Tax reform update and 2018 Social Security Projections

Tax reform update: On Wednesday, Republican legislators released a broad framework of individual and corporate tax changes. The proposal is far from enactment and many details will need to be negotiated.  It is not yet in the form of a bill which is ready to be voted upon, as the proposal is a 9 page PDF.  We will provide more detailed commentary and analysis as it progresses further.

The proposal includes eliminating most itemized deductions except for mortgage interest and charitable contributions and eliminates the Alternative Minimum Tax and Estate tax.  The framework proposes significant corporate tax reductions.


2018 Social Security Projections: Social Security recipients are projected to receive at least a 1.8% increase in 2018 benefits, but this could be partially or fully offset by higher Medicare premiums for most recipients. So, there may be no net increase in monthly Social Security payments for most recipients in 2018.

The Social Security Administration will officially announce the changes for 2018 in October, based on inflation figures through September 30th.

The increase in gross benefits would be largest annual COLA change (cost of living allowance) since 2012, as inflation has been very low over the past 5 years.

However, for many high income individuals and couples, they may have no change or even face net reductions in their monthly deposits, due to higher Medicare premium tiers which take effect in 2018.

For 70% of Medicare enrollees who are Social Security recipients, any Medicare insurance premium increase cannot exceed the increase in gross Social Security benefits. Thus, their net benefits may remain the same in 2018.

High income seniors, defined as singles with income over $85,000 and couples with income above $170,000, are not protected by this “hold harmless” provision regarding Medicare insurance premiums exceeding Social Security benefit changes.

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.   The Medicare premiums for 2018 are based on your 2016 tax return information.

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.


This week’s Takeaway: While net Social Security deposits may stay the same or decrease in 2018, these are still vital benefits for nearly all Americans. Annual payments can be $20-40,000, which is the equivalent of withdrawing 4% per year from an account value of $500,000-$1,000,000.



Source: Investment News, Mary Beth Franklin, September 25, 2017

Diversification for investment success

When we structure and monitor your investments, we diversify your portfolio in many ways. Diversification is a core principle of our firm.

It is clear that to grow your investments and outpace inflation, a portion of your portfolio needs to be invested in stocks.

However, we will never invest so much in any one company stock or bond that your financial future would be significantly impacted if a single company were to blow up or decline dramatically.

For your stock portfolio, we invest in mutual funds which are highly diversified. They are each invested in at least hundreds of companies, across a broad range of industries. For international and emerging market funds, there are maximum levels of exposure to countries and regions, as well as at the company and industry sector level.

We also broadly diversify your fixed income securities across numerous companies and industries. We would not have you own more than a few percentage points of your portfolio in any one company’s bonds, at most.

These principles are designed to use diversification to reduce your risk by avoiding over-concentration in any one region, idea, concept or stock. We cannot control the future, but we can use diversification as a method to control your risk.

Just owning a group of mutual funds does not ensure adequate diversification. Many times we have seen prospects or others who own many mutual funds, but several stocks are the major holdings throughout these funds. These people had numerous funds, but were not properly diversified. The set of mutual funds we recommend prevents this type of duplication. For example, you will not find Apple held in 4-6 of  the 12 funds that we may recommend for you. If you are not a client, we can analyze your accounts to determine how well you are diversified, by company, industry sector and geography.

The world is constantly changing. Technology and innovation cause companies to succeed and others to fail. It is very difficult to consistently predict which companies will do best in the future, especially over the long term. By being broadly diversified and using asset class funds, we enable our clients to participate in the growth of the US and worldwide economy, through owning companies of all sizes and industries.

Many investors focus their holdings on high dividend paying stocks. They feel they are diversified and think they are doing well, as they may own many stocks in various industries. However, we have seen numerous portfolios where these portfolios are lagging stock market benchmarks by huge margins over the long term on a total return basis. They are diversified, but by focusing on what we refer to as “legacy stocks” of the past decades, they are not doing as well as they could be from companies in various industries. Being diversified using our investment philosophy mitigates this dramatic underperformance of owning primarily legacy or high dividend paying stocks.

Diversification cannot prevent losses. Diversification cannot avoid broad declines when all global stock markets go down at the same time.

