Best Practices to Minimize an Audit
Richard Belanger • March 21, 2024
Taxpayers invest about 13 hours preparing their tax returns, according to the IRS’s instructions for Form 1040.
More specifically, the IRS says that the average nonbusiness taxpayer spends nine hours preparing a tax return, which includes three hours of record keeping. For taxpayers who file a business return, expect around 24 hours, with about half of that spent keeping records.
No wonder it’s easy to make a mistake. Time-consuming or not, the IRS isn’t always in a forgiving mood when errors pop up.
Even if you hand your records to your accountant or CPA, forgetting important documents can delay your refund, force an amended return, or worse, trigger an audit.
7 ways to minimize audit risks
1. You’ve probably heard it before, but let’s start with the basics. One of the biggest mistakes folks make is filing a return before they have all their 1099s and W-2s.
By now, you’ve probably received any corrected 1099 forms. But in the future, be careful about filing by early February (gosh, I know that feels good, but…) and getting a notice in late February that your brokerage firm has adjusted your original 1099.
2. One reason taxpayers get into trouble is the failure to report income from:
- regular wages (W-2),
- Social Security (SSA-1099),
- pensions, IRA distributions, and annuities (1099-R),
- partnership income (K-1),
- income from an independent contractor gig (1099-NEC),
- rent or royalties (1099-MISC),
- real estate sale proceeds (1099-S), and
- income from interest (1099-INT), dividends (1099-DIV), or capital gains (1099-B).
The income above is derived from various sources, but they share a common thread: They all trigger a form.
If income triggers a form, the IRS will receive a duplicate copy.
Good record-keeping and reliable tax software that reminds you of the previous year’s activities can help eliminate errors.
If possible, stay consistent with the same tax software, which will remind you of the forms you used the previous year.
Good record-keeping
Did you receive the form in the mail? Put it in your “tax drawer.” Did you receive an email alerting you that your 1099 is available? Save the email in your tax year 2023 email folder. Don’t have a tax year 2023 folder or tax drawer, then create one.
We can’t overemphasize the importance of good record-keeping.
3. Watch out for business losses. Most businesses lose money in the early stages. But if your business is losing money year after year, it could raise suspicions that it is simply a hobby.
You may love golf. You may even teach beginners how to play. But if your golfing business can’t turn a profit, the IRS may decide it’s a hobby.
Or it may raise suspicions that you are misreporting income or expenses. This can be especially true for cash-based businesses.
That doesn’t mean you shouldn’t report losses. Keep detailed records for at least seven years demonstrating legitimate expenses.
4. Let’s turn to deductions. Is a charitable deduction outside of what is considered “normal,” i.e., much higher than the average charitable deduction based on your income?
Be sure you keep careful records. Overall deductions for donations to public charities, including donor-advised funds, are generally limited to 50% of adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit on donating appreciated non-cash assets held more than one year is 30% of AGI.
The home office deduction is becoming increasingly popular, but you must be self-employed and conduct most of your business from home. If your company allows you to work from home and you are a W-2 employee, don’t even consider taking the home office deduction.
Starting in tax year 2013, the IRS began allowing taxpayers to take what they call the simplified option. It is a standard deduction of $5 per square foot, a maximum of 300 square feet.
It’s much simpler than the standard method, and there is no recapture of depreciation upon the home’s sale, but your deduction will probably be lower.
5. As a business owner, your income may fluctuate. But wild swings in income can put an unwanted spotlight on your tax return because it may raise suspicions that you may not be reporting all of your income.
Consider a note when filing if expenses or income changes dramatically. Most software programs will let you include documentation that sheds light on your unique circumstances.
Other deductions: How much is too much?
How much is too much? No one really knows, but if it is too far outside the norm, IRS computers may flag your tax return. Again, keep detailed records that substantiate your deductions.
6. Does the IRS suspect that you have $10,000 or more in foreign accounts and have not filed a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), or if they believe you reported incorrectly or have misreported values on the FBAR, you may be subject to an audit, according to Bloomberg Tax.
7. Avoid abusive tax shelters. More recently, questionable transactions identified by the IRS include abusive syndicated conservation easements, abusive micro-captive insurance company arrangements, and Malta retirement plans (Bloomberg Tax).
In addition, scams involving the earned income tax credit, sick leave, family leave, and false fuel tax credit claims can trigger an audit.
Key tax filing dates
April 1, 2024: RMD due if you turned 73 in 2023.
April 15, 2024: Tax Day (unless extended due to local state holiday).
April 15, 2024: Deadline to File Form 4868 and request an extension.
April 15, 2024: Deadline to make IRA and HSA contributions for tax year 2023.
October 15, 2024: Deadline to file your extended 2023 tax return.
Source: Intuit
Bottom line
It’s impossible to bulletproof a tax return completely, and high-income taxpayers will come under more scrutiny simply because of their income.
But you can reduce the risk, and if audited, you will be in a better position to quickly answer questions and put the exam in the rearview mirror.
If the IRS contacts you, you probably won’t receive an invitation for an at-home audit. Instead, you will receive a letter detailing the money the IRS believes you owe, along with penalties and interest.
The IRS will give you a specified amount of time to prove that your original filing is correct. Provide the documentation requested. If everything looks good, you’ll be clear.
Please let us know if you have any tax-related questions. As always, feel free to reach out to your tax advisor.
Election-year shenanigans
Investors disregarded disappointing inflation numbers last month and talk of fewer rate reductions this year.
Instead, they remained fixated on robust business earnings and rising enthusiasm for AI, or artificial intelligence.
As the table illustrates, U.S. stocks are off to a good start this year.
| Index | MTD% | YTD% |
|---|---|---|
| Dow Jones Industrial Average | 2.2 | 3.5 |
| Nasdaq Composite | 6.1 | 7.2 |
| S&P 500 Index | 5.2 | 6.8 |
| Russell 2000 Index | 5.5 | 1.4 |
| MSCI World ex-U.S.A.* | 1.6 | 1.9 |
| MSCI Emerging Markets* | 4.6 | -0.3 |
| Bloomberg Barclays U.S. Aggregate Bond TR USD | -1.4 | -1.7 |
Source: Wall Street Journal, MSCI.com, Bloomberg, MarketWatch
MTD returns: January 31, 2024–February 29, 2024
YTD returns: December 29, 2023–Febraury 29, 2024
**in U.S. dollars
During a presidential election year, investors often wonder about the impact on the market.
Well, stocks usually appreciate during presidential election years, but an annual gain is not unusual.
Historically speaking, broad-based market indexes have a long-term upward bias.
So, let’s review the data for any discernable trends.
Since 1928, the S&P 500 Index has averaged an annual increase of 11% (dividends reinvested). The index finished the calendar year higher 73% of the time, according to data provided by the NYU School of Business.
| Presidential Election Year Performance | |||
|---|---|---|---|
| S&P 500 Index annual average since 1928 | Presidential election year since 1928 | The incumbent* runs for re-election since 1928 | |
| Average rise in the S&P 500 Index | 11% | 11% | 15% |
| The S&P 500 Index rose: | 73% of the time | 83% of the time | 93% of the time |
Data Source: NYU Stern School of Business Historical Returns on Stocks, Bonds and T-Bills
The S&P 500 is an unmanaged index that cannot be invested into directly.
