What to do with an Inherited IRA?

The greatest wealth transfer in history is under way.  An estimated $30 trillion in assets will pass from Baby Boomers to Millennials and all cohorts in between.[1]   A large percentage of this wealth is held in individual retirement accounts and company retirement plans.

Transferring wealth by beneficiary designation is a simple process but does come with several rules and regulations once the money has been moved to your name.   The transfer from one IRA to another by beneficiary designation is called an inherited IRA.

If your spouse passes away, you have a few options.  You can leave the IRA as is and name yourself as the account holder, roll the assets into your IRA, or remain as the beneficiary.[2]  Once you decide on how to treat the IRA, you can remove the assets all at once, over your life expectancy or within five years if your spouse was under the age of 70.5. If your spouse was over the age of 70.5, you can take a lump sum distribution or distributions over your life expectancy.[3]  As the new account holder, you can also make contributions to your new IRA.

If you’re the non-spousal beneficiary, you cannot treat the IRA as your own and you must inherit it as a beneficiary meaning you can’t make contributions to the account or rollover the assets into your own IRA.   Once the account has been transferred as an inherited IRA, you can remove the assets over your life expectancy, over a five-year period, or as a lump sum if the owner was under the age of 70.5.  If the owner was over the age of 70.5, you can take distributions over your life expectancy or as a lump sum.[4]

Whether a spouse or non-spouse beneficiary, any distributions from the IRA will be taxed as ordinary income.  If you’re the spouse and you treat the IRA as your own, you’ll have to pay a 10% penalty on the distribution if you’re under the age of 59.5.  The 10% penalty does not apply to non-spouse beneficiaries regardless of age.

As the new owner of your inherited IRA you can name your own beneficiaries.  The assets inside the IRA can be traded without taxation giving you the option to keep the existing investments or moved to ones based on your investment goals, risk tolerance and time horizon.

There are a few more inherited IRA rules than those listed in this blog.  Your advisor should be able to assist you with all the rules and regulations for inherited IRAs as they relate to your unique situation.  If you do inherit an IRA, you’d be wise to seek financial and tax advice before making any significant changes to the account.

but whoever drinks the water I give them will never thirst. Indeed, the water I give them will become in them a spring of water welling up to eternal life.” ~ John 4:14.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.   For more information on financial planning and investment advice, please visit www.parrottwealth.com.  Thank you!

July 30, 2017

[1] https://www.cnbc.com/2016/11/29/preparing-for-the-30-trillion-great-wealth-transfer.html, by Anna Robaton, 11/30/2016

[2] https://www.irs.gov/publications/p590b/ch01.html, accessed 7/29/2017.

[3] https://www.irs.gov/publications/p590b/ch01.html#en_US_2016_publink1000230538, accessed 7/30/2017.

[4] http://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/inherited_ira/withdrawal_rules, accessed 7/30/17.

What to Do When a Loved One Dies?

Losing a loved one is tragic.  The loss leaves a void that may take years to recover.   During your grief, it will help to have a checklist to guide you through this difficult time.

Several estate planning tools can assist you during the grief period.  The most common estate planning items are the family will and family trust. I’d also recommend creating an estate planning file listing important data, contacts and passwords.  A “love letter” is also encouraged for the file.  The love letter is written to family members with last rites and other suggestions.   The estate planning file should bright red so it’s easy to find.

Here are more suggestions to help you during your difficult transition.

