What Does a Biden-Democratic Election Sweep Mean for Taxes?

Many investors are wondering what the implications are if voters place a Democrat in the White House and what it could mean if the House and Senate obtain a Democratic majority.

Voters casting their votes in the voting booth
Photo by Morning Brew on Unsplash

There are many changes that may come about should the above scenario come to fruition. However, before we begin, I’d like to note that we are not trying to make a determination about which set of tax laws are best. Since the current tax laws are already in place, we will be setting out to answer questions relating to the changes the proposed tax laws may enact. More specifically, we will focus on how these changes may affect your portfolio, your income tax liability, and your estate tax liability. Let us take a look at the changes you may see in each of these areas.

Effects on Your Portfolio

In 2017, corporate tax rates were cut from 35% down to 21%. Former Vice President Biden is targeting an increased corporate tax rate of 28%. In addition, his proposal would create a minimum tax of 15% on corporations with book profits of $100 million or higher. Currently, a company may have net profits, but after deducting the cost of investments, R&D expenses, etc., they pay very little or even no federal income tax. This “minimum book tax” is not in addition to the corporate tax rate. Rather, it is a minimum tax on profits.

Another law that came about through the Tax Cuts and Jobs Act (TCJA) is the Global Intangible Low Tax Income (GILTI). This new tax places a minimum 10.5% tax on foreign income contributed to intangible assets such as copyrights, patents, and intellectual property. Though many agree that the law isn’t fully working as intended, it was developed to deter companies from shifting these types of assets overseas where they may pay little to no tax on the income they generate. In Biden’s proposal, GILTI tax rates would double to 21%.

Should we see an increase in corporate tax rates, this would directly impact earnings. With a “book tax,” companies that fully expense investment costs or that receive R&D credits to lower their tax liability would now be subject to a minimum tax. In addition, many of the largest US companies listed on the S&P 500 derive half or more of their business from overseas markets. This, too, could mean a decrease in earnings as their tax liability increases. As these companies cope with additional taxation, there is the potential for their stock prices to weaken.

Photo by Markus Spiske on Unsplash

Effects on your income tax liability

Biden’s proposed tax plan comes with various changes, mostly to high income earners. His proposal shifts the marginal tax rate on the highest income filers from 37% to 39.6%. Long term capital gains and qualified dividends for those with gross income over $1 million would be taxed at the ordinary rate of 39.6%, which is nearly double the current highest rate of 20%. Anyone with income over $400,000 would be subject to a new Old-Age, Survivors, and Disability Insurance (Social Security) payroll tax –12.4% split equally between employee and employer. Business owners of pass-through entities earning more than $400,000 would lose their Qualified Business Income (QBI) deduction.

Some other changes include restoring the Pease limitation and capping itemized deductions to 28% of value, introducing renewable energy tax credits to individuals, expanding child and dependent care credits to $8,000 per child/dependent up to $16,000, and overhauling the deductibility of retirement plan contributions. This last change would provide a flat 26% refundable credit for every dollar contributed to a traditional retirement account (such as a 401(k), 403(b), IRA, or SIMPLE IRA) up to the maximum contribution amounts. The credit would be refunded directly to the retirement account. Since the credit is a flat percentage, those in higher tax brackets receive less benefit.

There are plenty of uncertain details around the proposed changes. One is the ordinary income taxation of long-term capital gains. What type of assets would be included in this new rule? Would a business owner who is selling her closely held business be required to pay ordinary income rates on all the proceeds? What about the sale of assets used in a trade or business or the sale of real estate that has been depreciated under current allowances? As always, we will have to wait to see how some of these questions are addressed.

Effects on your estate Tax liability

There are a couple of key changes that have support from the Democratic party that are almost certain to make their way into discussions should we see a Democratic majority.

First on the list is a reversion of federal estate tax exemptions to their pre-TCJA levels (around $5.5 million) or even to their pre-American Taxpayer Relief Act (ATRA) levels (around $3.5 million). This is a very stark contrast to the current $11.58 million exemption currently in place.

Next is the removal of the step-up in basis for assets passed to heirs upon death. Currently, when an owner dies and leaves the asset to the heir, the owner’s cost basis “steps up” to the current market value of the asset. The heir could then sell the asset and pay little to no capital gains tax. Without a step-up in basis, it would likely make it much more burdensome on the heir to prove the original cost basis for inherited assets. If the owner kept exceptional documentation while living, it may be okay. If not, be prepared for headaches.

Further, if the step-up in basis was eliminated and the estate tax exemption was lowered to its previous level, it could mean adding additional capital gains tax to an already high estate tax rate of 40%. The amount of wealth transferred to heirs may not be as high as expected.

tax form
Photo by Kelly Sikkema on Unsplash

What does it all mean?

Whenever there is change, there are always opportunities. When it comes to your investments, consider realizing some of your positions with low cost basis or even donating them to a charity. Use previous losses to offset the gains to the extent you can. Be prepared for the next shift in pricing. It may or may not come right away, but if you are sticking to your allocation and maintain your focus, you’ll weather the storm. In your estate, consider making gifts of assets to your children or heirs that are in lower tax brackets to remove the assets from your estate and avoid the higher tax liability. Think about utilizing life insurance to replace wealth lost to taxes or donated to charity.

In the end, regardless of the political atmosphere, we will press on. Don’t worry. You can have peace of mind knowing we are here to help guide you through your decisions.

Market Commentary Q2 2020

The equity markets made a dramatic recovery in the second quarter of 2020.

