Blog Archives - PFwise.com

Stocks Screening Ideas: Value, Growth, and More

5/31/2021

Fidelity.com has a good article that helps investors use its stock screener to look for stock ideas.

Value stock ideas
For value stocks, it uses the following conditions: stocks with a market cap of at least $6.86 billion, a "very low" P/E ratio of 11.27 or lower, and a "very low" PEG ratio of 1.16 or lower (sorted by largest market cap).

Growth stock ideas
For growth stock ideas, it uses the following conditions: stocks with a market cap of at least $6.86 billion, a "high" forward EPS long-term growth (3 to 5 years) of at least 18.52%, and a "very high" cash flow growth rate (3 years) of at least 61.67% (sorted by largest market cap).

Value and Growth ideas
The "Something for Everyone" screen from Zacks Investment Research, a third-party independent research provider, attempts to find companies that have demonstrated strong earnings growth that also trade at low P/E multiples. Specifically, this screen searches for companies that have the best 5-year historical growth rates (higher than 80% of all other stocks with a Zacks Buy Recommendation) and lowest P/E ratios (lower than 80% of all stocks with a Zacks Buy Recommendation). This screen focuses on stocks trading at more than $5 per share and have a 10-day average share volume of 50,000 shares or more.

Use of Life Insurance in Asset Repositioning Strategy

5/30/2021

Do you want to use your assets to -

Help provide for loved ones after your death.
Provide a generally income tax-free benefit (according to IRC Section 101(a), that can help offset the income taxes owed by beneficiaries after receipt of the balance of the tax-deferred asset).
Potentially increase your legacy through tax-deferred growth.
Provide accelerated life insurance death benefits if you become chronically or terminally ill.

If yes, please see a flyer from Prudential about using life insurance in the asset repositioning strategy.

How Long to Keep Tax Records?

5/29/2021

3-Year Statute of Limitations
You've likely heard that seven years is the perfect period to hold on to tax records, including returns. However, in most cases, tax records don't have to be kept for seven years because there's a three-year statute of limitations. So assuming there's no fraud or nothing else wrong, the IRS cannot look at your tax returns beyond that three-year statute.

Exceptions to the Statute of Limitations
The statute of limitations has some important exceptions, and if your tax return has any of these, you'll need to keep your returns and your records longer than three years. For example, the statute of limitations is six years if you have substantially underestimated your income. The threshold for substantial understatement is 25 percent of your gross income. If you claim your gross income was $50,000 and it was really $100,000, you've substantially understated your income.

The six-year rule also applies if you have substantially overstated the cost of property to minimize your taxable gain. Say if you sold a piece of property for $150,000 and claimed you paid $125,000 instead of the actual $50,000, the IRS has six years to take action against you. And if you have omitted more than $5,000 in income from an offshore account, the statute of limitations is also six years.

Keep records for seven years if you file a claim for a loss from worthless securities or bad-debt deduction. If you haven't filed a return, or if you have filed a fraudulent return, there's no statute of limitations for the IRS to seek charges against you.

Property Records Can Be Forever
When you sell a property at a profit, you'll owe capital gains tax on that profit. Calculating your capital gain often requires you to hang on to your records as long as you own your investment. You'll need those records to calculate the cost basis for the property, which is the actual cost, adjusted upward or downward by other factors, such as major improvements to the structure.

Calculating the cost basis on property you live in is relatively simple because most people can avoid paying capital gains tax on their primary residence. If you sell your primary residence, those filing individual returns can exclude up to $250,000 in gains from taxes, and couples filing jointly can exclude up to $500,000. You must have lived in your home for at least two of the past five years to qualify for the exclusion. Even so, you'll need to save your records of the transaction for at least three years after selling the property.

If your sale doesn't meet the above criteria, you'll need to keep records of significant improvements for at least three years after the sale. IRS Publication 523, “Selling Your Home,” spells out what improvements you can add to your cost basis — and reduce your capital gains bill. The same holds true for rental property.

Questions That Will Help You Develop New Insights Into Your Lives

5/28/2021

The following topics and lists of questions come from a joint research between AIG Life & Retirement and MIT AgeLab.

Housing

What is your current housing situation today? Are you renting or do you own your home?
If you’re renting, do you have plans to eventually buy a home?
How do you see your housing situation evolving over time?
Do you plan to downsize when you retire? Or possibly move to another city or town? Are there family members you would like to be near–or a particular community that’s of interest to you?

Potential Expenses for Care

Have you thought about your future expenses to provide for your own care?
For example, health care costs or the cost for care and assistance you may need in late retirement?

Physical Health

Are there any health-related topics that might impact how we plan and prepare for your future?
What can you share with me about your family’s longevity that might help us better plan for your future?

Fraud Prevention

Is fraud prevention and identity protection a topic you’ve thought about or discussed with family members?”
Do you currently have any protections in place?
Are you and your family familiar with common scams that could compromise your identity and financial security?