  • Contact family members, friends and your spiritual leader to surround yourself with those who love you most. Your family members and friends can help with arrangements.
  • Contact your local funeral home so they can schedule the funeral. The funeral home will help you obtain certified copies of the death certificate.
  • Identify important documents like the family will or trust. The deceased may have also left a letter of instruction or signed power of attorney.  These documents will help settle the estate.
  • If the deceased was employed, contact the company to notify them of the death. The human resource department will assist you with any benefits which may include company owned life insurance and a retirement account.
  • Arrange for dependent care If young children are still living at home. A family member or friend may be your best option to take care of the children while you handle the details for the deceased.
  • Pets also need to be tended to during this time. Arranging for your local vet or kennel to keep the pets for a few days is recommended.  Reaching out to a neighbor to help feed and water large animals, like horses, is preferred.
  • Locate important documents like the driver’s license, birth certificate, marriage license and passport.
  • Contact the local VA office If the deceased served in the military.
  • Contact the Social Security Administration.
  • Contact the DMW.
  • Monitor the mail for bills and notices. Contact the post office to notify them of the death.
  • Reach out to the credit reporting services so you can monitor accounts and to close the accounts that can be closed like credit cards.
  • Identify and protect all valuables. Keep them on your person, get a safe deposit box or leave them with a trusted confidant.
  • Contact the local utility companies to transfer services into your name or have them shut off.
  • Shut down social media accounts like Facebook, Instagram, Twitter, Snap or LinkedIn. Closing email accounts is also recommended.
  • Reach out to the CPA, attorney and financial advisor so they can transfer assets and file tax returns.
  • Contact your local bank to set up an account in the name of the estate so you can write checks to pay bills and settle debts. Check with the bank to see if there is a safe deposit box for the deceased.
  • Identify the executor of the estate so they can start the process of settling the estate.
  • Identify any notes payable or debts to settle.
  • If the deceased was a renter, contact the landlord.
  • Contact the life insurance company so they can distribute life insurance proceeds to loved ones and beneficiaries.
  • If the deceased was your spouse, update your beneficiary information for your investment accounts or life insurance policies. If you have a family will or trust, make sure these are updated as well.

This list may help you get through your difficult time.   I’d encourage you to print this list or create your own to include in your important files.

Of course, if you don’t have an estate plan in force, I’d recommend contacting an attorney today so your loved ones can benefit from your proper planning.

“Come to me, all you who are weary and burdened, and I will give you rest. Take my yoke upon you and learn from me, for I am gentle and humble in heart, and you will find rest for your souls. For my yoke is easy and my burden is light.” ~ Matthew 11:28-30.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

July 26, 2017

Rock on Brother!

U2 produces powerful music.  I first heard U2’s song New Year’s Day in 1983 and was mesmerized with the band and their music.  I listened to their music on KROQ and KLOS while growing up in Los Angeles and eventually bought a few of their albums.  Several kids from my high school were music aficionados and listened to Rush, Van Halen, The Who, The Rolling Stones, Aerosmith, and The Eagles as often as they could.  When these bands toured through Southern California they would attend their concerts.

The classic bands have been playing music for a long time and their longevity should be appreciated.  Bands like U2, ZZ Top, Aerosmith and Rush have produced quality music for decades.  The Rolling Stones have been playing together since 1962!  These bands are also consistent and fans who attend their concerts will know what to expect.   In 1987, I attended a U2 concert in San Diego and my expectations were exceeded.

Rock bands can teach us a few lessons on how to become a better investor.

  • Quality. These bands produce quality music.  Their music has crossed generations and is still going strong today.   When you construct a portfolio of high quality investments it will sustain your account for generations.   Companies with strong balance sheets and solid earnings will deliver rock star returns for your portfolio.   In fact, profitable companies have outperformed less profitable companies 93% of the time over five years and 100% of the time over fifteen years.[1]
  • Consistent. The long-term survival of these bands can be credited to their consistent music and they weren’t one hit wonders like Dexys Midnight Runners or Haircut 100 nor did the succumb to popular fads like wearing hammer time pants.  The best bands focus on what they do best.   Steady, consistent returns will give you solid performance so don’t try to time the market or get caught up in the latest investment fad.  Pursue a buy and hold strategy by owning index funds with low fees.
  • Plan. Great bands just don’t happen without a plan.  Writing music, singing songs, and performing at concerts takes careful planning and lots of persistence.   A financial plan will make sure your goals and investments are working in concert to help you achieve financial success.
  • Patience. U2 was founded in 1976 but it wasn’t until 1983 before their band achieved global fame.  Their album War put U2 center stage in the music world.   Patience is also required as an investor.  It may take three to five years or more before your investments start to hum financially.    Set your eyes on the long term and don’t worry about short term fluctuations in your account balances.
  • Balanced. Classic bands use multiple instruments to deliver wonderful music and they don’t rely on one instrument or one performer to deliver results.  The balance in the band is what keeps fueling their run.  The intelligent investor will use multiple investments like stocks, bonds and cash to achieve positive results.   A balanced portfolio will help smooth out your returns over time as well.
  • Global. U2 was founded in Dublin, the Beatles in Liverpool, and Van Halen in Pasadena. If these bands only played in front of the home crowd, it’s doubtful they would’ve achieved global success.  To achieve global success in your portfolio you need to venture to distant lands by adding international investments to your account.  International investments will help diversify your account beyond local holdings.

