Education Podcast

What is a Fixed Annuity?

What is a Fixed Annuity?
A fixed annuity is an insurance product designed to provide investors with principal protection, a fixed rate of interest, and tax-deferred growth. It is most appropriate for investors aged 59 ½ or more, due to the fact that a 10% IRS penalty may apply to growth that is “cashed out” before age 59 ½. Please note that the guarantees of a fixed annuity are subject to the claims-paying ability of the insurance company. Therefore, for investors interested in fixed annuities, it’s important to review the financial condition of the insurance company before investing.

When might I consider owning a fixed annuity?
Each client’s situation is unique, but one particular scenario may seem especially well-suited for owning a fixed annuity. At Calder & Colegrove, we encourage clients who are near or in retirement, to maintain a healthy emergency fund. And we define an emergency fund as assets that are both liquid and guaranteed. In our opinion, FDIC guaranteed accounts, such as checking, savings, and money market, are ideal sources for emergency fund holdings. However, clients have sometimes expressed dissatisfaction with the interest they receive from these accounts.

With this in mind, we believe that a fixed annuity may make sense for assets above and beyond what a client holds in their emergency fund. Consider this scenario: Jane holds $100,000 in FDIC guaranteed assets. She states that she would like to earn a better interest rate. But Jane indicates that she does not wish to take any stock market risk with these assets. After discussing her needs, we determine that maintaining $50,000 through her FDIC guaranteed accounts makes sense. And therefore, for the remainder, we recommended a $50,000 fixed annuity, for the three-fold purpose of principal protection, a fixed rate of interest, and tax-deferred growth.

Are there any tax advantages to owning a fixed annuity?
The interest earned in a fixed annuity is compounded and tax-deferred. As an example, let’s revisit Jane for a moment. Let’s say that Jane purchased a $50,000 fixed annuity with a 5-year maturity, and the contract provided for a 3% fixed rate of interest. After one year, her balance would be $51,500 ($50,000 + 3%). After two years, her balance would be $53,045. That’s because a fixed annuity provides compound interest, as opposed to simple interest. Skipping ahead: At the end of five years, her annuity would equal $57,963.70. In terms of taxes, normally, when an investor enjoys gains on an investment, those gains are subject to taxes. But if the account type is some type of tax-favored investment, such as a 401k or IRA, then those taxable gains are deferred until later. This is described as tax-deferred growth. This is also the case with a fixed annuity. The interest earned on a fixed annuity is deferred so long as the interest remains in the annuity. Once an investor withdraws the interest, then the taxes on that interest are due.

What if I don’t need the money when it matures?
When a fixed annuity matures, an investor has three choices:

1.Cash Out: : Simply put, this means that an investor cashes out the annuity and receives their principal, plus interest. Interest earned is subject to taxes at this point.

2.Renew: Alternatively, you can renew your annuity, with the same insurance carrier, for a new period. Through renewal, gains in the annuity continue to be tax deferred, until withdrawal.

3.1035 Exchange: Lastly, perhaps the current annuity carrier doesn’t offer the best interest rate available in the market place. In that case, an annuity can be transferred to a new insurance carrier through a 1035 exchange. And similar to renewing your annuity, a 1035 exchange continues the tax-deferred nature of the interest earned.

When might it be a bad idea to buy a fixed annuity?
We believe the decision to buy or not buy a fixed annuity comes down to the need for liquidity. Because, if a client needs more liquidity, a fixed annuity may not a suitable investment. Although a fixed annuity may provide a higher interest rate as compared to some FDIC products, the liquidity provisions of fixed annuities are limited. As an example, some fixed annuity products provide a 10% annual withdrawal of principal, free of any surrender costs, after one year of ownership. Therefore, if a client needed access to more than 10% in any given year, surrender costs may be imposed by the insurance company. Additionally, if an investor is under age 59 ½ at the time of purchase, and the maturity of the annuity is also scheduled to occur before the investor reaches age 59 ½, we do not recommend the use of a fixed annuity. This is due to the fact that the interest earned may be subject to a 10% IRS penalty upon distribution.

