What is Your One Thing?

As fall begins and we approach the last three months of 2015, what deserves your attention before December 31, 2015?

Take a step back. What is one thing, which if you focus on, will make a difference in your life, or the life of your family?

As Stephen Covey said, what is something that is important, but not necessarily urgent, that needs to be done?

What comes to mind? What can you be pro-active about? What have you been procrastinating or avoiding?

If you are young, are you saving enough? Are you participating in your company’s 401(k) program? Are you properly allocating your investments within your 401(k)? We can help you with this.

If you have children who are young, have you prepared a will and designated guardians for them? Do you have adequate life insurance? Have you started to properly save for their college education? We can help you with these.

If you are older than 50, have you started to plan how much income you will need for your retirement? Have you checked your social security benefits online? Have you developed a financial plan for a 30 year retirement span? With longer life expectancies, a 30 year retirement will become the norm for many. We can help you with these.

Is there a medical test that you should have done, which you have been putting off? Are you getting regular physicals? We can’t help you with these, but hopefully this gentle reminder will encourage someone to make an important appointment or phone call. I will make the appointment that I have been putting off.

Is there an important conversation that you need to have with someone, or a group of people, which you have been putting off? Please take the initiative and have the conversation. Some of the most important things are accomplished by having what appear to be, in advance, uncomfortable conversations. They may be uncomfortable, but they are usually very worthwhile. We can help you with these.

If you don’t have an idea yet, are you using a password management program, like 1Password or Last Pass? If not, please read these blog posts: How to Securely and Efficiently Manage Your Passwords, Practical Tips for Online Security and 5 Password Security Tips. Password management may not be as important as many of the topics above, but it should be on your list to get updated. We can help you with this.

We view our roles as financial advisors very broadly. We provide our clients with investment management, tax and estate planning advice. We counsel families, individuals and people who are going through life transitions regarding numerous topics, both financial and non-financially related.

We hope this essay helps you to improve some facet of your life. If we can assist you to do this in any way, please contact us.

Reaction to the Federal Reserve’s Inaction

The Federal Reserve again left short term interest rates unchanged at near zero, at the conclusion of their two day September meeting yesterday.  They will next meet in October and December, 2015.

When was the last time the Federal Reserve increased interest rates?

There has been no change to short term rates since 2008, which have basically been at 0% since then. They last raised rates in 2006.  The Federal Reserve directly influences short term interest rates and indirectly can cause changes in longer term interest rates.

Was the Federal Reserve expected to raise interest rates yesterday?

The Federal Reserve dual mandate is to “foster maximum employment and price stability” (keep inflation around 2% annually).  Many forecasters expected at the beginning of 2015 that there would have already been at least one .25% raise by now.

Due to “recent global economic and financial developments,” the Fed decided to leave the fed funds target range at 0 – 1/4%.  This implies that the Fed did not raise short term rates yesterday due to their concern about the Chinese economy and the huge decline in oil prices and other commodities.  These “are likely to put further downward pressure on the inflation in the near term.”

In her press conference after the Fed press release, Fed chairwoman Janet Yellen said that thee US economy has been performing well, but they did not raise rates at this time primarily due to the recent financial uncertainty.

When is the Fed expected to increase interest rates and by how much?

In their projections, 13 of the 17 Federal Reserve board members believe the Fed will raise rates before year end, in either October or December.  This initial rate increase would likely be .25%.  The key factors are “developments abroad,” labor markets and oil prices.

The board members short term interest rate expectations by the end of 2017 are 2.6%, which is lower than the 2.9% they predicted in their June, 2015 release.  This would imply that short term interest rates on investments like 1-3 year CDs would be around 2.5-3.0% by the end of 2017.  The Fed board member projections have been consistently inaccurate the past few years, but are helpful as an indication of their expectations.

What does the Fed think of the US economy?

The formal Federal Reserve statement “suggests that economic activity is expanding…moderately.” Household spending, business investment, housing and the labor market all continue to show progress and improvements.  These all appear to be positive comments.

How does this meeting and the related information impact our investment strategy?

We expect that the Fed will increase interest rates very gradually, beginning later in 2015.  This bolsters our confidence about the US and world economy.  A very gradual increase in interest rates should be welcomed.

The continued recovery of the economy and still historically low interest rates should provide for growth in corporate earnings.  This should lead to gains in stocks over the long term, of course with volatility along the way.

We remain committed and confident in our long term philosophy of a globally diversified stock portfolio along with an appropriate fixed income allocation, based on your personal situation.

How One Book Has Impacted So Many

What book has impacted you the most?

I read this question last week and I immediately knew my answer.

I have read hundreds of books, but only one influenced my career change and led to such a positive impact for my clients.

