The Sun Will Shine Again

Acknowledge:

You’ve seen the news.  The pandemic, race riots, geo-political unrest, and economic uncertainty.  For some reason the news presented to us has always seemed to be glim, and even more so now.  All the information we have access to is overwhelming and it is difficult to digest and fully discern its accuracy.  I personally feel like this has been a roller coaster of a time.  I feel confident and full of hope one day and down the next.  As a man of faith, I remind myself that my hope, true hope, doesn’t come from the circumstances of the day.

Perspective:

In a financial plan, timeless wisdom prevails.  These times reiterate the value of spending less that we earn, the importance of an emergency fund, and being careful with debt.  This pandemic reinforces the importance of asset allocation and diversification.

“Everyone has a plan ’till they get punched in the mouth” – Mike Tyson

I love this quote from Mike Tyson.  This wit and wisdom of Tyson indicates that it is human nature to have a plan and follow it until there’s a shock to the system and then we begin to flail. We have a plan in place for a time such as this.  Although it can be tempting, this is not the time to flail.  Now is the time for confident resolve.

Confidence:

The very things we try to avoid at all costs, are the same things that accelerate our personal and collective growth.  We do not grow in spite of tribulation; we grow because of it.  There is no doubt, it’s a high cost for growth.  But challenging times accelerate ingenuity and problem solving.  Think of the failed moon launches: budget pressures, technology challenges, political pressure, waning public support, and the time crunch.  What was the result of all these tensions?

“One small step for man, one giant leap for mankind” – Neil Armstrong

I have confidence in our desire and ability to thrive because of tough times.  What do we learn?  How do we get better?

Opportunity: 

Staying the course does not mean standing still.  It means we have a plan and we adjust…looking for opportunities.

Covid-19 has been an accelerant for previously existing trends…

    • Cloud Computing
    • Cybersecurity
    • Online eCommerce
    • Efficient Logistics
    • Telemedicine
    • Working from home
    • Home fitness
    • Online education – possibly reducing higher education costs and reducing future student loan debt.
    • Deglobalization, diversifying, and shortening of the supply chain – possibility of new automated and intelligent factories manufacturing moving closer to the end consumer and out of China
    • Less business travel and in-person conferences
    • Home cooking increases
    • Investing in virology and anti-infectives
    • New standards for hygiene and sanitation

Plan of action:

What are our actions considering the market and these trends?

We plan to:

    • Rebalance
    • Look for mutual fund managers who are actively overweight the sectors with higher trending demand like tech and healthcare and underweight the sectors with a lessening demand like brick and mortar retail and office and retail real estate. Managers that look to discover companies that are winners considering these trends. We believe now is a time for active management rather than indexing or even factor-based investing.  Now is not the time to indiscriminately buy the whole market.
    • Tax-loss harvest
    • Roth conversions
    • Optimize asset location and allocation

 

Appreciation:

I appreciate you, your business, friendship, and confidence in these unusual times.  I pray for you and your family’s wellness.  These storms will not last forever and the sun will shine again.

 

 

 

 

Why Rebalance?

To restore to the correct balance.

By Tim Flick, CFP®

 

What is Rebalancing? Rebalancing is the process of realigning the weightings of your portfolio assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation.

For example: say our original target asset allocation for your account was 50% stocks and 50% bonds. If the stocks performed well during a period, it could have increased the stock weighting of the portfolio to 70%.  The investor could then decide to sell some stocks and buy bonds in order to get the portfolio back to the original target allocation of 50/50.

While the term “rebalancing” has connotations regarding an even distribution of assets, a 50/50 split is not required.  Instead, rebalancing a portfolio involves the reallocation of assets to a defined makeup by the investor. This can be a target allocation of 50/50, 70/30 or 40/60…

Often these rebalancing steps are taken to ensure the amount of risk involved is at the investor’s desired level. As stock performance can vary more dramatically than bonds, the percentage of assets associated with stocks will change with market conditions.  Along with the performance variable, investors may adjust the overall risk within their portfolios to meet changing financial needs.

Rebalancing for Diversity? Depending on market performance, investors may find a large number of current assets held within one area.  For example, should the value of asset class X increase by 25% while asset class Y only gained 5%, a large amount of the portfolio is tied to asset class X.  Should asset class X experience a sudden downturn, the portfolio will suffer a higher loss by association.  Rebalancing lets the investor redirect some of the funds currently held in asset class X to another investment, be that more of asset class Y or purchasing a new asset class entirely.  By having funds spread out across multiple asset classes, downturn in one will be partially offset by activities of the others, which can provide a level of portfolio stability.

