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Life Insurance: A Key Component of a Financial Planning

Life Insurance: A Key Component of a Financial Planning

Life Insurance: A Key Component of a Financial Plan

If asked what comes to mind when thinking of financial planning, many would likely mention topics such as saving for retirement, planning for college, creating strategies for retirement income, or structuring a portfolio with an eye toward maximizing tax efficiency. Indeed, planning for our later years, or saving to accomplish certain goals, tend to be the primary focus for many in financial planning. Equally important, we believe, is the importance of incorporating life insurance strategies into a financial plan that will address specific needs such as providing for loved ones, or ensuring a business’ continuity, if and when one is gone.

Life Insurance: The Major Types

When considering life insurance, there are essentially two types: permanent, and term. Broadly speaking, permanent policies are designed to cover the insured over his or her lifetime, while term policies provide coverage that spans a specified time period. Regardless of whether one chooses term or permanent coverage, however, the death benefit bypasses time consuming probate proceedings, and typically passes directly to the insured’s beneficiaries free of income taxes.

Term insurance can be categorized as “group term”- low cost insurance offered to a group of individuals, such as the employees of a company or business, or “individual term”- coverage that is purchased by an individual for a certain period of time such as 5, 10 or 15 years. Given that term policies are designed to provide a death benefit only, term insurance is typically less expensive, at least initially, compared to permanent policies. Once the term expires, however, any renewal of the policy will typically be met with an increase in premiums.

In contrast to term insurance, permanent policies are designed to provide a lifetime of coverage, with the two main types of permanent insurance being “whole life,” and “universal life.” With whole life policies, annual premium costs are initially higher than those of term policies, but they remain constant over the life of the policy. Furthermore, in addition to covering the insurance cost that provides for the policy’s death benefit, a savings component of the premium payments helps to build cash value over time. As with other savings vehicles, the cash value of whole life policies earns interest, and does so on a tax deferred basis. Also, depending on the policy, the cash value may be withdrawn or taken out in the form of a policy loan for things like college tuition, home improvements or retirement income.

With universal life, policyholders may enjoy some extra flexibility with respect to the premiums, or the face value of the policy. For example, premium payments can be increased, decreased or possibly deferred, while also building cash value over time. Similarly, universal life policyholders may have the option of changing the death benefit of the policy as needs or circumstances change.

Who Needs It and Why?

While life insurance may not be appropriate for everyone, we believe it offers value to many including:

Individuals with a spouse or children that rely on them for financial support. Perhaps the most important benefit of life insurance is its power to replace the income of a family breadwinner in order to help maintain the family’s current lifestyle. When considering how much insurance to carry, consider factors such as current and future income needs, as well as future expenses such as college tuition.

Those seeking to cover the cost of final expenses. While most may choose to avoid thinking about their own passing, some basic planning for final expenses may help one’s heirs to better navigate, financially, during what will likely be a difficult time. With proper planning, life insurance can help cover the cost of final expenses such as funeral costs, outstanding medical bills, or estate taxes, such that surviving family members can avoid spending savings that was planned for other uses.

Individuals with a joint mortgage or other significant debt. For those who have a joint mortgage or other large debt, life insurance may prove invaluable to a surviving borrower. In the absence of coverage, the survivor may find him or herself in the position of having to sell the home or other assets, perhaps at a discount, in order to pay off the outstanding debt.

Business owners. Life insurance can also play a role in helping a business owner to leave his or her estate to the children in a manner that all might consider fair and equitable. For example, a business owner may have children involved in running the family business, as well as others who have chosen to pursue other professions. Logically, the owner may want to leave the business to the children who were involved in its management so that they can continue to derive benefit from it. In order to provide for the children who were not involved in the business, the owner may choose to purchase a life insurance policy that carries a death benefit that’s similar in value to that of the business, and name these children as the beneficiaries on the policy. In this way, all of the children would receive assets of approximately equal value upon the owner’s passing.

Yet another way that life insurance may benefit business owners is in business partnership situations. In order to help ensure that a surviving partner could afford to buy out a partner’s heirs in the event of his or her passing, each of the partners may wish to hold an insurance policy on the life of the other.