*1940 and 1944, when FDR sought a third and fourth term, are not included.
The modern S&P 500 Index was first launched in 1957. Performance back to 1928 incorporates the performance of the predecessor index, the S&P 90. Data includes dividends reinvested.
Past performance is no guarantee of future results.
During a presidential election year, the S&P 500 index also advanced an average of 11%. That is to say that a presidential election appeared to have no influence on stocks. Election or no election, the S&P 500 averaged 11%; end of story, right?
Let’s take it one step further and review returns when the incumbent was running for re-election.
When the incumbent sought a second term, the S&P 500 averaged an advance of 15% and finished the year in positive territory 93% of the time.
The return not only exceeded the longer-term average, but the 93% “win rate” topped the presidential “win rate” of 83% and the longer-term “win rate” of 73%.
Of course, there’s no guarantee stocks will follow the historical pattern. Exercises such as these make for fascinating conversation but not much more, in our view.
Today’s climate
Today’s political environment is filled with acrimony and bitterness, but we caution against making investment decisions tied to political headlines. It’s common to hear pundits proclaim that this election is “the most important in our lifetime.” But that has more to do with hype and voter turnout.
Unquestionably, the winner will help set the course for the nation. However, investors view market performance through a very narrow lens.
Year after year, the economic fundamentals have fueled gains or losses in equities. Interest rates, economic activity, corporate profits, and inflation are the variables that have historically influenced market sentiment, not elections or the party that wins.
Investing wisdom from the professor
As legendary investor and the chairman of Berkshire Hathaway, Warren Buffett pointed out in his annual letter to shareholders last month:
“Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally good businesses to be strikingly mispriced. Indeed, markets can—and will—unpredictably seize up or even vanish as they did for four months in 1914 and for a few days in 2001,” he said.
“If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often—but they will happen.”
But, as Buffett opined, “Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been—and will be—rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.”
We’ll sum up our letter to you with this final remark from him. “It’s harder than you would think to predict which (businesses) will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.”
That’s one reason why we stress the importance of diversification, not the political headline of the month. It allows us to participate in the “American tailwind.”
I trust you have found this review to be informative. If you have any inquiries or wish to discuss other matters, please don’t hesitate to contact me or any team member.
Disclosures:
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effect of inflation and the fees and expenses associated with investing.
S&P 500 -A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 -The Russell 2000 is a stock market index measuring the performance of 2000 small capi1alization stocks. It represents the 2000 smallest companies in the Russell 3000 Index, which in tum represents the 3000 largest companies in the U.S.
MSCI Emerging Markets -Designed to measure equity market performance in global emerging markets.
MSCI EAFE -Designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada
Barclays Global Aggregate -The Barclays Global Aggregate Index is a measure of global investment grade debt from twenty-three different local currency markets.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
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The views stated in this letter are not necessarily the opinion of LPL Financial and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither LPL FInancial nor any of its representatives may give legal or tax advice.
Social Security provides retirees with a basic income. It was never intended to fully cover the cost of living in retirement. But it acts as a supplement to your resources. Social Security includes disability, dependent benefits, and survivor benefits for minor or disabled children. Our focus today will be on retirement benefits. As you are probably aware, retirement benefits may start at age 62. The table below highlights the age you receive your full retirement benefit based on your date of birth.
What is financial fitness? It is not just about having a pile of money in a bank account or a fat portfolio of stocks and bonds. Lottery winners often stumble into wealth without having much in the way of financial knowledge. A beneficiary of a large estate may know very little about financial matters. The same holds for successful college athletes who enter the world of professional sports. In other words, hitting the financial jackpot does not equate to financial fitness. Without an understanding of the basic fundamentals of personal finance, wealth that is quickly attained can quickly disappear. Paraphrasing from Proverbs 13, wealth from get-rich-quick schemes evaporates; wealth from hard work and diligence grows over time. We can approach this topic in many ways, but first, let’s broadly define the term financial fitness. Financial fitness enables you to make good financial decisions because you have developed the skills and knowledge to pursue goals that will enhance your wealth and secure your financial future. Did you put together a list of resolutions when the year began? Resolutions are broad. They might be akin to a vision statement. Goals, however, are well defined. They are measurable. They should include an action plan, and they have a time limit. If I resolve to be healthier in 2024, I may just say that I want to lose weight or work out more often. If I set a goal, I’ll write down the number of pounds I want to shed, a date I’d like to reach that goal, and embark on a program that will help me achieve my goal. Better yet, I’ll enlist an accountability partner. We are mindful that we are not personal trainers, but the same general principles that apply to goal setting in other areas of life can also help you achieve financial fitness. Simply put, financial fitness is a crucial step towards attaining financial security and achieving your financial objectives, whether they are short-term or long-term in nature. 7 steps to a more secure financial future 1. Set goals. If you don’t know where you are going, you won’t get there. It’s that simple. 2. Where does your money go? You’ll never get a true handle on your finances if you don’t track your cash outlays. You know what your monthly mortgage is. But how much do you spend on restaurants, entertainment, fun, clothing, etc.? Do you budget for home and auto repairs or an upcoming vacation? You might be surprised by what you uncover after tracking cash outlays for two or three months. 3. You want money at the end of your month. A key principle of understanding financial fitness includes the concept that wealth accumulation isn’t a secret that has been unlocked (or can only be unlocked) by the wealthy. Squirreling away savings involves living within our means and keeping our expenditures in check. If you find that you typically have “month at the end of your money,” you can’t save. Those who are financially fit understand this principle. 4. Manage debt; get out of debt. Let’s come up with a strategy that eliminates high-rate credit cards and personal loans. We recognize that debt can be used judicially for purchasing a home, home improvement and autos. But debt can also be an unwanted burden that interrupts shorter and longer-term financial goals. Paraphrasing from Proverbs 22, the borrower serves the lender. 5. Set it and forget it. Set up automatic transfers into savings, retirement, or for various goals you may have. Get into the habit of saving today, even if the steps you initially take are small. Upon mastering the initial five concepts, you will have the knowledge, skills, and tools necessary to increase your chances of success in achieving your financial goals. 6. Invest, but not simply for the sake of investing. Why do you want to save money? Do you want an emergency fund, a vacation fund or a “my car is broken and needs repairs” fund? Are you saving for a home, retirement or your child or grandchild’s education? The “why” is what drives you to overcome procrastination. It helps prevent you from drifting away from your carefully crafted plan. When obstacles arise, and they will, the “why” keeps you on the path. Without a “why,” it’s much easier to enjoy life’s pleasures today, even if it creates nagging worries about the future. A well-diversified investment plan to which you automatically contribute every month keeps you on track toward your financial goals. Start small and adjust upward on a regular basis. You’ll be surprised at how quickly you progress. Don’t worry too much about short-term performance and volatility. Let us help you create a plan and regularly review it, making adjustments as needed based on your goals and situation. 7. Seek assistance. There’s no shame in reaching out when you are outside your area of expertise. Understanding and utilizing core financial principles and best practices for saving and investing are crucial for financial fitness. Sourced in part from the CFA Institute A positive start to the new year The economy seems fine. The job market seems fine. So far, there are few signs the economy is about to slip into a recession. In January, the Dow added to gains, setting new highs, and the S&P 500 Index eclipsed its prior high-water mark made two years ago (Yahoo Finance S&P 500). A loss on the final day of the month pared the market’s January advance, but the S&P 500 managed to finish the month above its prior all-time high in early 2022.
