Frank Talk - 3rd Quarter Newsletter (2017)
Table of Contents
Happy Summer, Clients and Friends!
We hope you’ve had an opportunity in recent weeks to reconnect with family and friends over a hot grill or a cool lake breeze and enjoy some down time. I know from my own experience that as kids grow older it gets harder and harder to juggle everyone’s schedules and get together for family dinners, vacations, or other activities. If yours are still small, cherish these crazy times trying to juggle camp, swim meets or other activities with your busy schedule. Trust me, you’ll actually miss it one day!
Family is at the very heart of everything we do at Planned Financial Services, from our focus on helping you pursue the goal’s you’ve established for your family, to making sure our team members have the flexibility to balance family and workplace obligations. Our dedication to serving our clients as objective family financial stewards is why Frank will be participating once again as a panelist at the Smart Business Northeast Ohio Family Business Conference and Achievement Awards in September. You can find more information below about this event and where to register if you’d like to attend.
Cynthia Yang Named “One of America’s Top Next-Generation Wealth Advisors”
We’re also very pleased to announce that a highly regarded member of the Planned Financial Services family and your dedicated team has been named among the nation’s top Millennial advisors. Join us in congratulating, Cynthia Yang, CFA®, for being named one of America’s Top Next-Generation Wealth Advisors from Forbes. The prestigious listing, published on Forbes.com is based on research conducted by SHOOK Research, LLC and considered advisors born in 1980 or later with a minimum 4 years relevant experience who have built their own practices and lead their teams; joined teams and are viewed as future leadership; or a combination of both.*
Cynthia joined our team in 2012 as a wealth advisor with a Master of Science degree in Finance and Accounting. While working fulltime advising a broad range of our individual clients and businesses, she completed the rigorous curriculum required to achieve the highest distinction in the investment management profession — the Chartered Financial Analyst® (CFA) designation. As a CFA®, Cynthia has mastered a broad range of practical portfolio management and advanced investment analysis skills, bringing deep knowledge, insight, and expertise in equity valuation, independent investment research, risk management, and portfolio performance attribution analysis to our team and our clients. Additionally, she reviews and adjusts investment portfolios for our clients on a regular and timely basis.
Cynthia was also instrumental in mastering and installing our new trading platform to create a portfolio interface enabling seamless trade entry and execution through the advanced platform. Her dedication to advancing our firm’s business goals, and her commitment to exceeding client expectations while seeking to provide objective, timely, and actionable advice, solidified her role as a key contributor and leader within our firm well before being named to America’s Top Next-Generation Wealth Advisors from Forbes.
9th Annual Cleveland Economic Summit Recap
I want to thank those of you who attended our 9th Annual Cleveland Economic Summit for joining us at the Cleveland Botanical Garden in late May. We were grateful for the opportunity to once again host so many clients, friends, and local business leaders for this event featuring our two distinguished speakers: Emily R. Roland, CIMA®, Head of Investment Research at John Hancock Investments and Eric Embacher, Visitor Experience Program Manager at Destination Cleveland.
Following our late afternoon networking and cocktail reception, I had the honor of giving opening remarks and introducing Emily Roland who provided her analysis and perspective on key macro themes impacting the financial markets and economy, including major elections in the U.S. and abroad, improving global growth, and the normalization of U.S. monetary policy. The following insights were among the highlights of Ms. Roland’s presentation: 1
- The U.S. elections were a net positive for the markets due to proposed pro-business policies.
- Global growth – along with improving corporate earnings—is giving an added tailwind for domestic stocks.
- The Fed is gradually raising rates, a sign of a continued expansion in U.S. economic growth, which should be a positive for U.S. equities.
- A key development we’ve seen in the U.S. equity market is a recovery in corporate earnings. Analysts expect the positive growth to continue in 2017, which should buoy stock prices.
