Blog Archives - PFwise.com

What To Do If No Money for Mortgage or Rent?

3/31/2020

Q. What resources are out there if no money for mortgage or rent payment?

A. Assistance is out there, here is what you need to do -

Mortgage payment help
Contact your loan servicer right away if you think you can't make payment. Fannie Mae and Freddie Mac have already said they are suspending foreclosures on mortgages they guarantee for 60 days.

What exactly can you expect?

For loans held by banks, go to aba.com and search "Industry responds to the coronavirus" to see what relief institutions are offering.
For credit unions' responses, go to americascreditunions.org

Rent payment help
Fannie Mae and Freddie Mac will offer multifamily property owners loan deferrals if they promise not to evict tenants.

Although various jurisdictions have temporarily halted evictions, you should call your landlord to explore your options. Keep in mind even if your landlord is able to get a forbearance for their mortgage, you will likely have to catch up on the missed rent payments later.

What Does Bear Market Look Like Historically?

3/30/2020

Like it or not, and most people don't, bear markets are a regular part of investing. Bear markets are commonly defined as a decline of at least 20% from the market's high point (peak) to the low during the selloff. Using the S&P 500 as representative of the market, this has happened 16 times since 1926, an average of about once every 6 years. When a bear market does happen it tends to be fairly dramatic, with an average loss of almost 40%. And it tends to take a while to recover those losses—the average duration is 22 months.

The good news is that in every case markets have come back, and often have made sizable gains in the months immediately following the downturn. The past is no guarantee of future results, but historically even the worst markets have been temporary dips in a general march higher for stocks (see the table below which depicts bear market periods and subsequent returns). Of course, there was significant variability of outcomes around these averages.

Panic Selling Leads to More Losses

3/29/2020

Vanguard created a chart to show what happened to 3 investors who found themselves at the bottom of one of the worst bear markets in history: the Great Recession.

From 2008 to 2009, even balanced portfolios lost almost 30% of value. It was, to say the least, a stressful time to have money in the market.

Each of the investors chose a different course of action:

Investor 1, represented by the blue line in the chart below, decided to stick with her plan. She started with a 50/50 allocation, and didn’t sell out of the equities portion.
Investor 2 couldn’t stand the pain of loss anymore. Although he initially had the same 50/50 portfolio allocation, he decided to sell all his equities to buy into bonds. He sold all of his stocks to buy bonds, feeling this was “safer.”
Investor 3 felt she had to protect the money she had left, and she sold everything to move to cash.

So how did the investors end up?

Investor 1 — who stayed put and stuck to her plan — regained all the lost value in her portfolio by mid 2010. By 2017, her portfolio balance was almost double the other two investors who panicked and couldn’t stick with their investment strategy.
It took Investor 2 almost 8 years just to regain the lost value in his portfolio. And he’s far behind Investor 1, who stayed invested according to her plan.
And Investor 3, who moved to cash to protect her money? Not only did she never make her money back, but she’s also the only one of the investors in this scenario who ended up with a realized loss.

What this shows us is that the investors who panicked and sold equities at the bottom of the market would have taken years to break even… or they would have realized their losses and locked them in, to wind up with far less money than they would have had they done nothing and simply stayed the course.

Would life insurer go under if coronavirus deaths mount in the U.S.?

3/28/2020

Q. Do I have to worry that my life insurer will go under if coronavirus deaths mount in the U.S.?

A. Insolvencies are unlikely.

First, the question assumes that those dying own life insurance. That isn't a given.

In the U.S., sales of individual life-insurance policies fell 40% from the 1980s until flattening in recent years, according to research firm Limra.

Many Americans rely on life insurance provided by their employers. Many of those dying from the coronavirus are 70 or older, so they wouldn't likely be covered by these policies.

What is more, U.S. life insurers' bottom lines are protected at least somewhat in that they have lines of business that benefit when people die prematurely. Many are big sellers of annuities and have blocks of long-term-care policies on their books. If deaths rise, insurers would get out from under obligations on these contracts.

Having said the above, there is no question that life insurers face hard times if Treasury bond yields stay at this ultralow level. Insurers invest customers' premiums heavily in corporate bonds, which are priced in relationship to Treasury bonds.

4 Actions Investors Should Take Now

3/27/2020

1. Rebalance
I don’t know where the bottom is but I’m 100% certain that stocks are a much better buy today than they were on Feb. 19. Rebalancing during the dot-com and real estate financial bubbles worked out pretty well. Buying stocks on sale usually works in the long-run and you may need to do it several times since we don’t know when the bottom will come.

2. Tax-loss harvest
By selling losses, you can build up a tax-loss carryforward for use in future years, not to mention the $3,000 that couples can recognize each year. Bad times don’t last forever and markets will move up again. That tax-loss carryforward you build now will be very valuable when you have to sell stocks at gains later on. If stocks/funds haven’t recovered in the 31-day waiting period to avoid a wash sale, you can then go back into that original stocks/funds.

3. Get rid of the dogs
Dogs in the portfolio, of course. That could be a fund that is expensive and/or passing through some capital gains. And, by the way, those funds may pass though gains even in a bear market like this, potentially sharpening investment pain. In addition, dogs could be individual stocks provide uncompensated risk. But if the gains evaporate or become smaller, minimal taxes would need to be paid. Even if there are still gains in these dogs, the tax-loss harvesting previously mentioned may provide losses to offset these gains.

