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Looking at retirement from a wide view, we find the root concern for most individuals centered around three key questions: Do I have enough money to retire? Will I outlive my money? What happens to my money after my passing? Digging into these questions we find the answers through investments, taxes, social security, estate planning, and insurance. Answering these questions should provide individuals and families with the peace of mind needed to enjoy their life, but it’s often very easy to be sidetracked especially with what may happen in the market from time to time.

For example, let’s look back over the past month. September was a volatile month with the market pulling back a few percentage points. There were news headlines about a government shutdown, a looming debt ceiling deadline, a default of a property developer in China, and continued effects from Covid. Talking heads went wild with the volatility and questioned the stability of the economy. Furthermore, news articles were written comparing the events in China to bank defaults in 2008. In contrast, very few articles were written about this being the first 5% pull back in a year. Almost no one pointed out that these pullbacks are healthy for the market and that they allow for excesses to be removed before bubbles can form. Those data points don’t sell as many commercials but are much more important. Here are a few other things to keep in mind when the market has volatility:

  • Markets average a 14% drop from a high annually, and daily dips of more than 2% occur about five times a year
  • Markets drop 30% from a high about every five years
  • Over the past 75 years we have seen 12 recessions, 14 bear markets, and 26 market corrections, yet the market is still setting new all-time highs

Volatility is normal, and it’s healthy. Unfortunately, that doesn’t mean it can’t be distracting when it occurs. Remember, the markets rise almost three out of every four years, but which years are ahead of time? Trying to time the market is a loser’s game and leads to buying high and selling low which destroys wealth. It’s important to turn the TV off and focus on the plan developed to answer the first three questions: Do I have enough money to retire? Will I outlive my money? What happens to my money after my passing? If you need help answering these questions, contact your financial advisor at CPS to bring these questions into focus.

Eric J Jackson
Financial Advisor

The third quarter ended with heightened market volatility. The major stock market indexes ended the quarter mixed, with some showing slight gains, while others posted small losses. Worries over inflation, decelerating economic growth, the rise of the Delta COVID variant, and political turmoil in Washington weighed on investors.

Consumer Finances and Jobs Are Still Strong

The household savings rate has declined this year but remains well above pre-pandemic levels. Consumer spending again reached record levels in the third quarter, as economic reopening proceeded. Unemployment continued to improve, with over one million jobs being created and filled. Although it will be a few weeks before final economic numbers are available, the economy appeared to continue to grow at a reasonable rate in the third quarter. Early estimates indicate the economy grew between 1% and 3% in the third quarter. This is a decline from the extremely strong 6%+ growth we experienced earlier in the year.

Although the rate of economic growth is slowing, this isn’t necessarily a bad thing. Many sectors of the economy have struggled with supply problems and labor shortages. An economic slowdown will give companies time to resolve some of these problems and help alleviate inflationary pressures. The decline in demand for goods as prices rise is a sign the economy is functioning normally. One example of this is in the housing market. Home price increases reached all-time highs in April but a housing market cool-off followed in May and June.

Proposed changes in tax and fiscal policy have weighed on the markets in recent weeks. Substantial increases in income taxes and capital gains taxes could likely slow the economy and trigger a recession. However, it is of interest to remember that mid-term elections are around the corner. Neither party wants to take the blame for causing a recession, which makes compromise on fundamental issues of tax policy, fiscal policy, and the debt ceiling more likely than not. Higher tax rates will make tax planning even more valuable.

No matter what policies ultimately come from Washington, history tells us that the markets tend to rise nearly every three out of four years. Markets average one substantial drop annually, and daily dips of about 2% occur about five times a year. Even with the recent volatility, the market has hardly experienced an average number of daily slumps this year.

As with all things in the markets, there is a natural ebb and flow to economic growth. Signs of a potential economic slowdown are not a good reason to sell stocks. History shows that often the best returns for investors come when least expected. In the long run, the United States remains the global epicenter; for economic growth, technological innovation, and purposeful capitalism. Long-term investors will do well to continue to bet on America.

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

On September 25th, many of President Biden’s tax proposals moved closer to becoming law. The House Budget Committee’s vote to move forward with a $3.5 trillion spending bill puts corporations and individuals squarely in the crosshairs. In addition to raising tax rates, the legislation would create new restrictions on savings in retirement accounts and limit the usefulness of trusts in estate planning. As the House debates substantial tax increases, individuals and business owners should plan for higher tax rates.