Cleveland business leaders were particularly interested in hearing from our second speaker, Eric Embacher, who discussed the tremendous positive impact tourism and business travel have had in stimulating growth in the Greater Cleveland community from job creation, to direct and indirect sales, and tax revenues. Mr. Embacher illustrated how Cleveland’s travel and tourism industry has been a critical driver of Northeast Ohio’s economy in recent years and is responsible for generating $8.1 billion in direct and indirect business sales and over 65,000 jobs supporting 1 in 12 salaried workers, resulting in the #1 industry employment growth rate. 2 With more than 20,000 visitors passing through the Cleveland Visitors Center each year, the city’s tourism related tax revenue exceeds $1 billion annually. Mr. Embacher attributes this growth to several factors, including:
- More major sports teams than comparably-sized U.S. cities
- Broad array of local attractions including the Rock and Roll Hall of Fame
- Growing culinary, retail and entertainment sectors
- Burgeoning arts, music and cultural scene
- International spotlight as a result of holding the 2016 Republican National Convention
- Unprecedented development exceeding $3 billion spent on new visitor-related infrastructure, including a $50 million renovation of downtown’s Public Square and six new downtown hotels boasting nearly 5,000 rooms.
While it’s hard to believe it’s been nearly a decade since we hosted our first Economic Summit during the recession in 2009, we look forward with great anticipation to hosting our 10th Annual Cleveland Economic Summit in 2018. Watch for our “Save the Date” email in March 2018 – you won’t want to miss this milestone event!
E.F. Boyd & Son, Inc., Hoist Equipment Co., Inc. and OGS Industries Receive Smart Business Longevity Awards
Congratulations to our clients and friends at E.F. Boyd & Son, Inc., Hoist Equipment Co., Inc. and OGS Industries who were recipients of the 2017 Business Longevity Awards at the August 3rd luncheon and awards ceremony hosted by Smart Business in Cleveland, Ohio. Founded in 1905, E.F. Boyd & Son, Inc. celebrates 112 years in business this year. Hoist Equipment Co., Inc. founded in 1954, and OGS Industries founded in 1959 were both honored for more than 50 years of business growth. All three companies were recognized for their significant contributions and leadership as longtime members of the Northeast Ohio business community.
Frank Fantozzi Moderates Elite Advisor Forum
In July, Frank moderated a panel discussion of his peers at the 2017 LPL Private Client Elite Advisor Forum in Boston, discussing relevant opportunities and challenges facing the wealth management industry today. Topics of discussion included how to best structure a team, changing client needs and expectations, and collaborating with outside professional advisors, among others.
Upcoming Family Business Conference and Achievement Awards
Planned Financial Services is proud to be a sponsor of the Smart Business Northeast Ohio Family Business Conference and Achievement Awards interactive workshop in September. Frank will participate on a panel of leading industry experts, sharing real life examples of what separates success stories from failures. The networking breakfast and interactive workshop will offer perspectives from both industry experts and actual family business owners to address a myriad of issues and challenges family-owned businesses face. If you’re a member of a family business and will be in the Cleveland area on September 7th, we encourage you to attend. This is a great opportunity to learn about the issues family businesses face in today’s political and economic climate and what really leads to family business success. The conference and awards program will be held on September 7, 2017 from 7:30 – 11:00 a.m. at the Corporate College East in Cleveland, Ohio.
LifeAct® Achieves Record Outreach in Northeast Ohio
We want to thank those of you who have joined us in supporting LifeAct® over the years in its mission to prevent suicide by teaching young people throughout Northeast Ohio to recognize the warning signs and seek professional help for themselves and others. We’re pleased to report that LifeAct® reached over 50,000 teens and adults from July 1, 2016 to June 30, 2017 through the following programs, events, and online channels:
- Community programs on suicide prevention, peer social messaging (Youth Advisory Board), and web site served more than 25,000 individuals.
- Two special events attracted over 1,500 participants: 22nd Annual "Links for Life" Golf Outing and 13th Annual "Into the Light" Walk, which is also a memorial event for those who have lost family and friends through suicide.
- "Recognizing Teen Depression and Preventing Suicide" and “UROK” suicide prevention programs reached 24,659 high school and middle school teens in 189 Northeast Ohio schools. 2,130 of these students (8.6%) reached out to a LifeAct instructor for help and were immediately connected to mental health support.
As a member of the LifeAct® Board of Directors, Frank plays an integral role in developing and implementing the organization’s formal growth strategy focused on identifying new donor channels and donor types, and leveraging existing donors.