4. Reframe what the stock market is
Vanguard founder Jack Bogle famously said, “Investing is about enjoying the returns earned by businesses. And the stock market is nothing but a giant distraction in that quest to acquire returns that business earns.” Are you buying a stock because you believe the company's business or due to other reasons?

7 Questions to Boost Your Life Insurance IQ

3/26/2020

7 in 10 Americans recognize that life insurance will protect their ability to live a long, financially secure life. Yet more than half either do not have life insurance or don’t know if they do--leaving themselves and their families vulnerable to financial risks.

If you like, you can use the following 7 questions from AIG to test your life insurance IQ. You will be surprised how many Americans have the answers to these basic questions wrong!

Go to here to start.

The Swiss Army Knife Approach to Retirement

3/25/2020

If you’re like most people, you want financial security. This means having protection from future uncertainty and the flexibility to make changes to your financial plan. And because you’re likely to spend 20 or more years in retirement, you probably want a smart way to potentially increase your savings to help pay for health-related expenses not paid for by Medicare.

Sagicor's WealthCare can help you feel confident about your future
By adding a WealthCare policy to your retirement portfolio, you’ll have the advantages and financial flexibility you’re looking for in one efficient solution. So, you can focus on enjoying your retirement because you have the following flexibility and benefits -

Why Life Insurance Trusts Are Better For Multi-generational Planning

3/24/2020

Q. Why life insurance trusts are better for multi-generational planning?

A. This is because the new Secure Act!

Consider this scenario
Someone is leaving a $1 million IRA to a conduit IRA trust for his grandchildren.

Under the old stretch IRA rules, if the trust qualified as a see-through trust, RMDs could be based on the age of the oldest grandchildren, say, 19-year old. RMDs would be paid to the trust and from the trust right through to the grandchildren over 64 years (the life expectancy of a 19-year old), leaving the bulk of the inherited IRA funds protected in trust for decades.

Meanwhile, the grandchildren receive only about 1.6% to 2% of the account for the first 14 years, with the percentage increasing very slightly each year. That percentage of IRA funds being released to the grandchildren would stay under 10% for 50 years. Those smaller RMDs would keep tax bills lower for many years and keep balance of the nondistributed trust funds protected.

Why it won't work anymore
But not anymore! Under the new Secure Act, if the plan stays as is, all the funds will be released to the grandchildren and taxed by the end of the 10th year after death. Even if a discretionary trust was used to keep more funds protected, the entire inherited IRA balance would still have to be paid out to the trust by the end of 10 years - and taxed at trust rates for any funds retained in the trust for continued protection.

That's why the person with $1 million IRA could instead withdraw the IRA funds over time using today's low tax rates and use them to buy a life insurance policy. Due to the life insurance leverage, the payout after death can far exceed the $1 million balance in the IRA, depending on the person's health and age.

The caveat?
In order for the new life insurance strategy works, the person has to qualify for life insurance.

3 Myths About Annuities

3/23/2020

MYTH 1: Consumers hate annuities
Truth: Although some people may not fully know the benefits of annuities, or hold outdated, incorrect opinions, a growing number are becoming educated and are choosing to add fixed indexed annuities (FIAs) to their retirement plans. In fact, recent annuity sales are shattering previous records. According to the LIMRA Secure Retirement Institute, FIA sales were $20 billion in the second quarter of 2019, 14 percent higher than prior year results. Indexed annuity sales are expected to grow by double digits to about $96 billion by the end of 2023, a 38 percent gain over 2018. Those who understand the benefits FIAs can provide — income protection and stability with little or no maintenance — are not surprised.

MYTH 2: Annuities are not an accumulation vehicle
Truth: With the innovation of uncapped crediting strategies, this is no longer true. Consumers can take advantage of a positive index performance without worrying about another 2008. An indexed annuity with a decent participation rate will help significantly reduce clients’ risk, but also give holders the growth they need. In fact, according to a study on traditional asset allocation conducted by Roger Ibbotson and Zebra Capital Management, FIAs help control financial market risk, mitigate longevity risk, and will likely outperform bonds over time.

MYTH 3: Annuities are unnecessary with proper asset allocation
Truth: The Ibbotson and Zebra Capital Management study also showed that “a major advantage of an FIA is the ability of the insurance provider to ‘transform’ equity returns into a more ‘tailored’ return/risk profile (eliminating downside risk and providing an opportunity for interest earnings based upon a portion of equity returns). This downside protection is very powerful and attractive to many individuals planning for retirement. Additionally, with today’s low interest rate environment coupled with experts’ modest expectations for bond returns in the near-term, FIAs should be considered.

It Is Time To Hunker Down

3/22/2020

The following is a piece from Fidelity's director of global macro, Jurrien Timmer, from Fidelity's Global Asset Allocation Division, specializing in global macro strategy and active asset allocation.

Is the bear market predicting recession?
Not all bear markets have recessions. When they do, the bear market typically starts two months before a recession begins and typically ends four months before the recession ends. That makes sense, given that the market is always trying to discount the future. Something to keep in mind as we will start reading more and more about a recession in the coming weeks.

In my view, the key is to differentiate between a technical recession (i.e., a few quarters of negative growth followed by a return to trend growth), an inventory cycle (the classic recession scenario in which tight monetary policy driven by inflation triggers a recession just as companies spent too much on capital equipment), and a financial crisis (the above plus large financial imbalances that come unglued during the downturn).

