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C.H. Robinson

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Market Volatility Following the Election

Written by Matt Wright on .

Emotions are still running high following yesterday's election and Wall Street got hit with the one thing it dislikes more than anything: A surprise. Financial market trading last night implied potentially dramatic losses in the stock market today, but in the morning light, those losses have reversed into relatively modest gains. It's reasonable to assume that the coming days and weeks will see above-average market volatility as investors adjust to new expectations, but we are advising clients to sit tight and let it pass without making changes to your long-term investing strategy.

Several brief points as to why we think this is:

We've seen this before – U.S. stocks dropped 5% in the week following the 2012 election, only to resume a multi-year bull market shortly after. No one can predict what will happen this time around, but we do know that a gut / emotional response to get out of the market at that time was in error.

You're diversified – With very limited exceptions, our clients are invested in balanced strategies that have between 30% to 60% in fixed income. This is your portfolio's counterweight to stock market volatility, and we fully expect this portion to soften the volatility that stocks may exhibit.

We're all in this for the long-term – Our focus as your financial advisor is to implement a successful long-term financial plan. We vow not to make emotional short-term decisions that could impair this plan and we ask that you do the same.

We understand that this is a difficult time for some of you, and there may be a feeling that something has to be done. We're not here to tell you that your feelings are wrong, we just want to make sure that any changes to your financial situation are made in your best long-term interest. Please contact one of us if you'd like to review your financial situation and discuss any actions you are considering before making any changes.

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Asset Location is part of our Vocation

Written by Matt Wright on .

Raise your hand if you want to pay more taxes!

No one? Okay, let's talk about whether you're living up to that reality. You most likely know to take advantage of tax-deferred retirement accounts and other tax-favored options such as Health Savings Accounts. You've probably heard about Roth IRA conversions and how, in some circumstances, you might be able to pay some amount of tax today with the expectation of saving taxes later on.

But, if you have taxable investment accounts in addition to tax-deferred accounts, how well are you managing your overall tax situation? If you aren't quite sure how your investment income will be taxed, you may be leaving money on the table.

SWA has always believed in investing client funds in a tax-efficient manner and does so by using mostly passively managed investment options and limiting trading turnover. By doing so, we can take greater control over the timing and amounts of realized capital gains. But we don't stop there – the next level of tax management is called "Asset Location."

Asset Location is a method of allocating your investment portfolio across your different account types in an effort to improve the performance of your portfolio, net of taxes. Certain types of so-called qualified investment income (e.g., qualified dividends and long-term capital gains) are taxed at lower rates than non-qualified income (e.g., interest, short-term capital gains, Real Estate Investment Trust dividends). No matter which tax bracket you land in, non-qualified income is taxed at a rate at least 10% higher at the Federal level than qualified income. Therefore, the logic of an Asset Location Strategy is to position your investment assets between your taxable and tax-deferred accounts in a way which will be more tax-friendly over time. Although it varies based on each client's situation, this could result in higher after-tax portfolio growth of 0.2%-0.5% per year. The key is that you incorporate all of your investment assets in this strategy, otherwise you cannot expect to realize the full benefits.

Many investors and investment managers are still focused on outdated ideas on how to manage their money, still believing that they can pick the next hot stock or successfully time moves in and out of the market. While there are always going to be a small group who do this successfully, there is an overwhelming amount of research (and personal experience) that the net result is much more likely to be higher fees and higher taxes on what you do earn. Instead, we should be focusing on the things we can actually control and understanding the tax code is a critical part of this.

If you need help in investing your money in a tax-effective manner, contact us now before another tax year slips away.

 

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Call It What It Is: A Dividend is a Refund

Written by Summit Wealth on .

Term insurance is something we recommend most clients have in place as we are not typically proponents of permanent life insurance in most cases. That said, a few weeks ago we had a conference call with a life insurance salesman (for a company that shall remain nameless) that caused us to pause and consider what he was selling. Let me lay out the facts for you:

  • The clients (husband and wife) both own a term insurance policy with premiums increasing annually, as each gets older.
  • As you would suspect, neither of these term policies is accumulating any cash value as they are term policies and not permanent (whole life, variable life, etc.) policies.
  • The salesman touted that the clients were "guaranteed" to receive at least a 5.2% annual "dividend" on their policies and, quite often received 6% to 7% annual "dividends" on their policies.

At first, we asked questions like:

  • How can the insurance company afford to pay 6% to 7% annual dividends on their products, given the low interest rate environment we are in?
  • Where could they invest the money to earn a 9% to 10% annual return, since they would have to earn that much, after their fees to afford to pay their clients 6% to 7%, to earn a profit?