Market and Economic Update
**August 2017 begins to close the door on summer here in the United States, but it is also a relatively quiet month in terms of big market moving events. The Federal Reserve (Fed), European Central Bank (ECB), and Bank of Japan all had meetings last month and they won’t hold official monetary policy meetings again until September. Another solid earnings season is winding down as well, which means big news driven events may be slim in August. Even though the month is light on highly anticipated events, this doesn’t mean there can’t be volatility, in fact there normally is. Since the bull market started in 2009, August has been the worst month of the year twice (out of eight years) and has finished in the top half of all months for the year only twice. The biggest event of the month is probably the first solar eclipse to pass the entire continent in 99 years. Which raises the question: are the stars aligned for some volatility? Knowing this month’s history for volatility, it is important to stay on top of the significant happenings coming up. To help, we’ve created this guide to the August 2017 market calendar, providing an overview of the key events.
AUGUST 4: July Employment Report Jobs growth bounced back in June with a very impressive 222,000 jobs created, with both April and May revised higher as well. This is now an incredible record of 81 consecutive months of jobs growth, but the 12-month average of jobs created continues to trend lower. This is perfectly normal at this stage of the economic cycle and as the labor market continues to tighten, it should eventually push up wages as well. Nonetheless, wage growth was up a disappointing 0.2% last month (month over month), continuing a trend of weaker inflation data. The unemployment rate ticked up to 4.4% last month from 4.3%, but for good reason, as more job seekers came into the market. Strengthening the employment backdrop is the employment index of the Markit Composite Purchasing Managers’ Index (PMI) rising to a seven-month high in July. Lastly, expectations are for 180,000 jobs to be created in August and the unemployment rate to dip back down to 4.3%.
AUGUST 11 AND 31: Inflation Data With a largely healthy labor market, low inflation has been the main foil of the Fed’s efforts to normalize rates. The Consumer Price Index (CPI) peaked at 2.7% year over year in February, aided by strong year-over-year price gains for oil, and has since declined to 1.6%. The Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred measure of inflation, peaked at 2.1% year over year in February, its first foray above 2% since 2012, and has since fallen to 1.4%. Current core readings (excluding food and energy) are similar. The Fed had initially emphasized the role of “transitory factors” in declines from February peaks, highlighting idiosyncratic price changes for wireless telephone services and prescription drugs. These factors aren’t enough to account for declines alone, but they play some role and will continue to have an impact until they roll off the year-over-year number in 2018. In its July 26 policy statement released at the conclusion of its most recent two-day meeting, Fed policymakers made small accommodations to declines in inflation compared to the June statement, changing its declaration that inflation had “recently declined” and is “running somewhat below 2%” to inflation has “declined” and “is running below 2%.” Granted these are small adjustments, but small adjustments in the statement are one of the ways the Fed signals its intentions to markets. July CPI data will be released on August 11, with current consensus expectations at a 0.1% month-over-month increase, 0.2% ex-food and energy. The July PCE Price Index will be released on August 31.
FIRST THREE WEEKS OF AUGUST: Back-to-school (BTS) shopping is already underway and we expect a very strong season, but anticipate things really heating up in August. The National Retail Federation (NRF) is forecasting a more than 10% increase in BTS sales this year versus 2016. We see several reasons to be optimistic:
- Consumer confidence is high. Based on the University of Michigan consumer sentiment readings, consumers haven’t been this confident in over a decade.
- Steady job gains. A solid job market is driving the confidence and providing fuel for spending. Annual wage gains of 2–2.5% are hardly eye opening but they are driving more spending.
- Wealth effect. The strong stock market supports spending—the S&P 500 Index is up over 7% over the past six months so shoppers feel wealthier. The strong housing market makes shoppers feel wealthier, with average prices up 5–6% nationally according to various sources (National Association of Realtors, FHFA, S&P CoreLogic Case-Shiller). And, low gas prices don’t hurt as summer driving season continues.
- Online shopping boom. Online players will continue to get an increasing share of back-to-school shopping, meaning that discounting will again be heavy and the strong sales growth may not necessarily show up in the stock prices of traditional brick-and-mortar retailers. Regardless, the powerful growth in online shopping will be a big part of the annual increase.
- More college kids. According to Prosper Insights & Analytics, the average family spend will be up 6.3%, with the additional sales growth coming from more students, particularly college students.
