As we progress through life, we find there are certain things we can control and others we cannot. However, even with the things we can’t control, we can exercise good judgment based on facts, due diligence, historical patterns and a risk/reward calculation.
These strategies play an important role in retirement planning. When it comes to accumulation, spending and protecting your nest egg, financial analysts rely heavily on safety and probability planning strategies.
For example, a probability-based approach generally refers to investing. In other words, prices of stocks and bonds will vary over time, and as investors, we do not have control over the factors that cause those price swings – such as poor company management, a dip in sector growth, an economic decline, political instability and even global economic implications. We basically have to do our due diligence to ensure the securities we invest in are stable and well-managed, but in the end it’s a bit of a leap of faith. The markets will inevitably rise and fall and our equity investments will be impacted.
When it comes to retirement, financial advisors often recommend the following probability-based investments because they tend to be more stable and reliable:
Investment-grade bonds
High dividend-paying stocks
Real estate investment trusts (REITS)
Master limited partnerships (MLPs)
On the other hand, the safety side of the equation involves insurance products. Note that all guaranteed payouts are backed by the issuing insurer, not the Federal Deposit Insurance Corporation (FDIC) or the U.S. Treasury Department. So even though insurance products represent strategies that we consider “safe,” they are only as secure as the financial strength of the issuing insurance company.
Insurance contracts are based on insurance pools. This means they spread the risk of losing money across a wide pool of insured participants, betting that a portion of that pool will die early while others live longer. However, that risk is managed by the insurer instead of the contract owner, who is guaranteed to get paid no matter what happens in the investment markets or how many people in the insurance pool live a long time.
Among safety-based vehicles, you might want to consider a long-term care insurance policy to cover expenses should you need part- or full-time caregiving in the later stages of your life. Like homeowner’s insurance, this type of contract leverages manageable premiums to pay for expenses that you might otherwise not be able to afford.
Another safety contract is an income annuity, which offers the option to pay out a steady stream of income for the rest of your life and the life of your spouse – even if the payouts far exceed the premiums you paid. This is a way of ensuring you continue to receive income even if you run out of money.
A retirement plan doesn’t have to rely on safety or probability alone – you can combine these strategies. Many retirees feel more comfortable knowing they have a growth component in their portfolio to help offset the impact of long-term inflation. And within the safety allocation, you can even combine strategies. For example, a hybrid life insurance policy that offers a long-term care benefits rider allows you to draw from the contract if you need to pay for your own long-term care, which simply reduces the death benefit for your heirs. This way you don’t have to pay for coverage you don’t need, but it’s there if you do.
Safety vs. Probability: Planning For Retirement
February 1, 2020 · Blog, Financial Planning
⏱ 3 min read
As we progress through life, we find there are certain things we can control and others we cannot. However, even with the things we can’t control, we can exercise good judgment based on facts, due diligence, historical patterns and a risk/reward calculation.
These strategies play an important role in retirement planning. When it comes to accumulation, spending and protecting your nest egg, financial analysts rely heavily on safety and probability planning strategies.
For example, a probability-based approach generally refers to investing. In other words, prices of stocks and bonds will vary over time, and as investors, we do not have control over the factors that cause those price swings – such as poor company management, a dip in sector growth, an economic decline, political instability and even global economic implications. We basically have to do our due diligence to ensure the securities we invest in are stable and well-managed, but in the end it’s a bit of a leap of faith. The markets will inevitably rise and fall and our equity investments will be impacted.
When it comes to retirement, financial advisors often recommend the following probability-based investments because they tend to be more stable and reliable:
Investment-grade bonds
High dividend-paying stocks
Real estate investment trusts (REITS)
Master limited partnerships (MLPs)
On the other hand, the safety side of the equation involves insurance products. Note that all guaranteed payouts are backed by the issuing insurer, not the Federal Deposit Insurance Corporation (FDIC) or the U.S. Treasury Department. So even though insurance products represent strategies that we consider “safe,” they are only as secure as the financial strength of the issuing insurance company.
Insurance contracts are based on insurance pools. This means they spread the risk of losing money across a wide pool of insured participants, betting that a portion of that pool will die early while others live longer. However, that risk is managed by the insurer instead of the contract owner, who is guaranteed to get paid no matter what happens in the investment markets or how many people in the insurance pool live a long time.
Among safety-based vehicles, you might want to consider a long-term care insurance policy to cover expenses should you need part- or full-time caregiving in the later stages of your life. Like homeowner’s insurance, this type of contract leverages manageable premiums to pay for expenses that you might otherwise not be able to afford.
Another safety contract is an income annuity, which offers the option to pay out a steady stream of income for the rest of your life and the life of your spouse – even if the payouts far exceed the premiums you paid. This is a way of ensuring you continue to receive income even if you run out of money.
A retirement plan doesn’t have to rely on safety or probability alone – you can combine these strategies. Many retirees feel more comfortable knowing they have a growth component in their portfolio to help offset the impact of long-term inflation. And within the safety allocation, you can even combine strategies. For example, a hybrid life insurance policy that offers a long-term care benefits rider allows you to draw from the contract if you need to pay for your own long-term care, which simply reduces the death benefit for your heirs. This way you don’t have to pay for coverage you don’t need, but it’s there if you do.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
A rising tide might lift all boats, but the same cannot be said for the economy.
When the U.S. experiences robust economic growth, certain sectors of the stock market tend to rise while others hold steady or even decline by comparison. The stocks of companies that experience higher revenues are typically categorized as cyclical. In other words, their good fortune rests mainly on consumers being gainfully employed and having ample discretionary income with which to buy more goods and services.
Take, for example, auto manufacturers. Sales typically increase when more people can afford to buy a new car. But that’s not all the time, because the economy is cyclical – it ebbs and flows over time. Therefore, companies that produce non-essential products – sometimes referred to as consumer discretionary goods and services – tend to flourish during economic cycles of strength and rising GDP. That is why they are called cyclical stocks.