The S&P 500 index (U.S. Large Cap stocks) finished the second quarter up 21%, its biggest quarterly gain since 1998. As of the end of June, the S&P 500 was only 3% below its value at the beginning of 2020. The largest technology companies drove returns, although the rally became more widespread as the quarter progressed. U.S. Small Cap stocks did even better during the quarter, up 25.4%. Foreign developed (Europe and Japan) and Emerging market stocks had stellar quarterly returns, as well, up 14.9% and 18.1%, respectively. They outperformed their U.S. counterparts in late-May and June in part due to a weaker U.S. dollar boosting foreign stock returns. Even non-investment-grade (i.e. high yield) U.S. corporate bonds gained 9.6% during the quarter. These returns are remarkable given the world-wide economic downturn and global economies continuing to struggle with re-opening businesses given continued spikes in COVID-19. Additionally, racism and inequality protests around the world stole the headlines from COVID-19 during the quarter but the markets continued to march on.

U.S. Core and International bonds had an uneventful second quarter, gaining 2.9% and 1.8% respectively, and bond yields continue to be at historic lows. The 10-year Treasury yield is 0.66% on June 30th.

Here are the broad index returns through the Second Quarter of 2020*:

U.S. Large Cap Stocks -3.1% U.S. Real Estate -19.0% Allocation 30%-50% Equity -2.7%
U.S. Small Cap Stocks -13.0% U.S. Aggregate Bonds 6.1% Allocation 50%-70% Equity  -3.6%
Foreign Developed Stocks  -11.3% International Bonds  2.3% Allocation 70%-85% Equity -6.7%
Emerging Market Stocks -9.8%


Why are equity investors so optimistic?

The unprecedented intervention by global central banks and governments to assist businesses and individuals during the pandemic have given investors the confidence to re-enter risk assets such as equities and corporate credit. Along with familiar interest rate cuts and quantitative easing programs, central banks like the U.S. Federal Reserve have implemented “new” tools such as the outright purchase of bond exchange-traded funds (ETFs). Global governments have also responded with massive stimulus spending. In fact, most economists and investment analysts expect a second-round of stimulus from the U.S. Congress by the end of summer. Time will tell.

Investors are also anticipating a speedy recovery and an effective vaccine but could be disappointed. Unfortunately, business re-openings are having spotty success and the unemployment rate is not expected to be back to pre-recession levels for another couple of years. Additionally, many health care professionals, health care stock analysts, and economists do not believe that a vaccine is imminent. It could still be another 8-10 months before a vaccine is ready and available for global distribution. Cautious optimism is likely best right now.

What is the BFA Investment Committee’s outlook and strategy lately?

We believe that current U.S. equity valuations are excessive and that volatility in equities will increase as reality sets in for investors. Data suggests that this will be a much?more drawn out recovery than originally expected. Thus, we are anticipating a correction (i.e. 10% or more drop in value) by year-end in US equities. We are currently holding cash in lieu of U.S. high yield bonds and it could be early next year before we re-enter the U.S. high yield corporate bond sector. Also, we believe that Emerging markets, particularly those in Asia, are poised to outperform U.S. and foreign developed stocks. They should continue to benefit from positive structural changes, including participation in “new economy” sectors such as digitalization and technology and from revamped regional trade agreements which will help smooth out bumps in the supply chain. Valuation discounts of emerging market equities to U.S. equities are at all?time highs and the portfolio is weighted appropriately.

The recovery in equities during the second quarter gave us the opportunity to identify those Equity allocations that had grown above their maximum weights. We sold Equities and purchased Fixed Income to bring the Equity allocation back down to its target weight (i.e. sell high and buy low) and to protect the gains that you have recently realized. We also added a new investment-grade bond fund in U.S. core bonds that should boost yield in our fixed income portfolios while maintaining that sector’s role as ballast for the portfolio.

Finally, as a fee-only fiduciary firm, we always have your best interest at heart and believe in full disclosure of our compensation. To this end, we have included a copy of our new Client Relationship Summary, on file with the SEC and in plain English, which provides a summary of our relationship with you, our clients. Please review it and let us know if you have any questions. Also, please let us also know if there are any changes in your financial situation or investment objectives or if you wish to impose, add, or modify any restrictions to your accounts.

As 2020 rolls on, we know that a number of uncertainties in the markets, economy, and political landscape continue to exist. Please know that your BFA Investment Committee continually monitors these landscapes and will make any adjustments as necessary. If you have any questions or need reassurance, please let us know. We look forward to talking with you again soon!

*U.S. Large Cap=S&P 500, U.S. Small Cap=Russell 2000, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=Barclays Global Aggregate ex-U.S. USD-Hedged, US Real Estate=MSCI US REIT: Data Source: Morningstar®. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Index returns are for illustrative purposes only and do not represent actual performance of any investment. Client returns will differ from the results shown. Index performance returns do not include any management fees, transaction costs or expenses. The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate; thus an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than return data quoted herein. Indexes are unmanaged and one cannot invest directly in an index. Please review your allocation regularly and notify BFA immediately if your circumstances should change. The foregoing content reflects the opinions of BFA and is subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

401(k) Employer Matching: What You Don’t Know Might Hurt You

It’s common to hear that you should contribute enough money to your company’s 401(k) or 403(b) plan to receive the employer’s match if there is one. It’s good advice as it typically results in “free” money being contributed towards your retirement. However, what if you are planning to maximize your contributions ($19,500 in 2020)? Does the timing of your contributions affect your employer’s match? Could you be leaving “free” money on the table?

calculator and woman sitting at computer
Photo by Charles on Unsplash

The answer to this question is tricky. Let’s begin by looking at a simple scenario that we can build upon.

Base Scenario: Contributing enough to receive the match

You currently earn a base salary of $100,000 and are paid monthly which results in a paycheck of $8,333. In addition, your employer will match 100% of your contributions up to 6% of your gross pay each month. To get the full match, you contribute 6% ($500) of your paycheck each period. This results in annual contributions of $12,000 (Your $6,000 + Employer’s $6,000 match). You’ve received your employer’s full match.