AUGUST 21: The Great American Eclipse. This one doesn’t have anything to do with markets or the economy, but it is worth getting ready for. If you are lucky enough to be in the 70-mile-wide area to see the total solar eclipse, then you will witness the first total solar eclipse in 99 years that will cast its shadow across the entire continent, in what is called a “path of totality.” It is also the first eclipse since 1776 whose path falls only in the U.S.—which is why it has been dubbed “The Great American Eclipse.”
AUGUST 24 – 26: The Kansas City Fed’s Jackson Hole Monetary Policy Symposium takes place from August 24–26, 2017, and the theme this year is “Fostering a Dynamic Global Economy.” This gathering of central bankers has taken place annually since 1978, and tends to be closely watched by markets. Global central banks have at times used this conference to signal upcoming changes to policy. For example, the Fed signaled the start of two quantitative easing (QE) programs in 2010 and 2012, and ECB President Mario Draghi signaled the ECB’s QE program in 2014. This year we are less likely to see central banks signaling stimulus, but markets will instead be watching for signs of tighter policy. The Fed has announced how their balance sheet normalization plan will work, but has so far refused to specify a start date, so markets will be watching Fed speakers closely for any hints. Markets have also been closely watching the ECB in recent months for any comments regarding further tapering of their current QE program. ECB President Draghi will be in attendance, and given that the conference will take place just two weeks before the ECB’s September 7 meeting, investors will be keeping a close eye on his remarks at Jackson Hole.
August might not have many high-profile events to look forward to, but history still says this is one month to watch closely as it can be quite volatile. From jobs growth, to inflation data, to BTS shopping, to the Jackson Hole Symposium there will be plenty for market participants and the Fed to analyze as we head into September. Enjoy those remaining summer vacations. And here’s to hoping your kids adjust quickly to getting up early again!
We continue to adjust our portfolios in response to market activity to ensure our clients’ investment strategies are aligned with their stated investment objectives. Additionally, we are pleased to see a growing number of our clients choosing to refine and enhance their investment strategies, and their overall approach to financial management by taking advantage of our innovative Riskalyze® software and WealthPlanTM system. Both are valuable tools for helping our clients free up more time for doing the things that are most meaningful to them with the people they care about the most.
Your Return on Life® is always our top priority and we remain committed to providing you with the education, advice, and insight required to retain a long-term perspective and focus on your individual goals. If you need additional help or someone you know needs our advice, remember, we’re only a phone call away at 440.740.0130. We are always honored to help our clients’ friends and business associates take greater control of their future with the guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.
Real People. Real Answers.
Health, Happiness, and Good Fortune,
President & Founder
CPA, MT, PFS, CDFA, AIF®
High-Income Earners Can Benefit from Roth IRAs
Roth IRAs, with their promise of tax-free growth and withdrawals, are appealing retirement savings vehicles. But income restrictions typically limit the ability of high-income earners to contribute to these accounts. Fortunately, there are strategies for getting around these restrictions, including using “backdoor” Roth IRAs.
Right for you?
The primary difference between traditional and Roth IRAs is the timing of income taxes. Traditional IRA contributions are potentially deductible — which means they’re funded with pretax dollars — but withdrawals of contributions and earnings are taxable. In contrast, Roth IRA contributions are nondeductible, which means they’re funded with after-tax dollars, but qualified withdrawals of contributions and earnings are tax-free. Withdrawals from either type of IRA before age 59½ are generally subject to a 10% penalty. The penalty also applies to withdrawals from Roth IRAs that are less than five years old.
For most savers, the decision between a traditional and a Roth IRA depends on whether they’re better off paying taxes now or later. If you think your tax rate will go down in retirement, deferring taxes in a traditional IRA will result in a lower overall tax liability. But if you expect as high a tax rate in retirement, a Roth IRA can produce greater after-tax returns.
There’s another advantage to Roth IRAs. With a traditional IRA, you must take required minimum distributions (RMDs) beginning at age 70½, but you can leave funds in a Roth IRA as long as you want. If you won’t need these savings for retirement, you can let them continue growing tax-free for life and pass them on to your beneficiaries income-tax-free. If, on the other hand, your beneficiaries inherit a traditional IRA (or what’s left of it after RMDs), they’ll be stuck with a substantial income tax bill as the account is distributed to them.
