are assigned a date, and you select a fund based on your retirement. As that date nears, the fund managers rebalance the holdings, so the risk profile automatically adjusts.

Hiring a financial professional is a great way to ensure you maintain a well-diversified, balanced fund. Financial professionals are duty-bound to understand your needs and honor those needs when managing your portfolio. Better yet, they usually have access to assets beyond basic publicly traded stocks and bonds that may help diversify your portfolio if you, alongside your selected professional, decide that they fit your goals and investment strategy.

Your 2023 Taxes

Thu, 24 Aug 2023 11:12:16 GMT

Tax Brackets in 2023

We’re only 3/4 through 2023 – surely too early to start thinking about taxes, right?

Think again.

Already this year, we’ve seen massive market volatility. Maybe you’re considering capturing gains from the current run-up or trimming some losing positions to plan a tax harvesting strategy proactively. Either way, now is the perfect time to brush off your annual tax plan and start proactively thinking about its impact on your 2024 financial goals.

We’ll look at the Internal Revenue Service’s (IRS) tax provisions for 2023 to help you get a leg up on your efforts but remember – it's critical to vet any information and your overall plan through your tax professional. Tax teams are a vital part of your financial planning ecosystem, so touch base before setting anything in stone.

How Does the IRS Deal with Inflation?

One of the IRS’ critical roles is determining how to account for inflation. Inflation can cause bracket creep, which pushes payers into a higher bracket due to nominal increases in income. In this case, citizens are on the hook for greater tax payments without seeing much additional cash in their pocket or increased spending power due to inflation.

You’re likely familiar with the Consumer Price Index (CPI), the standard way to measure inflation. Instead of the CPI, though, the IRS measures inflation with the Chained Consumer Price Index (C-CPI).

What is the Chained Consumer Price Index?

The C-CPI differs slightly from the CPI, typically resulting in a lower inflation estimate. Aside from differences in the actual calculation, the C-CPI tries to negate two pitfalls to the standard CPI: the substitution bias and small-sample bias.

The substitution bias happens when consumers pick lower-cost alternatives to goods and can skew results if the index measures an increasingly pricier product that consumers are swapping for an alternative. In short, the substitution bias in the CPI doesn’t always account for rational consumer behavior at the grocery store or retail outlet.

Likewise, the small-sample bias in the index happens when, by virtue of practicality, measurement and polling techniques are constrained by a relatively small number of aggregate prices. The small sample may not represent the whole, further expanding inflation reports.

To combat the substitution bias, the C-CPI aggregates pricing from two consecutive months (chaining them together) to determine a better average as consumers adjust their spending habits. The C-CPI uses a geometric average rather than the standard CPI’s arithmetic average to account for the small-bias effect.

Source: Federal Reserve Economic Data

Here, we see the difference in action: although by a slim margin, the C-CPI measures inflation lower than the standard CPI at 4.1% in May 2023 compared to the CPI’s 4.3%.

2023’s Adjusted Tax Brackets

Note: all data comes from the Internal Revenue Service’s 2023 tax inflation adjustments report.

The standard deduction, like the brackets themselves, is adjusted to account for inflation. Remember that the standard deduction is how much non-itemizing taxpayers can deduct from their income before taxation kicks in. If you aren’t itemizing, a higher standard deduction is usually preferred.

Ultimately, these are 2023’s tax brackets to consider when planning the rest of your year’s tax strategy:

Other 2023 Tax Adjustments

While the standard deduction and tax brackets apply to nearly all payers, some subtle changes in the IRS’ tax planning affect individual citizens and couples to varied degrees. These are a few of the most common and wide-ranging changes in 2023:

The Earned Income Tax Credit, benefiting low-income working families, is $560 for childless filers, $3,995 for a single child, $6,604 for two, and $7,430 for three or more children. In 2022, the maximum credit for three or more children was $6,935.
The Child Tax Credit remains fixed, unaffected by inflation, and is set at $2,000. However, the refundable portion of the credit jumped $100 to $1,600 for 2023.
→ Capital gains tax rates are typically at most 15% for many taxpayers.
→ Capital gains may be taxed at 0% for individuals and couples filing separately if income doesn’t exceed $41,675, $83,350 for married filing jointly, and $55,800 for heads of household.
→ A 15% capital gains tax may apply for single filers with income more than $41,675 but less than $459,750, more than $83,350 but less than $517,200 for joint filers, and more than $55,800 and less than $488,500 for heads of household. Married filing jointly sees a 15% capital gains tax if income exceeds $41,675 but is less than $258,600.
→ If income in any category exceeds the upper limit for 15%, a 20% capital gains tax rate may apply.
→ You can continue to claim up to $3,000 in capital losses to lower your income and carry the balance to future years if you exceed that.

Retirement Account Contributions in 2023

Some retirement accounts contribution limits also increased for 2023. This year, you can contribute:

Up to $22,500 for 401(k), 403(b), most 457, and TSP plans.
Up to $6,500 for IRAs.

Gearing Up for Tax Season

Again, consulting with your tax team before determining a plan of action for 2023 taxes is critical. Still, it’s best to prepare early, as due diligence today may drive your investment and savings plans for the remainder of 2023. Remember – the best plan is developed early, so connect with your tax planner today to ensure a fruitful rest of 2023 and an easy entry into 2024.

Bridging the Income Gap

Thu, 10 Aug 2023 11:16:29 GMT

In our final post of the retirement income planning series, we’re going to define and explore retirement income gaps. This is also the shortest piece in our series. Ultimately, your income gap (and ways to mitigate the gap) are more dependent upon personal circumstances, wants, and needs than basic retirement budget planning or developing a Three Bucket Strategy.

Because the income gap is so personal, it’s critical to work with a wealth manager to identify costs in retirement, budget for them, tweak your Three Bucket Strategy Allocations, then manage the gap. Here, we’re going to simply define the income gap and discuss a few options we often recommend to bridge the gap. Ultimately, though, the gap is as personal as your fingerprint so working closely with a wealth manager who understand your needs and how to account for a gap is as important as acknowledging the gap in the first place.

Identifying an Income Gap

You can take a few approaches to identify whether you’ll have a retirement income gap. The simplest method is to break everything down into three core components:

Estimate retirement income.
Create a budget of today’s expenses.
Use today’s costs and planned income to create a projected retirement budget.

When working through the three components, remember to account for inflation, healthcare costs, mortgage management, and all other variable factors that may rear their head in retirement – truth be told, it’s usually best to work with a financial planner as they’re best equipped to know and address each of the nuances affecting your retirement plans.

You have an income gap if you’ve tallied your income streams and accounted for expenses, including major moves, mortgage payments, and incremental annual increases, yet you still fall short.

Bridging the Gap

If you’re identified a potential income gap, you can begin planning today to mitigate the shortfall. Even if you’re close to retirement, there are a handful of viable strategies available to ease your transition into retirement with as tiny a gap as possible:

You can increase annual 401(k) or other retirement account contributions if you're still far from retirement. Make sure you’re contributing enough to maximize any employer matching scheme!
You can work longer or even pick up a part-time job in retirement. While not ideal, many retirees find themselves bored after the initial novelty of hanging around the home wears off. For many, a part-time retirement job is the perfect solution to income gapping and keeping your mind engaged.
Reassess your expenses – is there any room to cut costs? Perhaps consider moving to an area with a lower cost of living or buying an affordable used car that’s better on fuel expenses for in-town grocery shopping.
Try to cultivate additional income streams. While these opportunities are contingent upon your current and planned financial position, you can generate extra income through rental properties, bond ladders, and annuities.

Identifying and bridging an income gap is best done with a professional’s assistance. Integrating your income planning strategy alongside investment, tax, healthcare, and other pre- and post-retirement considerations within a larger package is best. It’s sometimes difficult to find the perfect wealth manager who can juggle all these at once or provide qualified referrals, but when you do, they’re worth their weight in gold.

Ready to Retire: Plan, Execute, Analyze

Entering the realm of retirement doesn’t need to be a journey into the unknown. With the right planning, execution, and constant analysis, you can ensure a retirement that is not just comfortable but fulfilling.

By understanding your needs, evaluating all possible income sources, and being flexible in adjusting your strategies based on market changes and personal circumstances, you can pave a smooth path toward financial stability in your golden years. Remember, retirement planning is not a one-time event, but a lifelong process that evolves with time and changing life circumstances.

As you transition from active earning years into retirement, your financial blueprint should serve as a reliable guide, ensuring your readiness for this new chapter in life. So, gear up, set your plans into motion, and remain vigilant in your analysis, because a well-planned retirement is a cornerstone of a peaceful and prosperous future.

We hope this income planning series has been useful, and that you’ve learned a few actionable tips to enact today before it’s too late. Remember, working closely with a professional’s comprehensive income planning toolkit is the best way to manage your retirement and ensure the best golden years possible – and you know where to find us.

Keeping Your Cash Flow in Retirement: The “Three Bucket” Approach

Thu, 27 Jul 2023 11:24:12 GMT

Keeping Your Cash Flow in Retirement: The “Three Bucket” Approach

No investment or capital management tactic will apply today and during your retirement. Still, careful strategizing today can build a flexible foundation that’s adaptable no matter your life circumstances. At Assurance Wealth Management, we like to employ a Three Bucket Strategy with our clients. This strategy is a framework, rather than a prescriptive set of rules, and a well-developed Three Bucket Strategy is easily modified as you age out of the workforce and into retirement.

At its most basic, the strategy allocates your cash and capital across three buckets:

Liquid: easily accessible cash you have constant access to, used for emergency expenses and similar costs. You can think of the liquid bucket as an emergency fund, of sorts, but it’s true function is more much all-encompassing.
Income: this bucket consists of all your cash flow-producing assets, including planned income streams like Social Security. Ultimately, the income bucket should replace your day-to-day salary or wage as you enter retirement and begin budgeting.
Growth: the growth bucket is more closely aligned with your typical brokerage or retirement investment account and should go as untouched as possible before retirement to maximize its growth potential. Even in retirement, you should maintain as large a growth allocation as possible to account for increased longevity and, if applicable, ensure you’re leaving a financial legacy for your children or family members.

Liquid Allocations

Unplanned expenses and emergencies pop up more often than we’d all prefer, so it’s critical to maintain an easily accessible, liquid pool of cash to address these emergencies. You can call it an emergency fund, and many do, but we prefer “liquid bucket” as the term applies to a greater number of scenarios than just a broken-down car or surprise medical event.

The primary goal for your liquid bucket is capital preservation. You don’t want this bucket exposed to daily or even long-term market fluctuation – this capital needs to be accessible and steady. Essentially, you’re sacrificing gain for the comfort of a decent cash cushion to address unforeseen circumstances.

That doesn’t mean stuff a bunch of bills under your mattress, though. As we saw previously, inflation degrades cash’s value over time. So, ideally, you allocate your cash to short-term, stable, “safe” investments. Beyond cash in a checking account, these can include:

High-yield savings accounts.
Money market funds.
Short-term Treasuries and certificates of deposit (CDs).

If you’re leaning towards the last category and want to squeeze additional yield from your liquid pool, carefully consider which fixed-income products you select. First, manage the maturity closely. Because you want easy access to capital, locking your funds in a 10-year CD or Treasury Note isn’t advisable – particularly when deciding on CDs, as these don’t always trade easily (or at all), and you may face a loss if you sell the CD on a secondary market before maturity.

For example, this six-month CD has zero market depth, meaning no buyers or sellers are interested in transacting the security. While you can, sometimes, request a bid from potential buyers, expect to sell at a discount for the convenience of “unlocking” the capital.

While Treasuries trade quickly on secondary markets, you should also consider the size of the investment. Sometimes, secondary market buyers demand a substantial minimum purchase. Here’s a snapshot of one secondary market listing:

For this four-week Treasury Bill, secondary buyers want a minimum transaction size of 50 T-Bills. That equates to $50,000 face value, and higher pricing for the asset demands greater transaction sizes – all the way up to $3 million. So, if you have $10,000 allocated to short-term Treasuries and need to liquidate quickly, you may be unable to offload the Treasuries or, if you request a bid, end up with less than initially invested.

For these reasons, it’s best to stick with very short maturities to balance the best yield with accessibility and liquidity. You can also explore laddering strategies, where you invest in a series of maturities to generate income while maintaining liquidity, but this advanced strategy generally demands a greater overall allocation to be worth the effort.