Are you familiar with how our federal tax code originated? In 1909, progressives in Congress attached a provision for an income tax to a tariff bill. Hoping to kill the idea for good, conservatives proposed enacting such a tax as they believed 75% of states would never ratify a constitutional amendment, according to the National Archives . Much to their surprise, the 16th Amendment was ratified in 1913, establishing Congress’s right to impose a federal income tax. Initially, fewer than 1% of the population paid income taxes. The rate was only 1% of net income due to generous exemptions and deductions. Clearly, the tax code has changed dramatically over the years, and it will continue to change. Diving into the details The Internal Revenue Service announced last year the annual inflation adjustments for more than 60 tax provisions ( 63 to be exact ) for the tax year 2024, including the tax rate schedules. As incorporated into law, the IRS adjusts various categories to account for inflation. It’s not a perfect measure, but the adjustments help mitigate the impact of inflation on income. Without indexing, a cost-of-living raise, for example, could automatically push you into a higher tax bracket or reduce the value of your standard deduction. Annual inflation adjustments, however, do not cover all tax provisions. We won’t cover each of the 63 changes. We will touch on the high points. If you have questions, please reach out to us. As always, if you have specific tax questions, feel free to check with your tax advisor. 1. Tax brackets and tax rates have changed. Table 1 highlights the seven separate tax brackets for 2024 for single, married, head-of-household and married filing separately.
Christmas is a time of great joy and celebration. With holiday parties, shopping, and family events filling up the calendar, it may also be a busy time for many. Whether you’ve already finished your Christmas shopping or are just getting started, we encourage you to set aside some time for year-end financial planning. It will help put an exclamation point on 2023 and prepare you for the new year. 5 smart planning strategies 1. RMDs—Required Minimum Distributions from your traditional IRA Required means just that—required. You must take your first required minimum distribution (RMD) for the year in which you reach age 72 (73 if you reach age 72 after December 31, 2022). However, you can delay that first RMD until April 1 of the following year, which means that if you turned 72 in 2022, you must take (already have taken) your first RMD no later than April 1, 2023. You will also be required to take a second RMD by December 31, 2023. Going forward, you will take an RMD in 2024, 2025, etc. If you are older than 72, you must take your annual RMD by December 31. Here’s where it gets a little bit tricky for a few folks. Last year, Congress passed legislation that raised the age you must take an RMD from 72 to 73 years old starting in 2023. Therefore, if you turned 72 in 2022, you fall under the old rules described above. If you turn 72 in 2023, you won’t have to take an RMD until the 2024 tax year (when you turn 73), which will be due by April 1, 2025. If you hold multiple IRAs, you must calculate the RMD separately for each IRA you own but can withdraw the total amount from one or more of the IRAs. Similarly, a 403b owner must calculate the RMD separately for each 403b contract that you own but can take the total amount from one or more of the 403b contracts. However, RMDs required from other types of retirement plans, such as 401k and 457b plans, must be taken separately from each account. Most 401k plans allow you to postpone RMDs from your current employer’s plan until no later than April 1 of the year after you stop working. If you have a 401(k) from your prior employer, you may be subject to an RMD. Check with your plan administrator in both instances. According to the IRS, penalties for failing to take an RMD “may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.” However, it’s best to avoid the hassle and stick with the deadlines. 2. Cut your tax bill Most likely, you have gains and losses in taxable accounts, and now might be a good time to match any losses against gains. This is what is called “harvesting losses.” For example. You have a $30,000 short-term loss (a stock held less than one year), and a $25,000 gain in another stock held less than a year. If you sell both positions and net the gain against the loss, you will have a short-term loss of $5,000. You may reduce your ordinary income up to $3,000 in tax year 2023 and carry over the remaining loss of $2,000 in tax year 2024. While we caution against using tax policy to drive a buy/sell decision, in this example, we booked a profit in one security and used the loss on another security to avoid paying any taxes on the capital gain. Just be aware of the wash-sale rule that will typically disallow the loss for tax purposes if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale. 3. Harvest your gains As with tax-loss harvesting, you wouldn’t do this in an IRA account (because they are not subject to taxes as long as assets remain in the account), but you may be able to harvest a long-term gain and avoid any federal income tax in a taxable account. For 2023, individuals with taxable income below $44,625 ($89,250 for married couples) pay no federal tax on a long-term capital gain. So, if you are single with a taxable income of $34,625, you could strategically sell a stock with a long-term gain of up to $10,000 and pay no federal income tax. If you repurchased that investment, you have reset the cost basis to a higher level, which potentially reduces your future tax burden. Just be careful. If you must sell at a profit in less than one year, you’ll have taxable short-term gain. In some states, you have raised your taxable income and you may owe state income tax on the profit from the sale. You may also boost your modified adjusted gross income, which can impact certain tax deductions or credits. And don’t forget to consider any mutual fund distributions, which could significantly affect your taxable income. 4. Invest in your retirement The 401k contribution limit for 2023 is $22,500 for employee contributions and $66,000 for combined employee and employer contributions. Subject to income limits if you have a company retirement plan, if you’re age 50 or older, you’re eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,000. The IRA contribution limit for 2023 is $6,500 for those under age 50 and $7,500 for those age 50 or older. You can contribute to your IRA for the year 2023 until the tax filing deadline in April. 5. Benefiting others through charitable giving The deadline is December 31st to give a gift and itemize on your 2023 tax return. Consider a donor-advised fund or DAF . It is a charitable investment account for the purpose of supporting charities. Your donation to the fund grows tax-free and is eligible for a tax deduction. At the time you choose, you may donate to your favorite charity. Should you convert your traditional IRA into a Roth IRA? It may be a great idea if you don’t believe you will need the converted Roth funds for at least five years (if withdrawals are taken within five years of the conversion or before age 59½ you’ll be penalized), you live in a state that doesn’t have an income tax but may retire to a state that has a state income tax, and you believe you will be in the same or a higher tax bracket during retirement. However, you will owe federal and state income taxes on the dollar amount you convert. It’s best to pay the taxes on the converted dollar amount without using retirement funds. We hope that these planning ideas have been helpful to you. If you have questions, please don’t hesitate to contact us. We are always here to assist you. If you have specific tax questions, you may also want to check in with your tax advisor. A dose of humility Wall Street firms strive to hire the best and brightest. But the best and brightest don’t have a clear read on the future. Consistently pinpointing where the stock market will land in 12 months is almost impossible. Look no further than the 2023 consensus forecast among analysts. According to Bloomberg, forecasters, on average, expected the S&P 500 Index would register a decline of about 2% this year, the first projected decline of the 21st century. It’s unusual for analysts to project a market decline. For starters, markets tend to rise over time. Moreover, analysts rarely predict market declines due to an inherent bias since they work for firms that sell stocks.