What happens to my fixed annuity if I die or become disabled?
Although each contract is different, it’s commonplace for insurance carriers to provide a 100% distribution, free of surrender costs, in the event that the contract owner passes away. Additionally, there are provisions with some insurance carriers, that provide surrender-free access to the fixed annuity due to qualifying long-term care events. Each contract, however, is unique.

Comparing a CD to a Fixed Annuity
Through many custodians, such as banks, an alternative to fixed annuities is found through a Certificate of Deposit (CD). Like a fixed annuity, a CD may also provide a higher rate of interest in comparison to checking, savings, and money market accounts. And if liquidity is a concern, a CD may be a better choice than a fixed annuity. For a side-by-side comparison of a CD and fixed annuity, see below:

CD Fixed Annuity
Principal Protection Yes – Backed by FDIC Yes – backed by claims-paying
ability of Insurance Carrier
Interest Type Simple Interest Compound Interest
Tax-Deferred Growth No Yes
Liquidity More Liquid Less Liquid

In Conclusion
The decision to buy or not buy a fixed annuity is not easy to self-determine. Seeking the advice of a trusted financial professional is warranted. And we believe that it’s in a client’s best interest to work with a professional who takes a look at the holistic view of a prospective investor before making any recommendations. If you want to find out personally, if a fixed annuity might have a place in your portfolio, please contact our office.

CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity. Annuities are not FDIC insured. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges apply. Guarantees are based on the claims paying ability of the issuing insurance company.

Education Podcast

What is a 401(k)?

A 401(k) plan is a retirement savings plan that is sponsored by an employer. It has grown quite popular in the United States, with over 100 million participants (Source: U.S. Department of Labor).

A 401(k) plan offers significant tax benefits while helping you plan for the future. You contribute to the plan via payroll deduction, which can make it easier for you to save for retirement. One important feature of a 401(k) plan is your ability to make pre-tax contributions to the plan. Pre-tax means that your contributions are deducted from your pay and transferred to the 401(k)plan before federal (and most state) income taxes are calculated. This reduces your current taxable income — you don’t pay income taxes on the amount you contribute, or any investment gains on your contributions, until you receive payments from the plan.

Trivia Question: Do you know why it’s called a 401(k) plan? Answer: It’s a reference to the section of the IRS code—section 401, paragraph (k).

You may also be able to make Roth contributions to your 401(k) plan. Roth 401(k) contributions are made on an after-tax basis, just like Roth IRA contributions. Unlike pre-tax contributions to a 401(k) plan, there’s no up-front tax benefit — your contributions are deducted from your pay and transferred to the plan after taxes are calculated. But a distribution from your Roth 401(k) account is entirely free from federal income tax if the distribution is qualified. In general, a distribution is qualified only if it satisfies both of the following requirements:

  • It’s made after the end of a five-year waiting period
  • The payment is made after you turn 59½, become disabled, or die

Generally, you can contribute up to $19,000 ($25,000 if you’re age 50 or older) to a 401(k) plan in 2019 (unless your plan imposes lower limits). And, if your plan allows Roth 401(k) contributions, you can split your contribution between pre-tax and Roth contributions any way you wish.

When can I contribute?
While a 401(k) plan can make you wait up to a year to participate, many plans let you to begin contributing with your first paycheck. Some plans also provide for automatic enrollment. If you’ve been automatically enrolled, make sure to check that your default contribution rate and investments are appropriate for your circumstances.

What about employer contributions?
Employers don’t have to contribute to 401(k) plans, but many will match all or part of your contributions. As a rule of thumb, contribute as much as possible in order to maximize the matching contribution from your employer. This is essentially free money that can help you pursue your retirement goals. Note that your plan may require up to six years of service before your employer matching contributions are fully vested (that is, owned by you), although most plans have a faster vesting schedule.

