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Articles by Alan & Akemi
Alan is the founder and president of Kondo Wealth Advisors, Inc.

Growth for Whom?

This week, President Trump was forced to back off on his aggressive trade war, defend himself against recorded audio discussing a payoff to a Playboy model, and fret over the Trump Organization financial chief, Allen Weisselberg, testifying before a federal grand jury. Understandably, Trump has seized on relatively good news that U.S. economic growth hit 4.1% in the second quarter of 2018. Nevertheless, 40 million Americans live in poverty, and remain without healthcare coverage¹. It begs the question, "Who is the growth benefiting?"

The apparently good numbers come in the wake of a massive tax cut from 35% down to 21% that Trump gave corporations at the beginning of the year. Although previous administrations have used economic stimulus in order to avoid recessions, Trump's gift came at a bullish period of economic expansion, falling unemployment and rising home values. Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, calls it a "temporary sugar-high" that has long-term negative consequences because it pushes the federal deficit to over $1 trillion.² 

The biggest beneficiaries of this largesse have been corporate executives. Corporate profits after taxes are at the highest level ever seen in this country.² Earlier this year, the United Nations Human Rights Council reported that the top 1% of the U.S. population owns 38.6% of the total wealth in the country, and that "the U.S. already leads the developed world in income and wealth inequality." ³

Only a trickle has gone towards employee raises or bonuses. $800 billion is going towards stock buybacks to boost share prices and dividends. Stock shareholders have benefited, but 84% of all stocks are owned by the wealthiest 10% of households. 40% of Americans (125 million people) have hardly any investments at all.⁴

Trump’s trade war has also created an artificial spike in growth. In anticipation of U.S. tariffs and retaliatory tariffs being implemented, foreign companies have been stockpiling goods and raw materials in order to buy before prices jump. This has temporarily boosted U.S. exports.

A 10% tariff on $400 billion of imports is $40 billion that goes into the U.S. Treasury, a welcome pay increase for the government. But who pays for the trade tariffs? For American consumers, the trade war is a new financial hit, because it raises prices. The import tax on automobiles would raise the cost of a Toyota Corolla, Honda CRV or Ford F150 by about $1,000 due to the tariffs on car parts manufactured outside the U.S. It would add about $5,000 to the cost of imported cars.⁵

In addition, General Motors estimates that because of the proposed tariffs, they would have to eliminate 195,000 jobs over the next three years. With retaliatory tariffs, these job losses could increase to 624,000.⁶

It appears that “growth” means even more wealth to a small number of already-wealthy Americans. For the vast majority of the population, it means paying more for food, housing, clothing and healthcare, including the possibility of losing their jobs.

Although Trump characterizes the quarterly number as “an economic turnaround of HISTORIC proportions,” it is actually more modest and fleeting. During the Obama administration, the economy exceeded 4.1% four times.⁷ And because of the unusual confluence of events that created last quarter’s surge, it’s likely the economy will soon return to the average 2 to 2.5% rate that we’ve experienced since 2009.

 

¹ Bloomberg 4/3/2018

² New York Times 7/25/2018

³ Los Angeles Times 6/6/2018

⁴ CNN Money, 2/16/2018

⁵ CBS News 7/2/2018

⁶ CNBC 7/3/2018

⁷ New York Times 7/27/2018

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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U.S. Stock Market Improves in Second Quarter

The first half of this year was shaky, and made some people wonder if the positive, bull market was coming to an end. Thankfully, the market stabilized in the second quarter, and made back much of the losses. The U.S. equity markets are back on the positive side.

The broadest measure of the U.S. market is the Wilshire 5000 Total Market index. For this last quarter, it finished up 3.83%. For the first half of the year, it was up 3.04%.¹

There are two closely-followed indices for the U.S. large company market: the Wilshire U.S. Large Cap index, and the Standard and Poors 500 index of large company stocks. The Wilshire index was up 3.41% in the last quarter, and up 2.62 from the beginning of the year.¹ The S&P 500 index was up 2.93% in the last quarter, and up 1.67% for the year.² The generous tax cut that Trump gave these companies, from 35% all the way down to 21%, took awhile to kick in, which is one reason why the second quarter performance was better than the first. 

