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Do I Need a Personal Financial Strategy to Manage Long Term Risk?

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Managing a household be challenging even for the best of us. No matter what your status in life, chances are you worked very hard to earn the money you have. What if something unexpected were to happen? Two proven ways to prepare for change are 1) to educate yourself and 2) to plan ahead with a professional.

Walking the Tightrope of Risk

One sunny afternoon, a daring street performer crossed Niagara Falls. To make the stunt interesting, he decided to push a wheelbarrow across a tightrope. “Ladies and Gentleman! Children of all ages! I am now going to push this wheelbarrow on this tightrope across this waterfall. Who thinks I can succeed?”

A crowd cheered him on. Slowly, steadily and ever so carefully, he crossed the falls. Stunned observers watched aghast. Eventually he reached the other side. The crowd cheered wildly!

“Was that amazing?!”
“Yes! Yes!” the crowd shouted back.
“Do you think I can do it again?”
“Yes! Yes! Do it again! Do it again!”
“OK! Who wants to get into the wheelbarrow?”  The thunderous applause instantly became complete silence.

This humorous parable is one of my favorites because it starkly illustrates risk tolerance. Sure, it is easy to watch others take exciting risks, but we feel differently about our own risk, do we not?

My friends, allow me to explain the metaphor. The performer crossing the tightrope represents you as an investor! The slow journey across the tightrope represents the decades of your lifetime. The wheelbarrow represents your financial dreams. The waterfall represents the never ending changes in global markets, law and the cyclical economy. What about the crowd, you ask? They represent all the onlookers willing to give free advice. They are all “experts” that surround us at the water cooler at work, or in the pub or in the mainstream media. What is the solution?

Why Choose a CERTIFIED FINANCIAL PLANNER™ Practitioner?

Simply stated, you deserve a professional who understands you. Everyone wants to be financially successful but in my experience success means different things to different people.  Personal financial advisors are willing to discuss your life with you individually. They help clients articulate, define and plan their long term financial success.

CERTIFIED FINANCIAL PLANNER™ Practitioners are unique because they are trained in multiple disciplines. They are also required to adhere to the highest ethical standards. They are able to provide detached objective advice and insight when a client may need it most.

It Pays to Plan Ahead

This is a true story. In the 1940s a farmer was accidentally pinned under his tractor, which had rolled. Fearing the worst, he whipped out his pocket knife and scratched the following into the fender: “I leave everything to my wife.” A few hours later, he died. Luckily for his wife, the court upheld his last minute will and testament. This is a touching story, but hopefully there is a lesson here for all of us. Plan ahead! For example, I hope you never find yourself saying:

  • “Darn it! The doctor says I have cancer. I guess it is time to get serious about my life insurance.”
  • “Shoot, is that ambulance here already? Hold on a minute while a do a health insurance review.”
  • “The Stock Market is down drastically today? Wow, I hope I was positioned defensively.”
  • “What do you mean I owed $30,000 to the IRS this year?”
  • “I’m 64 today. Happy birthday to me! I guess it is time to start saving for my retirement.”

These lighthearted examples are intended to be entertaining. I wish I could say I have never met people who have been in similar situations, but honestly in my years of practice I actually have. The reality is the majority of us simply do not plan ahead financially.

Can I really afford a Financial Advisor?

Financial missteps can be costly. Procrastinating can also be extremely expensive. A more appropriate question may be, what is the cost of not having a financial advisor?

At Castle Rock Investment Company we offer different options to accommodate clients at different phases in their lives. Whether you are newlyweds or great-grandparents, Castle Rock Investment Company has a flexible fee structure to help accommodate most budgets. Call for a free consultation.

What if you met with a professional for an annual financial review? What if you had a devoted guide to help you make educated financial decisions? What if you had access to objective advice that coincided with your long term goals and dreams? What if someone got into the wheelbarrow with you?

Written by Michael Angell, CFP®, EA
Castle Rock Investment Company
303.719.7523
Michael@CastleRockInvesting.com
Copyright 2017

Water Cooler Wisdom: Fourth Quarter 2016 The “Trump Bump”

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The U.S. stock market soared after Trump’s electoral victory.  Investors and traders put bets on his pledge to reduce corporate tax rates, pull back regulations and increase infrastructure spending. As seen in the chart on the right, fourth quarter returns for the U.S. stock market were higher for small companies and value-oriented stocks. Looking forward, the common theme among market forecasters is a low to moderate US stock market return (mid-single digit). This may be due to current valuations (see chart below) with price to earnings ratios well above their historical norms and an underlying fear of bubbles resulting from the Great Recession.

