The summer months are almost underway, which means that both vacations and midyear check-ins are ahead. As we approach the midpoint of 2018, many of us will take this opportunity to reflect on what we’ve seen so far and what may be ahead for the rest of the year. But we’re not quite there yet! So as we kick off the month of June, here are some valuable takeaways coming out of recent action in Italy and a quick check-in on the U.S. economy.

The impact of Italy’s shift in government has been a hot topic during the past couple of weeks. Three months after Italy’s election, political uncertainty led to heightened concern that Italy’s populist coalition may try to pull out of the European Union and Eurozone (countries that use the euro as their currency). The potential for Italy to operate outside of the Eurozone prompted investors to reassess the risk of Italy’s government debt, leading to large sell-off in Italian government bonds and triggering stocks to fall globally.

In hindsight, markets may have overreacted to Italian political risk. These moves partially reversed after markets digested the news and backed off the worst-case-scenario mindset. Italy isn’t expected to leave the Eurozone, although political unrest may continue, which could weigh on Europe’s outlook. One positive takeaway from the market’s initial reaction, however, is the role that high-quality bonds played. Investors reacted to the sell-off by flocking to U.S. Treasuries, reaffirming that high-quality bonds can be an important element of a well-balanced portfolio, particularly amid stock market volatility.

In U.S. economic news, the big headline was the May jobs report, which was generally positive. The report indicated that job growth may be accelerating, wage growth is increasing, and the unemployment rate is near a 50-year low. Wage growth is not at a level that would alarm the Federal Reserve (Fed), but likely keeps the Fed on track to increase interest rates at its next meeting this month (June 12–13), which is widely anticipated by the markets. This healthy labor market may continue to provide support for the economy and consumer spending.

Overall, the global economic backdrop, particularly in the U.S., appears to remain intact. Although the situation in Italy is an ongoing risk worth monitoring, LPL Research does not believe it indicates a change in the trajectory of the global economy.

Rest assured that as the days become longer and summer unfolds, I will continue to keep a close eye on developments in Italy and around the globe, watching for any potential investment impacts.

A recap of the major changes impacting corporations and closely held firms.

The Tax Cuts & Jobs Act changed the tax picture for business owners. Whether your company is incorporated or held closely, you must recognize how the recent adjustments to the Internal Revenue Code can potentially affect you and your workers.

How have things changed for C corps? The top corporate tax rate has fallen. C corps now pay a flat 21% tax. For most C corps, this is a big win; for the smallest C corps, it may be a loss.1

If your C corp or LLC brings in $50,000 or less in 2018, you will receive no tax relief – your firm will pay a 21% corporate income tax as opposed to the 15% corporate income tax it would have in 2017. Under the old law, the corporate income tax rate was just 15% for the first $50,000 of taxable income.1,2

Another notable change impacting C corps involves taxation of repatriated income. Prior to 2018, American companies paid U.S. tax rates on earnings generated in foreign countries; those profits were, essentially, taxed twice. Now they are being taxed differently – there is a one-time repatriation rate of 15.5% on cash (and cash equivalents) and 8% rate on illiquid assets, and those taxes are payable over an 8-year period.2

By the way, the 20% corporate Alternative Minimum Tax (AMT) is no more. The tax reforms permanently abolished it.2

What changed for S corps, LLCs, partnerships, and sole proprietorships? They can now deduct 20% of the qualified business income they earn in a year. Cooperatives, trusts, and estates can do the same. This deduction applies through at least 2025.2,3

The fine print on this deduction begs consideration. If you are a lawyer, a physician, a consultant, or someone whose firm corresponds to the definition of a specified service business, then the deduction may be phased out depending on your taxable income. Currently, the phase-out begins above $157,500 for single filers and above $315,000 for joint filers. Above these two thresholds, the deduction for a business other than a specified service business is limited to half of the total wages paid or one quarter of the total wages paid plus 2.5% of the cost for that property, whichever is larger.2

Salaried workers who are thinking about joining the ranks of independent contractors to exploit this deduction may find it a wash: they will have to pay for their own health insurance and absorb an employer’s share of Social Security and Medicare taxes.2

