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Tax Topic: Qualified Business Income Deduction

One of the provisions included in the Tax Cuts and Jobs Act of 2017 was the Qualified Business Income (QBI) deduction. It is designed as a tax break for small businesses or self-employed individuals and is comparable to the enhanced tax breaks legislated for larger companies. However, while the corporate tax changes are made permanent, the QBI is scheduled to end in 2025 – along with a host of other individual tax-return breaks.

The QBI applies to revenues that are “passed through the business,” so the owner actually pays taxes on that money on his or her individual tax return at their individual tax rate. Since they do not benefit from the substantially reduced corporate tax rate, S Corp or sole proprietors can claim up to 20% of their “qualified business income” as a deduction.1

The IRS defines QBI as income, gains, deductions and losses from a qualified trade or business – including income from partnerships, S corporations and sole proprietorships – minus business deductions such as half the self-employment tax, self-employed health insurance and qualified retirement plan contributions.2

To qualify, the taxpayer’s income must be at or below $163,300 for single filers or $326,600 for married filers ($164,900 / $329,800 in 2021). If income is above those thresholds, the taxpayer may still qualify for the QBI, but it gets tricky, particularly if he or she works in a specified service trade or business. This generally includes high-income professions such as a doctor or a lawyer.3 It’s a good idea to consult with a financial professional to help you understand if you qualify for this deduction.

A taxpayer with several different entrepreneurial ventures can combine those multiple sources of income to calculate his total QBI. The higher the qualified income, the higher the deduction (as long as it remains below the threshold for the individual’s filing status). When income looks to be higher than the limit, these tactics can be used to help reduce it to qualify for the QBI deduction:4

Be aware that a taxpayer who claims business losses may still qualify for the QBI but, here too, it gets very complicated.5 It’s important to work with a qualified tax professional who is familiar with the ins and outs of this deduction.

Content prepared by Kara Stefan Communications.

1 Stephen Fishman. Nolo. 2021. “The 20% Pass-Through Tax Deduction for Business Owners.” https://www.nolo.com/legal-encyclopedia/the-new-pass-through-tax-deduction.html. Accessed March 9, 2021.

2 IRS. April 8, 2019. “Facts About the Qualified Business Income Deduction.” https://www.irs.gov/newsroom/facts-about-the-qualified-business-income-deduction. Accessed March 9, 2021.

3 Andrea Coombes and Tina Orem. Nerdwallet. Nov. 13, 2020. “Qualified Business Income Deduction (QBI): What It Is & Who Qualifies.” https://www.nerdwallet.com/blog/taxes/pass-through-income-tax-deduction/. Accessed March 9, 2021.

4 Paul Chaney. Small Business Trends. March 3, 2021. “What’s the Qualified Business Income Deduction and Can You Claim It?” https://smallbiztrends.com/2020/08/qualified-business-income-deduction.html. Accessed March 9, 2021.

5 Michael T. Odom. The Tax Adviser. Dec. 1, 2020. “QBI deduction: Interaction with various Code provisions.” https://www.thetaxadviser.com/issues/2020/dec/qbi-deduction-interaction-code-provisions.html. Accessed March 9, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.

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Warren Buffett’s Annual Shareholder Letter

Every year, Berkshire Hathaway’s Chairman and CEO Warren Buffett sends a thoughtfully crafted letter to the company’s shareholders from which the investment industry gleans whatever newfound wisdom possible. Given that 2020 was an unusual year by economic, social and financial standards, there is much to glean.

Despite the difficulties the U.S. has experienced in managing the COVID-19 virus, Buffett has one sustaining message: “Never bet against America.” He also is a man who aligns his money with his beliefs. Presently, Berkshire Hathaway owns the highest value of U.S. business assets – comprised of property, plants and equipment – than any other company in the country.1

Berkshire is a conglomerate of disparate companies, and Buffet spends much time in his letter imparting what he’s learned about being a majority shareholder versus running a business. He says that “owning a non-controlling portion of a wonderful business is more profitable, more enjoyable – and far less work.”2

Fortunately, that’s also what it can be like to be an individual investor. While we may not be major shareholders, investors are often rewarded with a slice of the profit pie when we choose a well-run and profitable business. The key, of course, is to pick the right ones. Short-term investors may look to trade high risk for a quick profit, while longer-term investors may seek more reliable performance and give a company plenty of time to deliver. Sometimes it’s a matter of first figuring out what it is you want to accomplish with the money you make and then develop a strategy from there. Let us know if we can help.