Should I make pre-tax or Roth contributions (if allowed)?
If you think you’ll be in a higher tax bracket when you retire, Roth 401(k) contributions may be more appealing, since you’ll effectively lock in today’s lower tax rates (and future withdrawals will generally be tax free). However, if you think you’ll be in a lower tax bracket when you retire, pre-tax 401(k) contributions may be more appropriate because your contributions reduce your taxable income now. Your investment horizon and projected investment results are also important factors.

What else do I need to know?

  • Your contributions, pre-tax and Roth, are always 100% vested (i.e., owned by you).
  • If your plan allows loans, you may be eligible to borrow up to one half of your vested 401(k) account (to a maximum of $50,000) if you need the money.
  • You may also be able to make a hardship withdrawal if you have an immediate and heavy financial need. But this should be a last resort — hardship distributions may be taxable to you, and you may be suspended from plan participation for six months or more if you take the withdrawal in 2019. (Beginning in 2020, suspension of participation will not be permitted, per IRS rules proposed in November 2018.)
  • Distributions from your plan before you turn 59½ (55 in some cases), may be subject to a 10% early distribution penalty unless an exception applies.
  • You may be eligible for an income tax credit of up to $1,000 for amounts you contribute, depending on your income.
  • Your assets are generally fully protected in the event of your, or your employer’s, bankruptcy.
  • While your participation in a 401(k) plan has no impact on your ability to contribute to an IRA (Roth or traditional), it could impact your ability to make deductible contributions to a traditional IRA.
  • Many 401(k) plans let you direct the investment of your account. Your employer provides a choice of funding arrangements (typically, mutual funds or annuity contracts issued by an insurance company). But it’s your responsibility to choose the investments most suitable for your retirement objectives.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Education Podcast

What’s the Difference Between a Roth IRA and a Traditional IRA?

An individual retirement arrangement (IRA) is a personal savings plan that offers specific tax benefits. IRAs are one of the most powerful retirement savings tools available to you. Even if you’re contributing to a 401(k) or other plan at work, you might also consider investing in an IRA.

What types of IRAs are available?
The two major types of IRAs are traditional IRAs and Roth IRAs. Both allow you to contribute as much as $6,000 in 2019 (up from $5,500 in 2018). You must have at least as much taxable compensation as the amount of your IRA contribution. But if you are married filing jointly, your spouse can also contribute to an IRA, even if he or she has little or no taxable compensation, as long as your combined compensation is at least equal to your total contributions. The law also allows taxpayers age 50 and older to make additional “catch-up” contributions. These folks can contribute up to $7,000 in 2019 (up from $6,500 in 2018).

Both traditional and Roth IRAs feature tax-sheltered growth of earnings. And both give you a wide range of investment choices. However, there are important differences between these two types of IRAs. You must understand these differences before you can choose the type of IRA that’s best for you.

Note: Special rules apply to certain reservists and national guardsmen called to active duty after September 11, 2001.

Learn the rules for traditional IRAs
Practically anyone can open and contribute to a traditional IRA. The only requirements are that you must have taxable compensation and be under age 70½. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount that you earned.

Your contributions to a traditional IRA may be tax deductible on your federal income tax return. This is important because tax-deductible (pre-tax) contributions lower your taxable income for the year, saving you money in taxes. If neither you nor your spouse is covered by a 401(k) or other employer-sponsored plan, you can generally deduct the full amount of your annual contribution. If one of you is covered by such a plan, your ability to deduct your contributions depends on your annual income (modified adjusted gross income, or MAGI) and your income tax filing status:

For 2019, if you are covered by a retirement plan at work, and:

  • Your filing status is single or head of household, and your MAGI is $64,000 or less, your traditional IRA contribution is fully deductible. Your deduction is reduced if your MAGI is more than $64,000 and less than $74,000, and you can’t deduct your contribution at all if your MAGI is $74,000 or more.
  • Your filing status is married filing jointly or qualifying widow(er), and your MAGI is $103,000 or less, your traditional IRA contribution is fully deductible. Your deduction is reduced if your MAGI is more than $103,000 and less than $123,000, and you can’t deduct your contribution at all if your MAGI is $123,000 or more.
  • Your filing status is married filing separately, your traditional IRA deduction is reduced if your MAGI is less than $10,000, and you can’t deduct your contribution at all if your MAGI is $10,000 or more.