During a market update call on January 10th, an adviser asked if the “Trump Bump” could really be paid for by the President-elect.  The market strategist explained it may be possible through reducing corporate tax rates and that every 1% drop in the effective corporate tax rate potentially generates an additional $1.50 of earnings for the S&P 500, currently at $115 per share (see attachment “Corporate profits”).
“If Trump dropped the current effective tax rate from 26% to 18%,” the strategist hypothesized, “earnings per share would increase to $128 and pay for the rally.” Ironically, “in each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability…for tax years 2008 to 2012, profitable large U.S. corporations paid, on average, U.S. federal income taxes amounting to about 14 percent of the pretax net income that they reported in their financial statements (for those entities included in their tax returns).”[1]

So, what do we know?  There is a general concern about a continued decline in Treasury prices that coincides with the expectation of three Federal Reserve rate hikes in 2017. Also, leading economists like Trump’s commitment to infrastructure spending and believe it will boost non-college wages and jobs while, at the same time, they strongly disagree with his isolationist policies and deregulation of the energy industry.[2]

What we don’t know?… the price of populism. I could not find an estimate on the timeframe or projected cost to Americans that economists fear.  By the time you read this, America will have inaugurated Donald Trump as President of the United States and we will be embarking on his “100-day action plan to Make America Great Again” (attached). Whether it’s due to economic insecurity or a cultural backlash, Europeans and Americans have voted for protectionist leaders that have made big promises of change. Perhaps America will be the model for Brexit.

[1] GAO-16-363:  Published:  March 17, 2016 “Most Large Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed Significantly from the Statutory Rate”

[2] http://www.igmchicago.org/surveys/100-day-plan

Family Love Letter Event

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Did you know you can gift your Itunes, American Express points, and airline miles to a designated recipient in the event of your death (but only if it’s included in the will!)? Or that if a family member dies you can get refunds on their unused subscription accounts?

These are just a couple of the interesting facts we learned last night at our Family Love Letter event. 

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We were fortunate to have Karen Shirley, an estate planning attorney, to answer our questions about our wills!

We also received tools to gather all our information in one place for our families. We each walked away with a booklet where we will provide a huge amount of information, from informing our loved ones what type of burial we desire to passwords of accounts that will need to be closed if something happens to us.

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Great food!

We had a fun (and sometimes emotional) night of good food, sharing, and learning incredibly valuable lessons. 

Karen Drancik from Neuberger Berman kicked off the evening by sharing stories of individuals in situations with an incapacitated family member (due to Alzheimer’s, dementia, or in some cases, death) and went through extraordinarily stressful situations trying to locate information during their time of grief and confusion. She also shared stories of individuals who had completed their Family Love Letter booklet and gave their families an enormous gift of peace during that time.

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Karen Drancik sharing stories and information on how to get your affairs in order before you’re unable.

Karen explained how having difficult conversations before it becomes urgent can help families avoid overly emotional discussions and rash decisions for everyone involved. Developing a plan that includes what is valuable to family members, who will make decisions if someone is incapacitated, and dictating what you wish for your funeral can bring peace during a tumultuous time.

Simply documenting all information that family members will need to know and keeping it somewhere they can locate it easily is an enormous gift to your loved ones. The Family Love Letter booklet takes it a step further by inviting you to write down beloved traditions and even recipes to remember you by.

We were reminded to create a plan for surviving pets, and to create a list of people in your life who should be contacted in the event of your death. 

We discussed that it would perhaps be easier to create all these documents digitally, but writing them in your own hand will provide a valuable keepsake for your family. One individual in the audience still has the document his grandfather wrote describing his Ethical Will, describing what he hopes his family will remember of him. Family Love Letter provides a space for you to write these items down.

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Attendees were surprised at the amount of information included in the Family Love Letter booklet they hadn’t thought of.
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Several audience members inquired how to handle situations with their parents.

Several members of the audience had very emotional questions pertaining to their parents who are suffering from Alzheimer’s, and mentioned how much they wished they had come across a tool like Family Love Letter before their parents began to forget details. Others had questions about whether someone without children or a spouse should have a document like this. (Karen’s response, by the way, was a resounding “YES!”)

Take a look at what one of the attendees had to say about the evening:

“Several years ago, my husband and I took a trip to India. Preparing for the trip made me begin to think of things I should share with my family in the event of a tragedy. I tried to think of any information they might need, and started putting together a binder of information for them with information on bank accounts, insurance, stocks, and other important materials.

Last night, I attended an event called “Family Love Letter – A Holiday Affair” hosted by Castle Rock Investment Company.