As you construct your financial opus follow the lead of the great bands and focus on quality, persistence and longevity.   Rock on!

Music can change the world because it can change people. ~ Bono.

Let us come into his presence with thanksgiving; let us make a joyful noise to him with songs of praise! ~ Psalm 95:2

Bill Parrott is President and CEO of Parrott Wealth Management.   For more information on financial planning and investment management, please visit www.parrottwealth.com.

July 24, 2017
 

[1] Dimensional Fund Advisors, Historical Performance of Premiums over rolling periods, 1963 – 2016.

Do You Crave Safety?

According to Maslow’s Hierarchy of Needs people crave food, water, shelter and warmth followed by security, stability, and freedom from fear.[1]   Scrolling through Facebook it appears people also crave selfies.

The ultimate in safety for an investor is the United States Treasury Bill.  In fact, dating back to 1926 the T-Bill has never lost money.  The T-Bill requires a $10,000 minimum investment and matures in one year or less.  It’s also 100% guaranteed regardless of how much money you invest.

A T-Bill can play a major role in your investment portfolio by giving your account safety and liquidity. Here are some ideas of how the T-Bill can help you with your investments.

  • Invest your money in a T-Bill If it’s earmarked for something. My daughter is in college and I keep two years’ worth of tuition payments in treasuries because I can’t afford to lose this money.
  • If you carry a high level of cash in your investment accounts, invest in a T-Bill as a cash alternative. It’s likely the T-Bills will provide you with a higher interest rate than your cash or money market account.
  • If you’re a house flipper or real estate investor, you can use T-Bills as a bridge between projects. The T-Bills will also give you liquidity if you need to purchase a piece of property quickly.
  • Business owners take considerable risk in running their company and may not want to take risks with their investments. The treasury market can be used to hedge or offset this risk.  My grandfather ran a successful business for years and was reluctant to buy stocks because of their short-term uncertainty.  He kept his money invested in cash, municipal bonds and U.S. Treasuries so he could access his money to buy equipment or real estate.
  • T-Bills are a hedge against a stock market correction. If you’re concerned about a falling stock market, then invest in T-Bills because they’re negatively correlated to stocks.  If one is rising, the other is falling.  A T-Bill is the best investment you can own when stocks drop.

T-Bills can be purchased from your advisor, broker or banker.   You can also set up an account at Treasury Direct to purchase them directly from the government.  Their web address is www.treasurydirect.gov.

It may sound like the T-Bill is the perfect investment but they do have some downsides.  The rate of interest is extremely low due to their high level of safety.  The T-Bill is a short-term investment and will not grow over time.  To grow your investments, you need to own stocks especially if your time horizon is longer than three years.

For short term safety, consider the T-Bill!

In peace I will lie down and sleep, for you alone, Lord, make me dwell in safety. ~ Psalm 4:8.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  For more information on financial planning and investment management, please visit www.parrottwealth.com

[1] https://www.inc.com/disneyinstitute/comaford/3-things-humans-crave.html, By Christine Camaford, 1/8/2014

Save It or Spend It?

Money can’t buy happiness and the Bible says the love of money is a root of all kinds of evil.   A 2015 survey by the American Psychological Association found 64% of Americans say money is a source of stress.[1]   When it comes to money we have a couple of choices; we can save it or spend it.