Corporate and Individual Tax Increases

If passed as currently written, the new legislation will increase corporate taxes from the current 20% level to 26.5% for corporate income over $5 million. Corporate earnings under $5 million would be subject to a new graduated rate schedule, starting at 16% under $400,000. A tax rate of 21% would apply to income up to $5 million. Corporations classified as “personal service corporations” would pay the 26.5% tax rate on all of their income. Some professions impacted by this tax hike include accounting and law firms, medical and veterinary practices, and engineering and architectural companies.

The new legislation will also hit high-income individuals with higher taxes. The top individual tax rate would go up to 39.6% for married couples earning over $450,000 and single taxpayers earning more than $400,000. The highest long-term capital gains tax rate would be raised from 20% to 25% and made retroactive to September 13th, 2021. Individuals earning over $5 million would be subject to a new 3% tax, on top of the other tax increases. The Affordable Care Act’s 3.8% tax on net investment income would expand to include income from many self-employed business owners. The Qualified Business Income Deduction, created by 2017’s Tax Cuts and Jobs Act, would be subject to new limits.

New Rules for Retirement Plans, and Estate and Gift Tax Hikes

Several new retirement plan rules will apply to high-income taxpayers. Taxpayers with retirement plan balances over $10 million will not be allowed to make additional contributions. They would also be required to take immediate distributions of 50% of their retirement plan balances over this limit. Taxpayers with over $20 million in retirement accounts would be required to take 100% distributions from their Roth IRAs. In addition, high-income taxpayers would be prohibited from converting traditional IRAs to Roth IRAs.

Estate and gift taxes would also see significant increases. Current law excludes the first $11.7 million of assets from estate taxes, while the new legislation would cut this amount in half. It would also limit using trusts in estate planning and assess estate taxes on many trust-owned assets currently not subject to it.

Together, these tax increases would be the most significant tax hikes in many years. Although slated to be debated by the House, this legislation is still a long way from becoming law. The bill will likely see many provisions added, removed, or changed during the legislative process. This bill does bring into focus the most likely changes to individual and corporate taxes. Now is the time to start thinking about how these changes could impact you and consider planning moves if the bill becomes law. In complicated situations like these, it is wise to seek advice from a financial planner who is also a licensed tax practitioner.

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

Cost Saving Techniques

Posted on September 28, 2021 in

Raise your hand if you’ve noticed that some items you regularly buy are costing you a little bit more in 2021 than they did in 2020. Most hands are probably going up. Gas prices, food prices, and different goods have all seen their prices rise some in 2021 for various reasons, but what do you do if your income didn’t go up as well? Often, you must find ways to offset those costs. Some costs are tougher to offset like gas or food, but there are other expenses that can be examined for saving opportunities.

Insurance | One expense that we all pay every year, and often hope to never use, is the various forms of insurance. Whether it’s health care, homeowner’s, automobile, travel, or long-term care insurance, we all pay for some sort of insurance, and they almost never seem to get cheaper. So how can we minimize costs?  Don’t be afraid to shop. Have you ever been to the store to buy food and saw that one brand of an item was cheaper than the identical item of a different brand? How many of us have bought the cheaper, identical item? Insurance should be the same. You may not be able to shop your healthcare insurance if it’s provided to you through work, but your home or automobile insurance should be checked annually for savings opportunities. If the coverage is the same and the company has a good rating, take the cheaper premium.

Banks | Another interesting way to save some cash are reviewing the charges your bank is charging you. Banks generate much of their revenue from fees they charge on ATMs, check-writing services, overdraft protection, and more. If you pay your bills with checks and find that you spend too much on checks, consider the online bill pay services at many banks. Often times, this is a free way to avoid fees, pay your debts on time, and can be automated to save you time! Additionally, review your statements regularly for any fees that are being charged. Sometimes these fees can be easily waived by managing minimum deposits or having something like an automatic deposit set up on an account. It may not seem like a lot, but these fees will add up over time. This can be applied to anything that gives you monthly statements like cable, utilities, cell phones and other subscriptions.