But when the economic future is in decline or at least uncertain, people tend to delay buying non-essential items like a new car. When the economy really takes a nosedive, more consumers are affected, they buy less stuff, manufacturing takes a hit and companies start laying off their workforce.
Despite these unfortunate circumstances, people still have to eat. They buy essential items, such as food and toothpaste and toilet paper. These are considered consumer staples, and the stocks of companies that produce these types of goods are defined as non-cyclical stocks. That’s because those companies are expected to continue earning revenues regardless of economic cycles. Non-cyclical industries include food and beverage, tobacco, household and personal products.
Another non-cyclical sector is utilities. Utilities are a little bit different because people tend to purchase relatively the same amount of utility service – with exceptions for extreme weather or making slight thermostat adjustments to save money – whether the economy is robust or in a downward spiral. Because of this, utility companies are considered a very stable business model.
For investors, that means they are well-established, long-term performers and usually pay out high dividends. Not only are utility stocks a good option for retirees seeking income to supplement their Social Security benefits, but they offer a safe haven for investors to relocate assets during periods of economic decline.
In light of recent cautions by economists predicting a recession in 2020, this could be a good time to review your portfolio from the perspective of cyclical versus non-cyclical holdings. It doesn’t mean you need to sell completely out of your stock allocation; perhaps just temper your holdings to equities that tend to perform reliably regardless of the economy. In addition to consumer staples and utilities, consider companies that specialize in national defense, waste management, data processing and payments.
Also be aware that the past three decades have boasted several of the longest running economic expansions in U.S. history (1991 to 2001; 2001 to early 2007; 2009 through 2019). What this tells us is that U.S. economic growth cycles appear to be lengthening while declines are relatively shorter and followed up with impressive recovery periods.
So, take heart. If you decide to transfer some of your assets to less flashy, non-cyclical securities, you might not have to leave them there for long. However, it’s always a good idea to maintain a diversified portfolio so you don’t have to make adjustments based on economic cycles. And as always, consult an investment professional to help you make these important decisions.
Economic Correlation: Cyclical and Non-Cyclical Stocks
January 1, 2020 · Blog, Financial Planning
⏱ 3 min read
A rising tide might lift all boats, but the same cannot be said for the economy.
When the U.S. experiences robust economic growth, certain sectors of the stock market tend to rise while others hold steady or even decline by comparison. The stocks of companies that experience higher revenues are typically categorized as cyclical. In other words, their good fortune rests mainly on consumers being gainfully employed and having ample discretionary income with which to buy more goods and services.
Take, for example, auto manufacturers. Sales typically increase when more people can afford to buy a new car. But that’s not all the time, because the economy is cyclical – it ebbs and flows over time. Therefore, companies that produce non-essential products – sometimes referred to as consumer discretionary goods and services – tend to flourish during economic cycles of strength and rising GDP. That is why they are called cyclical stocks.
But when the economic future is in decline or at least uncertain, people tend to delay buying non-essential items like a new car. When the economy really takes a nosedive, more consumers are affected, they buy less stuff, manufacturing takes a hit and companies start laying off their workforce.
Despite these unfortunate circumstances, people still have to eat. They buy essential items, such as food and toothpaste and toilet paper. These are considered consumer staples, and the stocks of companies that produce these types of goods are defined as non-cyclical stocks. That’s because those companies are expected to continue earning revenues regardless of economic cycles. Non-cyclical industries include food and beverage, tobacco, household and personal products.
Another non-cyclical sector is utilities. Utilities are a little bit different because people tend to purchase relatively the same amount of utility service – with exceptions for extreme weather or making slight thermostat adjustments to save money – whether the economy is robust or in a downward spiral. Because of this, utility companies are considered a very stable business model.
For investors, that means they are well-established, long-term performers and usually pay out high dividends. Not only are utility stocks a good option for retirees seeking income to supplement their Social Security benefits, but they offer a safe haven for investors to relocate assets during periods of economic decline.
In light of recent cautions by economists predicting a recession in 2020, this could be a good time to review your portfolio from the perspective of cyclical versus non-cyclical holdings. It doesn’t mean you need to sell completely out of your stock allocation; perhaps just temper your holdings to equities that tend to perform reliably regardless of the economy. In addition to consumer staples and utilities, consider companies that specialize in national defense, waste management, data processing and payments.
Also be aware that the past three decades have boasted several of the longest running economic expansions in U.S. history (1991 to 2001; 2001 to early 2007; 2009 through 2019). What this tells us is that U.S. economic growth cycles appear to be lengthening while declines are relatively shorter and followed up with impressive recovery periods.
So, take heart. If you decide to transfer some of your assets to less flashy, non-cyclical securities, you might not have to leave them there for long. However, it’s always a good idea to maintain a diversified portfolio so you don’t have to make adjustments based on economic cycles. And as always, consult an investment professional to help you make these important decisions.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
The economic indicator known as Gross Domestic Product (GDP) represents the dollar value of all purchased goods and services over the course of one year. It is comprised of purchases from all private and public consumption, including for profit, nonprofit and government sectors.
There are four components that are added to calculate the GDP:
Consumer spending
Government spending
Investment spending (this includes business, inventory, residential construction and public investment), Net exports, meaning the value of goods exported minus the value of goods imported
The government calculates and publishes the GDP rate on a quarterly basis and for the entire year.
What Affects GDP?
There are different ways GDP is measured. For example, nominal GDP refers to a straight calculation of raw data, while real GDP adjusts the calculation to include the impact of inflation.
When inflation increases, the GDP tends to rise; when prices drop, so does the GDP. Be aware that this adjustment can happen even when there is no change in the quantity of goods and services produced in the United States during that time frame.
