HURRICANE SEASON 2017: SPOTLIGHT ON FLOOD INSURANCE

Water seems to be everywhere right now.  Hurricane season lasts until November 30th, but many of us in the coastal areas of the United States are already weary from this year’s active storm season.  Texas, Florida, Georgia and the Carolinas have seen widespread damage from Hurricanes Harvey and Irma and those in the East and Northeast are closely watching Jose and Maria to see what kinds of impacts they will bring.  As we watch the news and see the photos of flooded homes, streets turned into waterways and communities working to recover from the mess, the reported costs of these two storms seems almost unfathomable – estimates of the total economic cost for both storms range from $115 billion to $290 billion!  Many of those in need of assistance appeal to FEMA, the Federal Emergency Management Agency, and, while FEMA can provide small assistance payments as a safety net, much of the flood damage assistance must come through FEMA’s National Flood Insurance Program (NFIP) – and you must have a flood insurance policy to receive anything from them.

Premium rates for flood insurance policies are partially subsidized by the federal government and, without these subsidies, the cost for this type of insurance could be exorbitant.  Complicating the matter is that most banks won’t loan money to build or purchase homes in flood-prone areas without it.  Currently, flood insurance claims, partially paid-for by those premiums, will cover replacement costs for property of up to $250,000 and up to $100,000 for contents.  The average NFIP claim payment is around $97,000.  According to a September 10th Post & Courier article, in SC it is estimated that 70% of properties in the high-risk areas are insured.  Also, high-risk areas have a 1 in 4 chance of flooding during a 30-year mortgage, according towww.southcarolinafloodinsurance.org.   However, 30% of flood losses occur in flood zones that are not at high risk.  As the head of the SC Department of Insurance said, “our entire state is in a flood zone.”

The NFIP is now reportedly close to $25 Billion in debt, even before these most recent storms, and the program was set to expire on September 30th.  Last Friday, PresidentTrump signed legislation reauthorizing the National Flood Insurance Program until Dec. 8, 2017 and providing federal disaster assistance for the nation’s hurricane recovery.  This buys more time for Congress to consider reforms to the program, which, by all accounts, is drastically needed.  Reportedly, program costs overrun annual premium income, even without the catastrophic losses from natural disasters.  While a lot of communities have flood mitigation programs in place, there is much discussion that it is time for stronger flood-proofing standards – like making sure that all flood-prone properties are reinforced or elevated and redrawing outdated flood maps to properly assign risk to those properties.  Critics have claimed that the NFIP has wasted money rebuilding vulnerable homes when it would be cheaper to help homeowners move to higher ground.  There is also concern that “grandfathering” certain properties allows homeowners to pay subsidized rates based on outdated flood maps.

The National Flood Insurance Program was created in 1968 when private sector insurance carriers stopped offering the non-profitable coverage.  The idea was to transfer some of the financial risk of property owners to the federal government and, in return, high risk areas would adopt flood mitigation strategies to reduce some of that risk.  Some are now arguing that these subsidies mask the true risk of living in these high flood-prone areas and full actuarial rates for flood insurance premiums should be phased in, subsidizing only those truly in need.  In a Bloomberg article from September 18th, U.S. Rep. Sean Duffy (R-WI) and U.S. Rep. Earl Blumenauer (D-OR) are appealing for reform and suggest that “…the NFIP’s subsidized rates make flood-prone properties more affordable… and that for “ the sake of people’s health and safety”, it’s critical that we “stop paying to repeatedly rebuild flood-prone properties.”  They hope to encourage Congress to reform NFIP and to make bi-partisan recommendations to protect future flood victims.

At DWM, we recommend that you annually review all of your insurance, including property & casualty and flood insurance.  There are many ways coastal or flood-prone homeowners can mitigate their own risk with upgrades to roofs, windows, landscaping, hurricane shutters etc.  You should find out your home’s elevation and evaluate your risk.  You may also want to check on your flood zone and consider a flood insurance policy for added protection.  Flood insurance has a 30-day waiting period, so once there is a hurricane en route, it is too late to sign up and be covered in time.  For most policies not in high-risk flood areas, annual premiums range from $400-$700 under the current regulations – high-risk flood zones will be more.  We will continue to monitor the legislation as it approaches the next deadline of December 8th.  Luckily, our DWM office did not have to contend with any direct flooding issues, but we will most certainly be keeping an eye on the weather!

Please let us know if we can help review any of your insurance policies to make sure you have affordable and appropriate coverage on all aspects of your life and property.