Income-based Allocations

Income allocation and assets have greater diversity than most liquid bucket options and even include bankable income streams like Social Security, which aren’t considered investments. That’s why it’s important to project and plan for these income-producing sources within the specific bucket. Dividend stocks and longer-term bonds are usually the go-tos when considering income opportunities. Still, many future retirees overlook a handful of income opportunities, although they may provide 50% or more of a retiree’s consistent, recurring income.

As with any asset or opportunity, options depend mainly on your circumstances. We don’t recommend all options for all clients, but you can consider a range that includes:

Social Security benefits: it isn’t easy to project what your future Social Security income stream may be worth, particularly if you’re many years from retiring. Still, most ready to retire in the next 10 – 15 years should be able to bank on a foundation of $1,000 - $2,000 monthly that rises with inflation and remains generally unaffected by the wider market.

Ultimately, the typical American retiree relies on Social Security for 30% - 40% of their annual income – so Social Security should factor into your income projections if you’re nearing eligibility or retirement.

Social Security is a complex topic, and alternative cash flow strategies are available that include forgoing recurring income for an upfront lump sum. Remember, too, that spousal benefits can impact your own (and vice versa), so consultation that addresses your unique lifestyle qualities is usually best before pulling the trigger on any Social Security decisions.

Annuities: these financial products get a bad rap sometimes, but it’s typically due to unscrupulous salespeople hawking shadily structured assets rather than anything intrinsically wrong with annuities themselves. For some retirees, annuities are an ideal option to supplement your income bucket. Within income-based annuity options, retirees typically pick between one of two primary types:

Single premium, immediate annuity. Retirees contribute a lump sum premium when using an immediate annuity and convert that payment into retirement income. Sometimes, you can elect to continue income payments to a beneficiary or spouse after the principal annuity holder passes. Annuity terms vary by provider, usually underwritten by an insurance firm, and variance includes maximum premium payment, number of terms, and integration with existing retirement accounts to manage tax burdens.
Deferred annuity. Deferred annuity mechanics are more aligned with typical fixed-income investment options like bonds. When buying an annuity, the purchaser forks over a premium for the promise of income cash flow in the future. Different types of deferred annuities generate different and varied returns:
→ Fixed annuitiesreturn the agreed-upon amount when the buyer pays the premium and signs the contracts.
→ Indexed annuities return a rate based on an underlying market index.
→ Variable annuities’ return depends on the annuity owner’s investment portfolio performance.

As you can likely tell, these three types have different risk profiles, with fixed annuities at the “low risk/low reward” end of the spectrum. In contrast, variable annuities reliant upon third-party investment performance are riskier with much greater potential return (or loss).

Annuities are a viable income bucket option for many prospective and current retirees. Because types and terms vary so much, though, and the annuity sales field tends to attract unscrupulous operations, working closely with a trusted wealth manager while considering annuity options before pulling the trigger is vital.

Growth Bucket

Most likely, your growth bucket comprises all the accounts and assets you’ve accrued over your lifetime. Your growth bucket is made up of brokerage accounts, 401(k) accounts, IRAs, employer-sponsored plans, and even your real estate assets. Within growth accounts, you’ve cultivated a range of stocks, bonds, ETFs, mutual funds, and other securities over time.

Because your growth bucket allocations are as unique as your fingerprints, there’s little use diving into every possibility or contingency. What’s useful, though, when considering income planning for retirement is how you adapt your growth bucket to your lifestyle.

Risk management is the primary driver of that adaptation, but many wealth managers or investment planners go about risk planning incorrectly. You’ll often see or get a generic risk profile questionnaire primarily based on your age and time of retirement. As you age or get closer, wealth managers generally cycle your growth allocation to “safer” assets like bonds and structured notes.

What should happen, though, is an evaluation of your growth bucket as a function of what you need in retirement. If you have a robust portfolio and well-managed liquid and income buckets and want to continue on an aggressive path within your growth bucket as part of a legacy plan, there’s an argument to be made those heavily weighting equities is the right move. For many wealth managers, that’s anathema – but a good, quality relationship is built on an intimate understanding of your financial position, current and future needs, and what you want. If your manager uses generic risk profiling tools or unthinkingly follows the classic “allocate your bond percentage by subtracting your age from 100,” you deserve better.

Maintaining the Best Bucket Possible

Ultimately, there’s no one-size-fits-all solution to allocating assets across your three buckets. And, practically speaking, what works today won’t necessarily be right tomorrow – meaning you must periodically and comprehensively review your buckets in line with your lifestyle changes and adapt them to your needs.

Ultimately, though, creating a foundation for the future using the Three Bucket Strategy sets you up for a fruitful retirement. The primary benefit of the strategy is its inherent flexibility and adaptability to your current and future life circumstances. Working with your wealth manager to establish a plan of action, using the Three Bucket Strategy, is a surefire way to begin getting comfortable with the realities of retirement.

Accounting for Hidden Retirement Costs

Thu, 13 Jul 2023 11:32:40 GMT

In this series, we’re going to dive into the details you should consider when projecting income throughout your retirement years. While nothing is guaranteed, an early and comprehensive look at your income needs, coupled with a realistic look at the true costs you’ll see in retirement, can help assure a relaxing, enjoyable, and well-deserved retirement period.

In the series, we’ll look at three core aspects of a quality retirement income plan strategy:

Hidden costs you’ll encounter during retirement.
A lifelong approach to capital allocation we call the Three Bucket Strategy that you can start using today.
Identifying and mitigating income gaps during retirement.

Accounting for Hidden Retirement Costs

When weighing retirement costs, most focus on how they plan to spend discretionary income to maximize their golden years. Often, retirement expense planning centers around what vacations you’ll take, how you’ll renovate (or buy) your dream home, and how much cash you’ll allocate to your favorite hobbies that you never had time for during your working life.

But focusing on the fun parts of retirement spending can be a huge misstep in retirement income planning. While managing these discretionary expenses is important, and preferable to thinking about healthcare costs and taxes while you’re healthy and still in a 9-to-5 grind, overlooking major hidden expenses can mean those discretionary funds dry up faster than expected post-retirement.

Longer Life = Less Money?

Did you ever think that a long, fulfilling life is the biggest problem you’re facing today as you develop a retirement plan? It’s true – many of the current systems in place, like Social Security, account for much lower life expectancies than todays. In fact, the average life expectancy in 1935 (when FDR signed the Social Security Act) was 60 years for men and 64 for women. For those that broke the 65-year-old barrier, the minimum eligibility age, actuaries projected 12 – 14 years of Social Security income.

Today is different, as life expectancy has jumped nearly 15 years. Those hitting 70 will likely live until their mid-to-late-80s, putting substantial pressure on the system. According to 2023’s Social Security Trustees report, improved longevity looms large on Social Security and Medicare’s future:

In 2021, costs began exceeding income (more money paid to beneficiaries than taken in from workers). The Trustees expect that trend to be valid indefinitely under the current system.

The current pot of money, and its projected balance, will be exhausted by 2034, leaving all current and future beneficiaries in the lurch. Notably, last year’s report indicated 2035 as the point of no return – meaning the trend towards Social Security insolvency is accelerating.

Inflation Nation

Most are all too familiar with inflation and its immediate economic impact. Many fail to consider, especially those on the younger end of the pre-retirement spectrum, that inflation over time can wreak havoc on income planning.

While you’re working, assuming a quality company and continual contributions to investment accounts, inflation isn’t a huge deal. Your salary likely keeps pace with inflation; if it doesn’t, you probably have the flexibility to explore other options. And, in the long run, stock market returns blow inflation away.

When you’re faced with a fixed income in retirement, though, and withdrawing from investment accounts faster than your capital grows, inflation is a serious issue. Tomorrow’s money isn’t worth the same as todays, and planning expenses using today’s purchasing power can devastate retirement. For example, if inflation averages 3% annually (a standard estimate), prices will double over 25 years. If you’re planning to retire at 65 and live another quarter-decade to 90, your healthcare, clothing, food, gasoline, and basic living costs double – did you account for that when you circled the “I can retire with this much in my investment account” figure? And, since prudent retirement investing usually demands cycling into reliable and steady fixed-income securities, your capital growth rate may not match inflation’s effects on your nest egg.

Unexpected Costs in Retirement

After decades of hard work, many plan their retirement income around basic needs and well-deserved niceties. It’s simple to calculate, for example, a baseline annual living expense total and tack on a few Hawaiian vacations or home renovations when you’re 30 and in good health.

But two key categories aren’t usually addressed: healthcare and tax expense.

Healthcare Costs in Retirement

But many overlook the sheer size and scope of late-life healthcare costs, and even fewer consider long-term care. A 2022 study found lifetime per-capita healthcare costs may be as high as $700,000, and a landmark 2004 research project indicated that “one-third of lifetime expenditures is incurred during middle age, and nearly half during the senior years. For survivors to age 85, more than one-third of their lifetime expenditures will accrue in their remaining years.”

Despite advances in medical technology, there’s little reason to expect the trend to reverse when we consider increased longevity and the bevy of ill health outcomes associated with advanced age.

Long-term care costs demand even more of your retirement income, considering they exceed the baseline expected healthcare expenditures. These costs range from relatively limited, like a few hours of in-home care weekly, to very pricy if you need private nursing home residency. While specific costs vary by location, consider this output from AARP’s long-term health care calculator for zip code 77380, a region whose household median annual income is slightly less than the national average:

For retirees needing moderate assistance, including a few home help weekly hours and a few days at adult day care, you’re looking at an annual $31,500 expense – in 2023 dollars before accounting for increased national overall costs and inflation. If you need greater assistance, including assisted living or private nursing home care, you’re left with an annual bill as high as $70,000:

While government programs, private insurance, and family assistance can offset these costs, the fact remains that they’re a massive demand on your post-retirement income and should be a core part of your planning efforts today – but they’re often not fully considered.

Tax Effects on Retirement Income

Finally, taxes often jump up to bite unsuspecting retirees in their golden years. Everybody’s tax situation is different, and variables include retirement account types, residency location, and additional retirement income streams like rental property or part-time jobs.

Often, retirees spend carefully according to their budget but get surprised with a whopping tax bill in April. In these cases, even the most diligent income planning is knocked askew. That can have devastating follow-on effects as each year’s additional tax expense dips into your reserves, forcing the sale of taxable assets and incurring another tax burden the next year – you get the point.

Tax nuances are a bit beyond the scope of this piece, but it’s best to work with a tax advisor during retirement income planning sessions to account for these nasty little surprises that often arise.

Conclusion

These are just a handful of considerations you should carefully weigh before you dive fully into planning your golden year vacations, whether it’s an annual Hawaii trip or transitioning to an RV life and traveling cross-country. While these expenses should form a major part of your plan, to be sure, a comprehensive retirement planning session should also account for managing hidden costs like healthcare and taxation.

We already demonstrated that Americans are living far longer today than when many social safety nets were enacted – make sure you’re able to maximize those additional years by working with your wealth manager to include these hidden costs.

Planning Priorities – Care Costs in Retirement

Thu, 29 Jun 2023 11:35:32 GMT

Planning Priorities – Care Costs in Retirement

Planning for healthcare costs in retirement demands a thorough understanding of healthcare spending trends by age and gender and how those trends apply to your circumstances. For example, women tend to spend more than men on healthcare, and older individuals outspend their younger counterparts.

Incorporating both premiums and out-of-pocket costs, an average healthy Medicare beneficiary will easily spend more than $6,000 annually on premiums, uncovered prescription drugs, and other out-of-pocket expenses like dental, vision, and even popular alternative treatments like massage, chiropractic, and acupuncture.

Balancing your Healthcare Budget

Inflation and illness are the primary drivers of your healthcare budget considerations. As healthcare costs escalate, insurance premiums rise equally fast while costs for non-covered services also inflate. Illness often demands more expensive prescription drugs, and with aging, you may need massively expensive non-covered services like extensive dental work, hearing aids, or even long-term care.

How can you prepare for escalating healthcare costs when your income might be fixed upon retirement? One strategy is to save sufficient funds to cover your future healthcare expenses prior to retiring. Fidelity conducts an annual study to determine how much an average couple might need at retirement onset to finance all their future healthcare costs, excluding long-term care and they estimate that an average couple will need around $300,000.

The Employee Benefit Research Institute did a similar study, concluding that men might need $130,000, women $146,000, and couples $270,000. Remember, these are averages. If your lifespan exceeds the average life expectancy or your healthcare needs differ, you might require more funds. Critically, these estimates do not include long-term care.