Traditional and Roth IRAs are subject to the same contribution limits — for 2017, $5,500 per year ($6,500 if you’re age 50 or older). Anyone with sufficient earned income can contribute the maximum to a traditional IRA, regardless of income level, although deductions for those contributions may be reduced or eliminated depending on your income and whether you or your spouse is eligible for a qualified retirement plan at work.
Contributions to a Roth IRA, however, are phased out for high income earners. For individuals, the maximum 2017 contribution is reduced when modified adjusted gross income exceeds $118,000 and eliminated when it reaches $133,000. For joint filers, those thresholds are $186,000 and $196,000, respectively.
Through the back door
Income phaseouts don’t necessarily need to deter you, though. One option, if your employer offers it, is to participate in a 401(k) or other qualified retirement plan that permits Roth contributions. Generally, these contributions aren’t subject to income limits.
Another possibility is the “backdoor” Roth IRA: Each year, you contribute the maximum amount to a nondeductible traditional IRA and then convert it to a Roth IRA. There are no income restrictions on Roth IRA conversions. You’ll owe taxes on the traditional IRA’s preconversion earnings, but you can minimize those taxes by completing the conversion quickly.
But before choosing a backdoor Roth IRA, it’s important to understand the “pro-rata rule.” If you have other IRAs that hold pretax contributions and earnings, the taxable portion of your conversion is calculated by aggregating all of your IRAs and multiplying the converted amount by the ratio of pretax to after-tax assets. However, there may be a way around the pro-rata rule. If you’re self-employed with a solo 401(k) or if your employer has a retirement plan that permits “roll-ins,” you may be able to transfer your pretax IRA assets into that plan.
Rules are complex
The rules regarding Roth IRA conversions are complex. Your advisor can help you navigate them to avoid unpleasant tax surprises and achieve your retirement savings goals.
Role of DAFs and PIFs in a Charitable Giving Plan
If you want to support the charities you care about in a tax-efficient manner, several planning vehicles are available. One that’s become particularly popular in recent years is the donor advised fund (DAF), which offers many of the benefits of a private foundation at a reduced cost. The pooled income fund (PIF) is another option that’s beginning to attract attention.
Cheaper than a foundation
With a DAF, you make tax-deductible contributions to an investment account typically controlled by a public charity or a financial institution, and advise the fund on the charities you’d like to support. Funds aren’t legally bound to follow donor recommendations, but they generally do anyway, as long as the charities are qualified.
Private foundations offer greater control over the timing, amounts and recipients of your largesse, but they typically are expensive to set up and administer and, therefore, require large contributions to be effective. In addition to lower expenses, DAFs enjoy higher deduction limits than foundations. Also, contributions of appreciated securities are deductible up to their fair market value. With foundations, deductions for property other than publicly traded stock are limited to the property’s cost basis.
Option avoids 10% rule
A PIF is to a charitable remainder trust (CRT) what a DAF is to a private foundation. CRTs provide donors (or noncharitable beneficiaries) with an income stream for life or a term of years, after which the remaining assets go to a designated qualified charity. When donors fund the trust, they enjoy a partial charitable tax deduction based on the present value of the charity’s projected remainder interest, which must be at least 10% of the trust’s fair market value. Assets grow tax-free until they’re distributed, and CRTs can sell assets tax-free and reinvest the proceeds, making them ideal vehicles for appreciated property.
PIFs are different in that they aren’t subject to a 10% rule. Also, they’re administered by a charity that pools individual contributions with those of other investors, reducing donor costs. You receive annual income payments for life, based on the size of your contributions, the fund’s earnings and certain actuarial assumptions. You also enjoy a charitable deduction based on the amount projected to go to the charity. Unlike CRTs, PIFs can be an attractive option for younger donors because they avoid the 10% rule.
There are many ways to satisfy your charitable interests while generating valuable tax benefits. Talk to your advisor to find out if a DAF, PIF or other charitable giving vehicle makes sense for you.
3 Classic Investment Strategies are Always in Style
In a fast-paced investment landscape, top-performing securities and sectors can change by the hour. What tends to remain consistent, however, are: adopting a margin of safety, investing in what you understand and holding great companies for the long term.