Future Goals and Aspirations

What are your long-term goals and aspirations?
As you look ahead, what do you hope to achieve – either from a financial perspective or a non-financial perspective, or both?
What’s most important to you and your family today?

Family and Loved Ones' Finances

Do you anticipate needing to provide care and/or financial assistance to family members? For example, potential expenses for younger family members, aging parents, grown children, siblings, grandchildren, etc.?
Are you providing such care or financial assistance currently?
If you have children, have you discussed how college will be paid for, including repayment of student loans?

Job Transitions and New Careers

Do you expect any changes to your employment situation in the near future – or do you have any long-term career transitions in the back of your mind?
Have you thought about possibly working part-time once you retire or pursuing a new “career” that may be more aligned with your personal interests or passions?
Have you considered a “phased” approach to retirement, where you continue to work in some capacity for a number of years?

Retirement Planning

What is your vision for retirement? What are you doing each day?
Have you thought about what retirement might look like? Where are you living?

Taxes and retirement: 5 planning tips - Tips 4 and 5

5/27/2021

The previous tips are here. Now the last 2 tips.

4. Learn about taxes on Social Security benefits
What you should do. Learn about Social Security’s rules for provisional income.

Provisional income is a measure used by the IRS to determine whether or not Social Security recipients are required to pay taxes on their benefits.

Retirement income such as interest, dividends, and taxable retirement account distributions, combined with your Social Security income, can cause up to 85 percent of your Social Security income to be taxable.

Since qualified Roth distributions are not taxable, they don’t count toward your provisional income. If you can turn more of your retirement distributions into Roth distributions, you can reduce the possible taxes on your Social Security benefits.

5. Consider a partial Roth conversion
What you should you do. Before you retire, and especially right after you retire, it can make a lot of sense to move some of your retirement money into Roth accounts through what is called a partial Roth conversion.

A Roth conversion involves moving money from a retirement account whose distributions are taxable — such as a 401(k), 403(b), or traditional IRA — into a Roth IRA. The conversion will generally be taxable, and subject to a 10 percent early withdrawal penalty if you’re younger than 59½, unless you follow specific IRS rules .

How this strategy saves on taxes. Once your retirement savings are in a Roth IRA, they’re no longer subject to required minimum distributions. You’ll have to pay taxes on the conversion, but you won’t pay taxes on the withdrawals going forward. This can help smooth out your level of taxable income [in retirement] and potentially drop you into a lower tax bracket.

Bonus tip : Ladder your conversions before RMDs begin. Instead of making one large conversion of 401(k), 403(b), or traditional IRA funds in a single year, which could trigger a large tax bill—especially if you’re still working — systematically convert smaller amounts over several years.

Bottom line
It’s important to preserve your retirement savings by understanding how your decisions about which accounts to withdraw money from and when will affect your tax bill. While taxes are far from the only consideration when dealing with retirement assets, learning the tax rules and savings strategies ahead of time can make a big difference in how much you owe and how much you’re able to keep.

Taxes and retirement: 5 planning tips - Tips 3 and 4

5/26/2021

The first tip is here. Now the next 2 tips.

2. Understand required minimum distributions
What you should do. For each of your retirement accounts, learn if they are subject to required minimum distributions and how RMDs work. For example, traditional IRAs require you to start taking minimum distributions beginning with the year you turn 72. 401(k)s do, too, unless you’re still working. Roth IRAs don’t require any distributions until the owner dies.

How this strategy save on taxes. If you don’t take RMDs or if your distributions are too small, you’ll owe a tax penalty of 50 percent of the amount you didn’t withdraw — a huge waste of money. Make sure to withdraw the full amount you’re required to each year, which is generally based on your age, life expectancy, and account balance.

You must take your first RMD in the year when you turn 72, but you have the option to delay it until April 1 of the following year. You might want to delay it if your income will be substantially lower the following year—for example, if you’re still working but about to retire. You may also need to make quarterly estimated tax payments on your retirement account distributions to avoid tax penalties.

Bonus tip : Once you are over age 70 ½, you can make a direct transfer of up to $100,000 from your IRA (other than a SEP IRA or SIMPLE IRA) to a qualified 501(c)(3) charity through what’s called a qualified charitable distribution (QCD). A QCD will satisfy part or all of your RMD requirement and reduce your taxable income, even if you don’t itemize deductions on your tax return.

3. Consider proportional withdrawals
What you should do. It’s common to have retirement assets in three types of accounts: taxable brokerage accounts, tax-deferred retirement accounts, such as 401(k)s or 403(b)s, and tax-free Roth accounts. It is important to time the withdrawals in order to potentially avoid getting bumped into a higher tax bracket and also to avoid making Social Security taxable.

How this saves on taxes. Typically, a retiree withdraws a certain amount from their portfolio each year. How much could vary from person to person, but a rule of thumb is 4-5 percent of the overall portfolio value each year.