Long-Term Care

Long-term care doesn't necessarily mean nursing home care. Long-term care can range from having someone visit your home a few hours a week for meal preparation to requiring skilled nursing care. It's critical to understand that neither Medicare nor Medigap covers this. The most comprehensive Medigap policy only covers 100 days of skilled nursing care.

As you age, you may progressively need more help. At first, you might require assistance with shopping, meal preparation, housework, money management, and travel. This can be provided by family members or a paid housekeeper. As your needs grow, you may require help with essential activities of daily living such as eating, bathing, dressing, using the bathroom, transferring from your chair to your bed, and maintaining continence.

Finally, you might need 24-hour supervision, disease management, and rehabilitation. The cost of long-term care depends on the type of care you need. On average, in-home health aides cost about $150 a day, adult daycare costs about $74 per day, residents in an assisted living facility cost $4,300 per month, and private rooms in nursing homes range from $200 to $1,200 per day.

Planning for long-term care is vital for several reasons, one of them being to alleviate your children or other family members from the burden of taking care of you. Another reason is to avoid spending down assets to qualify for Medicaid, which requires you to spend assets to less than $2,000. With proper planning, you can direct your own care, obtaining the type and quality of care you want.

Series Conclusion

As we conclude, we hope this series has given you a clear roadmap to navigate the Medicare maze and a heightened awareness of what to expect in terms of healthcare costs in retirement. Remember, informed planning is the key to a worry-free, secure retirement.

Thank you for joining us on this journey. We hope the information provided has been valuable, and we encourage you to share this knowledge with others who may benefit. As you continue to plan your retirement, remember that your health is a priority, and it’s never too early to start planning for it.

Keep an eye out for future series, where we will continue to shed light on important aspects of retirement planning. Until then, here's to a secure and healthy future!

Decoding Medicare: Your Key to a Healthy Retirement

Thu, 15 Jun 2023 05:36:54 GMT

As we travel along life's journey, we often dream about the golden years of retirement. We envision days filled with leisure activities, exploring long-put-off hobbies, or simply relishing the luxury of a well-deserved rest. But amidst these idyllic dreams, it's crucial to remember that the retirement phase also introduces new challenges and considerations, primarily related to healthcare.

In this blog series, we aim to shed light on the nuances of healthcare during retirement. We want to help you not only understand the intricacies of healthcare cost planning but also provide insights into creating a balanced healthcare budget, managing long-term care, and preserving your health for a better quality of life in your golden years.

Our first post, "Decoding Medicare: Your Key to a Healthy Retirement," dives into the complexities of Medicare. We unravel the different aspects of the program, explain enrollment timelines, highlight potential penalties, and discuss the significant role of private insurance to fill the gaps in Medicare coverage.

In our follow-up post, "Planning Priorities: Care Costs in Retirement," we delve into a deeper analysis of healthcare expenses that retirees often overlook. We look at spending trends, discuss the importance of planning for escalating healthcare costs, and emphasize the critical need for long-term care considerations. We also touch upon the role of personal health preservation and professional guidance in managing these costs.

Our hope is that through this series, we empower you to prepare better for the healthcare aspect of your retirement journey. By demystifying the complex world of retirement healthcare, we want to arm you with the knowledge to create a comprehensive and realistic retirement plan, so you can enjoy your golden years with peace of mind.

Stay tuned for a detailed exploration of these significant aspects of healthcare in retirement. We are excited to guide you through this essential, though often overlooked, part of your retirement planning. Let's step confidently into the future, armed with knowledge and readiness.

Decoding Medicare – Your Key to a Secure Retirement

As we stride towards our retirement years, many of us indulge in dreams of leisurely days, punctuated by the occasional consideration of income streams from our retirement savings. However, one crucial element that often takes a backseat in our thoughts is Medicare. While the term may be familiar, a complete understanding of what it entails, and the significant role it plays post-retirement, remains elusive to many.

Broadly speaking, Medicare is the federal health insurance program in the United States that provides healthcare coverage for individuals aged 65 and above. Certain specific disability-based cases also qualify for Medicare, but we'll focus primarily on age-based coverage in this post. Medicare consists of four main components - Parts A, B, and D.

Medicare Mechanisms

Part A caters to hospital stays, inpatient care, hospice, skilled care facilities, and certain elements of home health care. Part B provides coverage for select outpatient medical services, treatments, preventive care, and supplies. Part D, often considered the most intricate segment, deals with drug and pharmaceutical coverage. When you turn 65, Medicare typically becomes your primary insurance provider. Private insurance comes into play once Medicare has processed your healthcare or hospital bills, covering costs not handled by Medicare.

However, enrolling in Medicare isn't as straightforward as you may think. Enrollment usually needs to take place when you turn 65, with late enrolment resulting in penalties that are added to your monthly premiums for the duration of your enrollment. These penalties can include up to 10% of your premium for late Medicare A and B enrollment, and 1% monthly (or 12% per year) for Medicare D.

Auto-enrollment occurs when you start receiving Social Security, bringing you into the ambit of Parts A and B (with certain exceptions for Part B for those covered under workplace plans). However, if you are not yet drawing Social Security, it's prudent to enroll before your current coverage lapses. For example, if you're nearing your 65th birthday and your employer's insurance program (with fewer than 20 enrollees) is set to drop you, enrolling in Medicare A and B a few months in advance can help avoid any coverage gaps.

Medicare has specific enrollment windows for each of its sub-programs to avoid penalties. Part B offers an eight-month grace period, whereas Part D permits only 63 days post your previous coverage's end. Missing your initial enrollment window could mean waiting until the annual general enrollment period, resulting in potential coverage gaps until your Medicare benefits kick in, which could lead to significant financial setbacks.

For non-Social Security enrollees or those using the general enrollment window, Medicare offers special enrollment periods for Parts A and B. These apply to individuals over 65 who are still employed with an eligible employer insurance plan or their covered spouses.

On the cost front, Medicare splits out-of-pocket expenses into two main categories - premiums and out-of-pocket costs. Premiums are paid monthly towards Medicare and private insurance companies providing drug plans or Medicare Advantage plans. Out-of-pocket costs cover deductibles, the percentage of a doctor's bill not covered by Medicare, and services outside of Medicare coverage.

While Part A does not require a premium, Part B costs $164.90 monthly (or more, depending on your income). Part D premiums vary as per the chosen plan and are paid directly to the private insurance company.

It's important to note that Medicare doesn't cover your entire medical bill even beyond the deductible. For instance, under Part D, you'll pay about $445 as a deductible followed by 25% of drug costs. Furthermore, hospital stays beyond 60 days incur daily charges, which can quickly add up.

Bundling Medicare and Private Insurance

Despite its wide coverage, Medicare has some gaps that can be bridged using Medicare Advantage programs or 'Medicare Part C'. These allow you to bundle your private insurance with the federal program. A significant step in healthcare planning involves choosing the right Medicare Advantage partner since various providers offer different service levels and insurance coverage. Medicare Advantage may also offer additional benefits such as vision care, but it's crucial to choose a plan that best suits your needs.

Finally, Medigap policies can cover all or part of your deductibles and hospital costs after 60 days, and the 20% of the doctor's bill not covered by Medicare. They offer standardized insurance policies (designated by letters A through N), which have uniform benefits across states but can vary in premiums.

Conclusion

Understanding the nuances of Medicare is critical as you approach retirement. The decisions you make now can significantly impact your financial health during your golden years, making it crucial to arm yourself with the necessary information to navigate your healthcare journey.

Have you ever wondered what your healthcare could cost you in retirement? If so, you'll want to tune in for our next blog post, "Planning Priorities: Care Costs in Retirement." In this enlightening read, we'll dig deeper into the expenses that often catch retirees off guard.

We will break down the significant factors that influence healthcare costs and help you understand the necessity of incorporating both premiums and out-of-pocket costs in your retirement budget. We will also delve into long-term care – a substantial cost that is commonly misunderstood and underestimated.

Estate/Legacy Planning Checklist

Thu, 01 Jun 2023 05:42:57 GMT

AWM Family,

We know the process of legacy planning is overwhelming and often challenging to ensure you've covered all the necessary details. In our experience, getting started is the hardest part and organizing the many documents is a significant part of that friction.

That's why we've put in the work to simplify this process for you, and created this Legacy Planning Checklist that covers many common situations we see in our clients.

Whether you're just beginning the planning process or just need a reminder to tick off all the boxes, our Legacy Planning Checklist can help. It’s detailed, easy to understand, and designed to guide you through your initial organization, making the overall process less daunting by kickstarting it.

We firmly believe that estate planning is not only about distribution assets, but about providing peace of mind, securing a future for loved ones, and leaving a lasting legacy.

Our checklist is a testament to this belief.

To get started, download our Legacy and Estate Planning Checklist . Use this roadmap to jumpstart your journey and start on the right foot.

We encourage you to take this important step today. Your peace of mind, and the future security of your loved ones, is worth this small investment of time.

As always, we're here to help. If you have any questions or need further assistance, please reach out to us.

Download our Legacy and Estate Planning Checklist now.

Here's to YOUR legacy!

Legacy Planning Series: Part 4

Mon, 22 May 2023 05:47:56 GMT

Crafting Your Legacy: A Comprehensive Guide to Planning and Preservation

Legacy planning is more than just managing your tangible assets; it's about how you want to be remembered and the impact you make on your loved ones' lives. While planning your legacy may not be "fun," it's a crucial part of ensuring your wishes are met and your family's future is secure. In this guide, we'll discuss the importance of preserving intangible assets, reviewing your plan regularly, and working with professionals to create a comprehensive legacy plan.

Preserving Intangible Assets

An essential aspect of legacy planning is preserving and sharing your personal memories, thoughts, and skills with your beneficiaries. Consider the following steps to build a collection of these invaluable, but intangible, assets:

Digitize photos and other physical mementos for future generations
Write down your thoughts, memories, and hopes for your beneficiaries' future
Record video diaries detailing memories or demonstrating special skills you'd like to pass down, such as woodworking or cooking

These intangible assets are invaluable and play a vital role in the legacy you leave behind.

Revisit, Review, and Revise Your Legacy Plan

Rather than being a one-time event, legacy planning is an ongoing process that requires regular reviews and updates. Just like visiting your doctor or dentist, it's essential to ensure your legacy plan remains current and aligned with your wishes. Work closely with your wealth management team and estate attorneys, and establish a review schedule based on your age and circumstances. We require an annual review for our wealth management clients, but we also will review plans twice a year in some instances.

Conclusion

To create a lasting, positive legacy, it's essential to be proactive and develop a comprehensive plan that covers both your tangible and intangible assets. Following our recommendations and working with wealth managers and estate attorneys will provide a solid foundation for your legacy plan.

We hope this guide has inspired you to start planning your legacy. We’re here and ready to help you through the process, offering expert advice and personalized solutions for your unique needs. While we can't make decisions for you, our experience and connections ensure we can find the right answers for any situation.

Ultimately, the true measure of your legacy is the impact you make on the lives of those you love and the thoughtful, intentional planning that guides your legacy's preservation.

Legacy Planning Series: Part 3

Mon, 15 May 2023 05:53:41 GMT

The Legacy Planning Series: Asset Distribution and Estate Planning - Securing Your Wishes

In the first installment of our Legacy Planning Series, we covered the importance of planning for incapacity and getting organized. Now, we move on to the more complex aspects of legacy planning: asset distribution and estate planning. In this segment, we'll explore decision-making around "who gets what," account titling, beneficiary designations, and estate planning strategies to ensure your wishes are met and assets are distributed according to your preferences.

Step 3: Deciding "Who Gets What"

Determining the distribution of your assets can be challenging and may lead to familial conflicts. It's often best to keep these decisions confidential, sharing them only with your legal and wealth management teams and a trustee or designated third-party representative. As you work through the distribution process, consider the following questions:

What happens if my spouse passes before me?
Are my children mature enough to handle a sudden windfall?
What charitable organizations do I want to support?
What are the tax implications of inheritance, and how can I minimize that burden?
Do you want to allocate specific possessions to individual parties or distribute the estate exclusively based on monetary value?
Do you have a special needs child or beneficiary who might lose benefits if they receive a large inheritance?

These are just a few examples of the questions you'll need to consider. Consult with your legal team for a more comprehensive list and personalized guidance.