“An Ounce of Prevention is Worth a Pound of Cure”- B. Franklin

Millions of Americans are being impacted by two Category 5 disasters- Hurricane Irma and the Equifax data breach!!  Certainly, we’re all watching Irma spread through FL and our hearts and prayers are with all those in Irma’s path.  But don’t discount the Equifax high-tech heist as something small.  Last Thursday, Equifax announced that personal and confidential information for 143 million Americans.  This included names, social security numbers, birth dates, addresses and, in some instances, driver’s license numbers and other information.

This epic breach is a really big deal and a great concern.  Equifax, Experian and Transunion warehouse the most intimate details of Americans’ financial lives, from credit cards to medical bills.  Once security is breached, the hackers typically sell the stolen information to sophisticated identity thieves.  Last year, 15.4 million Americans were victims of identity theft, which totaled $16 billion.  In most cases, the money was recovered, but only after a tremendous amount of time, money and stress.  One man said the thieves so ruined his credit that he was unable to secure a needed mortgage refinance.  One lady’s social security number was used by others to file her income taxes and get a refund before she even filed her own return.  It took her over a year to get it straight with the IRS.  In the first half of 2017, there were a record 791 data breaches in the U.S., up 29% from last year.  Victims have recounted what a terrifying experience it is to have your identity stolen.  “You’re worried about the tremendous implications this could have and the possibility of it going on for years.”

Here’s the really bad part of the Equifax breach. We now know that the breach occurred six weeks ago, July 29th.  The hackers probably sold the information shortly thereafter.  We’ve likely all been compromised for six weeks and we didn’t know it.  Equifax is now under investigation for the breach and their lack of transparency by Congress, New York’s attorney general and the Consumer Financial Protection Bureau. If you call Equifax, it’s another frustration.  Their “hot line” is staffed with people who really can’t tell you if your information was taken or not.  You should assume that it was.  Ouch!!

It’s time for us to play defense.  Step one- put a credit freeze on all three reporting services immediately.  It’s your only hope.  A credit freeze prevents existing creditors and new creditors from using your information.  It prevents new accounts being opened in your name.  When you contact the sites listed below you will receive a PIN that allows you to temporarily lift or “thaw” your freeze.  Put that number in a very safe place (see below).  Yes, you may be delayed a day or two to get your information released when you need to apply for new credit, but that’s a small problem compared to potential identity theft.

Here are the sites:

Equifax – https://www.freeze.equifax.com/Freeze/jsp/SFF_PersonalIDInfo.jsp

Experian – https://www.experian.com/freeze/center.html

TransUnion – https://freeze.transunion.com/sf/securityFreeze/landingPage.jsp

I froze Elise and my accounts yesterday in about 20 minutes.

 

Step two-you need to create strong passwords and store them in a secure spot. The bad guys have two pieces of information, your social security number (which you don’t want to change) and your address.  Don’t help them with the next step by having weak passwords.

Updating your passwords will take some time.  Focus first on the key ones; your credit cards, financial institutions, and key retailers like Amazon and Apple; anywhere there is money or where thieves could get merchandise or services.  If a site offers additional security with a two-factor authentication, enable it.   Once you’ve got the key sites, start knocking out the others.

You should use a password manager like 1Password or LastPass.  It’s always important to update your password every so often. These sites create a unique random number password for every website you visit and stores them in a database that you create.  This makes it much more difficult for the thieves to decode your password. Further, these are great places for all of your passwords and your PINs.  Of course, you need to keep your master password in a special spot and share that with your spouse and/or another trusted person.

No question, this is a real pain!!  But, the alternative is possible identity theft which could be a 100 times worse.  We live in an age of Big Data.  We have all allowed the emergence of huge detailed databases full of information about us.  Thanks to technology, financial companies, tech companies, medical organizations, advertisers, insurers, retailers and the government can maintain and access this information.  Unfortunately, companies like Equifax are only lightly regulated and there’s not much punishment for breaches.  Hence, breaches will keep happening.  Even with new technology, like Apple’s new iPhone8 which includes face recognition to unlock it, the consumer credit bureaus are not going away anytime soon.

Please do yourself a favor and freeze your credit, change your passwords and store everything securely this week.  The process will certainly feel like more than an “ounce” of prevention, but if it saves you from identity theft, it will be far more than a “pound” of cure.

My, How Jobs Have Changed

Hope you had a super Labor Day weekend!  Wonderful to be with family and friends.  It’s amazing how jobs have changed over the years.  The NYT over the weekend illustrated how life is so much different for workers by comparing two janitors working for two top companies then and now.