The traditional approach is to draw down the money in your taxable brokerage accounts first, incurring little to no tax since the only taxable part of those withdrawals is from capital gains, which are taxed at a lower rate than other kinds of earned income. Next would come 401(k) and traditional IRA withdrawals, which will typically incur taxes at ordinary rates. When those accounts are depleted, turn to Roth withdrawals, which can generally be taken tax-free. Overall, this strategy means tax bills are mainly due in mid-retirement years for most people. Also, this overall approach lets money in tax-deferred accounts grow longer.

But a different strategy is emerging where a retiree would withdraw from every account in their portfolio, based on each account’s percentage of their overall savings. So, some money would come from brokerage accounts, 401(K)/traditional IRAs, and Roth accounts each year. This strategy typically incurs a tax bill every year, but the amount can be lower and relatively stable from year to year. And it ultimately may amount to a lower tax bill over the length of your retirement. It could also reduce taxes on Social Security benefits and lower Medicare premiums, since taxable income would be spread out over a greater number of years.

Which strategy makes the most sense will depend on personal circumstances and finances. Many people opt to discuss their options with a financial professional or tax specialist.

Bonus tip : For retirees in the 15 percent to 20 percent capital gains tax bracket, combining the traditional and proportional withdrawal strategy could result in greater tax savings. Again, consulting with a financial professional or tax specialist would probably help see if that option is workable.

Our last two tips are here.

Taxes and retirement: 5 planning tips - Tip 1

5/25/2021

During your working years, you’ve probably used strategies to reduce your tax liability: contributing to tax-advantaged retirement accounts, making charitable contributions, or buying municipal bonds, for example. The importance of tax planning doesn’t diminish as you approach and enter retirement. It arguably becomes even more important, as lowering how much tax you owe can help your nest egg last longer.

While tax strategies should always be tailored to your unique situation, the concepts below often help retirees save money.

Max out contributions to tax-advantaged accounts.
Understand required minimum distributions.
Take proportional withdrawals.
Learn about taxes on Social Security benefits.
Consider a partial Roth conversion.

1. Max out contributions to tax-advantaged accounts
What you should do. If you haven’t been maxing out your contributions to tax-advantaged retirement accounts—in 2021, that’s $19,500 to 401(k)s and 403(b)s; $7,000 to IRAs—now is the time to start. If you’re 50 or older, take advantage of catch-up contributions: $6,500 for 401(k) and 403(b) plans and $1,000 for IRAs.

How this strategy saves on taxes. Contributions to most retirement accounts reduce your taxable income now. Contributions to Roth accounts reduce your taxable income later. Contributions to either account, when invested, grow tax deferred. That means you don’t get a tax bill every year if your account increases in value.

Bonus tip: Hedge your bets about future tax rates by contributing to both a 401(k) or traditional IRA and a Roth 401(k) or Roth IRA. The two account types get opposite tax treatment when you take withdrawals.

Keep reading for the next tip.

FIA Accumulation Solutions Case Study

5/24/2021

Are you looking for a solution that has principal protection with the potential for asset growth?

Meet Henry and Catherine

Henry (age 60) is married to Catherine (age 62).
They want to protect their retirement savings from market downturns.
They also want more growth potential than what traditional fixed income assets are offering today.

Below is a FIA accumulation solution offered by AIG.

Relations Between AGI and MAGI

5/23/2021

Your AGI (adjusted gross income) is the sum of all your sources of income, minus some deductions. It's the basis for figuring out your tax. When you file your 1040 tax return, your AGI is online 11.

Your MAGI (modified adjusted gross income) is your AGI plus some deductions that are added back. The deductions you must add back depend on the government benefit in question.

For many tax payers, MAGI is the same as AGI.

However, for some federal tax breaks, your eligibility is based on your MAGI, not your AGI.

IRA Related
For example, MAGI determines your eligibility to contribute to a Roth IRA or whether you are allowed to deduct a contribution to a traditional IRA. To calculate your MAGI for all matters related to IRA, take your AGI and add back any deductions you have taken for student loan interest, a contribution to a traditional IRA, foreign earned income and housing exclusions, savings bond interest and employer adoption benefits.

Medicare Related
For Medicare, your Part B and Part D premiums are based on your MAGI, in this case, you need to add back any tax-exempt interest income to your AGI.

Health Insurance Related
If you purchase health insurance through the federal Affordable Care Act (ACA) marketplace, your MAGI is used to determine if you quality for a reduced premium. The ACA MAGI adds back any deducted foreign income, nontaxable Social Security benefits and tax-exempt interest.

When to Give Inheritance Money to Your Kids

5/22/2021

Below is an article from WSJ on April 30, 2021 about when to give inheritance money to your kids and areas you need to pay attention to.

Should an inheritance be strictly an inheritance, to be left to children when their parents die? Or should parents use at least some of that money while they’re still alive to help out their adult children financially? And if parents give while they’re alive, how much should they give and when?