Given that COVID-19 is presumably a temporary demand shock, I am assuming that if we get a recession it will be of the technical variety. But it will be important to watch the jobless claims data to make sure that the economy doesn't enter a negative feedback loop of layoffs begetting more layoffs. A robust fiscal response combined with ample liquidity from the Fed will hopefully be able to prevent this from happening.

It's important to remember that every recession is different, as this one will be, should it happen. And not every recession is a financial crisis. The global financial crisis in 2008 was a perfect storm with financial contagion spreading to all corners of the market. The current episode certainly has some of the contagion aspects now that an oil shock has been added to the mix, but the overall degree of leverage in the system seems far less today than 2008. Households are clean, the banks are clean, and most of the leverage in the corporate sector seems to be on the financial engineering side (for acquisitions and share repurchases) as opposed to old-fashioned capital expenditures.

Another important angle to consider when thinking about recessions is that the response function of the Fed and the trend in interest rates and inflation is also important. For example, the 1974 recession produced a 48% bear market in part because the Fed kept on raising rates throughout the entirety of that bear market. Only when it stopped in October 1974 was the market able to recover. It's a far cry from today's situation.

The power of diversification
For most long-term investors who have a properly diversified portfolio, the market storm has been scary but manageable, at least so far. A 60/40 stock/bond portfolio since the valuation peak in January 2018 is still up 5%, even though the drawdown in the S&P 500 from the February high is 27%. This is why it's important to (a) have an all-weather portfolio that is appropriate for an investor's financial situation, risk tolerance, and liquidity horizon (i.e., when the investor needs to draw from it), and (b) sticking with that plan through thick and thin, and (c), rebalance from time to time. At some point, that last one should be the next step for many investors.

For now, as we wait for COVID-19 to peak, for earnings season to kick in, for the policy response to take shape, for the contagion across asset classes to abate, and for the margin calls to be fulfilled, I think it's safe to say that we will see plenty more volatility across all markets. But technically, the market is very oversold now, and hopefully, we reached levels last week from which we can start building a base.

Typically, the market will form a momentum low, followed by many weeks or even months of base building, followed by a retest of sorts, and then finally a new bull market. So, even if last week was the low (unknowable for now), it will take time for the market to regain its health.

So, in the days ahead, stay safe. If you have a plan that's right for you, stick with it. Selling now means locking in losses. If you don't have a plan or are wondering if yours is still right for you, talk to a financial professional. In life and finances, now is a good time to hunker down.

5 Essential Lessons Investors Should Learn From Robo-Analysts And Robo-Advisors

3/21/2020

The article below is from Stockcharts.com, its analysis of 5 lessons investors could learn from robo-advisors is excellent -

Robots beat us at chess and are driving our cars now too. FinTech is invading Wall Street and Main Street too. To say that robo-analysts and robo-advisors (think Betterment.com) are stock market disruptors is an understatement on so many levels. Even so, we individual investors still have advantages, but what can we learn from the robo-investing universe?

Before we dig into the seismic insights from the Robo Universe, let's first review ourselves — individual investors. Can we become better by understanding what they're better at? The fact is that investing is messy. Why? Because it involves your money and your emotions. You tell yourself that you'll be disciplined, rational and analytic. But because your emotions are a big part of the equation and because human nature is what it is, you suddenly find yourself slipping between being logically disciplined and irrationally impulsive— and back again.

Herein lies the corrosion that seeps into your portfolio management. The thin threshold between what you know you should do versus what you find yourself actually doing. The constant frustration of how quickly you can abandon the rational for the irrational. In the pursuit of your own sensible equilibrium, you consent to pursue the appeals of your emotions and you fail to follow your self-imposed discipline. Successful investing requires in large part building a firewall between these two spheres. Something at which the Robo Universe excels.

Professional money managers have protections specifically structured into their operational arenas. Follow the system or get fired. Individual investors must implement their own firewall and protections which can take years to achieve. Some never do. With all that in mind, let's explore the powerful lessons we can take away from the Robo Universe.

Lesson 1
A recent Indiana University study analyzed over 75,000 robo-analyst reports, and the insights were jaw-dropping. Whereas traditional human analysts issued buys on 47% of the stocks analyzed, robots were more discriminating and issued only 30% buys. Robots were clearly more selective, and it also turns out they had a better hit ratio. This may sound like a dispiriting conclusion, but don't let it be.

Let's consider the sports world. All professional teams these days assemble their rosters using statistical techniques and algorithmic tools. The increased demands of competition have forced teams to raise their level of analysis. Investing is no different. We individual investors must raise our level of analysis too. For me, that means doing a better job of combining fundamentals and technicals. An appropriate example is the new equity summary page on stockcharts.com that has earnings and revenue data for fundamentals. As to technicals, I myself watch relative strength, volume and money flow most closely. The two arenas together — fundamentals and technicals — are what I call "Rational Analysis". It's been my experience that with these tools and scanning engines, we individual investors can outperform the robots.

Lesson 2
The same Indiana University study also looked at the sell side. Where human analysts issued sell recommendations on 6% of stocks, the robots issued sell recommendations on 25% of the same stocks. Intuitively, this is how it should be. Robots are free of emotional baggage. They are disciplined and consistent —thereby free of bias.

The lesson for individual investors is to be "more like a robot" when it comes to selling. A simple rule is to know your "uncle point" (i.e. your selling price) before you enter the trade. Sell on the facts (charts), not on the fundamentals, the projections or the talking heads' opinions. The charts will never lie to you. They are simply a picture of what buyers and sellers are willing to pay.

