Blog Archives - PFwise.com

Use DCF Model to Determine if Market is at a Top

7/31/2021

We can measure the value of investments and determine if they are appropriately priced or not by using the discounted cash flow model (DCF). The inputs to the DCF formula include earnings growth, the payout ratio (dividends plus buybacks as a percent of earnings), interest rates, and the risk premium.

This article from Fidelity.com discusses the details of each of the 4 inputs to the DCF model and analyzed their possible moves and the resulting impact on stock valuations.

The conclusion?
"In my view, interest rates are repressed by the Fed, and this will likely continue for a long time. That means that the stock market is 25% higher than it would otherwise be, but this can remain the case for a long time. Having said that, at 1.3% the 10-year yield probably has more upside than downside, and, all else being equal, that should be a drag on valuation.

In my view, only an earnings decline or regulatory action will slow this train. As long as rates are low and companies produce more free cash flow than they can put to use, they will buy back shares, inflating EPS and raising the payout ratio in the process.

Finally, while there have been pockets of exuberance and speculation in the markets, as a veteran of 36 years of market cycles I just don't see the bell-ringing signs that the market as a whole has reached a sentiment extreme.

A bubble? No, not in the classic sense. Distortions through policy and financial engineering? You bet. Can it last? You bet. For how long? Well, my secular bull market roadmap suggests another 5–7 years of outsized returns. So I'll go with that."

4 Types of Insurance You Need to Protect Your Income

7/30/2021

Based on the article from Fidelity.com, here are the types of insurance you might want to consider to protect your income:

1. Disability insurance
More than half of US workers did not have disability insurance in 2020, according to Unum, a national provider of such insurance, and the number was an even higher 70% among Baby Boomers. But this type of insurance is an essential element to protecting your income stream in the event of an emergency.

Not to scare anyone, but there are so many things that could happen that could impact your ability to earn at the level you currently do, even if you could earn something at another type of job. Think about the sports star who blows out a knee and has to choose a backup career to make ends meet. An important factor to figuring out how much coverage you need is the payout percentage—most policies only offer 60% income replacement.

2. Long-term care insurance
Most companies do not offer long-term care insurance as part of a standard employee benefit package, but many now offer it as a supplemental option. Most group employee policies cost less than an individual policy would cost on the open market, and you can buy into at a younger age with simplified underwriting that could exclude you if you are older and develop health conditions.

If you are considering policies on the open market, you will face a vast array of choices, from traditional policies that offer a standard day-rate benefit to hybrid policies that combine long-term care with life insurance policies. There's a lot of fine print and conditions on most of these policies, like waiting periods, exclusions, and cost-of-living adjustments, so you may want to get the help of a professional to get the right policy to suit your needs.

Even if you are wealthy, the cost of a major health event may be hard to manage. Paying out-of-pocket for the care you need may end up diverting your financial plan.

3. Umbrella insurance
Got a dog? Teen drivers? A pool? Really, just having any amount of assets and living a quiet life can still put you in the crosshairs of an expensive liability lawsuit. Umbrella insurance picks up where other liability policies leave off, both in terms of dollar limitations and scope of coverage. Put simply, it provides extra (or "excess") liability coverage and is effectively insurance of last resort, but coverage will not take effect until after other sources of coverage like homeowner's insurance or car insurance have been used fully.

4. Life insurance
Only 54% of AmericansOpens in a new window had any type of life insurance at all in 2020, according to LIMRA, the life insurance trade organization, and that number was down nearly 9%Opens in a new window, over the last decade. While the pandemic ticked up life insurance policy sales at the start of 2021, that still leaves many without adequate coverage.

To figure out what kind of life insurance you need for the members of your family and how much, you may want to consult a financial professional, especially if your financial situation is complicated. They key step is to make sure the principal amount of the life insurance is enough to cover the income or financial obligations of the person covered. If that person makes $1 million per year, you need enough of a lump sum to invest that would generate that much income in a year.

If you're concerned you are not properly insured to protect your income, you can review your insurance policies and calculate your needs, and then shop for insurance policies that suit your needs. You can also consult a financial professional to do an insurance assessment that will look at your whole financial picture and help you assess what coverage will work best for you and your family.

Alternative Ways to Get Emergency Reserve Money

7/29/2021

While having an "emergency fund" is a staple of basic financial planning, near-zero yields on cash makes it especially unappealing to hold any substantive level of cash in the current market environment, both in terms of absolute returns (almost nothing) and the opportunity cost of not getting cash invested and put to more productive use.