Of course, every family is different—both in terms of what they can afford and what brings them joy. But there are some things every family should consider when deciding how to pass wealth from one generation to the next. The Wall Street Journal invited three financial advisers to discuss those issues: Michael Garry, founder of Yardley Wealth Management in Yardley, Pa.; Jacqueline B. Roessler, certified divorce financial analyst at the Center for Financial Planning in Southfield, Mich.; and Tony Walker, a retirement-planning specialist in Louisville, Ky.

Here are edited excerpts of the discussion.

WSJ: How do you advise clients on the topic of the timing of inheritance?

MR. GARRY: I believe strongly that parents should dole out money while they are alive and not stockpile it any more than they need to for their own financial security. The people who make gifts during their lifetimes are able to help their children, and maybe grandchildren, at the exact time they likely most need the money, and not based on the random date of their death. They also get to see the benefit of the gift to their children and grandchildren. The extent of the gifts depends on how much the parents can afford.

MS. ROESSLER: It depends on their personal goals, tax situation and current financial needs, as well as the financial needs and tax situation of their heirs. First, they need to make sure they have enough resources to cover their own financial needs, including any potential long-term-care expense. Once that’s established, they should discuss gifting strategies with their adviser, keeping in mind the parents’ ultimate goals, such as minimizing income taxes and capital-gains taxes during their lifetime, spending down their assets to later qualify for Medicaid, or providing for their children’s specific financial needs.

MR. WALKER: I’m a firm believer that too many people save every penny until the day they die, instead of spending their money now. With so many savers maxing out contributions to their 401(k) plans, my concern is that most of them have no plan for using and enjoying their savings before it’s too late. There’s a struggle going on with my clients when I broach this subject of saving too much for the future. They wonder: Will their children be responsible with the money? There’s only one way to find out, and that’s throw them a bone now to see how they handle it.

WSJ:With the pandemic wreaking havoc on many families’ finances, have you seen families change the way they are thinking about inheritance?

MR. GARRY: Most of my clients are in much better shape than they were a year ago. Unfortunately, a lot of their children and grandchildren are not. We’ve seen a real uptick in people expressing gratitude in being so fortunate with their health and finances and not wanting to wait to help both their offspring and their favorite charities.

We’ve had people who have kicked the idea around for years but never did it who are actually taking steps now and making gifts. They seem to realize more than ever that they don’t know how much time they have, and some of their kids have been unemployed for much of the last year. I don’t think many of them ever expected to see their children hurting so much, and it has moved them.

MS. ROESSLER: I haven’t seen families make dramatic changes to their legacy planning, at least not yet. However, as government aid ends, many millennials will be left without jobs and with increased expenses. In conversations with older clients, they are prepared to begin making adjustments in their gifting strategy to accommodate changing needs.

WSJ: Should there be strings attracted to parental giving?

MR. WALKER: This is a gift and shouldn’t come with any strings attached. Still, how your kids and grandkids react might certainly sway future considerations as to whether you wish to continue the gift-giving trend.

MS. ROESSLER: I think it depends on the family circumstances. Some parents may feel their children need guidance on how to wisely spend gifted dollars; others aren’t comfortable attaching any strings to gifts. One family I’ve worked with requires their adult children to donate a portion of their annual gift to a worthy charity. Another family specified that the gift must be used toward college costs for their children or major expenses such as a car or down payment on a home.

WSJ: How can parents who want to help their children while they are alive prevent themselves from becoming their children’s bank?

MR. WALKER: Before starting the gift-giving trend, it is important for parents to speak about their finances frankly with their children. While you don’t have to take all of your financial clothes off, you need to be frank with them as to how you’re doing financially. As well, blend into the mix that you are very grateful for the way you have been blessed and your desire to share some of your good fortune with them now—at a time in life when they can use it—versus waiting until after you die. Also, never tell them that there’s more where that came from, as you might regret setting up such an expectation.

MR. GARRY: It makes it much easier to avoid being the bank if the child knows that the gift is for a specific purpose, like to pay their health insurance, or go toward their student loans, or make their IRA contribution or for a deposit on a property. I’ve also told my clients they can feel free to tell their children their financial adviser has said they can’t afford to make that gift or even make any more gifts, depending on the circumstances.

WSJ: What are some common mistakes you see parents making in deciding how to transfer wealth to their children?

MR. WALKER: Not understanding that the value of their 401(k) actually will go down over time. That is because between future taxes and inflation, the money they are stockpiling will be worth less then than it is now. Think about it: What if, instead of socking it all in a 401(k), you could give some money away to your kids now with no tax to them? Wouldn’t that make more sense?

MS. ROESSLER: Some parents give more than they can afford and wind up with an unintentional reduced standard of living. This can lead to marital tension when both spouses aren’t on the same page. There is also a substantial tax advantage to transferring stocks and mutual funds after death versus during your lifetime, though this could change under President Biden.