Base Scenario | Salary: $100,000
Month Payroll % Contribution Amount Match up to 6% Employer Employer YTD
1 $8,333 6% $500 100% $500 $500
2 $8,333 6% $500 100% $500 $1,000
3 $8,333 6% $500 100% $500 $1,500
4 $8,333 6% $500 100% $500 $2,000
5 $8,333 6% $500 100% $500 $2,500
6 $8,333 6% $500 100% $500 $3,000
7 $8,333 6% $500 100% $500 $3,500
8 $8,333 6% $500 100% $500 $4,000
9 $8,333 6% $500 100% $500 $4,500
10 $8,333 6% $500 100% $500 $5,000
11 $8,333 6% $500 100% $500 $5,500
12 $8,333 6% $500 100% $500 $6,000
$6,000 $6,000


Scenario #2: Maximizing your contributions

Now, let’s say you plan to maximize your retirement contributions for the year ($19,500). Instead of contributing 6%, you now contribute 19.5% per paycheck or $1,625. Your employer still matches the first 6% ($6,000) of contributions so you end the year with $25,500 of total contributions. As with the base scenario, you have received the full employer’s match. All is well.

Scenario #2 | Salary: $100,000
Month Payroll % Contribution Amount Match up to 6% Employer Employer YTD
1 $8,333 19.50% $1,625 100% $500 $500
2 $8,333 19.50% $1,625 100% $500 $1,000
3 $8,333 19.50% $1,625 100% $500 $1,500
4 $8,333 19.50% $1,625 100% $500 $2,000
5 $8,333 19.50% $1,625 100% $500 $2,500
6 $8,333 19.50% $1,625 100% $500 $3,000
7 $8,333 19.50% $1,625 100% $500 $3,500
8 $8,333 19.50% $1,625 100% $500 $4,000
9 $8,333 19.50% $1,625 100% $500 $4,500
10 $8,333 19.50% $1,625 100% $500 $5,000
11 $8,333 19.50% $1,625 100% $500 $5,500
12 $8,333 19.50% $1,625 100% $500 $6,000
$19,500 $6,000

Scenario #3: Receiving a bonus and maximizing your contributions

Because you did such a great job last year, your employer tells you that you will be receiving a $10,000 bonus in January. Since your overall compensation is now $110,000, you do the math ($19,500/$110,000) and decide to lower your monthly contribution from 19.5% to a little under 18%. Your first contribution for the year is $3,250 and the rest are $1,477. At the end of the year, you have maximized your contributions and received the full employer’s match $6,600 ($110,000 x 6%).

Scenario #3 | Salary: $100,000; January Bonus: $10,000
Month Payroll Percent Amount Match up to 6% Employer Employer YTD
1 $18,333 17.73% $3,250 100% $1,100 $1,100
2 $8,333 17.73% $1,477 100% $500 $1,600
3 $8,333 17.73% $1,477 100% $500 $2,100
4 $8,333 17.73% $1,477 100% $500 $2,600
5 $8,333 17.73% $1,477 100% $500 $3,100
6 $8,333 17.73% $1,477 100% $500 $3,600
7 $8,333 17.73% $1,477 100% $500 $4,100
8 $8,333 17.73% $1,477 100% $500 $4,600
9 $8,333 17.73% $1,477 100% $500 $5,100
10 $8,333 17.73% $1,477 100% $500 $5,600
11 $8,333 17.73% $1,477 100% $500 $6,100
12 $8,333 17.73% $1,477 100% $500 $6,600
$19,500 $6,600

At this point, you may be wondering why the answer to the original question was “tricky.” So far, things have been pretty straightforward and, in each scenario, you’ve managed to receive your employer’s full match. That’s about to change.

Scenario #4: Contributing your entire bonus in January

Upon learning you will be receiving a bonus, you decide to leave your monthly contribution rate at 19.5% and contribute your entire bonus to your 401(k) in January. Now, your first contribution of the year is $11,625, the next four are $1,625, and the last one is $1,375. You maximize your contributions by the end of June and are excited because starting in July you won’t have to make any more contributions and your take-home pay will be much higher. That sounds great, but you find out at the end of the year that your employer only contributed $3,600. How could that be? Where is the other $3,000?

Here’s where things get tricky. Many employers only match contributions on a per period basis. In these scenarios, the periods are monthly. This means that each month the employer looks at the compensation for that month and contributes up to 6% of that amount. Even though you contributed $11,625 in January, your employer could only contribute up to 6% of your pay for that period or $1,100. Your employer continued to match each of your other contributions ($500/period), but after six months, you were no longer contributing; therefore, the employer had nothing to match.

Scenario #4 | Salary: $100,000; January Bonus: $10,000
Month Payroll % Contribution Amount Match up to 6% Employer Employer YTD
1 $18,333 63.41% $11,625 100% $1,100 $1,100
2 $8,333 19.50% $1,625 100% $500 $1,600
3 $8,333 19.50% $1,625 100% $500 $2,100
4 $8,333 19.50% $1,625 100% $500 $2,600
5 $8,333 19.50% $1,625 100% $500 $3,100
6 $8,333 16.50% $1,375 100% $500 $3,600
7 $8,333 0.00%
8 $8,333 0.00%
9 $8,333 0.00%
10 $8,333 0.00%
11 $8,333 0.00%
12 $8,333 0.00%
$19,500 $3,600.00

Scenario #4 isn’t the only time this could happen. If your income is high enough, it may result by simply setting your contribution percentage too high for the year—which would also cause your contributions to stop before year-end.

Luckily for some, not all employers make contributions in this way. Many retirement plans have provisions that allow the employer to look back at an employee’s income and contributions over the entire year and make an additional contribution so that the percentage of compensation matched aligns with the annual compensation.

In Scenario #4, a provision like this would have allowed the employer to make a $3,000 contribution at year-end—bringing the total contribution to $6,600.

If you aren’t sure how your plan is structured, be sure to ask your plan provider. Don’t miss an opportunity to increase your retirement contributions.