Accordingly, while the standard approach is to hold 3-6 months of living expenses, Clements offered suggestions on alternative approaches to maintain the necessary emergency reserve, including:

if you've ever made any prepayments on your mortgage, consider trying to have your mortgage recast for a lower payment, which reduces the amount of fixed costs to be emergency reserved in the first place;
take a hard look at what truly are fixed costs, to make sure you're only emergency reserving what needs to be reserved against (and not holding reserves to cover discretionary payments that in practice would likely just be trimmed out if times were truly tough);
remember that having a Home Equity Line Of Credit (HELOC) provides a pathway to borrow against home equity in an emergency (but otherwise doesn't have the opportunity cost of cash, since it's not tapped unless actually needed);
be cognizant of other pathways to borrow if/when needed, including 401(k) loans or even borrowing on margin from an investment account (which again isn't ideal, but borrowing in an actual emergency is a reasonable course of action, because you're only borrowing when you really do need to);
contribute to a Roth IRA, recognizing that after-tax contributions can be withdrawn tax- and penalty free if needed; and
consider funding an HSA but then pay for medical expenses out of pocket on top (which can presumably be done if you had the extra cash to save in an emergency fund in the first place), and then keep your receipts and in an emergency, use your receipts to validate tax-free withdrawals from your HSA to cover the emergency

Top 10 ESG ETFs

7/28/2021

Among the investing trends that have becoming increasingly popular in recent years is sustainable investing as defined by ESG factors—environmental, social, and governance.

Generally, ESG factors involve the impact that a company's operations and products have on the environment; the relationship a company has with customers, employees, suppliers, and communities they operate in; and a company's governance policies. The Global Sustainable Investment Alliance recently estimates that sustainable investments now account for more than a third of all global assets.

If you are interested in exploring ESG-focused ETFs, here are the 10 largest ESG ETFs by net assets, as of July 2021:

iShares ESG Aware MSCI USA ETF (ESGU)
iShares ESG Aware MSCI EM ETF (ESGE)
iShares Global Clean Energy ETF (ICLN)
iShares ESG Aware MSCI EAFE ETF (ESGD)
Vanguard ESG US Stock ETF (ESGV)
XTrackers MSCI USA ESG Leaders Equity ETF (USSG)
iShares ESG MSCI USA Leaders ETF (SUSL)
iShares MSCI USA ESG Select ETF (SUSA)
iShares MSCI KLD 400 Social ETF (DSI)
First Trust Nasdaq® Clean Edge® Green Energy Index Fund (QCLN)

Top 10 Infrastructure-Focused ETFs

7/27/2021

Amid the latest worries over new COVID cases, expectations for potentially significant infrastructure spending is helping drive many segments of the market higher. There's a long way to go before proposals might be signed into law, but a bipartisan group of US senators continue to work with the White House on a $579 billion infrastructure package for the nation's highways, ports, and rail lines. That is on top of an existing transportation bill, which would bring the proposed total spending for infrastructure to $1.2 trillion.

If you are interested in exploring infrastructure-focused ETFs, here are the largest types of these ETFs (sorted by net assets), as of July 2021:

Global X US Infrastructure Development ETF (PAVE)
iShares Global Infrastructure ETF (IGF)
Flexshares Stoxx Global Broad Infrastructure Index Fund (NFRA)
iShares US Infrastructure ETF (IFRA)
SPDR® S&P Global Infrastructure ETF (GII)
ProShares DJ Brookfield Global Infrastructure ETF (TOLZ)
iShares Emerging Markets Infrastructure ETF (EMIF)
Legg Mason Global Infrastructure ETF (INFR)
AGFiQ Global Infrastructure ETF (GLIF)

Top 10 COVID Related Momentum ETFs

7/26/2021

While there are no ETFs explicitly designed to provide exposure to investments that a fund manager has constructed to capitalize on market views related to COVID trends, momentum measures may provide an insight into those ETFs that have been able to outperform during the pandemic.

Here are the top 10 results for ETFs with the highest 1-year market total returns (54% and above) and a "high" Sharpe ratio (month-end 1 year) to account for risk-adjusted returns, sorted by highest net assets, as of July 22, 2021:

iShares Core S&P Small-Cap ETF (IJR)
iShares Russell 2000 ETF (IWM)
Vanguard Small-Cap Index Fund ETF Shares (VB)
Financial Select Sector SPDR® Fund (XLF)
Vanguard Small-Cap Value Index Fund ETF Shares (VBR)
Vanguard Extended Market Index Fund ETF Shares (VXF)
iShares Russell 2000 Value ETF (IWN)
Schwab US Small-Cap ETF™ (SCHA)
Vanguard Financials Index Fund ETF Shares (VFH)
iShares S&P Small-Cap 600 Value ETF (IJS)

Top 10 Money Rules

7/25/2021

I like these top 10 money rules in this article -

What money can and can’t do for you isn’t intuitive, so most people are surprised at how they feel when they suddenly have more or less than before.
Money makes it easy to mistake optimism (good) with gullibility (dangerous) and overconfidence (disastrous).
Getting rich and staying rich are different things that require different skills.
The formula for how to do well with money is simple. The behaviors you battle while implementing that formula are hard.
“Save more money and be more patient” is too simple for most people to take seriously, but it’s the best solution to most financial problems.
Expectations move slower than reality on the ground, so it’s easy to become frustrated when clinging to the economic trends of a previous era.
Everything is relative. John D. Rockefeller was asked how much money was enough and said, “Just a little bit more.” Everyone, at every income, tends to feel the same.
Spending money to show people how much money you have is the fastest way to have less money.
Debt removes options, savings add them.
No one is impressed with your possessions as much as you are.