MR. GARRY: The biggest downsides come when gifts are given with no discussions around expectations. We had a client who, before coming to us, went through a bit of a rough patch with his son and daughter-in-law. He had made gifts for a few years to them around Christmas and he didn’t say anything about it other than “Merry Christmas!” Well, after three or four years of those gifts, the son and daughter-in-law expected them to continue. Without saying anything, he just stopped because he wasn’t in the financial position to continue. But they didn’t understand that and there was tension until they finally talked about why he had discontinued giving and they were able to heal the rift.

Details and Implications of Buying Fractional Shares at Fidelity

5/21/2021

Which Stocks are Eligible?
With fractional shares or dollar-based orders, you can trade National Market System (NMS) exchange-listed stocks. This includes stocks listed on the NYSE or Nasdaq. Stocks and ETFs available for fractional shares or dollar-based orders can change at any time, and you will receive an error message if an investment you are trying to trade is not eligible.

The Details
Trading in fractions or dollars is available on the Fidelity Mobile App. You can place market or limit orders, good for the day of the trade only. Fractional shares or dollar-based orders are eligible for real-time execution during market hours (approximately 9:30 a.m. to 4:00 p.m. ET) on normal trading days, and they may only be placed while the market is open. Fractional share quantities can be entered out to 3 decimal places (.001 as long as the value of the order is at least $1.00). Executions will be rounded down to the nearest .001 shares. Fractional shares or dollar-based orders can be entered out to 2 decimal places (e.g., $250.00), and your order will be converted into shares out to 3 decimal places (.001) and are rounded down to the nearest decimal. Investors utilizing fractional shares or dollar-based orders experience bid-ask spreads proportionally equivalent to the spreads for whole shares.

It's also important to know that the value of a trade may be impacted when entering a dollar-based buy or sell order. As orders are converted to shares, there is some rounding off of shares, so the value of shares you receive might be higher or lower than the dollar amount you requested. Also, sell orders are subject to additional assessments, and sell orders placed in certain account types, or account conditions, may be subject to taxes, which could reduce the proceeds of the order.

Dividend Reinvestment Program
If you currently participate in Fidelity's Dividend Reinvestment Program, after you’ve placed your first fractional shares or dollar-based order, any fractional shares in your account acquired prior to that point in time will no longer be automatically liquidated when you sell.

Proxy Votes and Transfers
You will not be able to participate in proxy voting or participate in most voluntary corporate actions for the fractional share portion of a position. You can't transfer or receive certificates for fractional share positions outside of Fidelity. Fractional share positions will need to be liquidated prior to transferring out.

What Is The “Best” Healthcare Option For “Early” Retirees?

5/20/2021

Based on this article, early retirees do have a few options as they consider the best way to obtain health coverage in early (pre-Medicare) retirement.

1) COBRA
For workers who retire from a company with greater than 20 employees, COBRA (Consolidated Omnibus Budget Reconciliation Act) coverage allows newly-separated employees (or employees who work so few hours that they’re not eligible for their employer’s health plan) to continue their existing insurance coverage at the same (full-premium) cost (plus an administrative fee that is usually capped at a maximum of 2% of the premium). However, COBRA coverage generally lasts only 18 months, and thus can only (except under certain conditions) be used to bridge short gaps before Medicare eligibility begins.

2) Covet A Group Plan to An Individual Plan
Another option for retirees looking to continue their coverage using the same health insurance provider is to “convert” the plan under the group to an individual plan… at least, as long as the plan allows for such a conversion. Again, though, this isn’t always an ideal alternative, as there’s no requirement that the terms (or cost) of such an individual policy are the same as their “old” group plan.

3) Affordable Care Act Plans
Meanwhile, retirees who (either due to eligibility or cost) decide that either COBRA coverage or a conversion policy isn't the right choice for them, may choose to simply purchase health insurance using their state-approved exchange created under the Affordable Care Act. However, while retirees can’t be denied coverage for a pre-existing medical condition, coverage can only be purchased during specific open enrollment periods, or within 60 days that the employer’s plan is terminated (which means time is of the essence after retiring to make a decision).

Ultimately, though, the key point is simply to realize that, while retirees may be understandably worried about their healthcare costs eating away at their life savings, the availability of Medicare ameliorates those concerns to a significant degree. However, for those who aren’t yet eligible for Medicare, the issue of securing health insurance to bridge the gap until they reach age 65 becomes less clear… particularly for those whose budgets aren’t exactly robust. Regardless, the good news is that there are options, with coverage that is guaranteed (at least if timely obtained). But the range of choices means it is necessary to conduct a thorough cost/benefit analysis when finding the best option between purchasing COBRA coverage, converting an existing group health plan to individual coverage, and/or purchasing insurance via a state-approved health insurance exchange.

How Options-based Strategies May Help Retirement Income Planning

5/19/2021

Purposes of Options
While options are used for a wide range of purposes from hedging to sheer speculation, at the most basic level options simply allow investors to "reshape" the distribution of future returns by either buying into, or hedging out of, various parts of the upside or downside spectrum of outcomes.