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.

www.cornerfi.com

Registered Representatives -Securities offered through Cambridge Investment Research, Inc., a Broker Dealer, Member FINRA/SIPC. Investment Advisor Representative – Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Cambridge and Cornerstone Financial Advisory, LLC are not affiliated.

 

The Snowball Effect

Save and invest, year after year, to put the full power of compounding on your side.

 Provided by Tim Flick, CFP®

 

Have you been saving for retirement for a decade or more? In the foreseeable future, something terrific is likely to happen with your IRA or your workplace retirement plan account. At some point, its yearly earnings should begin to exceed your yearly contributions.

 

Just when could this happen? The timing depends on several factors, and the biggest factor may simply be consistency – your ability to keep steadily investing and saving. The potential for this phenomenon is apparent for savers who start early and savers who start late. Here are two mock scenarios.

 

Christina starts saving for retirement at age 23. After college, she takes a job paying $45,000 a year. Each month, she directs 10% of her salary ($375) into a workplace retirement plan account. The investments in that account earn 6% per year. Thirteen years later, Christina is still happily working at the same firm and still regularly putting 10% of her pay into the retirement plan each month. She now earns $58,200 a year, so her monthly 10% contribution has risen over the years from $375 to $485.1

 

The ratio of account contributions to account earnings has tilted during this time. After eight years of saving and investing, the ratio is about 2:1 – for every two dollars going into the account, a dollar is being earned by its investments. During year 13, the ratio hits 1:1 – the account starts to return more than $500 per month, with a big assist from compound interest. In years thereafter, the 6% return the investments realize each year tops her years’ worth of contributions to the principal. (Her monthly contributions have grown by more than 20% during these 13 years, and that also has had an influence.)1

 

Fast forward to 35 years later. Christina is now 58 and nearing retirement age, and she earns $86,400 annually, meaning her 10% monthly salary deferral has nearly doubled over the years from the initial $375 to $720. This has helped her build savings, but not as much as the compounding on her side. At 58, her account earns about $2,900 per month at a 6% rate of return – more than four times her monthly account contribution.1

 

Lori needs to start saving for retirement at age 49. Pragmatic, she begins putting $1,000 a month into a workplace retirement plan. Her account returns 7% a year. (For this example, we will assume Lori maintains her sizable monthly contribution rate for the duration of the account.) By age 54, thanks to compound interest, she has $73,839 in her account. After a decade of contributing $12,000 per year, she has $177,403. She manages to work until age 69, and after 20 years, the account holds $526,382.2

 

These examples omit some possible negatives – and some possible positives. They do not factor in a prolonged absence from the workforce or bad years for the market. Then again, the 6% and 7% consistent returns used above also disregard the chance of the market having great years.

 

Repeatedly, investors are cautioned that past performance is no guarantee or indicator of future success. This is true. It is also true that the yearly total return of the S&P 500 (that is, dividends included) averaged 10.2% from 1917-2017. Just stop and consider that 10.2% average total return in view of all the market cycles Wall Street went through in those 100 years.2

 

Keep in mind, when the yearly earnings of your IRA or employer-sponsored retirement plan account do start to exceed your yearly contributions that is not a time to scale back your contributions. Your retirement account will not do all your retirement saving work for you at that point; you still need to keep the momentum of your saving effort going – and maintaining it will assist the compounding.

 

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.

www.cornerfi.com

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – time.com/money/5204859/retirement-investments-savings-compounding/ [3/21/18]

2 – fool.com/investing/2018/05/16/how-to-invest-1000-a-month.aspx [5/16/18]

Should You Use 529 Plan Funds on K-12 Education?

Federal law says you can, but you may want to think twice about it.

