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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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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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