Options Address Sequence of Return Risks
From a retirement planning perspective, the use of options can be especially appealing given how sequence of return risk can adversely impact retirement income sustainability; if options make it possible to carve out the 'worst' parts of the (downside) return outcomes, it's possible that retirees could spend more even if their returns aren't higher, simply by ameliorating sequence-of-return risk.

3 Options
The practical question, though, is how to actually construct such options-based portfolios. In this article, David Blanchett analyzes three choices:

"DIY" approach where the advisor directly purchases options to hedge their clients,
"Packaged" solutions via ETFs that use options strategies, and
Registered Index-Linked Annuities (RILAs) which package the options strategy within an annuity wrapper.

Which Option is the Best?
In theory, there would be no difference between the three - given that they're all ostensibly doing some combination of buying bonds, selling out-of-the-money call options, and using the option proceeds plus bond interest to buy (at-the-money) call options to produce the upside participation rate. In practice, though, Blanchett finds that annuity products may actually have better pricing than DIY (or packaged ETF) options, both because RILAs typically have specific product terms (e.g., 6 years) which allows the strategy to be implemented with longer-duration bonds that produce more interest yield (and thus have more money in play to generate higher participation rates), and also because insurance and annuity companies have at least some ability to 'leverage' their balance sheets with a more diversified (albeit still conservative) portfolio to generate more than 'just' the government bond yield that would likely be obtained in the DIY or ETF scenarios.

The Conclusion
Thus far, annuity companies have actually been pricing their RILA products at a lower product cost than ETFs (e.g., the Allianz Index Advantage Variable Annuity has an annual expense ratio of 25bps, compared to 74bps for the similar Allianz Buffered Outcome ETF). Or stated more simply: while annuities have long been criticized for their surrender charges and the associated illiquidity, the irony is that when it comes to hedging sequence of return risk, a commitment to a less liquid annuity can actually generate a more favorable options profile to secure retirement income (where any surrender charges are a moot point because the product is intended as a buy-and-hold retirement income strategy over the intended term anyway).

4 Layers of Benefits of Indexed Universal Life Policy for Young Consumers

5/18/2021

There are 4 lays of benefits offered by an Indexed Universal Life (IUL) for a young policy owner.

Layer One Benefit - Death Benefit
Death benefits from an IUL policy. Such benefits will ensure any debts from the insured will not be left to his or her loved ones if they die unexpectedly.

Layer Two Benefit - Living Benefit
A living benefits from an IUL policy can help in the event the insured gets a serious medical condition. With qualifying chronic, critical or terminal illness, the policy owner can access a portion of the death benefit to help pay medical expenses while preserving their other assets.

Layer Three Benefit - Cash Value
An IUL policy will accumulate cash value that will grow tax-deferred based on the growth of various indexes. IUL policies are protected from market downturns and can be an appealing way to save. The cash value can be used to build a better future and help pay for various things like a down payment on a house, or even a child's college expenses.

Layer Four Benefit - Tax-free Loan
An IUL policy has the ability to supplement other retirement income streams with tax-free loans, this is especially valuable when the policy owner is in retirement phase and market has a major downturn, so they don't have to access other retirement funds facing a major drawdown.

6 Investment Ideas That Could Help Protect You Against Inflation

5/17/2021

With the April consumer price index at 4.2% higher than a year ago (the biggest jump since 2008), this could mean an important change for investment strategy in a generation, and it calls for ways to fight again inflation.

Below are some old and new investment ideas that could protect you against inflation.

1. Traditional inflation hedges: gold, commodity, real estate, and TIPS. Consider fund: Permanent Portfolio (PRPFX), it has a diversified holdings: gold and silver, foreign currencies, high-grade short-term bonds, real estate and natural resources, and growth stocks.

2. Companies tat have a lot of hard assets and business models that are less reliance on capital and labor input. For example, financial service stocks, particularly exchanges and brokerage firms. Consider ETF: Horizon Kinetics Inflation Beneficiaries (INFL).

3. REITs with short-term lease agreements, so the rents could be reset frequently and rise with inflation. Consider ETF: Nuveen Short-Term REIT (NURE).

4. Investment products that are used exclusive to institutional investors only. For example, Quadratic Interest Rate Volatility and Inflation Hedge (IVOL) has 85% weight in TIPS notes which offers inflation protection as their face values are adjusted based on the CPI. But TIPS price could decline if interest rates rise, so tis fund has 15% in fixed-income options that would profit from rising long-term interest rates.

5. Because TIPS usually pay much lower yields than comparable Treasury notes, consider Simplify Interest Rate Hedge (PFIX), it allocates 50% to Treasury notes, and 50% in options that profit from rising long-term interest rates.

6. Floating rate corporate loan funds with income that outpaces prices. For example, Fidelity Floating Rate High Income (FFRHX).