As a Tool for Planning

While life insurance is likely thought of, first and foremost, as a vehicle to provide a death benefit, it can also play a role in areas such as charitable giving or long term care planning. For example, if one donates regularly to a favorite charity, the charity could use the donated funds to purchase a life insurance policy on the donor. By purchasing a policy on the donor’s life, the charity is positioned to receive a death benefit that may far exceed the value of the donations received once the donor eventually passes. Similarly, through regular charitable giving, the donor is able to continue to enjoy the tax benefits over the remainder of his or her lifetime.

With respect to long term care planning, life insurance can play a very important role. Traditionally, long term care policies would only pay out a claim if one became ill and needed care. If the individual were to live a long healthy life, and then died suddenly, all of those long term care premiums would be gone. Fortunately, many of today’s permanent life insurance policies give the option of using the death benefit for qualified long term care expenses while the person is living. If the insured needs long term care, the “living benefit” will pay for the care, thereby protecting other assets. If he or she pass away without needing care, the death benefit will be paid to the chosen beneficiary.

While, on the surface, life insurance may seem a fairly simple and straightforward vehicle designed to help provide for one’s heirs when he or she is gone, we believe that when used correctly, it can be a valuable component of one’s overall financial plan. Please contact us if you have questions as to whether life insurance is right for you, or if you have questions about an adequate level of coverage. Similarly, we’re happy to review any existing policies that you may have to help ensure that they are adequately meeting your personal protection needs.

CLICK HERE to request a free Wealth Managment Consultation.


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ROTH vs Traditional IRA’s: What’s the Difference?

ROTH vs Traditional IRA’s: What’s the Difference?

The ROTH after tax and the Traditional Pre-tax method of saving is almost identical except for one variable, which is a person’s income tax. A person’s income tax rate will be a key factor in deciding which avenue to take, pre-tax or not.

What is an Income Tax Rate?

An income tax rate is based on the amount of taxable income a person brings in. The higher the taxable income, the higher the income tax rate. A person’s filling status, meaning if they have dependents or other deductions, will directly affect the tax bracket a person falls in. More income, or higher wages equals a hirer tax bracket.

Traditional or Pretax IRA/401K Method: How does this benefit me in my higher tax bracket?

Traditional or Pretax IRA method of saving pulls the contributions to the retirement fund before taxes. Only when a person pulls from their IRA, do they pay taxes on their money.  This benefits those who want to reduce their income, which in turn reduces their income tax rate. There are a few reasons why a person would choose to deduct their retirement before taxes.

  1. Reducing taxable income by 10 to 15% or more can reduce the amount of income tax a person pays at the end of year to the IRS. This along with charitable deductions and/or dependents can put a person in a lower income tax bracket and reduce their income tax rate. An example of this is explained below:

Let’s say hypothetically, a family brings in $465,000 a year. In the State of Arkansas, that would place them in a tax bracket of 39.6%. This is equivalent to 46 cents per dollar they earn will go to taxes. This family wants to reduce their tax bracket by having their IRA/401k contribution taken out before taxes, along with any other charitable donations and place them in a lower tax bracket that will reduce the total tax amount.


  1. A person may realize that when they retire, they will be in a lower tax bracket, and when they pull from their IRA/401K, it will be at a lower income tax rate. An example of this is explained below:

A person’s W2 shows $30,000 – $3,000 = $27,000 (hypothetically, their tax rate is 20%)

For 20 years a person pulls out $3,000 a month before taxes, which now equals $60,000. Their IRA or 401K, the funds have grown as well to equal $150,000. This person is retired, living on a fixed budget and is in a much lower income tax bracket. Now when the person pulls from their IRA/401k, they are paying the taxed amount that reflects their current income tax bracket.

 ROTH Taxed Method: How does the taxed IRA help me in my tax bracket?

With the ROTH Taxed Method, a person is paying taxes on the contributed amount to their IRA/401K. It would look like this: $30,000 – $3,000 = $30,000. This is because the contribution amount is being taxed along with the rest of taxable earnings. Again, there are multiple reasons why someone would choose the taxed method of savings.

