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What’s Driving Oil Prices?

Oil prices are influenced by supply and demand, and 2020 was a great demonstration of this principle. With global and local shutdowns due to the spread of the coronavirus, there was less demand for products and services. While online shopping was up, foot traffic in stores languished and retailers – both local and nationwide – suffered from reduced consumerism.

With fewer customers, merchants needed less inventory. Wholesale orders dropped, as did the need to transport them from manufacturers to distributors to vendors. Reduced transportation led to less need for crude oil and gas. Thus, with decreased demand, gas prices dropped and stayed low.

Today, it’s a different story. Long-awaited vaccines have given retailers new hope for consumerism, so they are ordering increased inventory and deliveries are being made every day. Higher demand begets increased transportation, so oil prices are on the rise again. Lest we succumb to the impulse to complain about increased gas prices, remember that economic growth is a big contributor.1

Furthermore, for the first time since the pandemic began, more people are starting to leave the nest, taking vacations or planning trips for this summer. In April, the Energy Information Administration (EIA) announced that highway traffic is up 1% from a year ago and jet fuel demand jumped to 1.358 million barrels as vaccinated travelers are starting to take advantage of lower-cost airfares and hotel discounts. 2

As the economy recovers, we can expect higher inflation with many commonplace expenses. If you’ve reduced spending in the past year, note that your household budget may necessarily increase in kind – and not simply because you’re indulging in pent-up demand. If you need to make adjustments to your savings rate or review your portfolio to help defend against the effects of inflation, please give us a call. Now is a good time to review and reset your goals and allocations.

The oil industry is a little different from typical consumer goods. Because it takes time to mine for oil and refine it for consumer use, there is a lag time that can influence prices. For example, today’s new high demand will take a few months to affect crude oil production. The IEA predicts that new orders won’t be accurately reflected in global oil demand and supply until the second half of 2021. Once production is ramped up to meet rising demand, prices may begin to drop again.3

As of mid-April, the U.S. had fully vaccinated about 22% of the population. The United Kingdom was at about 11%, with France and Germany at only 6% vaccinated according to the Reuters vaccine tracker. Vaccine rollouts have been much slower and infections continue to surge in places like Europe, India and some emerging markets. Note that global oil producers take into consideration that other economies are not recovering as quickly as the U.S. While this may make them less inclined to ramp up oil production too quickly, the U.S. shale oil industry has a direct market to serve, so production is scheduled to increase by about 13,000 barrels per day.4

Also note that it’s not that easy to stay solvent during a year-long pandemic, even in the oil industry. In North America alone, bankruptcies among oil producers increased to the highest first-quarter level since 2016.5

Content prepared by Kara Stefan Communications.

1 US Energy Information Administration. 2021. “Oil and petroleum products explained.” https://www.eia.gov/energyexplained/oil-and-petroleum-products/prices-and-outlook.php. Accessed April 15, 2021.

2 Phil Flynn. Futures Magazine. April 15, 2021. “An Increase In Travel Is Tightening Oil Supply In The U.S.” http://www.futuresmag.com/2021/04/15/increase-travel-tightening-oil-supply-us. Accessed April 15, 2021.

3 Gina Lee. Investing.com. April 15, 2021. “Oil Down as Investors Digest Latest Supply Forecasts, U.S. Crude Oil Supply Draw.” https://www.investing.com/news/commodities-news/oil-down-as-investors-digest-latest-supply-forecasts-us-crude-oil-supply-draw-2474995. Accessed April 15, 2021.

4 Aaron Sheldrick, Bozorgmehr Sharafedin and Stephanie Kelly. Reuters. April 12, 2021. “Oil rises on U.S. vaccine rollout, Middle East tension.” https://www.reuters.com/business/energy/oil-prices-climb-favourable-outlook-us-fuel-demand-2021-04-12/. Accessed April 15, 2021.

5 Liz Hampton. Reuters. April 15, 2021. “North American oil bankruptcies hit highest Q1 level since 2016.” https://www.reuters.com/business/energy/north-american-oil-bankruptcies-hit-highest-q1-level-since-2016-haynes-boone-2021-04-15/. Accessed April 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.