Why He Hired a Retirement Advisor For the First Time?

7/24/2021

As technology platforms, from online brokers to robo-advisors, make it easier and easier for consumers to manage their own retirement portfolios and automate the process of buying into and rebalancing a diversified portfolio, the question from the consumer perspective is "why would we need to hire a financial advisor?" Friedman highlights his own journey as someone who was historically a self-directed consumer but chose to hire a financial advisor when he retired.

Here are things that were important to him when looking for a financial advisor:

After one advisor failed to turn up for our appointment, I realized how important it was to have someone who was dependable and trustworthy.
I wanted someone with reputable credentials, such as the Chartered Financial Analyst or Certified Financial Planner designation. In addition, the advisor couldn’t work on commission because that creates an incentive to push high-cost financial products.
I wanted my own dedicated financial advisor, with the ability to schedule an appointment when needed. I wasn’t willing to leave my investment portfolio in the hands of a robo-advisor, with no human interaction.
I wanted a portfolio designed specifically for my circumstances, needs and goals.
I wanted my portfolio built primarily with low-cost, broad-based index funds.
I wanted transparency, with the ability to go online and see up-to-date information on the total management fees incurred, my portfolio’s performance and the likelihood of meeting my financial goals.
I wanted excellent customer support not just from my financial advisor, but from the whole organization.
I didn’t want to pay for the initial investment plan. If I didn’t like the plan, I wanted to be able to walk away without incurring a fee.
Finally, I wasn’t willing to pay someone 1% of assets per year to manage my investments. It would have to be considerably less.

Why Joint Ownership of An Annuity Is a Bad Idea - Part B

7/23/2021

We discussed beneficiary designation in last blogpost.

Joint Ownership Issues
As stated before, required minimum distributions must begin at the death of any owner which means that when the first joint owner dies, the annuity must begin making distributions. The only exception is if the surviving spouse was named beneficiary, they could continue the annuity without current distributions. There is no real benefit to joint ownership as it does not extend the life of the annuity and it can be a detriment to continuing the annuity when the first owner dies. Many individuals believe that since they own their other property jointly, they should also own their annuity jointly. The better way to go would be to have each spouse name their spouse the beneficiary rather than making both spouses co-owners. Naming the spouse as beneficiary would allow a better tax outcome.

Parent-Child Joint Ownership
If a parent purchases a joint annuity with their child, the parent and child will own equal shares. A withdrawal requires two signatures and distributions are made out to both parent and child. If the parent paid the premium, they have just made a gift to their child of half the value of the annuity. If the parent wants to make a withdrawal, one half the distribution will be taxable to the child regardless of who receives the money. If the child is under age 59½ then the entire amount distributed is subject to a 10% penalty. If the parent owns the annuity jointly with a child or grandchild, making the child the co-owner makes no real difference in postponing distributions and if the child dies before the parent, the parent would be forced to begin liquidating the annuity even if they had supplied the money.

Conclusion
In most cases, using joint ownership only hurts the ability to sustain tax-deferred growth. Most owners think joint ownership will allow the annuity to continue until the second death and that they will obtain additional tax-deferred growth. In actuality, it is just the opposite. When the first owner dies it can trigger the required minimum distributions. Do not set up joint ownership but to instead name the second spouse the beneficiary so you may continue the annuity uninterrupted if the owner dies.

Why Joint Ownership of An Annuity Is a Bad Idea - Part A

7/22/2021

Not only do annuities provide excellent investment vehicles, but they also provide tax-deferred growth. If you take two investment accounts with the same assets and one is taxable and one is tax-deferred, the tax-deferred account will always do better because it is not paying taxes until the money is distributed from the vehicle. Annuities are treated similarly to IRAs and qualified plans. The additional advantage of a non-qualified deferred annuity is that unlike a qualified plan or an IRA, no required minimum distributions need to be made during the life of the owner.

However, the tax deferral only applies as long as the owner is alive. Once the owner dies, the annuity must begin making post-death distributions to the beneficiary. Under IRC Section 72(s), upon the death of any owner, the annuity must begin to make post-death distributions to the beneficiary.