Provided by Tim Flick, CFP®  

When President Trump signed the Tax Cuts & Jobs Act into law late in 2017, new possibilities emerged for the tax-advantaged investment vehicles known as 529 college savings plans. Funds from these accounts may now be used to pay for qualified elementary and secondary school expenses under federal law.1

Unfortunately, some state laws for 529 college savings plans are just catching up with federal law or treat such withdrawals differently from a tax standpoint. Hopefully, these differences will be resolved with time.2

Federal law permits you to spend up to $10,000 of 529 funds on K-12 tuition per year. Under the Tax Cuts & Jobs Act, you can use these funds to pay tuition at private and public elementary and secondary schools. If you do this, the withdrawal from your 529 plan is tax free or at least free from federal taxation.1 

The question is how the state hosting the 529 account treats the withdrawal. Some states, such as Missouri and Tennessee, quickly indicated they would allow 529 plan withdrawals for qualified K-12 education expenses and treat the withdrawals in the same fashion as the new federal law. Other states took a different approach. Louisiana’s state legislature, for instance, complemented the state’s 529 college savings plan with new K-12 education savings accounts in June.3

While your state’s 529 plan may allow you to withdraw funds to pay for qualified K-12 education expenses, the state and federal tax treatment of the withdrawal may differ. The distribution could be taxed at the state level, even if untaxed at the federal level. That is the case in Oregon, for example.2,4  

You may or may not want to use 529 plan funds in this way. The Tax Cuts & Jobs Act basically redefined 529 savings plans as education savings accounts rather than solely college savings accounts. The added versatility is nice, but chances are, you have been saving money for a college education in a 529. Do you really want to draw down a tax-favored account capable of compounding to pay K-12 education expenses today instead of college costs tomorrow? Like an early withdrawal from a retirement account, this may be a decision that you come to regret.

If you are independently wealthy or anticipate having the financial ability to cover college costs in some other way, then partly or wholly reducing your 529 plan balance might be bearable. If your household is middle class, it could simply be a bad idea.  

Of course, 529 plans are just one of the ways available to save for college. You should explore your options to build education savings. A chat with a financial professional well versed on the topic may give you some ideas.

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.

www.cornerfi.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

      

Citations.

1 – cpapracticeadvisor.com/news/12416531/section-529-plans-can-now-be-used-for-private-elementary-and-high-schools [6/12/18]

2 – forbes.com/sites/megangorman/2018/03/08/navigating-the-new-529-rules-the-land-of-wealth-transfer-piggy-backs-and-donor-advised-funds/ [3/8/18]

3 – nola.com/politics/index.ssf/2018/06/new_law_creates_k-12_savings_a.html [6/14/18]

4 – oregonlive.com/business/index.ssf/2018/03/oregon_wont_allow_529_tax_brea.html [3/8/18]

 

The Pros & Cons of Roth IRA Conversions

What are the potential benefits? What are the drawbacks?

 Provided by Tim Flick, CFP®

 

If you own a traditional IRA, perhaps you have thought about converting it to a Roth IRA. Going Roth makes sense for some traditional IRA owners, but not all.

Why go Roth? There is an assumption behind every Roth IRA conversion – a belief that income tax rates will be higher in future years than they are today. If you think that will happen, then you may be compelled to go Roth. After all, once you are age 59½ and have had your Roth IRA open for at least five years (five calendar years, that is), withdrawals of the earnings from your Roth IRA are exempt from federal income taxes. You can withdraw your Roth IRA contributions tax free and penalty free at any time.1,2

Additionally, you never have to make mandatory withdrawals from a Roth IRA, and if your income permits, you can make contributions to a Roth IRA as long as you live.2

For 2017, the contribution limits are $135,000 for single filers and $199,000 for joint filers, with phase-out ranges respectively starting at $120,000 and $189,000. (These numbers represent modified adjusted gross income.)2

While you may make too much to contribute to a Roth IRA, you have the option of converting a traditional IRA to a Roth. Imagine never having to draw down your IRA each year. Imagine having a reservoir of tax-free income for retirement (provided you follow Internal Revenue Service rules). Imagine the possibility of those assets passing to your heirs without being taxed. Sounds great, right? It certainly does – but the question is: can you handle the taxes that would result from a Roth conversion?1,3     

Why not go Roth? Two reasons: the tax hit could be substantial, and time may not be on your side. 

A Roth IRA conversion is a taxable event. The I.R.S. regards it as a payout from a traditional IRA prior to that money entering a Roth IRA, and the payout represents taxable income. That taxable income stemming from the conversion could send you into a higher income tax bracket in the year when the conversion occurs.2

If you are nearing retirement age, going Roth may not be worth it. If you convert a large traditional IRA to a Roth when you are in your fifties or sixties, it could take a decade (or longer) for the IRA to recapture the dollars lost to taxes on the conversion. Model scenarios considering “what ifs” should be mapped out.