  1. Let’s say hypothetically, a family feels comfortable in their tax bracket of 10, 15 or 20%. They have some children living at home and pay a mortgage for which they receive additional tax credits and donate to charities and/or their religious institution. They know that when they retire, they will be in a higher tax bracket because they will have less deductions. Hopefully, their home will be paid for, they will not have children living at home and they could have other investments that count as income.

In that 20 years, they have paid tax on $60,000. That taxed money has grown as well and now equals $150,000.

According to the IRS, the original amount of $60,000 has already been taxed and now there is a growth or gain of $90,000 that is untaxable. This is because the IRS considers these funds to be co-mingled with the original $60,000, and the funds can be pulled out at any time without any additional tax.

  1. There is a chance that a family’s income could increase or tax laws can change. And at this moment the amount that is being taxed in the allocated tax bracket, they are comfortable with. So, they decide to pay taxes now, instead of later.

Every financial portfolio is unique to each individual situation. If you have more questions regarding the differences between taxed and pre-taxed IRA/401ks or you need some extra guidance with how to save and allocate funds for retirement, please reach out to us.

CLICK HERE to request a free Wealth Managment Consultation.


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Contact Hagan Newkirk

Telephone: (501) 823-4637

Email: info@hagan-newkirk.com


Visit our Office:

6325 Ranch Drive

Little Rock, AR 72223

What To Do With Medicare If You Work After 65

What To Do With Medicare If You Work After 65

Many of my financial planning clients are introduced to me as they approach age 65 and have questions related to Medicare, specifically: “What do I do with Medicare if I plan on working past age 65?” In this post, I will go over a few of the more common scenarios that I encounter while working with clients that plan to continue working past age 65, and answer a few of the questions that I tend to field on a regular basis. If you have an individual health insurance policy that is not through an employer, chances are you will not be able to keep that policy when you become eligible for Medicare. This article is for those that have coverage through an employer and have additional decisions that need to be made.

The first step in the decision making process is to understand the insurance that you currently have: What does it cost each month? What are the copay and deductible amounts, and what is your maximum out of pocket exposure?

After reviewing your current coverage, you should speak with your human resources department or benefits coordinator and learn how becoming eligible for Medicare will effect your employer coverage. If you work for a company with less than 20 full time employees, their health plan may have a rule that forces you go onto Medicare and/or reduce your premium if you go onto Medicare.

Now comes the hard part: trying to understand the different parts of Medicare, their costs and coverage, and which ones you need.

Part A: Medicare Part A provides coverage when you are admitted to the hospital for anything other than overnight observation, admitted to a skilled nursing facility, receiving hospice care, and in some cases home health care.  Since there is no premium cost for Part A if you or your spouse has worked and paid Medicare taxes for 40 quarters (10 years), I almost universally recommend that my clients enroll in Medicare Part A at age 65, because it adds a secondary hospitalization payer at no cost. The exception to this is if you wish to continue contributing to a health savings account, which you cannot do if you are enrolled in any part of Medicare. If you are currently drawing Social Security benefits you will automatically be enrolled in Part A at age 65. If you have not started drawing Social Security benefits yet and wish to enroll into Part A, you will not be automatically enrolled and will need to submit an application for benefits to Social Security, either in person at your local SSA office, online, or working with an advisor like myself that offers this service.

Part B: Medicare Part B covers outpatient medical, such as as doctor visits, x-rays, and lab services, as well as outpatient surgery, chemotherapy and radiation. Unlike Part A, which does not have a premium for most people, there is a monthly premium for Part B, which is $134 in 2017. If your income is over certain thresholds you may also pay what is called an income related monthly Medicare adjustment in addition to the standard premium. Like Part A, if you are currently drawing Social Security benefits then you will be automatically enrolled in Part B at age 65 and receive your Medicare card around 3 months prior. If you decide to keep coverage through your employer and delay Part B until retirement, you may do so by signing the back of your Medicare card in the declination section and you will receive a new Medicare card with Part A only. This is a very common method for those working past age 65. Also, like Part A, if you are not yet drawing Social Security benefits you will not be enrolled into Medicare Part B.

