This past week I went on what has turned into a weekly running date with a buddy of mine. In addition to discussing our anticipation for the 2nd season of Stranger Things and who was going to binge the show fastest, my friend brought up an article he saw in The Wall Street Journal a few weeks ago. Knowing that I work at Human Investing, he asked: “I read something about how Morningstar Fund Rating are kind of bogus. Have you heard anything about that?”

Oh I had heard about it and I had many thoughts. Selecting a fund for investors has turned into murky waters over the past few years as it seems like many organizations are pushing their own agendas - explaining why their fund or fund process is best. In response to my friend and to the Wall Street Journal’s Article on Morningstar’s fund rating process

"https://www.wsj.com/articles/the-morningstar-mirage-1508946687"  I wanted to do a quick Q&A on a prudent process for selecting a fund or funds that fit into your portfolio.

These are the types of questions that are essential to ask yourself when selecting a fund:

Q: I haven’t read the WSJ article about Morningstar and it’s very long, can you summarize it for me?

A: Sure! In short multiple reporters did a yearlong investigation asking the question, “Is the Morningstar rating system a good guide for investors when looking to invest capital?” Their takeaway was that it is not and in my estimation they are somewhat right.

Q: Did Morningstar Respond to the article?

A: Yes. Morningstar took this article very seriously and gave multiple responses including this one  http://news.morningstar.com/articlenet/article.aspx?id=831740. I really enjoyed this paragraph and believe that it represents how investors should use Morningstar ratings:

“The star rating system has been a useful starting point for research that tilts the odds of success in investors favor.”

Q: In a nutshell should I use the star rating as my only means for choosing a fund?

A: No

Q: Okay so if star ratings aren’t the best way to judge a fund, then what should I do?

A: Now you are asking the right questions! As a fiduciary (someone who by law must act in the best interest of another) for many 401k plans here are a few bullet points that our firm typically recommends when selecting a fund:

• Regression to the Mean: Just because a fund or an asset class has recently outperformed its peers it doesn’t mean that trend will continue. More times than not it means the opposite is more likely. If you are currently selecting your funds based on short-term past performance, it might have worked out recently but you are playing a losing game in the long term.

• Passive over Active: By selecting a passive (index fund) over an active manager you are often accomplishing two things.

  • First you are reducing your overall investment costs which is an immediate savings to you.

  • Second you are subscribing to the idea that indexes historically outperform active managers. Historically this has been a true statement. The chart below speaks to indexes beating active managers in their respective asset classes 85% of the time over a 15-year period!!!! There are active managers who have outperformed their benchmark, however the deck is stacked against investors when trying to determine who that manager is.

• Behavior Management: You can do everything right when investing in a fund, but if an investor panics and sells out of an investment at the wrong time all of their good decisions are immediately lost by their behavior. Understanding the rocky road of long term investing is essential to selecting a fund(s) that fits your needs

• Risk Management: In line with behavior management is also understanding your risk and the risk of the fund you are investing in. If you knew there was the potential of your fund losing half its value how would that affect your decision to invest in the fund?

Solution

Whether you’re investing through your employer’s retirement plan or outside that plan, often a great solution is to use an age based target date fund or a risk based constant risk model (i.e. aggressive, moderate or conservative allocation fund). Both fund types look to take holistic approach to diversify risk and create an allocation either based on your age or risk profile. It’s important to check if these options use index funds as the component parts to ensure you are aligning with the aforementioned investment strategy.

Our team recognizes that tracking your investments may not be your full-time job. If this blog post or the WSJ article sparks any questions, please don’t hesitate to reach out as we would welcome talking through your investment selection process and make sure you are maximizing your investable dollars!

  #1: Know Where You Stand Financially

Whether because of singleness, divorce or death of a spouse over 90% of women will be managing their money alone at some point in their future. Because women tend to save less and live longer, it is critical that women start looking out for themselves financially!  The good news is there is always time for course correction. Below are a few tips to help you know where you stand financially.

1. Get involved in your household finances. Don’t be afraid to have the hard conversation with your significant other - your future may depend on it. Some couples find it helpful to set up a financial date night. Set some guidelines for the conversation. It can be an emotional topic so try and keep it light and educational.

2. Make sure you and your significant other are fully maximizing employee benefits, especially any employee match to a retirement plan, life insurance, and disability benefits.

3. If eligible contribute to IRAs; learn about and take advantage of the spousal IRA.

4. Have jointly owned as well as individual bank and credit card accounts. Speak with your trusted advisor about how you can protect one another in the event of a death or disability - you want to have access to accounts if you need them.

5. Most importantly, know where all the money is and keep log-in credentials for all accounts stored safely.

#2: Have a Plan

Envision retirement! Whether it is around the corner or 30 years away it is important to envision what you would like your future to look like and then plan for it. Whatever your income may be, it is never too early or too late to create a plan.  In our experience clients that have gone through the planning process tend to have more contentment, assurance of their future and unity with their partners.