Gail Evans was a janitor for Eastman Kodak in Rochester, NY almost forty years ago.  She was a full-time employee, received 4 weeks paid vacation, reimbursement for some tuition costs to go to college and bonuses. And, when the Kodak facility was temporarily closed, the company kept paying her and had her perform other work.  Ms. Evans took computer classes at night, got her college degree in 1987 and ultimately became chief technology officer for Kodak.

Marta Ramos cleans floors for Apple in Cupertino, CA.  She isn’t on Apple’s payroll. She works for one of Apple’s contractors.  Ms. Ramos hasn’t had a vacation in years-she can’t afford the lost wages.  Going back to school is out of the question. There are no bonuses and no opportunities for some other role at Apple.  Ms. Ramos earns $16.60 per hour, about the same as Ms. Evans did in inflation-adjusted terms.  But her only hope for advancement is to become a “team leader”, which pays an extra $.50 per hour.

Over the last 35 years, American corporations have increasingly focused on improving their bottom line by focusing on their core competency and outsourcing the rest. Part of the success of the Silicon Valley giants of today has come from their ability to attain huge revenues and profits with relatively few workers.  It’s led to huge profits for shareholders, helped grow the U.S. economy, but also has fueled inequality.

In 1993, three of the then tech giants – Kodak, IBM and AT&T – employed 675,000 employees to produce $243 billion of revenue in inflation-adjusted dollars.  Today, Apple, Alphabet and Google produce $333 billion in annual revenue with less than 1/3 of that number, employing only 205,000 employees.

Apple is quick to point out that its products generate many jobs beyond those who receive an Apple paycheck.  It estimates that 1.5 million people work in the “app economy.” However, research shows that the shift to a contracting economy has put downward pressure on compensation.  Many corporations hire full-time employees only for the most important jobs and outsource the rest; obtaining contractors at the time and place needed for the lowest price possible. It’s not just janitors and security guards that are outsourced.  There are also people who test operating systems, review social media posts and screen job applicants, for example.  It’s understandable: companies face really tough competition and if they don’t keep their work force lean, they risk losing out to a competitor that does.

In addition, outsourcing often results in a culture of transience.  Contracted workers are often changing jobs every 12 to 18 months, which obviously can be stressful to them and their family.  Contractors generally don’t receive stock options nor robust health insurance.  Also, retirement plans, even for full-time employees, have changed considerably in the last 35 years. In 1979, 28% of workers were covered by a company paid pension program and 7% had a 401(k). In 2014, only 2% of workers were covered by a pension plan and 34% had a 401(k) plan, which of course, means that most of the funding now is coming from the worker.

Here’s what’s really amazing.  With all these changes, job satisfaction has gone up.  For the first time since 2005, more than half of U.S. workers say they’re satisfied with their jobs.  This optimism has led to consumer spending increasing every month this year and a strong economy.  Apparently, after a decade of job cuts, minimal raises and reduced benefits, workers have lowered their expectations.  Rick Wartzman, author of “The End of Loyalty: The Rise and Fall of Good Jobs in America,” feels that young workers today “don’t even know what they are missing.”

On Monday, we celebrated Labor Day, honoring working people.  That’s particularly important these days as many workers don’t have it nearly good as it was 30-40 years ago.  Even so, American values, spirit and resiliency continue to be very evident in these ever-changing times. Perhaps we need another holiday, “Resilience Day.”  Time to get the grill heated up again!

How Much do You Know About Labor Day?

We are all aware that Labor Day signifies the end of a summer filled with backyard BBQs, family and sunshine. It is the one long weekend of the year when families come together to say goodbye to summer, unwind and prepare for the changing seasons ahead. However, many of us don’t take the time to consider the true origin of Labor Day.

The concept of Labor Day dates back all the way to the Industrial Revolution in the U.S. during the late 1800s. The typical work day was 12 hours long, and the typical work week was seven days. Working conditions were far from ideal, and even children as young as four or five years old were commonly seen working in mills and factories to help their struggling families scrape by.

Many workers began organizing protests and strikes across the U.S. Unfortunately, many of these demonstrations turned violent and, in some cases, deadly. In 1894, Eugene V. Debs, with the support of the American Railroad Union, organized a strike and boycott of the Pullman Palace Car Company in Chicago. This strike effectively crippled all railroad traffic in the U.S., leading then President Grover Cleveland to deploy 12,000 troops to the area to dissolve the strike.