Margin of safety
In investing, as in many facets of life, it’s best not to cut too close. This is the guiding principle behind adopting a “margin of safety,” most widely associated with economist and investor Benjamin Graham.
A stock with a big safety margin trades at a share price well below what the stock is worth, which can be measured by a variety of metrics, such as price-to-earnings or price-to-book ratios. The bigger the gap between the share price and the stock’s intrinsic value, the better. That way, if market conditions go against the stock, its value might still have room to increase (or, at least, decrease less).
In his classic work The Intelligent Investor, Graham explains that “the function of the margin of safety is … that of rendering unnecessary an accurate estimate of the future.” In other words, the margin of safety allows you to be wrong about a stock and yet potentially still make money. This isn’t to say that cheap stocks can’t get cheaper; they certainly can. But the downside is much bigger with an expensive stock that has little or no margin of safety because, for example, the price reflects high investor expectations. In contrast, a stock with a large margin of safety won’t necessarily have favorable expectations priced in and therefore may be more resilient to negative surprises.
Understand what you own
Another piece of classic investment wisdom is to focus on investments you understand. Famed money manager Peter Lynch put it this way: “If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand.”
Consider the market bubble of the late 1990s and early 2000s. The impulse to capture huge gains in new technology stocks led countless investors to brush aside the fact that they really didn’t know what the companies did or how their business models worked. Things didn’t end well for many when the market crashed in the early 2000s.
Billionaire investor Warren Buffett famously avoids companies with esoteric business models. During the “tech bubble,” he was widely derided as out of touch. But Buffett’s unwavering focus on buying businesses whose fundamentals he thoroughly understands has resulted in undeniable success.
Complicated businesses can be great investments if you have specialized areas of expertise. For example, if you’re a professional chemist, you may be better positioned to understand the merits of a new pharmaceutical stock than someone with a layperson’s knowledge. However, you probably don’t want to invest only in one market niche. Your financial advisor can help broaden your knowledge base and assemble a diversified portfolio of investments that make sense for you.
In for the long term
Buffett is a well-known proponent of another piece of classic investment wisdom: Find great companies and hold them for a long time. As he once put it, “Our favorite holding period is forever.” Of course, the trick is to be able to distinguish the great companies from the not-so-great.
Try to tune out the daily noise in the markets and instead look for companies with dominant competitive positions and strong, sustainable business plans. Generally, you want to keep these names in your portfolio, reinvesting any dividends and letting compounded growth work for you. That said, there are valid reasons for selling securities that once met your criteria. Changing economic and market conditions, and factors such as a company’s management, product lineup or competitive profile, may all be good excuses to sell.
Reading about tried-and-true investment concepts is one thing. Applying them effectively is another. This is where your financial advisor can be a significant asset — both as a sounding board for your own ideas and as a source of investment advice that can bring you closer to your goals.
Sidebar: Make your portfolio an emotion-free zone
It’s natural to experience emotions in response to market volatility. But anxiety, excitement and fear shouldn’t guide your investment decisions.
To avoid the consequences of rash acts, consider enrolling in an automatic investment plan. Offered by many financial institutions, these plans allow you to invest set amounts of money at regular intervals. By investing on a schedule, you can avoid the temptation to buy and sell at inopportune times, and actually buy larger quantities when prices are lower.
It’s also important to develop an individualized wealth management plan. Your advisor can help you determine the appropriate asset allocation for your age, goals and risk tolerance. Be sure to record your goals, making them as specific as possible. Then stick to your plan, regardless of what’s happening in the market.
How Disability Insurance Protects Your Finances from the Unexpected
When a friend was seriously injured in an auto accident and faced at least several months of rehab and recovery, it got Janie and Douglas thinking. How would they cope financially if one of them were disabled for a long period?
Janie’s employer offered some coverage, but the couple doubted it would be sufficient. Douglas was self-employed and didn’t have long-term disability (LTD) coverage. He was worried he would have to pay high premiums to buy it on his own. The spouses sat down with their financial advisor, who stressed that, because their biggest asset was their ability to earn, they needed to look into getting more LTD coverage.