For 2019, if you are not covered by a retirement plan at work, but your spouse is, and you file a joint tax return, your traditional IRA contribution is fully deductible if your MAGI is $193,000 or less. Your deduction is reduced if your MAGI is more than $193,000 and less than $203,000, and you can’t deduct your contribution at all if your MAGI is $203,000 or more.

What happens when you start taking money from your traditional IRA? Any portion of a distribution that represents deductible contributions is subject to income tax because those contributions were not taxed when you made them. Any portion that represents investment earnings is also subject to income tax because those earnings were not previously taxed either. Only the portion that represents nondeductible, after-tax contributions (if any) is not subject to income tax. In addition to income tax, you may have to pay a 10% early withdrawal penalty if you’re under age 59½, unless you meet one of the exceptions. You must aggregate all of your traditional IRAs — other than inherited IRAs — when calculating the tax consequences of a distribution.

If you wish to defer taxes, you can leave your funds in the traditional IRA, but only until April 1 of the year following the year you reach age 70½. That’s when you have to take your first required minimum distribution from the IRA. After that, you must take a distribution by the end of every calendar year until you die or your funds are exhausted. The annual distribution amounts are based on a standard life expectancy table. You can always withdraw more than you’re required to in any year. However, if you withdraw less, you’ll be hit with a 50% penalty on the difference between the required minimum and the amount you actually withdraw.

Learn the rules for Roth IRAs
Not everyone can set up a Roth IRA. Even if you can, you may not qualify to take full advantage of it. The first requirement is that you must have taxable compensation. If your taxable compensation in 2019 is at least $6,000, you may be able to contribute the full amount. But it gets more complicated. Your ability to contribute to a Roth IRA in any year depends on your MAGI and your income tax filing status:

  • If your filing status is single or head of household, and your MAGI for 2019 is $122,000 or less, you can make a full contribution to your Roth IRA. Your Roth IRA contribution is reduced if your MAGI is more than $122,000 and less than $137,000, and you can’t contribute to a Roth IRA at all if your MAGI is $137,000 or more.</li?
  • If your filing status is married filing jointly or qualifying widow(er), and your MAGI for 2019 is $193,000 or less, you can make a full contribution to your Roth IRA. Your Roth IRA contribution is reduced if your MAGI is more than $193,000 and less than $203,000, and you can’t contribute to a Roth IRA at all if your MAGI is $203,000 or more.
  • If your filing status is married filing separately, your Roth IRA contribution is reduced if your MAGI is less than $10,000, and you can’t contribute to a Roth IRA at all if your MAGI is $10,000 or more.

Your contributions to a Roth IRA are not tax deductible. You can invest only after-tax dollars in a Roth IRA. The good news is that if you meet certain conditions, your withdrawals from a Roth IRA will be completely income tax free, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply:

  • You have reached age 59½ by the time of the withdrawal
  • The withdrawal is made because of disability
  • The withdrawal is made to pay first-time home-buyer expenses ($10,000 lifetime limit)
  • The withdrawal is made by your beneficiary or estate after your death

Qualified distributions will also avoid the 10% early withdrawal penalty. This ability to withdraw your funds with no taxes or penalties is a key strength of the Roth IRA. And remember, even nonqualified distributions will be taxed (and possibly penalized) only on the investment earnings portion of the distribution, and then only to the extent that your distribution exceeds the total amount of all contributions that you have made. You must aggregate all of your Roth IRAs — other than inherited Roth IRAs — when calculating the tax consequences of a distribution.