One concept Buffett often reiterates is the need to hold a margin of safety when investing. Millions of people who lost their jobs during the pandemic learned just how narrow that margin of safety was within their own households. For those lucky enough to continue working, they may be even better off than before – simply because the pandemic shut down normal spending activities. That means many households are now in a position to reduce their debt and financial risks, and create an emergency fund they may not have had previously.3

Another hallmark move Buffett made in 2020 was an outsized buyback of Berkshire Hathaway’s own shares. The total 2020 tab came to $24.7 billion – compared to the combined total of $6.4 billion from the two prior years. Buffett noted that while he normally shies away from repurchases, the strategy offered “a simple way for investors to own an ever-expanding portion of exceptional businesses.” The strategy proved to be appropriate for an unpredictable year such as 2020.4

And finally, another key component of the shareholder letter was that Buffett admitted to making a big mistake in the past that came to a head in 2020. In 2016, Berkshire purchased aerospace-

parts manufacturer Precision Castparts for $37 billion. While he still believes the company is the leader of the aerospace industry and will generate solid returns in the future, Buffett cops to an earnings miscalculation that led him to pay too much for the company.5

Content prepared by Kara Stefan Communications.

1 Yun Li. CNBC. Feb. 27, 2021. “Warren Buffett says ‘never bet against America’ in letter trumpeting Berkshire’s U.S.-based assets.” https://www.cnbc.com/2021/02/27/warren-buffett-says-never-bet-against-america-in-letter-trumpeting-berkshires-us-based-assets.html. Accessed March 8, 2021.

2 Warren Buffett. Berkshire Hathaway. Feb. 27, 2021. “To the Shareholders of Berkshire Hathaway Inc.” https://www.berkshirehathaway.com/letters/2020ltr.pdf. Accessed March 8, 2021.

3 Chris Farrell. Star Tribune. March 6, 2021. “Take advantage of this rare opportunity to reduce financial risk.” https://www.startribune.com/take-advantage-of-this-rare-opportunity-to-reduce-financial-risk/600031093/?refresh=true. Accessed March 8, 2021.

4 Aparna Narayanan. Investor’s Business Daily. Feb. 27, 2021. “Warren Buffett’s Key Investment Strategy Rests On These ‘Family Jewels’.” https://www.investors.com/news/warren-buffett-annual-letter-signals-maintaining-berkshire-hathaway-strategy-2021/. Accessed March 8, 2021.

5 James Leggate. Fox Business. Feb. 27, 2021. “In Warren Buffett’s annual letter he admits making this ‘big’ mistake.” https://www.foxbusiness.com/markets/warren-buffett-admits-making-this-big-mistake-in-annual-letter-to-investors. Accessed March 8, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Annuity Insights

Annuity Insights

The Insured Retirement Institute (IRI) – a trade association for the retirement income industry – advocates annuities as a vehicle that can help provide retirees income, guaranteed by the insurer. The organization has been actively educating and lobbying legislators to expand annuity access as part of employer-sponsored retirement plans.1 Under this scenario, whatever portion the investor contributes to an annuity option in his 401(k) would be eligible for distribution throughout his lifetime based on an estimated calculation of life expectancy.

A deferred annuity is a contract between an insurance company and an individual. The individual pays a one-time or ongoing premium in exchange for eventual payouts that include both return of premium plus interest.2

There are many types of annuities. They are complex and include additional fees and restrictions that make them more expensive than other types of investments. Then again, there are no other products that guarantee a combination of minimum income payout, an option for guaranteed income for life and a guaranteed death benefit. It’s important to work with a financial professional to ensure an annuity is appropriate for your situation, and to choose the best option. We would be happy to help you with that evaluation.

Outside of a qualified workplace plan, retirees may purchase an annuity to diversify their retirement portfolio. Historically, bonds offered guaranteed income that retirees could count on, but today’s lower yields have investors searching around for other alternatives. An annuity can offer a similar level of guaranteed income without market risk.

In a fixed-index annuity (FIA) an investor pays premiums to an annuity company, which then invests to earn enough money to distribute contractual payouts plus interest, as well as generate revenues to run the company and hold a general reserve fund. Because the insurer does the investing, it bears all the market risk. With an FIA, the investor’s principal is protected from market volatility and he receives a minimum interest guarantee.3

Some fixed-index annuities are linked to a specific index, such as the S&P 500. The insurer provides the annuity owner a certain percentage of the index’s return but limits any losses. That way the investor can earn more income in any given year, based on how well that index returns.4

Note that when the owner withdraws money from an annuity, regardless of whether it is part of or separate from a workplace retirement plan, the full distribution is taxed as ordinary income, not as long-term capital gains. However, note that when annuity interest is earmarked to pay for long-term care insurance premiums or qualified long-term care expenses, it may be withdrawn tax-free.5

Content prepared by Kara Stefan Communications.

1 Mark Schoeff Jr. Investment News. March 4, 2021. “Insured Retirement Institute wants more worker access to plans, annuities.” https://www.investmentnews.com/insured-retirement-institute-wants-more-worker-access-to-plans-annuities-203567. Accessed March 4, 2021.

2 David Rodeck and John Schmidt. Forbes. Feb. 4, 2021. “What Is a Deferred Annuity?” https://www.forbes.com/advisor/retirement/deferred-annuity/. Accessed March 4, 2021.