I’m a saver by nature and enjoy investing money.  I remember my first savings account as a kid and was thrilled when my balance soared above $60 because I thought I had it made.  I’ve been told my entire life that money can’t buy happiness but this isn’t entirely true because when it comes to experiences money can buy happiness.  According to a Wall Street Journal article on money and happiness it said, “People think that experiences are only going to provide temporary happiness, but they actually provide both more happiness and more lasting value.”[2]

Peggy has been a client of mine for over twenty-five years.  We’ve enjoyed a great relationship and during our recent quarterly review of her account and investments we mostly talked about her travel experiences.   Peggy has taken amazing trips during her lifetime and they’ve created life long memories.   She told me a story about a trip she made with her young family to Crater Lake in Oregon.  She recounted the beauty of the area, especially the brilliant blue water.   She didn’t recall the cost of the trip but years later still receives joy when thinking about her experience.

Peggy and I have adopted a buy and hold strategy for her investments by owning a mix of high quality mutual funds.   Every year she will withdraw money from her account to fund her trips.  In a way, I feel like I’m on the trip with her as she tells me her travel stories from places like Fiji, Alaska or Europe.   We’ve experienced many market cycles together and, despite several stock market corrections, five U.S. Presidents and annual withdrawals, her account continues to grow and support her lifestyle.  She’s a bold and courageous investor not afraid of market drops and her investment strategy has served her well over time.

Here are a few tips to help you as you grapple with the saving or spending battle.

  1. Take the trip. It’s time to spend some money on your dream trip and cross it off your bucket list.   It may be expensive and cause a dent in your net worth but when you reminisce about your trip years from now you’ll be glad you made the trek.   When our daughter was young my wife and I decided to take amazing trips so we could create incredible memories.  I’m glad we spent the money because I look back on our family trips with fondness and happiness.
  2. Do it today and don’t wait for tomorrow. If you wait for the perfect time in your life or a certain level of assets, you’ll never take your trip.  Also, we don’t know what tomorrow will bring.  A former client of mine was waiting until he retired to travel the country with his wife and a month after he retired she passed away.  Proverbs 27:1 says, “Do not boast about tomorrow, for you do not know what a day may bring.”
  3. Use your vacation days. Most employees don’t take their paid vacation for fear of not getting their work done or having their employer question their dedication.[3]   If your company is giving, you should be taking.  It’s true your work won’t get done but I doubt your company will question your dedication.   I once took a four-week trip across Europe with my family and when I returned to the office the company was still standing.   I did have thousands of emails upon my return and my company still valued my work.  In the end, I’ll remember my family trip more than the pile of paperwork or what my company thought about my work ethic.
  4. Invest for growth and dividends. A portfolio designed for growth and income will help fund your experiences.   It’s also okay to spend your principal on your trips because your investments will replace what you removed from your account.   If you turn on your faucet to fill up a tub with water and then remove the water with a bucket, it will be replenished with the running water from the tap.   For example, you invest $100,000 in the Vanguard S&P 500 Index Fund (VFINX) on August 31, 1976 and start removing 5% of your account balance every year.   As of June 30, 2017, forty-one years later, your original $100,000 investment is worth $855,000 and you’ve taken out over $883,000 from your account.[4]
  5. Post it. Post your amazing trip on Facebook and Instagram so your friends can see what an amazing time you’re having and perhaps be inspired to take a trip of their own!

Take Peggy’s advice and travel the world, you’ll be glad you did!

The world is a book, and those who do not travel read only a page. ~ Saint Augustine

Bill Parrott is the President and CEO of Parrott Wealth Management and is a fan of travelling the world.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

July 16, 2017

Note.  Your returns may be more or less than those posted in this blog.  Peggy gave me permission to tell her story.

[1] http://www.cnbc.com/2015/08/03/most-americans-rich-or-not-stressed-about-money-surveys.html, by Shelly Schwartz, 8/3/2015.

[2] https://www.wsj.com/articles/can-money-buy-happiness-heres-what-science-has-to-say-1415569538, By Andrew Blackman, 11/10/2014.

[3] http://www.marketwatch.com/story/55-of-american-workers-dont-take-all-their-paid-vacation-2016-06-15, Quentin Fottrell, 5/28/2017.