It’s hard to think about, but long-term care is an important need for which you should prepare. How much care might you need? On average, women will need 3.7 years of care, and men will need an average of 2.2 years. Approximately half of people turning age 65 will require some type of paid long-term care in their lifetimes, according to Morningstar. About 60% of us will need assistance with things like getting dressed, driving to appointments, or making meals, according to the Administration for Community Living (ACL), a division of the U.S. Department of Health and Human Services. Not all of these activities will require paid assistance. Some of us may require home care, which would include those who need minimal assistance with health-related tasks. Others might benefit from adult daycare, which offers daytime supervision, including meals, recreational and therapeutic activities. It occurs in a community setting. The ACL defines long-term care as “a range of services and supports you may need to meet your personal care needs. Most long-term care is not medical care, but rather assistance with the basic personal tasks of everyday life, sometimes called Activities of Daily Living (ADLs).” The definition seems a bit on the dry side, so let’s take a more practical approach. ADLs include: Shopping for groceries or clothes Managing money Housework Caring for pets Bathing Using the bathroom Taking medication 6 steps to long-term care planning Planning is critical, but many people are not sure what is covered by insurance, and others are often misinformed about what is covered by Medicare. Here are six steps to help you think—and begin planning for—your possible long-term care needs. Gauge the likelihood of needing care. Review potential costs. Assess available resources. Create a long-term care fund. If insurance is the answer, investigate whether a stand-alone or hybrid policy makes sense. If government-funded care is part of the solution, think through the ramifications. Medicare and most health insurance plans, including Medicare Supplement Insurance (a Medigap policy), do not pay for long-term care. What does Medicare cover? Medicare covers up to 100 days of nursing home care. For many, that may not be enough. Medicare can help with costs for skilled-home health or other skilled in-home services. What is skilled-home health? It is a wide range of health care services that can be provided in your home for an illness or injury. These might include monitoring a serious injury or illness, injections, patient and caregiver education and nutrition therapy. The goal is to help you recover, regain independence, become more self-sufficient, or slow any decline in health. Generally speaking, long-term care services by Medicare are provided for a short period of time. Medicare does not pay for non-skilled assistance with ADLs, which make up most long-term care services. If needed, you will have to pay for long-term care services that are not covered by a public or private insurance program. What about Medicaid?Medicaid is available to those who meet strict income and asset guidelines. Unlike Medicare, which is health insurance, Medicaid is public assistance. Medicaid will count wages, Social Security benefits, pension, veteran benefits, bank and investment accounts, trusts and annuities and your property. In most states, Medicaid looks at your income over the last five years, according to the American Council on Aging. California reviews your data going back 30 months. Assets that were transferred or gifted during that period may count against you. So, we would advise that you not try to transfer financial assets to qualify for Medicaid. Medicaid eligibility occurs on a rolling basis. You could make just $1 over the monthly income limit and end up on the hook for the cost. Developing financial strategies Which option is best will depend on various factors, including age, health status, the likelihood of needing care and your financial situation. Some people use their own assets to pay for care. Be advised you may have tax consequences for drawing on an IRA, 401k or qualified plan. Discuss this with your tax advisor. A reverse mortgage, long-term care insurance, hybrid life insurance policies, and annuities can provide much-needed flexibility. Let’s look at these potential resources. A reverse mortgage can be complicated, but it may offer you the cash needed to help with long-term care. Other borrowing options may be available, too, including a home equity loan. Long-term care insurance is an alternative. The cost will vary depending on the benefits. Younger, healthy people who are at low risk of needing long-term care in the next 25 years may benefit from a long-term care policy. Costs will rise for those who are older or have health problems. You may not qualify if your health is compromised or you are already receiving end-of-life care services. Typically, you become eligible for benefits when you can no longer perform two ADLs. Most policies have a waiting period before you receive benefits. However, many insurance companies no longer offer traditional policies. Those that do may raise premiums annually, and the cost may be high. Hybrid life insurance offers unique features that may offer financial assistance. What is a hybrid policy? It combines life insurance with long-term care insurance. The policy may pay for long-term care or a death benefit if the policy isn’t used to pay for care. Another option is a long-term care annuity, which provides a benefit based on your investment. However, it has become challenging for insurers to provide these policies due to today’s interest-rate environment. Other avenues Some states offer PACE (Program of All-Inclusive Care for the Elderly), which is a combined Medicare and Medicaid program. It may pay for some or all the long-term care needs of a person with Alzheimer’s disease. SHIP, the State Health Insurance Assistance Program, is a national program offered in each state that provides one-on-one counseling and assistance with Medicaid and Medicare. Final thoughts How you should approach long-term care will depend on your circumstances. We have offered a basic outline of various options. If you have additional questions or concerns, we encourage you to reach out to us. Stocks waver in October October has been associated with frightening incidents in the financial world. Perhaps this is because two significant stock market crashes that occurred in 1929 and 1987 happened in the month that sports Halloween. However, it may surprise you to know that broad market indexes such as the S&P 500 have historically performed well in October (data provided by the St. Louis Federal Reserve). Nonetheless, last month was an exception to the usual trend.