3 Life Insurance Purchasing Strategies for Younger Buyers

5/16/2021

The decisions you make when you buy life insurance in your twenties or thirties can help you avoid scrambling to find coverage before your term policy expires later.

You could buy a permanent life insurance policy and never worry about the coverage expiring. But the premiums are much higher than the premiums for term insurance, and young families who start out with permanent insurance frequently buy too little coverage because that's all they can afford.

A more cost-effective way to extend the coverage is to layer policies. For example, buy a 20-year term policy for the bulk of your coverage, that allows you to get a death benefit large enough to protect your family while your kids are at home and you are making mortgage payments. Then layer it with a policy with longer term and smaller amount.

If you want some permanent coverage too, you can add a guaranteed universal life (GUL) which has much lower premium that other permanent life insurance policies but you can keep for your lifetime.

Are You Concerned About Tax Increases? Consider Cash Value Insurance

5/15/2021

Diversifying assets in your retirement portfolio is always a smart way to reach long-term income goals. It’s important to select assets that will reduce tax risk as your savings grow and when you take retirement income.

The following chart focuses on the tax treatment of the types of assets that may be in your retirement portfolio. All of these have a variety of advantages, limitations and restrictions.

Cash value life insurance also has 5 other advantages:

No income ceilings or contribution limits
No required minimum distributions (RMDs) to take starting at age 72
No 10% penalty for early retirement distributions taken before age 59½
Premium flexibility
Distributions can be taken when you want

How Longer Crediting Periods Offer the Potential for Higher Returns

5/14/2021

In our last blogpost, we introduced an annuity product from Athene that offers 7-year point-to-point return period which is significantly lower than the common 1-year point-to-point crediting period. How longer crediting periods offer the potential for higher returns?

Please see the following flyer from Athene for a look-back study.

Meet the Demand for Growth + Potential with AccuMax

5/13/2021

Athene developed Athene AccuMax 7 to specifically to meet rising demands for growth potential and protection from loss due to market downturns. An accumulation-focused fixed indexed annuity, AccuMax offers multi-year crediting strategies, attractive Participation Rates and zero risk of losing principal due to market loss. Plus, a suite of new features was designed to give clients added stability in volatile markets.

Below is a brochure of this product.

Why It Is Important to Know Your Net Worth

5/12/2021

When you apply for life insurance, one of the questions all insurance companies ask you is how much is your net worth. Even you are not applying for life insurance, it is still important to know your net worth.

Net Worth = Assets - Liabilities

Your net worth provides a snapshot of your financial situation at this point in time. If you calculate your net worth today, you will see the end result of everything you've earned and everything you've spent up until right now. It can provide a wake-up call if you are completely off track, or a "job-well-done" confirmation,

How to determine target minimum net worth
Below is a simple formula to help you determine a minimum "target" net worth:

Target Net Worth = [Your Age−25] ∗ [1/5∗Gross Annual Income]

Why track net worth over time
When you see financial trends in black and white on your net worth statements, you are forced to confront the realities of where you stand financially. Reviewing your net worth statements over time can help you determine
1) where you are, and
2) how to get where you want to be.

This can give you encouragement when you are heading in the right direction (i.e., reducing debt while increasing assets) and provide a wake-up call if you are not on track.

Where to Find Dividend Histories

5/11/2021

Dividend-paying companies often disburse payments every 3 months. It might be confusing for income investors if different stocks pay out on the same schedule. You can visit www.nasdaq.com/quotes/dividend-history.aspx and enter your stock holdings.

You can also check payout dates for most U.S. stocks at https://ww.nasdaq.com/market-activity/dividends

12 Tax Benefits for Rental Property Owners

5/10/2021

Here are a dozen key tax benefits for rental property owners:

Repairs: Repairs you make to your rental property are generally deductible in the year they’re expensed. Larger projects classified as “improvements” might need to be depreciated (see #3 for more) rather than deducted, so check with your accountant. Every plumbing, heating, electrical or carpentry repair could be a deduction reducing your rental income.
Interest expense: Mortgage interest is usually the single largest deduction landlords can take, but it’s not the only type of interest deduction. You can also deduct home improvement loan interest and even credit card interest for property-related expenses.
Depreciation: This deduction is like a gift of cash off your rental income tax bill, because you don’t actually spend any money in order to receive it. You can deduct a portion of the structure’s cost each year as depreciation (the value of the land is not depreciable).
Marketing: Whether you advertise your property in local newspapers or magazines or pay to place it on a rental property website, every paid ad you run for tenants is a deductible expense.
Travel expenses: As long as the primary reason for the travel was related to rental property activity, both local and long distance count toward this deduction.
Independent contractor expenses: You may be hiring landscapers, painters or exterior cleaners as independent contractors. You can deduct what you pay them.
Employee expenses: If you hire someone as an employee — as opposed to a contractor — to do maintenance or management tasks, you can deduct their wages and related benefits against income.
Insurance: You must insure your investment, and if it’s mortgaged, your lender will require it as well. Insurance premiums are deductible — this includes liability, casualty and any other insurance related to the rental property.
Local property taxes: Real estate taxes are everywhere, but you can deduct the county, city and school taxes you pay on the rental property.
Theft and casualty losses: Break-ins or property damage from criminal activity or even acts of nature are normally totally deductible. Of course, this is only for expenses outside of insurance coverage, which would include deductibles paid on a claim.
Legal, accounting and management services: You may be hiring professionals in any of these disciplines, and what you pay them is deductible in the year expensed. If you hire a management company to handle all of the headaches of rental property ownership and tenant relations, Uncle Sam will pay a share of it through a deduction from your rental income tax.
Offset other investment income: In certain cases, losses from a rental property can be used to offset income from other investments. Why would you lose money? If your depreciation deduction is substantial, it can wipe out a lot of real income without you spending any extra money. You may be enjoying a great positive cash flow, but combining mortgage interest and depreciation you could show a paper loss.