In many respects, the earlier in life you convert a regular IRA to a Roth, the better. Your income should rise as you get older; you will likely finish your career in a higher tax bracket than you were in when you were first employed. Those conditions relate to a key argument for going Roth: it is better to pay taxes on IRA contributions today than on IRA withdrawals tomorrow.

On the other hand, since many retirees have lower income levels than their end salaries, they may retire to a lower tax rate. That is a key argument against Roth conversion.

If you aren’t sure which argument to believe, it may be reassuring to know that you can go Roth without converting your whole IRA.

You could do a multi-year conversion. Is your traditional IRA sizable? You could spread the Roth conversion over two or more years. This could potentially help you avoid higher income taxes on some of the income from the conversion.2 

Roth IRA conversions can no longer be recharacterized. Prior to 2018, you could file a form with your Roth IRA custodian or trustee to undo a Roth IRA conversion. The recent federal tax reforms took away that option. (Roth IRA conversions made during 2017 may still be recharacterized as late as October 15, 2018.)2    

You could also choose to “have it both ways.” As no one can fully predict the future of American taxation, some people contribute to both Roth and traditional IRAs – figuring that they can be at least “half right” regardless of whether taxes increase or decrease.

If you do go Roth, your heirs might receive a tax-free inheritance. Lastly, Roth IRAs can prove to be very useful estate planning tools. If I.R.S. rules are followed, Roth IRA heirs may end up with a tax-free inheritance, paid out either annually or as a lump sum. In contrast, distributions of inherited assets from a traditional IRA are routinely taxed.3

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.

www.cornerfi.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – cnbc.com/2017/07/05/three-retirement-savings-strategies-to-use-if-you-plan-to-retire-early.html [7/5/17]

2 – marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26 [3/26/18]

3 – time.com/money/4642690/roth-ira-conversion-heirs-estate-planning/ [1/27/17]

 

 

Train Up a Child

Three Ideas: Guiding a Child to Wise Financial Choices.

By Tim Flick, CFP®

Everyone seems to agree that financial education for children is important.  The lack of training can be obvious and the benefits are numerous.  Some of the significant byproducts of training children money management skills are:

  1. Wisdom
  2. Character Development
  3. Learning Contentment
  4. Generational Impact

Use it or lose it.  One of the challenges is financial literacy is similar to learning a foreign language.  You can talk the talk and pass the tests, but then it becomes “use it or lose it time”.  Children don’t have the opportunities to use this knowledge like an adult.  The necessity of practicing financial principles isn’t present.

Start with the big picture principles.  The key is to begin with foundational wisdom.

Teach general principles like:

  1. Spend less than you earn
  2. Avoid debt
  3. Saving – Build liquidity
  4. Set long-term goals
  5. Giving – Delight in generosity
  6. Understand that God owns it all – we are the managers

The rest can be taught in a “just in time” or “next step” manner.  For instance before a child goes to college, talk about the credit card offers they will receive.  Teach how credit works with the paying of interest making the items we purchase much more expensive than the price shown for the article.

Three ideas to build the foundation:

  1. Three cups – Give a child three cups to place in their room. Label the cups “Giving”, “Saving”, and “Spending”.  Then, every time the child receives money, have them put 10% each into the “Saving” and “Giving” cups.  The remaining 80% goes in the “Spending” cup.  Help the child find a church or charity for the giving portion and encourage them to be involved.  Also help them discover a long-term goal for their savings and even open a savings account.  The “Spending” cup is for them to decide how to spend and learn from, even as they make mistakes.
  2. Provide a match. To encourage savings, you can match the amount they decide to put into a savings account.  You may want to set limits for some over achievers.
  3. Have them earn an allowance. Give them age appropriate jobs and if they do the work, they get paid.  If they don’t, they don’t.  You may even want to come up with a fun tracking system.  I’ve heard one family uses Popsicle sticks.  One end says, “To Do” and the other end “Done”.

Finding a good “Second Voice”. The responsibility of training the child in finances falls squarely on the parents.  As many know, it’s always better with help from a like-minded resource. Hopefully, you can find support from family, friends, resources, and encouragement from church, school, and your financial advisor.

There are some good resources out there for teaching kids about money.  Check out:

www.crown.org

www.daveramsey.com

www.compass.org

The benefits are not only numerous for your own children, but can have an impact on generations to come.  Generations that may include your grandchildren and great-grandchildren.  Let’s start a new trend of financial wisdom.

Tim Flick may be reached at 317-947-7047 or tflick@cornerfi.com.

www.cornerfi.com