The National Council on Aging recently shared a story about a scammer who targeted a homeowner in Massachusetts. The victim alleged that a contractor damaged his home’s foundation and didn’t return to finish the work—even after taking thousands of dollars in payments. Since 2007, 109,000 home improvement scams have been reported to the Federal Trade Commission (FTC), resulting in about $207 million in losses in roughly the same period. But that may just be the tip of the iceberg, since many victims of scams do not report the crime. Sadly, scammers often seek out older homeowners, who they expect to be more trusting, wealthier, and more likely to have memory or cognitive problems. The value of home improvement Of course, there are many legitimate home improvement outfits out there. Many businesses suffered during the pandemic lockdowns, but homeowners funneled an estimated $420 billion into remodeling projects in 2020 alone, according to Money, as lockdowns and social distancing curtailed outside entertainment. Making improvements to your home not only enhances your enjoyment but also increases the return on investment (ROI) if and when it is time to sell. The projects you decide to tackle may be influenced by the ROI, your personal choices, or a combination of those and other things. For many of us, our home is the largest purchase we will make. You may want to consider ways to increase its value. According to the National Association of Realtors 2022 Remodeling Impact Report , hardwood floor refinishing and new wood flooring provide the top return, 147% cost recovery and 118%, respectively. Insulation upgrades offered 100% cost recovery. Bathroom renovation and kitchen upgrades don’t top the list in terms of investment, but do improve your own enjoyment of your home. They provided 67% and 63% return on cost, respectively. Of course, these are simply averages. Location plays a big role in the value of your upgrades. And it goes without saying that a very expensive renovation in a modestly priced house will lead to a diminished ROI. If you are planning to sell your home, an experienced real estate agent can help you find the sweet spot between outlays and returns. The dark side of home improvement Home remodeling isn’t as simple as walking into Walmart or Home Depot and making a purchase. There is a high level of comfort that a major retailer will provide a good product and stand behind its warranty. Home improvement companies, however, are everywhere and exist at every level of quality. Some are trustworthy, and their work stands out. Others are looking to make a fast buck. Quality of work isn’t a high consideration. Then there are actual scammers who make empty promises and leave you, your finances, and your home worse off than when you started. They have one goal—take your money and leave you with little value. Trust but verify How can you tell if a contractor might not be reputable? According to the FTC, these behaviors are red flags: Scammers knock on doors, claiming to be “in the area” looking for business. Scammers claim they have materials left over from a previous job, which will save you money. They pressure you into an immediate decision. They ask you to pay for everything upfront and/or only accept cash. They ask you to get the required building permits. Scammers suggest you borrow money from a lender they know. They won’t sign a contract, but insist on a handshake deal. These seem almost obvious, but con artists don’t become con artists without learning the art of persuasion. They put you at ease. They engender trust and your guard comes down. Here is how it might work: A friendly home improvement tradesman might knock on your door and tell you they have noticed a problem with your house. They offer to inspect the issue at no cost and then provide a quote that seems reasonable because they just happen to have an oversupply of materials from a prior job, so they can give you a deal. When you agree to their proposal, they insist on a large deposit or 100% payment upfront. Or they might request a payment method that isn’t common, such as an online money transfer or prepaid debit card. Once your cash is in their hands, they disappear.Step back for a moment and review this scenario. Somebody you don’t know knocks on your door and demands a big cash payment for work they haven’t yet performed. They would have to be pretty charming, because that’s a huge red flag. Homeowners are often targeted by scammers posing as contractors after a natural disaster, promising low-cost repairs and pressuring them to act quickly. But again, after taking the deposit, the service provider may disappear or the work may be poorly executed or left incomplete. Another scenario is when a project snowballs. After a contractor starts your project, they may try to persuade you that there are additional, costlier problems that require your immediate attention. If you refuse to authorize additional work, they may threaten to abandon the project, leaving it unfinished. Another move is to intentionally perform low-quality work to ensure repeat business. Be alert. If something doesn’t feel right, you are under no obligation to move forward. How to avoid scammers Here are some ways you can greatly reduce your odds of being victimized. Consider only contractors who are licensed and insured. Get recommendations from family and friends. Check with the local Home Builders Association and consumer protection officials to see if they have complaints against a contractor. Research a business online and read reviews but keep in mind that they may not be perfect. Instead, focus on the center of gravity, i.e., the bulk of reviews, and how complaints are handled. Get written estimates and read the contract carefully. Don’t pay the full amount up front. A downpayment will likely be required, but avoid those who want full payment upfront. Loan scams Your remodeling project may be financed by cash in the bank or a home equity loan. Be careful about your financing: Never agree to financing through your contractor without shopping around and comparing loan terms. Never agree to any loan without understanding the terms of the loan. Don’t sign a document that you haven’t read or one that contains blank spaces. Don’t let anyone pressure you into signing an agreement. Once again, let me remind you to be alert. If something doesn’t feel right, you are under no obligation to move forward. If you have been the unfortunate victim of a scam, report the crime to your state attorney general’s office, the state’s consumer protection office, the BBB, your local media’s call for action lines, and the National Association of Homebuilders. Many home improvement companies pride themselves on their workmanship. You can greatly reduce the likelihood of falling prey to a scam by taking some simple precautions and learning about the reputation of the company you are hiring. Seasonal doldrums Historically, August and September have provided disappointing returns for investors, according to monthly S&P 500 data from the St. Louis Federal Reserve. Since 2010, the average monthly decline for the S&P 500 Index is -1.2%, the worst-performing month (excluding reinvested dividends). It’s important to note that this isn’t a new trend. Since 1970, the S&P 500 has averaged a 1.0% dip in September, which is also the worst-performing month during the period surveyed. September has finished higher six times since 2010. But last month, September didn’t buck the averages. The S&P 500 Index finished lower for the fourth-straight year.
A single person age 65 in 2023 may need about $157,500 saved after taxes to cover health care expenses in retirement, according to Fidelity . In 2023, their estimate for an average retired couple aged 65 is around $315,000. The actual amount you’ll need will depend on many variables, including where you live during retirement, your health, and how long you may live. Remember, Fidelity’s numbers are just an average. Some folks will spend more, and some will spend less. The good news is that costs are expected to stay the same compared to 2022. The bad news: it’s almost double the 2002 estimate. Fidelity bases its example on those who take part in traditional Medicare. If you have yet to retire, do not assume that Medicare is a panacea for all health care costs. Many younger folks believe that Medicare covers all expenses. It doesn’t. While coverage is broad, it does not take care of everything. Let’s take a brief look at Medicare. Medicare Part A covers treatment in a hospital. It’s free for most folks. The premium for Medicare Part B, which covers doctor visits and lab tests, is currently $165 a month (or more, depending on your income). There’s usually a 20% cost share when you receive treatment. Many who enroll in traditional Medicare purchase what’s called a Medigap policy . A Medigap policy is health insurance sold by private insurance companies that help plug “gaps” in traditional Medicare. Medigap policies help pay for some health care costs that original Medicare doesn’t cover. You may go to any doctor that accepts traditional Medicare insurance. The premium varies for Part D, which covers prescription drugs. Beginning in 2025, out-of-pocket costs for prescription drugs will be capped at $2,000 a year. Medicare Part C is growing increasingly popular. Also known as a Medicare Advantage Plan, Medicare Part C wraps Parts A and B into a single plan. Many offer vision, hearing, dental, and health and wellness programs. Most include Medicare Part D. Private health insurance companies offer Medicare Advantage plans. They must follow rules set by Medicare. But much like an HMO or PPO, you’ll be funneled into in-network doctors or your out-of-pocket costs will be much higher. However, since 2011, federal regulations for Medicare Advantage have mandated out-of-pocket limits for Parts A and B. In contrast, traditional Medicare has no out-of-pocket limit for covered services—hence the need for a Medigap policy. In 2023, the out-of-pocket limit for Medicare Advantage plans may not exceed $8,300 for in-network services and $12,450 for in-network and out-of-network services combined. Planning smart for health care in retirement With this brief review in mind, let’s look at several ways you can position yourself favorably as you approach retirement. 1. Obtain the correct Medicare plan that best suits your needs The information we provided above is a broad outline. The insurance you obtain during retirement will depend on costs, your health and your individual circumstances. If you decide that Medicare Advantage is the right choice for you, you will want a plan that includes your doctors and medications to avoid higher out-of-network costs. If you have additional questions, we would be happy to point you in the right direction. 