Focus on what is happening, not why you think something may or may not happen. The lesson for us humans is to recognize that robots aren't susceptible to paralysis from analysis in the way that we might be.

Lesson 3
Robots don't concern themselves with what their peers think. They don't worry about "sexy" equities, personal relationships or hurting someone's feelings — be they clients or corporate executives. Not so easy if you manage other people's money or as an individual investor who might have to explain their positions to family members or cocktail party friends. Aspiring to be a human being with robotic tendencies is not altogether a bad objective.

Lesson 4
Robots can't do personally appropriate estate plans or sophisticated individualized tax planning. This part of the investing arena is and will always be more a nuanced art than just the science of methodology. Technology is fine for data processing, communications and automation, but it has drawbacks in many areas. Don't be fooled into believing that it's better than humans in all situations. If that were true, some robotic algorithm would own the stock market.

Lesson 5
Finally, robots have no patience or intuition. We individual investors are capable of both. We learn from our mistakes, and we can adjust our future behavior based on nuanced exceptions and dynamic conditions. The best most personally appropriate investing solution may still require human judgement, patience and intuition. Investing (especially our own portfolios) is still more art than science.

Combine Earnings Scenarios and Valuation Scenarios to Predict Market Movements

3/20/2020

Fidelity.com has a great article that discusses market volatility from earnings scenarios and valuation scenarios perspectives, below are some of its highlights -

3 Earnings Scenarios

Our starting point is 2019 earnings per share (EPS) of $163 and 3,379 for the S&P 500 Index (SPX), the ending point is the high in January 2020.

The first scenario (U) assumes a modest 5% hit to EPS over the coming 2 quarters, followed by a trend-line growth rate of 8% (the expected growth rate prior to COVID-19). This scenario would see EPS bottom at $156 in Q2 and then rebound to $161 in 2020 and $172 in 2021—a recovery delayed but not canceled.
The second scenario (V) is a one-time hit of 10% over 2 quarters (down to $147 in Q2) followed by a V-shaped recovery to $159 in 2020 and $186 in 2021. Think of it as the earthquake scenario where demand gets hit hard and then comes roaring back.
The third scenario (L) is a one-time hit of 10% over 2 quarters followed by the same moderate trend-like 8% growth rate that was expected. In this scenario, EPS falls to $147 as before, but only rebounds to $152 by the end of 2020 and $163 in 2021 (so, it ends up where it is now).

2 Valuation Scenarios

Best-case scenarios
From here it becomes a matter of applying the appropriate valuation multiple. Let's optimistically assume for now that the market should be valued at 19x trailing earnings, below the recent peak of 20.7x but in line with where interest rates and inflation are.

In the U-shaped scenario, the S&P 500 should decline 13% from the highs, to 2,956. Compared to the low of 2,857 that we saw 2 Fridays ago, the market has already corrected more than it needed to. That suggests that the bottom is in place and the market can build its base before it moves back up (to 3,058 in 2020 and 3,271 in 2021).

In the V-scenario, the S&P 500 would fall to 2,795 from the highs for a total decline of 17% from the highs. That means that the S&P 500 has corrected almost as much as it should have (to the low of 2,857) and has upside to 3,023 in 2020 and 3,537 in 2021.

In the L-scenario, we would also see a decline of 17% from the peak, followed by a slower rebound to 2,891 in 2020 and 3,093 in 2021.

Worse-case scenarios
Now let's take a lower multiple of say 17x, and see where we come out. At a 17x multiple and using the above 3 earnings scenarios, we would get the double-whammy of both an EPS decline and a valuation haircut.

In the U-scenario, we get to a bottom of 2,645 for a decline of 22% from the high (crossing slightly into bear market range), and in the L-scenario, we would get a decline to 2,501. That would be a 26% decline and would put us firmly in bear market territory.

From there we would recover slowly or swiftly, based on the earnings recovery and more importantly the magnitude of multiple-expansion off the lows.

A Common Tax Error Made By Freelancers

3/19/2020

What's the most common tax error made by freelancers?

Did not pay quarterly estimated taxes!

With more freelancers than ever before, this also means more taxpayers will be required to pay quarterly estimated taxes for the tax year. Unfortunately, some people are not aware they have to do this, or don’t know how and when to make their payments.

What are the consequences?
A failure to pay quarterly estimated taxes does a couple of things.

It leaves the taxpayer with a massive tax bill come April.
It can trigger late fees and interest on top of the base tax figure. For high earners, this could amount to thousands of dollars in additional taxes.

The IRS has a pretty good resource on self-employment and how to pay taxes. It explains who is required to pay quarterly taxes, how to make the payments, when to submit the payments, and how these payments impact the annual return. Freelancers and self-employed professionals should read it to ensure they don’t run into problems come April.

3 Strategies for Long Term Investors to Deal With Market Volatility - Part III

3/18/2020

We introduced strategies 1 and 2 here, now the third strategy for long term investors to deal with market volatility -

Strategy 3. Use Tactical Short Term Shorts

Tactical shorts such as Direxion Daily S&P 500 Bear 1X Shares ETF (SPDN) can reorient a portfolio’s risk exposures quickly without unwinding existing long positions. Such shorts seek investment returns, before fees and expenses, of 100% or more of the inverse of the performance of the S&P 500 Index or other market indexes for a single day.