Step 4: Estate Planning Strategies

Once you've made preliminary decisions about asset distribution, it's time to create enforceable legal documentation to ensure your wishes are met after your passing. Collaborate closely with your legal and wealth management teams, and consider the following estate planning strategies:

Account Titling

Some accounts, such as banking and brokerage accounts, allow for different titling options that automatically trigger actions upon your death. The most common and secure option is to designate an account as joint with rights of survivorship (joint WROS). A joint WROS account reverts wholly to the surviving owner if the other owner dies.

Beneficiary Designations

Retirement and investment accounts often allow you to designate specific beneficiaries. Upon your death, the transfer of assets to the beneficiary is triggered. Beneficiaries should be designated for all accounts, even joint ones, to ensure a smooth transition of assets in various circumstances. Designated beneficiaries may also help assets bypass probate proceedings in some cases, regardless of the stipulations outlined in your will.

Communication with Wealth Managers

Make sure your wealth manager is informed of the network of beneficiaries you establish across accounts. Ideally, create a concise list of contacts for the team to facilitate quick communication if the beneficiaries aren't local.

Covering Your Bases

In some cases, account titling and beneficiary management, along with a basic will, may be sufficient for your estate planning needs. However, it's always best to consult with your wealth manager and an estate attorney to ensure your decisions are ironclad and all legal requirements are met.

Conclusion

In this installment of our Legacy Planning Series, we've covered the intricacies of asset distribution and estate planning. By addressing these critical aspects, you'll further solidify your comprehensive legacy plan. Next, we’ll look at legacy management and the best way to ensure your estate plan stays relevant over time.

Legacy Planning Series: Part 2

Tue, 09 May 2023 05:57:26 GMT

The Legacy Planning Series: Incapacity and Organization - Laying the Foundation for a Secure Future

Planning for the future can be both exciting and overwhelming, especially when it involves your legacy and the well-being of your loved ones. To help you navigate the complexities of estate planning, asset distribution, and tax implications, we've created a comprehensive Legacy Planning Series. Our goal is to provide you with practical advice and useful tips to make informed decisions.

In this installment of our four-part series, we'll discuss the importance of planning for incapacity and getting organized. By taking these crucial steps, you'll lay a solid foundation for a robust and comprehensive legacy plan that ensures your loved ones are protected and your assets are preserved according to your wishes.

Step 1: Planning for Incapacity

Many people overlook the importance of planning for potential medical incapacitation, but doing so can have dire consequences for your family and assets. Establishing a plan in case of incapacitation is a vital part of legacy planning, which typically involves creating a durable power of attorney (POA), living trust, and advanced medical directive.

Advanced Directives and Medical Power of Attorney

An advanced directive outlines your medical treatment preferences, such as resuscitation orders, ventilation or respiration requests, and other life-extending measures. A medical POA, on the other hand, designates a trusted person to make medical decisions on your behalf. Ensure that a medical POA is included in your advanced directive, even if you plan to create a durable power of attorney or living trust.

Durable Power of Attorney

A durable POA allows a third party to make financial decisions on your behalf, ensuring that your family can access and manage your assets in case of incapacitation. This legal document can be tailored to include or exclude specific provisions, so consult with a lawyer to create a POA that best suits your needs.

Living Trusts

A living trust is an arrangement that assigns asset management responsibility to a trustee in the event of your incapacitation or death. It sets forth specific conditions for asset management and can help avoid the need for court probate. Keep in mind that a living trust is not a substitute for a will, but rather an additional tool for estate planning.

Step 2: Getting Organized

Organizing your financial and medical records is essential for avoiding confusion and stress after your passing. Begin by gathering all relevant documentation, such as mortgage papers, titles, deeds, and even passwords to online accounts. Create a comprehensive list of your assets, their approximate values, access instructions, and any related documentation.

For digital accounts, consider creating a shared browser profile with a trusted loved one, which stores all usernames and passwords. Alternatively, you can maintain a written list in a safe deposit box.

Additionally, consider drafting a non-legal letter to surviving family or friends outlining your wishes for funeral planning and other basic tasks, such as pet care and mail management.

Conclusion

In this part of our Legacy Planning Series, we've covered the importance of planning for incapacity and getting organized. By addressing these critical aspects, you'll create a strong foundation for your comprehensive legacy plan. Stay tuned for the next installment in the series, where we'll delve into the intricacies of asset distribution, inheritance, and tax implications.

Is Diversification Dead? Portfolio Alternatives for Today’s Market

Mon, 24 Apr 2023 06:52:35 GMT

Is Diversification Dead? Portfolio Alternatives for Today’s Market

The 60/40 portfolio might not be dead, but it’s certainly on life support.

Long heralded as the golden standard for retirement planning, traditional investment strategies largely followed the “Rule of 100.” This basic principle balances your portfolio by deducting your current age from 100 to determine your equity/bond blend, i.e. if you’re 55 today, the Rule of 100 mandates a 45/65 split.

This basic calculation aims to protect capital as you age by shifting into “safer,” fixed-income investments and away from growth assets like individual equities and stock market index funds.

The concept of balanced diversification, colloquially called the 60/40 split, emerged during a very different era devoid of hedging strategies, market liquidity, and the industry's digital transformation.

Today, alternative strategies might be your portfolio’s solution to volatility and underperforming “traditional” strategies.

60/40 Over Time – and Today

Numbers tell the story far better than I could, so let’s look at some 60/40 stats to see how the standard strategy fared over time:

A 60/40 split returned 2.3% from 2000 – 2009, with negative returns after inflation.
The allocation returned 11% from 2011 to 2021, buoyed mainly by low rates and cheap debt rather than inherent benefits – a rising tide lifts all boats.
Following the rule lost 16% in 2022, bringing the annualized return to a less attractive 6% for the preceding decade.

So, not bad – but not great. Self-managed investors would do perfectly well following the 60/40 ethos. But, if you’re working with a wealth manager or retirement advisor and they’re sticking with 60/40, you’re leaving gains on the table and aren’t getting the full bang for your buck after accounting for fees.

Beyond 60/40

The primary problem with the 60/40 split is that the underlying thesis no longer rings true. The key benefit underpinning the concept is diversification – historically, bonds beat equities in a bear market while fixed income falls when stocks rise. But monetary and fiscal policy changes over the past decade nullify that proposition.

Source: BlackRock Investment Institute

Although high yields mean fixed income is producing income for the first time in quite a while, merely relying on meager cash flow isn't enough for most investors. Instead, bond performance depends on secondary pricing remaining negatively correlated with stocks – one goes down as the other rises.

But, as this chart shows, stocks and bonds are increasingly positively correlated, which means both follow similar trajectories rather than move opposite. This positive correlation means that, for sophisticated investors, simple stock-and-bond diversification may not be the done deal it once was.

Alternative Options

There’s no “one best option” to replace traditional allocation, as everyone circumstance varies, and specific strategies are best discussed with your wealth manager. But hedging opportunities represent a viable avenue to explore, mainly since these strategies are often customizable to your particular needs and risk preferences.

Of course, hedge strategies vary by firm, but “hedging” refers to what amounts to insurance on your portfolio. Effective hedges offer downside protection in bear market conditions, effectively providing the offset the 60/40 concept hinged on.

Hedging concepts differ from the oft-maligned hedge fund in that hedge funds diversify across many strategies and alternative assets to maximize returns while increasing risk. Hedging strategies seek to reduce risk.

We can’t speak to each hedging strategy out there, as there are as many proprietary methods as wealth managers, but we’ll detail our primary strategy’s performance as a representative sample.

Holding a Hedge

Our strategy is systematic , meaning it’s rules-based and divorced from subjective biases, even those under the surface. Using a complex algorithm, we work together to develop the inputs to feed your portfolio’s hedging strategy, including age, risk tolerance, existing asset allocation, and similar variables.

Conclusion

When working with financial professionals, a 60/40 split only works for one person: the wealth manager who's either lazy or overburdened with too many clients to understand each individual's needs. Relegated to pushing a "rebalance" button once or twice a year, sticking with this strategy wastes your time and costs you directly in potential gains and very real fees paid.

Our hedging strategies offer upside benefits and downside protection, outperforming the 60/40 split while protecting your hard-earned capital. Tailored to your unique circumstances, we won't simply deduct your age from 100. Instead, we, and our hedging algorithm, work alongside you to understand your needs, future hopes, and each of the many facets of your financial life.

Don't settle for outdated investment approaches - take control of your financial future and reach out to learn more about how a tailored hedging strategy can benefit your future, livelihood, and family wellbeing.

Legacy Planning Series: Part 1

Mon, 24 Apr 2023 06:44:54 GMT

The Guide to Legacy Planning

Death and taxes – as the old saying goes, neither can be avoided. Furthermore, few are eager to talk about, or even consider, the prospect of either. Both carry significant financial implications, and poor planning (or no planning) today means an increased burden down the road. However, unlike taxes, death is far less predictable. Considering the ramifications of underplanning your legacy – stress for your loved ones, loss of wealth and capital you worked for, and worse – is far more painful than putting together a comprehensive plan and reviewing it annually.

A Tale of Three Legacies

To understand the importance of legacy planning, let's explore real-life scenarios. Although our three examples are on the extreme ends of the spectrum, they illustrate what can go wrong (or right) when planning your legacy.

The Good

Randy Pausch, a professor at Carnegie Mellon University, died young at 47. Diagnosed with pancreatic cancer in 2007, he had a prognosis of just a few months. Armed with this knowledge, Randy rapidly got his affairs in order to spend as much quality time as possible with loved ones. His famous Last Lecture series, later turned into a book, imparts wisdom to his children, creating a lasting legacy. Randy's story is a prime example of proactive legacy planning when facing a terminal situation.

The Bad

James Gandolfini, of Sopranos fame, suddenly died while traveling through Italy. His estate and legacy planning proved inadequate, which proved disastrous for his remaining family. Despite dividing his estate among his family, the IRS seized nearly half of the $70M estate in taxes. Avoidable through a straightforward trust management system, the estate also went into probate, further diminishing the net distributions to his family.

The Ugly

Jean Paul Getty's family affairs caused significant public intrigue. His will, with 21 amendments, led to a decades-long legal battle amongst heirs that continues in part today. The immediate aftermath involved numerous attorneys, negotiations, court documents, and millions of dollars in legal fees.

Recap

While these stories may not directly apply to your situation, they offer valuable lessons for legacy planning:

Comprehensive legacy planning, done early, ensures your family and estate are properly accounted for in the event of sudden death.
If terminal illness or other poor prognosis gives you an idea of when you'll pass, prior planning means you maximize that time with family rather than dealing with wealth managers, notaries, and legal teams during your last days.
When planning, simplicity is key. Overplanning can cause complications, and a competent team can help draft a comprehensive plan with little need for constant adjustments, except for extraordinary life changes and periodic reviews.

Next Up: In our second installment, we'll dive into the essential steps to prepare for incapacity, ensuring your family and assets are protected in case of unexpected medical emergencies and some recommended ways you can get organized to save time and headache when planning a legacy.

Watch our Legacy Planning Webinar

Recession-Proof Your Retirement Portfolio

Mon, 03 Apr 2023 07:09:35 GMT

Recession-Proofing Your Retirement Portfolio

Bottom Line Up Front

Align your retirement portfolio with your goals and risk profile.

Avoid sitting on cash positions due to inflation.

Don't try to time the market. Focus on dollar-cost averaging strategies to keep investing without worrying about short-term market fluctuations.

Remember that recessions are part of the economic cycle and don't let short-term fear impact your long-term goals. Stick to your plan and rely on your team for support.

We admit it – we used “recession-proof portfolio” in the title to grab your attention. In reality, every asset allocation experiences recession risks differently, and there’s no way of timing market moves perfectly to capitalize upon each up or downswing.

We can, however, work together to optimize your portfolio for a recession. We’ll look at specific, actionable strategies to benefit most retirement portfolios, but each circumstance is different. The only way to optimize and adjust your recession-proof portfolio adapted to your circumstances is to connect with us, review your risk profile, and develop a plan of action.

Still, our broad strategies fall under two specific themes: retirement goals and risk profile.

Risking Retirement

Aligning retirement portfolios to goals and retirement date is the first step when considering asset allocations and structuring a retirement portfolio. But misaligning those investments with the goals for retirement is one of the most common mistakes we see in self-managed retirement portfolios and far more often than we’d like when clients move to us from other professional providers.