The Tax Reform Act of 1986 changed the joint ownership of annuity taxation rules to prevent using joint ownership to avoid taxation of the annuity over two lives. This makes annuities distributable whenever either one of the owners dies. If the other spouse is named as beneficiary, the taxation would then be postponed.

Beneficiary Designation
When a surviving spouse is named the beneficiary of the non-qualified annuity, they may continue the annuity in their own name. This is very similar to a spousal IRA rollover allowing the surviving spouse to continue to receive tax-deferred growth. The ability to continue the non-qualified annuity does not turn on ownership at all but on who the beneficiary is. If one spouse is the owner but names their spouse as the beneficiary, then the spouse who is named beneficiary can continue the annuity and continue to receive tax-deferred growth in the annuity.

In next blogpost, we will discuss joint ownership issues.

Annuities 101

7/21/2021

"Annuities 101," by Sheryl J. Moore, answers most of the basic questions related to various types of annuities, it can be found on WinkIntel.com.

Net Investment Tax Questions and Answers - Part C

7/20/2021

Previous net investment tax questions are answered here.

6. Can federal income tax credits be used to offset NIIT liability?

Although federal income tax credits can offset any tax liability, the final regulations state that income tax credits are allowed only against regular income tax and may not reduce net investment income tax. Examples of this type of tax credit include the foreign income tax credit and the general business tax credit.

The denial of tax credits as an offset of the NIIT is reflected by the sequence of reporting tax and tax credits on Form 1040. To this point, regular income tax is reported on line 46 of Form 1040. All tax credits reducing that regular income tax are taken lines 47-53. Beginning on line 56, “other taxes,” including the NIIT (reported on line 60), are reported. So logistically, all tax credits that reduce regular income tax are taken before the entry for the NIIT.

7. What form is used to report NIIT?

Net investment income tax is reported on line 60 of Form 1040. On Form 8960 (attached to Form 1040), the taxpayer computes the tax. In addition to reporting all the taxpayer’s net investment income, amounts reported on Form 8814 (Parents’ Election to Report Child’s Interest and Dividends) are also included.

Similar to regular income tax or self-employment tax, individuals who expect to be liable for the NIIT may either make estimated tax payments or request that their employer withhold additional amounts to avoid being subject to penalties for underpayment of taxes.

8. What is the additional Medicare tax? Who is liable for paying it?

The additional Medicare tax is a tax of 0.9% that is tacked on to the “regular” Medicare tax on all wages and self-employment income (collectively referred to as “earned income”) that exceed applicable threshold amounts. Thus, on earned income in excess of the applicable threshold amount, the total Medicare tax rate is 3.8% (the 2.9% regular Medicare tax rate plus the 0.9% additional Medicare tax rate).

In spite of its name, the tax revenue generated by the additional Medicare tax is not specifically earmarked for the Medicare fund. Similar to the regular Medicare tax, the additional Medicare tax is imposed only on individual taxpayers. Thus, entities such as C corporations, trusts and estates are not subject to the tax.

Net Investment Tax Questions and Answers - Part B

7/19/2021

Previous 3 questions are here.

4. Can conversion from a traditional IRA to a Roth IRA cause an individual to indirectly become subject to the NIIT?

Officially, distributions from traditional retirement accounts (IRAs, 401(k)s) are excluded from the NIIT. Similarly, amounts that are rolled over into Roth accounts from these traditional accounts are technically excluded. But these amounts still count in determining an individual’s AGI — and can cause the individual to exceed the applicable threshold and become subject to the NIIT.

As a result, for some individuals, Roth conversions are best exercised in small steps over time —converting only a small portion of traditional retirement funds each year to avoid crossing the AGI threshold. For others, Roth conversions may no longer be the best option for generating tax-free income during retirement.

5. How does the NIIT effectively increase the tax rate for capital gains and dividends?

The 3.8% net investment income tax is a surtax, meaning it is imposed independently on net investment income that is also subject to any other applicable income tax. To illustrate, the capital gains and dividend tax rate for taxpayers in the 39.6% tax bracket is 20%. However, if the taxpayer is also subject to the net investment income tax, there is an additional 3.8% tax imposed on those same capital gains and dividends. Thus, adding the two tax rates together, the overall effective tax rate for capital gain and dividends for those taxpayers is 23.8%.

For taxpayers who are not in the 39.6% tax bracket, the capital gains and dividend tax rate is only 15%. However, it is possible that such taxpayers with modified AGI that exceeds the threshold levels for the net investment income tax may also be subject to the net investment income tax. Adding the 15% regular income tax capital gain and dividend rate to the 3.8% net investment income tax rate, the effective rate of such taxpayers would be 18.8%.