After having some discussions with SWA team members and giving it some serious thought, I remembered back to my days working at a CPA practice and recalled purchasing a term policy from the American Institute of Certified Public Accountants (AICPA). At the end of each year, I would receive a refund check from the AICPA, which they called a "dividend."

Simply put, that dividend check was a refund of the premiums I paid in, because fewer than expected individuals in my age group (covered by the same policy) had died that year. Then it dawned on me that the particular insurance company that we're now dealing with was doing the same thing. By that, I mean they are refunding premiums they overcharged their clients and are calling those refunds a "dividend."

Now I don't know about you, but getting a refund of something I am overpaying (every year) in the first place is not a return on my investment. It merely tells me that I am likely getting charged too much for a product I can likely purchase for less somewhere else.

My counsel to each of you reading this blog is to understand exactly what type of life insurance coverage you are paying for and how much it is really costing you. Most importantly, don't let the insurance company convince you that life insurance is a "great investment." We feel, in almost all cases, life insurance should be used to protect your family and not as a tool to create wealth for retirement, college planning, etc.

If you have any questions about this topic, please reach out to SWA as we have the life insurance resources that can review your existing policies, help you understand your coverage, and determine whether other options may prove more beneficial.

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Health Insurance is Out of Control

Written by Summit Wealth on .

After reading an article titled: "MN Insurance Premiums Jump, State Calls Increases 'Unsustainable,'" by Katharine Grayson of the Minneapolis / St. Paul Business Journal, we felt compelled to share some of that information. We are well aware that this topic is of great interest and concern to our clients. Here are some of the facts Katharine references in her article that are alarming:

  • Minnesota insurers will increase rates for individual health plans by an average of more than 50% in 2017.
  • The insurer with the smallest approved rate increases in the individual market was HealthPartners, although it still received a 50% rate hike on average.
  • The largest rate increase is for UCare, which received a premium increase of nearly 67%.
  • Rate hikes in the small-group market (businesses with 50 or less workers) were considerably less, ranging from a decline of 1% to an increase of 14.8%.

Based on the above information, we feel it is increasingly important to understand what health care costs could look like for you, and the impact those costs could have on your retirement cash flow needs, especially if you anticipate retiring before age 65.

If you have any questions regarding your specific situation, please contact SWA as we have resources that can work with you, on an individual basis, to help find the best solution for you.

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When Should You Enroll in Medicare?

Written by Summit Wealth on .

Knowing when to sign up for Medicare can be tricky. When you turn 65, you will be enrolled in Medicare Part A & B automatically (although you have a choice to accept Part B), if you are already receiving Social Security or Railroad Retirement Board benefits. If you are age 65 or older and are not receiving Social Security or Railroad Retirement Board benefits (because you are still working), Medicare enrollment works differently. In this case, you will not automatically be enrolled for Medicare Part B and you will need to sign up during your Initial Enrollment Period. If you have health insurance coverage because you are actively employed and choose to delay your enrollment in Medicare Part B, you will be granted a "Special Enrollment Period" that begins when you quit working or your health insurance ends.

For enrollment in Medicare Part A, if you are still working at age 65, your situation may be different. If you've worked at least 10 years (40 quarters) and qualify for premium-free Medicare Part A, you will be automatically enrolled in Part A when you turn age 65, even if you are still working. However, if you haven't worked enough quarters to receive Medicare Part A without paying a premium, you will need to enroll in Part A yourself.

If you need to sign up for Part A and / or Part B, you can sign up during the following time frames:

  • Medicare Initial Enrollment Period: When you first become eligible for Medicare, you have a 7 month period to sign up. This 7 month period begins 3 months before the month of your 65th birthday, including the month you turn 65, and ends three months after the month you turn 65.
  • General Enrollment Period: If you happen to miss the Initial Enrollment Period, you can sign up between January 1st and March 31st each year. Your coverage will begin July 1st. Unfortunately, you may have to pay a higher premium if you enroll late.
  • Special Enrollment Period: If you or your spouse (or a family member, if you are disabled) is currently working and you are covered by a health insurance plan through an employer or union (that meets certain Medicare standards), you have a "Special Enrollment Period" when your coverage ends. This period ends 8 months after employment health insurance coverage ends.

If you have any questions about your Medicare benefits or how the impact of what we have outlined above may affect you, please contact us today. We have resources available that can help answer your questions.

North Metro: 763.355.5873
227 East River Parkway
Champlin, MN 55316-5873

South Metro: 612.987.9112
5871 Crossandra Street SE
Prior Lake, MN 55372-3337

West Metro: 763.639.3425
322 Greenhill Lane
Long Lake, MN 55356

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