Medicare Supplement Insurance: Also called “Medigap” insurance, are polices provided by insurance companies that pay as a secondary payer to Medicare and help with out of pocket costs such as the hospital deductible and outpatient co-insurance. I almost always advise my clients to purchase a Medicare supplement policy if they don’t have secondary insurance from another source. Federal regulations have standardized Medicare Supplement plans in an effort to make comparison shopping between different companies simpler. When comparing different Medicare supplement insurance companies, it is important to review both their current premiums and if the company has an established history of offering their products in your area, and if so, what their rate increases have been.

Medicare Part C: Part C has been around since 2006 as a result of the 2003 Medicare Modernization Act. Better known as Medicare Advantage, these plans are offered by private insurance companies that have contracted with the Center for Medicare services.  Medicare Advantage plans are not a supplemental plan that pay in addition to original Medicare. Medicare advantage plans actually take the place of your original Medicare. While many Medicare Advantage plans may give you an opportunity to lower your monthly premium cost, they may also require you to see doctors in their network, and have higher out of pocket costs if your health were to decline. I always advise my clients to carefully review their options and speak with their healthcare providers before enrolling in a Medicare Advantage plan.

Medicare Part D: Medicare Part D is prescription drug coverage for Medicare beneficiaries offered by private insurance companies. Each plan has a tiered formulary that determines which medications are covered and what the copay is for each covered medication. Monthly premiums vary from company to company, and some plans may have a deductible. Medicare.Gov has a very handy plan finder tool that I use to assist clients that allows you to enter your medications and compare the various plans that are available in your area.

You can find pricing information for Medicare supplement plans, as well as Part C & D plans online, through a local insurance agent that specializes in Medicare products, or contacting your local area agency on aging to compare with your current coverage and make a decision.

If you would like a guide to help you navigate the Medicare process, please complete this contact form or call my office. I have helped hundreds of people through this process and can simplify this transition for you.

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A Quick Guide to Retirement

A Quick Guide to Retirement

  • Your 20’s: Planning Pays off Richly – You’re poorer than you’ll ever be again. If you’re in your 20’s and broke, you are in good company. There is good news! You can begin laying the groundwork for a prosperous future. Getting your act together now means you are putting time on your side. Live as cheaply as you can, avoid the usual financial traps like: spending too much on cars, wardrobe, or eating out. Shovel money into your retirement plan; aim to put aside 12-15% of your gross pay. Consider this: Someone who puts $4,000 a year into retirement accounts starting at 22 can have $1 million by age 62, assuming 8% average annual returns. Wait 10 years to start contributing, and you’d have to put in more than twice as much — $8,800 a year — to reach the same goal.
  • Your 30’s: Don’t be Derailed by Debt – Nine out of 10 people in their 30s are in debt, the highest proportion of any decade. Budget, budget, budget! Did I mention you should have a budget? Control your expenses by knowing where you are spending your money, and aggressively pay off debt.
  • Your 40’s: Make it or Break it – Pay off your debt (excluding the house) and make retirement savings your top goal. Every $1 you fail to set aside now could mean $10 less in retirement income. Meet with an advisor to determine the amount of money you need to save before you retire, then make it happen. Every financial decision from here on out is a big one.
  • Your 50’s: Heads-up – People in their 50s are usually in their peak earning years, and more than half no longer have kids at home. Now is not the time for looking in the rear-view mirror by saying, “I should’ve started saving when I was in my 20’s.” Retirement saving is Priority #1. Review your retirement accounts annually, rebalance to make sure you are taking the appropriate amount of risk.
  • Your 60’s: Last Chance to Get Ready –  Zero in on a retirement date. To know if you can comfortably retire, you’ll need to have a target retirement date, because how much money you’ll need and how much you’ll get (from Social Security and other options) depends on this. But you need to stay flexible, in case the day you’d like to quit working turns out to be too early. Working even a year or two extra can boost your nest egg and increase your retirement income enormously, but there is also no point in hanging around longer than you have to. Review Social Security options. Review your estate plans. Meet with a fee-only planner. The decisions you’re about to make are too important to your future not to get a second opinion. Look for an objective planner who’s experienced with retirement-income calculations.