Keeping reading for more net investment tax Q&As.

Net Investment Tax Questions and Answers - Part A

7/18/2021

1. What is net investment income?

Net investment income is the tax base for the 3.8% net investment income tax. In general, net investment income potentially includes any income other than “earned” income that is subject to Social Security tax and Medicare tax.

There are three general categories of net investment income: income commonly considered to be traditional investment type income, such as interest, dividends, annuities, rents and royalties; gross income derived from a trade or business; and net gain attributable to the disposition of property.

2. What is modified adjusted gross income for purposes of the NIIT?

For most taxpayers, MAGI is the same as their AGI. This is because the only adjustments made to AGI in arriving at MAGI relate to foreign earned income.

3. Who is liable for paying the net investment income tax?

Any taxpayer who has net investment income (in any amount) and modified adjusted gross income (MAGI) in excess of $200,000 for single taxpayers, $125,000 for married taxpayers filing separately and $250,000 for married couples filing jointly. Unlike many other income threshold amounts, these thresholds are not indexed annually for inflation.

In addition to individuals, the net investment income tax applies to certain trusts and estates. Nonresident aliens are not subject to the tax.

Keeping reading the next blogpost for more net investment income Q&As.

5 FIA Myths Busted - Part B

7/17/2021

In last blogpost, we discussed the first 2 FIA myths. Now we will bust the rest 3 FIA myths.

Myth 3: Fixed indexed annuities are not liquid.
It’s important to understand that annuities are a long-term retirement savings strategy. Except for some immediate annuities, most contracts begin payments on a fixed date many years in the future. So, if you withdraw money from an annuity before that date and during the withdrawal charge period, the withdrawal will incur a charge called a “surrender payment”.

In most cases, deferred annuities allow withdrawals up to a specified percentage of the contract’s accumulated value each year during the withdrawal charge period without any charges. Once the withdrawal charge period has ended, funds may be withdrawn without any charges. FIAs are designed to meet the need for long-term retirement savings and income, so one should have sufficient liquid assets to let the annuity funds sit.

Myth 4: Fixed indexed annuities are investments.
Fixed indexed annuities do not directly invest your money in any stock or equity investments. Instead, the annuity company credits a set, guaranteed return each year, with the potential for additional interest credits based in part on the performance of an external index. You should understand that FIAs are insurance products that are designed to help you manage certain financial risks associated with retirement such as volatile markets, interest rates and longevity.

Myth 5: Fixed indexed annuities are full of hidden charges.
Many types of annuities are available in today’s retirement marketplace. Some, like variable annuities, require explicit annual fees similar to mutual funds or managed money solutions. Unlike variable annuities, fixed indexed annuities do not directly participate in any stock or equity investments and do not charge the fees commonly associated with those investments.

With fixed indexed annuities, charges are typically imposed for discretionary actions like excess withdrawals or early surrender of the annuity contract; for optional features like supplemental guaranteed lifetime withdrawal and legacy benefits, or to support higher indexed interest crediting rates. These charges enable the insurance company to provide the guaranteed value promised to customers. FIAs have levers such as participation rates and caps that can limit interest crediting in return for providing guarantees, such as the protection of principal from market loss. Fees are not “hidden,” and must be fully disclosed prior to purchase.

5 FIA Myths Busted - Part A

7/16/2021

A recent Secure Retirement Institute study revealed that Americans are largely confused about how to turn workplace savings into a guaranteed income stream. Only 1 in 4 consumers understood that money saved in workplace retirement plans could be used to purchase annuities.

Here are five common myths about fixed index annuities (FIAs). Once armed with the facts, you will be ready to make a more confident decision in adding FIAs to your financial plans.

Myth 1: Fixed indexed annuities are not tax efficient.
FIAs may be a valuable solution for those looking to grow their retirement savings because they are a long-term, tax-deferred product - annuities allow retirement savings to grow without being reduced by tax payments – another appealing reason to consider an annuity. In fact, annuity earnings grow on a tax-deferred basis until you begins taking withdrawals or surrenders the annuity.

Over time, you will have the potential to build more retirement savings than you would have been able to if your earnings been taxed as income. Keep in mind that there is no additional tax benefit associated with funding an annuity from a tax-qualified source like a 401(k) plan.

Myth 2: Fixed indexed annuities can’t keep up with inflation.
Income riders frequently offer payout options that are indexed to inflation, which may help annuity holders keep pace with the rising cost of goods and services. However, when you are considering annuities in retirement planning, you should factor in the inflation risk associated with a fixed annuity payout. Like any risk in retirement planning, there are ways to insure, hedge, offset or otherwise lessen the impact of a known risk.

In next blogpost, we will bust the rest 3 annuity myths.