Over a longer period of time, small companies tend to grow faster than large companies. This makes sense, because it's easier to double in size if you're a small company, compared to doubling in size as a mega-company. Small U.S. companies are starting to have their day in the sun. The Wilshire U.S. Small Cap index rose 7.87% in the last three months, and is up 7.08% for the year. ¹ A comparable index is the Russell 2000 Small Cap index. It is up 7.66% since the beginning of the year.³

International stocks have been hit badly by the Trump trade tariffs. Because the U.S. economy is the strongest in the world, it's like the 800-pound gorilla. Trump is likely betting that in an all-out trade war, weaker global economies will feel the pain more than the U.S., and so far this is happening. The EAFE (Europe, Australasia and Far East) index, which represents companies in developed foreign markets, lost 2.34% in the last quarter. The performance for the year is even worse, down 4.49%. Europe by itself has a loss of 2.74% over the last three months, and an overall loss of 5.23% for the year.

Emerging markets indices represent small, less-developed but quickly-growing economies, like China, India, Brazil and Russia. These suffered most of all from the trade war in the last quarter. The Shanghai Composite is already in a bear market, down more than 20% from its 52-week high. MSCI's EM index is down 8.66% for the quarter, with a loss of 7.68% for the year.⁴

Trade tariffs act like an extra tax on the people. When the U.S. slaps tariffs on goods coming into the U.S., it doesn't go into our pockets -- it goes into the U.S. Treasury as extra revenue. Because domestic producers are not forced to reduce their prices from increased competition, U.S. consumers are left paying higher prices as a result. In a round-about way, the tariffs are helping the government pay for the tax cut to corporations, and Americans are paying the price at the cash register.

Jerome Powell, the chairman of the Federal Reserve Bank, has raised interest rates a couple of times already this year. He also announced possible further interest rate increases for September, December, next March, and next June. This has a direct impact on the bond market. Typically, when interest rates go up, bond values go down, with long-term bonds affected the most. When bond values go down, the coupon rate (which is relative to the lower value) goes up. Consequently, the coupon rate on 10-year Treasury bonds has risen to 2.86%, and for 30-year Treasuries, 2.99%.⁵

You'll notice that the coupon rate between 10-year and 30-year Treasuries is not that different. This is called a "flattening yield curve," and is a concern to economists because it's an indication that the current bull market, which started in March of 2009, is running out of steam.

The stimulus given to corporations in the recent Tax Law gave an artificial boost of adrenalin to the U.S. market and economy. The benefits could be short-lived, but the long-term impact of the additional $1 trillion deficit can have dire consequences, especially if the Trump administration attempts to take it out of Medicare, Social Security and other programs that benefit everyone.

¹ www.wilshire.com/indexes/calculator

² www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf-p-us-1

³ www.ftse.com/products/indices/russell-us

⁴ www.msci.com/end-of-day-data-search

⁵ www.bloomberg.com/markets/rates-bonds/government-bonds/us

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Strong Dollar and Trade Tariffs Play Chicken

The Dow Jones Industrial Average got an awakening this last week when two consecutive days of losses wiped out the year's gains. Down by 1.8% for 2018, it marked the worst half-year performance for the index since 2010.