2. Take advantage of a Health Savings Account You must have a high-deductible plan, but you may contribute up to $3,850 pretax to a Health Savings Account (HSA) as a single person and up to $7,750 if you have family coverage. Much like an IRA, capital gains and earnings in an HSA are sheltered from taxes. Moreover, you may withdraw from an HSA and pay no taxes if the funds are used for qualified medical expenses. Other HSA advantages : You may use your HSA to pay certain Medicare expenses, including premiums for Part B and Part D prescription drug coverage. Your HSA can be used to cover part of the cost of a tax-qualified long-term care insurance policy. Your HSA is a retirement savings account, too. In other words, an HSA becomes a viable tool that can be used to save for retirement as well as a savings account for health care expenses. For example, let’s say you are 68 years old and withdraw $1,000 from your traditional IRA to pay for qualified medical expenses. You’ll pay federal and state income taxes on that withdrawal. If you pull $1,000 from an HSA for the same expenses, you won’t pay any taxes. Consider maxing out your IRA and HSA if possible. If you can’t max out both, consider placing some of your retirement savings into an HSA. 3. Plan for long-term care Long-term care is a difficult topic many would rather avoid. A person turning 65 has about a 70% chance of needing long-term care at some point, according to the Department of Health and Human Services. Medicare covers skilled home health care if it’s required. However, coverage for skilled nursing home care is limited. Medicare pays for the first 20 days in a nursing home. You’ll pay a $200/day co-payment for days 21 to 100. After day 100, you’ll be responsible for 100% of the cost. You may consider a long-term care policy, which can be quite expensive. To address this potential obstacle, you may look at hybrid insurance, which is a combination of permanent life with a long-term care rider. Another option is self-insurance, where you set aside funds that may be used for long-term care. Assessing your situation is the most important factor in determining the correct approach to health care. It’s a complex issue. It sometimes feels as if you are untying a knot when you are planning for health care coverage. But there are solutions. This month’s newsletter serves as a guide that can help you untangle that knot. If you have additional questions, we’re happy to assist. It’s never a straight line Last year was a year most investors would like to forget. While the performance was underwhelming, let’s not forget some of the lessons learned. We recognized that a well-diversified portfolio of stocks appreciates over a long period. But we expect interruptions along the way. Since 1909, there have only been four periods where the rolling 10-year annualized return of the S&P 500 Index has been negative . Two occurred in the late 1930s, which coincided with the stock market collapse and the Great Depression, and two occurred in the late 2000s, which coincided with the financial crisis and the Great Recession. Looking back 10 years prior to those periods, we arrive at the Roaring Twenties and a thriving stock market, and the stock market bubble of the late 1990s. In other words, stocks had gotten well ahead of the economic fundamentals, and an economic event forced a longer-term retrenchment. Here is one more statistic. Over the period in question, stocks averaged a 10% annual return. Despite their volatility, stocks still outperformed savings accounts, CDs, T-bills, and bonds over the long term. Last month, stocks took a breather. When markets are seemingly priced for perfection, any disappointment may lead to a pullback. Last month, Treasury yields began to move higher, with the 10-year Treasury yield hitting its highest level since 2007, according to data from the St. Louis Federal Reserve. Concerns over China’s slow recovery from draconian covid lockdowns also created some jitters. Finally, August has historically been a weak month for stocks, per monthly S&P 500 data from the St. Louis Federal Reserve.
Getting prepared for college can be both exciting and overwhelming for a high school senior. What might your goal-oriented peers do that will help them succeed as they set out on a new path? The key to successful college preparation is to establish an efficient and structured plan. Having a clear roadmap to guide your planning can make the process smoother and ease any worries that you might have as you move on to the next phase of your life. Let’s look at some important steps that can ease the stress and uncertainty that often accompanies the transition to college life. 7 boxes to check According to Sallie Mae’s Higher Ambitions: How America Plans for Post-Secondary Education 2020 , 94% of high school students are likely to continue their education after high school. Although not everyone will attend college or obtain a two- or four-year degree, developing a plan and establishing goals can increase the likelihood of making the right choices. If you can check off these seven boxes, you will be well on your way. 1. Research the schools that capture your attention Just under half of high school seniors have researched potential colleges. So, what are you looking for? Is it a state university or a private college? Do you prefer a large or small school? Do you want to stay near home, or would you prefer an out-of-state college? Is there a specific career or major area of study that will influence your choice? The top three factors students reported when researching and choosing a college are: Does the school offer a program that matches their desired career or major? Where is the school located? What type of financial aid is offered? 2. Rising costs are real It’s no secret that the cost of college has soared . According to BestColleges.com, on average, tuition and fees rose 5.1% a year at public four-year colleges and 3.9% a year at private four-year colleges between 2000 and 2020. But there is some good news, as the pace has slowed. If you need some extra cash to attend university, taking out a student loan could be a viable option. There’s no shame in borrowing for your education. However, it’s important to remember that loans must be repaid. Don’t overextend yourself. You don’t want to end up with a burdensome repayment schedule that lasts long after graduation. It is also important to consider scholarships and grants. According to Online College Plan, scholarships are often overlooked as a valuable resource for funding. It’s a missed opportunity that may leave free money on the table. There are three different types of scholarships offered: Need-based scholarships, based solely on financial need Merit-based scholarships, based solely on academic excellence or extracurricular achievements Special scholarships, based on a variety of factors and are usually offered to students of a specific race, gender, chosen field, and more Consider these resources: 50 best scholarships for online college students 20 featured scholarships for veterans Easy scholarships quick college cash Trade school scholarships While we want to get you pointed in the right direction, please supplement our ideas with your research. In addition, let the treasure hunt for local money begin at your area’s Department of Education or youth and family government agencies. Even if they don’t have grants, they can get you pointed in the right direction. 3. FASFA is key About 60% of high school seniors have filed the Free Application for Federal Student Aid (FAFSA) for their upcoming freshman year by April. The FAFSA costs nothing to complete, but it can unlock thousands of dollars of financial aid for college. Some of the monies are distributed on a first-come, first-served basis, so don’t put it off. The clock is ticking. The opening date for the FAFSA application is usually October 1. However, due to new changes in the application, the opening date for this year only has been moved to December 2023. Consider completing the form even if you have no intention of taking out student loans. Otherwise, you could inadvertently forfeit scholarships, grants, and work-study opportunities. 4. Test-taking wanes in influence The SAT or ACT is becoming less of a requirement nationally, and many colleges and universities are now test-optional. If you’re considering the SAT or ACT, there are test prep classes and practice exams available online. 5. Essays and letters of recommendation increase your odds There is no shortage of resources for writing college essays, as a quick Google search will reveal. Here’s one to consider from U.S. News and World Report: How to Write a College Essay . The most important thing to do is to get started. In addition, ask for and collect letters of recommendation from teachers (in and out of the classroom), guidance counselors, and even your principal that highlight your strengths and contributions. Some teachers write so many letters that they may unintentionally seem generic. Therefore, you may consider providing them a “tip sheet” that highlights your best work and accomplishments. 6. Take a trip That’s right, visit the school or schools you would like to attend. No two campuses are alike. The admissions office at your school of interest can help you plan your visit. An on-campus tour allows you to explore the school, the dorms, the library, the classrooms, the dining hall, the student union, recreational facilities, campus hangouts, off-campus life, and much more. During your visit, you may conclude that this could be your home away from home for the next four years—or you may decide that what you thought would be a favorite just doesn’t fit. 7. Your guidance counselor is there for you Applying to colleges can seem overwhelming, but you can seek assistance from your high school guidance counselor, who can offer valuable advice that simplifies the process. Did you know that school counselors can nominate students for scholarships? It’s a great idea to build a relationship with your counselor early on, as it could potentially lead to financial assistance. How do you climb a mountain? Put one foot in front of the other. If you’re heading to college next year, or even in the next couple of years, breaking up your prep work into smaller tasks can help reduce stress and give you a sense of achievement. Start your prep work today, and you will be amazed by what you’ll learn and the challenges you’ll overcome. Is the stock market up 7% or 37% this year? Well, it depends. According to one major index, the market is up a respectable 7%. That’s not bad following last year’s dismal performance, but contrast that with another well-known index, and we might conclude that the stock market is up nearly 20%. Sounds great, right? Well, it is, unless we compare it to a third index, which has soared 37% since the start of the year. That said, let’s name some names. The Dow Jones Industrial Average is up 7%, the S&P 500 is up almost 20%, and the tech-heavy NASDAQ Composite is up 37%.