5 New Rules Related to Inherited IRAs - Part B

7/15/2021

In last blogpost, we discussed 3 new rules related to inherited IRA accounts for non-spouses, now the next 2 changes.

4. Some may use the old RMD method
For some non-spouse beneficiaries, they may use the old RMD method - if the beneficiary meets the IRS definition of being disabled or chronically ill, RMDs based on life expectancy are allowed. The same is true of beneficiaries who are within 10 years of the age of the deceased. Minor children can also take RMDs until they reach the age of 18, at which point the 10-year rule kicks in. Grandchildren are held to the 10-year rule.

5. If an estate or trust inherits the IRA
the Rules are different if the IRA is inherited by an estate or trust. If the deceased was not yet taking RMDs, the account must be fully withdrawn within 5 years. If the deceased was taking RMDs, withdrawals can continue to be made using the RMD method.

Finally, a tip about withdrawals for inherited Roth IRA - wait until late in the 10th year to move the money, so you can enjoy a decade of tax-deferred growth before you must move the money to a taxable account. For traditional IRA accounts, it's best to spread the withdrawals in 10 years to minimize tax because any withdrawals are taxed as ordinary income.

5 New Rules Related to Inherited IRAs - Part A

7/14/2021

For anyone other than the spouse who inherits an IRA account, here are 5 new rules to follow, otherwise, you will face 50% penalty from the IRS.

Spouses can still use the "stretch" IRA strategy - set annual required minimum distribution (RMD) based on life expectancy.

1. No annual RMDs
You don't have to withdraw money each year, as long as the account is empty at the end of the 10th year following the year the original owner died.

2. If the deceased had an RMD due for the year
The beneficiary must take the distribution. Failure to do so will result in 50% penalty of the amount that should have been withdrawn.

3. Even Roth IRAs must be emptied within 10 years
You can withdraw contributions the owner made at any time tax-free, but earnings are taxable if the account was set up by the deceased less than 5 years before their death.

The next 2 new rules are more complicated, as discussed in next blogpost.

The Best Investment Strategies for Inflationary Times

7/13/2021

With inflation indicators flashing at least short-term warnings as the COVID-19 pandemic winds down and the American consumer begins to bounce back, inflation is suddenly becoming a hot topic again...

In this paper attached here, researchers analyzed data across a wide range of asset classes over the past century, spanning three different countries (the US, UK, and Japan), to identify what fares better or worse in the face of rising inflation.

Not surprisingly, the data shows that rising inflation is bad for bonds, but also shows that persistent high inflation bodes poorly for equities as well (although the transition to higher-inflation environments from lower inflation tends to provide an initial boost to stock prices). Commodities also tend to fare well in inflationary environments, but with significant variability within the commodities complex, as energy tends to perform best, precious and industrial metals perform well, but foodstuffs and agricultural tend to perform weakest (if only because governments sometimes intervene to try to quell food inflation because it can be especially disruptive to households simply being able to afford to eat). And while real estate prices may rise on a nominal basis in inflationary environments, their real returns tend to hold quite steady (not materially better nor worse) in the face of inflation.

On the other hand, the researchers find that a number of more 'dynamic' investment strategies tend to perform better in inflationary environments, with profitability and value factors roughly holding their own during inflationary periods, smaller companies performing poorly in inflationary environments, and trend-following strategies (that capitalize on the broader restructuring of investment markets transitioning from a low-inflation to higher-inflation regime) faring best.

I Had a Stroke, Can I Still Get Life Insurance? Part B

7/12/2021

In last blogpost, we discussed what is stroke. Now we will discuss life insurance for people with strokes.

Life Insurance Underwriting for Stroke (TIA or CVA)

The primary questions to be asked of a proposed insured who presents with a history of stroke are:

Age of diagnosis?... and was it diagnosed as a TIA or CVA?
Was this the first occurrence?...if not, when were prior instances?
Any history of CAD, PVD, diabetes, hypertension, or smoking?
Has there been follow-up testing and have results been negative?
Is there a known cause of the stroke?
Is there any residual neurologic or cognitive impairment?

Strokes have a tendency to recur and, because of that, will often have a postponement period of 3 to 12 months. If there are no further incidents, underwriting improves as time from the stroke occurrence increases. Age of the person at the time of the occurrence or diagnosis is also a factor. TIAs are underwritten more favorably than CVAs, and we can often get offers of Table 2-3 and up. CVAs are more difficult to underwrite, but offers of Table 4-6 are not uncommon.

If you have had strokes in the past and are interested in life insurance, please contact us.

I Had a Stroke, Can I Still Get Life Insurance? Part A

7/11/2021

About Stroke - TIA or CVA
In general, a stroke refers to the death of brain tissue, due to lack of oxygenated blood reaching a particular area of the brain. They can either be characterized as a mini stroke — TIA (Transient Ischemic Attack) or full stroke — CVA (Cerebrovascular Accident). Strokes are one of the leading causes of death and disability in adults today.