3 Insurance News Net. March 3, 2021. “Are Annuities A Good Alternative To Bonds?” https://insurancenewsnet.com/oarticle/are-annuities-a-good-alternative-to-bonds. Accessed March 4, 2021.

4 Sandra Block. Kiplinger. Feb. 19, 2021. “The Case for Indexed Annuities.” https://www.kiplinger.com/retirement/annuities/602301/the-case-for-indexed-annuities. Accessed March 4, 2021.

5 Ken Nuss. Kiplinger. Feb. 12, 2021. “How Annuities Are Taxed.” https://www.kiplinger.com/retirement/annuities/602248/how-annuities-are-taxed. Accessed March 4, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Can Money Buy Happiness?

In 2010, a study was published by two Nobel prize-winning economists purporting that people with more money feel better about their lives. However, that held true only up to an annual salary of $75,000 ($90,000 in today’s dollars). Past the $75k threshold, people weren’t necessarily any happier.

That scenario has apparently changed in the ensuing decade. A recently updated version of the study now concludes that happiness continues to increase with income – without a cap.1

How do you define happy? The way we quantify happiness during our working years may be different from retirement. That’s largely because some of us define ourselves by our work or career status – how much we earn and whether we’ve reached our professional goals. Once we retire, the focus is put less on these things – our happiness can be shifted towards other things.

It may be family, travel, improving our golf or tennis game, pursuing hobbies, or checking off that bucket list. When we are in the retirement planning stage, it’s important to think about what will make you happy in retirement. From there, you can establish a number – your total assets – that support those concrete goals. That’s different from coming up with a random number and then living whatever lifestyle you can with it. If you’d like to discuss your retirement goals in more depth, feel free to contact us.

The 2020 World Happiness Report promises to be an interesting read because it’s the first in which data was collected during a global pandemic. While you would think the responses would be dreary, there are some positive patterns to consider. Across 12 countries, people affected by lockdowns developed stronger relationships with friends, neighbors and even the front-line workers at their local stores. In fact, 62% reported that living under a lockdown made them feel more connected to their community. More than half (58%) determined that those human connections are what make them truly happy.2

If you speak with retirees from earlier generations, there has long been a common theme that the important factor affecting a happy retirement is health – not wealth. More than 80% of today’s retirees agree. According to a recent Merrill Lynch study, regardless of wealth, Americans age 50 and older say that their biggest worry in preparing for retirement is being able pay for health-care expenses.3

Everyone’s ideal retirement is different. Your actual plans are what can change the goalposts for “the number” you need to have saved by retirement. While traditional retirement advice recommends we save anywhere from 10 to 15% of current income for retirement, you may be able to save less – or need to save more – to achieve the specific lifestyle you want in retirement. In other words, budget for the lifestyle you plan to enjoy, not the income that you presently earn.4

It’s one thing to scale your annual retirement income to your lifestyle – but what about the big-ticket risks? The Society of Actuaries (SOA) has identified a number of post-retirement risks that can affect income, such as the need for long-term or nursing care.5 By unbundling the income and insurance elements of your plan, you may be better able to afford the retirement lifestyle that will make you happy.6

Content prepared by Kara Stefan Communications.

1 Alex Ledsom. Forbes. Feb. 7, 2021. “New Study Shows That More Money Buys More Happiness, Even For The Rich.” https://www.forbes.com/sites/alexledsom/2021/02/07/new-study-shows-that-more-money-buys-more-happiness/?sh=561c2ff770d5. Accessed March 1, 2021.

2 World Happiness Report. Feb. 24, 2021. “Let’s Build Back Happier!” https://worldhappiness.report/blog/lets-build-back-happier/. Accessed March 1, 2021.

3 Kathleen Coxwell. New Retirement. Jan. 9, 2020. “65 Retirement Tips for a Healthy, Wealthy and Happy Retirement!” https://www.newretirement.com/retirement/retirement-tips-healthy-wealthy-happy-retirement/. Accessed March 1, 2021.

4 Paula Pant. The Balance. Feb. 11, 2021. “Plan for Retirement Based on Lifestyle, Not Current Income.” https://www.thebalance.com/plan-for-retirement-based-on-lifestyle-not-current-income-453919. Accessed March 1, 2021.

5 Ken Hawkins. Investopedia. Jan. 4, 2021. “Common Post-Retirement Risks You Should Know.” https://www.investopedia.com/articles/retirement/08/post-retirement-risks-outlive-assets.asp. Accessed March 1, 2021.