Ironically, the losses were due to the strong U.S. economy and dollar, and the sluggish performance of overseas markets. More than half of the 30 companies that make up the DJIA receive 50% of more of their revenue from outside the U.S. By comparison, only 30% of the 500 companies that make up the Standard & Poors Index receive significant overseas revenue. The S&P 500 is still positive for 2018.¹

Since March 2009, when the U.S. pulled out from the bottom of the Great Recession, the domestic market benefited from one of the strongest rallies in history. The strength of the dollar increased in tandem. In order to thwart rampant inflation, the Federal Reserve Bank steadily raised interest rates. Chairman Jerome Powell recently raised interest rates for the second time this year, and indicated his intention to raise them two more times before the end of the year. Consequently, the dollar's value is at its highest since June 2017, compared to other global currencies -- up 5.5% against the Euro, and up 4.2% against the Japanese yen.¹

The dollar gained even more steam when mega-corporations were granted a "tax holiday" on profits held overseas in the latest tax law. $175 billion in profits were repatriated in the first quarter of 2018. Economists estimate that eventually, $450 billion will return to the U.S.¹

Emerging market countries, like Brazil, India, and Russia have been hammered by the strong dollar because in past years, they borrowed heavily in dollars to service their debt. Now, they have to repay the debt with dollars that cost even more. The Brazilian real is down 14% in value, the Indian rupee is down 7%, and the Russian ruble is down 9%.²

The firm dollar may be one of the reasons that Trump has decided to spark a trade war. Because the U.S. is in a stronger position than its global rivals, it may be hurt less than China or Europe, and can afford to "play chicken." The administration is even drafting a bill to exit from the World Trade Organization so it can impose tariffs with a freer hand, and without the consent of Congress.³

The tariffs have crippled markets outside the U.S. The Shanghai composite is in a bear market, down more than 20% from its 52-week high. The German DAX index is down 9% since January. The European market is down 6%, and Europe-focused funds lost $25 billion in assets in just the second quarter of the year. By comparison, U.S.-focused equity funds gained $3.2 billion in inflows in Q2. Of global investment portfolios, U.S. stocks and bonds now have a 60% share, the highest allocation since early 2017.⁴

U.S. Treasury bonds have also benefited from the turmoil. In a "flight to safety," investors have been drawn to the security of government bonds. The higher interest rates have made them even more attractive.

What does this mean for your personal investments? The money pouring into the U.S. market seems like a vote of confidence for strong, future growth. Because stocks are currently a little cheaper, this may be a buying opportunity. Volatility (the ups and downs of the market) may increase in the short-term because of the upcoming mid-term elections, and the continued uncertainty over how the trade war will play itself out. However, if you are investing to support 25 to 30 years of retirement, short-term volatility may be inconsequential to you.

The bottom line is, don't panic. This level of volatility is normal for the market, and is one of the reasons why the market holds out the potential for returns that are better than stashing money in a bank account. A strategy of broad, global diversification can be an effective way to reduce volatility, by spreading your risk. That way, no matter which of the many global markets is doing the best, your investment can benefit from it.

 

¹ Wall Street Journal, 7/2/2018

² Reuters 6/29/2018

³ Marketwatch 7/2/2018

⁴ Institute of International Finance 7/2/2018

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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U.N. Study Exposes American Poverty

In his "campaign rallies," and in Twitter, Trump often credits his economic approach for creating "the greatest economy in the HISTORY of America." However, on June 21, U.N. investigator, Philip Alston, presented a report to the U.N. Human Rights Council that told a very different story --

* 40 million Americans live in poverty. 5.3 million Americans live in "Third World conditions of absolute poverty."

* Among Organization of Economic Cooperation and Development countries, the U.S. has the highest youth poverty rate, and the highest infant mortality rate.

* Four out of ten Americans cannot cover an emergency expense of $400 without borrowing money or selling possessions.

* The top 1% of the U.S. population owns 38.6% of the total wealth.

Alston's study, carried out last December, included Skid Row in Los Angeles, African American communities in Alabama, the hard-hit coal country in West Virginia, and hurricane-racked Puerto Rico. He described, "people who have lost all of their teeth because adult dental care is not covered in programs for the poor," and Puerto Ricans living next to mountains of toxic coal ash. In Alabama, he found cesspools of sewage that have led to a resurgence of hookworm, which thrives in conditions of poor sanitation. A recent study found that more than one-third of people surveyed in Alabama tested positive for hookworm.