What's a TIA?
A TIA is a brief, temporary ischemic attack (less than 24 hours) that resolves itself without permanent damage to the brain or residual neurologic impairment. Most TIAs are due to a small temporary blockage of a cerebral or carotid artery that impairs neurological activity for a short period of time. Symptoms include temporary numbness, dizziness, weakness, blurry vision or dizziness, speech abnormalities, and fainting. Because of the fleeting nature of TIAs, the doctor's diagnosis is usually made from history alone, rather than by a physical exam or lab testing. Often, it’s reported to the doctor by someone who observed the event and can recall the symptoms.

What's a CVA?
A CVA, in contrast, occurs when one or more blood vessels in the brain are blocked or rupture, often leading to permanent damage. Lack of blood flow (ischemia) is the major cause of strokes, and atherosclerosis (plaque in the arteries) is the leading cause of cerebral ischemia. High blood pressure, smoking, diabetes, peripheral vascular disease (PVD), and heart disease are all major risk factors for strokes. Testing for CVAs will include CT scans, MRIs, carotid ultrasounds or Doppler testing, and echocardiograms or stress tests. CVAs and TIAs have similar symptoms and can result in long-lasting neurological impairments, memory loss, and paralysis.

In next blogpost, we will discuss life insurance underwriting for applicants with strokes.

How to Prepare for a Retroactive Capital Gains Tax Hike

7/10/2021

What if the Biden administration’s proposal to raise the capital gains tax on high-income taxpayers was retroactive to April 28, the day it was proposed as part of the American Families Plan, or to May 28, the date the Treasury Department released the administration’s proposed fiscal 2022 federal budget?

Either is possible since the Treasury Department noted in the budget, aka the “Green Book,” that its proposal on capital gains “would be effective for gains required to be recognized after the date of announcement,” which could refer to April 28 or May 28.

Thinkadvisors.com has an article that discusses, for high income earners (annual income > $1 million), how to prepare for a retroactive capital gains tax hike.

CPA Sheryl Rowling, who heads rebalancing solutions for Morningstar, offers some pointers.
Consider moving up future big multimillion-dollar sales into this year.
Structure future deals as installments to keep annual income under $1 million.

The 7 Drawbacks to Fixed Annuity Products - Part B

7/9/2021

In last blogpost, we discussed 3 drawbacks to fixed annuity products, now the next 4 drawbacks.

4. Limited Access to Cash
Fixed annuity products are not checking accounts. They do, however, allow the consumer to withdraw money from the contract in many ways but with restrictions. The three most common ways contracts allow access to cash are 1) by a partial withdrawal from the contract, 2) a full surrender of the contract and 3) by taking payments based on one of the contract’s options or riders. If the consumer takes more than a certain percentage of the contract’s value (usually 10%), they will be subject to a surrender charge. Most annuities come with a surrender charge schedule that requires the buyer to pay a fee if they surrender the annuity contract in a certain number of years (i.e., typically 6 to 10 years) from purchase. These fees can be significant. So, it is hard to back out of a contract once purchased. Overall, consumers should only put money into an annuity contract that is being invested or saved for the medium to long-term.

5. Additional Taxes for Withdrawals Prior to Age 59½
If withdrawals are taken from a fixed annuity contract prior to age 59½, in most cases, an additional 10% penalty or tax will be due on withdrawn interest earned. Remember, annuities were intended to create supplemental retirement income and withdrawals prior to age 59½ trigger this penalty. There are some exceptions to this rule and consumers should consult their tax professional to get the specifics.

6. No Additional Tax Benefit for Qualified Funds
If a buyer funds their fixed annuity purchase with pre-tax or qualified funds, they do not receive any additional tax deferral benefit for doing so. Qualified funds are already tax deferred by law and, thus, get no additional income tax benefit by being placed into a fixed annuity. Many consumers buy annuities using qualified money, however, to obtain the basic benefits that annuities offer that other savings products do not, such as guaranteed lifetime income.

7. Complexity
One of the cardinal rules of saving and investing is not to buy a product you don’t understand. Annuities are no exception. Consumers need to be sure they understand the contract they are purchasing and its key features, benefits, costs and restrictions.

Fixed annuity contracts can be extremely valuable for the consumers who need them. They can provide guaranteed fixed rates of return, potential returns tied to investment market indices, protection of principal and guaranteed lifetime income in exchange for certain drawbacks or restrictions. They are a financial tool that can be used to create tax-advantaged returns and supplemental lifetime income. The key is for buyers to understand the drawbacks and to make sure the annuity products they buy fit their needs and risk tolerance.