Another advantage of the Roth IRA is that there are no required distributions after age 70½ or at any time during your life. You can put off taking distributions until you really need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution. Also, as long as you have taxable compensation and qualify, you can keep contributing to a Roth IRA after age 70½.

Choose the right IRA for you
Assuming you qualify to use both, which type of IRA is best for you? Sometimes the choice is easy. The Roth IRA will probably be a more effective tool if you don’t qualify for tax-deductible contributions to a traditional IRA. However, if you can deduct your traditional IRA contributions, the choice is more difficult. The Roth IRA may very well make more sense if you want to minimize taxes during retirement and preserve assets for your beneficiaries. But a traditional deductible IRA may be a better tool if you want to lower your yearly tax bill while you’re still working (and probably in a higher tax bracket than you’ll be in after you retire). A financial professional or tax advisor can help you pick the right type of IRA for you.

Note: You can have both a traditional IRA and a Roth IRA, but your total annual contribution to all of the IRAs that you own cannot be more than $6,000 for 2019 ($7,000 if you’re age 50 or older).

Know your options for transferring your funds
You can move funds from an IRA to the same type of IRA with a different institution (e.g., traditional to traditional, Roth to Roth). No taxes or penalty will be imposed if you arrange for the old IRA trustee to transfer your funds directly to the new IRA trustee. The other option is to have your funds distributed to you first and then roll them over to the new IRA trustee yourself. You’ll still avoid taxes and the penalty as long as you complete the rollover within 60 days from the date you receive the funds.

You may also be able to convert funds from a traditional IRA to a Roth IRA. This decision is complicated, however, so be sure to consult a tax advisor. He or she can help you weigh the benefits of shifting funds against the tax consequences and other drawbacks.

Note: The IRS has the authority to waive the 60-day rule for rollovers under certain limited circumstances, such as proven hardship.

Education Podcast

What’s the Difference Between Term Insurance and Whole Life Insurance?

Life insurance is an agreement between you (the policy owner) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.

The many uses of life insurance
One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family. Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need?
Your life insurance needs will depend on a number of factors, including whether you’re married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you’re young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions:

  • What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
  • How much of your salary is devoted to current expenses and future needs?
  • How long would your dependents need support if you were to die tomorrow?
  • How much money would you want to leave for special situations upon your death, such as funding your children’s education, gifts to charities, or an inheritance for your children?

Since your needs will change over time, you’ll need to continually re-evaluate your need for coverage.
How much life insurance can you afford?
How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage. The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.

What’s in a Life Insurance contract?
A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.

Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses).

The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits.

The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policies
The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods.

Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force. Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Permanent life insurance can be further broken down into the following basic categories:

  • Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer.
  • Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time.
  • Index universal life: This is a form of universal life insurance with excess interest credited to cash values. But, unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.
  • Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested.
  • Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts.

Note: Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

Your beneficiaries
You must name a primary beneficiary to receive the proceeds of your insurance policy. You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. You should carefully consider the ramifications of your beneficiary designations to ensure that your wishes are carried out as you intend.

Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person’s permission to adjust any of the policy’s provisions.
Where can you buy life insurance?

You can often get insurance coverage from your employer (i.e., through a group life insurance plan offered by your employer) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody’s, and Standard & Poor’s, evaluate an insurer’s financial strength. The company offering you coverage should provide you with this information.

Market News Podcast

Market News: Trump, the Tariff Man

Trade tensions have interrupted an unusually calm year in U.S. stocks. In May, the S&P 500 Index fell from an April 30 record high as the United States and China failed to reach a trade deal and escalated tariff tensions. The United States also proposed new tariffs on Mexico, further complicating the outlook for trade. The turnaround in trade talks has surprised investors and rattled global financial markets.

While a resurgence in trade tensions is unnerving, investors should pause and consider the fundamental implications of increasing tariff rates. Higher tariffs and other retaliatory measures could potentially weigh on economic activity and inflation, but the escalation is not expected to derail this expansion. In the worst-case trade scenario, gross domestic product (GDP) growth could be closer to 2% this year. While slower, that pace of growth is largely consistent with the average pace over the last decade.