Alston found that, "the U.S. already leads the developed world in income and wealth inequality, and is now moving full steam ahead to make itself even more unequal," citing the $1.5 trillion in tax cuts that Trump passed in December of 2017, which "overwhelmingly benefited the wealthy and worsened inequality." Simultaneously, Trump cut a third of the food stamp program, and proposed to triple the base rent for federally subsidized housing. Alston said, "It's a very deliberate attempt to remove basic protections from the poorest, punish the unemployed, and make even basic health care into a privilege to be earned rather than a right of citizenship." He concluded that the U.S. is "building a society where wealth and privilege will dominate everything. The persistence of extreme poverty is a political choice made by those in power, amounting to a violation of civil and political rights."

In an interview with the Los Angeles Times,¹ Alston elaborated -- "There's been a systematic effort by conservatives to promote the notion that anyone who is receiving money from the government is shameful and offensive. Yet the rich receive vastly more money from the government, and that's not considered shameful." He pointed out "caricatured narratives" that hold up the rich as drivers of economic progress, while slamming the poor as "wasters, losers and scammers."

The report takes special note that the inequalities "affect African Americans in particular, where they just come out worse on every possible indicator, and policies are clearly designed to hit them harder." On the flip side, it cautions that "the equality of opportunity, which is so prized in theory, is in practice a myth, especially for minorities and women, but also for many middle-class White workers." Nobel prize-winning economist, Joseph Stiglitz added, "Can you believe a country where the life expectancy is already in decline, particularly among those whose income is limited, giving tax breaks to billionaires and corporations while leaving millions of Americans without health insurance?" Stiglitz warned that Trump's assault, "bodes ill for society as a whole. The proposed slashing of social protection benefits will affect the middle class every bit as much as the poor."²

"The American dream is rapidly becoming the American illusion," is the scathing message that the report delivered to the U.N. Human Rights Council. That message was scorned and dismissed by the Trump administration. Republican Party leaders like House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell and the Republican committee chairs have declined to comment. Rather than addressing the contents of the report, Trump's U.N. Ambassador, Nikki Haley, chose instead to criticize the U.N. Human Rights Council.

¹ Los Angeles Times 6/6/2018

² The Guardian 6/1/2018

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Charitable Gifts and the New Tax Law

One of the unexpected consequences of the new tax law is that charitable organizations are going to be struggling. Under the new tax law, charitable contributions are expected to drop by about half.¹

This is because the Standard Deduction has nearly doubled, from $13,000 to $24,000. At first blush, this would appear to be good news, but this is how it pans out for some taxpayers --

Let's say we're back in 2017, when the Standard Deduction for a married couple was $13,000. Your mortgage is paid off, and your only itemized deduction is $10,000 for state and local taxes.

It would make sense to make a $10,000 charitable contribution, because your tax deductions would total $20,000, $7,000 greater than the Standard Deduction.

However, for 2018, you would probably want to take the Standard Deduction of $24,000, because it's higher. Consequently, you might not do a gift to charity because there would be no tax benefit to you. In the past, roughly 30% of taxpayers were itemizers. That number is expected to drop to 10% by the time we start filing this year's taxes.² It's a tough decision, because you may still want to support your favorite church, temple or charitable organization, and help preserve the community.

There is still a way to support the community, take advantage of the higher Standard Deduction, and also receive additional tax deductions -- it's a strategy called "bunching," and it uses the unique advantages of the Donor-Advised Fund.

A Donor-Advised Fund is a fund in your name created inside a public charity. You receive an immediate federal (and sometimes state) tax deduction for the full value of your donation. Then, you can decide which charities, how much, and when to make distributions from the account later on.

In "bunching," (continuing the example above), instead of gifting $10,000 each year, you do $20,000 every other year. That gets your Itemized Deductions above the level of the Standard Deduction, but you have full control over when to make grants from the fund.