The trend tends to swing in one direction, and we’ve seen it get worse over the past year: investors of all ages are far too risk-averse and tend to prefer sitting on cash positions ¹ , chasing yield, and even selling on the way down. Except for the third mistake, these strategies have a time and place, but they’re often not executed deliberately; instead, they result from fear and uncertainty.

Which makes sense. It’s an uncertain time, and the masses of “market experts” on both sides of the bull/bear dynamic shouting about imminent reversals or end-of-the-world predictions don’t help. But managing emotions is a critically underrated component in successfully investing, and one we’ve found to be our most valuable asset when working with unsure clients.

Cash is Trash

Investing juggernaut Ray Dalio is well-known for parroting cash is trash throughout the past decade. Still, his assertion is more accurate today than ever – although for a different reason. Before, Dalio avoided cash because sky-high valuations across most equities all but guaranteed outsized returns in an exuberant market buoyed by low rates and cheap debt.

Today, inflation is grinding cash’s purchasing power ² , ultimately making each dollar worth less. Unfortunately, those prone to sitting on cash to preserve capital are older investors with retirement right down the road or, in some cases, already retired.

Either way, it’s an understandable sentiment if this describes you – you’ve worked hard all your life, planning and looking forward to retirement each day. It isn’t your fault that a recession popped up right at the tail-end of your working life, but watching your value dip due to equity crashes or fall based on higher bond yields makes cash feel safe.

But there’s a better way. Hopefully, you’ve worked with your wealth manager to consistently rebalance and guide your portfolio as you’ve aged to align with a more conservative risk profile. Ideally, you have an appropriate mix of equities to capture upside gain over time and a healthy allocation to fixed-income assets designed to generate returns while buffering against stock losses and preserving capital.

If volatility keeps you up at night and you start thinking your money is best off under your mattress in stacks of cash and bundles of bills: talk to us. We’ve worked hard to identify targeted capital preservation strategies for each of our clients that don’t rely on cash. We’ve likely covered them in one of our updates before, but today is different, and we might need to dive into their details a little more if you need reassurance to avoid cash at all costs.

Don’t Roll the Dice

Trying to time the market is a fool's game and often an unsuccessful strategy. The stock market is notoriously unpredictable, and attempting to make short-term predictions about when to buy or sell can lead to poor investment decisions – especially if driven by fear (should I sell now before it falls more?) or greed (this must be the bottom, better get in while I can).

It's often difficult to tell whether a market downturn is a temporary setback or the beginning of a longer-term decline, and attempting to time the market can result in missed opportunities and losses. This is even truer in recessionary periods. These charts drive the point home. Stocks tend to:

Swing wildly throughout a recession, making it difficult to determine whether "this is the end" for those trying to time a bottom.
Front-run both the decline and reversal. This means that stocks tend to fall substantially before the recession or limp into the recession relatively "flat" and reverse their course before the broad economic recovery happens. ³

The result of both is the unpredictability that makes timing the market difficult, if not impossible, during a recession. Instead, equity-focused, younger, and more aggressive investors should stick to dollar-cost averaging strategies.

Dollar-cost averaging (DCA) is a strategy where an investor buys a predetermined amount of a stock or index at regular intervals, whether monthly, annually, or somewhere in between. This strategy emphasizes recurring investments that hit the market consistently rather than making trades based on the current share price.

By consistently investing in this manner, you're buying the stock regardless of whether it's down or on the way back up. Over time, the stock's cost basis or average purchase price settles in the middle. This approach can help you avoid emotional trading decisions and reduce the impact of short-term market volatility on your portfolio.

Review Your Requirements

We always advise sticking to your guns and maintaining a long-term investment plan. But even though it's critical to avoid making impulsive decisions based on market fluctuations, there are times when it is important to reevaluate your portfolio's risk. Today is one of those times.

If you're concerned about your portfolio's risk, you might want to chat with us more often or sit down for longer to dive into the details of what we're doing, why, and how it bests sets you up for retirement success. If nothing else, we can provide some critical context to recession investing:

Since our nation's founding, the average period between recessions is just 3.25 years, although that's driven by a hands-off approach in our early economic years that let recessions flare up and die out on their own. ⁴
Since World War II, recessions have happened almost every five years, although it's slowed to about once a decade since the 1980s. ⁴
The average recession length since our founding is about 18 months, but only 11 since World War II. ⁴
The longest recession since World War II, The Great Recession, tied the long-term average at 18 months. ⁴

Bottom line: recessions are less severe, common, and long-lasting today than ever. Whether because of monetary policy intervention, a more robust economic foundation, or simply the effects of post-industrial globalization, recessions are scary when we're in their midst but ultimately far less impactful than the television would have you believe.

Conclusion

In a nutshell, there's no perfect way to recession-proof your retirement portfolio, but there are strategies that can help.

Don't try to time the market – it's like trying to hit a moving target blindfolded. Rely on your team and stick to your risk profile. Dollar-cost averaging can be a great way to keep investing without worrying about short-term market fluctuations.

Remember that cash is not always king, and sitting on cash positions can ultimately hurt your portfolio's growth potential. Inflation eats away at your purchasing power, making it worth less over time. Instead, consider a mix of equities and fixed-income assets designed to generate returns while buffering against stock losses and preserving capital.

Lastly, don't roll the dice by trying to time the market. Instead, focus on recurring investments through dollar-cost averaging. It will help you avoid emotional trading decisions and reduce the impact of short-term market volatility on your portfolio.

In the end, recessions are scary but also part of our economic cycle. Don't let short-term fear impact your long-term goals. Stick to the plan and remember that we're here for you.

[1] https://www.cnbc.com/2023/01/18/investors-are-holding-near-record-levels-of-cash-and-may-be-poised-to-snap-up-stocks.html

[2] https://fred.stlouisfed.org/series/FPCPITOTLZGUSA

[3] https://www.forbes.com/sites/kristinmckenna/2022/04/01/how-stocks-perform-before-during-and-after-recessions-may-surprise-you/?sh=1102e203249d

[4] https://www.nber.org/research/business-cycle-dating & https://www.kiplinger.com/slideshow/investing/t038-s001-recessions-10-facts-you-must-know/index.html

The Denominator Effect: Coming to a Portfolio Near You?

Mon, 27 Mar 2023 07:21:23 GMT

Bottom Line Up Front

The Denominator Effect (TDE) can impact any portfolio, not just institutional or pension funds with private assets.
TDE occurs when the value of the fund decreases, causing the percentage of the fund's assets invested in a particular asset class to appear larger than it actually is.
Wealth managers can mitigate the impact of TDE by discussing liquidity needs, exploring product options, and reviewing portfolio rebalancing frequency

Deciphering Denominators

Most consumers and retail investors have never heard of the Denominator Effect (TDE), let alone how it could impact their portfolio. While most wealth managers are familiar with the concept, they’ve never had to consider its impact on client portfolios. The Denominator Effect historically affected massive institutional and pension funds, private equity, venture capital, and similarly sized portfolios.

We’ve talked a lot about volatility and what to expect as we navigate this unpredictable market. But that volatility means we must account for the Denominator Effect as we help manage your asset allocations to fit the goals and risk profiles we agreed upon, so you might hear the Denominator Effect come up in future portfolio updates and conversations as we act to manage and mitigate it.

So, what is the Denominator Effect?

A Quick Math Refresher

If you remember most of your math lessons, skip ahead – but if you dozed off hearing your algebra teacher list off formulas from an overhead projector (like most of us), this quick refresher is for you.

For a good reason, hearing the Denominator Effect might give you flashbacks to elementary-school math and fractions worksheets. Remember that a fraction is made of a numerator on top and a denominator on the bottom. When considering portfolios and funds, the numerator is an asset in a portfolio, and the denominator is the total portfolio value:

Adding in the dollar amount of each gives you the percentage of that asset in the overall portfolio:

The Denominator Effect describes what happens when Stock A and the portfolio get out of whack with one another.

Defining the Denominator Effect

It’s easiest to describe the Denominator Effect (TDE from here on out, for simplicity’s sake) in terms of practical examples. Let’s first look at it from an institutional or pension fund standpoint since the term comes blended with both private and public assets.

Portfolios like these have real estate, private company investments, direct lending, and similar non-public assets alongside standard stocks, bonds, structured notes, and ETFs in your retirement portfolio.

When public markets fall, the value of stocks and similar public assets in the fund drops. But private investments may not decline at the same rate; for example, real estate holdings don’t typically crater, and, if they do drop in value, it’s slow and by a matter of degrees rather than dramatically.

Let’s look at a comparison between those public equities in a portfolio and theoretical real estate values over the past few years:

The massive dip in red, representing the percentage change in the S&P 500, is the beginning of the pandemic when massive fear and uncertainty brought the index down nearly 20% in a single go.

Let’s assume our hypothetical fund billed itself to investors as 80% SPY (S&P 500 ETF) and 20% residential real estate to diversify risk. At the beginning of 2020, we’d see:

2,484,472M shares at $322 per share.
522 homes at $383,000 each, based on a US Census Bureau report.

At the beginning of Q2 2020, SPY was around $250 per share, but those home prices only fell about 2%, leaving us with a fund allocation of:

76% SPY
24% real estate

Not terribly skewed from the 80/20 goal allocation, but those homes are less liquid than stocks . So, as the fund tries to rebalance, they may be unable to offload those homes and remain permanently misallocated – a severe issue since investors pick funds and set allocations based on risk profile, and managers are obliged to maintain the promised proportions.

Why Does Any of This Matter?

“OK,” you’re thinking, “that’s a fun lesson, but so what? I don’t have any real estate or private equity in my retirement account.”

Volatility as we’re seeing changes everything, and not all assets trade equally. Even in a basic retirement portfolio. Many wealth managers, us included, use structured notes as an alternative to bonds to fit fixed-income investment needs. Without fully explaining their mechanisms, most structured notes are certificates of deposit (CDs) built from a package of traditional bonds combined with various derivatives based on the note’s profile.

We love structured notes because they provide greater returns than bonds and, in some cases, specifically protect against downside risk in an index like the S&P 500. But they may not be liquid and thus exposed to the Denominator Effect.

Here’s some specifics from the prospectus of a structured note typical of what you see in a retirement portfolio:

No matter the performance of the underlying index (the S&P 500, in this case), you’ll get your initial deposit amount back in seven years when the CD note matures.

You can’t cash out early unless you die or are deemed incompetent.
Since the CDs aren’t securities, they aren’t listed on any exchange to trade easily.
The issuing bank says they may operate a secondary market to sell before maturity but notes that “proceeds from a sale of CDs prior to maturity may be less than the principal amount initially invested.”

So, in this case, you have a basket of fixed-income, stable investment products worth $1,000 but as illiquid as real estate or private equity. A growth-centric retirement portfolio could be 80% stocks and 20% structures notes. If you had $1M in cash on January 1st, 2022 and allocated 80/20 into SPY and these notes, you’d have:

1688 shares at $474 per share.
200 notes at $1,000 par value.

In September that year?

Your portfolio (denominator) is worth $790,000, of which:
75% is SPY at ~$350.
25% are structured notes at $1,000.

You’re stuck on the sidelines, misallocated, and unable to push those notes onto a secondary market to reallocate into an 80/20 split.

Today, SPY is up around 15% from that low (about $400 per share). The unbalanced portfolio is worth $875,000. But if you had rebalanced, your portfolio would be worth $1.1M.

And that’s in just a few short months! Imagine the compounding effects as the market truly rebounds. Since the 80/20 allocation befits a younger investor with time until retirement, that missed opportunity caused by the Denominator Effect represents millions in lost potential gains.

Managing the Denominator Effect

We made a lot of assumptions to simplify our examples. We don’t constantly tweak and rebalance to maintain constant allocations. That isn’t practical, and trying to time the market like that is a fool’s game.

But our example shows the risk the Denominator Effect represents for even standard retirement portfolios, especially for younger investors trying to capitalize on potential gains with an aggressive risk profile.

So how can we mitigate the effect?

Talk to us. Now that you understand the effect let’s discuss the impact TDE might have and your liquidity profile. You might want to take advantage of the downturn to dollar-cost average on the way down and back up, so fixed-income assets might not suit you. You might want more frequent updates or to review how often we’re rebalancing your portfolio to meet your goals.

As wealth managers, we also have access to tools and derivative securities you might not. Talk to us and explore ways to buffer the effects of lost liquidity – our job is to protect your capital and help it grow, so we’ll explore as many product options as possible to meet your needs and keep you comfortable.