As always, we are here to help. If you need help planning for your retirement – no matter what age group you are in – do not hesitate to contact us. I would welcome the opportunity to sit down with you and discuss your specific situation.


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8 Social Security Questions That You Need To Consider Before Retiring

8 Social Security Questions That You Need To Consider Before Retiring

If you are thinking about retiring in the next few years, chances are you are wondering about
the same things that many other people are at this stage of life. Here are some of the most
frequently asked questions that clients ask me about Social Security Benefits:

How is my monthly benefit amount determined?

Social Security bases your monthly benefit on the amount of FICA taxes that you paid through
out your work history. They take your monthly earnings during the 35 years in which you earned
the most, and index earnings from past years for inflation to calculate your basic benefit,
formally called your primary insurance amount.

How does drawing early effect my monthly benefit?

You can begin drawing benefits as early as age 62, but doing so reduces your monthly benefit to
75% of what it would be if you wait until you reach your full retirement age.

Can I delay my benefits past my full retirement age?

Yes, delaying your benefits past full retirement age earns you delayed retirement credits which
increase your monthly benefit by 8% for each year that you wait past full retirement. The
maximum delayed retirement credits that you can earn is 32% by delaying benefits until age

Can I draw benefits on my spouse’s work history?

If your spouse is currently drawing benefits then you can draw a spousal benefit that provides a
monthly amount up to half of your spouse’s current benefit.

Can I draw benefit off of an ex spouse?

You can draw benefits from an ex spouse if you were married for at least 10 years and are not
currently married. Your ex spouse does not have to be drawing benefits for you to draw ex
spousal benefits.

Will I receive my spouse’s benefit if she passes away?

If your spouse’s monthly benefit was higher than yours, you will begin receiving that higher
amount as a survivor benefit which will replace your monthly benefit.

Can I draw benefits while I am still working?

Yes, however if you work and receive benefits before reaching your full retirement age your
benefits will be reduced by $1 for every $2 that you earn over $16,920. The reduction changes to $1 for every $3 over $44,880 during the calendar year that you will reach full retirement age. There is no income related reduction in benefits after reaching full retirement age.

Will my Social Security benefits be taxed?

Your Social Security benefits may be taxed based on a figure called “combined income”. Your
combined income is your adjusted gross income, plus half of your Social security benefits, plus
a non taxable interests such as earning from municipal bonds. After calculating your combined
income, the IRS may determine that up to 85% of your benefits are taxable.


If you need help answering these questions, please, give me a call or fill out this form.


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Understanding the WHY Behind Saving & Investing

Understanding the WHY Behind Saving & Investing

Getting it right the first time

Over the past 15 years, it feels like I’ve heard it all. The stories from investors saving for retirement are all over the board. From “Man, if only I would’ve started saving when I got my first job”, to “I’ve never really understood investing, so it’s probably best I just wait until I have time to figure it out.” Then, of course, my favorite, “My retirement plan is to win the lottery!” 

One of the obstacles is that many of us have very little knowledge of investing. It’s not exactly standard curriculum in school, and most of us have little desire, let alone the time, to actually dig in and learn it ourselves. My goal in the next few paragraphs is to give you a basic understanding of saving, investing, and most importantly, WHY we do it.

I heard a saying about 10 years ago that I’ve latched onto ever since. There are three things that we can do with our money. We can SPEND it (nobody needs help with this on, we are experts already). We can SAVE it. We can INVEST it. It’s critical to establish the foundation that saving and investing are two very different things. In short, savings is designed for short-term needs like your emergency fund, a new dishwasher when the old one finally dies, or maybe braces for a child. We SAVE money that we will need to have access to over the short-term, say up to two years. The major concern here is not how much money we can earn, it’s accessibility. We need the money when we need it, and we don’t know when we’ll need it!

Investing, when done right, is done with a focus on the future. We INVEST for the long-term. We invest for things like retirement, kiddos college, etc. It’s noticeable right off the bat that these things are not near-term expenses. They are more than two years away for most of us and that should get us out of a saving mindset and into an investing mindset. What’s the major difference, you ask? We need our long-term money to GROW. And this brings us to a crucial point, and one that you should understand. WHY?