6 Jerry Golden. Kiplinger. Nov. 4, 2020. “Find the Income to Insure Against Retirement Risks.” https://www.kiplinger.com/retirement/601671/find-the-income-to-insure-against-retirement-risks. Accessed March 1, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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That Pesky Early Withdrawal Penalty: It’s There for a Reason

One way for the government to potentially earn more tax revenue is by eliminating the early withdrawal penalty. This is the typical 10%-tax penalty on distributions from retirement accounts by people younger than age 59 ½.1

If that penalty didn’t exist, investors may be more inclined to pull money out of their retirement accounts, whether to purchase necessities or to splurge on a luxury item. Without that penalty, they would pay only income taxes on the distribution, which seems somewhat equitable since they received a tax break on the contributions that went into the account. But paying 10% to the government on top of those taxes? It can be very discouraging.

On the one hand, that means the government will have to wait longer to receive tax revenues on those tax-deferred assets. On the other hand, it means the government will likely receive higher tax revenues because taxes will be due on long-appreciated capital gains. However, the other way the government benefits is because the more that people put away for retirement, the less they will have to rely on government benefit programs during retirement.

So, in many ways, the early withdrawal penalty is a win-win for both investors and the government, except during times when financial struggles are particularly difficult, such as during a pandemic. After the COVID-19 outbreak, millions of Americans lost income, and many had no choice but to pull money out of their retirement accounts to help make ends meet.

If you are considering making a withdrawal from your 401(k) — or any other investment account — to meet your current income needs, give us a call. We can review your financial situation to see if there may be a better way to leverage your assets that will help protect your potential for investment growth in the future.

Recognizing that Americans needed cash fast, the government stepped in with the CARES Act in the spring of 2020, permitting retirement account owners younger than age 59 ½ to withdraw up to $100,000 from their savings without paying the 10% penalty.2 That provision ended in 2020, but a major disaster declaration was signed into effect for account owners who experienced federally declared disasters, not including COVID. For example, during the Texas winter storm.3

However, Olivia S. Mitchell, executive director of the Pension Research Council at Wharton School of Business, says withdrawing money early from retirement accounts for any reason is a terrible idea. According to Mitchell, the biggest danger to doing so is the opportunity risk, and she cited the following example:

Assume a 40-year-old withdraws $50,000 from her retirement account today. By retirement at age 67, she would have given up more than $223,000 in retirement assets (assuming an annual return of 5.7%). Converted into annual benefits, that’s about a $14,000/year reduction in retirement income for the rest of her life.4

In other words, taking $50,000 out of your savings today may save you a 10% penalty, but it could potentially negatively affect your retirement lifestyle in the future.

If you did make a 401(k) distribution last year, note that the CARES Act also included a provision to help restore some of your potential investment gains. Investors have three years to pay the amount withdrawn back to the plan without any tax consequences — income taxes or the early withdrawal penalty.5 This is a substantial expansion period compared to the usual 60 days — and hopefully gives many retirement plan owners time to recoup and repay that “loan” to themselves.

Content prepared by Kara Stefan Communications.

1 Jim Blankenship. EFT Trends. Feb. 23, 2021. “16 Ways to Withdraw Money From Your 401(k) Without Penalty.” https://www.etftrends.com/16-ways-to-withdraw-money-from-your-401k-without-penalty/. Accessed Feb. 25, 2021.

2 Mark Paller. Forbes. Feb. 25, 2021. “How The CARES ACT Changed Retirement Plan Distribution Rules.” https://www.forbes.com/sites/forbesfinancecouncil/2021/02/25/how-the-cares-act-changed-retirement-plan-distribution-rules/?sh=6a4193b64add. Accessed Feb. 25, 2021.

3 Alex Briseno and Todd J. Gillman. The Dallas Morning News. Feb. 22, 2021. “Additional 31 Texas counties included in federal major disaster declaration.” https://www.dallasnews.com/news/politics/2021/02/22/additional-31-texas-counties-included-in-federal-major-disaster-declaration/. Accessed Feb. 25, 2021.

4 Knowledge@Wharton. Feb. 23, 2021. “Why Early 401(k) Withdrawals Are a Bad Idea.” https://knowledge.wharton.upenn.edu/article/why-early-401k-withdrawals-are-a-bad-idea/. Accessed Feb. 25, 2021.

5 Andrew Osterland. CNBC. Jan. 21, 2021. “Here are tax issues to consider if you tapped retirement account to weather 2020.” https://www.cnbc.com/2021/01/21/here-are-tax-issues-to-consider-if-you-tapped-retirement-account-in-2020.html. Accessed Feb. 25, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions.

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Is the Market Poised for a Value Shift?

The stock market continues to exhibit resiliency in the face of disrupting factors, ranging from a global pandemic to a severe economic decline to a controversial presidential election. For many years, Wall Street analysts warned a market correction was long overdue. Despite intermittent volatility, those concerns largely have not borne out.

You may be tired of worrying about a correction, but there’s no denying many share prices appear to have topped out, if not in an outright bubble.1 While growth-oriented investors may be willing to keep rolling the dice and hope prices rise even higher, a growing number are looking to transition to value stocks.