A financial plan can help answer questions such as:

1. Are you saving enough?

2. Are your assets allocated properly?

3. Are you properly insured?

4. What will happen to your assets when you die?

5. How will you know if you have saved enough and can retire?

#3: Don’t Forget to Budget!

In our experience clients that budget tend to have a high rate of success at reaching their financial goals. When we take stock of what we are spending it is amazing to discover how trivial things may be eroding our wealth accumulation day by day. And you don’t need to re-create the wheel: there are some great budgeting tools out there that can help. One tool we like to refer clients to is YNAB (You Need a Budget). You can do research and find all kinds of tools and apps.  Many are quite user friendly and have apps that you and your significant other can both use.

#4: Put Your Money to Work and Ask for More!

1. Part of any good investing strategy is putting your money to work for you. If you are afraid to invest talk to your financial advisor about your fears and how you feel about taking risk. There are many different strategies to accomplish your goals. By expressing your fears, exploring the options and educating yourself you will be equipped to face your fears and overcome them or at least minimize them. The sooner you address your fears around investing the quicker you can put your money to work.

2. Ask for a raise! Although the gender pay gap is closing there are still many women that are not making as much as their male counterparts. One reason for this is that women are less likely to ask for a raise and advocate for themselves. Equip yourselves by working to achieve job goals, deepen your level of expertise and research what others are making in similar positions. At your next review present your findings and then be prepared to ask for that raise. You might be pleasantly surprised by the response you receive. Commit a portion of those new dollars towards your long-term goals and get them invested.

#5: Consult with Your Trusted Advisor

Having an advisor to assist and guide you on your journey can be a game changer.  Don’t be afraid to ask your advisor the simple and complex questions so you can be involved in the conversation.  If your advisor is not a good fit, look for someone you feel comfortable with, can trust and can easily talk with.  An advisor can provide you with accountability, a roadmap for retirement, counsel in turbulent times and help with financial discipline.  They can also be a huge asset in the event of a death or family emergency.  We have helped many families navigate these difficult situations as an added support.

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Do you participate in an employer’s retirement plan in which you own your employer’s stock? Before selling shares or rolling your account over to an IRA, you should consider a special election that could save you significant tax dollars. For taxpayers with employer stock held inside a qualified employer plan, the IRS allows a special election to distribute those shares at their cost basis and recognize the appreciated gain at preferential capital gain tax rates (avoiding “ordinary” income tax rates). This strategy is known as “Net Unrealized Appreciation” and is outlined in IRS code section 402(e)(4). The net unrealized appreciation is referring to the excess fair market value (FMV) of your employer shares over their cost basis. The election creates an immediate income tax liability on the cost basis of the distributed shares, but allows for continued deferral and favorable tax rates on the embedded and future gain.

There are three requirements to qualifying for and executing an “NUA” election strategy. First, the stock must be distributed out of your employer plan “in kind.” Transferring stock “in kind” means you take distribution of the stock itself, not its liquidated cash value. Second, the NUA election must be made as part of a lump sum distribution in a single tax year. You can make the NUA election on all or a portion of your employer stock and make a tax-free rollover with the rest of your account. The rules only stipulate that the entire account must be distributed/rolled over in a single tax year. Lastly, the lump sum distribution must transpire from one of four situations: death, attaining age 59 ½, leaving the company, or disability.

Below is a chart that outlines the tax treatment of employer stock distributed in an NUA election (www.kitces.com)

For example, let’s say you were a Nike employee and inside your 401(k) you hold 150k of Nike stock. Those shares have been purchased inside your 401(k) over a 20-year career and have an average cost basis of 50k. You retired last month and are looking to roll over your 401(k) assets into an Individual Retirement Account (IRA). Before making the rollover, you decide to make the NUA election on all your Nike stock. The distribution of those shares at their cost basis is immediately taxable at your ordinary income tax rates (i.e. 33% * 50k = $16,500). Those assets are now outside a qualified plan and all embedded and future appreciation can be realized at capital gain rates. Let’s say you then held those Nike shares until they were worth 200k. That 150k gain (200k FMV – 50k basis) would be taxable at 15%, or $22,500. So, in total with an NUA election, you paid $39,000 in Federal income tax. In contrast, by not making the NUA election, and rolling the entire 401(k) into your IRA there is no immediate income tax bill on the rollover, but all embedded and future gains are taxed at ordinary income tax rates. So, using the $200,000 fair market value assumption, and a lower 25% Fed tax rate, your tax bill would be $50,000 when drawn out of the rollover IRA account. The NUA election would have saved $11,000 in Federal income taxes.