This book was the “tipping point” which enabled us to start this investment firm and provided the foundation of our investment principles.

This book was the beginning of business relationships which are the backbone for our firm, for research, technology and the use of Dimensional Fund Advisors (DFA) mutual funds.

This book changed my life and the lives of my clients and their families.

“The Only Guide to a Winning Investment Strategy You’ll Ever Need” was this instrumental book. Larry Swedroe, Director of Research for BAM Advisor Services, wrote this book in 1998. I read the book a year or two later, as I was exploring how to transition from a traditional CPA into the investment advisory business to better help my clients. Reading this book started me on the path of developing our core investment principles. It enabled us to provide an investment solution that would benefit our clients for the long term.

This book showed us how we could have an investment philosophy that would be effective, understandable, disciplined and hold up over time. This book provided a way to talk with our clients and prospects. Many of our clients come to us after experiences with other brokers or advisors. They appreciate the clarity of our investment approach and see that we invest with a consistent and rational philosophy. They recognize that we focus on what we can control and work to minimize their costs and taxes.

Swedroe’s book stresses that stock market corrections are normal and expected, during most years. Knowing this, you can benefit from the long term expected returns of a globally diversified stock portfolio. This knowledge provides you with the courage to remain committed to your stock investments and be confident about your future.

The book explains that you can’t effectively time the market or confidently pick stock winners to “beat the market” over a long term period. That research is just as valid today.

Swedroe refers to the “stomach acid test” as a way to see if you have the fortitude and discipline to stick with your stock allocation when the going gets rough. We talk to our clients about this, so they are able to remain in the market during volatile times. We make sure that you have an adequate foundation of cash or fixed income for many years of cash flow needs. This provides you with confidence and security.

Swedroe’s book gave me the courage, capability and confidence to commit to starting our investment advisory firm. Over a decade later, this foundation has contributed to the positive impact we have had on the lives of our clients and their families.

Don’t underestimate the power of a single book.

Social Security Benefits, Medicare Premiums and Payroll Taxes: 2016 Projections

Social Security recipients are projected not to receive a benefit increase for 2016. However, for high income individuals and couples, they may actually face a net benefit decrease, due to a huge potential increase in Medicare premiums. The projected Social Security wage base for 2016 would remain the same, at $118,500, but the Medicare portion of payroll taxes would continue to apply to all wages. The .9% Medicare surtax would apply to wages over $200,000 for single files and $250,000 for joint returns.

The Social Security Administration will officially announce the changes for 2016 in October. Early projections indicate that there will be no Social Security COLA (cost of living adjustment) increase for 2016. COLA changes are based on Consumer Price Index (CPI) data. CPI, or the inflation rate, is negative for the first two quarters of 2015, mostly due to the huge decline in gasoline prices. Since COLA changes to Social Security benefits were introduced in 1975, only in 2010 and 2011 has there not been a COLA Social Security benefit increase.

Social Security trustees project a 3.1% COLA benefit increase for 2017. We are not sure how this can be predicted at this point, so we are not sure how reliable this projection is.

Of significant importance to high income retirees, individuals with Modified Adjusted Gross Income (MAGI) over $170,000 for couples and over $85,000 for individuals, are potentially facing a 52% increase in their Medicare Part B premiums for 2016. MAGI is your annual gross income plus municipal bond interest.

There are 5 Medicare premium brackets, based on your income level. The top premium surcharge is $230.80 per month, per person, in addition to the standard of $104.90. A high income couple would currently be paying $671.40 per month, as a monthly deduction from their 2016 Social Security benefits. If the projected increase is approved by Department of Health and Human Services in October, their Social Security benefits would remain the same but their net deposit would decline by over $100 per month due to the Medicare premium increase.

The reason for this huge Medicare premium increase is that the Social Security Act protects about 70+% of the people considered lower income Social Security recipients from Medicare increases when there are no offsetting COLA increases. For these people, their net benefits (Social Security benefits and Medicare deductions) are not allowed to decline.

Thus, for the approximately 25-30% of the Social Security recipients who earn the most, they will be absorbing the increased Medicare burden for all Medicare beneficiaries. The Secretary of Health and Human Services Department may possibly intervene and set a lower Medicare premium, to be announced in October.

These premium increases do not impact those who begin to collect Social Security in 2016 or those who have enrolled in Medicare, but who have not yet started to collect Social Security benefits.

There is not any planning which can be done to avoid the impact of the Medicare premium increase, as it is based on past income tax returns. If you have not yet begun to collect Social Security and are nearing the age which you can begin to collect Social Security (62-70), you may want to contact us to discuss this important decision.

 

 

Sources:
Mary Beth Franklin, Investment News, August 3, 2015
Michael Kitces, kitces.com, blog post dated August 19, 2015