Why should you invest? Think about it. We know that investing involves some degree of risk, so why risk our money? Why do millions of seemingly same people in this world take risks with their hard-earned money? What’s your gut reaction? They could lose money, right? so why do they invest?

I’ve been asking this question for years to literally thousands of people, and I usually get an answer like: “So my money will grow.” Why do you need your money to grow? “So I’ll have more of it.” But WHY do you need more money? “So I’ll have more of it.” But WHY do you need more money? “So I will have more money to spend.” Why do you need more money to spend? “So I can quit working and live the same lifestyle or maybe even improve my lifestyle.” This is about the extent of our understanding as to WHY we invest our money. A critical reason we invest is a dirty little word called INFLATION. We have to invest in order to keep up. Inflation is the cost of goods (cost of living) getting more expensive. If our money doesn’t grow because we don’t want to take risks, we are effectively ensuring the very thing we are afraid of. We’ll go broke slowly. Think about it, according to cars.com, the number one selling car in 1985 was a Chevrolet Cavalier (it was ugly!). Brand new, it cost $9,005. The number one selling car in 2016 was the Toyota Camry. Brand new, it cost $24,840.

So, if you had $9,000 in 1985 and “saved” it, did you lose money? Technically, no. But, you did lose purchasing power. That’s WHY we invest. In my opinion, you can’t afford NOT to.

See full video below…

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How Often Should Companies Benchmark Their Retirement Plan?

How Often Should Companies Benchmark Their Retirement Plan?

Benchmarking can protect plan fiduciaries, reduce plan fees and maintain the quality of service and advice participants deserve!

1. “How often do you shop and compare your company’s health insurance plan with other provider plans?”
2. “Do you go years before shopping and comparing your personal car insurance rates with the rates of other providers?”

“Annually” and “No” are the most frequent answers people give to these two questions. With that in mind, why would you not also shop to compare and request bids on your company’s retirement plan on a regular basis? This is what we refer to as “Benchmarking your Retirement Plan” and the Department of Labor (DOL) recommends benchmarking about every three years.

As plan fiduciaries, it is important to remember that Section Plan of the Employment Retirement Income Security Act (ERISA) imposes high standards and provides that fiduciaries gather the information necessary to assess the “reasonableness” of fees paid for services by both the company and the participants. It also highlights the amount and the quality of the services they provide are commensurate with the fees being paid. Benchmarking your retirement plan will help protect against possible fiduciary breaches, disgruntled employees, and legal hassles.

Benchmarking is not just about fiduciary protection. Plan design features and participant education have a huge impact on retirement savings for participants, contributing not only to the success or failure of their retirement readiness, but also to the overall value of a company’s retirement plan as an employee recruitment and retention tool.

Regularly benchmarking your retirement plan is not only a DOL “best practice” – it is just good business. Conducting an independent RFP can result in a thorough review of features and fees. It can, however be a time-consuming process requiring senior staff, resources and attention. We recommend plan sponsors retain an independent plan consultant (not the broker) to do a complete benchmarking analysis on the company’s behalf. A truly independent analysis will provide the plan sponsor the cleanest and most unbiased look at their present situation as well as propose multiple alternatives to consider.

In preparing to benchmark your plan, it’s important to consider the following in order to maximize the benefits:

  • Use your most up-to-date and accurate retirement plan data, including plan level and investment expenses, investment performance and services provided by your current record keeper, administrator, and plan advisor.
  • Compare the retirement plan in a relevant context: Plans of similar size, type, design, location, and industry.
  • Don’t forget to consider the value provided! It can be reasonable to pay higher fees if a plan is receiving more or higher-quality services or is attaining higher participant success measures than similar plans.

Regular benchmarking of retirement plan costs and performance can go a long way to protect plan fiduciaries, reduce plan fees and maintain the quality of service and advice participants deserve.

CLICK HERE to request a free, independent benchmarking analysis for your plan(s).

You can call us directly or visit our office too!