[4] Morningstar Office Hypothetical Tool as of June 30, 2017.

Ready for a New Retirement?

Do you love new things?  Do you like driving a new car off the dealer’s lot?  How about getting a new pair of shoes?   We like getting new gifts but how about a new retirement?  Are we ready for a new retirement?

Corporations continue to scale back on pensions and benefits.  In 2015, 99 companies in the Fortune 500 offered a pension plan down from 292 in 1998, a drop of 66%.[1]  Only 9% of the Fortune 100 offer full healthcare benefits for their employees a drop from 34% in 2001.[2]

My wife’s grandfather worked his entire career for a large oil company in Texas.  He retired with a pension allowing him to receive a lifetime income stream for him and his lovely bride.   The payments from his former employer would continue for as long as one of them was living.  In addition, they didn’t have any out of pocket expenses for health and medical benefits, including drug prescriptions, as these items were covered by the company.   His pension, coupled with his Social Security payments, allowed him to enjoy a substantial retirement income.

Today, workers will have 10 to 15 jobs over their working career with an average of 12.[3]  A college graduate who retires at age 65 may switch jobs every three to four years.  By switching jobs often, a worker won’t accrue much in the way of company retirement benefits.  If you join a company with a 401(k), you may have to wait a year to join and if you leave before year end you might forfeit an employer contribution to your retirement plan.   By repeating this process over time, a lot of money will be left on the table.

Living longer is also causing heartache for the retiree.  A long, happy retirement can be enjoyable especially if you have money but longevity risk is making this a challenge for some.  According to the Motley Fool, Social Security will cover about 40% of your retirement income and the average monthly benefit will pay $1,350.[4]  This means you’re responsible for the other 60% of the financial pie.  According to the Social Security life expectancy tables an individual aged 65 today will live another nineteen years to age 84.  Will your assets generate income for nineteen years?

What does this mean for today’s worker?  We have entered a brave new world for retirement.  The responsibility for retirement is now on your shoulders and you must bear the weight of making your money last a lifetime.   However, you’re not alone.  With the right help, you can achieve your goals.

To start on your new journey, you’ll need a plan.  A financial and retirement plan will give you a financial target and this will be your guiding light as you journey through your working career.   Your financial plan will outline the amount of money you’ll need to save to achieve your goal.  To achieve your goal, you’ll need to commit to it as well.  I met with a friend recently who was bemoaning the fact he didn’t have enough money saved for retirement.  We talked about a few ideas but he wasn’t willing to commit – yet.   He likes to eat out often and his Facebook page shows him on elaborate treks with his family.  At some point, he’ll need to bear down and get serious about his financial future.

In addition to your new plan, you must save money.  Contributing to your company retirement plans, IRAs and investment accounts is paramount.   Saving money today will pay dividends tomorrow.  A worker who starts saving a $1,000 a month at age 25 will have $6.3 million at age 65.  Her nest egg will be worth $759,000 If she waits until age 45 to start saving money, a drop of 87%![5]   Automate your savings to help accumulate assets by establishing a draft between your bank to your investment accounts.

You can control your spending and saving.   The less you spend and the more you save will be a winning formula for your new retirement so start today and put your plan into action!  I know you can do it!

All hard work brings a profit, but mere talk leads only to poverty. ~ Proverbs 14:23

Bill Parrott is the President and CEO of Parrott Wealth Management.   For more information on planning and investment management, please visit www.parrottwealth.com.

July 13, 2017

 

 

 

[1] https://www.businessinsurance.com/article/20160222/NEWS03/160229986, by Jerry Geisel, 2/22/2016.

[2] http://fortune.com/2016/03/30/employer-paid-health-insurance-is-dying-off/, by Lauren Lorenzetti, 3/30/2016.

[3] https://www.thebalance.com/how-often-do-people-change-jobs-2060467, by Alison Doyle, May 1, 2017.

[4] https://www.fool.com/retirement/2016/10/23/can-you-live-on-social-security-alone.aspx, by Chuck Saletta, 10/23/2016.