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Gen X Prepares to Ascend the Throne

Generation X, comprised of adults between the ages of 40 and 55, have entered their prime earning years while at the same time enjoying a bull market for stocks. This demographic represents about a quarter of households in the U.S. (26.8%) and a similar share of

household net worth (26.9%). However, many economists see Gen X as the next

generation to hold significant wealth.1

While the declining Baby Boomer generation now accounts for only 22% of American consumers, Gen X is expected to grow to more than 38 million households by 2027. Furthermore, this group is expected to reach $34.6 trillion in investable assets during that same time frame, up from holding $9.2 trillion in in 2017.2

If you or someone you know is earning a good income but has little investment experience, we’d be glad to help. Forming a trusted relationship with a financial professional can be the key to designing and achieving a plan for a financially confident retirement. Please feel free to give us a call or refer us to family, friends and colleagues.

A new study of Generation X women found that more than half (54%) of those with partners earn as much as or more than their spouse. In fact, nearly a third of Millennial and Gen X women report that they are the primary breadwinners of their household. With earnings and financial planning top of mind, about 77% of Gen X women say they are making sure their children learn about managing finances.3

However, Gen X largely represents the last of the old guard. This generation grew up believing in the American dream – get an education, work hard, buy a house with a 30-year mortgage and save for retirement. In contrast, the generations following are more skeptical of these principals. Having lived through and witnessed the effects of two recessions and a global pandemic on their parents’ finances, Millennials and Generation Z are more likely to question the cost-value proposition of a college education and the wisdom of committing to a 30-year mortgage – especially while carrying student loan debt and an auto loan.4

Gen X may be more interested in a job that provides health benefits, while younger generations tend to be more entrepreneurial, and choosing the entrepreneurial path, benefits are not always included with the job. As such, Gen X is more old school when it comes to investing, contributing to traditional savings vehicles and adopting a buy-and-hold mindset. In some ways Millennials are proving more sophisticated; using apps to actively buy and sell stocks, invest in fractional shares, and mix up their savings vehicles among tax-advantaged accounts such as a 401(k) or a Roth IRA.

In many ways, Generation X is in a prime position. Although overlooked by the larger, more influential Baby Boomers and Millennials, Gen X has benefited from being sandwiched in the middle. They’ve inherited the values of the American Dream. Many got their college education before tuitions skyrocketed and student loans became prevalent. Some had bought their first house and had a firm foothold in their career before the 2007 recession.

At the same time, they grew up with computers and easily adapted to smartphones and other new technology. Gen X has accumulated assets that are well positioned to continue growing and help ease them into retirement, not to mention the potential for inheriting wealth from their parents.5

Content prepared by Kara Stefan Communications.

1 Howard Schneider. US News & World Report. March 29, 2021. “Gen X Emerging From Pandemic With Firmer Grip on Americas Wallet.” https://money.usnews.com/investing/news/articles/2021-03-29/gen-x-emerging-from-pandemic-with-firmer-grip-on-americas-wallet. Accessed April 11, 2021.

2 Steven A. Morelli. Insurance News Net. March 26, 2021. “Don’t Call Them Slackers: Why Generation X Is Really Generation $.” https://insurancenewsnet.com/innarticle/dont-call-them-slackers-why-gen-x-is-really-gen. Accessed April 11, 2021.

3 Jacqueline Sergeant. Financial Advisor Magazine. April 1, 2021. “The Buck Increasingly Stops With Millennial, Gen X Women.” https://www.fa-mag.com/news/the-buck-increasingly-stops-with-millennial–gen-x-women-61202.html. Accessed April 11, 2021.

4 Andrew Lisa. Yahoo Finance. April 6, 2021. “What Millennials Can Learn From Gen X’s Money Mistakes.” https://finance.yahoo.com/news/millennials-learn-gen-x-money-201401828.html. Accessed April 11, 2021.

5 Andrew Lisa. Yahoo Finance. March 24, 2021. “Surprising Ways Gen X and Millennials Are Worlds Apart Financially.” https://finance.yahoo.com/news/surprising-ways-gen-x-millennials-110017806.html. Accessed April 11, 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.

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Investment Consolidation Strategies

Throughout investment industry and financial media sources we constantly hear the message that our money should be diversified. By spreading assets throughout a number of different vehicles, we can take advantage of various market opportunities while helping protect them from some investment risks.

But how much diversification is too much? And what exactly should it cover?