A key component of the GDP calculation is net exports. This number rises when the country sells more goods and services to foreign countries than it buys from them. A trade surplus means the United States sells more than it purchases, which is a strong contributor to GDP. When the United States buys more foreign goods than it sells, this creates a trade deficit, which is a negative weight in the GDP calculation.
GDP also reflects demand. The dollar output of certain sectors and industries rises and falls based on the popularity of their products and services. For example, when a new product is well received, then those sales increase that sector’s contribution to the GDP. This is a helpful measure because it enables companies to make better research and development decisions based on recent success. The same is true when a new product, or even an upgrade to a new product, does not increase sales.
What Does GDP Indicate?
The GDP is the most common, broad-based measure used to monitor the country’s economic progress. When it is on the rise, the economy is considered to be growing. When the GDP rate drops – even if it remains in positive territory – the economy is viewed as contracting. If it continues to slip quarter after quarter, it is an indicator that the economy might be in trouble and the Federal Reserve or Congress could consider altering monetary (interest rates) or fiscal (taxes and government spending) policy to inject cash into the nation’s financial system.
Technically, economists define a recession as a prolonged period of economic decline, often precipitated by two consecutive quarters of negative GDP growth.
This economic yardstick also is used to indicate a country’s general standard of living. The better a country is able to produce the goods and services that its residents and businesses use, the more that capital is infused back into the country. Therefore, higher GDP levels indicate a more prosperous country and relatively higher standard of living among its residents.
The GDP doesn’t just gauge domestic economic health, it serves as a comparison measure to other countries. This is particularly important during periods of growth and decline, when the United States can track how well it is responding to global economic factors relative to other countries.
Current Trendline
According to the Bureau of Economic Analysis, first quarter real GDP closed at 3.1 percent. In the second quarter, real GDP fell to 2.0 percent. The advanced assessment for the third quarter of 2019 is 1.9 percent.
Gross Domestic Product: A Primer
December 1, 2019 · Blog, Financial Planning
⏱ 4 min read
The economic indicator known as Gross Domestic Product (GDP) represents the dollar value of all purchased goods and services over the course of one year. It is comprised of purchases from all private and public consumption, including for profit, nonprofit and government sectors.
There are four components that are added to calculate the GDP:
Consumer spending
Government spending
Investment spending (this includes business, inventory, residential construction and public investment), Net exports, meaning the value of goods exported minus the value of goods imported
The government calculates and publishes the GDP rate on a quarterly basis and for the entire year.
What Affects GDP?
There are different ways GDP is measured. For example, nominal GDP refers to a straight calculation of raw data, while real GDP adjusts the calculation to include the impact of inflation.
When inflation increases, the GDP tends to rise; when prices drop, so does the GDP. Be aware that this adjustment can happen even when there is no change in the quantity of goods and services produced in the United States during that time frame.
A key component of the GDP calculation is net exports. This number rises when the country sells more goods and services to foreign countries than it buys from them. A trade surplus means the United States sells more than it purchases, which is a strong contributor to GDP. When the United States buys more foreign goods than it sells, this creates a trade deficit, which is a negative weight in the GDP calculation.
GDP also reflects demand. The dollar output of certain sectors and industries rises and falls based on the popularity of their products and services. For example, when a new product is well received, then those sales increase that sector’s contribution to the GDP. This is a helpful measure because it enables companies to make better research and development decisions based on recent success. The same is true when a new product, or even an upgrade to a new product, does not increase sales.
What Does GDP Indicate?
The GDP is the most common, broad-based measure used to monitor the country’s economic progress. When it is on the rise, the economy is considered to be growing. When the GDP rate drops – even if it remains in positive territory – the economy is viewed as contracting. If it continues to slip quarter after quarter, it is an indicator that the economy might be in trouble and the Federal Reserve or Congress could consider altering monetary (interest rates) or fiscal (taxes and government spending) policy to inject cash into the nation’s financial system.
Technically, economists define a recession as a prolonged period of economic decline, often precipitated by two consecutive quarters of negative GDP growth.
This economic yardstick also is used to indicate a country’s general standard of living. The better a country is able to produce the goods and services that its residents and businesses use, the more that capital is infused back into the country. Therefore, higher GDP levels indicate a more prosperous country and relatively higher standard of living among its residents.
The GDP doesn’t just gauge domestic economic health, it serves as a comparison measure to other countries. This is particularly important during periods of growth and decline, when the United States can track how well it is responding to global economic factors relative to other countries.
Current Trendline
According to the Bureau of Economic Analysis, first quarter real GDP closed at 3.1 percent. In the second quarter, real GDP fell to 2.0 percent. The advanced assessment for the third quarter of 2019 is 1.9 percent.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Economists generally determine that the country has fallen into a recession after two consecutive quarters of negative gross domestic product (GDP) growth. Since 1967, the United States has experienced seven recessions.
The thing is, predicting a recession is a little like predicting a tornado. Experts are never exactly sure if or when one will occur, but they can cite when conditions a ripe for one based past experience. The good news for predictors is that the economy follows a similar pattern of indicators in the months leading up to a recession.
The bad news is that many those indicators have recently emerged. For example:
Inverted Yield Curve – This is when the yield on longer-term Treasury bonds is lower than the yield on shorter-term Treasury bonds, which happened recently for the first time since 2007. On average, an inverted yield curve has occurred 14 months in advance of every recession in the past 50 years.
Corporate Profits – Estimates for corporate earnings growth have dropped substantially since last year, from 7.6 percent to 2.3 percent.
Global Trade – The ongoing U.S. trade war with China has resulted in weakness in the manufacturing and farming industries. Moreover, global trade volume is also down, which further reduces the market for U.S.-manufactured goods.
What to Expect in a Recession
The worst recession in U.S. history was the most recent one, between 2007 and 2009. Dubbed the Great Recession, it was short (compared to the Great Depression of 1929-1939) but it took a powerful toll on a large chunk of the population. For example, close to half of U.S. households lost at least 25 percent of their net worth; one out of every four households lost at least 75 percent of their net worth.