[5] FV calculation with assets growing at 10% before taxes and fees.

Are You an All-Star Investor?

The 88th Major League Baseball All-Star Game will be played on Tuesday in Miami honoring the game’s greatest players.   The all-star game has included perennial legends like Hank Aaron, Willie Mays and Stan Musial each having played in twenty-four all-star games.

Newcomers also make an impression on the game.   This year MLB has two young stars lighting up the score board; Aaron Judge of the New York Yankees and Cody Bellinger of the Los Angeles Dodgers.   Aaron Judge currently has thirty homeruns and set a record for Yankee rookies for the most home runs before the all-star break.   Cody Bellinger has twenty-four homeruns and is on pace to shatter the Dodger record set by Mike Piazza’s in 1993.

The baseball all-star game is the best sports spectacular of all the all-star games held by the major sports.  The game is comparable to the regular season format and it’s competitive.  If you need proof, watch the YouTube video of Pete Rose running over Ray Fosse in the 1970 All-Star Game.

Despite the great talents of these players they still must work at their craft.    Ichirio is in relentless pursuit of perfection on the baseball field.  He spends hours stretching and swinging and according to C.C. Sabathia, Ichirio only takes off two days out of the year, the day after the season ends and Christmas.[1]

All-Stars have down days too.  As great as these players are, they still strike out, make errors and throw wild pitches.  However, they continue to play through the dark days knowing the odds of success will be in their favor.  A strong work ethic, constant practice, and a positive outlook will soon return them to the spotlight.

Are you an investor all-star?  Do you have what it takes to be among the all-time investor greats?  I believe you do and with a few simple tweaks to your investing routine you can be an all-star investor.  Let’s look at a few ideas to help keep you in the investing game.

  • Plan. The great managers of the game of baseball all have a plan.  Tommy Lasorda, Walter Alston, and Joe Torre had a plan for each game.  Like these managers, you too should have your own plan.  A well-constructed financial plan will help you become an all-star investor.  Your plan will drive home your hopes, dreams and fears.
  • Line-Up. Casey Stengal once said, “Good pitching will always stop good hitting and vice versa.”  A strong line up is tough to beat.  The 1927 Yankees are considered by many to be the best baseball team of all time.  Their “Murderer’s Row” consisted of Earle Combs, Babe Ruth, Lou Gehrig and Tony Lazzeri all of whom are in the Baseball Hall of Fame.[2]   A strong line up of low cost, diversified index funds will keep you in the game for a long time and produce winning results.
  • Routine. Baseball players are superstitious.  Wade Boggs ate chicken before every baseball game.  To increase your odds of success you should create a routine.  Two routines I recommend are dollar cost averaging and rebalancing.  Dollar cost averaging consists of investing the same dollar amount each month into an investment.   If you participate in your company sponsored retirement, you’re dollar cost averaging every pay period.    Following this strategy with your investment accounts will pay big league dividends.   Rebalancing your portfolio will reduce your risk and keep your original asset allocation intact.  I recommend rebalancing once per year, typically in January.
  • Play. “Progress always involves risks. You can’t steal second base and keep your foot on first base”, said Frederick B. Wilcox.  To be an all-star investor you need to own stocks.   Stocks are perpetual all-stars and have outperformed bonds and cash by a wide margin.   A dollar invested in the S&P 500 in 1926 is worth $6,031 today.  This same dollar invested in a one-month US Treasury Bill is worth $21![3]
  • Review. Baseball players watch tape on opposing players and themselves to look for clues on how to gain an advantage.   Reviewing your accounts quarterly will keep you in peak form.  As you review your accounts look at winners and losers.  Do you need to make any adjustments or changes?   A quarterly review is an opportunity to make sure your investments are in line with your financial game plan.
  • Celebrate. Derek Jeter’s last game at Yankee Stadium was epic.  The Yankees and Orioles were tied in the bottom of the ninth when Jeter came to the plate.  To put a punctuation point on his fabled career he had the game winning hit and everyone in Yankee stadium erupted in applause and celebration.   As you gain success as an investor take some time to enjoy the fruits of your labor.