Diversification can also limit your upside. For example, by being broadly diversified, you would not have benefited as much if you had invested a large percentage of your portfolio in a few stocks, such as Facebook or Amazon which have a had huge long term gains. The tradeoff for diversification is less overall risk and less volatility. We think that is worthwhile in the long-term, given that you would own some of each of these stocks within the mutual funds we recommend.

Given that the future is always uncertain, we diversify your portfolio in an effort to compensate for this uncertainty.

Broad diversification enables you to avoid preventable investment issues, such as being highly concentrated in a single stock or industry, and then to see this stock or sector vastly underperform global benchmarks. Examples of this would be concentrated investments in energy in the past few years or technology stocks in the early 2000s.

We use diversification as another way to provide you with a better long-term investment experience. Diversification is a way we can strive to reduce your risk, as much as possible, through good planning.

This week’s takeaway: The more you own of any one stock or one sector, such as energy, health care or a few technology stocks, the greater the unnecessary risk you are taking. We recommend broad diversification for a greater chance of long-term investment success.

Equifax data breach and how it will affect you

Last week credit-reporting agency, Equifax, disclosed a data breach that has affected approximately 143 million Americans. You should assume that you have been affected. Equifax disclosed last Thursday (September 7) that personal client data consisting of Social Security numbers, dates of birth, names, addresses, driver’s licenses and credit card numbers were exposed through the breach.

Equifax first discovered this breach back in July of 2017. Equifax stated they immediately took action to stop the intrusion and hired an independent cybersecurity firm to conduct a through review to confirm the extent of the invasion and the information accessed. The company also reported the criminal activity to law enforcement and continues to work with the authorities.

After the breach, Equifax provided a website to verify if you were affected by the breach. Initially many have questioned the accuracy of their website and the data provided. This website also hosts important updates for consumers, FAQs, and how to enroll in the credit-reporting agency’s complimentary identity theft protection and credit file monitoring.

Equifax is offering free identity theft protection and credit file monitoring to all U.S. consumers, even if you are not impacted by the data breach. You may want to do this, but we do not feel this provides you with any real form of identity theft “protection.” It is more like a monitoring program than protection. Per Equifax’s website, “This offering, called TrustedID Premier, includes 3-Bureau credit monitoring of your Equifax, Experian and TransUnion credit reports; copies of your Equifax credit report; the ability to lock and unlock your Equifax credit report; Identity theft insurance; and internet scanning for your Social Security number- all complimentary to U.S. consumer for one year.” The enrollment for this offering must be completed by November 21, 2017.

A first step you can take now is to set up fraud alerts with all three major credit reporting agencies, EquifaxExperian and TransUnion. You will get an alert if someone tries to apply for credit in your name.

Another step you should take now is to put a credit freeze in place at each of the three credit-reporting agencies in an attempt to prevent becoming a victim of identity theft. A credit freeze at each agency prevents someone from establishing new credit in your name. Eve Velasquez of the non-profit Identity Theft Resource Center said on CBS News, “A credit freeze will lock the criminals out of opening financial accounts in your name, but there are other types of identity theft. And that includes medical, criminal and governmental.”

As of last Saturday, tens of thousands of U.S. consumers had initiated credit freezes. Credit freezes are open to anyone and are temporarily or permanently reversible. Equifax is currently not charging a fee to initiate a credit freeze. It is unclear how Experian and TransUnion will handle the fee to initiate and lift the credit freeze. Some states require consumers to pay a fee to lift a freeze. The fee range is about $5 to $10 and varies by state.

A credit freeze does not affect existing credit arrangements like outstanding loans or credit card accounts. Establishing a credit freeze helps to prevent others from opening new credit card and loans in your name. A credit freeze is not recommended if you plan to open up a new credit card or new car loan in the very near future. A credit freeze does not affect your credit score. If you establish a credit freeze, you will be given a personal identification number (PIN) that you would use when you need to temporarily or permanently reverse the credit freeze. It will take approximately three business days to lift a freeze per the Federal Trade Commission when and if you decide to lift the freeze. For more information and a helpful guide to a credit freeze, please see Alia E. Dastagir’s article, Equifax data breach: How to freeze your credit in USA Today.