For many investors, a more tactical short-term hedge is an attractive tool when facing a more volatile market environment. Investors with long-term conviction in their equity holdings but equally strong short-term concerns can tactically add short exposure in order to gain when markets decline.

It is important to note that such funds should not be expected to provide 100% of the inverse of the benchmark’s cumulative returns for periods longer than one day. And investors should understand the risks associated with the use of shorting and are willing to monitor their portfolios frequently.

3 Strategies for Long Term Investors to Deal With Market Volatility - Part II

3/17/2020

In last blogpost, we introduced strategy 1 to deal with market volatility, now strategy 2 -

Strategy 2. Invest in Low Beta Defensive Stocks
If you have a bearish view about near to medium term but still want to maintain a positive exposure to the stock market, you can add defensive stocks to your portfolio. Such stocks could be in sectors that are inherently less sensitive to macro shocks. When the economic outlook deteriorates, defensive stocks are likely to outperform cyclical equities based on historical precedent.
What are defensive stocks? They include utilities, consumer staples, and healthcare stocks that tend to exhibit significantly lower historical betas relative to the broader S&P 500. Historical betas (measure of a stock’s volatility in relation to the overall market) for all sectors shift over time, but more cyclical ones tend to be greater than 1. Overweighting defensive sectors while underweighting cyclicals helps to retain the upside potential of a rising market while mitigating downside risk.

We will discuss strategy 3 in next blogpost.

3 Strategies for Long Term Investors to Deal With Market Volatility - Part I

3/16/2020

Q. I am a long term investor, is there anything I could do to deal with market volatility?

A. For long-term investors, the most damaging potential threat of a major equity market shock is not the volatility itself, but the temptation to abandon the long term strategy out of fear and sell assets at the worst possible time.While volatility gives rise to anxiety, it also creates opportunity. Below are 3 strategies that long-term investors can use to prepare their portfolios for volatility, depending on the investor’s conviction about near-term conditions and longer-term opportunities.

Strategy 1. Invest in Assets with Low Correlations with Equity Markets
Such assets include long term U.S. Treasuries, Gold Bullion, and Utility stocks. Combined, these assets had an average correlation of zero over the past 8 years.

Such strategy is probably more acceptable for most investors than the hedging strategy, because a hedging strategy is designed to protect portfolios rather than keeping pace with the market. While it's certainly better to have an insurance policy in place before your house is on fire, investors may find their behavioral biases taking over if hedges are constantly in the red as markets continue to gain.

We will introduce strategy 2 in next blogpost.

How to Write a Perfect Cover Letter for Life Insurance Application

3/15/2020

A cover letter is a critical part of the underwriting process, it presents a more comprehensive and accurate portrait of the applicant than the application allows. A well-written letter that includes background on a client’s risk factors can help move the application through underwriting. A poorly written cover letter – or none at all – could result in unwanted delays or even a quick decline.

To help ensure your cover letter does its intended job, start by reiterating the type of policy you would like and the face amount and explaining the purpose of the coverage – personal or business – and providing any additional pertinent details, such as:

Whether the personal policy will be tied into loans or used for income replacement or estate coverage.
For business policies, the applicant’s position and role within the company. Explain the applicant’s importance to the company and any unique talent that would be difficult to replace. If a buy-sell agreement exists, detail how it will be tied into the company’s value. For loan coverage, provide details on the loan.
Noting, with full details, any additional companies where the applicant has submitted applications for insurance.

Three Key Elements of Cover Letter

Financial Details

Explain how you and your client arrived at the desired face amount.
Provide details around any bankruptcies, poor credit or other financial issues.
Explain any unusual situations that may merit special consideration.

Medical History

Provide a summary of the applicant's relevant medical history.
For any significant conditions your client has or had, include details on current and past treatments, medications and any outcomes.
Note which rating class was quoted.

Lifestyle

Share any relevant information regarding lifestyle risks, such as hobbies, exercise routines or travel preferences.
If relevant, note any history of driving violations.

5 Ways the SECURE Act Could Harm Retirees

3/14/2020

1. Less Wealth Passed to Heirs (and More Taxes Being Paid)
In the past, most beneficiaries could stretch out the RMDs of inherited IRAs and 401(k)s over their own life expectancy. This allowed inherited IRAs and 401(k)s to grow tax advantaged for heirs for many years. Additionally, RMDs were relatively small, since they were based off of their longer life expectancy.

Now, these non-spouse beneficiaries must cash out the entire IRA within 10 years. Because the withdrawals will be larger, they will likely force beneficiaries to pay higher tax rates on taxable distributions, and because the time period is limited, the opportunity for tax-deferred growth is also being shortened.

2. Confusion Leading to Possible Missed RMDs (and Penalties)

If you were born before July 1, 1948, you were already taking RMDs, and that continues unchanged going forward.
If you were born on July 1, 1948, through June 30, 1949, you turned 70.5 in 2019. Your first RMD is due by April 1, 2020. Your second one is due by Dec. 31, 2020. And then you continue to take RMDs by the end of each year going forward.
If you were born on July 1, 1949, or later, your first RMD is due by April 1 of the year after which you turn 72. Your second would be due by Dec. 31 of that same year, and then by Dec. 31 of each year thereafter.