Individual policies offer more
Like Janie, you may have some coverage through your job. Most people receive short-term disability coverage — for injuries and illnesses lasting anywhere from two weeks to two years — as part of their employer’s benefits package. Less common but no less important is long-term coverage. However, even when an employer provides long-term coverage, the amount of that coverage often is inadequate to meet living costs.
If your employer doesn’t offer disability insurance — or provides less than adequate coverage — (or if, like Douglas, you’re self-employed), consider buying an individual policy. This type of disability policy may actually offer several important benefits not provided by group coverage. For example:
- It’s portable, meaning your policy will stay in force even if you leave your job.
- Disability income received from an individual policy is income-tax-free, as long as you pay the premiums yourself.
- An individual policy allows you to decide how much coverage you need.
Cost is a consideration
The main drawback of buying your own disability insurance policy is that coverage can be expensive. Many factors go into determining the cost, such as your age, current health status and the amount of coverage you want.
Generally, the older you are or the longer your desired coverage period, the more you can expect to pay in current premiums. Also influencing your policy cost is whether your insurer is permitted to raise your premiums. “Noncancelable” policies prohibit cancellation as long as you keep paying your premiums. The length of your “elimination period,” or how long you must wait before you begin to receive benefits after a disability, will further factor into the cost of your policy.
Conventional wisdom says you should obtain coverage for 50% to 60% of your net income. But that doesn’t mean you would be happy with that payout. Because there’s no single right answer for everyone, sit down and calculate how much money you’d need each month to meet all of your expenses.
You may be able to save money by not duplicating benefits you already have. For example, if your employer provides short-term disability coverage for one year, you might want to set your policy’s elimination period for at least that long. However, a word of caution: Trying to save money by skimping on coverage is probably not in your best interest. Less expensive policies often lack important protections and may severely restrict your benefits. Your worst-case scenario would be to suffer a disability and then find yourself without the protection you thought you had purchased.
Averting a potential crisis
The bottom line is that you never know when an injury or illness might affect your income-earning ability, as it did Janie and Douglas’s friend. Assess your disability insurance coverage now so that you can take steps to avert a financial crisis and help ensure your family remains secure whatever fate throws your way. If you think you need to purchase an individual policy, talk to your financial or insurance advisor for more information.
*Ranking algorithm is based on qualitative measures: telephone and in-person interviews, client retention, industry experience, credentials, review of compliance records, firm nominations; and quantitative criteria, such as: assets under management and revenue generated for their firms. Investment performance is not a criteria because client objectives and risk tolerances vary, and advisors rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC, which does not receive compensation from the advisors or their firms in exchange for placement on a ranking.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Any economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Purchasing Managers’ Indexes are economic indicators derived from monthly surveys of private sector companies, and are intended to show the economic health of the manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change. The two principal producers of PMIs are Markit Group, which conducts PMIs for over 30 countries worldwide, and the Institute for Supply Management (ISM), which conducts PMIs for the US. Personal Consumption Expenditures (PCE) is a measure of price changes in consumer goods and services, targeted towards goods and services consumed by individuals. PCE is released monthly by the Bureau of Economic Analysis (BEA). The Consumer Sentiment report refers to a report published by the University of Michigan, in which the University’s Consumer Survey Center questions 500 households each month on their financial conditions and attitudes about the economy. Consumer sentiment is important because it is directly related to the strength of consumer spending. Preliminary estimates for a month are released at mid-month. Final estimates for a month are released near the end of the month. Quantitative Easing (QE) refers to the Federal Reserve’s (Fed) current and/or past programs whereby the Fed purchases a set amount of Treasury and/or Mortgage-Backed securities each month from banks. This inserts more money in the economy (known as easing), which is intended to encourage economic growth. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
**Source: LPL Research: Weekly Economic Commentary, 7/31/17
Securities offered through LPL Financial, Member FINRA/SIPC
Investment advice offered through Planned Financial Services, a Registered Investment Advisor
Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor. Other advisory services offered through Planned Financial Services, a registered investment advisor. 401(k) Prosperity and Planned Financial Services are separate entities from LPL Financial.
Emily Roland/John Hancock Investments, Eric Embacher/Destination Cleveland, LifeAct, and Planned Financial Services are all separate, unaffiliated entities.
A portion of this material was prepared by a third-party publisher for use by the representatives.