It’s still possible that the United States and China can avoid further trade escalation, since it appears the bulk of the agreement is already in place. The United States and China are expected to reach some kind of a trade agreement—or at least a trade truce—in the next few months. And trade issues with Mexico likely will be resolved sometime this summer.

There has been a lot of fear-based decision-making in markets. Some nervousness is understandable, but current concerns on tariff impacts look overblown. Most likely there may be more bouts of volatility ahead as President Trump and China President Xi pursue a new path to compromise. In the end, look for a deal that should help support continued growth in the United States and global economies.

Some stock market weakness after such a strong start to the year was to be expected. While it’s felt like a turbulent month, the S&P 500’s decline has been relatively modest compared to previous experiences.

The U.S. economy continues to grow at a solid pace, and job creation is steady. Wages are rising at a healthy rate, and some benefits of tax reform and fiscal spending are still supporting demand. Earnings growth also has been better than feared, and S&P 500 companies have the potential to exceed low profit expectations the rest of this year. Ultimately, earnings growth and solid fundamentals could drive the S&P 500 to new highs later in 2019.

It’s important to remember that stocks’ rally is still intact, and pullbacks like the most recent one are normal events over the long term. While near-term volatility can be uncomfortable, it has helped curb excesses in the markets and sustain healthy sentiment, allowing for what is now the longest bull market on record. Volatility may also provide opportunities for suitable investors to rebalance, diversify portfolios toward targeted allocations, or add to equity positions.
If you have any questions, please me at our office.

Important Information
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.
All data is provided as of May 31, 2019.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.


September 2018 Economic Update

In this month’s blog, I’ll discuss some of the major headlines that influenced markets in August. I will also provide insight into what these developments could mean for you as an investor.

U.S. stocks celebrated a major milestone in August. On the 22nd, our current bull market officially became the longest in U.S. history. At over 3,400 days old—or more than 9 years—we have never gone this long without a bear market.[i]

By month’s end, domestic indexes had recorded their best August performances in years. The S&P 500 increased by 3%, and the Dow added 2.1%. Both had their largest August gains since 2014. The NASDAQ did even better, growing by more than 5.7%. That increase was its best August since 2000.[ii]

Throughout the month, trade tension remained—as has been the case for much of 2018.[iii] The U.S. and China failed to reach any real breakthroughs in their ongoing trade skirmishes.[iv] Meanwhile, renegotiating the North American Free Trade Agreement (NAFTA) did make some progress, as the U.S. and Mexico announced a new trade agreement. However, talks with Canada—NAFTA’s 3rd member—didn’t reach any resolution. As August ended, the future of NAFTA remained unknown.[v]

In addition to trade, concerns about Turkey’s plummeting currency also captured investors’ attention. During August, the lira hit its lowest point ever compared to the U.S. dollar.[vi] The currency’s value has dropped as inflation spiked to its highest point since 2003. Some analysts worry that Turkey’s economic problems could spread to other countries.[vii] It’s not likely to spread, though. Turkey has a relatively small economy and still has opportunities to help relieve its spiraling inflation.[viii]

So, between trade tension and emerging market concerns—not to mention geopolitical drama—why did markets perform so well in August? The U.S. economy continues to show that it is in good condition.

For example, August brought the 2nd publication of Gross Domestic Product (GDP) between April and June. The data indicated the economy grew even faster than originally measured.[ix] The labor market also stayed strong in August as unemployment numbers approach lows not seen in decades.[x] In addition, business investment spending showed positive data, and one measure of small- to mid-size organizations’ sentiments hit its highest point in 35 years.[xi] Perhaps unsurprisingly, given this confluence of data, consumers are also feeling good. Consumer confidence reached its highest reading since 2000.[xii]

Of course, market risks remain, and we will continue to follow many factors in the coming months. From emerging markets’ health to domestic political developments, we have a number of details to monitor as related to market performance.