Get your game on and become an investing all-star.  I know you can do it!   Your talent mixed with discipline, practice and patience will give you major league results!  Batter up!

I can do all this through him who gives me strength. ~ Philippians 4:13

“Ruth, Gehrig, DiMaggio, Mantle … Costanza?!” ~ Jerry Seinfeld

Bill Parrott is the President and CEO of Parrot Wealth Management and is a big fan of Major League Baseball.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

July 8, 2017

Note. Your investment results may differ than those highlighted in this post.

 

[1] https://www.nytimes.com/2015/10/04/sports/baseball/ichiro-suzuki-aiming-at-age-50-but-first-3000-hits.html?mcubz=1, David Waldstein, October 3, 2015.

[2] https://www.fold3.com/page/629784704_1927_new_york_yankees_murderers_row#description

[3] Dimensional Fund Advisors Matrix Book 2017.

Do You Need a Cinnabon™?

The summer travel season is upon us and this means an increase in traffic at your local airport.  As you stroll through the terminal it’s impossible to miss the awesome aroma of a Cinnabon™.   Cinnabon’s™ smell amazing and look incredible and it takes enormous will power to walk past their kiosk.   What’s the downside to indulging in one of these famous pastries?   According to Cinnabon’s™ nutritional guide the classic roll has 880 calories and a couple of their rolls have more than 1,000![1]   Eating a couple of Cinnabon’s™ may taste good in the moment but will leave you with a heavy dose of guilt once consumed.

The financial marketplace is full of products that look good on the surface but have a hidden underbelly.  These products are complicated and expensive with numerous bells and whistles designed to hook the unexpecting investor.  Here are few of these products you’d be wise to pass on the way to your financial destination.

Viatical Settlements.  This program is a bet on death.  An investor will purchase the life insurance policy from an individual who’s terminally ill.  The investor will pay the owner of the policy a discounted value of their accumulated cash value.   The investor will then make payments on the life insurance policy to the insurance company and when the owner of the policy passes away the life insurance proceeds are paid to the investor.   The return on these investments is unknown because the life of the insured can’t be calculated.  If the insured dies quickly, the investor will enjoy a high rate of return.  If the insured lives a long life, the investor will suffer a low rate of return.   In addition, the beneficiaries of the insured might not know the policy has been sold and this will deny them a claim to the proceeds.  This is a morbid investment strategy with few beneficiaries.

Structured Notes.  A structured note allows the investor to participate in the stock market with a few caveats.    The notes typically have a maturity of five years and may offer a fixed rate between 5% and 7%.  For example, you decide to buy a note on the Standard & Poor’s 500 index with a five-year maturity.  The note will give you downside protection if the market drops and cap your upside in a rising market.    If the stock market generated a return of 10% you forfeit the upside.  If the market should fall for five years, you’ll get your fixed rate on the note.[2]  Structured notes are complex and can be expensive.[3]

Leveraged Exchange Traded Funds (ETF’s).   Using leverage to sweeten your return may work in a rising market but will leave a sick feeling in your stomach when the market turns south.   An ETF can use 2X, 3X, or 4X leverage.   For example, if the stock market is down 2%, a 3X leveraged ETF will be down 9%!

Annuities.  Annuities may serve a purpose for individuals who need a guaranteed stream of income; however, most investors should look elsewhere to generate growth and income.   Annuities have high fees especially if they’re pumped up with riders.  It’s not uncommon for annuity fees to soar above 3%.   To add, your income and gains from an annuity are taxed as ordinary income.   Historically the stock market has returned 10% and inflation has averaged 3%.   After subtracting inflation, fees and taxes, your 10% return will drop to 1.2%!

Reverse Mortgages.  Americans have used their homes as ATM machines for years and this is one of the attractions to obtaining a reverse mortgage.  A monthly income stream from your bank sounds compelling but there are downsides.    If you obtain a reverse mortgage, your beneficiaries might have to sell the home when the owner dies.  If the family can’t pay off the reverse mortgage one the homeowner dies, then the home most be sold to cover the note.  Interest on the note is non-deductible and the rate is variable which will be a problem if interest rates rise.[4]

As you travel to your financial destination pay close attention to the small print because several products have compelling brochures, websites and advertising to entice individuals to buy the flavor of the month.   If it sounds too good to be true, it probably is!