It’s FAFSA® Season!

man discussing something on computer screen with young adult
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October is here; school is well underway; and, for parents with high school seniors, it’s time to start planning for college! October 1st marks the beginning of FAFSA® season. Not familiar with the term “FAFSA®?” That’s okay! Today, you will learn the basics of what you need to know.

What is the FAFSA®?

FAFSA® stands for the Free Application for Federal Student Aid. This form, created by the office of Federal Student Aid—a part of the U.S. Department of Education, is designed to determine which forms of federal student aid are available to students currently enrolled or preparing to enroll in higher education programs. By completing the FAFSA®, you will learn whether or not you qualify for 3 things:


A grant is a form of financial aid that does not have to be repaid. They are usually based on need and are primarily provided by the federal government, state governments, colleges, or non-profit organizations.

Work-Study Programs

Federal Work-Study programs provide students with part-time jobs while they are enrolled in school. These jobs may be on or off-campus and they allow students to earn money to help pay for their education. 

Federal Student Loans

These loans are administered by the federal government and allow eligible students and parents to borrow money to assist with educational expenses. There are various types of loans available, but there are two types that are most common—Direct Subsidized Loans and Direct Unsubsidized Loans.

Direct Subsidized Loans

Direct Subsidized Loans are available to undergraduate students and are based upon financial need. While in school, the U.S. Department of Education pays the interest on the loan. Once the student graduates, he or she assumes responsibility for the loans.

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to undergraduate and graduate students and are not based on financial need. Unlike the Direct Subsidized Loans, the student is responsible for interest at all times, though they are not required to make a payment while enrolled.

man filling out form
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When should I complete the FAFSA®? 

Now! It’s important to get a jump on the application process and complete it as soon as possible. Why? 

First, the form can be somewhat challenging if it’s your first time completing it. There are various pieces of information that are needed such as tax returns, banking and investment statements, and more. Completing the form can be done in one sitting, but it often takes multiple days to get everything sorted and verified before submitting.

Second, there are three key deadlines: the College’s Deadline, the State’s Deadline, and the Federal Deadline.

Many colleges have a set amount of funds that are set aside each year for student aid. These funds are often awarded on a first come, first served basis. So, if you submit your FAFSA® early, your chances of being awarded student aid are likely to go up. In addition, many states have their own financial aid programs. These programs, similar to college programs, often have a limited amount of funding available that is awarded until funds are depleted.

Finally, it may take several weeks for your form to be processed and for you to receive your Student Aid Report (SAR), which is a summary of your FAFSA®. Colleges also receive this form and use it to determine your eligibility for aid. In some cases, you may receive a notice with your SAR that you have been selected for verification. This means that the office of Federal Student Aid or your college is requesting additional information to verify the information on your FAFSA® is correct. Going through this step could add another few weeks to the process and delay the award notification from the college.

Why should I complete the FAFSA®?

Simply put… college is expensive. Completing the FAFSA® gives you the best opportunity to maximize your student aid. With so many colleges and state programs basing their scholarships, grants, and other forms of aid on the information they receive from the FAFSA®, not completing it could severely limit your funds received.

Hint: Even though you may think your financial situation is “too good” for you to qualify for student aid, don’t be fooled. “In fact, most people are eligible for federal student aid” (Studentaid.ed.gov/sa/).

Another reason to complete the FAFSA®, especially early on, is that it then allows you to focus on everything else that needs to be done before the start of the school year. You’ll have more time to:

  • Submit college applications
  • Apply for scholarships
  • Research degree plans and coursework
  • Create a budget to determine how much aid you actually need

Finally, it will make it much easier to compare colleges and determine the one that’s the best fit for you. You will know how much it costs to attend each school, how much free aid you have been offered, what scholarships you qualify for, and whether or not there is a shortfall in funding. Knowing these things will allow you to make an informed decision that you feel confident in.


Now is the time to complete the FAFSA® form. If you know which colleges you are interested in attending, reach out to their financial aid administrator to find out when their deadlines are. If one is sooner than the others, use that as your target date for completion. Don’t wait until the federal deadline and potentially miss out on free money! To get started, head on over to the Federal Student Aid office website and check out their guidelines for filling out the FAFSA®.

If you are still in the college planning stage or you are in your first FAFSA® season and need some help mapping out the costs of college and how to pay for it, please schedule a free introductory call with one of our financial planners. We’d love to help you understand your options!

5 Tips for Protecting Your Credit from the Capital One Data Breach

Every day seems to present an opportunity for a new data breach at some large financial institution. The most recent news occurred this week when Capital One released the following message (in part):

Date: July 29, 2019

“Capital One Financial Corporation (NYSE: COF) announced today that on July 19, 2019, it determined there was unauthorized access by an outside individual who obtained certain types of personal information relating to people who had applied for its credit card products and to Capital One credit card customers.

“Based on our analysis to date, this event affected approximately 100 million individuals in the United States and approximately 6 million in Canada.

“The largest category of information accessed was information on consumers and small businesses as of the time they applied for one of our credit card products from 2005 through early 2019. This information included personal information Capital One routinely collects at the time it receives credit card applications, including names, addresses, zip codes/postal codes, phone numbers, email addresses, dates of birth, and self-reported income.

“Beyond the credit card application data, the individual also obtained portions of credit card customer data, including:

  • Customer status data, e.g., credit scores, credit limits, balances, payment history, contact information
  • Fragments of transaction data from a total of 23 days during 2016, 2017 and 2018

“No bank account numbers or Social Security numbers were compromised, other than:

  • About 140,000 Social Security numbers of our credit card customers
  • About 80,000 linked bank account numbers of our secured credit card customers

“We will notify affected individuals through a variety of channels. We will make free credit monitoring and identity protection available to everyone affected.”