Because the investments continue to grow inside the fund, you could give away only the earnings each year, and preserve the principal. Or you could give away some or all of the principal. You can even wait several years, letting the money in your account grow before making grants. The main restriction is that the charities must be IRS-approved.

It gets even better. Suppose you donate stock that you bought at $10 a share, and now it's worth $50 a share. If you sold it yourself, you would have to pay capital gains taxes on the $40 per share gain. However, when you donate the appreciated stock to a Donor-Advised Fund, you escape paying the capital gains taxes. Nevertheless, you still receive a tax deduction based on the full $50 a share, as long as you’ve held the stock for at least a year. In this example, because of the tax savings, it would only cost you about $9,000 to make a $20,000 gift to your favorite community organization. 

You don't need to be a millionaire to consider Donor-Advised Funds. Minimum initial donations are typically in the $5,000 to $10,000 range.  Subsequent contributions can be much smaller. Donor-Advised Funds can accept any one of a variety of assets as a charitable contribution --  cash, wire transfers, stocks, mutual fund shares and bonds all are acceptable. 

When choosing a Donor-Advised Fund, you should carefully examine management fees, donation restrictions and investment choices.  A Certified Financial PlannerTM or CPA who is involved in the community can provide advice on the local needs of your community as well as a feature comparison of Donor-Advised Funds.

¹  http://cct.org/2018/02/giving-after-the-tax-cuts-jobs-act-a-charitable-conversation-guide/

² https://www.aefonline.org/blog/new-tax-law-bundling-gifts-donor-advised-funds

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Stock Buybacks and the American Dream

President Trump, trumpeting the new tax law that took effect this year, promised that the massive corporate tax cut from 35% down to 21%, on top of the "tax holiday" on approximately $2.1 trillion of corporate profits held tax-free overseas would result in increased investment in factories, workers and wages, and would invigorate the American economy.

The numbers are now in -- only 4% of workers are getting salary increases or bonuses. 80% of the tax windfall is going toward stock buybacks, in which corporations use the cash on hand to buy back their own stock.¹ Because this removes stock from the open market, it creates a scarcity value and drives up the share price.

This is good for the senior executives of these corporations, who tend to be big owners of their companies' stock. It also benefits the 10% wealthiest Americans who own 84% of all stocks.² However, the bottom 40% of Americans (125 million people) own nearly nothing in stocks, and continue to balance the rent, the grocery bill, and the rising cost of gas and electricity.

Until the early 1980s, stock buybacks were considered illegal because they were an artificial way to manipulate share prices.³ They were an easy way to create phantom profits, compared to hiring workers, spending on research and development, and building new plants.

Corporations tend to put share value first, ahead of customers, employees, the community or public interest, but wield control over the American economy and politics. In order to understand how corporations got this powerful, we have to go back to the end of the Civil War. The 14th Amendment was passed to protect fundamental human rights. It granted emancipated slaves full citizenship, and protection of life, liberty, property, and due process of law. However, using lies and a twisted interpretation of the Amendment, railroad barons pushed Congress to grant corporations the status of "persons." Corporations used the shelter of the 14th Amendment to overturn economic regulations, child-labor laws, zoning laws, and fair wage laws. 

150 years later, "corporate personhood" has snowballed into an overturn of the democratic system. In the last 4 years, the Supreme Court dramatically expanded corporate rights, and in 2010 ruled that corporations have full rights to spend money as they wish in candidate elections -- federal, state and local. It unleased a flood of campaign cash and corporate influence over elections, the budget and public policy. Corporations play it both ways -- they reap the benefits of "personhood," but unlike real people they can keep and grow their assets in perpetuity, and are not subject to the laws of inheritance.

Much of what Americans perceive to be wrong with America has roots in this ideology -- rising income and asset inequality, swings from boom to bust, unemployment, crumbling infrastructure, and unaffordable education.