About one-third of households experienced one or more of the following:
Fell more than two months behind on their mortgage
Had their home foreclosed
Had their home equity drop into negative territory
Lost a job
That was a bad recession. Fortunately, while economists are seeing signs of another one on the horizon, as of now (absent any significant shocks) they do not expect it to be as severe.
Tips to Prepare for a Recession
With multiple warning signs evident, it appears we do have some time before a recession potentially hits. It’s a good idea to use this time to protect your financial situation to help minimize any impact that a recession can have on you personally. The following are some tips to consider.
Shore Up Your Finances
Start by reducing your debt as much as possible, particularly any accounts exposed to a variable interest rate. The interest on credit cards and home equity lines of credit have a habit of increasing when you can least afford it. If you have a variable rate mortgage you might want to refinance at today’s low fixed mortgage rates so your monthly payments do not increase. One way to generate a robust savings fund is to temporarily suspend contributions to a retirement plan and save that money in a readily available account.
Minimize Household Expenses
Most people have to cut back on household expenses during a recession, so you might as well start now to help you prepare. For example, consider trading in a gas-guzzling car for one with better gas mileage and lower monthly payments, or pull the plug on cable TV and switch to a streaming service. Deploying these cost-reduction strategies now not only reduces your expenses during a recession but will also help contribute to your savings fund.
In many areas of the country, real estate prices are at the top of the market. It might be worth considering selling your house now while you can get a good price. This will give you a pot of cash to sit on during the recession, which is especially helpful if you lose your job. In fact, after the sale you may consider renting until real estate prices drop and you can purchase another home at a good price – and maintain a healthy cache of savings. This strategy could also save you from raiding your investment portfolio for money – helping protect your future financial security.
Protect Your Investment Portfolio
Take a good look at your portfolio and give it a recession stress test. Consider reallocating some funds to options that tend to perform reliably during an economic decline, such as:
Government bonds
Treasury Inflation-Protected Securities (TIPS)
Corporate Inflation-Protected Securities (CIPS)
Consumer staples stocks
Well-established dividend stocks
Fixed Income Annuity (FIA)
Recognize that it is generally not a good idea to completely cash out of the market. The best way to accumulate wealth over time is to stay invested regardless of temporary economic declines. In fact, investors who maintained their market positions between 2007 and 2017 experienced an average 240 percent growth rate.
Once the recession has ended, think about rebalancing your portfolio to realign its strategic asset allocation with your investment objectives and timeline. This allows you to cash in on outperforming assets and buy into depressed securities that could be poised for post-recession growth.
What to Expect and How to Prepare for a Recession
November 1, 2019 · Blog, Financial Planning
⏱ 5 min read
Economists generally determine that the country has fallen into a recession after two consecutive quarters of negative gross domestic product (GDP) growth. Since 1967, the United States has experienced seven recessions.
The thing is, predicting a recession is a little like predicting a tornado. Experts are never exactly sure if or when one will occur, but they can cite when conditions a ripe for one based past experience. The good news for predictors is that the economy follows a similar pattern of indicators in the months leading up to a recession.
The bad news is that many those indicators have recently emerged. For example:
Inverted Yield Curve – This is when the yield on longer-term Treasury bonds is lower than the yield on shorter-term Treasury bonds, which happened recently for the first time since 2007. On average, an inverted yield curve has occurred 14 months in advance of every recession in the past 50 years.
Corporate Profits – Estimates for corporate earnings growth have dropped substantially since last year, from 7.6 percent to 2.3 percent.
Global Trade – The ongoing U.S. trade war with China has resulted in weakness in the manufacturing and farming industries. Moreover, global trade volume is also down, which further reduces the market for U.S.-manufactured goods.
What to Expect in a Recession
The worst recession in U.S. history was the most recent one, between 2007 and 2009. Dubbed the Great Recession, it was short (compared to the Great Depression of 1929-1939) but it took a powerful toll on a large chunk of the population. For example, close to half of U.S. households lost at least 25 percent of their net worth; one out of every four households lost at least 75 percent of their net worth.
About one-third of households experienced one or more of the following:
Fell more than two months behind on their mortgage
Had their home foreclosed
Had their home equity drop into negative territory
Lost a job
That was a bad recession. Fortunately, while economists are seeing signs of another one on the horizon, as of now (absent any significant shocks) they do not expect it to be as severe.
Tips to Prepare for a Recession
With multiple warning signs evident, it appears we do have some time before a recession potentially hits. It’s a good idea to use this time to protect your financial situation to help minimize any impact that a recession can have on you personally. The following are some tips to consider.
Shore Up Your Finances
Start by reducing your debt as much as possible, particularly any accounts exposed to a variable interest rate. The interest on credit cards and home equity lines of credit have a habit of increasing when you can least afford it. If you have a variable rate mortgage you might want to refinance at today’s low fixed mortgage rates so your monthly payments do not increase. One way to generate a robust savings fund is to temporarily suspend contributions to a retirement plan and save that money in a readily available account.
Minimize Household Expenses
Most people have to cut back on household expenses during a recession, so you might as well start now to help you prepare. For example, consider trading in a gas-guzzling car for one with better gas mileage and lower monthly payments, or pull the plug on cable TV and switch to a streaming service. Deploying these cost-reduction strategies now not only reduces your expenses during a recession but will also help contribute to your savings fund.
In many areas of the country, real estate prices are at the top of the market. It might be worth considering selling your house now while you can get a good price. This will give you a pot of cash to sit on during the recession, which is especially helpful if you lose your job. In fact, after the sale you may consider renting until real estate prices drop and you can purchase another home at a good price – and maintain a healthy cache of savings. This strategy could also save you from raiding your investment portfolio for money – helping protect your future financial security.