Because there is a tradeoff between recognizing income immediately on an “in kind” stock distribution (NUA election) and a full retirement plan rollover, the cost basis in those employer shares is a significant consideration. The lower the cost basis in the shares, the better. Studies have shown unless your cost basis is 50% or less of the stock’s FMV at the date of distribution it is hard to make a case for the NUA election, and a full rollover to an IRA likely makes the most sense (www. kitces.com).

That said, everyone’s situation is different and there are varying factors that may lead to one recommendation over another. Even your desire for charitable giving may weigh in on the decision. For example, let’s say you were to make the NUA election and receive 100 shares with a cost basis of $40 and a FMV of $100; this would create 40k of gross income in the year of distribution. But, if you were to donate 40 of those 100 shares to a charitable organization or donor advised fund, you could create an offsetting 40k charitable contribution deduction. This offsetting deduction could mute the immediate income tax impact and leave you with 60 shares (60k value) that can appreciate at preferential tax rates outside of a retirement account.

There are a multitude of taxpayer specific situations and profiles that may or may not support making the NUA election. So, if you hold employer stock in a qualifying retirement plan and are getting close to retirement, looking to rebalance the account, or sell out of any of those employer shares, please reach out to us and see if an NUA election strategy makes sense for you.

If you would like to talk with one of our advisors please call Jill Novak at 503-905-3100.

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Exciting news from the Human Investing office:  In the year 2017 alone five babies will be born into the families of Human Investing (2 girls and 2 boys already, with 1 boy on his way)! For myself and the other new parents in our office, 2017 has already been a year of much joy, little sleep, ‘dad jokes’, cliché parenting sayings and a bunch of finance nerds trying to figure out how to care for their little ones and save for their college education. Here’s what we came up with. First the cost –

In recent years, the average rate of inflation in college costs has been about 5%.

Source: National average cost data © 2017 The College Board, “Trends in College Pricing 2016.”

Parents like my wife and I and others in the office may have different goals and philosophies on how much we would like to cover for our child’s education expenses - whether a dollar amount, like $50k, or a percent of the education expense. Whatever the philosophy, we understand the need to save. But what is the best vehicle to do so? Here are a few of the most common options and some important considerations to take into account when saving or choosing an account type:

• 529 Savings Plan: 529 accounts allow you to set aside after-tax contributions that grow tax free. The balance can be used for qualified higher education expenses, such as tuition, room and board, and books. States may offer 529 plans to residents, often with tax breaks or additional incentives - check your state here.

• Coverdell Education Savings Account (ESA): ESAs allow you to set aside after-tax contributions that grow tax free. Account value can be used for expenses not exclusive to college. Unlike 529 plans, there is flexibility to use ESAs for qualified education expenses from Kindergarten through Graduate School.

• Roth IRA: The Roth IRA can be used as a combination retirement account and educational savings vehicle. Your after-tax (Roth) contributions can be invested for retirement purposes and college expenses can be withdrawn with exemption to early withdrawal penalties. Additionally, the value of your Roth IRA will not hurt chances for financial aid eligibility as it is not considered assets on the Free Application for Federal Student Aid (FAFSA).

• Uniform Gifts to Minors Act and Uniform Transfer to Minors Act (UGMA/UTMA): The original college savings account, UGMA/UTMA assets are transferred to the child’s account and are invested on their behalf until he or she reaches age 18 – 21 (defined by state). At this time, the beneficiary can use dollars for whatever they wish. With a UGMA /UTMA you can realize $1,050 of gains tax-free per year. Note: UGMA/UTMA is in the child’s ownership for FAFSA purposes.

* This data is provided by www.savingforcollege.com and is subject to change. The numbers provided reflect 2017 regulation and will fluctuate with time. Please contact a trusted tax professional to understand exact tax implications.

The consensus: If you are looking to maximize saving for college and want to make it a family affair (any one can contribute) then the 529 is the best option. If you are not sure about college for your child but would still like to save for their future, then other great options like a UGMA/UTMA may be beneficial. Want to talk about what type of account is best for you or share baby stories? Let’s talk, Human Investing is here to help.

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  It has been widely reported that Equifax, one of the three main credit reporting companies, suffered a major data breach that exposed Social Security numbers and other vital information of millions of people.

About 143 million people in the United States were affected by this breach. Data was available to hackers in May and July. The hackers had access to Social Security numbers, dates of birth, addresses, credit card numbers and other information.

Before we share some steps to help protect your credit, we want to go over exactly what is included on your credit report:

Personal Information

Name, address, Social Security number, date of birth and employment information. This information is not used to score your credit.

Trade Lines

Credit accounts. Lenders report on each account you have established with them. This includes the type of account (credit card, mortgage, auto loan, etc.), date accounts were opened, credit limit, account balance and payment history.

Inquires

Inquiries occur when a lender asks for a copy of your credit report. The inquiries section is a list of everyone that has accessed your report within the last two years.