That’s it for this month’s educational economic update.

Once again, this is Dr. John Colegrove with Calder & Colegrove Investment Group signing off for the month of September 2018.

Please remember that nothing we talk about here is a recommendation. If you would like to discuss your personal financial situation, please give us a call at 678-482-0686. We’d be happy to talk to you.

Required Disclosure

While we believe the information in this report is reliable, we cannot guarantee its accuracy. Opinions expressed are subject to change without notice and are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining markets. The indices mentioned are unmanaged and cannot be invested into directly. Past performance does not guarantee future results.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.














Martha’s Investment Income

Today, I was referred to talk with a client’s mother. As they say in the movies, to “protect the innocent,” we will give her a fictitious name. Let’s call her Martha.

Martha is 80 years old. She has been a widow for over 30 years and lives by herself in the same home she and her husband bought together when they were newlyweds. She lives on a fixed income, that consists of social security and a small pension her deceased husband left her.

Martha was referred to me because she wants to get more income out of her investment account. She holds $60,000 in a taxable account, which consists mostly of bond mutual funds. Martha is a conservative investor. She recently visited a financial advisor at another firm, who suggested that she use a combination of bank CDs and a small amount of equity mutual funds. And she wanted to know what I thought of that recommendation. The recommendations she received seemed logical on the surface, but I explained that we don’t make recommendations without first having a full and complete picture, so I proceeded to ask some more questions. Through that process, this is what I learned:

Martha has no credit card debt or car note, and in fact, she has been driving the same car for 17 years. Her home is paid for except for a $20,000 home equity line of credit (HELOC) – which she took out to make repairs and upgrades over the last few years. Her payment on her HELOC is $450/month. Martha has about $2,000 cash in the bank.

Since she is a conservative investor and estimates that her bond mutual fund portfolio supports 4% withdrawal rate from her $60,000 account per year (income is her objective from her account). Given that information, 4% of $60,000 is only $2,400/year or $200/month. I explained to her that if she somehow found one of the smartest and brightest advisors in the world, it would be unlikely that most any advisor could move the needle very much on a $200/month draw from her $60,000 investment.

Rather, I turned my attention to her debt. Think about it like this: She’s paying out $450/month to pay on her HELOC debt. And she’s only drawing $200/month from her investment. To me, that’s just simple math and it’s not a good deal. It’s unlikely, as a conservative investor, that she can earn a return that is greater than the interest that she pays on that HELOC loan.

Simply put, I think the elimination of the debt would do more to help her bottom line than it would be to change investment portfolios. Because once she pays off the debt, she might not need to pull income from her investment account – which may increase the account over time through reinvested dividends.
The moral of the story is this – as an experienced CFP® Professional, I find that if I ask more questions and listen, the answer to a client’s financial question may be within reach. And those solutions are not always found in a financial product. Sometimes, a little bit of common sense might just be the right prescription.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.


Are You Smarter than a 6th Grader?

I recently had the opportunity to teach one class of my daughter’s 6th grade math class. Wesleyan School was kind enough to invite parents who wanted to bring “real world” math usage and share it with 6th graders. I chose the concept of the “Rule of 72.”

What is the Rule of 72?
Albert Einstein is rumored to have said that compound interest is the 8th wonder of the world. Whether or not this is true, or an urban legend, is a debatable point. But what is not debatable is the power of compounding interest. And this brings us to the Rule of 72. It’s a simple mathematical formula that provides us with a way to measure how quickly an initial investment may double, when measured against a hypothetical rate of return. For example, let’s say that an investor bought $5,000 worth of stock and received a 6% return. How long would it take the initial $5,000 investment to double in value, given a hypothetical 6% rate of return? Here’s the formula: 72 / 6 = 12. So, the answer, is that it would take 12 years for the investment to grow from $5,000 to $10,000, given the rate of 6% return.