The use of military force on behalf of the U.S. government essentially poured gasoline on the already burning fire of discontent with current labor wages and conditions. Several people were killed during the Pullman strike altercation, and although the strike did come to an end, American workers were still unhappy and began to condemn President Cleveland’s aggressive response.

Meanwhile, union workers in New York City had been organizing and going on strike one day of the year in support of the idea of a national Labor Day that had been circulating around the U.S.

Later in 1894, which happened to be an important election year, President Cleveland decided to implement a nationally recognized annual celebration of American workers to appease his critics – and thus Labor Day as we know it was born.

Fast forward to 2017, where we at Detterbeck Wealth Management are fortunate enough to do what we are passionate about everday in a constructive and collaborative environment. We choose to use this year’s Labor Day as an opportunity to reflect on and appreciate how far the U.S. economy and workforce has come since those historic strikes in 1892.

From everyone here at DWM, have a great Labor Day Weekend and enjoy some time with the family!

“The Markets are going to Fluctuate”

Last Thursday, August 17, the equity markets took a hit of 1-1.5%.  In overall terms, it wasn’t a pullback (5% drop) or a correction (10%) yet some were concerned this might be the “start of the end” of the long-term bull market.  Yes, stock valuations have been high for some time, but many people wondered “Why now?” Various reasons were given to “explain” the causes of Thursday’s decline.  Let’s take a look at some of these:

“Terrorism.”  The first reports of the attack in Barcelona were posted in New York around noon last Thursday.  The markets were already in a decline and gold and bonds were moving higher.  Though the attack was dreadful and disgusting, it likely didn’t move the markets.

“Corporate America abandons the White House.”  Kenneth Frazier, CEO of Merck, resigned Monday, August 14.  Others followed and the major business councils disbanded on Wednesday, August 16.  However, participation on President Trump’s councils is voluntary and the first priority of each of the CEOs is their “day job,” which involves working with their customers, employees, suppliers and investors.  Their departure shouldn’t have been a surprise.

“All Donald Trump all the time has worn out people’s patience.”   Certainly, many may be exhausted by the almost singular focus of the news being the White House for the last seven months.  However, impatience is unlikely to cause the markets to move lower.  It was only two weeks ago that we all were worried about the possibility of a nuclear war starting in the Korean peninsula. And, that scare didn’t move the markets.  Therefore, it’s hard to believe the daily White House news would be a source of concern for the markets.

“The White House Economic Team is Leaving.”  Early last Thursday, a rumor floated through Wall Street that Gary Cohn, the Director of the National Economic Council, was resigning.  Mr. Cohn, along with Treasury Secretary Steven Mnuchin are leading the all-important tax reform and infrastructure initiatives.  The S&P 500 began a sharp move down around 10 am last Thursday exactly the time the false tweet came out.  Fortunately, the rumor was squelched almost immediately but the markets, nevertheless, continued to fall.   Hence, the rumor seems not to have been the catalyst for the sale, though the loss of either Mr. Cohn or Mr. Mnuchin would, in fact, be a major concern.

In short, these “explanations” given after last Thursday’s market drop really don’t identify why it happened.  Even so, story lines will continue.  We humans want them.  We are wired to try to understand why and how things happen and use that information to guide our future.

Legend has it that about a century ago, an alert young man found himself in the presence of John Pierpont Morgan, one of the most successful investors of all time.  Hoping to improve his fortune, the young man asked Mr. Morgan’s opinion as to the future course of the stock market.  The alleged reply has become a classic:  “Young man, I believe the market is going to fluctuate.”

Yes, there are many things we cannot control and, fortunately, some we can.  At DWM, we focus on helping you to create and maintain an investment portfolio that is designed to participate in good times and protect in bad times by:

  • Identifying and implementing a customized asset allocation based on your goals and risk tolerance
  • Diversifying the holdings by asset class and asset style
  • Using the lowest cost investments wherever possible
  • Striving to make the portfolio tax efficient
  • Rebalancing regularly
  • Staying fully invested
  • Providing discipline to keep you on track and, for example, making sure you are not trying to time the markets or chase performance

Yes, the markets are going to fluctuate.  We can’t control that.  But, at DWM we can help you control those key metrics that, over the long run, can produce higher expected returns with lower risk.

Total Eclipse of the Sun

We all spend a lot of time thinking about our Sun.  In the summer, we want to know if clouds or rain will obscure the Sun’s heat and brilliance and perhaps impact our plan for outdoor activities.  We must think about the Sun’s intensity by protecting our skin and our eyes from the powerful UV rays with sunscreen, protective clothing and eyewear.  Sunrise and sunset mark the ebb and flow in our days with beautiful atmospheric displays.  The Sun, as we all know, keeps us alive on this planet!