Value stocks are considered those priced lower than merited given certain company fundamentals, such as earnings, sales or book value. They are often believed to be overlooked in the market because their returns are relatively unimpressive. However, value stocks are kind of like the tortoise in the race against the hare (i.e., growth stocks). They may slowly plod along but, because they lack “flash” or volatility, can outpace their growth peers in the long term.2

Some stock analysts are starting to favor value stocks in the current landscape. They believe additional stimulus efforts will increase the money supply, and that will drive a commodity boost. Commodity outperformance, in turn, tends to be more positive for value stocks. One investment analyst recently projected value stocks could outperform growth stocks by as much as 30%, as measured from Q4 of 2020 through Q3 of 2024.3

Moving forward, the analysts at Russell Investments say they favor non-U.S. equities over U.S. equities, undervalued cyclical value stocks over expensive technology and growth stocks, and

the value offered by emerging markets (EM) equities.4

From a performance standpoint, the long-term story is quite different from recent short-term numbers. In 2020, value funds on average lost more than growth funds in the first-quarter market collapse and continued to lag after the market bounced back. By year end, value stock funds posted one of their worst years on record relative to growth funds.5

However, when you compare very long-term performance, value stocks have doubled the success of growth stocks. According to Bank of America, since 1926, value investing has returned 1,344,600% compared to 626,600% by growth investing.6

We often recommend diversification among investment portfolios, and adding value stocks or value-oriented mutual funds/ETFs is another way to diversify an equity allocation. If you’d like more guidance about stocks and their role in a retirement portfolio, please feel free to contact us.

Content prepared by Kara Stefan Communications.

1 Palash Ghosh. Forbes. Feb. 17, 2021. “Can Stocks Keep Rising Or Is A Correction Imminent? Here’s What To Expect, According To Market Experts.” https://www.forbes.com/sites/palashghosh/2021/02/17/can-stocks-keep-rising-or-is-a-correction-imminent-heres-what-to-expect-next-according-to-eight-wall-street-experts/?sh=3f43a7201fa8. Accessed Feb. 23, 2021.

2 Tim Smith. Investopedia. Nov. 26, 2020. “Value Stock.” https://www.investopedia.com/terms/v/valuestock.asp. Accessed March 9, 2021.

3 William Watts. Marketwatch. Feb. 22, 2021. “‘Excessive stimulus’ puts value stocks on track to outperform growth over next 4 years, says Stifel’s Bannister.” https://www.marketwatch.com/story/excessive-stimulus-puts-value-stocks-on-track-to-outperform-growth-over-next-4-years-says-stifels-bannister-11614020385. Accessed Feb. 23, 2021.

4 Russell Investments. Feb. 4, 2021. “2021 Global Market Outlook.” https://russellinvestments.com/ca/global-market-outlook. Accessed Feb. 23, 2021.

5 Peter Brennan. S&P Global. “Tide may eventually be turning for value stocks after strong end to gloomy 2020.” https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/tide-may-eventually-be-turning-for-value-stocks-after-strong-end-to-gloomy-2020-61992240. Accessed March 9, 2021.

6 Rob Berger. Forbes. Nov. 12, 2020. “Do Value Stocks Really Outperform Growth Stocks Over The Long Run?” https://www.forbes.com/advisor/investing/value-vs-growth-stocks-perfo[rmance/. Accessed Feb. 23, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Asset allocation or diversification does not ensure a profit or guarantee against loss; it is a method to help manage risk.

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Retirement Planning Insights

Amid lost jobs and a scaled-back economy in 2020, some workers may have decided to retire earlier than planned. There are a couple of Social Security strategies worth considering in this scenario.

First, if both spouses are over age 62, determine if you can make ends meet by taking only one Social Security benefit while letting the other benefit accrue to a higher level. Depending on your circumstances, it may be better to let the higher earner’s benefit accrue untapped as long as possible. This tactic not only provides higher income for the latter stages of retirement, but also allows the surviving spouse to receive a higher benefit – which is important when the household income is cut in half.

A second strategy is to wait until the economy recovers and then look for another job. If you start Social Security and then go back to work in fewer than 12 months, you can stop your benefit and actually pay back the money received. That will reset your start date and enable your benefit to continue accruing until you’re ready to retire again.1

Remember, there are various strategies you can use to create bridge income should you retire early or just want to give your Social Security benefits and/or investments more opportunity to grow. For example, if you downsize to a less expensive living arrangement, you can use excess equity to create a reliable income stream either throughout a specific period of time, or for life. Please contact us if you’d like to learn more about strategic retirement income solutions.

One of the silver linings of the pandemic was that the average savings rate among Americans increased significantly last year. According to the Bureau of Economic Analysis, the U.S. personal savings rate soared to a record 32.2% in April 2020 – which coincided with many state and local lockdowns. The previous one-month record was set back in May of 1975, at a mere 17.3%. Throughout the past decade, our savings rate has floated between 6-8%.2

Even if for only one month, Americans proved that they could live without many everyday goods and services. For the sake of saving more aggressively for retirement and other long-term goals, consider keeping your savings rate high, even post-pandemic. If that seems too challenging, consider appointing a “cut-back month” when you and your family commit to reducing expenditures just for one month. You may have done that last April; consider doing it again. If you are successful, consider deploying a cut-back month once every quarter.