Please be extra vigilant of the PIN that you are given if you decide to go the credit freeze route. Make sure the PIN Equifax and the other credit-reporting agencies gives you is a randomly generated number. Originally Equifax issued PIN numbers based on the date and time you called to set up your credit freeze, which are not considered secure.

A third step is to check your credit report. You are entitled to one free credit report per year from all three credit-reporting agencies. It is recommended to spread these out over the year, checking in every four months. You can access the credit reports here.

Separate from the credit report issue, we would again remind you to change your passwords to your online financial accounts. It may be a good idea to update and strengthen those passwords and or PIN numbers attached to those accounts. Our firm is a strong advocate of making sure you safely and efficiently manage your passwords. We have written several blog posts regarding this subject matter: 5 Password Security Tipsand How to securely and efficiently Manage Your Passwords.

Even if your name does not register as part of the Equifax data breach, we recommend monitoring your credit reports and updating your password(s) and any PIN numbers associated with your accounts.

As the world is more tech savvy, it definitely puts us on high alert with our personal information and the number of companies who have access to it. If you need further guidance or have questions regarding the data breach, please contact our office.

This week’s takeaway: Everyone should consider that they are affected by the breach and should establish a credit freeze at all three credit-reporting agencies. Please see the article, Equifax data breach: How to freeze your credit by Alia E. Dastagir, USA Today, for all three credit-reporting agencies contact information and how to guide to a credit freeze.


Additional helpful guidance and some of the information we gathered can be found with the links below:

Victim of Equifax data breach speaks out, Anna Werner, CBS News, 09/12/2017

How to defend yourself against identity theft after the Equifax data breach, Adam Shell, USA Today, 09/11/2017

After Equifax Breach, Here’s Your Next Worry: Weak PINs, Ron Lieber, The New York Times, 09/10/2017

Equifax, Bowing to Public Pressure, Drops Credit-Freeze Fees, Ron Lieber, The New York Times, 09/12/2017

4 Things You Should Do About the Equifax Hack, Tim Herrera, The New York Times, 09/10/2017



Questions to Ask Your Financial Advisor – Part 2

Last week, we wrote Part I of a blog post in response to the Wall Street Journal’s Jason Zweig’s column ** encouraging people to ask their financial advisor 19 questions. Today we answer questions 10-19.

We hope you find this Q and A informative and helpful to you.

While these questions focus on very specific issues, the relationship between a client and their financial advisor must be based on trust and many intangible factors. These factors are not part of Zweig’s questions.

As we stated last week, if you are a client of our firm, we hope you find our answers re-assuring and comforting.

If you are not a client of our firm, we encourage you to discuss both sets of questions with your current broker or advisor, and compare their answers to ours. See whose answers makes you the most comfortable and confident that the advisory firm is fully aligned with your financial interests and has a long-term investment philosophy, approach and range of services which best meets your needs.

10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? We provide comprehensive services to our clients, which includes investment management as well as other topics as clients request them. As CPAs with significant investment and financial experience, we are uniquely qualified to provide guidance, alternatives and ideas on a wide range of financial issues. We work with our clients on these issues, may times to help them deal with hard to address topics. We help them move things forward, take the next step and make decisions. We have extensive experience with complex issues, such as estate planning, generational planning, and charitable giving. These services are part of our advisory fees. We do not sell life insurance or draft estate plans, but provide advice in these areas.

11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? No. We do not get compensated for referring clients to other professionals. We strive to match the needs of our clients with other professionals who would be a good fit for them.

12. What is your investment philosophy? We have utilized the same long-term investment philosophy since our firm was founded in 2003, which is guided by the concept of global diversification through the use of asset class mutual funds, the appropriate allocation between stocks and fixed income and rebalancing. We believe every investor should have a written investment policy statement based on their specific situation, need and ability to take risk.

  • Most brokers and financial consultants do not have an investment philosophy beyond the concept of trying to pick the best stocks or mutual funds. We have an investment philosophy which is clearly defined and proven to be successful over the long term.

Investing for the long-term requires patience and discipline. We work with you to provide these. We accept that uncertainty is an inevitable aspect of investing. We help you by managing your risk and by implementing diversification at many levels.

We have a consistent market philosophy and systematic investment process which provides greater transparency to you. This should increase your confidence that our strategy will deliver its objective and enable you to have a better client experience.

See our answers to 13, 14 and 15 below.