If you find your information has been compromised (or even if it hasn’t), here are Five Tips to help protect your credit and identity:

  1. Request a copy of your credit report today.

You are allowed to request a free copy of your credit report once a year from each of the three credit reporting agencies: Equifax, Experian, and TransUnion —at: AnnualCreditReport.com.

You can do this every 122 days by rotating among the agencies. Look for suspicious accounts or activity that you don’t recognize—such as someone trying to open a new credit card or apply for a loan in your name. If you DO see something, visit: IdentityTheft.gov/databreach to find out how to mitigate the damage.

  1. Monitor your online statements.

The credit report won’t tell you if there has been money stolen from a bank account or suspicious activity on your credit card.  Unfortunately, you’ll have to turn this into a habit.  In most cases, theft happens over time, starting with small amounts stolen from across your accounts.

review online accounts
Photo by Sergey Zolkin on Unsplash
  1. Place a credit freeze and/or fraud alert on your account with all the major credit bureaus by visiting:AnnualCreditReport.com.

You can put a fraud alert, for free, by contacting one of the credit agencies, which is required to notify the other two.  This will warn creditors that you may be an identity theft victim, and they should verify that anyone seeking credit in your name is really you. The fraud alert will last for 90 days and can be renewed.

Consider putting a freeze on your credit. A freeze blocks anyone from accessing your credit reports without your permission—including you. This can usually be done online, and each bureau will provide a unique personal identification number that you can use to “thaw” your credit file if you need to apply for new lines of credit sometime in the future. Fees to freeze your account vary by state, but commonly range from $0 to $15 per bureau. You can sometimes get this service for free if you supply a copy of a police report (which you can file and obtain online) or affidavit stating that you believe you are likely to be the victim of identity theft.

  1. Consider signing up with a credit monitoring service.

Many Americans have opted to sign up for a credit monitoring service, which won’t prevent fraud, but WILL alert you when your personal information is being used or requested. In most cases, there is a cost involved, but Capital One appears to be offering protection for free for those affected.

  1. Opt out of prescreened credit offers.

ID thieves like to intercept offers of new credit sent via postal mail.  If you don’t want to receive prescreened offers of credit and insurance, you have two choices: You can opt out of receiving them for five years by calling toll-free: 1-888-5-OPT-OUT (1-888-567-8688) or by visiting: optoutprescreen.com

To opt out permanently, you must return a signed Permanent Opt-Out Election form, which will be provided after you initiate your online request.

It appears that data breaches are a part of the world we live in but it doesn’t take much to ensure that you are a bit more protected. Please let us know if there is anything we can do to help.

Market Commentary Q2 2019

The markets keep rolling along. Every asset class finished the first half of 2019 with gains.

After a rough May, stocks rebounded in June and the S&P 500 index (U.S. Large Cap stocks) turned in its best first-half performance since 1997. Real estate stocks continued their winning streak, as well, with both U.S. and Global REITs up 16-17% year-to-date. During the same time, U.S. Core bonds were up over 6% and Foreign and Emerging market stocks gained 14% and 11%, respectively. Even commodities participated in the rally, earning 5% over the first six months of 2019.

Bond and stock investors have diverging views of the U.S. economy. In June, the Federal Reserve discarded their “patient” stance and hinted they would lower rates by year-end. There are two ways to interpret this news: U.S. bond investors have focused on a looming recession, continued low inflation, and possible interest rate cuts. The demand for bonds has significantly lowered bond yields. U.S. stock investors, on the other hand, have viewed mixed economic indicators through rose?colored glasses, are anticipating an end to the trade wars and have driven stock returns to record levels. Only time will tell who is correct.

U.S. Large Cap Stocks 18.5% U.S. Aggregate Bonds 6.1% Global Real Estate 16.2%
U.S. Small Cap Stocks 17.0% International Bonds 5.4% Allocation 30%-50% Equity  9.8%
Overseas Stocks  14.0% Commodities  5.1% Allocation 50%-70% Equity 12.2%
Emerging Market Stocks 10.6% U.S. Real Estate 17.1% Allocation 70%-85% Equity 13.6%

Economic Outlook

The U.S. economy is slowing down.

In July, the current U.S. economic expansion became the longest in U.S. history. However, signs of slowing momentum continue to mount as evidenced by the gradual decline in the annualized U.S. Gross Domestic Product (GDP) figures for the past 12 months:

2018 – Q1: 2.2%, Q2: 4.2%, Q3: 3.4%, Q4: 2.2%
2019 – Q1: 3.1%, Q2: Various analyst estimates for 2nd quarter 2019 GDP are still positive but in the sub-2% range.

Global economic growth is slowing, as well.

Like the slowing U.S. economy, global economic growth projections continue to be revised downward due to threatened tariffs, or those already in place, driving reductions in trade. Brexit (the divorce between the United Kingdom and the European Union) and its October deadline have also raised trade worries in the European markets. In response, global central banks have begun to lower interest rates and/or ease financial conditions. Despite the short-term risks, however, attractive valuations suggest that investments in European and emerging-market stocks will still significantly outperform U.S. stocks over the next five to 10 years.

Global economic reports continue to be mixed but you can count on the media to focus on the bad news. Recessions and their corresponding market declines are inevitable, but it is impossible to forecast when a recession will hit. We will continue to monitor the economic and market environments for you and will adjust as needed.

*U.S. Large Cap=S&P 500, U.S. Small Cap=Russell 2000, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=FTSE WGBI, Commodities=Bloomberg Commodity, US Real Estate=MSCI US REIT, Global Real Estate=S&P Global REIT: Data Source: Morningstar®. Economic Data: Litman Gregory Analytics and Vanguard Investments. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Tax Planning Data Source: KPMG 2019 Tax Planning Guide. 1“Important”: ssa.gov/oact/NOTES/as120/LifeTables_ Body.html, 2https://www.onefpa.org/MyFPA/Journal/Documents/March2017_Contributions_Blanchett.pdf#search=annuity. Index returns are for illustrative purposes only and do not represent actual performance of any investment. Client returns will differ from the results shown. Index performance returns do not include any management fees, transaction costs or expenses. The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate; thus an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than return data quoted herein. Indexes are unmanaged and one cannot invest directly in an index. Please review your allocation regularly and notify BFA immediately if your circumstances should change.