Public Records and Collections

Public record information from state and county courts. Overdue debt from collection agencies, bankruptcies, foreclosures, suits, wage garnishments, and liens are also included.

What is not on your credit report

A few things not included in your credit report are your bank account number(s) and balances and investment account number(s) and balances.

So, what action can you take?

There are a number of steps that you can take to protect your credit and identification.

The first, confirm if you have been impacted by this incident. You can do this by visiting https://www.equifaxsecurity2017.com/potential-impact/ and entering your last name and the last 6 digits of your Social Security number. Additionally, Equifax has setup a dedicated call center to answer basic questions regarding the breach. You can contact them directly at 866-447-7559. Be prepared for long wait times.

If you have been impacted, it may be wise to take one or more of the following steps to protect yourself.

Do a Credit Check

Consider checking your credit with the three credit agencies, Equifax, Experian, TransUnion. This can be done for free by visiting https://www.annualcreditreport.com/. If you see suspicious activity on your report contact the affected entity and the reporting agency.

Freeze Your Credit

A credit freeze will make it more difficult for someone to open a new account in your name. It cannot, however, stop a thief from using one of your current accounts. To apply for new credit, you will need to unfreeze your credit.

Monitor

At a minimum, closely monitor your credit card and bank account activity. Most banks and credit cards offer alert services which can be configured to send you an email when there is activity on your accounts. Contact your bank or credit card company immediately if you see suspicious activity.

ID Theft Protection

Sign up for an ID theft protection plan through companies like LifeLock, Experian, and IdentityForce. These services provide the monitoring and protection on your behalf. Fees for this range from $10 to $30 per month.

Take caution with phone calls or emails that claim to be from the credit agencies especially Equifax.

If you have any questions please feel free to call our office at 503-905-3100 to speak with either myself or Jill Novak.

With a week or so left of summer we come to the close of an enjoyable schedule of vacationing, traveling, summer reading, and relaxing. One book I’ve been reading talks about the timing of making investment changes based on your financial plan and if there is a “best” time. The author uses the analogy of conducting life-boat emergency drills. When done while the ship is in port during calm seas, these drills can make the difference between surviving the storm or sinking. Careful, thoughtful planning and strategizing during times of peace can provide the greatest probability of surviving an emergency. Similarly, in the context of investing, the best time to discuss asset allocation and how much is in growth assets like stocks (more volatile) versus income assets like bonds (less volatile), is when the markets are in a calm, low volatility state. Currently the Volatility Index (VIX) is near a 27-year low. This is 80% below the October 2008 peak in volatility during the housing and financial crisis. Applying the analogy of the sea, we are currently in port with lake level waves. October 2008 was like being in stormy high seas in the Alaskan Bering Sea. It would be extremely difficult to make sound investing decisions during the peak of a market storm with heightened volatility.

With that said, today is the day to discuss the risk reward trade-off, where to take the risk, and how much is appropriate based on your financial plan. Your financial plan, not the markets, should dictate how much you have in stocks versus bonds. The best time to make changes (if the plan dictates) is during seasons like the one we are currently in when market volatility is low. Using specially designed software to show what “risk-reward” looks like, the visual below is a comparison of a 100% stock allocation versus a balanced 50/50 stock to bond allocation. This shows the volatility of a particular allocation and the normal range based on historical events. You can see the financial benefits and drawbacks to certain allocations at differing times. Does your plan suggest more growth or more income? Due to historically low volatility, this is a great time to reassess your plan and investments.

Considering the market, we can also draw upon the analogy (and one we in Oregon are currently living through) of forest fires. While devastating, these fires clear out the excesses and overgrowth to reset the clock of growth and life. The markets act in much the same way. After many years of growth and abundance there comes seasons of cleansing where the inefficiencies and excesses in the market are reset. These resets come in the form of recessions and market corrections. On average, there is a 20-30% correction every 5-6 years. Fires are a normal part of the environment where we live and the markets where we invest. While we can’t predict exactly when these events will occur, we can plan, prepare and make appropriate adjustments to weather them with as minimal damage as possible. Take the time today. If you would like to talk with one of our advisors please call Jill at 503-905-3100.

Two Things to Consider When Managing Your Employee Stock Options.

Stock options are an interesting benefit. Instead of giving you actual shares of company stock, your employer gives you the “option” to buy a certain number of shares at a particular price. While options can be a tremendous benefit, they are frequently mismanaged causing you to either take too much risk or to miss out on most of the benefit. If you’ve been given employee stock options there are a couple of things to know.

First, there are a different types of stock options: Non-qualified Stock Options (NQs), Restricted Stock Units (RSUs), Incentive Stock Options (ISOs), etc. Second, the value of your stock options may differ from owning actual shares of stock. Understanding how options pricing works is key to getting the most from this potential benefit.