What’s the best way to accumulate extra savings to build your wealth? Here are the 2021 contribution limits for various tax-advantaged accounts:3

  • Employer-sponsored 401(k)/403(b) plans – $19,500 ($26,000 for age 50+)
  • SIMPLE IRA and SIMPLE 401(k) – $13,500 ($16,500 for age 50+)
  • Traditional and Roth IRAs – $6,000 ($7,000 for age 50+)
  • Health Savings Accounts (HSAs) – $3,600 individuals; $7,200 families

If you’ve maxed out your available tax-deductible contributions, consider stashing extra cash into a Roth IRA. They’re funded with money you’ve already paid taxes on, so qualified distributions are tax free.4 Moreover, a Roth does not mandate required minimum distributions (RMDs) at any age, so if you don’t need that money during retirement, it’s a way to continue accumulating assets for your heirs.

While it is generally recommended that investors save at least 15% of their annual earnings to generate adequate retirement income, that number may need to be higher or lower based on what age you started saving and your retirement goals. To determine the percentage of income (“savings multiple”) you should consider saving going forward, divide your total retirement savings by your annual income.5

Content prepared by Kara Stefan Communications.

1 Ilana Polyak. BenefitsPro. Dec. 28, 2020. “3 Social Security changes coming in 2021.” https://www.benefitspro.com/2020/12/28/3-social-security-changes-coming-in-2021/. Accessed Feb. 18, 2021.

2 Alex Gailey. NextAdvisor. July 31, 2020. “The Pandemic Has Resulted in Record U.S. Savings Rates, but Only for Some.” https://time.com/nextadvisor/banking/savings/us-saving-rate-soaring/. Accessed Feb. 18, 2021.

3 T. Rowe Price. Feb. 4, 2021. “2021 Key Financial Numbers That You Need to Know.” https://www.troweprice.com/personal-investing/resources/insights/key-financial-numbers.html. Accessed Feb. 18, 2021.

4  Roger Young. T. Rowe Price. Feb. 3, 2021. “What You Need to Know When Deciding Between Roth and Traditional.” https://www.troweprice.com/personal-investing/resources/insights/what-you-need-know-deciding-between-roth-and-traditional.html. Accessed Feb. 18, 2021.

5  Judith Ward. T. Rowe Price. Feb. 4, 2021. “What Adjustments Should I Make to My Retirement Savings?” https://www.troweprice.com/personal-investing/resources/insights/what-adjustments-should-i-make-my-retirement-savings.html. Accessed Feb. 18, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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What Is The Value of a CEO Pledge?

As it turns out, the value of the 2019 pledge signed by 181 U.S. corporate CEOs was a fairly good deal for themselves and their shareholders … although less so for the other stakeholders it was designed to represent.

In the past, private companies thought little of the injustice of layoffs and reducing compensation packages for employees when the goal was to deliver greater value to shareholders. After all, workers could be replaced — but shareholders held the company purse strings. Efforts to increase dividend payouts as well as fighting labor demands and environmental regulations were considered justified to serve the greater good — which referred to stockholders.

This shareholder-driven business philosophy harkens back to the writings of economist Milton Friedman. In 1970, he wrote a treatise for The New York Times proclaiming that the primary social responsibility of a business was to increase its profits. Beyond that dictate, all other goals should be secondary.1

While growing share price is important, investors have other factors they must consider. It’s critical to pair the potential for investment growth with your tolerance for market risk and timeline. Don’t ever lose sight of what you want your money to accomplish beyond simply accumulation. If you would like guidance on investments and potential market risks, we are here to help.

In recent years, the tide has begun to turn regarding that singular business vision. The 2019 CEO

Business Roundtable pledged to not emphasize shareholder value so much if it would harm other stakeholders,particularlycustomers, employees and distributors.2 They also pledged a commitment to investing in employees, delivering value to customers, dealing ethically with suppliers and supporting local communities.

Signatories included J.P. Morgan Chase’s Jamie Dimon, Amazon’s Jeff Bezos, Apple’s Tim Cook, Bank of America’s Brian Moynihan, Boeing’s Dennis A. Muilenburg and GM’s Mary Barra.3 It is worth noting that signing the pledge was mostly an independent action by these CEOs, and wasn’t always approved by their company boards.4

This initiative was indicative of the changing times. The presidential administration was entirely focused on supporting an “America First” platform, so the private sector felt compelled to support social and economic issues that affected the general public.