A year ago, Eden and Mark (last name withheld) lost their life savings to a scammer. “We lost all the money we made in our business. All of the monies we saved together for 38 years we’ve been married, and it was all taken from us,” Eden told California news broadcasters. It’s heartbreaking and frightening, but what happened? Eden received a pop-up notice on her PC about a virus and was told to call “Microsoft.” When she called the number, she was told that there was a “terrible problem” on her computer. The man on the phone, who was not associated with Microsoft, told her the problem was connected to identity theft, and that she needed to transfer her money to safe government accounts in Hong Kong. With the assistance of other scammers, she complied, making five wire transfers to the criminals to the tune of $564,000. Critiquing situations after they have occurred can be tempting, but scammers have a talent for appearing genuine, trustworthy and convincing. They may make you feel like they genuinely care about your well-being. Be on guard There is no shortage of tricks that scammers will use to deceive the elderly. Some will use deceitful emails and texts that encourage you to redirect to their fraudulent websites. Others may impersonate loved ones, requesting financial assistance. These fraudulent activities are becoming increasingly sophisticated and diverse. But the results are often the same. Seniors get bilked out of their savings. According to the latest data , total losses reported to the FBI’s Internet Crime Complaint Center (IC3) increased a whopping 84% in 2022 to $3.1 billion. This may be just the tip of the iceberg. Some may be unaware of the scam, and others may be too ashamed to report the theft. Tech and customer support schemes continued to be the most common type of fraud reported, while monetary losses due to investment fraud jumped 300%, largely due to the rising trend of crypto investment scams. For example, tech and customer support scammers, which primarily originate in South Asia, take advantage of their victims’ unfamiliarity with technology and online banking to quickly take as much money as possible. Some may be as simple as a call from “tech support” informing you that your computer has a virus. You don’t. This is a scam. No one will call you to inform you of an infected PC. They will claim to remove it for a fee, but they will also snoop around for relevant financial information, and you may unwittingly download malware that helps them track your every move. Or, a pop-up message or blank screen on a computer tells the victim their device is damaged and needs fixing. A phone number to reach ‘tech support’ (actually the scammer) is provided—this is what happened to Eden in the opening story. Remember this: tech support won’t call you to tell you there are issues with your computer. If you get such a call, hang up. Ignore pop-up numbers. Just turn off your PC and turn it back on. A small dose of prevention goes a long way It’s a difficult reality, but as we age, our cognitive abilities may decline, making ourselves or our loved ones more susceptible to fraudulent activities. But there are steps we can take to fight back. Designate a trusted contact. This person has no authority over your accounts but is someone your financial institution may contact to discuss issues if they suspect something is awry. Be leery of unknown phone numbers. Signing up for the National Do Not Call Registry will reduce telemarking calls, but this does nothing to stop scammers. If you don’t recognize the number, be leery about who may be on the other line. For example, why are you receiving a call from a toll-free number? Let it go to voicemail. Many are robocalls and don’t leave a message. Did the call come from a recognized firm you conduct business with? It may or may not be legitimate. It’s OK to call the company back using a phone number that you know is legit. Freeze your credit report with the three major credit rating agencies at no cost. This helps prevent accounts from being opened in your name without your knowledge. When the need arises, you may temporarily remove the freeze. Here are the three major credit agencies and a quick and easy way to contact them to freeze your credit report. Equifax: Credit Freeze Experian: Credit Freeze TransUnion: Credit Freeze Understand their methods The following are some of the primary scams being used now to defraud elders. Beware! Investment scams promise quick riches and pressure the elderly into accessing their retirement accounts, the equity in their home or convince them to go into debt. The lottery/sweepstakes/inheritance scam falsely notifies individuals that they have won a cash prize or will receive an unexpected inheritance from a distant and previously unknown relative. There has been an increase in romance scams , which can be particularly challenging to identify, as the perpetrator creates a false online persona to gain the trust and affection of the victim. These scammers could be called the “Houdinis of con artists” as they are very believable, genuine and caring. Once scammers earn your trust (and your heart), they start requesting money and won’t stop taking advantage of you until you cease sending them funds. You might think that this sounds implausible. Why would anyone send cash to someone they haven’t met and one that probably lives in another state? Well, love clouds judgment, and the elderly are especially ripe for abuse if they are lonely and their judgment isn’t as sharp as it once was. Besides, older folks are not the only ones whom romance scammers have conned. Scammers call unsuspecting older adults and pretend to be from the IRS, Social Security or Medicare. These organizations never make unsolicited phone calls. Hang up the phone. Be aware of the grandparent scam . You may get a call that goes like this. “Hi, Grandma. Do you know who this is?” When the unaware grandparent guesses the name of the grandchild the scammer most sounds like, the scammer secures their trust. The fake grandchild then asks for money to solve some urgent financial problems (such as overdue rent, car repairs or jail bonds). As you can see, there is plenty to be aware of. And these are just some of the more prevalent scams that are used to prey on the elderly. We go to great lengths to secure your assets. It’s important to stay vigilant, as scams can come from various sources. Stay alert and on guard. If the request looks out of the ordinary, that should be a red flag. It may turn out to be legitimate. But if not, caution and an ounce of prevention are worth their weight in gold. If you have additional questions or concerns, we would be happy to provide additional assistance. Breaking free of the bear A bear market is defined as a 20% or greater drop in a major market index, usually the broad-based S&P 500 Index. Unlike the better-known Dow, which comprises just 30 companies, the S&P 500, as its name implies, is made up of 500 firms and is considered a better benchmark of the overall stock market. From its early 2022 peak to its most recent bottom last October, the S&P 500 shed 25% of its value (St. Louis Federal Reserve S&P 500 data). It met the standard definition of a bear market. Just as a 20% peak-to-trough decline defines a bear market, a 20% rise from the most recent low marks the start of a new bull market, at least that is the technical definition. Since the mid-October low, the S&P 500 has advanced 24.4%.