For this post, I’m going to focus on non-qualified stock options. Non-qualified stock options have a few moving parts that can have a major impact on your ending value - or whether there is any value at all.  When an employer, such as Nike or Intel, gives non-qualified stock options, they come with a particular grant price.  The grant price is the price at which you have the “option” to buy your shares of stock. Having an understanding of the stock price vs. the grant price will help you maximize the value and minimize your risk of loss.

The grant price is the key difference between owning actual shares of stock and a stock-option. Unlike owning actual shares of stock, your options value is based on the difference between the grant price and the actual stock price, not the value of the stock price itself. Therefore, if the actual stock price is greater than the grant price, your options have monetary value. If the stock price is below the value of the grant price, then your options have no value.  For example, if you have 1000 shares of Nike options with a grant price of $65 and the actual stock price is $58, then that particular grant would be worth $0.

Here are two common mistakes I see employees make:

Mistake #1 – Selling Too Soon

Until the stock price exceeds your grant price by a significant amount, you will have only a partial benefit. For example, let’s assume the following:

• You were granted 1000 shares

• The share price is $60

• Your grant price is $57

Since the stock price is $3 more than your grant price, your options would have a value of $3000 ($3 of value per share x 1000 shares). While $3000 is a nice amount of money, it would only equate to 50 shares of actual stock ($3000/$60=50 shares). If you sell at this point in time you would effectively lock in a value of 50 shares instead of the full 1000 that you were given. As the stock price increases, your effective number of shares increases as well.

To show how this works, let’s assume the stock price increases to $80/share. How do your 1000 options look now? The new stock price of $80 gives you a value of $23/share ($80 - $57 = $23). Your new options value is $23,000 ($23 x 1000 shares). At this price, you’d have the equivalent of 287.5 shares ($23,000/$80=287.5).

In addition, you will notice that while the stock price went up from $60 to $80 in our example (an increase of 33%), your option value increased from $3000 to $23,000 (an increase of 667%). This is a phenomenon that is unique to stock options and one that can provide a lot of upside benefit. However, as you’ll see below, it can also expose you to more risk than you might think.

Mistake #2 – Holding on too long

For those of you who’ve seen some nice growth in your options over the years, you are possibly taking a lot more risk than you need to.  As you saw in our previous example, option value can rise significantly greater than the price of the stock itself. The flip side is that if the stock price declines, your options will go down in a greater percentage than the stock itself. Again, this is caused by the fact that you were not given 1000 actual shares of stock, but the “option” to buy 1000 shares at a price of $57/share.

To further demonstrate this, let’s use the reverse of the example above. If the stock price goes from $80 down to $60, a person who owns actual shares of that stock would lose 25% of their account value. However, since you have a grant price of $57 your options would go from $23,000 down to $3000.  That’s a loss of 87%!

Summary

Without a strategy for managing your stock options, you could be leaving a tremendous amount of money on the table and/or exposing yourself to a lot of unnecessary risk.

There’s no guarantee how any stock will perform in any given time-period, but with a proper strategy you can maximize your option value and minimize your risk, helping you stay on track with your financial goals.

If you would like help putting a strategy together to make sure you’re maximizing your options, give us a call at 503-905-3100.

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A blog that our advisors frequent is https://www.kitces.com. On the surface, the structure of the site may look a little unconventional, but after spending some time at the site you will realize that this guy really knows his stuff. One of his recent articles struck a chord with me. Kitces speaks to all the phases of investing and how each “moves the needle” when it comes to saving for retirement and creating an income to supplement a desired retirement. The article breaks down your working years into 4 distinct phases: Earn, Save, Grow, and Preserve. Before I get into the phases let’s have the chart below (showing someone saving $300/month at 8% earnings spanning from age 25 to age 65) guide us through the phases.

Something that stood out to me in the article was how powerful savings is at the beginning of retirement and how impactful an appropriate allocation is towards the end of your working years.

Consider these two scenarios:

Regardless of whether you are 25, 35, or 45 if you are just starting to save what matters even more than the allocation is how much you are contributing. Imagine if you have an account balance of $1,000 and contribute another $1,000 over the course of the year. With a $1,000 contribution you’ve doubled your money (or grown your balance by 100%). In contrast, if you were to have an above average year of performance, say 10% rate of return, but did not contribute to your account balance you would have grown your account $100. While $100 is nothing to dismiss, we can hopefully agree that it's not going to impact your retirement in a drastic way. Later on in life as your balance grows that 10% return will have a much greater dollar impact, but during the early phases of saving your contributions do most of the heavy lifting when building your account.

As you continue to work and save the pendulum will slowly swing from contributions having the most impact on your account to account growth (or capital appreciation) impacting your account. The below chart (again from Kitces) gives a representation of the importance your allocation has as you progress in your career.