Smart IRA Wealth Transfer - 2 Options

5/9/2021

It is not uncommon for retirees to die sometime between their 75th and 95th birthday. When that happens IRAs are often passed to the next generation at-or-near peak values. Because these IRA inheritances are fully taxable to the beneficiaries as ordinary, they may be taxed at very high rates, especially if beneficiaries are also at peak tax rates.

Below we will introduce 2 options for smart IRA wealth transfer.

Current Scenario

Solution 1

Solution 2

Changes to 7702 Definition Is a Good News for IUL Buyers

5/8/2021

Changes to the 7702 Definition of Life insurance were enacted with the passage of the Consolidated Appropriations Act on 12/21/2020. This change lowered the interest rates and increased the premium limits defined by the regulation. This includes the Guideline Level, Guideline Single and 7Pay TAMRA premium limits.

What Is the Impact on IUL Illustrations?
Generally, increases in premium limits mean that more premium can be paid into IUL for a given death benefit. Or in other words, a lower death benefit can be selected for a given amount of premium leading to higher accumulation and income values. The impact will vary by age, face amount and underwriting class so we encourage you to rerun any recent illustrations where premium limits came into play.

Increases in GSP, GLP and TAMRA premiums will be greater where mortality is lower. Which means:

Increases will be greater at younger issue ages than old issue ages
Increases will be greater for non-nicotine users than nicotine users
Increases will be greater for females than males

What Are In Biden's American Families Plan?

5/7/2021

President Biden recently announced the third phase of his economic and tax proposals (the first being the American Rescue Plan for coronavirus pandemic relief, and the second being the infrastructure legislation proposed last month). Dubbed the "American Families Plan", the core of the final piece of legislation is a wide range of support for families themselves, including:

Making the recent expansion of the Child Tax Credit from $2,000-per-child to $3,000-per-child and $3,600 when the child is under age 6 (as established by the American Rescue Plan) permanent instead of lapsing after 2025 (along with making permanent the American Rescue Plan's expansion of the child and dependent care credit as well);
Support for child care expenses that would cap the cost of child care at no more than 7% of income for families with children under the age of 5 (though the exact mechanism to determine and pay for this is yet to be announced);
An expansion of 4 years of "free" (government-provided) schooling for children and young adults by extending the existing K-12 approach to also include two years of preschool (for 3 and 4 year olds) and 2 years of tuition-free community college after high school;
An expansion of the Pell Grants program;
A new government-funded paid leave program that would ultimately allow up to 12 weeks of paid parental, family, or personal illness leave (covering up to $4,000/month of wages, with a minimum of 2/3rds average weekly wages replaced, but starting with a simple approach of introducing just 3 days of paid bereavement leave per year).

On the other hand, given the projected cost of the legislation - approximately $1.8 trillion - the proposal also includes so-called "revenue-raisers" in the form of various proposed tax increases (to help offset costs), including:

An increase in the top income tax bracket from 37% back to the 39.6% rate it was prior to President Trump's Tax Cuts and Jobs Act of 2017;
Increase the long-term capital gains rate to the ordinary income rate (39.6%, plus the 3.8% Medicare surtax, for a total of 43.4%) for capital gains above $1M; applying the 3.8% Medicare surtax on income from businesses (including S corporations) earning more than $400,000; t
The elimination of step-up in basis and instead a "forced sale" of appreciated assets at death, triggering capital gains when someone passes away (but with a $1M-per-person exemption to shelter gains for the 'average' household);
Limitations on both carried interest rules for private equity firms, and a limitation on 1031 like-kind exchange to defer no more than $500,000 of capital gains.

Notably, at this stage, President Biden's proposals are just that - proposals - and it remains to be seen whether the legislation will pass, and/or in what manner they may be altered during the legislative process in Congress to get the requisite votes to pass.

Full details available from the White House on the American Families Plan proposal can be found here.