3. Conduit or Pass-Through Trust RMD Failure (and a Big Tax Bill If Not Corrected)
In the past, many IRA and 401(k) owners have been encouraged to use conduit or “pass-through” trusts as beneficiaries of their retirement accounts to help qualify for the “stretch” provisions and provide creditor protections for their heirs. However, many of these trusts only gave access to the RMDs each year to the beneficiary of the trust.

With the new 10-year distribution period for many beneficiaries, there is actually no RMD for year one after the year of death of the account owner. In fact, the way the SECURE Act was drafted, the only year that has an RMD is year 10, as the act states all money must be distributed by the end of year 10 after the year of death of the IRA owner.

This means the trust provisions that were drafted prior to the SECURE Act could lock up money for heirs for up to a decade and then cause a full taxable distribution in one tax year for the full retirement account. This has potential for disaster, so trusts need to be reviewed as a consequence of the SECURE Act.

4. More Money Leaking Out of Retirement Accounts
A positive provision was added to the SECURE Act that allows those under the age of 59.5 to take out up to $5,000 from their IRA or 401(k) to cover costs within a year associated with childbirth or adoption and avoid the 10% penalty tax for early withdrawals. If both parents have their own retirement accounts, they could each withdraw $5,000, for a total of $10,000, without a penalty. Of course, they’d have to pay taxes on the money, though.

One issue with these types of additional access points, in regards to retirement money, is that they can encourage leakage — money leaving retirement plans and being used for other needs, instead of retirement.

5. Improper Annuity Ownership in Retirement Plans
A new rule in the SECURE Act lessened the standard of care and review that a retirement plan sponsor must use to vet insurance products going into the plan. As such, there will be a large push to add more annuities into 401(k)s. The reality is, more Americans need access to lifetime income options inside of their retirement plans. Because investment advice and help with financial planning in a 401(k) can be hard to receive, many investors are on their own when picking investment allocations within their employer retirement plans.

By adding more annuities into retirement plans, younger investors who do not yet need to be invested in an annuity might end up with large percentages of their wealth in this strategy. The reality is that annuities can add value, but they will not be the right investment option for all participants … and without quality guidance, education and advice, individuals could have improper ownership and investments in these assets.

IUL Bonus Multiplier - Be Aware of the Risks

3/13/2020

Increased upside seems attractive, but buyers should be aware of the additional potential risks and complexity inherent to IUL Bonus Multipliers.

Here is a video from AIG that explains such risks.

7 Reasons to Consider Index Annuities

3/12/2020

If you are concerned about low interest rate and long life expectancy, index annuity could be a solution, see 7 reasons cited by AIG for its Power Index 7 product below -

Please contact us if you are interested in annuity products.

9 Actions to Take When You Are 12 Months Before Retirement

3/11/2020

1. Review your retirement assets and expenses
You need to develop a truly comprehensive budget to be sure you understand what fixed expenses you are going to face in retirement, what your assets are, and how inflation may impact that budget.

Compiling such data should take a minimum of six months to give spending patterns time to emerge and to ensure any bills that get paid quarterly get factored into the budget. This will give you a chance to see trends, like how much you spend on dinners and vacations per year.

As you budget plan for the long haul, consider, too, which bills may disappear over the next five years, including perhaps your car loan or monthly mortgage. But also project for healthcare expenses, which tend to increase as you age.

Indeed, many retirees underestimate the cost of future medical expenses. The latest figures from Fidelity Benefits Consulting estimate that a 65-year old retiring today with traditional Medicare insurance coverage will need an average of $280,000 (in today’s dollars) to cover medical expenses throughout retirement, not including any costs associated with assisted living or long-term care.

2. Analyze your income stream
Once you’ve calculated your future expenses, determine how much money you will have coming in from guaranteed sources of income, such as Social Security and any pensions, annuities, or trusts.

Find out, too, whether those income streams include cost of living increases. If not, your future purchasing power may be far less than you bargained for.

The difference between your expenses and guaranteed income is the amount of money you will need to generate from your personal savings, IRAs, 401(k)s, and other investments to make ends meet.

A 4 percent withdrawal rate, adjusted annually for inflation, is often advised, as it may allow you to leave your principal untouched and minimize the likelihood you will deplete your savings, but rules of thumb don’t always apply. The ideal withdrawal rate for you will depend on your living expenses, the amount you have saved, and your portfolio’s annual rate of return.

If you can’t generate enough from your personal savings and investments to cover your bills, you face some tough decisions. You can potentially downsize to reduce your living expenses, assume more risk to chase higher investment returns, or simply work a few years longer to supplement your savings.

Remember, if you are age 50 or older by the end of the calendar year, you can potentially supercharge your savings by making additional catch-up contributions to your 401(k), 457 or 403(b) retirement plan.

Depending on the circumstances, some of these calculations get complicated. Some people opt to consult a financial professional to help determine an appropriate savings rate and withdrawal rate.

3. Stress-test your retirement budget
Before you bid farewell to the boss, it is also important to give your budget a test drive.

Try living off your projected income for a period of several months to make sure it meets your needs. Don’t forget that in the first decade of retirement, you are likely to spend more money than you did during your working years as free time allows for more travel, dining out, and spoiling the grandkids.

Your entertainment expenses may drop during the last decade of retirement, but your healthcare costs will likely rise.

4. Pay down your debt
If your budget looks tight, you may be in the position to lower your expenses by paying down some of your debt, such as your car loan or high interest credit card bills, before you retire. Indeed, minimizing debt is an important strategy when you move to a fixed income.