As you can see there is truly a shift in what influences your account most over time. Let’s look at that same $1,000 contribution later in life. Assume you’ve been saving for 20 years and your retirement account has grown to $250,000. The same $1,000 contribution now has less than a 1% impact on your account with the 10% rate of return on your account doing the heavy work to increase your account value by $25,000 (keep in mind a negative 10% return has the same impact on the opposite end of the spectrum).

So where do you go from here? Your savings rate and your allocation are going to impact your account value throughout the course of your working years with each providing great impact at different times during the course of your savings life. In fact, on average after saving in an account for 20 years, market growth accounts for 75% of increases in your account! A great rule of thumb is if you can pinch pennies in your 20s and 30s to build a great base in your account while keeping a growth allocation throughout your working years, you’re on your way to a successful retirement plan.

Call 5039053100

Email 401k@humaninvesting.com Sources

https://www.kitces.com

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Are you a sole proprietor or business owner running a closely held family business? Maybe you have a side consulting gig while working for a Fortune 500 company? Maybe you are already participating in your primary employer’s plan? If so, that’s great! But, are you aware that as a self-employed business owner there are additional plans you can implement to help put even more money away for retirement and reduce your income tax liability? For many, a retirement plan is synonymous with a corporate 401(k) plan. Often the perception is that only large employers have access and resources to implement these tax deferral and savings benefits and that your only other option for putting money away is to contribute to Individual Retirement Accounts (IRAs). Nevertheless, as a self-employed business owner there are several other inexpensive plan options that can be as effective and efficient in putting away additional dollars for your retirement.

Below are three retirement savings plans that work well for many business owners; from the lone self-employed contractor to a multi-shareholder corporation with up to 100 employees:

SEP (Simplified Employee Pension) IRA is a plan that allows an employer to make contributions to IRAs established by or on behalf of each qualifying employee.

• Annual SEP IRA contribution limit of 25% of annual compensation/business net income (54k contribution limit for 2017).

• Annual contributions are not required. You can elect year to year whether contributions are to be made.

• Qualifying employees must be 21 years of age, have performed services for the employer during 3 of last 5 years and received at least $600 of compensation.

• SEP IRAs must be setup and funded by the tax filing deadline, including extensions, for the tax year the plan is to be in effect (i.e. October 15, 2018, for a 2017 Form 1040).

• SEP IRAs can be setup in addition to participation in another company’s qualified retirement plan (i.e. 401(k) plan).

SIMPLE (Savings Incentive Match Plan for Employees) IRA is a salary reduction plan which eligible employees defer a portion of their salary with the employer contributing a portion as well.

• Employee deferral up to $12,500 (+3k catch up for >50years old) with an employer 3% match or 2% non-elective contribution.

• Eligible employees have earned at least 5k any two prior years and expect to earn 5k in current year.

• SIMPLE IRAs may be setup and effective between January 1 and October 1 of the tax year for a new plan, after October 1 if the business came into existence after October 1 to start that year, or effective January 1 if the company has previously established a SIMPLE IRA.

• These work well when a business has net income of less than 50k, as the employee deferral portion is a set max (i.e $12,500) not a percentage based on business net income.

Solo 401(k) is a profit sharing plan for self-employed individuals who are both the employee and employer.

• 401(k)s have salary deferral limits of 18k/year (+6k catch up for >50years old).

• You can add a ROTH feature vs. pre-tax contributions (i.e. up to 18k year into a ROTH 401(k) vs. $5,500 into a ROTH IRA).

• Allows for plan loans from your account balance; starting at 10k, up to the lesser of 50% of your account balance or 50k.

• Much of the complexity of a 401(k) plan are in relation to the non-discrimination testing, which is not applicable to solo 401(k)s.

• Spouses and/or children of the self-employed business owner can participate in a solo 401(k).

Internal Revenue Code 415 provides the rules surrounding contribution limitations for these plans. The 54k total contribution limitation is a “per plan” limitation, while the employee contribution limitation (i.e $12,500 and $18,000 deferrals) is a “per participant” limitation. Say, for example you were to participate in two separate company retirement plans, such as a 401(k) and SIMPLE IRA; as the employee participant in both, you are only allowed to defer 18k in total between the two plans, but are allowed up to 54k in total contributions each in (54k in combined employee and employer contributions). Accordingly, had those plans been a 401(k) and a SEP IRA (which is an employer contribution plan only), you could max out the 18k deferral in the 401(k) in addition to the employer contribution. This allows for up to 54k in total contributions plus the ability to make a full 54k in annual contribution in the SEP IRA.

Also note that the IRS views all “commonly controlled” companies as one entity for retirement plan purposes. Therefore, if a self-employed business owner owns more than 50% in multiple business entities, all businesses would be aggregated for retirement plan participation and Section 415 limitation (i.e. contribution limitations) purposes.