Paper Vs. Electronic Delivery | Finally, another way to save some cash around the margins is to make sure you’re set up for E-Delivery with your brokerage service. I recently opened new, highly commendable Uniform Transfer to Minor Act (UTMA) accounts for my kids. I thought I registered the accounts for document e-delivery that the custodian offers its customers, but I recently received a paper statement in the mail, and for some reason one account was not signed up for E-Delivery. It is not a bad thing to get paper statements, but in this case, there is actually a benefit to getting my statements by email. The custodian (the financial institution that holds securities and makes transactions happen) offers free transaction costs on the buying/selling securities if enrollees choose electronic delivery. So, I verified my settings were correct with the custodian to confirm electronic delivery, which then allowed my accounts to trade with no transaction costs, saving me and my children some money.

These are just some of the simple ways I’ve cut costs for myself recently, and the best part is that I didn’t make any sacrifices. In turn, I’ve used these same techniques to help do the same for my clients.

It’s always a good time to review your plan.  Don’t be afraid to reshape your goals based on where you are today.

Anthony M Corrao | CFP®
Financial Advisor

One of the most important steps in planning for retirement is to estimate how much income you’ll need to cover your expenses when you retire.

We call the point where your sources of retirement income are large enough to cover your expenses “financial independence”. Once you reach this point, going to work every day becomes a choice instead of a need. The goal of a good retirement savings plan should be for you to achieve financial independence. To know when you’ve reached financial independence, you need to know how much you will spend in retirement.

Three common mistakes people make in the retirement planning process are assuming their expenses will go down in retirement, underestimating the impact of inflation, and including non-investment assets in their retirement pile.

Assuming Your Expenses Will Go Down

One common assumption is that expenses always go down in retirement. It is true that some work-related expenses will go away at retirement, and that retirees may have a lower overall tax rate. However, in the early years of retirement, expenses for travel, recreation, and hobbies often increase. In the later years of retirement, as recreational spending slows, health care and long-term care spending will often rise. A good retirement spending plan should take these factors into account.

Ignoring the Impact of Inflation

Inflation is an invisible tax and can be a cancer that will destroy your retirement plan if you ignore it. Here’s an example of the destructive power of inflation: a first-class postage stamp cost 34 cents in 2001. By the end of 2017, that same first-class postage stamp cost 49 cents. Imagine being a retiree who ignored inflation and planned their spending around 34-cent stamps! Living in a world where the things you need cost more than you planned could be very difficult. A small level of persistent inflation can make a big difference in the cost of living over a retiree’s life.

Including “Non-Investment” Assets in Your Pile

A good retirement plan makes a distinction between retirement assets and non-retirement assets. Retirement assets are things like 401(k) plans, IRAs, brokerage accounts, and income-producing real estate. Retirement assets produce income, or are otherwise liquid and can provide you with income when you need it in retirement.

Your home is not a retirement asset! You can’t sell one room when you need cash to pay bills. Downsizing can be a valid part of a retirement plan, but keep in mind that you’ll still need to live somewhere. Cars, boats, recreational vehicles, and collectibles are difficult to sell quickly for full market value. These should also be considered “non-retirement” assets.

Estimating your retirement expenses is an important part of the retirement planning process. Spending patterns can change over the course of a long retirement. Simple estimates based on pre-retirement spending may underestimate your true retirement income needs. If you need help evaluating your retirement plan, contact a qualified financial planner today.

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

Infrastructure & Taxes

Posted on September 14, 2021 in

September is lining up to be a busy month for lawmakers in Washington, D.C. After passing a bipartisan infrastructure bill in the Senate, the pressure moved House Democrats to come up with a plan to pass the legislation through their chamber.  Many progressive Democrats did not want a vote on the bipartisan bill until an agreement on the budget reconciliation process to ensure an additional $3.5 trillion social infrastructure deal passed. In an attempt to accommodate both progressive and centrist Democrats, a compromise was reached to further the infrastructure discussion.