Many of the CEOs subsequently did reduce shareholder payouts, but in some cases, they redirected that cash to shield their companies from the financial effects of the pandemic. However, perhaps even more interesting is that a Reuters analysis of data compiled by Refinitiv found that most of those signatory companies paid out higher median net income to shareholders than S&P 500 firms that did not sign the pledge.5

Further analysis by Wharton School of the University of Pennsylvania revealed that, among those signatories, companies that paid out the largest share of profits to investors were also more likely to announce layoffs and furloughs during the pandemic.6

Alas, the lesson is that shareholder priority and CEO compensation are still deeply baked into corporate America’s governance. While more companies have developed plans to support social initiatives, priorities are still driven by profits and an average of 91% of CEO compensation continues to be linked to company financial performance.7

Content prepared by Kara Stefan Communications.

1 Milton Friedman. The New York Times. Sep. 13, 1970. “The Social Responsibility of Business Is to Increase Its Profits.” https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html. Accessed Feb. 8, 2021.

2 Business Roundtable. Aug. 19, 2019. “Statement on the Purpose of a Corporation.” https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationOctober2020.pdf. Accessed Feb. 8, 2021.

3 Maggie Fitzgerald. CNBC. Aug. 19, 2019. “The CEOs of nearly 200 companies just said shareholder value is no longer their main objective.” https://www.cnbc.com/2019/08/19/the-ceos-of-nearly-two-hundred-companies-say-shareholder-value-is-no-longer-their-main-objective.html. Accessed Feb. 8, 2021.

4 Jessica DiNapoli, Ross Kerber and Noel Randewich. Reuters. Jan. 25, 2021. “Investor payouts and job cuts jar with U.S. companies’ social pledge.” https://www.reuters.com/article/health-coronavirus-businessroundtable-wo/insight-investor-payouts-and-job-cuts-jar-with-u-s-companies-social-pledge-idINL1N2JU217. Accessed Feb. 8, 2021.

5 Ibid.

6 Ibid.

7 Michael Hiltzik. yahoo!finance. Aug. 19, 2020. “Last year CEOs pledged to serve stakeholders, not shareholders. You were right not to buy it.” https://www.yahoo.com/lifestyle/column-ago-ceos-pledged-serve-130028409.html. Accessed Feb. 8, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Pandemic Highlights the Difference Between Economics and Finance

One of the more glaring lessons of the 2020 pandemic was that the economy and the stock market are not the same thing, nor do they necessarily move in lockstep. They are measurements of two different things, often indicating how the other will react. However, as we saw last year, the economy is a greater indicator of how Main Street is doing while the stock market is more a reflection of Wall Street.

The day-to-day performance of major stock indices, such as the S&P 500 and the Dow Jones Industrial Average, is not usually an accurate account of what’s happening in the lives of most Americans.1

As a general rule, economics is more of a social science. It conveys a picture that captures the interplay between real resources and human behavior. Finance, on the other hand, is a proactive measure. Its focus is on the tools and techniques of managing money.

We hear these two terms used interchangeably all the time, though, and that’s because they often do move in the same direction. That’s not what happened last year. While millions of Americans lost jobs and other sources of earned income, after an initial drop in the stock market, many investors saw their portfolios make ample gains. This was a good demonstration of how your money in the market could be working as another source of income. It’s another way of diversifying your assets, so that your investments can keeping earning money even if you can’t. Remember, we’re here to help you put your assets to work, so call on us if you need guidance.

Economics covers the production, consumption and distribution of goods and services and how people interact with them — through buying, selling, or working to buy or sell them — and how they react to price changes driven by supply, demand and inflation. It is, after all, people who drive economic activity and ultimately growth. There are two main branches of economics: macroeconomics and microeconomics.2

Macroeconomics measures the overall economy through factors such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP) and changes in employment levels.3 Microeconomics tracks specific factors within the economy, largely the choices made by people, households and industries. It is a study of the incentives behind those decisions and how they affect the use and distribution of resources.4

Finance, on the other hand, deals specifically with the use and distribution of money. As a discipline, it comprises three basic categories: public finance, corporate finance and personal finance. Within those realms, we often talk about the difference between Main Street and Wall Street. Main Street describes the average American investor as well as small independent businesses, while Wall Street consists of high net worth investors, large global corporations and the high finance capital markets.

There are inevitable conflicts between these two sectors. For example, government regulations frequently are designed to protect individual investors and/or small businesses, but they can pose a detriment to Wall Street profitability. The opposite can also be true, where benefits for large corporations can hurt small businesses, local jobs and small investors.5

Early on, the Federal Reserve and other central banks stepped up to infuse the economy with capital, thus stemming the tide of the economic decline. While these moves helped bolster the stock market, they did not prevent the loss of hundreds of thousands of jobs or stimulate consumerism. In other words, policy and even legislative intervention may have helped Wall Street, but it didn’t do that much to encourage economic growth or job creation.6

Content prepared by Kara Stefan Communications.

1 Clark Merrefield. Journalist Resource. Jan. 11, 2021. “The stock market is not the economy. Right? Here’s what the research says.” https://journalistsresource.org/studies/economics/stock-market-not-economy/. Accessed Feb. 4, 2021.