If you are self-employed and have questions about how your business can benefit from one of these retirement savings plans please reach out. Your entity structure, employee base, net income and timeline will point to what plan might be the best fit. Let us help you implement the right plan, save on taxes and save more for your future retirement!

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In this season of the 4th of July, we have the chance to celebrate our freedoms with gratitude for the sacrifices of those who have gone and those who continue to go before us. When it comes to our household finances, sometimes it takes making current sacrifices in our personal lives so that we may celebrate a future financial freedom. Here are four things that can help provide financial freedom for you and your household:

# 1 - Create a Budget

Once we receive our paycheck most of us think we know where our money is going when in reality most of us have no idea. Making a budget allows us to give an account for our spending and to give each dollar a home.

• Assess your current state - The best way to get started in making a budget is to identify where your dollars are spent and what is necessary. Start by writing out a list of your current monthly expenses.

• Decide what’s important - Prioritize for each category and cut out what you need to, to balance your budget.

• Stick to the plan – Be diligent with your budget and as things change work to make tweaks as you go.

  • Mint is an online tool that many find helpful when tracking their spending and creating budget goals.

  • If you prefer a spreadsheet see the following Budget Template.

  • Look ahead – Are you expecting to have big expenses in the future? Start saving now.

#2 - Build a Safety Net

Some big expenses aren’t expected. That’s why it’s important to have money stowed away for emergencies (loss of job, unexpected medical bills, car repair, etc.). Even if you can only afford to set aside a small amount each month, it is important to put these dollars away and not touch them unless it’s crucial. Sometimes life doesn’t go according to plan and when it doesn’t a financial safety net will keep you on track. To provide an adequate buffer from the unexpected, aim to eventually build your savings up to have three to six months living expenses on hand.

#3 - Pay Down Debt

• Create a plan - Make “Paying Down Debt” a category in your budget.

• Be informed - Know what your interest rates are and understand how interest rates can work against you. Here’s an example of the impact of high interest debt using the average US household credit card debt.

  To see the effect of your debt, see the following debt payoff calculator.

• Be diligent - This can be a tough but worthwhile process for getting out of debt.

#4 - Take Care of Your Future Self

• Take advantage of free money - Does your employer have a retirement savings account? Chances are they have a match, meaning your employer will contribute to your retirement savings plan based on your annual contributions. Don’t leave free money on the table and make sure you capitalize on the match.

• “Don’t forget about me” – your future self. Try to save 10-15% of your income for retirement to help with the cost of living at retirement. Starting early has a significant impact upon your retirement balance by putting time on your side.

• Make contributions to your Health Savings Account (HSA). Set aside funds for health expenses now or in the future. Contributing to your HSA can provide you with a triple tax benefit: contributions, HSA investment growth, and withdrawals for qualified medical expenses are all tax free.

Happy Birthday America, let freedom ring!

Sources: www.federalreserve.gov

  Over 50% of us take Social Security before “Full Retirement Age”… and over 90% take Social Security by “Full Retirement Age”.

What age are we taking Social Security?

Munnell, A and Chen, A, “Trends in Social Security Claiming”, May 2015, Center for Retirement Research at Boston College, from http://crr.bc.edu/briefs/trends-in-social-security-claiming/

What is “Full Retirement Age” and are 90% of people right?

Full Retirement Age or FRA is the age an individual can take their full Social Security retirement benefit without a deduction.  Depending on your age this is between 65 and 67.

While the FRA to take Social Security is between 65 and 67, we can take Social Security as early as 62 with a reduction in benefits.  48% of women and 42% of men take their benefit at age 62.  Is this a good idea?  If your FRA is 67, by taking your benefit at 62 there is about a 30% reduction in your benefit for your lifetime.  If you were normally to receive $2,000 a month, by taking it at 62 you would receive about $1,400 a month for life not including cost of living increases.  Over time, this is significant.

Consider these 4 reasons for delaying Social Security:

Higher Income

If you wait until 70, your monthly benefit is significantly higher. If your FRA benefit at 66 is $2,000, then waiting until 70 will provide a benefit of $2,640.  You will receive an additional $640 each month for the rest of your life plus the cost of living increases.  If the $2,000 covers basic expenses, the additional $640 per month of discretionary income can be significant to an enjoyable retirement.

Survivor Benefit

If you are married, this applies to you.  When one spouse passes away the survivor gets the higher of the two benefits and loses the lower benefit. Having the spouse with the highest Social Security benefit wait until 70 can drastically improve the life of the surviving partner.  If you both take Social Security at FRA with one at $2,000 and the other at $1,200, when one passes the remaining spouse will lose $1,200 a month and be left with only the $2,000 benefit.  Waiting until 70 for the spouse with the higher benefit of $2,640 may significantly improve the life of the remaining spouse.