Karen Drancik presented a brilliantly concise and thoughtful method of capturing all the necessary information for a surviving family when one passes away. This not only includes financial and investment information, but every imaginable detail including people to notify, funeral and burial wishes, down to a request to airlines to disperse frequent flier miles.  What an amazing gift to leave my loved ones!

Thank you, Castle Rock Investment Company, for this important tool!”

-Becky Smoldt

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Michele Suriano and Ashley Coombe of Castle Rock Investment Company.

We look forward to hosting the event again in the future. Please sign up for our newsletter if you would like to receive information about dates. If you’d like to set up a time to meet with us to go over this information individually, please call Michele Suriano at 303.725.7086. We look forward to hearing from you! 

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Prepare for the Unexpected!

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Ever wonder what would happen if you were not able to make critical decisions by yourself because you were incapacitated? Is there anything you can do to prepare for the unexpected? Yes, there is! While you are still able to do so, there are three crucial documents that all adults should have to be prepared for one of life’s major curveballs. The documents include:

  1. The Financial Power of Attorney (“FPOA”): This is a document that allows an individual (the “principal”) to appoint someone (an “agent”) to make financial decisions on their behalf. This authority can be in effect immediately or come into force when the principal is incapacitated. This can also be beneficial for those who travel internationally and will not be available to sign financial documents.
  2. The Medical Power of Attorney (“MPOA”): This is a document that appoints an agent to make most medical decisions on someone’s behalf if they are incapacitated. It is crucial to also include something called a HIPAA waiver which will allow the agent to access medical records. Without the HIPAA waiver, the agent might not be able to act in the best interest of the principal due to lack of information. It is also important to know that if the principal is in terminal condition, a MPOA will not suffice. In that instance, there is another document that will.
  3. The Living Will/Advanced Directive: This document will allow an individual to decide how they want to be treated in the instance that they are in terminal condition and cannot communicate verbally. For instance, the individual can elect to refuse to be on life support or to be heavily medicated so they can pass peacefully. But perhaps the reason why this document is so crucial is because it will remove the burden from family members required to make these painful decisions and can even prevent families from falling apart due to disagreements.

So, what if you have children or if you were to pass away earlier than expected? If so, how can you communicate those wishes to your children along with other family members?

Contact Michele at MSuriano@CastleRockInvesting.com or (303) 725.7086 today to get your documents in order.

Getting the Facts Straight about Qualified Plan Loans

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Are you considering making a large purchase but don’t have the money to do so? Are you in need of emergency cash? Typically, they are many options for people in that situation such as a home loan, a home equity line of credit, personal loans, etc. But what if you do not want to deal with a bank or have a poor credit score? Fortunately, there are a few options, with the most notable being the Qualified Plan Loan. That’s right, you could be able to take a loan from your employer’s retirement plan. In fact, over 75% of Qualified Retirement Plans allow participants to take loans from their accounts.

So now to the big question…is it worth taking a loan from your retirement plan? In short, no. However, it is still important to weigh the options of taking such a loan. Below are the major pros and cons of taking loans from your employer’s retirement plan.

Pros:
1. Qualified Plan loans offer a low interest rate, which is usually the prime rate plus 1%

2. You are not borrowing from a bank; you are just borrowing from yourself. In other words, the interest that you pay will actually go into your retirement account balance. (However, please note that all loan payments going back into the plan are in after-tax dollars).

3. The loan process is typically very easy and you can get the needed cash in a timely manner. On top of that, payments are simply deducted from your paycheck.

4. Loan minimums can be as low as $500-1,000 and people can borrow up to 50% or $50,000 of their vested balance, whichever is less.

Cons:
1. Payment options are not as flexible as other loans since the only two options are the minimum payments deducted from your paycheck or to pay the balance in full.

2. You have 90 days to start making payments back into the plan or else the loan will be considered taxable and will trigger a 10% tax penalty (for borrowers under 59 ½). Remember, if you are laid off, you may only have 90 days to pay the remaining balance in full or the loan will become a taxable event and will also trigger the 10% tax penalty (for borrowers under 59 ½)

3. People who borrow from their employer retirement plan may face loan fees, i.e. loan origination fees, loan maintenance fees, etc. And if the loan is particularly small (say $1,000 for an example) you could theoretically be paying 15% just in fees, which will not go back into your plan.

4. Finally, there are major opportunity costs associated with a Qualified Plan Loan. For example, if the borrowed funds in your account can potentially earn an average of 8% a year while your borrowed funds can only earn a theoretical 4.5% with the interest from the loan, you could theoretically be losing money (depending on market conditions).

In the end, a Qualified Plan Loan may not a great idea for those who have other means of getting an affordable loan and in most cases should only be used as a last resort.