Don’t fret if you still have a mortgage. Unlike their parents’ generation, many retirees today still carry a mortgage. Some even “upsize” to nicer digs. Just be sure your income stream can support your future payments.

That said, it may make sense to refinance your mortgage loan to lower your monthly expenses if you can still secure a lower rate than you currently pay. Those who intend to renovate or relocate in the near-term may also wish to close on their new loan before they stop receiving a paycheck, as borrowing money in retirement can be more challenging,

5. Plan for healthcare costs
If you plan to retire before you are eligible for Medicare, the federal government’s health insurance program for those age 65 and older (and some younger people with disabilities), you’ll need to factor in the cost of private health insurance for the gap years until you are Medicare eligible.

Some employers allow retirees to continue on their plan at a much better rate (than you’d find on the private market), but for other companies, that’s not an option. You need to be sure you have a bridge.

Once you are Medicare-eligible, you’ll need to decide whether it makes sense to purchase a supplemental policy to cover some of the costs traditional Medicare doesn’t pay for, including copays and deductibles.

6. Strategize Social Security benefits
Nearly half of Americans aged 50 years or over failed a Social Security quiz in a nationwide MassMutual survey. That can be concerning because not knowing Social Security essentials could result in fewer benefits.

For instance, the age at which you begin taking Social Security benefits can have profound implications on your future income stream.

Those who claim benefits at the earliest opportunity, for example, which is age 62 for current retirees, get a reduced benefit for life, which may make sense if you do not expect to reach the average life expectancy due to family history or poor health.

By waiting until your full retirement age, however, which ranges from age 65 to 67 depending on the year you were born, you can increase your monthly benefits to the full amount to which you are entitled, as determined by your earnings record.
You can maximize your monthly benefit further still by delaying Social Security until age 70 — at which point the benefit of postponing any longer disappears. If your full retirement age is 66, for example, you would receive 132 percent of your monthly benefit by waiting until age 70.2

7. Consider longevity insurance
As you enter retirement, you may also potentially help insulate yourself from the threat of outliving your retirement savings by purchasing longevity insurance, or an annuity contract designed to pay a guaranteed income for life once the policyholder reaches a certain age.

If you buy an annuity in your mid— to late—70s, that’s when these products can offer a lot of value because you’re pooling mortality risk. If you live to 100, you get the resources of others you outlived, so it protects against longevity.

To that end, it may also make sense to purchase a deferred annuity when you retire that delivers an income stream at some point in the future – whatever age you select. That creates a much simpler financial problem. If you have an annuity that kicks in at age 85, now you only need to survive on your savings from now to then. An annuity allows you to hedge longevity risk.

8. Have an emergency fund
If you haven’t done so already, now is also the time to set up an emergency fund worth at least six months of living expenses in a liquid, interest-bearing account.

Why? A “cash stash” can help cover the bills when the market takes a tumble, minimizing the likelihood that you’ll have to liquidate a portion of your equity (stock) investments in a down market to generate income.

The other benefit of an emergency fund? A cash cushion may grant you the flexibility to keep a larger portion of your portfolio in growth-oriented investments, which could also help mitigate longevity risk.

You need some money in a ‘growth bucket,’ which is designed to add additional income for a few more years into your 70s, you can use the ‘Rule of 100.’ - “Take 100 and subtract your age. That’s the total amount of money a retirees could have at risk in a growth position.

9. Watch the Tax Man
When it comes to retirement, timing is everything. The last paycheck you collect is likely to be the biggest you’ve ever received. It may include unpaid vacation days, bonuses, and proceeds from stock options.

Picking the right retirement date is important. If you work the entire year and get that last check-in December, your entire salary could be subject to a higher tax bracket. It can pay big dividends to retire early into the new year so you’d be in a lower marginal tax bracket versus towards the end of the calendar year.

How to Avoid Top 5 Private REITs Investment Traps

3/10/2020

1. Manipulating the Timing of Real Estate Sales
Some real estate asset management firms sell their holdings within two or three years. That’s typically too soon to see significant profits, yet flipping the asset will show a high IRR that looks impressive to the unaware investor. Shorter horizons produce higher IRRs, but not wealth. This approach can be not only deceptive, but also risky. A deal laden with short-term, unsecured borrowing—based on hopes for a quick sale—will turn sour if interest rates rise and a sale isn’t possible.

Due Diligence: If real estate asset managers are selling early, they should explain why the business plan has changed. And investors should hold managers accountable for the expected equity multiple—the total return to the investor—rather than the IRR alone.

2. Abusing Subscription Lines of Credit
Borrowing in private equity real estate is often backed not only by the asset, but also by investors’ capital commitments. This is a type of bridge loan, and the real estate asset manager should repay it within a few days of a capital call. If the subscription line extends to 180 or 365 days, the investor is providing collateral without collecting interest in return. It’s also another way of inflating IRR, which doesn’t account for the extended time investors’ capital is committed but not yet put to work.

Due Diligence: Investors can ask real estate fund managers how they use subscription lines, and the average length of their borrowing. The equity multiple also will suffer if subscription lines are abused, since this borrowing produces no added profit.

3. Taking on Higher Financial Leverage
Deals with a loan-to-value (LTV) ratio of 85% or 90% have less investor equity, and thus show healthy return-on-equity numbers. But returns can evaporate quickly if the business plan encounters challenges. Fully leased commercial or multifamily real estate might seem like a safe investment, but depending on its class or condition, it can allow little leeway to raise added revenues for loan payments. In an economic downturn, lenders could force the asset’s sale even as real estate market conditions deteriorate.