For example, should you spread out your money across brokerages and custodians, or maintain a small number of accounts with one or two financial institutions? As young investors, we are often tempted to try out different investment opportunities in response to broker solicitations, direct mail advertisements, money managers we hear on television or radio, as well as a number of other mediums that seem promising.

But as we near retirement, it’s usually a good idea to begin consolidating accounts. This is because it can often be easier to manage fewer accounts as we grow older. It also can help our loved ones or a hired financial professional step in to find and manage money on our behalf. If you have reached this stage and would like to get your finances organized and consolidated, we can help you decide the best options for your situation. Don’t hesitate to call.

Should you consolidate down to just one brokerage and/or one bank? That may depend on the total value of your assets. Note that the Securities Industry Protection Corporation (SIPC) insures up to $500,000 in each account held at each institution. In other words, if you hold a taxable account and a tax-deferred account at the same brokerage firm, each is insured for up to half a million dollars. Also note that your money is kept separate from the assets of the brokerage firm itself. Therefore, if the company gets into trouble, it can’t tap its customers’ money to bail itself out.1

There are some good reasons to consolidate with one brokerage firm. First of all, it’s simply easier to monitor performance. Second, you also may enjoy additional perks if your total account size exceeds a specific threshold. For example, as a “premium investor” you may be eligible for free advisor consultations, free notary services, etc.

However, just because you consolidate with one broker doesn’t mean you need to put all of your money in one account. In fact, it can be a good idea to vary products for tax diversification. A combination of taxable and tax-free accounts — such as traditional and Roth IRAs (which do not require minimum distributions) – can reduce your tax liability during retirement.

However, be aware of portfolio overlap as you diversify your investments. Your investments — particularly mutual funds and ETFs — may share many of the same securities. When you consolidate, it can be  a good time to cross reference your investments to identify security duplication and concentration. One rule of thumb is to consider holding no more than 10% of your total investment in any particular industry or company. Otherwise, a performance decline may dramatically affect your income during retirement.2

Another idea is to consolidate into a “Target Date” fund which is designed to adjust its allocation mix as you approach the target date (often your retirement date). In doing so, you benefit from a single diversified portfolio managed by financial professionals who periodically rebalance the investment mix to stay on target with its timeline and performance goals.3

Be aware that as working spouses begin to consolidate their individual accounts, they may have many of the same underlying investments. Review all accounts to determine an appropriate asset allocation and retirement timeline for each spouse as well as the household.

If you are considering consolidating multiple 401(k) plans, your choices may be limited by what your past and current plan sponsors allow. Sometimes it’s easier to roll over those assets to a traditional IRA, especially if you tend to change jobs relatively often. The IRA becomes a repository to consolidate old 401(k) assets and maintain a strategic asset allocation without being overly diversified or having too many overlapping securities. Consider your 401(k) options:4

  • Leave the assets in the current 401(k) if allowed by your former employer’s plan.
  • When changing jobs, roll your old 401(k) account assets into your new employer’s plan — if allowed by the new plan. This may be preferable if the new plan permits loans, but be sure to compare new and old plan fees and investment options to ensure you get what you want.
  • Roll over your old 401(k) into an individual retirement account (IRA) — do this with each career/company move to maintain one consolidated reservoir. Be aware that an IRA does not permit loans and there may be negative tax consequences if you have significantly appreciated employer stock.
  • Cash out your old 401(k) only if you need the money. Not only are those funds considered taxable income and subject to an immediate tax withholding, but you also may be subject to a 10% tax penalty if you cash out too young. Moreover, you could miss out on future tax-deferred gains.

Content prepared by Kara Stefan Communications.

1 Teri Geske. Investorjunkie. Feb. 23, 2021. “Can You Have Multiple Brokerage Accounts?” https://investorjunkie.com/stock-brokers/can-you-have-more-than-one-brokerage-account/. Accessed April 2, 2021.

2 T. Rowe Price. Spring 2021. “Focus on Diversification.” https://www.troweprice.com/content/dam/iinvestor/planning-and-research/Insights/investor-magazine-spring.pdf. Accessed April 2, 2021.

3 T. Rowe Price. Spring 2021. “A One-Stop Approach to Retirement Investing.” https://www.troweprice.com/content/dam/iinvestor/planning-and-research/Insights/investor-magazine-spring.pdf. Accessed April 2, 2021.