What other major changes occurred? The business depreciation allowance has doubled and so has the Section 179 expensing limit. During 2018-22, the percentage for first-year “bonus depreciation” deductions is set at 100% with a 5-year limit and applies to both used and new equipment. The maximum Section 179 deduction allowance is now $1 million (limited to the amount of income from business activity) and the phase-out threshold begins $500,000 higher at $2.5 million. Also, a business can now carry forward net operating losses indefinitely, but they can only offset up to 80% of income.4

The first-year depreciation allowance for a car bought and used in a business role is now $10,000; it was $3,160. Claim first-year bonus depreciation, and the limit is $18,000. (Of course, the depreciation allowance for the vehicle is proportionate to the percentage of business use.) The TC&JA also created a new employer tax credit for paid family and medical leave in 2018-19, which can range from 12.5%-25%, depending on the amount paid during the leave.4,5

Some longtime business tax deductions are now absent. Manufacturers can no longer claim the Section 199 deduction for qualified domestic property activities. Business deductions for rail and bus passes, parking benefits, and commuter vehicles are gone. Deductions have also been repealed for entertainment costs linked directly to or associated with the conduct of business.4

Business owners should also know about the new restriction on 1031 exchanges. A like-kind exchange can now only be used for real estate, not personal property.3

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – thebalancesmb.com/corporate-tax-rates-and-tax-calculation-397647 [2/5/18]

2 – investopedia.com/taxes/how-gop-tax-bill-affects-you/ [2/14/18]

3 – americanagriculturist.com/farm-policy/10-agricultural-improvements-new-tax-reform-bill [12/27/17]

4 – cpapracticeadvisor.com/news/12388887/2018-tax-reform-law-has-benefits-for-some-small-businesses [1/2/18]

5 – marketwatch.com/story/use-your-car-for-your-small-business-the-new-tax-law-is-good-news-for-you-2018-03-06 [3/6/18]

A friend’s son, in his mid-20s and working in his first “real” job, emailed me a few weeks ago looking for recommendations for a financial advisor.

I replied to ask what type of guidance he’s looking for. I remembered that he started investing in stocks when he was in high school, so my guess was that he wanted help with something investment-related.

His response surprised me, in a good way. Rather than seeking investment guidance, he was thinking big-picture. He said he’d like to go to graduate school, but he was also contemplating buying a rental property as an investment and living in one of the units. He wanted some advice on his portfolio, but that was secondary to wanting to talk through the financial implications of the other, broader decisions on his mind. I gave him the names of two of my favorite hourly, fee-only financial-planning firms in the Chicago area, and he was off and running.

Many people, in contrast to my friend’s son, think financial advice automatically equates to investment advice. And for people who are older, wealthier, and more settled in their lives, guidance on investments is probably going to be the main thing a financial advisor assists them with. But for most people in early accumulation mode, investment decision-making should be secondary to big-picture decision-making. And people could use help with big-picture decision-making, and putting some math around those decisions, more than they might think.

That exchange got me thinking about how your life stage–and specifically your human capital/financial capital ratio–should influence your financial priorities and the type of advice you seek. While Morningstar has long asserted that human capital should play a role in how you position your financial capital, assessing your personal ratio of human to financial capital can help you figure out where to concentrate your precious resources. By precious resources, I mean the time you spend thinking about your financial affairs and any money you spend on financial guidance.

What’s Your Human Capital/Financial Capital Ratio? 
Morningstar has written extensively about the human capital/financial capital relationship, mainly as it relates to the asset allocation of your investment portfolio.

If you’ve just emerged from school with an advanced degree in a lucrative field, for example, you’re long on human capital. Your financial capital is probably scarce or even negative if you racked up debt to pursue that degree. Because you’re looking forward to a long and mostly uninterrupted string of great earnings, you can afford to take more risk in your investment portfolio that you’ve earmarked for retirement; you’re a long way away from tapping it.