Less Taxes

Social Security is not subject to tax the same way as your earned income. How much tax is paid on Social Security dollars depends on total combined income and differs from an individual to a married couple filing jointly. Whichever your situation may be, Social Security benefits are taxed either up to 50% or up to 85%. In any case, it is never taxed at 100% of the benefit. And waiting to receive your benefits until 70 may benefit the overall tax you pay. Always check with a CPA to confirm your specific numbers.

More Money

Most people will receive more Social Security dollars by waiting until 70 (If they live beyond 83.) Or if married and one of you live beyond 83, you will likely have more total dollars by waiting until 70. Additionally, if you live a long life, you will receive significantly more total dollars in retirement. This is due to the significantly higher Social Security benefit amount received by waiting, coupled with potentially lower income taxes.

Personally-saved retirement income is the base for many people’s retirement budget.  If portfolio assets run out or are greatly reduced, a higher Social Security benefit can drastically impact later years of retirement to fill the gap.

Higher income, survivor benefit, lower taxes, and more money… 4 good reasons to consider waiting past full retirement age to take your Social Security benefit.

Each person, each couple is unique

There is no one size fits all in retirement planning and the ramifications of the decisions made here are significant.  The questions you ask as you invest and then begin to plan towards retirement may be some of the most important, such as: what are you investing in and what are you taking your Social Security for? It's worth your time and finding trusted partners to help you navigate. At Human Investing these are the very questions we help people work through everyday for their "today's" and their "tomorrow's."

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This past year has been great for both sports and investors (who have been investing in stocks). Think about the last 12 months we’ve had in each:

Sports:

• Golden State Warriors blowing a 3-1 lead to the Cleveland Cavaliers

• Chicago Cubs winning their first World Series in the last 108 years

• Clemson vs. Alabama National Championship Game in college football

• Tom Brady leading the New England Patriots in the largest Super Bowl comeback of all time

• Roger Federer and Rafa Nadal play against each other for the Australian Open Final

• Maybe the most impressive Serena Williams wins the Australian Open while pregnant!!!!

Stocks:

The S&P 500 is up over 15%, not including dividends, over the last 12 months.

International stocks have also made money with developed countries growing at almost 10% and emerging markets growing at a 16% clip.

A similarity that I wanted to touch on that I commonly see in both sports and investing is sticking to a process rather than focusing on results. For example, I was talking with a client last week and made the comparison of basketball and investing. In basketball, your process can be perfect, as in calling the perfect play, making the perfect pass, and getting a wide open shot. However, even with a perfect process you might miss the shot and not receive your desired result. Does that mean you never run that play again just because you missed the shot? Of course not! Over time the more plays a team runs that produce open shots the better. That’s a winning process that gives a team the best chance to produce winning results. In the same light, investors can have a winning process and due to variables out of their control, potentially lose money in their account. It’s also possible for an investor to make a decision that in long term most likely wouldn’t be viewed as “best practice”, but make money in the short term.

In the context of employer sponsored retirement account (401(k)’s, 403(b)’s, Deferred Comp plans, etc.) it’s not always evident what differentiates good process vs. “lucky” results. While good process can be defined many ways our firm has developed a few staples that we hope can help you as you look to develop your own process for being a successful long term investor.

Reduce investments costs: This has been mentioned in our blog and many other blogs/articles before us. It’s been shown time and time again that reduced investment expenses is a leading indicator for above average (relative to other investors) performance.

Past performance is not an indicator of future results: If you are someone who looks at the trailing 5 year return number as your leading indicator for what to invest in for the next year that’s most likely not a good process. Not to say that it can never work, but looking at your investment decisions more holistically and considering costs, correlation, and other variables over time can set you up for success. This chart, which will we will be looking at more in a later blog, speaks to consistently selecting funds that outperforms their benchmark is nearly impossible.

Buy and Hold: Investing is hard. If the stock market begins to decrease in value it’s difficult to tell if a 5% loss is going to turn into a 30% loss. It’s equally as difficult to determine if growing market is overvalued and is on the brink of a correction. Some words/stats of encouragement from a blog our firm likes http://awealthofcommonsense.com, as it relates to buying and holding are:

• Stocks on average are up every three out of four years

• Stocks on average fall 5% roughly three times a year

• Stocks on average fall 10% roughly once a year

• Stocks on average fall 20% or more roughly once every 3-5 years

• Stocks historically are the best asset class for earning long term returns above inflation

So whether you’re a coach of an NBA team trying to figure out what play to run or an investor in a 401(k) plan trying to figure out what fund to invest in, remember that process trumps short term results.

Call us: 503.9053.100

Email us: 401k@humaninvesting.com

Sources:

http://awealthofcommonsense.com

http://us.spindices.com/spiva/#/reports

https://www.google.com/finance