On August 21st, our moon will pass between the earth and the Sun, throwing shade across a wide path of the United States that includes Charleston, SC.  Temperatures will drop, the sky will darken and animals will be confused about what to do. The Great American Eclipse of 2017 will begin in the Charleston area with the first phase at 1:17 pm, will hit the peak or “totality “ period at 2:46 pm and will finally end around 4:10 pm.  This is the first total solar eclipse to occur in the US since 1979 and is the biggest astronomical event that America has seen in years.

There are five stages to a solar eclipse and there are some interesting features to look for during each phase, for those of you getting ready to participate.  Here are the 5 phases:

1. Partial eclipse begins (1st contact): The Moon starts becoming visible over the Sun’s disk. The Sun looks as if a bite has been taken from it.

2. Total eclipse begins (2nd contact): The entire disk of the Sun is covered by the Moon. Observers in the path of the Moon’s umbra, or shadow, may be able to see Baily’s beads and the diamond ring effect, just before totality.  Baily’s beads are the outer edges of the Sun’s corona peeking out from behind the moon and the diamond ring effect occurs when one last spot of the Sun shines like a diamond on a ring before being obscured.

3. Totality and maximum eclipse: The Moon completely covers the disk of the Sun. Only the Sun’s corona, or outer ring, is visible. This is the most dramatic stage of a total solar eclipse. At this time, the sky goes dark, temperatures can fall, and birds and animals often go quiet. The midpoint of time of totality is known as the maximum point of the eclipse. Observers in the path of the Moon’s umbra may be able to see Baily’s beads and the diamond ring effect, just after totality ends.

4. Total eclipse ends (3rd contact): The Moon starts moving away, and the Sun reappears.

5. Partial eclipse ends (4th contact): The Moon stops overlapping the Sun’s disk. The eclipse ends at this stage in this location.

Historically, solar eclipses have been significant events and have been recorded dating back to 5,000 BC.  There are writings of mathematical predictions of eclipses from ancient Greece, Babylon and China.  Rulers and leaders often used the predictions of astronomical events to gain power or to offer reassurance to a fearful population.  George Washington was grateful for a heads up about a coming solar eclipse prior to a battle in 1777 so he could alleviate any superstitions that his troops may have.  And scientists have used the opportunity of an eclipse to study the Sun, measure distances and features in the universe and learn about the Earth’s atmosphere.  The discovery of hydrogen can be credited to a solar eclipse and a solar eclipse in 1919 provided observational data for Einstein’s theory of general relativity.  This year, NASA has set up many sites within the path of the eclipse to monitor, measure and capture data to further their knowledge.  There is much to be learned from studying these phenomena.

As we have seen throughout history, the science of astronomy can be used to predict and measure certain events and occurrences with regularity.  Wouldn’t it be nice if there could be more certainty in predicting the ups and downs of the stock market?  One study found that stocks around the world rise on sunnier days!  However, no one can predict the future.  We need to focus on what we can control, including an appropriate asset allocation, diversification and keeping costs low.  That is why actively managed funds underperform the benchmarks and why even the geniuses like Warren Buffet recommend using passive index funds.  At DWM, we think you should stick with your investing plan and not look for the latest fads or trends or even astronomical events to impact your strategy.

We hope that NASA and other scientists learn some spectacular new things from this years’ eclipse.  Here in Charleston, we will be avid, yet passive spectators to the historical occurrence and will use our ISO certified eclipse glasses to watch the once-in-a-lifetime event unfold.   Happy eclipse watching!

Let’s All Work to Grow Human Capital!

Your biggest financial asset may be your human capital.  Yes, perhaps even more important than your investment portfolio, house, real estate and other assets.  Simply put, human capital refers to the abilities and qualities of people that make them productive.  There are many factors that contribute to human capital.  Knowledge is the most important, but discipline, punctuality, willingness to work hard, personal values and the state of one’s health are among the other factors.

Generally, younger people will have more human capital than financial capital.  In an economic sense, their human capital is the net present value of their lifetime earnings.  In a larger sense, human capital is our ability to add value to others and improve their lives and, by doing so, improve our own.  Decisions young people make early on regarding their education, their careers, their job choices, life partner choice, etc. will all have huge impacts on their eventual financial capital and human capital. Key questions they should answer include “What is your passion?” “When are you at your best?” and “What allows you to engage your human capital at the highest level?”