A budget reconciliation framework was passed through the House, which included a September 27th vote on the bipartisan infrastructure bill. This will allow a bill to head to President Biden for his signature and push into law spending that is badly needed to upgrade the country’s roads, bridges, rails, and ports. While this is seen as a positive to most analysts, corporations, and politicians, the harder work remains to be completed. The $3.5 trillion social infrastructure bill is up for fierce debate in Congress and across the country as a whole. So far, these are a few items being proposed:

  • $726 billion for Education- Universal Pre-School, free community college, increased investments in schools and, expansion of grants to make education more affordable
  • $385 billion for Clean Energy initiatives including, improving the electrical grid, investing in clean energy production and infrastructure, and electrifying the federal vehicle fleet
  • $332 billion for Affordable Housing
  • $135 billion for Agriculture conservation, climate concerns, and wildfires
  • $107 billion for immigration reform and effective border security

Proponents of the bill believe social spending will spur economic growth and, overall, will be positive to the economy, even when financed by tax increases. Opponents think the price tag is too high and are concerned about raising taxes and overall spending levels. In the Senate, notably, a few key senators are voicing concerns and have spoken support for a smaller price tag between $1-2 trillion.  Regardless of the final size of the bill, many are wondering how it will receive funding. Here is what is being proposed so far on how to pay for such a bill:

  • Increase in the Corporate tax rate from 21% to 28%, with 25% being more likely
  • Minimum global tax rate on corporations of 21%, with 15% being more likely
  • Close tax loopholes for corporations
  • Elimination of “Carried Interest” provision (a way for hedge funds to tax their income as capital gains)
  • Increase the top marginal tax bracket back to 39.6%
  • Increase top capital gains rate to 39.6% for earnings of $1 million or more

While these are the most notable ways to pay for the bill, a few other ideas are being proposed. Wealth taxes are one way of targeting the wealthy that have been proposed to generate tax revenue. Senator Warren has been a proponent of taxing the wealth of American households with assets over $50 million, and there has been another proposal to tax investments annually on their value, regardless of gain. The wealth tax and investment tax would be difficult to implement and have different shortcomings, but both are unlikely to be put into place.

It is still too early to tell how the final form of the bill will look. However, investors need to know that it is becoming increasingly likely that an infrastructure package will occur, and there will be tax consequences to go with it. If you have questions or concerns on how these changes might affect your personal or business situation, please reach out to us at CPS Investment Advisors.

Michael E. Scott | MBA, CFA
Senior Portfolio Analyst

Protect Yourself from Identity Theft

Posted on September 7, 2021 in

In the modern world, your identity is a prime target for criminals. Some of today’s would-be identity thieves use sophisticated computer tools, while many are more modern versions of old-fashioned con artists. No matter what their methods, these scammers share common goals. Cyber-criminals want to empty your bank account, max out your credit cards, and use your identity for their nefarious purposes. Taking a few simple steps and remaining vigilant can prevent many identity theft crimes.

The term identity theft encompasses several different kinds of crimes. One kind of identity theft is “account takeover.” In this kind of crime, thieves will attempt to access your existing bank, brokerage, or credit card account and steal money from it. When your bank or credit card company notices suspicious activity, they may disable your account. The thieves may use your personal information to convince your bank or credit card company that the transactions are genuine.

The second kind of identity theft is impersonation. Cyber-criminals who gain access to your personal information can use it to open new credit accounts in your name. Because these are new accounts, you may not even know they exist until you notice them on your credit report or bill collectors start calling. In some cases, a bank you do not use may call to verify an account application. If this happens to you, it could be a warning sign that you are the target of a cyber-criminal.

Protect Your Identity Online and Offline

Protect your accounts by using strong passwords. The best passwords are random, but these can be hard to remember. If you have trouble keeping track of your passwords, tools like LastPass can help you keep your passwords safe and secure.

If you have social media accounts like Twitter or Facebook, review your privacy settings and be careful what you share. Anything that you share publicly could be used to impersonate you. Don’t create a password using names, places, pets, or dates that could be guessed from your social media accounts.
Be wary of impersonators! If you get a phone call from someone claiming to be from a bank, credit card company, or government agency, use caution. Don’t give out personal information over the phone unless you are completely sure of who you are talking to.

Check Your Credit Report Regularly

The Fair Credit Reporting Act requires the major credit bureaus to give you a free copy of your credit report every 12 months. Be careful when obtaining your credit report online. Many fake websites will try to charge you for a credit report or, worse, will sell your personal information. To get your free annual credit report, visit the Federal Trade Commission’s website at www.FTC.gov. If you find fraudulent transactions on your credit reports, promptly contest them in writing with the credit bureaus.

The threat of identity theft and cyber-crimes will only continue to grow. Taking some simple steps to protect your personal information can help deter would-be cybercriminals. Be careful when posting online, be skeptical of unsolicited phone calls, use strong passwords, and keep them secret. Your financial health could depend on it!

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

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