[1] https://www.cnbc.com/2023/01/18/investors-are-holding-near-record-levels-of-cash-and-may-be-poised-to-snap-up-stocks.html

[2] https://fred.stlouisfed.org/series/FPCPITOTLZGUSA

[3] https://www.forbes.com/sites/kristinmckenna/2022/04/01/how-stocks-perform-before-during-and-after-recessions-may-surprise-you/?sh=1102e203249d

[4] https://www.nber.org/research/business-cycle-dating & https://www.kiplinger.com/slideshow/investing/t038-s001-recessions-10-facts-you-must-know/index.html

Avoid these Common Retirement Mistakes

Tue, 21 Mar 2023 07:39:05 GMT

Avoid these Common Retirement Mistakes

No matter how quickly or often things change – technology, cultural attitudes towards investing, the economy itself – we’ve found a few remarkably consistent trends across all clients throughout our years of wealth management. No matter whether the client is a relatively small account targeting retirement in 30+ years or one of our high-net-worth-individuals, young or old, risk-averse or aggressive: human nature remains a common thread across the spectrum of our clientele, and we’ve noticed a few common mistakes that you can easily avoid when you’re planning for retirement.

The Takeaway

Strategically time your contributions to maximize your retirement wealth.
Avoid cash as a deliberate investment decision and considering the effects of inflation.
Continue to emphasize equities in a retirement portfolio despite higher fixed-income yields, especially when young, to maximize growth.
Stay the course in stocks for long-term retirement portfolio success.

Don’t Wait or Deliberate

If you’re actively planning for retirement and set aside the annual maximum possible contribution towards your IRA or retirement plan, great – you’re already well ahead of many Americans. Still, you can (and should!) optimize your contribution strategy. Aside from working with your wealth management team to best allocate your portfolio’s assets, strategically timing your contributions is the number one way to maximize your retirement wealth.

Luckily, it’s also simple. So simple it seems as though it’d be common sense, but we’re often surprised at how infrequently clients follow this rule.

Contribute your annual limit as soon as possible and, ideally, on the first day of the year. Early contributions give your money the maximum time to grow. However, many clients still wait until the last minute to contribute. We find ourselves making calls in April to convince clients to contribute the previous year’s limit before tax time far more often than we prefer.

Let’s look at what happens when you contribute at the beginning of the eligible annual period for a Roth IRA, January 1st, compared to waiting until the last minute (April 15th of the following year). We’ll assume that we’re starting our portfolio today, investing the annual maximum ($6,500) at a relatively reliable 7% return typical of a traditional 60/40 portfolio:

Compound interest being what it is, it’s easy to envision what a stark difference early contributions are compared to procrastinating. If you can afford to do so and planned to contribute anyway, doing it today instead of tomorrow makes a massive difference.

Cash isn’t King

Now, we nearly always advise not relying on cash as a deliberate investment decision. Even for the most risk-averse clientele, there are much better alternatives to preserve capital with sufficient liquidity to enable active retirement withdrawals. Unfortunately, we often see a mindset driven by fear, uncertainty, and doubt that makes clients shy about stocks when markets are in a downswing. Stockpiling cash is the exact opposite approach we recommend, though, no matter how close to retirement you are or your risk profile.

Nearing Retirement

We understand the tendency to keep cash at the core of your portfolio as you near retirement or if you are retired and actively withdrawing. But consider the effects of inflation; inflation is today’s watchword, so you’re likely sick of hearing about it. But inflation doesn’t trash cash only when it’s as high as today’s levels. Inflation is omnipresent, and while it might dip between high points, even a healthy 2% inflation rate reduces the actual value of your cash reserves daily.

As an aside, Treasuries (as a stand-in for a riskless investment) outperform cash when inflation is applied, even if only by a slim margin. When wealth managers refer to a cash position in your portfolio, they usually talk about “no-risk” investments like short-term Treasuries. Still, checking to ensure your account’s purchasing power isn’t dwindling due to inflation is best.

Furthermore, keeping cash can skew your calculations when projecting retirement savings requirements and planned expenditures. We don’t think that the 4% Rule is totally accurate, which we’ll look at shortly. Even as a good rule of thumb, though, holding cash destroys the model as your increasing withdrawal rate over time won’t match your portfolio’s value if it’s cash-heavy. The below table from a Stanford research study proves it: the top row shows the equities/cash portfolio blend, and the leftmost column is the withdrawal rate. Retirement failure is where they meet, so this table shows the likelihood of not having enough money through retirement if you over-rely on cash.

If you hold cash exclusively, you’ll see a guaranteed failure rate; failure rates drop nicely as you introduce an equity blend and demonstrates that even swinging for the riskiest allocation (100% stocks) through retirement still has good odds if you elect to stick to 4% withdrawals.

Youthful Exuberance

The standard advice for retirement planners is that the younger you are, the heavier you should weigh equities in a portfolio. We stand by that assertion: the longer your account has time and space to grow, the better. Riskier assets like stocks are the best vehicle to maximize that growth.

But faced with the prospect of surging rates where even high-yield savings accounts deliver 4%+ returns… well, the youth are forgiven for stacking cash in these and other high-yield, low-risk assets.

But the conventional wisdom that stocks are best the further you are from retirement remains true. Chasing yield isn't a fool's game, necessarily. Still, emphasizing short-term outcomes over long-term gains as the market rebounds while you've effectively dollar-cost averaged all the way down and ready to maximize the upswing… well, that is a bit foolish!

Remember, time in the market beats timing the market, especially when you have a long road to retirement. Couple a stock-heavy investment strategy with early contributions, as we hit previously, and you have a recipe for success in building a solid financial foundation with plenty of time to grow and mature.

Think of it another way: suppose your portfolio is worth $10,000, cash, and you can either buy a 60-month CD at 4.5% compounding or put it into a stock index ETF with these characteristics:

Purchase price: $400
Dividend yield: 1.6% (dividends reinvested)
Average dividend growth: 5%
Average annual return: 4.5%; this is somewhat conservative but represents the risk of a recession during the initial investment period.

When your CD reaches maturity, your portfolio is worth $12,462, but a stock index ETF over the same period is worth $13,596, and each share is now $477.

And, yes, you could use the CD’s balance to invest in the same ETF, but let’s look at that course of action compared to solely buying the ETF over ten years (we’ll also assume a more accurate 7% gain):

CD, then stocks: $18,939
Solely stocks: $21,125

Thirty years?

CD, then stocks: $140,344
Solely stocks: $156,538

You get the idea. Chasing yield feels great, especially when stocks are as rocky as they are today. But, over a long-term retirement portfolio, short-term gain doesn’t come close to touching the benefit of staying the course in stocks – and this doesn’t even account for the liquidity issues with CDs! Even if you could perfectly time the bottom and park your cash in a CD while waiting, there’s no guarantee you’ll be able to sell the CD on a secondary market. If you do, you’re liable to be forced to sell at a discount.

Conclusion

Planning for retirement is a daunting task, but avoiding common mistakes makes all the difference. Through years of working alongside clients like you, we’ve noticed a few consistent trends that can impact retirement savings, regardless of age or risk profile.

By avoiding delayed contributions, overemphasizing cash positions, and not shying away from equities in a portfolio, you can optimize your retirement wealth. By contributing early and often, diversifying investments, and maintaining a long-term strategy, you can set yourself up for success in building a solid financial foundation for your retirement years.

When Should You Start Your Social Security Income?

Mon, 06 Feb 2023 07:48:10 GMT

Social Security Income in Retirement

Social Security is a cornerstone of retirement income. Social Security payments are designed to replace about 40% of your previous earnings, but the amount you'll receive depends on when you start taking Social Security Income. In this post, we will discuss how Social Security works and what factors affect when you should start taking Social-Security payments.

Social Security is a government-sponsored retirement program that provides benefits to retirees, disabled workers, and their families. Social Security payments are based on your lifetime earnings. The more you've earned, the higher your Social Security payment will be. Depending on the age you decide to start your payments you can earn delayed retirement credits that will increase your income.

Social Security benefits can be claimed at any time after reaching 62 years of age. The longer you delay taking the income will earn you delayed retirement credits. If a worker delays their Social security past 70 they no longer earn delayed retirement credits and only receives what they've already earned toward future Social Security payments.

It is important to do your research and speak with a Social Security specialist to make sure you are getting the most out of Social Security benefits. Social security is an essential part of retirement planning, so be sure to look into all the options available to you. There are strategies that can help optimize your Social Security income such as claiming spousal benefits or delaying Social Security payments for as long as possible.

5 Factors that you may want to consider before turning on your Social Security payments.

1. Your Age: Social Security payments are available to those over the age of 62, but you can earn delayed retirement credits if you decide to wait until 70 to start taking Social Security Income. This can lead to an 8-32% increase in Social Security payments depending on your age.

2. Your Retirement Age: Social Security income is designed to replace around 40% of your pre-retirement earnings, so if you were planning on retiring at a younger age it could be beneficial to start Social Security payments earlier in order to help supplement your income and take some pressure off your retirement savings/investments.

3. Work Status: If you are currently employed, or plan on continuing working after reaching Social Security eligibility age, keep in mind that Social Security benefits may be reduced if you continue working and earning more than $21,240 per year (the Social Security Earnings Test Limit for 2023).

4. Spousal Benefits: If you are married (or in some cases previously married), you may be eligible for spousal benefits which can provide an additional amount of Social Security income for both spouses. The best strategy for claiming spousal benefits often depends on the different ages between spouses, so it's important to talk with a Social Security specialist before deciding when and how to take Social Security payments.

5. Current Health: Health can be a factor in determining when the best time is to take Social Security income as well - since Social Security payouts are based on your lifetime earnings and typically paid out over the course of your life if you think that you may not have many years left then it might make sense to start taking benefits earlier rather than later in order receive more total payment.

Social security income in retirement should not be taken lightly! It's important to consider all factors when deciding when to start receiving Social Security Income. Make sure you do your research and talk with a financial advisor before making any decisions about taking Social Security Income in Retirement.

For a ton more information on Social Security and how to Optimize your Social Security plan, check out our webinar recording which is available to you anytime by clicking HERE .

The Importance Of Hiring The Right Advisor

Mon, 30 Jan 2023 07:53:26 GMT

The Importance of Hiring the Right Advisor

Many Americans are searching for ways to make their money work for them. Retirement planning is one way to do that, but not everyone has the time or skills needed to plan out financials for retirement properly. A retirement planning specialist can provide you with all of these tools and more! Retirement planners work to help clients understand how much they need to save, where their money should be invested, choose the right investments based on their risk tolerance, tax strategy advice, insurance needs assessments and so much more! Retirement planners have helped thousands of people around the world retire early by providing expert guidance at every step of the process. The best part about working with a retirement planner? They will take care of everything from start to finish, so you can relax and enjoy your golden years!

Specialists

When choosing a financial advisor, it is important to find one who specializes in retirement planning. Many people make the mistake of hiring a general financial advisor for their entire portfolio, which includes their retirement savings. While these advisors may be qualified to help with other areas of your finances, they might not have the expertise needed when it comes to retirement planning. A specialist will know all about employer-sponsored plans, Individual Retirement Accounts (IRAs), 401ks, Roth IRAs, tax planning, estate planning, social security, and more! They will also understand how to work within your budget and what type of investments are best suited for you.

Investments

The best retirement planners know how to work within every budget and understand tax laws for different types of accounts like IRAs or 401ks. They also have access to a vast network of financial experts and advisors who specialize in specific areas such as real estate investment trusts (REITs) or annuities, which means they're able to provide clients with comprehensive advice when it comes to their finances. With all this knowledge at hand, retirement planners make sure each client's retirement dreams become reality by providing expert guidance at every step of the process.

Risk

Risk tolerance is one of many factors that play into choosing investments. An experienced Retirement Planner will be able to analyze risk tolerance to choose appropriate investment options such as stocks or bonds. However, a general financial advisor who does not specialize in Retirement Planning might recommend inappropriate investments because they don't understand this concept. This could lead to costly mistakes and missed opportunities down the road if an investor has high-risk tolerances when it comes to their money.

Taxes

The right advisor will be able to help you create a plan that is tax-efficient and could save you thousands in taxes. Where you draw your income from in retirement will make a big difference in the taxes you pay and how long your money will last. Retirement planners understand how to take advantage of tax breaks and can help you plan for retirement in a way that minimizes your tax bill. They will also be up-to-date on the latest changes to the tax code so you can be sure your plan is as effective as possible!