4 T. Rowe Price. Spring 2021. “What Should You Do With an Old 401(k)?” https://www.troweprice.com/content/dam/iinvestor/planning-and-research/Insights/investor-magazine-spring.pdf. Accessed April 2, 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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Diversification does not ensure a profit or guarantee against loss; it is a method used to manage risk.

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Social Security Proposals and Strategies

As the Social Security Trust Fund approaches its expiration date, many existing entities are offering helpful suggestions for funding alternatives. For example, the Association of Mature American Citizens (AMAC) recommends a combination of changing how cost of living adjustments are made, delaying retirement age and updating the delayed credit strategy. Among its proposals, the AMAC also advocates establishing a new “Social Security Plus” account — a personal retirement savings account that begins paying out at age 62. Specifically, this account would:1

  • Be funded on a strictly voluntary basis by both employees and employers
  • Be owned by the individual
  • Provide a tax deduction for employer contributions
  • Allow after-tax contributions by employees with tax-free withdrawals (similar to a Roth IRA)
  • Be funded via payroll deduction

Alicia Munnell, director of the Center for Retirement Research at Boston College and a respected individual in the retirement income field, advocates a long-term approach to solving the pending Social Security shortfall. While she does not advocate cutting benefits, Munnell believes that the only way to fund full benefits for the next 75 years is to raise current payroll taxes.2

Those who have already retired are less likely to be affected by changes to the Social Security system than those who are currently preparing for retirement. It’s important to have your own plan for an independent retirement income stream, separate from government benefits, to ensure your needs will be covered. Feel free to reach out to learn more about current income vehicles that can help secure your financial future.

In a recent proposal for funding Social Security, President Biden proposed:

  • Raising the guaranteed minimum benefit to 125% of the federal poverty level
  • A 5% increase for retirees who have been drawing benefits for at least 20 years
  • Enhancing payouts to surviving spouses by 20%
  • Boosting the annual cost-of-living adjustment for benefits

Biden proposes paying for benefit increases by levying FICA taxes on workers who earn more than $400,000 a year. Other proposed ideas include imposing FICA taxes on income above $142,800 (which is currently the limit for this tax), gradually increasing the payroll tax rate from the current 12.4% to 14.8%, reducing benefits for those with higher lifetime incomes, reducing cost-of-living adjustments, and limiting benefits for spouses and children of higher-income earners.3

Those are all proposals that, in some form, may likely change the future Social Security landscape. Those nearing retirement can utilize a couple of strategies now that may not be as lucrative once proposed changes are made.

One option is the delayed credit that accrues if you wait until age 70 to draw benefits. Now that people are living longer, this accrual strategy, which was implemented by the Social Security Administration back in the 1950s, produces a substantially higher advantage for retirees who delay drawing benefits and then live to a ripe old age. In fact, waiting until age 70 can make lifetime benefits worth 76% more than claiming them at age 62. This actuarially enhanced perk is available only until benefits are adjusted to match to today’s longer life expectancy.4

Also be aware that widows and widowers do not necessarily have to wait until age 62 to begin taking Social Security benefits based on the earnings of an eligible spouse who passed away. A surviving spouse can begin drawing the deceased spouse’s benefit at age 60, then switch to his or her own benefit later (if higher). They can even wait until age 70 for the delayed credit and begin taking the enhanced benefit at that point.5

Content prepared by Kara Stefan Communications.

1 Association of Mature American Citizens. 2021. “The Combined Social Security Guarantee and Social Security Plus Initiative.” https://amac.us/social-security/. Accessed March 30, 2021.

2 Jane Wollman Rusoff. ThinkAdvisor. March 14, 2021. “Alicia Munnell: Biden’s Social Security Tax Hike Plan Falls Short.” https://www.thinkadvisor.com/2021/03/19/alicia-munnell-bidens-social-security-plan-falls-short/. Accessed March 30, 2021.

3 Bob Carlson. Forbes. Feb. 22, 2021. “Changes Must Come To Social Security.” https://www.forbes.com/sites/bobcarlson/2021/02/22/changes-must-come-to-social-security/?sh=50094aa115e4. Accessed March 30, 2021.