2 Stephen D. Simpson. Investopedia. Nov. 2, 2020. “Finance vs. Economics: What’s the Difference?” https://www.investopedia.com/articles/economics/11/difference-between-finance-and-economics.asp. Accessed Feb. 4, 2021.

3 Investopedia. Dec. 29, 2020. “Macroeconomics.” https://www.investopedia.com/terms/m/macroeconomics.asp. Accessed Feb. 4, 2021.

4 Investopedia. Nov. 2, 2020. “Microeconomics.” https://www.investopedia.com/terms/m/microeconomics.asp. Accessed Feb. 4, 2021.

5 Corporate Finance Institute. 2021. “What is Main Street vs Wall Street?” https://corporatefinanceinstitute.com/resources/knowledge/finance/main-street-vs-wall-street/. Accessed Feb. 4, 2021.

6 Shyam Sunder. Yale Insights. June 17, 2020. “Liquidity Injections May Have Driven the Stock Market Recovery.” https://insights.som.yale.edu/insights/liquidity-injections-may-have-driven-the-stock-market-recovery#gref. Accessed Feb. 15, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Vaccines and the Stock Market

If there’s one thing that can move the economy and stock market forward, it’s hope. This year, that hope is being presented in the form of COVID-19 vaccines. Economists and Wall Street analysts have long proclaimed that comprehensive economic recovery is not possible until we have contained the virus. The prospect of wide distribution of effective vaccines and herd immunity by the end of the year has put recovery in our crosshairs.1

What does this mean for investors? Review your investment portfolio and get your financial house in order. If we are due for improvement, it could be beneficial to get into the market when prices are low, rebalance often and take advantage of market dips for additional investment opportunities. As always, we are here to help guide on the best way to meet your financial goals.

This hopeful sentiment was echoed by CNBC’s ever-enthusiastic “Mad Money” host, Jim Cramer. He recently proclaimed that the U.S. stock market will be poised for even greater heights if President Biden is successful in forging a plan to quickly and widely distribute the COVID vaccinations.2

Phil Orlando, Federated Hermes’ chief equity market strategist and one of Wall Street’s bullish market analysts, advocates a combination of vaccine rollout and additional fiscal stimulus. He believes one of the surefire ways to boost economic growth is to help lower-skilled unemployed people find work. He predicted that by July 4, the U.S. will be coronavirus-free, setting the stage for a “monster market year.”3

Unfortunately, European stocks continue to struggle despite market exuberance in the U.S. over a new presidential administration. Part of this concern may be that many EU countries have suffered setbacks due to subsequent and more virulent strains of the coronavirus. As before, the U.S. continues to lag on the worst of the effects of the virus as they occur.4 This foreshadowing makes it all the more important that vaccines get into as many arms as possible in the next few months.

Market sectors that have suffered terribly from calls for lockdowns and social distancing are likely to benefit the most from widespread distribution of the COVID-19 vaccine. This includes the aviation and hospitality sectors, as well as the office and retail property market in Europe and the U.S. Of course, the opposite could be true: Pandemic beneficiaries could see a loss in revenues once people get out and about — for example, Amazon, Netflix and Zoom Video.5

Content prepared by Kara Stefan Communications.

1 Robin Wigglesworth. Financial Times. Dec. 2, 2020. “The ‘everything rally’: vaccines prompt wave of market exuberance.” https://www.ft.com/content/d785632d-d9a0-45ae-ae57-7b98bb2fb8d6. Accessed Jan. 25, 2021.

2 Kevin Stankiewicz. CNBC. Jan. 20, 2021. “Jim Cramer says the stock market could ‘explode’ if Biden improves Covid vaccine rollout.” https://www.cnbc.com/2021/01/20/jim-cramer-stocks-could-explode-if-biden-improves-covid-vaccine-rollout.html?recirc=taboolainternal. Accessed Jan. 25, 2021.

3 Stephanie Landsman. CNBC. Jan. 20, 2021. “Covid-19 vaccines will end pandemic in U.S. by early summer, Federated Hermes’ chief equity market strategist predicts.” https://www.cnbc.com/2021/01/20/covid-19-vaccines-will-end-pandemic-in-us-by-early-summer-federated.html. Accessed Jan. 25, 2021.

4 Jim Armitage. Evening Standard. Jan. 25, 2021. “FTSE 100 rises slightly as investors balance surging Wall Street with Covid worries.” https://www.standard.co.uk/business/ftse-100-rises-covid-joe-biden-quarantine-b900967.html. Accessed Jan. 25, 2021.

5 Sumathi Bala. CNBC. Nov. 23, 2020. “Hopes for a coronavirus vaccine are creating market winners – and losers.” https://www.cnbc.com/2020/11/23/investing-coronavirus-vaccine-creates-market-winners-and-losers-.html. Accessed Jan. 25, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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