The 7 Drawbacks to Fixed Annuity Products - Part A

7/8/2021

Today’s fixed annuity products possess great intrinsic value (e.g., tax deferral, guaranteed income options, probate avoidance and others), but they come with drawbacks that a buyer must understand before committing their hard-earned cash.

Although these drawbacks are not deal breaker, they must be carefully considered before the products are purchased.

1. Interest Rates That Can Change Each Year
Most fixed annuity contracts (except for multiple year annuity products, where the interest rate is guaranteed for the entire surrender charge period) allow the issuing life insurer to set a new interest rate each year or period of years. This means that the interest rate the consumer receives can change during the surrender charge period. This is an implicit risk the consumer is taking when buying most fixed annuity contracts.

This impact of this drawback can be minimized by understanding the renewal rate history of the issuing life insurance company. Most all annuity companies will provide a documented record of their renewal rates as a historical indicator of how the carrier has treated consumers when setting renewal rates.

2. No Capital Gains Tax Rate
Income earned on fixed annuity contracts is treated as ordinary income and not as capital gain. For example, suppose a fixed annuity contract is purchased for $25,000 and the contract is fully surrendered 10 years later when its value is $50,000. Based on current tax law, the gain on the contract of $25,000 will be treated as ordinary income and taxed at ordinary income rates in effect at the time of withdrawal. The benefit of being taxed at likely lower capital gains rates is not available.

3. Contractual Bonuses That Come With Strings Attached
Many fixed annuity contracts are sold with what are advertised as first-year bonus interest of 3% to 5% for example. The buyer should know that for most contracts, to fully earn these bonuses, they will need to hold the contract for several years, or, in some cases, they will only get the bonus if they take an income stream from the contract.

Keep reading for the remaining drawbacks.

The 2021 Retirement and Annuity Interactive Atlas

7/7/2021

Agencies like the U.S. Census Bureau, the Social Security Administration, the Federal Reserve System and the Centers for Medicare and Medicaid Services are packaging more and more of their data together with mapping tools. Site visitors can use the tools to feed the data into maps without knowing anything about map software.

Here are 10 of the federal agency mapping tools that financial professionals using to help clients with annuities and retirement planning.

General Demographics
1. Data.Census.Gov Mapping Tool
Agency: U.S. Census Bureau
Latest Data Update: 2019
Use this to create maps showing what kinds of people live where. Much of the data can be mapped at the city or county level.

Income
2. Data.Census.Gov Mapping Tool: Retirement Income
Agency: U.S. Census Bureau
Latest Data Update: 2019
Search on Data.Census.Gov for “retirement.” The tables that come up can be used to create showing where people have wage earnings, Social Security benefits or private retirement benefits.

3. Old-Age Survivors and Disability Insurance Benefits at the State Level
Agency: Social Security Administration (SSA)
Latest Data Update: 2015
Here’s how the SSA slices and dices its own Social Security benefits data.
Hovering the mouse pointer over a state retails state Social Security benefits details, such as how many children of workers are receiving Social Security retirement benefits, how many widows are getting survivors benefits, and how many workers are collecting Social Security Disability Insurance benefits.

Pension Plans
4. State and Local Government Pension Funding Status, 2002-2018
Agency: Federal Reserve
Latest Data Update: 2018
This collection of maps can be used to show state or local government employees why, in many states, depending solely on a government employee pension plan for future retirement income may be a bad idea.

Consumer Financial Status
5. Year-Over-Year Home Price Changes
Agency: Federal Reserve Bank of New York
Latest Data Update: April 2021
This map can help homeowner clients see how home prices have changed over time.

6. County-Level Debt-to-Income Ratio
Agency: Federal Reserve Bank of New York
Latest Data Update: 2020

7. Mortgage Non-Payments by State
Agency: Federal Reserve Bank of Atlanta
Latest Data: February 2021
This map can help financial services companies see where many consumers are borrowing and how debt loads have changed over time.
Also, this map can help clients see where consumer stress levels are changing.

Health
8: Animated Historical Cancer Atlas
Agency: National Cancer Institute, GIS Portal for Cancer Research
Latest Data: 2015
This map can help clients who are analyzing future health care financing needs understand how likely it is that people in different states, and different regions within states, get various types of cancer, such as brain or breast cancer.

9. Interactive Atlas of Chronic Conditions
Agency: Centers for Medicare and Medicaid Services
Latest Data: 2018
This map shows the prevalence of a wide variety of disorders, including high blood pressure, liver problems, depression and drug use.

Compliance
10. Annuity Best Interest Map
Organization: A.D. Bakers & Co.
Latest Date: June 15
This map was created by a private organization and is subject to copyright rules. It may be useful for a financial professional who wants to know which states have done what about annuity sales suitability and best interest standards.

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