While many find it anxiety-provoking to think about, creating a legally binding plan to distribute your assets after your death ultimately provides you with peace of mind. You can rest easy knowing that your wishes will be carried out as you have requested. Some folks prefer a DIY, or do-it-yourself approach, but this may not be the best option for everyone. One reason is because each state has its own set of laws and requirements. You can find various templates online, but some of the documents may fall short of their claim to meet your state’s requirements. It is crucial that your estate plan meets your state’s legal requirements to ensure your final wishes are honored, so expert help is recommended. Consult with an estate planning attorney to ensure that documents are correctly prepared, avoiding costly and time-consuming missteps. While we encourage you to sit down with a legal professional, we also want to provide some general guidelines you can think through independently. Estate planning is a complex field, but a general outline can clear up some of the mystery. Estate planning 101 1. What do you want to accomplish? Will you be providing for children under 18? Or are your beneficiaries young adults, older adults, relatives or charities? Exactly how might you provide for your children? Options you may consider include a trust and/or a will. What is a trust? Trusts provide control over the distribution of assets, privacy, and potential tax advantages. A trust is a fiduciary arrangement that allows a trustee to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways, specifying exactly how and when the assets pass to the heirs. For example, are you concerned that a young adult might fritter away his or her inheritance? A spendthrift trust might be the answer. Instead of an account that allows immediate access to the assets, the trustee of a spendthrift trust dispenses the assets over time. Additionally, a spendthrift trust typically protects assets from creditors, bankruptcy, divorce and lawsuits. Is there a need to minimize taxes? An irrevocable trust might fit into your plan. By placing assets into an irrevocable trust, the estate’s value is reduced regarding estate taxes. Besides tax considerations, irrevocable trusts also help protect assets in lawsuits. You may also decide to create a living trust , which transfers your assets to your beneficiaries and avoids probate. Other trusts that you may find advantageous include charitable trusts, special needs trusts, generation-skipping trusts and bypass trusts. The latter two offer ways to reduce the estate tax. You may also consider a will . A will is a legal document that takes effect upon your death. It outlines your wishes, including provisions for guardianship of your minor children. As we already mentioned, complexities abound. We would be delighted to answer any inquiries you may have. Again, consulting with an estate-planning attorney can help you decide if a trust, a will, or both are best for securing your assets for your heirs. Don’t wait until it’s too late to secure the future of your loved ones. Take action today. 2. Have you taken stock of your possessions? It’s important to create an inventory of your assets, such as bank accounts, insurance policies, investment accounts and personal belongings. 3. Don’t avoid the difficult conversation If you were to pass away suddenly, do your loved ones have access to important documents, financial statements, etc.? It is important to inform your loved ones about the location of your will and the legal professionals who will handle the process. In other words, it’s important to ensure that your heirs won’t be forced to embark on an unexpected scavenger hunt in the event of your unexpected passing. 4. Choose the right executor or trustee Select a trustworthy individual or institution to act on your behalf. You need someone dependable, trustworthy, organized, fair and financially savvy. Identifying the best candidate can be made easier if you focus on these important attributes. 5. Be sure to designate and regularly update your beneficiaries It’s common to list a beneficiary or beneficiaries for an IRA and life insurance policy. However, it’s crucial to ensure that your designated beneficiaries align with your will. For instance, if the will you drafted last year names Bob as the recipient of your IRA at ABC Brokerage, but the beneficiary listed 15 years ago is Sally, Sally will be the recipient of the assets. 6. Prepare for medical decisions Estate planning isn’t complete unless you prepare legal documents such as a durable power of attorney for financial matters and a medical power of attorney for medical decisions. It is crucial in the event you are incapacitated. These documents appoint trusted individuals to make decisions on your behalf when you can’t. 7. Update your estate plan regularly Life is full of unexpected turns. Milestone events such as marriage, divorce, births and deaths can significantly impact your wishes and create gaps in your plan. In addition, charities that used to hold significance may not have the same impact anymore. Therefore, it is crucial to periodically review and make necessary adjustments to your plan. Estate planning is a personalized process, and we want to emphasize that the above-mentioned steps are merely an outline. Our objective is to initiate a dialogue and assist you in developing a plan or motivate you to revise an existing one. We are always available to address any questions you may have. Recession aversion A quote we mention in last month’s summary is worth repeating: “Usually, recessions sneak up on us. CEOs never talk about recessions,” said economist Mark Zandi at the end of 2022. “Now it seems CEOs are falling over themselves to say we’re falling into a recession. …Every person on T.V. says recession. Every economist says recession. I’ve never seen anything like it.” Last August, the highly respected Conference Board, which compiles the Leading Economic Index, believed the U.S. economy would not expand in the third quarter of 2022 and “could tip into a short but mild recession by the end of the year or early 2023.” The Conference Board doubled down last month, forecasting that “a contraction of economic activity” will begin in Q2 and lead to a mild recession by mid-2023. Nonetheless, the economy expanded at an annualized pace of 3.2% in Q3 2022 and added another 2.6% in Q4 before slowing to 1.3% in Q1 2023, according to the U.S. Bureau of Economic Statistics. Since January, the economy has added 1.6 million net new jobs, according to U.S. Bureau of Labor Statistics data, including 339,000 new jobs in May. Neither metric is consistent with the traditional definition of a recession. Although the year is not yet over, it serves as a reminder that the brightest minds cannot accurately foretell and time future events. Still, is the jump in the unemployment rate from 3.4% in April to 3.7% in May a concern? It’s worth pointing out that the unemployment rate is measured by a survey called the household survey. Employment, reported as nonfarm payrolls each month, is calculated via a survey of businesses called the establishment survey. The U.S. BLS says the household survey includes “self-employed workers whose businesses are unincorporated.” The establishment survey does not. Self-employed workers whose businesses are unincorporated declined by 369,000 in May. It’s possible that anomalies in the data accounted for the sharp decline and subsequent rise in the jobless rate. June’s unemployment rate should provide additional clarity. Investor’s corner What does this mean for investors? Well, the resilient labor market and the Fed’s war on inflation should all but guarantee a rate increase at the Fed’s June 14th meeting. Yet, following 10-straight rate hikes, the Fed has hinted that it will take a break in June and forgo a hike in interest rates. Its gentler approach this year, coupled with talk of a pause this month, has supported the major index this year. Please note, however, that the S&P 500 Index has been aided by the outperformance of a few mega-cap tech stocks . The Dow and the Russell 2000 Index, which measure the performance of small stocks, have lagged.