The 5 Steps You Aren’t Taking to Prepare for a Hurricane

Living on the Gulf Coast, everyone is aware when hurricane season rolls around. Each year, you begin sorting through your garage, shed, or storage bins to make sure you have all of your storm-prepping essentials. Things like batteries, bottled water, plywood, fuel, and food are often at the top of the list. However, what often gets overlooked, and what is arguably just as important, is making sure your home-related financial affairs are in order.

view of hurricane from space
Photo by NASA on Unsplash

Here are five essential steps to make sure you are ready for that next hurricane.

  1. Review your homeowner’s insurance policy.

Does your homeowner’s policy contain a rider for wind, hail, and named storms? If not, do you have a separate wind and hail policy? Have you made any improvements to your home or have construction costs risen in your area? If so, it’s important to make sure you’ve updated your policy to cover the value of the improvements and that your policy provides Replacement Cost Value (RCV) coverage rather than Actual Cost Value (ACV). Without RCV coverage, you may not have adequate coverage to rebuild your home.

  1. Set aside an emergency fund to cover unexpected expenses. 

It’s important to know how much your deductible is for a named storm. Often times, the deductible for a named storm is higher than your typical wind and hail deductible. Just as you would have an emergency fund for unexpected events such as a disability, you may want to set aside enough funds to cover your insurance deductible, especially if it is more than you can cover through your normal cash flow.

Your homeowner’s policy may cover some of your expenses if you are displaced from your home, but there is usually a daily, weekly, or monthly limit. Make sure you’re aware of these limits so you aren’t adding additional financial stress to an already stressful situation.

  1. Maintain a good inventory of everything in your home.

Should the unthinkable happen and your home is ravaged by a storm, will you have the documentation you need to replace all of your belongings that were destroyed, or will you be trying to remember how many socks were in your drawer, how many pictures were hanging on the wall, and how many towels were in the linen closet? You should read your insurance policy and understand what documentation is needed to verify your lost possessions. Without a detailed inventory, you might not receive the insurance payout you were expecting to replace your belongings.

Bonus Tip: use your smartphone to take short video walk-throughs of each room in your home. Then, upload those videos to cloud-based storage for easy access from anywhere you have an internet connection.

  1. Take steps to protect your home from damage.

You’ve probably heard someone say they are waiting on a hurricane to hit so they can have their deferred home maintenance taken care of while only paying a deductible. It might sound logical, in theory; however, the truth is that it is much more costly (and stressful) to go through a claims process than it would be to protect and maintain your home over time. After a severe storm where thousands of homes have been damaged, it may be weeks or months before the insurance company is able to settle your claim. It may be even longer before you are able to have the repairs made as the skilled labor force is likely to be overwhelmed by the volume of work to be done.

Take action now, in advance of the storm. Invest in storm shutters, cut weak branches and trees that could fall on your home, secure outdoor furniture, and move your valuables away from windows and to higher points in your home.

  1. Compare your insurance coverage against other providers.

Your insurance company may be the best for your needs, but there’s a chance they may not be. Speak with your agent about your current policy to make sure you understand your coverage. Then, check around with other carriers to see how your policy compares. You may find some substantial differences between the policies. If these differences are important to you, you may ask your current agent whether or not these items can be added to your policy. If not, it may be worth switching carriers.

Don’t, however, base your decision solely on price. Even though a policy may be less expensive and appear to have the same coverage, they may not have the best customer service. Customer service may not seem like an issue now, when nothing is going wrong, but when you are going through a claims process, it will make all the difference in the world knowing you have someone who understands your situation and is going to do their best to serve you well.

By taking these five steps, you can feel confident your financial stress due to a storm will be minimal. Be prepared! Don’t wait until you hear a hurricane is in the Gulf. When that time comes, it will be too late.

If you’re not planning for your financial future, it’s about like waiting on the hurricane to hit. Why not begin planning now so you’re ready when the storm comes your way? Give us a call and schedule your no-cost introductory meeting today.

Market Commentary Q1 2019

What a start to the new year! In a switch from 2018, every asset class finished the first quarter of 2019 with gains. In fact, U.S. Large Cap stocks (propelled by a resurging technology sector) and U.S. Real Estate had their best quarters since 2009, up 14% and 16%, respectively.

U.S. stock indexes have now recovered almost all of their declines from the latter part of 2018 but have yet to reach their record highs from last fall. Bonds participated in the rally, as well, with U.S. Core bonds up 3%. U.S. oil prices gained 32% in the first quarter, helping Commodities to earn over 6% during that time.  Foreign stocks (including emerging markets) gained 10% during the quarter, during what has been a challenging time for them, especially for developed markets. 

The markets mainly focused on three developments during the quarter. First, the U.S. Federal Reserve signaled its intentions to stop raising short-term interest rates and to slow the pace at which it was shrinking its $4 trillion asset portfolio.  Central banks across the globe, including in China and the Eurozone, also announced similar plans to stop tightening, or in some cases to put in place stimulus measures, to offset declining economic growth. Bond prices rallied as a result, pushing bond yields lower. Real estate stocks also rallied, as did small company stocks, whose earnings benefit from lower borrowing costs.

Second, news reports kept hinting that the U.S. and China were close to resolving their trade conflict, which affects other countries than just those two. Emerging market stocks in particular benefitted from these positive reports. Negotiators continue to meet to iron out their differences.