Protect Your Investment Portfolio
Take a good look at your portfolio and give it a recession stress test. Consider reallocating some funds to options that tend to perform reliably during an economic decline, such as:
Government bonds
Treasury Inflation-Protected Securities (TIPS)
Corporate Inflation-Protected Securities (CIPS)
Consumer staples stocks
Well-established dividend stocks
Fixed Income Annuity (FIA)
Recognize that it is generally not a good idea to completely cash out of the market. The best way to accumulate wealth over time is to stay invested regardless of temporary economic declines. In fact, investors who maintained their market positions between 2007 and 2017 experienced an average 240 percent growth rate.
Once the recession has ended, think about rebalancing your portfolio to realign its strategic asset allocation with your investment objectives and timeline. This allows you to cash in on outperforming assets and buy into depressed securities that could be poised for post-recession growth.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Statistics indicate that the average life expectancy is longer than it used to be, but empirically we see this every day among elderly people who have lived much longer than they probably expected. This phenomenon spotlights a particular component of retirement planning that was not as significant in the past as it is now: long-term inflation.
While we’ve not experienced annual inflation rates this century as high as the latter part of the 20th century, inflation can balloon at any time. But what can be even more devastating to a retiree on a fixed income is cumulative inflation over time. It’s also important to recognize that specific consumer product inflation rates can differ substantially from the averages.
For example, according to the Bureau of Labor Statistics, the cost (not always the price a consumer pays) of an oil change in 2000 was about $20. However, motor oil, coolant and fluids have experienced an average inflation rate of 5.66 percent per year – so in 2019 the cost of providing an oil change was about $56.89. That’s a 184.45 percent increase in less than 20 years for a common household expense during a normal retirement timeframe.
To build a portfolio designed to provide inflation-adjusted income throughout a long retirement, consider the following tactics.
Optimize Your Social Security Benefits
Social Security benefits receive periodic cost of living adjustments (COLA) based on the Consumer Price Index (CPI), which is a weighted average of prices of common goods and services purchased by all urban consumers. However, retirees spend more of their household income on goods and services that experience higher levels of inflation, such as medical services. Therefore, Social Security benefit increases might not keep up with a retiree’s actual cost of living – especially over time.
That’s why it’s important to consider inflation in order to optimize your Social Security benefits. In other words, except for people in exceedingly poor health (expected to die within a few years) or in dire circumstances, it’s a good idea to delay starting Social Security benefits as long as you can. If you can wait until age 70, benefits will increase by as much as 8 percent each 12-month period past your full retirement age. Delaying not only increases the level of income you’ll receive each month, but it also gives you more time to save money for retirement and allows your investments more time to grow.
Inflation-Aligned Investments
Another way to inflation-proof your retirement portfolio is to allocate a portion of assets to investments that tend to increase at the same pace as inflation. The following are some options you might want to consider.
Series I Savings Bond – The I-Bond, guaranteed by the federal government, helps protect an investor from creeping inflation in a couple of ways. First, the I-Bond credits the holder’s account with a fixed interest rate plus the annualized inflation rate from the preceding six months. Second, the account value does not drop when prices fall.
TIPS – Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal increases and decreases in tandem with the inflation rate (adjusted every six months). However, the coupon rate is fixed, so payouts vary based only on the inflation-adjusted principal. Upon maturity, the investor receives the greater of the adjusted principal or the original principal.
CIPS – Corporate Inflation Protected Securities (CIPS) are similar to TIPS, but they invest in corporate bonds and typically pay a higher yield that combines a fixed payout plus the variable CPI rate. Unlike TIPS, they are not guaranteed by the U.S. government but are backed by the financial strength of the issuing company.
REITS – A Real Estate Investment Trust (REIT) pays out reliable dividend income that tends to rise with inflation. REITS own or finance a diversified portfolio of income-producing real estate, such as office buildings, apartment buildings, warehouses, retail centers or hotels. REIT dividends have outpaced inflation in all but two of the past 20 years, according to the National Association of Real Estate Investment Trusts.
IPA – With an inflation-protected annuity (IPA), initial income payouts are low but rise over time to align with long-term inflation, based on a formula linked to the CPI. A differentiating benefit of an IPA is that it offers issuer-guaranteed income for life, so the retiree doesn’t have to worry about reinvesting assets during later stages of retirement.
It is a good idea to work with a financial advisor to incorporate inflation-resistant investments for your retirement portfolio based on your individual objectives, tolerance for risk and timeline.
How to Inflation-Proof a Retirement Portfolio
October 1, 2019 · Blog, Financial Planning
⏱ 4 min read
Statistics indicate that the average life expectancy is longer than it used to be, but empirically we see this every day among elderly people who have lived much longer than they probably expected. This phenomenon spotlights a particular component of retirement planning that was not as significant in the past as it is now: long-term inflation.
While we’ve not experienced annual inflation rates this century as high as the latter part of the 20th century, inflation can balloon at any time. But what can be even more devastating to a retiree on a fixed income is cumulative inflation over time. It’s also important to recognize that specific consumer product inflation rates can differ substantially from the averages.
For example, according to the Bureau of Labor Statistics, the cost (not always the price a consumer pays) of an oil change in 2000 was about $20. However, motor oil, coolant and fluids have experienced an average inflation rate of 5.66 percent per year – so in 2019 the cost of providing an oil change was about $56.89. That’s a 184.45 percent increase in less than 20 years for a common household expense during a normal retirement timeframe.
To build a portfolio designed to provide inflation-adjusted income throughout a long retirement, consider the following tactics.
Optimize Your Social Security Benefits
Social Security benefits receive periodic cost of living adjustments (COLA) based on the Consumer Price Index (CPI), which is a weighted average of prices of common goods and services purchased by all urban consumers. However, retirees spend more of their household income on goods and services that experience higher levels of inflation, such as medical services. Therefore, Social Security benefit increases might not keep up with a retiree’s actual cost of living – especially over time.