Estate Planning

Retirement Planners are also well-equipped to deal with estate planning. They know how to create detailed estate plans that include wills, trusts, and powers of attorney. This ensures that your assets are distributed according to your wishes after you've passed away. Having an experienced Retirement Planner in charge of your estate planning gives you peace of mind knowing everything is taken care of.

Healthcare/Medicare

Retirement Planners can also help you plan for the cost of healthcare in retirement. They know about all the different types of Medicare plans available and can help you choose the best one for your needs. A well-versed advisor can also assist with creating a budget for healthcare costs and finding ways to reduce those expenses.

Income

Retirement Planners know how to calculate your retirement income and can compare that number with your current expenses. They make sure you save enough money when planning for the future so you don't outlive your savings in old age! Social Security benefits are a big part of your income in retirement, but they can't be your only source of income. Retirement Planners will work with you to create a plan that includes all your income sources, both expected and unexpected.

Hiring the right advisor for retirement planning is essential to ensuring a secure future in retirement. Financial advisors who do not specialize in retirement planning might recommend inappropriate investments or fail to account for important variables like taxes and estate planning. Retirement planners have the knowledge and experience necessary to create a detailed plan that takes all of these factors into account.

The bottom line is this: Retirement planning is not a one-size-fits-all affair. Everyone's situation is different and requires a unique approach. That's why it's so important to have an experienced Retirement Planner on your side who can take all these factors into account and help you create a personalized plan that meets your specific needs. So don't wait any longer! Contact a Retirement Planner today and start planning for the future you deserve!

How To Build YOUR Retirement Portfolio

Mon, 23 Jan 2023 07:57:46 GMT

How To Build YOUR Retirement Portfolio

As the market continues to rise and fall, retirement portfolios are getting more attention. Investments that were once considered safe havens for retirement accounts may not be as secure as you previously thought. Investments such as bonds decline in value following interest rate hikes. This is why it's important to take different factors into consideration when deciding how to invest your money during your golden years!

There are a few key things to think about when building your retirement portfolio:

-Your current age and how long you have until retirement.

-How much money you will need each saved to cover retirement expenses.

-The likelihood of another recession or market crash during your retirement years.

-What returns do you need to average to meet your retirement plan's income goal.

When creating a plan, it's important to remember that everyone's situation is different! If you're nearing retirement, you may want to be more conservative with your investments, while someone who has a few more years until they retire can afford to take on more risk. No one knows what the future holds, but by being proactive and planning ahead you can rest assured that your golden years will be enjoyable!

With that said, not everyone will fit the typical mold. Some individuals near retirement still have a high appetite for risk and don't want or need to be conservative. Likewise, there are younger people that don't want to take any risk and therefore will want to invest with a slow and steady approach. There is no right or wrong answer, as long as it fits your needs and your appetite for risk.

How does your age, working years left and longevity play into your portfolio?

When you're young, time is on your side so you can afford to invest in stocks and take more risks. According to most "textbooks", as you get closer to retirement, the percentage of stocks should decrease and the percentage of bonds increase. This will help protect your portfolio against any sudden market crashes that may occur in the years leading up to and during retirement.

When you are in your working years, you are most likely adding to your 401k or your IRA on a consistent basis. So, when the market drops, you are buying in at lower values. You are by default "dollar cost averaging" into the market.

Once you retire and no longer have that paycheck coming in and are no longer consistently adding to your retirement accounts but instead you are taking money out of the accounts to live on...it changes everything. You most likely can't afford major pullbacks in the market and therefore in your retirement portfolio anymore.

For most people, when in retirement, you need to shift your mindset when it comes to investing. It's most likely no longer about how much you can make, but how much you can keep. You need this money to last your entire retirement years which for most people is between 15 & 30 years.

How much do you need saved to cover your retirement expenses?

This is a question that has a different answer for everyone. There are so many factors that go into this equation, it's ridiculous. The average person is expected to live to about the age of 84 for men and 86 for women which means you need to plan for at least 20 years of expenses after retiring in your 60's!

Most people that I have worked with all want to keep the same lifestyle they are accustomed to during their working years but maybe add a bit more travel. Well, that means you may need to plan for higher expenses than you have now (at least during the years you want to travel). Other people have mortgages or loans that they are going to have paid off in retirement which means they can live the same lifestyle with fewer expenses. Sitting down and figuring out your current expenses and expected retirement expenses is a major step in creating a comprehensive retirement plan.

You also need to consider a number of other expenses. Healthcare is a big one if you retire prior to age 65 (when you can get Medicare) as well as which Medicare plans you will be getting. Another possible large expense will be taxes, figuring out which accounts to withdraw from and when can cause major differences in the amount of taxes you will pay.

Of course, there are ways to decrease these numbers and still provide a comfortable retirement for yourself by taking less risk with investments or working part-time either before or during the later stages of your life. But when creating a solid financial foundation...you can't skimp out on these calculations no matter what stage of life you're currently in!

What is the likelihood of another market crash or recession during your retirement years?

This is a question that no one can answer with certainty. The only thing we know for sure is that it's bound to happen at some point. If you're like most people, you don't want to think about it or plan for it! But the reality is, planning for this event is just good financial planning practice.

There are many different schools of thought when it comes to how to prepare for another market crash or recession but I typically tell my clients, "If you are invested properly, you don't need to worry about a crash or correction. Your portfolio should be built around your retirement plan and have protections built into the plan that a crash or correction will now ruin the overall plan." A proper plan and portfolio will be able to sustain the down periods without giving you added anxiety in retirement.

According to this article by Fortune.com, "Since 1946, there have been 12 crashes, with average losses around 35%, and the market can take up to four years to recover."

Unfortunately, no one has a crystal ball and no one can tell when the next recession is, but that doesn't mean you can't plan for it.

What returns do I need?

So far we have discussed creating a portfolio around your age, longevity, and risk tolerance, a portfolio designed to meet your income needs and expenses, and a portfolio built to not allow a recession or market crash to destroy your retirement. When you take a look at the portfolio designed around your retirement plan you should be able to calculate an average rate of return needed from the portfolio to meet all of your retirement goals. So what is that number?

This question really depends on how much money you have saved already, how long until retirement, what are your goals in retirement, and what is your life expectancy? Not everyone needs the same rate of return on their investments and this number can change drastically from person to person.

To figure out the rate of return you should be shooting for, take a look at the amount you have saved, the expected expenses we discussed earlier, your other sources of income (post-tax), and what that gap in expected income versus expected expenses. That gap will tell you the post-tax amount you will need to create out of your portfolio. Keep in mind, it's ok to draw down on your principal a little every year as long as you have accounted for corrections and crashes to ensure the portfolio will be around long enough to draw income your entire retirement.

Conclusion

It's impossible to say exactly what everyone should do when creating their retirement portfolio. But by keeping the points above in mind, you can start to form a plan that is right for you!

Speak with an advisor, read books or articles on the subject, and most importantly...don't be afraid to ask questions!

Sequence of Return Risk: The Hidden Culprit That Could Destroy Your Retirement Savings

Mon, 16 Jan 2023 08:02:15 GMT

Sequence of Return Risk: The Hidden Culprit That Could Destroy Your Retirement Savings

Retirement planning can be a daunting task, especially when unexpected risks are involved. Sequence of Return Risk is one such risk that could have a devastating effect on your retirement savings if you’re not aware of it. Sequence of Return Risk is the hidden danger lurking in the shadows and it’s important to understand how this risk works so you can take steps to protect yourself from its effects. In this blog post, we will discuss Sequence of Return Risk in detail, including how to measure it, what strategies investors can use to mitigate this risk and how Sequence of Return Risk affects retirement planning. By understanding Sequence of Return Risk and taking the necessary precautions now, you can ensure that your retirement savings will remain secure for years to come.

Sequence of Return Risk and why it is important for retirement planning

Sequence of Return Risk is a risk that can negatively impact your retirement portfolio if you retire during a period of market downturn. Sequence of Return Risk occurs when the sequence of returns on investments, such as stocks and bonds, are lower than expected. When this happens, your portfolio’s principal will be eroded more quickly than anticipated due to poor early years' returns, making it difficult for your retirement portfolio to generate the same level of income in retirement as if the sequence of returns had been more favorable.

During your working years, you can take advantage of any market fluctuations and buy in at lower levels before retirement, giving yourself plenty of time to recoup. Unfortunately, when you are retired and have started pulling out money for living expenses, a downward shift in the market can be difficult to overcome without sufficient funds stored up. By then there will be less money left within your account that could help it recover once the markets start rising again.

These risks become particularly pronounced in a volatile market environment, where stock prices tend to fluctuate rapidly over short time periods. Sequence of Return Risk can also affect retirement savings when retirees discontinue their contributions or withdraw larger amounts than they had originally planned. This increases the likelihood that their portfolios will not have sufficient growth before retirement to sustain them during their golden years.

It is important to understand Sequence of Return Risk and take steps to mitigate it before building a retirement portfolio. Pre-retirees should thoughtfully contemplate what retirement will look like if the market is negative in their initial years when evaluating a retirement plan. As my father has always said, "When reaching retirement, it's not a matter of how much you make, it's how much you keep!"

What factors contribute to Sequence of Return Risk?

Certain factors contribute to Sequence of Return Risk, including economic conditions, market volatility, and one’s investment strategy. Economic conditions may cause Sequence of Return Risk due to changes in stock prices or other economic indicators. In addition, market volatility could lead to drastic price changes creating uncertainty about future returns on investments. Finally, if an investor fails to diversify their portfolio or make speculative investments with higher risk levels than what was initially planned for retirement savings, they could be taking unneeded risk.

Ultimately, Sequence of Return Risk is something that needs to be taken into account when planning for retirement. Understanding how Sequence of Return Risk works and what factors contribute to it is essential for creating a secure retirement plan that will protect your savings even during periods of market turmoil.

Explain the different ways Sequence of Return Risk can be measured

Sequence of Return Risk can be measured in a variety of ways. One of the best ways is to analyze an investor’s portfolio over different points in time and compare the returns in each period. If you are planning to retire in 2-3 years, imagine the first couple years of retirement were the year 2000-2003. If the market repeats itself, would you still be able to withdraw the income needed in retirement? Would your assets last all the way through retirement?

Another measure of Sequence of Return Risk is to look at the correlation between portfolio returns and stock market returns. If portfolio returns are highly correlated with the stock market, your risk is higher and your Sequence of Return Risk is likely present.

Finally, Sequence of Return Risk can be measured by examining a retirement account’s drawdown—the amount an investor withdraws from their retirement account over time. A large drawdown can indicate a higher risk should the market drop in the first few years of retirement. Withdrawing large amounts from an account while it is down make it very difficult for the account to recover when the market does.

Discuss strategies investors can use to mitigate Sequence of Return Risk

Investors can take several steps to mitigate Sequence of Return Risk. One of the most important strategies is to diversify the portfolio with different types of investments, such as stocks, bonds, real estate, commodities, alternatives and cash, so that any losses in one area will be offset by gains in another. This type of diversification helps protect retirement savings even when markets are volatile.

Another important strategy is to use a systematic approach to investing, such as dollar cost averaging or rebalancing the portfolio on a regular basis. This allows investors to take advantage of market fluctuations and spread out purchases over time, reducing Sequence of Return Risk and dampening any potential drops in retirement savings.

Finally, it is important to create a retirement income plan that is designed to last throughout retirement. This should include strategies for how much can be withdrawn each year, how long withdrawal periods will need to be adjusted depending on Sequence of Return Risk, and the types of investments needed in order to have enough money for retirement expenses.

Conclusion

Sequence of Return Risk is a serious issue that all investors should consider when planning for retirement. It can have a major impact on the amount of money available to retirees, so it’s important to understand how Sequence of Return Risk works and what strategies you can use to mitigate this risk. Diversifying your portfolio with different types of investments, using systematic approaches such as dollar cost averaging or rebalancing your portfolio regularly, and creating an income plan designed to last throughout retirement are just some of the ways in which Sequence of Return Risk can be managed effectively. With smart planning and sound investment practices, Sequence of Return Risk need not stand between you and a successful retirement.

SECURE Act 2.0: An Overview

Fri, 13 Jan 2023 08:10:26 GMT

In the final days of 2022, Congress passed a new set of retirement rules designed to make it easier to contribute to retirement plans and access those funds earmarked for retirement.