Money Talks! Gaining the Attention of 6th Graders
For my daughter’s class, I knew if I wanted to gain the attention of a class of 12-year olds, I had to add a “wow” factor into my presentation. I started the class with one question: “Who wants to learn what it takes to get a million dollars?!” Of course, all the hands shot up. They seemed eager to learn or maybe they were just excited about the stacks of cash sitting at the front of the classroom.

You see, before I become a financial planner, I was first and foremost a teacher. I taught college music mostly, but I also taught middle school and high school students. Teaching is a passion of mine and I really wanted to share my passion for finance with my daughter’s class. During my preparation of my Rule of 72 lesson, I talked with my wife about what props I should use to gain the most impact. My wife, Ruthie, teaches middle school band at Wesleyan School. She was the one who had the great idea of using cash to teach the kids about how to become a millionaire. So, kudos to Ruthie. As they say, the apple doesn’t fall far from the tree. For those who know my father-in-law, James Calder (JC), Ruthie is JC’s daughter number 2 of 4.

My goal was to show how young investors might utilize the power of compound interest to save and build $1 million over their lifetime. Using the Rule of 72 and assuming a $5,000 investment for a 12-year old and a 12% rate of interest, the math is pretty easy to follow: 72 / 12 = 6. Therefore, it takes 6 years for an investment to double, given a 12% rate of return.

Rule of 72 Graphic. Assumptions: $5,000 initial investment at age 12 with a 12% rate of compounding returns. No withdrawals and tax-deferred growth



Now before I presented this graph to the class, I wanted to use some props to gain their attention. Otherwise, this chart is just a bunch of numbers. I knew that I wanted to use cash, so I thought about it for a while and realized that I could use a $5 bill to represent $5,000. At that ratio, I would need $1,280 worth of $5 bills. I made a trip over to the bank, shared my lesson plan with them, and they were very kind to be a part of it, and I made the withdrawal of $1,280 worth of $5 bills. With prior approval of the math teacher, I brought the cash to the classroom.

Before class, I grouped the $5 bills together using paperclips into the following stacks: $5, $10, $20, $40, $80, $160, $320, $640. That way, as I stacked them up, it would total $1,280, which was my equivalent to $1,280,000.

It was so much fun! During the presentation, each time I stacked the next group of $5 bills on top of each other, I prompted the class to call out, in unison, the answer based on the chart above. It was so much fun to see a room full of 12-year old children light up. I’m sure that the stacks of $5 bills brought out most of the excitement, but the props helped drive home the lesson. I explained to the class that for most folks, wealth is accumulated. It’s not inherited. And many folks, who earned a modest salary during their lives, figured out how to become a millionaire. They lived within their means, stayed clear of bad debt, and saved for the future. That brings me to the point of this lesson for us to consider.

Form this lesson, I have an important question for all of us to consider: Are you and I smarter than a 6th grader? Do we take advantage of compounding interest or do we let it take advantage of us? Think about it like this: Borrowing from Star Wars references, the Rule of 72 has a “Light Side of the Force” and a “Dark Side of the Force.” The Dark Side is deceptive and seductive. And the powers of the dark side can lead you to taking on bad debts, such as credit card and car loans, and possibly unaffordable mortgage and student loan payments. In these instances, the Dark Side of the Rule of 72 will work against you – quite POWERFULLY! Have you ever heard the phrase, “I can’t seem to get ahead?” This is the mark of the dark side of the Rule of 72. But if we live with good financial margin in our financial lives and we are able to save and invest for retirement, then the “light side” of the Rule of 72 becomes your friend.

Consider using a Rule of 72 scenario for yourself. And if you have children or grandchildren, take a moment to explain this vitally important concept to them. There are many positive aspects to wealth building through the Rule of 72. It may lead to financially healthy lives, financially health marriages, and financially healthy retirements. And the wealth that is built may also be used by the next generation of big-hearted givers, who use their financial resources to make an impact not only for their families but for their communities and the needy as well.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.