Be sober-minded; be watchful. Your adversary the devil prowls around like a roaring lion, seeking someone to devour.  ~ 1 Peter 5:8.

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

July 6, 2017

 

 

[1] https://www.cinnabon.com/-/media/cinnabon/nutrition/CinnabonNutritionalGuide120216.pdf

[2] https://www.sec.gov/oiea/investor-alerts-bulletins/ib_structurednotes.html

[3] https://www.sec.gov/news/press/2011/2011-118.htm

[4] https://money.usnews.com/money/personal-finance/banking-credit/articles/2017-06-16/6-drawbacks-of-reverse-mortgages, By Maryalene LaPonsie, Contributor | June 16, 2017, at 11:37 a.m.

First, Do No Harm.

The Hippocratic Oath is the oath taken by physicians and is considered by many to be the source of medical ethics[1].  The oath is one of the more popular Greek medical texts and is named after Hippocrates who lived during the 5th century B.C.[2]  A section of the modern version of the oath is, “I will remember that there is art to medicine as well as science, and that warmth, sympathy, and understanding may outweigh the surgeon’s knife or the chemist’s drug.”[3]

What’s missing from the Hippocratic Oath is the phrase, “First, do no harm.” The popular saying isn’t part of the oath; however, the spirit of the term remains.[4]

Can you imagine visiting a doctor who hasn’t taken the Hippocratic Oath?  I can’t.  When I visit my doctor, I assume he’s taken the oath and will do no harm, especially to me.  A doctor is expected to administer medical care regardless of the circumstance.   During the College World Series between LSU and Florida Dr. Jerry Poche, father of LSU star pitcher Jared Poche, helped save the life of an elderly fan.  Dr. Poche and Jimmy Roy, another parent, administered CPR until the paramedics arrived.[5]  Dr. Poche acted swiftly to save the gentlemen’s life and he did no harm.

Registered Investment Advisors are under a fiduciary oath.  The National Association of Personal Financial Advisors (NAPFA) fiduciary oath starts with the sentence, “Always act in good faith and with candor.”[6]   The fiduciary standard originated with the Investment Advisers Act of 1940 and recently the Department of Labor recently passed the fiduciary rule requiring all financial professionals who work with retirement plans or provide retirement planning advice to be fiduciaries.[7]

The Certified Financial Planner Board requires their members to adhere to the fiduciary standard when providing financial planning services but this may be changing.   The CFP board is looking to change their stance on fiduciary status to include investment advice along with financial planning services.  In a sense, any individual who holds the CFP designation will be required to always act as a fiduciary.

As you look for an advisor to help you with your financial planning and investment advice look for one who’s a fiduciary and has taken a fiduciary oath!

And let us not grow weary of doing good, for in due season we will reap, if we do not give up. ~ Galatians 6:9.

Bill Parrott, CFP® is the President and CEO of Parrott Wealth Management.  For more information on financial planning and investment management please visit www.parrottwealth.com.

July 2, 2017

 

[1] https://www.nlm.nih.gov/hmd/greek/greek_oath.html, Michael North, National Library of Medicine, 2002.

[2] http://www.pbs.org/wgbh/nova/body/hippocratic-oath-today.html, Peter Tyson, 3/27/2001, Nova.

[3] http://www.psychceu.com/ethics/do_no_harm.asp, 1964 by Louis Lasagna, Academic Dean of the School of Medicine at Tufts University

[4] http://guides.library.jhu.edu/c.php?g=202502&p=1335752

[5] http://www.nola.com/lsu/index.ssf/2017/06/a_pair_of_lsu_baseball_dads_re.html, Andrew Lopez, 6/27/17/

[6] https://www.napfa.org/mission-and-fiduciary-oath

[7] http://www.investopedia.com/updates/dol-fiduciary-rule/