At the opposite extreme, let’s say you’re 64. You still like your job, and you’d like to keep going for as long as you can, maybe all the way to age 70 or beyond. But your spouse has had some health setbacks, and you know that you may have to pull back from work in order to help care for him. In that instance, your human capital–your ability to garner earnings from your job–has declined and isn’t fully within your control. Because you may not be able to earn a paycheck much longer, you’ll need to make sure your portfolio, and income from other sources like Social Security, can pick up where your salary leaves off. You’ll also want to make sure you own enough safe securities that you can tap in the near term, if and when your earnings stream is interrupted.

It’s Not Just for Investments
Just as it can help influence your portfolio positioning, an assessment of your personal human capital/financial capital ratio can help determine where to concentrate your financial priorities and where to get financial help.

When you’re young and just starting out in your career path, your human capital is extensive and your financial capital is likely small. It’s a given that once you start earning a paycheck, you should invest in the highest-returning portfolio you can stomach. But your contributions to your investments–not the gains on them–are going to be the biggest share of your portfolio’s growth at that life stage. The best way to bump up your contributions is by enlarging your earnings and/or making sure that you’re living within your means and not overspending. At this life stage it’s also crucial to think through what I call “primordial asset allocation” decisions, such as your savings/spending rate and whether you decide to pay down debt, such as student loans, or invest in the market. If you get those big-picture decisions right, your investments and your financial capital will take care of themselves.

By extension, if you’re going to spend on advice at this life stage, it stands to reason that you could go the cheap and efficient route: Buy an inexpensive target-date fund or use an inexpensive robo-advisor and call it a day. After all, it’s a rare young accumulator whose goals and risk tolerance would be radically different from another young accumulator’s: Enlarging the portfolio is the name of the game, and the best way to do that is to contribute regularly, go heavy on stocks, and not get rattled by periodic market downturns.

Because other decisions, such as whether you invest in additional education or buy a home or continue to rent, will be more impactful, it’s wise to concentrate your advice “buy” on someone who will make such issues their central concern–a financial planner. That’s not to say most investment advisors won’t be holistic in their assessment of your situation; the good ones most certainly will. But consulting on other aspects of your financial life may not be central to what they do. There’s also a logistical issue: With a very small portfolio, it may be difficult to find an investment advisor who’s willing to work with you, whereas hourly or per-engagement financial planners are much more readily accessible to people at all portfolio levels.

As you move through your life, and your human capital declines and your financial capital rises, you may have already plowed through most of your make-or-break primordial asset allocation decisions. You may have purchased your home and paid it off, paid for college for your kids, and advanced as far in your career as you’re going to go. You might still need financial-planning guidance, to be sure. But with an enlarged portfolio, it also makes more sense to focus more of your energies–and more of your advice “buy”–on it. Your tax rate may have gone up, and you will have likely accumulated assets in multiple accounts. You may be getting close to retirement and wondering whether your portfolio is sustainable and how to draw from it. In other words, getting some investment advice that’s specific to you and your situation is more appropriate than it was when you were a young accumulator.

This article lays out some of the key questions to ask yourself when seeking a financial advisor. At the top of list is “Are you seeking help with your whole financial life or your investment portfolio?” Thinking through your human capital/financial capital ratio can help you make the right call, and figure out where to concentrate your own energies, too.

Published June 7, 2018. But a message never out of date.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

No investment strategy, including asset allocation, assures success or protects against loss.

The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time including at the target date.

Morningstar is a separate entity from Cornerstone Wealth Management and LPL Financial.

LPL Tracking # 1-742861

A practical financial checklist for the future.

When our parents retired, living to 75 amounted to a nice long life, and Social Security was often supplemented by a pension. The Social Security Administration estimates that today’s average 65-year-old female will live to age 86.6. Given these projections, it appears that a retirement of 20 years or longer might be in your future.1,2

Are you prepared for a 20-year retirement? How about a 30- or 40-year retirement? Don’t laugh; it could happen. The SSA projects that about 25% of today’s 65-year-olds will live past 90, with approximately 10% living to be older than 95.2

How do you begin? How do you draw retirement income off what you’ve saved – how might you create other income streams to complement Social Security? How do you try and protect your retirement savings and other financial assets?