Third, disappointing Brexit and economic news from the Eurozone (mainly relating to difficulties in its members’ manufacturing sectors) kept coming during the quarter, creating headwinds for foreign stocks. However, foreign stocks did not have the headwind of the dollar this quarter, which was flat against a broad basket of currencies.

U.S. Large Cap Stocks 13.7% U.S. Aggregate Bonds 2.9% Global Real Estate 14.4%
U.S. Small Cap Stocks   14.6% International Bonds 1.7% Allocation 30%-50% Equity   7.1%
Overseas Stocks   10.0% Commodities 6.3% Allocation 50%-70% Equity  8.9%
Emerging Market Stocks 9.9% U.S. Real Estate 15.9% Allocation 70%-85% Equity 10.3%

Economic Outlook

What about the yield curve? The range of bond yields for short-term to long-term maturities has been flattening during the Fed’s interest rate hikes over the past few years, but the short-end of this “curve” had not yet inverted since 2007, meaning a higher yield on the 3-month Treasury bill versus the 10-year Treasury note. As most news outlets reported on March 22, 2019, the yield curve did invert, although the actual spread was only 0.022% and the inversion righted itself by early April. It is true that the 3-month Treasury yield has exceeded the 10-year Treasury yield ahead of every recession since 1975.

However, there have also been two false positives—an inversion in late 1966 that was followed by economic growth, and a largely flat curve, like the current one, in late 1998 that also wasn’t followed by a recession. Also, many analysts and fund managers believe that the power of an inverted yield curve to predict a recession is no longer as robust given the Fed’s interference in the credit markets from its almost decade-long Quantitative Easing (i.e. buying government bonds for their balance sheet to increase the money supply and lower yields). Finally, it is nearly impossible to predict the actual timing of a recession, and a study by Credit Suisse shows that the S&P 500 has risen around 16% in the 18 months following a curve inversion, going back to 1978.

So what are we to think and do?  First, ignore the 24/7 news. Second, know that we will eventually experience a recession, and the stock and credit markets will continue to chug along with some potholes (possibly deep) in the road. Third, know that your Brown Financial investment committee is monitoring economic and market developments on an ongoing basis and is committed to diversified portfolios that should help you navigate the road ahead.

This Is Important

There is good news and bad news associated with recent research. The good news is, according to Social Security Administration research1, you are expected to live longer after age 65 than any previous generation; approximately seven years longer for males and five years longer for females compared to those retiring in 1900. The bad news? You are responsible for paying for it.

In a 2017 study published in the Journal of Financial Planning, Blanchett, Finke and Pfau make the case that “historically high stock and bond prices will lead to lower future investment returns” which, when combined with a longer life expectancy, will make it harder than ever to navigate retirement successfully. Their conclusion2 is to either save more or delay retirement to compensate for the low-return environment.

But what if you have already retired? There is a solution: They suggest utilizing “the potential benefits of strategies that provide greater value in a low-return environment, such as the ability to earn mortality credits through later-life annuitization.” This simply means that you can buy “insurance” to protect your retirement income. This insurance comes in many forms but ultimately can provide a substantial increase in the sustainability of your savings and give you an increased sense of peace of mind that you will not outlive your nest egg. Nearly every retiree can benefit from this protection, but historically, you could only buy this protection from a commissioned insurance broker. Now we can provide these strategies to you on a fee-only, fiduciary platform. If you are concerned and would like to learn more, please let us know.

We truly appreciate the opportunity to work with you and look forward to talking with you again soon!

Planning With Purpose

“Discover a purpose that gives you passion. Develop a plan that makes you persistent…” -Israelmore, Ayivor

Are you living the life you intended or is life happening to you?

Time and again clients come into our office looking for financial guidance, which is understandable. Most people spend more time planning a vacation than they spend on their finances in a year. They are usually seeking answers to legitimate questions regarding their money.

  • Am I saving enough for retirement?
  • Should I be contributing to my Roth IRA?
  • What investments should I choose for my 401(k)?
  • Will my family be taken care of if something were to happen to me?
  • Should I start a 529 plan for my kids’ college?
  • Which retirement plan should I implement in my business? A Simple IRA, a SEP IRA, or a 401(k)?

All of these questions are important and should absolutely be addressed. However, what is often overlooked is WHY these things are important. It’s not typically because you love trying to figure out whether U.S. Large Cap Value will outperform Large Cap Growth over the next 10 years or because you aren’t sure if you’ll have enough tax-free income during retirement. No, most of the time, the reason why these things are important isn’t related to money at all. Rather, the purpose stems from our desire to feel a sense of well-being, comfort, and assurance that we and our loved ones will be okay. We want to know we have the ability to do the things we most enjoy in life without hindering our ability to meet our basic needs.

planning checklist
Photo by Glenn Carstens-Peters on Unsplash

So, do you have a plan that ensures your comfort, well-being, and security? Are you making it a point to do the things you most enjoy? Or, are you like most everyone else…letting life happen to you? You go from one day to the next, putting out fires and always hoping tomorrow will give you that much needed breakthrough. You have so many places you would like to see, people you would like to spend time with, and things you would like to do, but there’s never enough time—and resources are always less than you would hope. You think, “one day I’ll have a chance to make these things happen.”

A successful plan isn’t about having a fixed path

Instead of staying in this cycle of waiting on tomorrow, why not make a change? Discover what you are passionate about and what you want most out of life. Then, build a plan that you feel confident will help you fulfill those goals. A successful plan isn’t about having a fixed path to your goals. It’s about going through the planning process over and over as your circumstances change. Each time, you make the necessary adjustments to point you back towards your goals. There’s always going to be the unexpected setback. If there wasn’t, there would be no need for planning.

Make a decision to live with purpose

Don’t let life happen to you. Make a decision to live with purpose. Set your focus on what is most important to you. Then, as you are faced with decisions about how much life insurance you need, how much money to save for your kids’ college, which investments to choose, or which account type would be the most tax-efficient, you can consider each one of those questions in light of your goals. Maybe you need to buy more life insurance, maybe not. Your goals will help you determine the steps to take.