Historically, the cross-over point where financial capital starts to exceed human capital occurs when one is in their 50s.  However, with people living longer or pursuing “encore” careers, human capital may remain a significant personal asset for octogenarians and beyond.  A perfect example is 86 year old Warren Buffet who is committed to growing human capital:  “Investing in yourself is the best thing you can do.  Anything that improves your own talents cannot be taxed or taken away from you.”  Regardless of your age, human capital is like a garden, you need to continually give it your time and effort in order for it to grow.

For decades after WWII, the G.I. bill and the American economy pushed workers to build skills and maximize their economic potential.  This was arguably the greatest period of shared prosperity in the history of capitalism.  Last week’s Economist featured an article about University of Chicago Nobel Prize winner Gary Becker’s concept of human capital. Dr. Becker found that 25% of the rise in per-person incomes from 1929 to 1982 in the U.S. was because of increases in schooling.  Other components included on-the-job training and better health.  Dr. Becker was fond of pointing to Asian economics, such as South Korea and Taiwan, with few natural resources, who have invested in human capital by building up their education systems.  There is no debate that well-educated populations have greater incomes and broader social gains. There is a debate over whether the government should supply the education or students should bear the cost; yet both will receive the rewards.

Dr. Becker also wrote about “good inequality” and “bad inequality.”  Higher earnings for doctors, scientists and computer programmers, for example, help motivate students to push harder and achieve top paying jobs.  On the other hand, Dr. Becker wrote, when inequality becomes too extreme, the schooling and even the health of children from poor families suffers, with parents unable to adequately provide for them.  Inequality of this sort “depresses human capital, leaving society worse off.”

Certainly, many, if not most, of our DWM blog readers are committed to increasing and using their human capital to benefit themselves and others.  But, there are many Americans who do not or cannot.  Some are in occupations that have been hit hard by technological changes, others are in declining industries, others have limited education, and others have little opportunity.  As a result, there are lots of unhappy people due to this huge current gap between full human capital and employed human capital.  Can you imagine our country where the vast majority of our 323 million people were increasing their human capital and using it to benefit themselves and society?  Can you imagine an annual economic growth rate of GDP of 5-10%, like it was in the 60s and 70s, compared to the 2% it is currently?  Can you imagine hundreds of millions of Americans happy with their shared prosperity and with optimism for the future?

Let’s make growing human capital a lifetime commitment. And, let’s also commit to using our human capital to help others grow theirs.  It’s up to each of us. Mahatma Gandhi put it so well: “You must be the change you wish to see in the world.”

Next on the Agenda- Income Tax

Washington is moving on to tax reform. Earlier this week, the Senate Republicans made it clear that they want to focus on tax overhaul and critical fiscal legislation.  Republicans and Democrats have already outlined their plans.  Income taxes have always been a very important and often contentious subject. Before we review the key issues, let’s step back and review tax policy generally.

I remember my first tax class in Champaign, Illinois over 50 years ago.  We learned that income tax policy was more than simply raising money.  Taxes have always been an instrument of economic and social policy for the government, as well.

Income taxes became a permanent part of life in America with the passage of the 16th Amendment in 1913.  The first tax amount was 1% on net personal incomes above $3,000 with a surtax of 6% on incomes above $500,000 (that’s about $9 million of income in today’s dollars).  By 1918, at the end of WWI, the top rate was 77% (for incomes over $1 million).  During the Great Depression, the top marginal tax rate was 63% and rose to 94% during WWII.  The top rate was lowered to 50% in 1982 and eventually 28% in 1988.  It slowly increased to 40% in 2000, was reduced again from 2003 to 2012 and now is back at 40%. Corporate tax rates are 35% nominally, though the effective rate for corporations is between 20% and 25%.

Changes in the tax structure can influence economic activity.  For example, take the deduction for home mortgage interest.  If that deduction were eliminated, the housing market would most likely feel a big hit and economic growth, at least temporarily, would likely decline.  In addition, an argument is often made that tax cuts raise growth.  Evidence shows it’s not that simple.  Tax cuts can improve incentives to work, save and invest for workers, however, they may subsidize old capital that may undermine incentives for new activity and growth.  And, if tax cuts are not accompanied by spending cuts or increased economic growth, then the result is larger federal budget deficits.