4 Investopedia. Dec. 21, 2020. “How Much Can I Receive From My Social Security Retirement Benefit?” https://www.investopedia.com/ask/answers/102814/what-maximum-i-can-receive-my-social-security-retirement-benefit.asp. Accessed April 14, 2021.

5 Social Security Administration. 2021. “Receiving Survivors Benefits Early.” https://www.ssa.gov/benefits/survivors/survivorchartred.html. Accessed March 30, 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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Updates on FSAs and HSAs

A recent survey found that 40% of respondents with access to a health savings account (HSA) do not fully understand how they work. Basically, HSAs are paired with high-deductible health plans to help people save money for their plan’s high deductible, copayments and other qualified expenses.

However, the real value of an HSA lies in its tax-free advantages. Contributions are made tax free (reducing your current taxable income) and can be invested for tax-free growth in a variety of mutual funds, stocks and exchange-traded funds (ETFs). Additionally, HSA withdrawals are tax free as long as they are used to pay for eligible products and services.

In 2021, the contribution limit for a health savings account is $3,600 for individuals and $7,200 for families; anyone age 55 or older can make an additional $1,000 annual contribution.1

Throughout the past year, Congress expanded the eligible uses of these funds, further increasing their value and allowing you to purchase a wider range of personal and health-related products using tax-free income. If you have access to one of these accounts through work or purchase health insurance on the individual market, they are a good idea to include in a financial portfolio. If you’d like assistance determining how to invest your HSA savings to complement the rest of your portfolio, don’t hesitate to call us for advice.

The CARES Act, passed in spring 2020, expanded the types of products that can be paid for with HSA or employer-sponsored Flexible Spending Account (FSA) savings. Under the new regulations, these funds can be used to pay for over-the-counter medications, like ibuprofen and Claritin. Other products now eligible for purchase with HSA and FSA funds include:2

  • Facial cleansers, face wipes
  • Prescription acne medications and over-the-counter acne treatments
  • Sunscreen and medicated body lotions designed to alleviate certain skin conditions
  • Lip balms for sun protection and chapped lips
  • Hot and cold therapy packs, cooling headache pads
  • Heartburn medication
  • Allergy relief
  • Toothache relief, such as Orajel
  • Humidifiers, air purifiers and filters — with a letter of medical necessity (LMN) from a physician
  • Dietitian fees, with an LMN
  • Some mental health treatments and services
  • Prescription hormone replacement therapy
  • Birth control pills
  • Pregnancy tests
  • Fertility tests
  • Fertility treatments such as in vitro fertilization, intrauterine insemination, fertility medication, the temporary storage of eggs or sperm
  • Breast pumps, breastfeeding classes, absorbent breast pads, breast milk storage bags
  • Feminine care items, such as pads, tampons, cups, sponges

In February, the IRS published guidelines giving employers more flexibility to extend how long employees have to use their FSA funds. Normally these are “use it or lose it” by the end of the year, with a short grace period. However, due to job interruptions last year, new guidelines allow employers to extend those funding rules to carry over or extend the grace period for unused health and/or dependent care FSA funds for plan years 2020 and 2021 to the immediately following plan year. Note that the new rules permit employers to make these changes, but it’s up to the employer to decide what to do.3

FSA owners with more time and opportunities to spend their funds have many new approved items for which they can use that money – even for gift ideas (these expenses are approved for an HSA as well):4

  • Ancestry kits (a fun holiday gift for family members)
  • Baby monitors and potty-training undies (baby shower gift)
  • Birth classes and medically certified doulas
  • Prescription sunglasses (for a winter ski trip)
  • Nicotine gum, patches, lozenges, inhalers, nasal sprays (New Year’s resolution to stop smoking)
  • Moisturizers with SPF protection (such as expensive anti-aging facial lotions)

The Personal Health Investment Today (PHIT) Act is a bipartisan bill introduced in March that, if passed, would permit the use of pre-tax FSA and HSA funds to pay for healthy living products and activities, such as gym memberships, fitness equipment and sports-league fees.5

Content prepared by Kara Stefan Communications.

1 Brian O’Connell. Omaha World-Herald. March 4, 2021. “Saving For Medical Expenses With An HSA.” https://omaha.com/business/investment/saving-for-medical-expenses-with-an-hsa/article_3412a1e3-63be-51f0-8ebe-f6c49b3ddb2c.html. Accessed March 23, 2021.