Due Diligence: Investors should understand what kind of returns they need to substantiate the level of risk they’re assuming. In the case of leverage, the WACC (Weighted Average Cost of Capital formula) lets them quantify what the return should be to substantiate the risk. They should be wary of LTV ratios above 75%, and make sure the rate of return compensates them fairly for the risk of assuming a higher cost for equity.

4. Refinancing to Pay a Management Team
Once a real estate asset manager creates added value by renovating a property, it’s possible to raise rents, have it reappraised and refinance the property with a bigger loan. If the larger loan proceeds are used to compensate the manager alone, then the investor is left with only the higher risk of the increased debt. Further, many managers are paid through IRR-based hurdles, which incents them to refinance sooner and with larger loans. All of this means more risk for the investor.

Due Diligence: A refinance should benefit both the manager and the investors. Investors should look for investments that are structured with at least three to five years of refinance lockouts.

5. Hiding Ground Leases
Some commercial real estate owners sell the building and keep the land it sits on, and the buyer must assume a payment on the ground lease for the land. The lease payment is basically another form of debt financing. The building is collateral on the lease, and investors could lose the building if the lease payment isn’t made. Such a deal should come with a lower price.

Due Diligence: A ground lease would be a material risk factor in a private equity real estate deal, which should be disclosed to investors. The lease must be considered part of the cost of capital. Watch for short-term ground leases in particular (ones that are less than 50 years), which add even more risk because they become difficult to finance with lenders.

In Summary
Tougher regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 have made it much harder to use financial engineering unethically. But it’s still very easy for a prospectus to mislead shareholders or an asset manager to hide deal fundamentals that increase risk. Investors need to understand risk factors fully, quantify their expected returns and consider whether the profits justify the added level of risk.

Can I Use Life Insurance Cash Value At Anytime?

3/9/2020

Q. Can I use the cash value in my life insurance policy at anytime?

A. Yes, cash value can be used at any age

Before age 59½: No penalties for accessing the cash value.

Age 62: No effect on Social Security benefits by accessing the cash value for supplemental retirement income (as long as the policy maintains its tax-advantaged status).

Age 65: No effect on Medicare Part B premiums by accessing the cash value for supplemental retirement income (as long as the policy maintains its tax-advantaged status).

Age 70½: No required minimum distributions (unlike qualified plans or IRA assets).

Opportunity reserve during your working years

Cash value in a life insurance policy can be an income tax-free private reserve for certain life events, including:

Provide money to start or continue a business
Pay tuition
Help fund a child’s wedding
Funding for “once in a lifetime” purchases

How Smart Use of Permanent Life Insurance Can Help Reduce Tax At Retirement Time - Part B

3/8/2020

In our last blogpost, we showed the first couple how they use term life and stuck in their current tax bracket.

Couple 2: Has tax-sensitive distribution strategy

The second married couple has the ability to design a tax-sensitive distribution strategy because they are using permanent life insurance to protect their family and their wealth.

Just like the previous couple, their desired income is $100,000 and their required income is $78,950. However, they have the flexibility to take out $21,050 from any of the three financial toolboxes.

This year, they decide they want to be as tax-efficient as possible and will take dollars from a tax-advantaged toolbox to fill their income gap.

Net worth: Includes assets from all three financial tools: capital assets, retirement income and tax-advantaged

Achieving desired income

The taxpayers with a tax-sensitive distribution strategy desire to be as tax-efficient as possible.

Desired income of $100,000 Sources of income
Required income $78,950 Social Security and RMDs
Income gap $21,050 Filled with income from a tax-advantaged asset (cash value life insurance)

Taxes for tax-sensitive couple

This couple will pay taxes in the first two tax brackets only. Their total taxes due will be $9,086, and their effective tax rate is 9.1 percent.

Results

In this case, the second couple has a tax savings of $4,631 and a decrease in the effective tax rate of 4.6 percent compared to the other couple:

How Smart Use of Permanent Life Insurance Can Help Reduce Tax At Retirement Time - Part A

3/7/2020

This is a case study, we have two couples, each couple puts away the same amount for retirement, but they allocate assets differently among the tools. Some contributions were made to qualified plans.

Couple 1: Stuck in their tax bracket

The first couple chooses to protect their family’s dreams, aspirations and accumulated wealth with term life insurance until it runs out. They focus solely on capital assets and retirement income assets to fund their retirement.

Desired income: $100,000

Required income: $78,950; required income includes income clients are obligated to receive due to automatic payments, like pensions, or tax law (e.g., Required Minimum Distributions – RMDs, starting at age 70½)

Retirement income gap: $21,050; which will be filled using their capital asset or retirement income toolbox

Net worth: Includes only capital assets (e.g., investments and real estate) and retirement income assets, or qualified assets

Achieving desired income: The taxpayers stuck in their tax bracket decide to take dollars out of their retirement income toolbox to cover their income gap.

Desired income of $100,000 Source of income
Required income $78,950 Social Security and RMDs
Income gap $21,050 Filled with only retirement income assets (taxed at ordinary income rates)

Taxes for “stuck” married couple: This couple will pay taxes on the first two tax brackets and some ($21,050) in the 22 percent brackets. Their total taxes due will be $13,717 and effective tax rate is 13.7 percent.

In our next blogpost, we will look at the second couple that uses permanent life insurance smartly.

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