Hagan Newkirk  |  Plan, Invest, Live

Central Arkansas Corporate Office
6235 Ranch Drive
Little Rock, AR 72223
Phone:  (501) 823-4637
Email:  info@hagan-newkirk.com

Alternative Minimum Tax (AMT)

Alternative Minimum Tax (AMT)

According to Investopedia.com the “alternative minimum tax (AMT) recalculates income tax after adding certain tax preference items back into the adjusted gross income. AMT uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back into the taxpayer’s income to calculate one’s alternative minimum taxable income (AMTI), then the AMT exemption is subtracted to determine the final taxable figure.” Sounds simple enough, right?

This parallel tax system is a method for the IRS to impose additional tax for “high income earners”. What originally was only to impact a small group of people now effects a large amount of the population. Typically, large families with high incomes are adversely impacted by the AMT because certain deductions that they most often take advantage of are disallowed when calculating the AMT.

In an effort to avoid the AMT, you should look to reduce your Adjusted Gross Income (AGI). Click here for a tax guide that demonstrates the Exemptions and Phaseout Limits based on how you file. If you have an after-tax investment account, structuring your investments so that income produced by dividends and interest are reduced or deferred. Buying tax-exempt bonds or bond mutual funds is a method of decreasing their taxable income produced from your investments that is used to determine your AGI. Another step I would encourage is increasing 401k contributions. Not only does this option reduce your AMT exposure but it also makes sure that you are maxing out your retirement savings. If available, take advantage of a Flexible Spending Account (FSA).  If your employer makes this available you could make pre-tax contributions to an FSA. Doing so creates a pool of funds available to be spent on a pre-tax basis throughout the year for medical related expenses. There are some limits and issues related to FSA’s but could be helpful to reduce your reported income as well as set aside funds specifically for medical expenses. Be sure to consult your Human Resources director for help and more information. Lastly, you could consider buying up more life insurance offered on a pretax basis through your employers’ cafeteria plans.

For more information on how much life insurance you should have watch the video below:

If you are affected by the AMT, I would recommend that you consult with your tax advisor on some of these options discussed to see what is available to you and how it might reduce your income. For any other financial planning needs please don’t hesitate to contact us.

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Alternative Minimum Tax – AMT Definition | Investopediahttp://www.investopedia.com/terms/a/alternativeminimumtax.asp#ixzz4YhWZKGZO 

Ways to Fix Social Security

Ways to Fix Social Security

I recently got a social security statement. At first I thought that it was one of those direct mail scam programs. I sat there and thought what if I were to calculate my already earned credits as a present value. What would 13.76% of my cumulative income look like in a IRA or 401k plan, instead of a forecasted amount of fixed income at some future date? I didn’t actually do the exercise knowing the result would make me sick to my stomach. My father just turned 68 this last year. He handed me his social security print out and asked me to explain again why I have encouraged him not to take social security yet. My explanation was that we need to shore up the benefits for him and my mother. We expect for them to both have a longer life expectancy then generally assumed. Again, I shutter to think what his savings would be if we were to calculate it throughout his working life. What amount has been contributed to social security on his behalf and what amount of wealth would that be for him and my mom? Not to be selfish, but what difference in an inheritance could that be to me and my siblings? I am also curious as to what effect that could have had positively if deployed into the capital markets.

I do have mixed opinions about privatizing social security though. Ideally, yes I would say lets allow for that, because you could offer more investment choice and control, encourage a culture of personal responsibility as well as provide for a greater legacy for the worker’s family. If all the people who had the desire and insight to opt out of social security and preserve their contributions for themselves were able to do so and did, we would immediately destroy the entire program. It is built on the principle of pooling resources, insurance. The original design of social security in no way was intended to be as pervasive as it is today. I blame politics for that. What I am trying to avoid is suggesting the idea that social security is bad and should be privatized. I understand why our politicians are challenged with what to do to fix it.

There are a lot of people that have benefited from social security and there have been a lot of people who have paid for that benefit and deserve it. Consider the low income communities that almost live entirely on social security, that helps them for sure.

Unfortunately, social security provides no lump sum benefit that can provide a family with a legacy or inheritance. That earned benefit has no designed function to leave wealth to that workers family. How would that one particular aspect have helped elevate our poor communities if they had wealth to transfer to the next generation? How could that have eliminated poverty instead of perpetuated it? I think there is a component to the law of unintended consequences at play here.