Talking with a financial professional may give you some good ideas. You want one who walks your walk, who understands the particular challenges that many women face in saving for retirement (time out of the workforce due to childcare or eldercare, maintaining financial equilibrium in the wake of divorce or death of a spouse).

As you have that conversation, you can focus on some of the must-haves.

Plan your investing. If you are in your fifties, you have less time to make back any big investment losses than you once did. So, protecting what you have should be a priority. At the same time, the possibility of a 15-, 20-, or even 30- or 40-year retirement will likely require a growing retirement fund.

Look at long-term care coverage. While it is an extreme generalization to say that men die sudden deaths and women live longer; however, women do often have longer average life expectancies than men and can require weeks, months, or years of eldercare. Medicare is no substitute for LTC insurance; it only pays for 100 days of nursing home care and only if you get skilled care and enter a nursing home right after a hospital stay of 3 or more days. Long-term care coverage can provide a huge financial relief if and when the need for LTC arises.1,3

Claim Social Security benefits carefully. If your career and health permit, delaying Social Security may be a wise move for single women. If you wait until full retirement age to claim your benefits, you could receive 30-40% larger Social Security payments as a result. For every year you wait to claim Social Security, your monthly payments get about 8% larger.4

Above all, retire with a plan. Have a financial professional who sees retirement through your eyes help you define it on your terms, with a wealth management approach designed for the long term.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – cdc.gov/nchs/products/databriefs/db293.htm [12/21/17]
2 – ssa.gov/planners/lifeexpectancy.htm [5/9/18]
3 – medicare.gov/coverage/skilled-nursing-facility-care.html [5/8/18]
4 – thestreet.com/retirement/how-to-avoid-going-broke-in-retirement-14551119 [4/10/18]

For decades my carpenter father, who died in 2009, always carried a small wood level in his pocket. He would fish it out and place it on the nearest horizontal surface: shelves, mantels, stairs—even sidewalks. At the neighbor’s, when he thought no one was looking, he would sneak it out and go to work.

Is it the joists, the beams? I sensed him calibrating as he watched the yellow bubble careen and render an often skewed verdict. Maybe it’s the entire foundation. He was obsessed with balance, equilibrium.

John Joseph Foster —everyone called him Bud—was simple as a pine board, as were his Montana-born parents, Jack and Stella. On occasion, dad let us smoke his corncob pipe. Just when I took him for being too ordinary, he would let loose with a piercing, front-tooth gap whistle that startled the air. Sometimes he’d just yodel. How could such remarkable sounds come from this workaday man?

I left St. Paul, Minn., for Los Angeles at 21 and quickly dropped my Midwestern accent, along with what I judged as my unworldly, artless past.

Thirty years later, dad was dealt an ischemic stroke, wiping out nearly two-thirds of his brain’s left hemisphere. He was 91. “Hemisphere”—that word, when the doctor first said it, made me think of whole worlds destroyed.

Dad survived for another two months. I could see right off that, although existing in some distant right-brained universe, he craved connection. His eyes sought mine and would lock onto them. In a world where most eye contact is fleeting, I would sit with my father for up to 15 minutes steadily gazing into his eyes. Within a few minutes, the held gaze would settle into ecstasy.

The stroke felt like some cheap deus ex machina, but I was grateful for the opportunity it gave us. The eye gazing evened things out, brought our lives back into balance.

Dad gave me his level a few decades back, and I carry it in my pocket. Halfway through my eulogy for him, I placed the gauge at the head of his oak casket, wood on wood. I stooped down and examined the yellow air, sliding, deciding. There—for the first time in his life, I told my father’s six brothers and their sons, and the sons of their sons—there it is, equilibrium. Death, I suppose, supplies that: the ultimate leveling, a reckoning and summation of a life.