Our income tax system is a “progressive” system.  That means that the tax rate goes up as the taxable amount increases.  It is based on a household’s ability to pay.  It is, in part, a redistribution of wealth as it increases the tax burden on higher income families and reduces it on lower income families.  In theory, a progressive tax promotes the greater social good and more overall happiness.  Critics would say that those who earn more are penalized by a progressive tax.

So, with that background, let’s look at some of the key issues.

The Republicans and the White House outlined their principles last Thursday:

  • Make taxes simpler, fairer, and lower for American families
  • Reduce tax rates for all American businesses
  • Encourage companies to bring back profits held abroad
  • Allow “unprecedented” capital expensing
  • Tax cuts would be short-term and expire in 10 years (and could be passed through “reconciliation” procedures by a simple majority)
  • The earlier proposed border adjustment tax on imports has been removed

Also this week, Senate Democrats indicated an interest in working with Republicans if three key conditions are met:

  • No cuts for the top 1% of households
  • No deficit-financed tax cuts
  • No use of fast-track procedures known as reconciliation

The last big tax reform was 1986.  It was a bipartisan bill with sweeping changes.  Its goals were to simplify the tax code, broaden the tax base and eliminate many tax shelters.  It was designed to be tax-revenue neutral.  The tax cuts for individuals were offset by eliminating $60 billion annually in tax loopholes and shifting $24 billion of the tax burden from individuals to corporations.  It needed bipartisan support because these were permanent changes requiring a 60% majority vote.

With all that in mind, sit back, relax and follow what comes out of Washington in the next few months. It will be interesting to watch how everything plays out for tax reform, the next very important piece of proposed legislation.

Some Cures for Procrastination

While most of us are having a super summer, maybe traveling a little bit, maybe kicking back a little, 60 psychologists were in Chicago last week attending the 10th Procrastination Conference. Their goal:  to better understand who procrastinates and discuss how the dreaded loop of perpetual delay can be altered.

Amazing.  20% of people are true procrastinators.  It seems of all countries surveyed, including the U.S., to Poland, Britain, Germany, Japan, Saudi Arabia, Turkey, and Peru, all have about 1 in 5 residents who are chronic procrastinators, or “procs.”  They delay in completing a task to the point of experiencing subjective discomfort, such as anxiety or discomfort.  A proc is usually consistent; procrastinating in multiple areas of her or his life- work, personal, financial and social.  Procs often lose jobs, have broken marriages, suffer deflated dreams, have self-esteem issues and are in financial disarray. Procrastination can be a real problem.

Hopefully, though, we have none or only few chronic procs in our readership.  However, for those who are in the other 80% who “on occasion” delay making decisions until it is too late, find themselves saying “I’ll do it tomorrow,” putting things off until the last minute or simply neglecting important items, here are some ideas on ways to get more things done.

  • Begin by forgiving yourself for being a part-time procrastinator.
  • Break down tasks into smaller pieces. For example, “select your blog topic,” as opposed to “write the blog.”
  • Consider using the Pomodoro technique. Plan your day in 25 minute intervals with a 5 minute break after each.  Complete small tasks throughout the day which will produce a huge cumulative effect and a wonderful feeling of accomplishment.
  • Adopt the “Seven Minute Rule.” If you have a task that requires seven minutes or less, just get it done now.  No need to put it on a to-do list or waste energy thinking about it over and over again, just knock it out.
  • Minimize distractions. One key area is emails.  Consider being email free for 15-25 minutes at a stretch to be able to concentrate and complete a project rather than getting sidetracked every other minute.
  • Deal with problems now. Remember the following saying:  “If you have to swallow a toad, it’s best not to look at it too long.”
  • Seek external help for your goals.

It’s no surprise that many people procrastinate on getting their financial matters in order.  Making decisions for what happens to your estate when you die isn’t all that much fun.  Reviewing insurance coverage for when your house is destroyed or your dog bites your neighbor isn’t extremely enjoyable.  Income tax planning isn’t a bowl of cherries.  Planning for retirement and making choices about needs, wants and wishes is not like having a birthday party.  Trying to make investment decisions by yourself with so much information available and so many  conflicting, self-proclaimed “experts” is difficult and frustrating.

However, all of these items are very important and do need to be put in order. Wealth management is one of those key areas where seeking external help can break your procrastination and help you reach your goals.  Consider working with a full-service fee-only fiduciary like DWM.  Not only will you get an experienced, competent team to guide you and provide information and choices so you can make decisions on all aspects of your finances.  In addition, with firms like DWM, who have a proprietary and prudent process in place, you receive regular, consistent follow-up on all investment, financial planning, insurance, income taxes and estate planning matters for years to come.