That’s why it’s important to consider inflation in order to optimize your Social Security benefits. In other words, except for people in exceedingly poor health (expected to die within a few years) or in dire circumstances, it’s a good idea to delay starting Social Security benefits as long as you can. If you can wait until age 70, benefits will increase by as much as 8 percent each 12-month period past your full retirement age. Delaying not only increases the level of income you’ll receive each month, but it also gives you more time to save money for retirement and allows your investments more time to grow.
Inflation-Aligned Investments
Another way to inflation-proof your retirement portfolio is to allocate a portion of assets to investments that tend to increase at the same pace as inflation. The following are some options you might want to consider.
Series I Savings Bond – The I-Bond, guaranteed by the federal government, helps protect an investor from creeping inflation in a couple of ways. First, the I-Bond credits the holder’s account with a fixed interest rate plus the annualized inflation rate from the preceding six months. Second, the account value does not drop when prices fall.
TIPS – Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal increases and decreases in tandem with the inflation rate (adjusted every six months). However, the coupon rate is fixed, so payouts vary based only on the inflation-adjusted principal. Upon maturity, the investor receives the greater of the adjusted principal or the original principal.
CIPS – Corporate Inflation Protected Securities (CIPS) are similar to TIPS, but they invest in corporate bonds and typically pay a higher yield that combines a fixed payout plus the variable CPI rate. Unlike TIPS, they are not guaranteed by the U.S. government but are backed by the financial strength of the issuing company.
REITS – A Real Estate Investment Trust (REIT) pays out reliable dividend income that tends to rise with inflation. REITS own or finance a diversified portfolio of income-producing real estate, such as office buildings, apartment buildings, warehouses, retail centers or hotels. REIT dividends have outpaced inflation in all but two of the past 20 years, according to the National Association of Real Estate Investment Trusts.
IPA – With an inflation-protected annuity (IPA), initial income payouts are low but rise over time to align with long-term inflation, based on a formula linked to the CPI. A differentiating benefit of an IPA is that it offers issuer-guaranteed income for life, so the retiree doesn’t have to worry about reinvesting assets during later stages of retirement.
It is a good idea to work with a financial advisor to incorporate inflation-resistant investments for your retirement portfolio based on your individual objectives, tolerance for risk and timeline.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
If you have a relative who recently died and left you in charge of his or her finances, you are not alone. You probably have colleagues at work in the same boat. A neighbor or two (or 10) and even your millennial yoga teacher might very well be working through a quagmire of wills, probates and assets nobody can find. You are definitely not the only one.
The internet has made it much easier to keep track of our checking, savings and investment accounts. But the elder generation generally missed out on the convenience of dashboard consolidation and app trackers. What most of them leave behind are file cabinets full of bank statements and old bills, bookshelves of file folders and prospectuses – perhaps once carefully catalogued. You may start rummaging through papers and not find anything more recent than five years ago.
How do you wrap your hands around investments and assets you know your dad owned but have no idea where they are?
Bear in mind that when there is no activity in an account for a year or more, assets may be deemed dormant or abandoned. They could eventually become property of the domicile state through a process called escheat, so it is important that you do not wait too long before finding lost assets.
Start at Home
If your parent used a computer, you should get access to his file folders and dig into his email account to see if he received any electronic communications from financial companies. If he wasn’t computer literate, then start with the mail. It may take six months to a year to get your hands on all of the paperwork, but if your relative did not sign up for electronic delivery then companies are required to send him statements through the U.S. mail.
If no one continues to live at his home, the easiest way to do this is to notify the post office to route all of his mail to your address. To do this, you will need to complete a Forwarding Change of Address order at the post office and provide proof that you are authorized to manage the deceased’s mail.
As you’re rummaging through Dad’s paperwork, here are some tips on what to do:
Look for bills and check if those entities are holding a utility deposit;
Look for statements for bank accounts, bonds, stocks, mutual funds, CDs, dividend or payroll checks, life insurance policies and retirement accounts;
Look for any record of a safe deposit box, such as a bill for the rental or a key; if he has one it is most likely located at his bank branch;
Contact his past employers to ask if they have any record of pensions, retirement plans or employer-purchased life insurance for your parent.
Once you get your hands on any statements, call the company or broker listed. You will need to send them certain documents to verify your parent is deceased (or a durable power of attorney document if he is incapacitated). Different firms and circumstances might have different requirements, but you’ll definitely need to send a copy of the death certificate. You may also be asked to provide a Court Letter of Appointment naming you as executor, a “stock power” of attorney that enables you to transfer ownership of stock, a state tax inheritance waiver, affidavit of domicile, trustee certification showing successor trustee, and/or a letter of authorization for joint accounts.
You’ll need to call and provide these or similar documents for each institution where your parent holds assets. Don’t worry, these companies have trained staff to help guide you through the legal process of how to manage the assets of deceased account owners.
Move to the Internet
Check unclaimed property lists at every state where your father lived. Get started at Unclaimed.org, a free website that allows you to search for unclaimed property held by each state. Also search at MissingMoney.com to conduct a national search.
Go to the Pros
If you’re sure your relative had more assets than you’re able to find, consider hiring a forensic accountant. These professionals have the tools and expertise to find offshore accounts, shell companies and other types of financial accounting practices. For example, a forensic accountant may request an IRS transcript that reports past 1099-DIV and 1099-INT distributions. Note that banks are required to issue such forms for account activity involving $10 or more.
You also may want to share your task with your own financial advisors. They might be able to recommend ways to help you track down, transfer and manage your parents’ assets, particularly if you need to set up income sources for another parent or relative. The point is, you don’t have to go it alone. This is a common problem and there are experts to help you work through it – but it will likely take time, patience and a lot of paperwork.