My father’s simple existence has been like a horizontal plumb line for me, one to gauge myself against. Here is a summation of the primary lesson he gave me:

Carry a small level in your pocket at all times. Take it out once in a while. Place it on a mantel, a counter, a cabinet—your life. Observe the equilibrium. Check to see if there is balance. If needed, make minor adjustments.

If that doesn’t work, you’re going to have to examine the whole foundation.

Sometimes you can take penalty-free early withdrawals from retirement accounts.

Do you need to access your retirement money early? Maybe you just want to retire before you turn 60 and plan a lifelong income stream from the money you have saved and invested. You may be surprised to know that the Internal Revenue Service allows you a way to do this, provided you do it carefully.

Usually, anyone who takes money out of an IRA or a retirement plan prior to age 59½ faces a 10% early withdrawal penalty on the distribution. That isn’t always the case, however. You may be able to avoid the requisite penalty by taking distributions compliant with Internal Revenue Code Section 72(t)(2).1

While any money you take out of the plan will amount to taxable income, you can position yourself to avoid that extra 10% tax hit by breaking that early IRA or retirement plan distribution down into a series of substantially equal periodic payments (SEPPs). These periodic withdrawals must occur at least once a year, and they must continue for at least 5 full years or until you turn 59½, whichever period is longer. (Optionally, you can make SEPP withdrawals every six months or on a quarterly or monthly basis.)1,2

How do you figure out the SEPPs? They must be calculated before you can take them, using one of three I.R.S. methods. Some people assume they can just divide the balance of their IRA or 401(k) by five and withdraw that amount per year – but that is not the way to determine them.2

You should calculate your potential SEPPs by each of the three methods. When the math is complete, you can schedule your SEPPs in the way that makes the most sense for you.

The Required Minimum Distribution (RMD) method calculates the SEPP amount by dividing your IRA or retirement plan balance at the end of the previous year by the life expectancy factor from the I.R.S. Single Life Expectancy Table, the Joint Life and Last Survivor Expectancy Table, or the Uniform Lifetime Table.1,2

The Fixed Amortization method amortizes your retirement account balance into SEPPs based on your life expectancy. A variation on this, the Fixed Annuitization method, calculates SEPPs using your current age and the mortality table in Appendix B of Rev. Ruling 2002-62.1,2

If you use the Fixed Amortization or Fixed Annuitization method, you are also required to use a reasonable interest rate in calculating the withdrawals. That interest rate can’t exceed more than 120% of the federal midterm rate announced periodically by the I.R.S.1,3

A lot to absorb? It certainly is. The financial professional you know can help you figure all this out, and online calculators also come in handy (Bankrate.com has a good one).

There are some common blunders that can wreck a 72(t) distribution. You should be aware of them if you want to schedule SEPPs.

If you are taking SEPPs from a qualified workplace retirement plan instead of an IRA, you must separate from service (that is, quit working for that employer) before you take them. If you are 51 when you quit and start taking SEPPs from your retirement plan, and you change your mind at 53 and decide you want to keep working, you still have this retirement account that you are obligated to draw down through age 56 – not a good scenario.1

Once you start taking SEPPs, you are locked into them for five consecutive years or until you reach age 59½. If you break that commitment or deviate from the SEPP schedule or calculation method you have set, a 10% early withdrawal penalty could apply to all the SEPPs you have already made, with interest. (Some individuals can claim exceptions to this penalty under I.R.S. rules.)3,4

The I.R.S. does permit you to make a one-time change to your distribution method without penalty: if you start with the Fixed Amortization or Fixed Annuitization method, you can opt to switch to the RMD method. You can’t switch out of the RMD method to either the Fixed Amortization or Fixed Annuitization method, however.2

If you want or need to take 72(t) distributions, ask for help. A financial professional can help you plan to do it right.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments [12/19/17]
2 – fool.com/retirement/2017/05/19/use-your-retirement-savings-early-with-substantial.aspx [5/19/17]
3 – thebalance.com/how-to-use-72-t-payments-for-early-ira-withdrawals-2388257 [9/20/17]
4 – military.com/money/retirement/second-retirement/early-retirement-options.html [5/7/18]