2 Regan Olsson. BannerHealth. July 19, 2020. “7 Things Covered by Your FSA That Might Surprise You.” https://www.bannerhealth.com/healthcareblog/advise-me/7-things-covered-by-your-fsa-that-might-surprise-you. Accessed March 23, 2021.

3 JD Supra. Feb. 22, 2021. “IRS Notice 2021-15 Provides Clarity Regarding FSA Relief Available Under Consolidated Appropriations Act Benefits Law Update.” https://www.jdsupra.com/legalnews/irs-notice-2021-15-provides-clarity-3663572/. Accessed March 23, 2021.

4 Megan Leonhardt. CNBC. Dec. 15, 2020. “15 surprising things you can buy with your leftover FSA dollars.” https://www.cnbc.com/2020/12/15/15-surprising-things-you-can-buy-with-your-leftover-fsa-dollars-.html. Accessed March 23, 2021.

5 Jody Heemstra. DRG News. March 19, 2021. “Thune, Murphy Reintroduce Bill to Encourage Healthy Living.” https://drgnews.com/2021/03/19/thune-murphy-reintroduce-bill-to-encourage-healthy-living/. Accessed March 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.

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New Status on Pension Plans

Financial professionals and economists have been talking about the “graying of America” and the retirement crisis for at least a couple of decades. Now, it seems, things have reached a tipping point.

Even labor union workers, largely beneficiaries of rich benefits and pension plans, have been hit hard. Throughout the past century, unions set up multiple-employer pension plans so that unionized workers in the trucking, trade, construction, ironworking, carpentry and other industries could change employers throughout their career while staying with the same union and continue accruing pension benefits from job to job.1 Despite that effort, more than 1,400 multiemployer pension plans covering about 11 million U.S. workers have fallen into a financial hole. 

For example, a worker who retired in 2009 with 37 years paid into his pension fund was due $4,265 per month for life. However, in 2015 his pension benefit was slashed to $2,217 per month due to underfunding.2

This problem doesn’t just affect pensioners, it affects the nation’s overall economy. According to the National Institute of Retirement Security, each $1 spent on pension benefits supports $2.19 in economic output. In some coal-mining areas, entire towns are supported by union pensioners. In Detroit, nearly a third of income comes from pensions, union retiree health, Medicare and Social Security. If pension plans fail, communities throughout the heartland, including Ohio, Kansas, Pennsylvania, Michigan and Indiana, will suffer immeasurably.3

Union pensions are not the only plans under financial pressure. According to the 2020 Social Security Trustee report, the Social Security retirement trust fund was scheduled to run out of money by 2034. But that estimate was before the pandemic, when unemployment and suspended FICA payroll taxes significantly reduced Social Security revenues while at the same time millions of people retired early and began tapping their benefits. The new trustee report, due in a few months, will likely update that depletion date to 2032 or sooner. Without changes, Social Security benefits soon will be funded solely by current payroll taxes, which would reduce benefits by as much as a quarter of previous estimates.4

. It  may be a good time  to review your individual retirement plan to shore up any gaps that may be affected by reduced pension and government benefits. Feel free to contact us to discuss your situation and explore tax-efficient ways to provide more financial confidence to your retirement plans.

The recent $1.9 trillion stimulus bill took a first step to help stabilize pension plans. It authorized funding by the Pension Benefit Guaranty Corporation (PBGC) for eligible multiemployer plans to enable them to pay benefits at plan levels and remain solvent. The funding is being paid out from general revenues of the U.S. Treasury.5

Content prepared by Kara Stefan Communications.

1 Chris Farrell. Marketwatch. March 15, 2021. “The new stimulus bill will help shore up some shaky pension plans.” https://www.marketwatch.com/story/the-new-stimulus-bill-will-help-shore-up-some-shaky-pension-plans-11615586775?mod=home-page. Accessed March 22, 2021.

2 Teresa Ghilarducci. Forbes. March 15, 2021. “What Is The Pension Provision In The Stimulus Package? An Explainer.” https://www.forbes.com/sites/teresaghilarducci/2021/03/15/what-is-the-pension-provision-in-the-stimulus-package-an-explainer/?sh=7fdbc4c257d1. Accessed March 22, 2021.