Lost Inheritance: How To Find a Deceased Parent’s Assets
September 1, 2019 · Blog, Financial Planning
⏱ 5 min read
If you have a relative who recently died and left you in charge of his or her finances, you are not alone. You probably have colleagues at work in the same boat. A neighbor or two (or 10) and even your millennial yoga teacher might very well be working through a quagmire of wills, probates and assets nobody can find. You are definitely not the only one.
The internet has made it much easier to keep track of our checking, savings and investment accounts. But the elder generation generally missed out on the convenience of dashboard consolidation and app trackers. What most of them leave behind are file cabinets full of bank statements and old bills, bookshelves of file folders and prospectuses – perhaps once carefully catalogued. You may start rummaging through papers and not find anything more recent than five years ago.
How do you wrap your hands around investments and assets you know your dad owned but have no idea where they are?
Bear in mind that when there is no activity in an account for a year or more, assets may be deemed dormant or abandoned. They could eventually become property of the domicile state through a process called escheat, so it is important that you do not wait too long before finding lost assets.
Start at Home
If your parent used a computer, you should get access to his file folders and dig into his email account to see if he received any electronic communications from financial companies. If he wasn’t computer literate, then start with the mail. It may take six months to a year to get your hands on all of the paperwork, but if your relative did not sign up for electronic delivery then companies are required to send him statements through the U.S. mail.
If no one continues to live at his home, the easiest way to do this is to notify the post office to route all of his mail to your address. To do this, you will need to complete a Forwarding Change of Address order at the post office and provide proof that you are authorized to manage the deceased’s mail.
As you’re rummaging through Dad’s paperwork, here are some tips on what to do:
Look for bills and check if those entities are holding a utility deposit;
Look for statements for bank accounts, bonds, stocks, mutual funds, CDs, dividend or payroll checks, life insurance policies and retirement accounts;
Look for any record of a safe deposit box, such as a bill for the rental or a key; if he has one it is most likely located at his bank branch;
Contact his past employers to ask if they have any record of pensions, retirement plans or employer-purchased life insurance for your parent.
Once you get your hands on any statements, call the company or broker listed. You will need to send them certain documents to verify your parent is deceased (or a durable power of attorney document if he is incapacitated). Different firms and circumstances might have different requirements, but you’ll definitely need to send a copy of the death certificate. You may also be asked to provide a Court Letter of Appointment naming you as executor, a “stock power” of attorney that enables you to transfer ownership of stock, a state tax inheritance waiver, affidavit of domicile, trustee certification showing successor trustee, and/or a letter of authorization for joint accounts.
You’ll need to call and provide these or similar documents for each institution where your parent holds assets. Don’t worry, these companies have trained staff to help guide you through the legal process of how to manage the assets of deceased account owners.
Move to the Internet
Check unclaimed property lists at every state where your father lived. Get started at Unclaimed.org, a free website that allows you to search for unclaimed property held by each state. Also search at MissingMoney.com to conduct a national search.
Go to the Pros
If you’re sure your relative had more assets than you’re able to find, consider hiring a forensic accountant. These professionals have the tools and expertise to find offshore accounts, shell companies and other types of financial accounting practices. For example, a forensic accountant may request an IRS transcript that reports past 1099-DIV and 1099-INT distributions. Note that banks are required to issue such forms for account activity involving $10 or more.
You also may want to share your task with your own financial advisors. They might be able to recommend ways to help you track down, transfer and manage your parents’ assets, particularly if you need to set up income sources for another parent or relative. The point is, you don’t have to go it alone. This is a common problem and there are experts to help you work through it – but it will likely take time, patience and a lot of paperwork.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Traditionally, retirement was short and peaceful. People worked jobs that were hard on the body – such as farming, manufacturing, tradesmen or railroad workers. If you made it to retirement, you were relieved to have the chance to wind down your days in restful repose.
That all changed in the latter part of the 20th century. Retirees began to take advantage of affordable travel opportunities enabled by cars that could drive great distances and highways that could accommodate them, as well as regional intracontinental airlines. In the 1980s, exercise became a popular pastime and retirees could be found at fitness clubs, aerobics classes and racquetball courts. There was a sweet spot in time when retirement was short enough not to outlive savings and retirees were healthy enough to enjoy an active leisure life.
But a lot of things have changed over the past 30 years. More jobs are automated and life expectancy rates, especially for people who reach age 65, are longer than ever. By middle age, it is common to have developed one or more chronic conditions, making a long retirement a less-than-healthy one. Furthermore, we experienced a pretty severe recession and slow economic recovery, when many pre-retirees had to dig into their savings just to stay above water.
Another area that has changed is the transition from employer-sponsored pensions to 401(k) plans. This has fostered a different way of looking at retirement. Back when many workers had pensions, all they had to do was accumulate enough credits and they could retire with a guaranteed stream of income for life. That gave people something to look forward to. Now, with self-directed retirement plans, workers know that the longer they work the more they can save and the longer their investments have time to grow – which actually creates an incentive to work longer. Another reason people tend to work until at least age 65 is so they don’t have to pay for their own healthcare insurance, for which premiums have grown exponentially over the past 15 years.
In addition, the longer we earn an income the longer we can delay drawing Social Security benefits. Once you start taking a benefit, that payout level remains permanent throughout your life. However, the longer you wait, the higher the payout. In fact, people who delay to age 70 can take advantage of Delayed Retirement Credits, which increase their level of payout 5.5 percent to 8 percent a year past full retirement age.
Now that people are living longer, many are healthy enough to continue working longer as well. Plenty of employees want to continue working not only for the money, but for social interaction and intellectual engagement. When retirement was 10 years or less, that seemed like enough time to wind down and relax. But with today’s workers facing 30 years or more in retirement, the prospect of not having a regular place to go, people to see, and work to do for a few decades isn’t quite as appealing.
However, what if you hate your job and can’t imagine staying on past traditional retirement age? A recent study found that people who changed jobs in their 50s were more likely to work longer. In some scenarios, using well-earned experience can translate into a more rewarding job opportunity. Consider that even if you don’t earn more money, a lateral move could still yield higher financial rewards if you enjoy the new job and want to continue working there indefinitely.