If you’ve discovered “…a passion that gives you purpose,” but you you’re still trying to “develop a plan that makes you persistent,” maybe it’s time to consider working with a financial planner. Let us show you potential strategies for reaching your goals so that you can find the plan you are passionate about and can be persistent in your efforts.

6 Financial Planning Mistakes Small Business Owners Make (and How to Avoid Them)

According to the Bureau of Labor Statistics, for the 10 years ending March 2018 21% of businesses failed in their first year, 49% failed in their first 5 years, and 66% failed in their first 10 years.1 This means that only 34% of small business owners prepared well enough to survive over the long term.

So let’s suppose you are one of the few that have made it beyond 5 years. At this point your business is profitable, you have a better outlook on your fixed costs, you’ve likely hired a few employees, and you’re (finally) starting to pay yourself a decent income. Now that you feel all of your ducks are in a row and you aren’t running scared, you start mapping out a plan to maintain your customer base as you expand. Here’s the question…

During these first five years, did you ever focus on your personal financial well-being, or were you like most small business owners—you never felt like you had enough money, let alone time, to even think about it?

If you answered like most small business owners, you’re not alone. This is a common theme among many small business owners, even those who have been extraordinarily successful. Too often their time and talent is focused so intently on growing their business that they neglect their own personal financial planning. As a result, they experience success within the business but become prone to making mistakes that hinder their financial future.

Here are some of the most common mistakes small business owners make and what you can do to address them.

  • They do not establish a business disruption plan.

    Unfortunately, many small business owners are the sole “key” to the success of the business. If something were to happen that keeps the owner from working for an extended period of time, there is nothing in place to help cover overhead expenses such as utilities, rents, employee salaries, equipment, insurance premiums, or hiring additional help during this time.

This is where having Business Overhead Expense insurance and Key Person Disability insurance can prevent your business from failing. These types of insurance policies pay benefits to your business to keep things running while you are unable to work. It’s also important to consider who you would like to step in to temporarily fill your role.

  • They do not provide protection for their families should an unexpected disability or death occur.

    Have you considered how long your personal savings would carry you if you became disabled? Your personal expenses won’t stop just because you’re unable to work. Having a disability insurance policy in place makes sure you and your family are cared for while you’re out of the workforce.

What happens if you pass away unexpectedly? Is your thought that your family would be able to sell your business to successfully provide for their future? Many business owners feel this way. However, have you considered that your business may be worth far less without you there? It’s important to have the right type and amount of life insurance to provide the best outcome for your family.

photo of desk with notes and plans
Photo by Helloquence on Unsplash
  • They do not consider the value of adding benefits plans.

    As your business is getting started, you are often running lean and adding benefits for you and your employees may be cost-prohibitive. However, as your business grows, it is important to add benefits such as health insurance, disability insurance, life insurance, and retirement plans early on. These benefits will not only help you retain employees, but they will often allow you to save on costs and reduce your tax liability.

Flex spending accounts (FSAs) and Health Savings Accounts (HSAs) allow you to pay for medical expenses more efficiently, and implementing the right retirement plan allows you to maximize your retirement savings while accounting for variations in cash flow. Not only can you maximize your savings with the right retirement plan, but you can also drastically reduce your income tax liability.

  • They do not set aside savings outside of their business for future goals.

    As you are pouring money into your business so it can grow and prosper, are you neglecting to save for your own financial future? Many business owners enjoy a very comfortable lifestyle while the business is successful and assume that once they are ready to retire they can sell the business and live on the proceeds. They use this as motivation to continue to put money back into the business. However, doing so may lead to heartache should the business suffer a setback or fail altogether.

It’s important to balance personal savings with capital reinvestment. By considering your personal goals alongside the goals of the company, you can be proactive in drawing funds from the business when it’s profitable and directing those funds towards your personal goals. 

  • They do not consider their business as part of a diversified investment portfolio.

    Similar to the previous mistake, looking at your business as your sole means of wealth is dangerous. As the adage goes, “don’t put all of your eggs in one basket.” You should consider your business an investment just as you would an investment in stocks, bonds, mutual funds, and other investment vehicles.

While you may have more control over your business, you cannot control outside events that might have a significant impact on it any more than the next business. By diversifying your portfolio, you greatly reduce the risk of losing everything and not being able to retire. 

  • They do not develop an exit strategy or succession plan.

    As many business owners get close to retirement, they begin to think about what they are going to do with their business. They have spent much of their lives building their business into a successful enterprise. They have nurtured it, pruned it, and poured their blood, sweat, and tears into it. Now, they are not sure how to let it go. Many times, this realization comes at a time when they “need to” retire rather than being something they’ve planned for. At that point, there is often less control over the outcome which could result in not being able to provide the retirement income they were counting on.

Instead of waiting until there is an urgency to figure out how to part from the company, you should put a plan in place now. Decide whether you want to sell to a child, employee, competitor, or someone outside the industry. Develop a plan you feel comfortable with and make sure you have a clear vision for your life beyond the business. You’ll be glad you did.

business owner working with team
Photo by Helloquence on Unsplash

If you find yourself neglecting your own personal financial planning, like many business owners do, stop for a moment and decide you are going to be successful—not just in your business, but with your personal finances as well.

Consider partnering with a fiduciary financial planner to help you evaluate your options. A knowledgeable planner will help you choose appropriate workplace benefits and analyze retirement plan options that align with both your personal savings goal and your business’s cash flow. He will also work with you to create a 360° view of your finances so you always know where you stand. 

If your life currently revolves around your business and you want to alleviate some of the chaos, contact us today. When your circumstances are most chaotic, that’s when good guidance can have the most impact.

Source: 1 https://www.bls.gov/bdm/us_age_naics_00_table7.txt