3 Ibid.

4 Bob Carlson. Forbes. Feb. 22, 2021. “Changes Must Come To Social Security.” https://www.forbes.com/sites/bobcarlson/2021/02/22/changes-must-come-to-social-security/?sh=44501abc15e4. Accessed March 22, 2021.

5 Pension Benefit Guaranty Corporation. March 12, 2021. “American Rescue Plan Act of 2021.” https://www.pbgc.gov/american-rescue-plan-act-of-2021. Accessed March 22, 2021.

6 Jory Heckman. Federal News Network. Feb. 24, 2021. “USPS 10-year plan looks to redefine ‘unachievable’ service standards.” https://federalnewsnetwork.com/agency-oversight/2021/02/usps-10-year-plan-looks-to-redefine-unachievable-service-standards/. Accessed March 22, 2021.

7 Govtrack. Feb. 2, 2021. “H.R. 695: USPS Fairness Act.” https://www.govtrack.us/congress/bills/117/hr695. Accessed March 22, 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 the Stimulus Could Mean for Investors

Millions of Americans have embraced the new relief money resulting from the $1.9 trillion America Rescue Plan. They’ve been able to pay for utilities and put food on the table while looking for employment. Those who maintained their jobs throughout the pandemic have embraced the payout as well, but for different reasons. For them, it’s not about survival, it’s about ways to spend that lovely windfall.

It’s important to recognize that the new stimulus bill, passed at the same time that vaccine distribution became widespread, is not just about helping households in financial distress. It’s also about jumpstarting the economy right about the time people can get back out and find work. That’s why it’s called a stimulus bill — to stimulate spending. Households that need the money can spend it on consumer staples or pay down debt.1

If you’re looking to invest your stimulus money in an insurance or financial product, we can help. Contact us for a comprehensive portfolio review and advice on the best way to position your assets for your financial goals.

Regardless of what goods and services are purchased, the US economy will benefit from households spending. The more consumer spending, the faster the economy can recover and grow. The more it grows, the more demand for consumer goods will increase jobs, and jobs create more spenders and taxpayers. Increased sales and income taxes put more money in government coffers, which can then be used to pay down the debt acquired by the three stimulus bills passed during the pandemic.

Sectors and companies standing to benefit from the stimulus may be of particular interest to investors as we weave our way out of this health and economic crisis. Analysts at UBS Global Wealth Management expect capital to rotate out of tech and growth stocks and into cyclical sectors that will benefit from higher growth and a steeper yield curve, including financials, industrials, and energy stocks. Consumer discretionary stocks poised for growth include companies in travel, leisure and hospitality sectors, as well as Amazon. Unemployed workers will likely use enhanced jobless benefits to pay for rent, which benefits residential REITS.3

Even in the wake of a pandemic, there are always winners. For example, vaccine maker Moderna has been one of the highest performing stocks throughout the last year and a half. And now, the stimulus bill provides an additional $160 billion for vaccine development and distribution, which is a boon for pharmaceuticals.

Moving forward, investment analysts see underpriced “value stocks” gaining more momentum than growth stocks. While tech company stocks have soared during the pandemic, a virus-free country bodes well for airlines, hotel chains, movie theatres and other industries shut out by social distancing restrictions.4

Content prepared by Kara Stefan Communications.

1 Martha C. White. NBC News. Feb. 8, 2021. “Stimulus checks that don’t get used right away are still ‘economic rocket fuel,’ experts say.” https://www.nbcnews.com/business/economy/stimulus-checks-still-boost-economy-even-if-money-goes-savings-n1257073. Accessed March 15, 2021.

2 Palash Ghosh. Forbes. March 15, 2021. “Amazon, Six Flags, Square: Here Are The Stocks Ready To Rise Thanks To New Stimulus Checks.” https://www.forbes.com/sites/palashghosh/2021/03/15/amazon-six-flags-square-here-are-the-stocks-ready-to-rise-thanks-to-new-stimulus-checks/?sh=2ebd86071a29. Accessed March 15, 2021.

3 John Hyatt. Nasdaq. March 12, 2021. “What Biden’s $1.9T Stimulus Means for Investors.” https://www.nasdaq.com/articles/what-bidens-%241.9t-stimulus-means-for-investors-2021-03-12. Accessed March 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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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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