I believe that social security should be revamped to accommodate for a  modern economy. It should account for mortality in a more responsive manner. The problem now is it has been put on a path to destruction because of the lack of political will to proactively and over a series of generations modernize mortality rates and assumption of benefits. If social security is to survive it should be structured in such a way to protect itself from catastrophic effects of insolvency and mismanagement by politicians and bureaucrats. Imagine the retiree, where 70-80% of their income is from social security. How would they be effected if benefit amounts had to be restructured? Imagine the implications to public confidence in our system of governance?  I read recently that if they were to use the same mortality assumptions as they did when beginning social security, benefits would begin at 82- 83, not 62-66 & 70. So clearly we need to reform the program to accommodate revised mortality rates.

I think that a solution would be to treat the program more like a cash balance pension plan. Help the worker understand what the benefit is if they chose a monthly income or a lump sum payout. Both present pro’s and con’s. I think that if the social security program where required to comply by ERISA rules just like other qualified plans in this country it would be in a much better position. There is a need to maintain essential benefits for the poor, but also provide for modern approaches to maintain quality and confidence in the system.

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Growth versus Value Investing: Which is better?


Growth versus Value Investing: Which is better?

Ken French and Eugene Fama provided ground breaking research in the world of modern portfolio management that has been the bedrock for how the industry develops and manages a portfolio. What I find unique about Fama and French is that the goal for their initial study and those continued by other academics was simple, to “explain market returns”. Their initial study was what propelled them to the forefront of the discussion of value versus growth debate. That debate continues to this day.

Fama and French’s attempt was based on a pure and humble question. It wasn’t “how can we beat the market, or provide alpha consistently in a given portfolio”. In fact their assumption is that you can’t do that. Their research was focused on how to achieve market returns on a risk adjusted basis and what components explain those returns consistently. It was bent towards a curiosity, much like a scientist with nature, using observation to explain what is going on and how things truly work. Fama & French wanted to study the nature of returns, with all its facets, and distill down a more concise and thoughtful understanding of what provided meaningful evidences of return. From that, create efficient portfolios that reflect those elements of consistent return based on the expected risk return relationship of the portfolio. For a portfolio manager or advisor the result of this discussion and research helps us better allocate our clients wealth towards those areas evidenced in providing consistent returns. These essential ingredients are “factors” of return.

Whether it be the beta, size, value etc., they wanted to determine which of these factors best indicated and contributed to a higher return more consistently over a long period of time. Eventually, Fama & French developed what is now known as the three factor model. This model collectively explains 95% of the variability of expected market returns. Size, Market Risk, and Value are those main factors of return determined by Fama and French.

The debate continues as to whether growth stocks outperform value over a long period of time. Based on the research of Bank of America Merrill Lynch, value stocks outperformed growth stocks  by almost 5% over a 90 year period (http://www.fool.com/investing/2016/06/19/growth-stocks-vs-value-stocks-over-the-long-term-y.aspx ). What they also found was that value stocks tended to outperform during periods of economic growth, while growth stocks performed better during weaker economic periods. This helps explain why value stocks outperform overall, because the economy is expanding for a much longer period of time then when it is contracting.

Since the initial publishing by Fama and French, there have been additional factors introduced that can explain returns. Two new factors are, momentum and profitability/quality. “Momentum is the rate of increase in a stock’s price over a given period of time. Stocks that have “gone up a lot” in the last year are said to have substantial positive momentum, while stocks that have declined, have negative momentum.” Profitability or Quality is found in stocks with a high operating profitability perform better. So not only does the debate continue but also the search for factors that can attribute returns for a portfolio.

As an investment advisor I think that it is important to recognize the research of the past and ongoing in order to contribute to the debate. Moreover, being able to intelligently speak about this topic and understand the concepts are important regardless if you agree with them. What I believe is that both strategies are helpful when building and managing a portfolio. I would agree with a more passive or indexed approach, tilting the allocations towards those particular factors of return all while recognizing the need for broad diversification.

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McDonald, Ph.D. Michael, Momentum: What Do We Know About This Investment Strategy (June 2015)