So, don’t procrastinate.  Consider some of these ideas for getting more things done. And, if you need external help on your finances in order, please give us a call.

Tick, Tock… Is it Time for your Required Minimum Distribution (RMD)?

“Time flies” was a recent quote that I heard from a client.  Remember a long time ago…putting money aside in your retirement accounts, perhaps at work in a qualified traditional 401(k) or to an individual retirement account (IRA)?  It’s easy to ‘forget’ about it because, it was after all, meant to be used many years down the road.  It would be nice to keep your retirement funds indefinitely; unfortunately, that can’t happen, as the government wants to eventually collect the tax revenue from years of tax deferred contributions and growth.

In general, once you reach the age of 70 ½, per the IRS, many of those qualified accounts are subject to a minimum required distribution (RMD) and you must begin withdrawing that minimum amount of money by April 1 of the year following the year that you turn 70 1/2.  Of course, there are a few exceptions with regards to qualified accounts, but as a rule, when you reach 70 ½, you must begin taking money from those accounts per IRS guidelines if you own a traditional 401(k), profit sharing, 403(b) or other defined contribution plan, traditional IRA, Simple IRA, SEP IRA or Inherited IRA.  (Roth IRAs are not required to take withdrawals until the death of the owner and his or her wife.)  Inherited IRAs are more complicated and handled with a few options available to the beneficiary, either by taking lifetime distributions or over a 5 year period.  The importance here, is to be aware that a distribution is needed.  Another word of caution…In some cases, your defined contribution plan may or may not allow you to wait until the year you retire before taking the first distribution, so review of the terms of the plan is necessary.  In contrary, if you are more than a 5% owner of the business sponsoring the plan, you are not exempt from delaying the first distribution; you must take the withdrawal beginning at age 70 1/2, regardless if you are still working.

The formula for determining the amount that must be taken is calculated using several factors.  Basically, your age and account value determine the amount you must withdraw.  As such, the December 31 prior year value of the account must be known and, second, the IRS Tables in Publication 590-B, which provides a life expectancy factor for either single life expectancy or joint life and last survivor expectancy, needs to be referenced.  The Uniform Lifetime expectancy table would be referenced for unmarried owners and the Joint Life and Last Survivor expectancy table would be used for owners who have spouses that are more than 10 years younger and are sole beneficiaries.  It comes down to a simple equation: The account value as of December 31 of the prior year is divided by your life expectancy.  For most of us, your first RMD amount will be roughly 4% of the account value and will increase in % terms as you get older.

It all begins with the first distribution, which will be triggered in the year in which an individual owning a qualified account turns 70 ½.  For example, John Doe, who has an IRA, and has a birthdate of May 1, 1947, will turn 70 ½ this year in 2017 on November 1.  A distribution will need to be made then after November 1, because he will have needed to attain the age of 70 ½ first.  Therefore, the distribution can be taken after November 1 (for 2017), and up until April 1 of the following year in 2018.

Once the first distribution is withdrawn, subsequent annual RMDs need to be taken for life, and are due by December 31.  In this case, John Doe will need to next take his 2018 distribution, using the same formula that determined his first distribution.  This will become a regular obligation of John’s each year.

So, we’ve talked about who, what, why and when, now let’s talk about the where.  Once the distribution amount is calculated, an individual can then choose where he or she would like that money to go.  Depending on circumstances, if the money is not needed for living expenses, it is advised to keep the money invested within one of your other non-qualified accounts such as a Trust or Individual account, i.e. you can elect to make an internal journal to one of your other brokerage accounts.  Alternatively, if you have another thought for the money, you can have it moved to a personal bank account or mailed to your home.  Keep in mind that these distributions, like any distribution from a traditional IRA, are taxed as ordinary income, thus, depending on your income situation, you may wish to have federal or state taxes withheld from the distribution.  At DWM, we can help our clients determine if, and what amount, to be withheld.

Another idea for the money could be a qualified charitable distribution (QCD).  Instead of the money going into one of your accounts, a direct transfer of funds would be payable to a qualified charity.  There are certain requirements to determine whether you can make a QCD.  For starters, the charity must be a 501 (c)(3) and eligible to receive tax-deductible contributions, and, in order for a QCD to count towards your current year’s RMD, the funds must come out of your IRA by the December 31 deadline.  The real beauty about this strategy is that the QCD amount is not taxed as ordinary income.

It may be pretty scary to know how quickly time flies, but with DWM by your side, we can take the scare out of the situation!