13. Do you believe in technical analysis or market timing? No. We do not believe that market timing or technical analysis (making market predictions based on stock charts and trends) can be consistently successful over a long period of time. To be successful at either of these requires someone to be correct twice, when to sell and when to buy, for each decision they make, repeatedly over a long period of time. We do not believe these provide the best strategy for your financial future.

14. Do you believe you can beat the market? Financial industry performance data shows that actively managed mutual funds and professional money managers cannot consistently outguess and beat their respective benchmarks over the long-term, for all asset classes. For further information, see our blog posts, What Are the Right Investmentsand 10 Things You Should Know. Thus, we use very low cost, asset class mutual funds, which are similar, but not identical to index funds, to provide you with a better chance of outperforming most actively managed mutual funds.  Dimensional Fund Advisor (DFA), the primary stock mutual funds we recommend, “35 year track record of outperforming indexes and peers is a testament to both the validity of the idea and the investment approach.” ***

Rather than attempting to pick individual stocks by forecasting or other methods, we increase expected returns by giving greater weight to small, value and high profitability stocks. Data shows that small company stocks outperform large company stocks in the long-run. Similarly, value outperforms growth and International outperforms the US, over the long-term. Based on this evidence, we allocate more of your portfolio towards the asset classes with the greater expected returns, rather than investing most of your assets in US Large company stocks (the S & P 500), if that is defined as the “market.” See our blog post,A Better Way to Invest in Stocks.

Another way to view our goal: you should be comfortable throughout your life so you can meet your financial needs and goals through the assistance of our portfolio structure and our guidance during the difficult times of investing, when markets go down. In this manner, we believe that we will secure you a real-life outcome which will be superior to that achieved by the vast preponderance of your friends and peers.

15. How often do you trade? In general, we trade infrequently. Once we develop your initial portfolio, we make trades based on significant market movements which require us to rebalance your portfolio, as well as when you have life changes and as you get older. If we have discussions and change your investment allocation, we would make trades. We may also place trades, as needed, when you add or withdraw money from your accounts. Academic evidence shows that less trading correlates to better long term investment performance. For more on rebalancing, see blog post The Benefits of Disciplined Rebalancing.

16. How do you report investment performance? In the quarterly reports which we provide, your net investment return both in dollars and on a percentage basis, after deducting our fees, are shown over various time periods. It is simple and easy to understand. The custodian, usually Fidelity Investments, provides monthly statements, which you can receive by mail or online.

17. Which professional credentials do you have, and what are their requirements?Both principals are CPAs and hold the Personal Financial Specialist (PFS) certification from the AICPA, which is similar to a CFP (Certified Financial Planner) for CPAs. The PFS certificate requires significant hours of work within the financial planning profession, rigorous study, continuing education every year and adherence to high ethical standards. The CPA designation requires similar items, as well as a passing a multiple day exam.

18. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term? This is a difficult question to answer, as much of it depends on each specific person, as well as many factors which are subject to change. For a globally diversified stock portfolio, we would project a 10% long term return, before inflation and costs. However, there would be significant volatility from year to year, above and below this amount.

Your long-term expected return would be dependent on your allocation between stocks and fixed income (whose return is based on inflation and Federal Reserve policy) and this allocation will change over time, based on your financial goals and needs.

Our investment strategy would minimize the tax effect of your investments more than most other approaches. We utilize tax managed funds (which very few brokers recommend) and the funds have very low turnover, both which provide you with greater after-tax returns. Inflation currently averages around 2% per year. Our advisory fee would be 1% and the internal expense ratio of the stock portfolio we recommend would be around .30% for a client’s $1 million stock portfolio. Our advisory fee would be less for larger portfolios.

19. Who manages your money? Our investments are managed by our firm, in the same investments as our clients. Again, our financial interests are completely aligned with our clients. See blog post, Does your financial advisor invest as they recommend?


This week’s takeaway: We are confident that our investment strategy and comprehensive services will secure you a real-life outcome which will be superior to that achieved by the vast preponderance of your friends and peers.


** The 19 Questions to Ask Your Financial AdviserWSJ, August 26, 2017  (link maybe blocked by WSJ paywall)

*** Source: DFA’s 35 Quotations on a Better Way to Invest, quote 23, 2017