The law is called SECURE 2.0, and it's a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019.

The sweeping legislation has dozens of significant provisions, so to help you see what changes may affect you, I broke the major provisions of the new law into four sections.

New Distribution Rules

RMD age will rise to 73 in 2023. By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs). And starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. But if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach. ¹

Access to funds. Plan participants can use retirement funds in an emergency without penalty or fees. For example, starting in 2024, an employee can get up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse. ²

Reduced penalty. Also, starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25% from 50%. If you fix the mistake promptly, the penalty may drop to 10%. ³

New Accumulation Rules

Catch-Up Contributions. Starting January 1, 2025, investors aged 60 through 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals earning more than $145,000 annually. ⁴

Automatic Enrollment. Beginning in 2025, the Act requires employers to enroll employees into workplace plans automatically. However, employees can choose to opt-out. ⁵

Student Loan Matching. In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans. ⁶

Revised Roth Rules

529 to a Roth. Starting in 2024, pending certain conditions, individuals can roll a 529 education savings plan into a Roth IRA. So if your child gets a scholarship, goes to a less expensive school, or doesn't go to school, the money can get repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are allowed under certain other circumstances, such as the owner's death. The original Roth IRA owner is not required to take minimum annual withdrawals. ⁷

SIMPLE and SEP. From 2023 onward, employers can make Roth contributions to Savings Incentive Match Plans for Employees or Simplified Employee Pensions. ⁸

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth Individual Retirement Account (IRA) rules. From 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans. ⁹

More Highlights

Support for Small Businesses. In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan. ¹⁰

Qualified Charitable Donations (QCD). From 2023 onward, QCD donations will adjust for inflation. The limit applies on an individual basis, so for a married couple, each person who is 70½ years old and older can make a QCD as long as it remains under the limit. ¹¹

Remember that just because retirement rules have changed does not mean that adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changing another.

Also, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It's not intended as a substitute for real-life advice. If changes are appropriate, we will outline an approach and work with your tax and legal professionals, if applicable.

1. Fidelity.com, December 23, 2022

2. CNBC.com, December 22, 2022

3. Fidelity.com, December 22, 2022

4. Fidelity.com, December 22, 2022

5. Paychex.com, December 30, 2022

6. PlanSponsor.com, December 27, 2022

7. CNBC.com, December 23, 2022

8. Forbes.com, January 5, 2023

9. Forbes.com, January 5, 2023

10. Paychex.com, December 30, 2022

11. FidelityCharitable.org, December 29, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2023 FMG Suite.

Understanding Bond Investing For Beginners

Mon, 09 Jan 2023 08:13:50 GMT

Understanding Bond Investing for Beginners

Are you looking for a way to diversify your investments? Bonds could be the answer! Bonds are an important part of any portfolio and offer the potential for both income and capital appreciation. But it’s not always easy to know where to start when it comes to bond investing. Luckily, we’re here to help. In this article, we’ll explain what bonds are, how they work and why it’s important to know the basics of bond investing for beginners. So let’s get started!

What are Bonds?

Bonds are debt instruments that represent a loan made by an investor to an entity. These entities can include government agencies, corporations and other organizations. For the loan, the entity will pay the investor regular interest payments over a set period of time, plus return their original investment at the end of that period. In return for loaning money to the entity, the investor receives regular payments of interest.

The Different Types of Bonds

When it comes to investing, there are a few kinds of bonds you can consider. Government Bonds issued by the federal government boast low-risk but also provide lower returns. Corporate Bonds from corporations offer higher risk with more profitable returns compared to their governmental counterparts; whereas Municipal Bonds which come from municipal governments give investors an advantageous balance between risk and return potential.

Benefits of Investing in Bonds

Bonds are a great way to diversify your investment portfolio. They can help to spread out your risk while providing more predictable returns than stocks. Additionally, bonds are generally less volatile than stocks, making them attractive to many investors who are looking for steady income and a hedge against market volatility. Bonds also offer the benefit of liquidity, meaning that they can be easily sold and converted into cash. Furthermore, bonds can provide a steady stream of income, as the investor will receive regular payments of interest over the life of the bond.

Risks of Investing in Bonds

Bonds do come with some risks. For instance, the value of a bond can fluctuate due to changes in interest rates or other factors. Additionally, if the issuer of the bond defaults on their payments, then you may not receive all of your money back. Furthermore, bonds are subject to inflation risk, meaning that the money you get back may be worth less than what you originally invested. It’s important to keep these risks in mind when considering investing in bonds.

How to Invest in Bonds

Investing in bonds is fairly straightforward. For starters, you’ll need to decide which type of bond you want to invest in. Once you’ve made your decision, you can purchase the bonds directly through a broker or online brokerage account. You can also opt to purchase mutual funds or exchange-traded funds (ETFs) that specialize in bond investing.

Finally, it’s important to remember that the price of a bond can go up or down over time, and owning bonds is not risk-free. As with any investment, there is no guarantee of returns and you may lose money if you buy bonds at an inflated rate or sell them at a lower rate than you paid. Therefore, it’s important to do your research and consult with a financial advisor before investing in bonds.

In conclusion, bonds are an important part of a diversified investment portfolio. They offer the potential for both income and capital appreciation while helping to spread out your risk. Bonds come in different forms including government bonds, corporate bonds and municipal bonds. When investing in bonds, it’s important to understand the risks involved and do your research before purchasing. Investing in bonds can provide a steady stream of income, but also carry the risk of default or inflation. With careful research and understanding, bonds can be a great addition to your portfolio.

Happy investing!

An Introduction to Stocks and How To Make Smart Investing Decisions

Mon, 02 Jan 2023 08:23:48 GMT

If you're like a lot of people, the idea of investing in stocks can seem daunting. After all, the stock market is rife with stories of people who have lost big and even bigger gains made by those lucky enough to get in on the ground floor. But there's no need to be intimidated. With a little bit of knowledge about how stocks work, you can make smart decisions about your investments and start building wealth for your future.

What Is a Stock?

Simply put, stocks are shares of ownership in a company. When you purchase stock, you are buying a part of that company—which means that when the company makes money, so do you! Conversely, if the company loses money, so will your investment. It's important to understand this dynamic before making any investing decisions.

How Do Stocks Work?

Stocks can be used for anything from long-term investments (such as retirement savings) to short-term speculation (such as day trading). Depending on your goals and risk tolerance levels, different types of investments may be right for you; it's always best to do research and speak with an accredited financial advisor prior to committing your funds. However, one thing is certain: stocks have created some of the greatest wealth in this country and have been integral in creating economic growth over time.

What Are Stocks Used For?

Are There Different Types Of Stocks?

Common Stock – Common stock is the most common type of stock and is usually what people mean when they refer to “stocks” in general. This type of stock gives shareholders voting rights on certain issues, as well as proportional ownership in the company—the more common stock you own, the greater percentage of ownership you have in the company. It also entitles shareholders to dividends if the board approves them (which don’t always happen).

Preferred Stock – Preferred stock differs from common stock in that it does not give shareholders voting rights on certain issues, however they are entitled to receive dividends before common shareholders if approved by the board. Additionally, preferred shareholders are typically paid out first if a company goes bankrupt or liquidates.

Blue Chip Stocks – Blue chip stocks are stocks issued by large, established companies with strong financial track records. These companies tend to be leaders in their respective industries and have proven themselves over time with consistent growth in profits and revenues. Investing in blue chip stocks carries less risk than investing in smaller companies since these larger companies are more likely to survive tough economic times without suffering major losses.

Penny Stocks – Penny stocks which are low-priced investments that trade for less than $5 per share. While these may sound like a good deal at first glance, penny stocks come with a wide range of risks that far outweigh any potential rewards. Think about it this way: penny stocks are comparable to investing in a startup business and about 90% of startups fail within the first year.

Exchange Traded Funds (ETF) – ETFs are baskets of securities that track an index like S&P 500 or Dow Jones Industrial Average, and allow investors to diversify their investments across many stocks with just one purchase; they are traded like ordinary shares on an exchange. They also offer lower expenses than mutual funds since there is no need for a manager and therefore do not require any management fees since ETFs trade passively and don't require any active management decisions.

Mutual Funds – Mutual fund are a type of investment in which a group of investors pool their money together to purchase stocks, bonds and other securities. These investments are managed by professional money managers who use the fund’s assets to achieve a predetermined investment goal. Mutual funds are one of the most popular types of investments for individuals because they offer exposure to different types of investments (stocks, bonds, etc.) without requiring the investor to actually buy and manage each individual security

What Does This Mean To You?

In conclusion, while stocks may seem intimidating at first glance, they don't need to be! With just a bit of knowledge about how they work and what they are used for, anyone can make smart investing decisions that will help them reach their financial goals now and into the future. So don’t be scared off by all the noise - take some time today to learn more about how stocks work so that you can start building wealth tomorrow!

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Questions You Were Afraid to Ask: What Differentiates Mutual Funds, Exchange-Traded Funds, and Hedge Funds?

Questions You Were Afraid to Ask #5:

What Differentiates Mutual Funds, Exchange-Traded Funds, and Hedge Funds?

Mutual Funds

Exchange-Traded Funds (ETFs)

Hedge Funds

The Bottom Line

Your Questions Are Welcome

Questions You Were Afraid to Ask: What's the Difference Between Passively Managed and Actively Managed Funds?

Questions You Were Afraid to Ask #4:

What’s the Difference Between Passively Managed and Actively Managed Funds?

Actively Managed Funds

Considerations for Active Funds:

Potential Risks of Active Funds:

Passively Managed Funds

Considerations for Passive Funds:

Potential Risks of Passive Funds:

Which One is Right for You?

What’s Next?

Your Questions Are Welcome

Markets React to New Tariffs

But Markets Don't Like Surprises

So What Should YOU Do?

Celebrate Financial Literacy Month: Why Financial Education Matters

﻿ What Financial Literacy Can Do for You

Key Topics to Strengthen Your Financial Know-How

﻿ Take Charge of Your Financial Future

2025 Q1 Market Recap

Volatility Was the Only Constant

The Big Three: AI, Tariffs, and Inflation

The Big Three: AI, Tariffs, and Inflation

Volatility Isn’t a Bug — It’s a Feature

Looking Ahead

Questions You Were Afraid to Ask: What’s Better, Stocks or Bonds?

Questions You Were Afraid to Ask #3: What's Better, Stocks or Bonds?

How Stocks Work

How Bonds Work

Stocks vs. Bonds: Which is Better?

The Power of Diversification

What's Next?

Your Questions Are Welcome

Why a Down Market is an Investor's Best Friend

Why a Down Market is an Investor's Best Friend

The Hidden Opportunity in a Down Market

Your Investments are Built for the Long Haul

Now is the Time to Act

Tariff Questions You Should Be Asking: A Guide for Investors

Understanding the Tariff Impact

The Real Risk of Tariffs

Why Fear Can Lead to Costly Mistakes

A Better Approach: Think Like a Gardener

The Questions You Should Be Asking

Final Thoughts

Questions You Were Afraid to Ask: Why is the price of the Dow so much higher than the S&P 500?

Questions You Were Afraid to Ask #2: Why is the Price of the Dow So Much Higher than the S&P 500?

How the Dow Jones is Calculated

How the S&P 500 is Calculated

Weighted vs. Unweighted Indices

Key Takeaways

Why This Matters

Your Questions Are Welcome

Questions You Were Afraid to Ask: What’s the Difference Between the Dow, S&P 500 and NASDAQ?

Questions You Were Afraid to Ask #1: What's the Difference Between the Dow, S&P 500 and NASDAQ?

Understanding Indexes

The Dow Jones Industrial Average (The Dow)

The S&P 500

The NASDAQ Composite

Other Important Indexes

Why Do Index Values Differ So Much?

Your Questions Are Welcome

2024 Election Aftermath

Trump's Tax Policy

Tariffs

Oil

Two Caveats

SOURCES

Credit Freeze

What is a credit freeze?

Unsinkable

What Financial Literacy Can Do for You

Take Charge of Your Financial Future

Questions You Were Afraid to Ask #3:
What's Better, Stocks or Bonds?

Questions You Were Afraid to Ask #2:
Why is the Price of the Dow So Much Higher than the S&P 500?

Questions You Were Afraid to Ask #1:
What's the Difference Between the Dow, S&P 500 and NASDAQ?