Some retirees decide to go back to work because they’ve had a bit of fun but find they miss the day-to-day routine of work and having a broader network of interpersonal relationships. In fact, they often find their experience and expertise was sorely missed, and in some situations, are more valued by their colleagues. This might not happen in all cases, but the lure of renewing friendships, professional appreciation and additional income offer compelling reasons to come out of retirement.
IRS Reminds Taxpayers of April 1 Deadline to Take Required Retirement Plan Distributions
IRS Issue Number: IR-2017-63
WASHINGTON — The Internal Revenue Service today reminded taxpayers who turned age 70½ during 2016 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Saturday, April 1, 2017.
The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. It also typically applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. A taxpayer who turned 70½ in 2016 (born after June 30, 1945 and before July 1, 1946) and receives the first required distribution (for 2016) on April 1, 2017, for example, must still receive the second RMD by Dec. 31, 2017.
Affected taxpayers who turned 70½ during 2016 must figure the RMD for the first year using the life expectancy as of their birthday in 2016 and their account balance on Dec. 31, 2015. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.
Most taxpayers use Table III (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2016 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B.
Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
The IRS encourages taxpayers to begin planning now for any distributions required during 2017. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2017 RMD, this amount would be on the 2016 Form 5498 that is normally issued in January 2017.
IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.
A 50 percent tax normally applies to any required amounts not received by the April 1 deadline. Report this tax on Form 5329 Part IX. For details, see the instructions for Part IX of this form.
Below the IRS outlines tax benefits in their IRS Tax Tip 2017-31
Higher education costs paid in 2016 can mean tax savings when taxpayers file their tax returns. If taxpayers, their spouses or their dependents took post-high school coursework last year, they may be eligible for a tax credit or deduction.
Here are some facts from the IRS about tax benefits for higher education.
For 2016, there are two tax credits available to help taxpayers offset the costs of higher education. The American Opportunity Credit and the Lifetime Learning Credit may reduce the amount of income tax owed. Use Form 8863 to claim the education credits.
The American Opportunity Credit (AOC) is:
Worth a maximum benefit up to $2,500 per eligible student.
Only for the first four years at an eligible college or vocational school.
For students pursuing a degree or other recognized education credential.
For students enrolled at least half time for at least one academic period during 2016. Taxpayers can claim the AOC for a student enrolled in the first three months of 2017 as long as they paid qualified expenses in 2016.
The Lifetime Learning Credit (LLC) is:
Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.
Available for all years of postsecondary education and for courses to acquire or improve job skills.
Available for an unlimited number of tax years
The tuition and fees deduction can reduce the amount of income subject to tax. This deduction may be beneficial for taxpayers who don’t qualify for the American Opportunity Credit or the Lifetime Learning Credit. Use Form 8917 to claim the tuition and fees deduction.
The Tuition and Fees Deduction is:
Worth a maximum benefit up to $4,000,
Claimed as an adjustment to income,
Available even if a taxpayer doesn’t itemize deductions on Schedule A,
Limited to tuition and certain related expenses required for enrollment or attendance at eligible postsecondary educational institutions.
Additionally:
Beginning in 2016, to be eligible for an education benefit, a student is required to have Form 1098-T, Tuition Statement. They receive this form from the school they attended. There are exceptions for some students. See Publication 970 for more details.
They may only claim qualifying expenses paid in 2016.
They can’t claim either credit if someone else claims them as a dependent.
They can’t claim either AOTC or LLC and the Tuition and Fees Deduction for the same student or for the same expense in the same year.
Income limits could reduce the amount of credits or deductions they can claim.
Below the IRS explains about the additional Medicare tax.
Some taxpayers may be required to pay an Additional Medicare Tax if their income is over a certain limit. The IRS would like people to know more about this tax.
Tax Rate. The Additional Medicare Tax rate is 0.9 percent.
Income Subject to Tax. The tax applies to the amount of wages, self-employment income and railroad retirement (RRTA) compensation that is more than a threshold amount. For more information, go to Questions and Answers for the Additional Medicare Tax.
Threshold Amount. Filing status determines the threshold amount. For those who are married and file a joint return, they must combine the wages, compensation or self-employment income of their spouse with their own. The combined total income determines if it is over the threshold for this tax. The threshold amounts are
Filing Status
Threshold Amount
Married filing jointly
$250,000
Married filing separately
$125,000
Single
$200,000
Head of household
$200,000
Qualifying widow(er) with dependent child
$200,000
Withholding / Estimated Tax. Employers must withhold this tax from wages or compensation when they pay employees more than $200,000 in a calendar year. Self-employed taxpayers should include it for estimated tax liability purposes.
Underpayment of Estimated Tax. People who had too little tax withheld or did not pay enough estimated tax may owe an estimated tax penalty. IRS Publication 505, Tax Withholding and Estimated Tax, provides rules and details on estimated taxes.
People who owe this tax should file Form 8959, with their tax return. People should also report any Additional Medicare Tax withheld by their employer or employers on Form 8959. IRS.gov offers more on this topic. Forms and publications are available on IRS.gov/forms anytime.
Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
As we progress through life, we find there are certain things we can control and others we cannot. However, even with the things we can’t control, we can exercise good judgment based on facts, due diligence, historical patterns and a risk/reward calculation.
A rising tide might lift all boats, but the same cannot be said for the economy.
Economists generally determine that the country has fallen into a recession after two consecutive quarters of negative gross domestic product (GDP) growth. Since 1967, the United States has experienced seven recessions.
Statistics indicate that the average life expectancy is longer than it used to be, but empirically we see this every day among elderly people who have lived much longer than they probably expected. This phenomenon spotlights a particular component of retirement planning that was not as significant in the past as it is now: long-term inflation.