So, how can someone get money for large purchases without going to a bank or borrowing from their retirement plan? For starters, people can make it a monthly habit to contribute to an emergency fund and/or a special purchase(s) fund so that they will not have to borrow money in the first place (please read our previous blogs on emergency funds and on general savings tips).

Overall, borrowing can be quite a hassle and could be costly in the long run no matter how you look at it. However, if you develop a plan for making a large purchase or plan ahead of an emergency, funding these events in our lives can be a much smoother and inexpensive process. If you currently do not have a plan, contact Castle Rock Investment Company to help you reach life’s major financial milestones, we will always work in your best interest!

Water Cooler Wisdom: Third Quarter 2016

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By Mack Bekeza

The Presidential Election and What to Know

Despite the pleasant performance in the stock market for 2016, investors are becoming more doubtful about the global economy as a whole in regards to how “pleasant” future growth will be. On top of that, The U.S is having one of the most interesting presidential elections in history. With both of the leading candidates making big promises to the public, how will these proposed actions affect the economy as a whole? But perhaps the biggest question and misconception that U.S investors have is “How does the President affect the economy?”

For our response, we want to point out 3 big myths about how the President affects the economy

            1. Capital Markets perform better when Republicans are in the White House:  

Although many consider the Republican party as the “pro-business” party, if you look at the returns of the Dow Jones Industrial Average since 1897, the markets do not give a hoot about who is president.

2. Major pieces of legislation get passed once the new President assumes office:

With the exceptions of the Affordable Care Act and Dodd-Frank, The United States rarely makes major policy changes in one major swoop, rather in small increments.

3. The President has as much of an impact on the economy as consumers and businesses:

     Although the media places major scrutiny on the President over the U.S Economy, government spending only accounts for 17.7% of total GDP, while the remaining 82.4% comes from consumer spending, private investments, and foreign trade.

So… will this presidential election completely change the way we invest? More than likely no. However, it is important to note the U.S GDP is expected grow between 1.5 to 2% over the next decade. This is primarily due the recent and projected dismal growth in the U.S labor force along with over $30 trillion in private wealth being transferred to younger generations. In other words, it is more crucial to observe how Millennials begin to take charge of the U.S Economy rather than who becomes president.

Attached are slides that provide more detail regarding presidential elections and major leading economic indicators.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@CastleRockInvesting.com.

 

HSAs and what you need to know about them!

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Since 2003, Health Savings Accounts (“HSAs”) have been an excellent tool for families to help cover current healthcare costs, along with future healthcare costs. HSAs are also known to be an excellent tax-planning tool since participants are allowed to contribute on a pre-tax basis and the funds grow tax deferred. Additionally, participants are able to make tax-free withdrawals for qualified medical expenses. Funds in an HSA may also be invested in a list of mutual funds, or even have a brokerage link for more savvy investors. On top of that, people have until April of the following year to make contributions (similar to an IRA).

With all of these excellent benefits, there are a few caveats:

  • There is a yearly contribution limit of $3,400 per year for individuals and $6,750 for family plans in 2017. If your health plan runs from January to September, you can only make contributions for these months.
  • There can be tax penalties if withdrawals are made for non-qualified medical expenses before age 65. This involves paying income taxes for the non-qualified withdrawals as well as a whopping 20% penalty.
  • In order to qualify to contribute to an HSA, individuals must have a high-deductible health care plan (“HDHP”). This means that an individual plan must have a minimum deducible of $1,300 and minimum “maximum out-of-pocket costs” of $6,550 for 2017. For family plans, the minimum deductibles and maximum out of pocket costs would be $2,600 and $13,100 respectively. You also cannot be enrolled in Medicare.
  • Finally, if you are currently enrolled in a health plan that is a part of a healthcare.gov exchange, finding a health plan that is HSA eligible for 2017 will be nearly impossible since the requirements for a health plan to be eligible for a government exchange go against the requirements for a plan to be HSA eligible.

These setbacks should not prevent people from taking advantage of these accounts. In fact, HSAs will more than likely save people money in the long term and even in the short term. With having a HDHP, premiums will be notably less expensive for individuals and families, meaning that people can use those up front savings towards HSA contributions. Also, people can reimburse themselves for medical expenses that occurred in the past as long as the HSA was opened before that expense occurred. This means that if someone needed to make a non-qualified distribution, he or she can make it appear as if they were reimbursing themselves for a prior medical expense.

Although you will have to increase your deductible and maximum-out of pocket costs, utilizing a Health Savings Account could be one of the best decisions you will make if you want to plan for future health needs, even in retirement. And, don’t forget to keep your medical receipts…you may need them later!