Corporate stock buybacks are just one manifestation of this ethic. When corporations' primary role is to boost short-term shareholder value at the expense of everything else, what's lost is a long-term investment in the future. To get the largest "return on investment," corporations want the biggest return from the smallest investment. Costly new factories are a no-no. Investing in education for the surrounding community is irrelevant. Hiring expensive workers who receive health and retirement benefits is counter-intuitive. Corporations as "job creators" is a myth -- creating shareholder value and creating good jobs is incompatible. Stock buybacks, though, are a no-brainer -- they create profits out of thin air.

What does this mean for the American Dream? Wages are stuck. College degrees are out of reach. Medical costs are skyrocketing. A recent study by a team of the nation's leading economists at Stanford, Harvard and the University of California Berkeley reported that for the first time, it's extremely unlikely that this generation of American children will earn more than their parents, after adjusting for inflation. Much of the anger fueling last year's presidential election stemmed directly from the concerns of Americans who feel they are losing ground economically. Corporations pumped over $2 billion into the 2017 elections⁵, and found scapegoats to target -- immigrants, people of color, unions, international trade agreements, and workers in other countries.

One positive aspect to the current administration is that many Americans have received an education about the political system. They didn't receive the tax cuts that they expected. Jobs that were promised did not materialize. The vulnerability of the electoral process to social manipulation became exposed. The swamp overflowed. The coming mid-term elections may be an opportunity for an energized electorate to take back the democratic system, and roll back a fake prosperity that only benefits a few at the top.

 

¹ Americans for Tax Fairness, 4/9/2018

² CNN Money, 2/16/2018

³ New York Times, 2/26/2018

⁴ Washington Post, 12/8/2016

⁵ Fortune, 3/8/2017

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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The First Quarter & The Market Outlook

Is the bull market over? In the first quarter of this year, the U.S. investment markets have experienced the first correction (a decline of 10% or more) in three years. The VIX index (known as Wall Street's "fear index") had its biggest quarterly jump since 2011, rising 81%.

The downturn hit most parts of the market, both domestically and globally --

  • The Wilshire Total Market Index finished the quarter down 0.76%.¹
  • The Russell 1000 Large-Cap Index fell 0.69%.²
  • The Russell Midcap Index dropped 0.46%.²
  • The Wilshire U.S. Small-Cap Index lost 0.73%¹
  • The EAFE (Europe/Australasia/Far East) Index went down 2.37%.³
  • The Wilshire U.S. REIT (Real Estate Investment Trust) Index fell 7.42%¹

The reasons are varied. Some are due to Trump's self-inflicted wounds --

  • The White House is in chaos. Thirty-seven staff have been fired by President Trump, or have left on their own since the inauguration, eleven just since January.
  • Trump is at risk for impeachment for one or more violations -- collusion with Russia, obstruction of justice, and/or illegal campaign financing.
  • Trade tariffs on steel and aluminum and on Chinese products announced by Trump have created uncertainty. Even if these tariffs are quietly walked back and amount to little in the end, they have caused a temporary roiling of the markets.

Some of the volatility has resulted from a strong economy --

  • The unemployment rate is near record lows.
  • Salaries have risen 3%, and 18 states have increased their minimum wages.
  • Companies in the Standard and Poors 500 index of the largest U.S. firms are enjoying a 7.1% boost in earnings in the first quarter of this year, the quickest rise since 1996.⁴

Because of the robust economy, Jerome Powell, the chairman of the Federal Reserve Bank, has announced that he will likely increase interest rates at a faster pace than he did in 2017. This is a reasonable and prudent move. The Fed would like to see controlled growth, as opposed to runaway growth that could spark inflation. However, his announcement was one of the causes of the current volatility.

One of the keys to understanding the current market is not to panic, and to view current events from a long-term perspective --

  • The VIX "fear index" although higher than last year, is now near its historical average. In other words, the current volatility is "normal" compared to the steady, uninterrupted growth we had last year.
  • A big concern last year was that stocks were overvalued. That is, the Price Over Earnings (P/E) ratio was inflated at 18.6. That means that the price of one share of stock was 18.6 times projected annual earnings. After the correction in the last quarter, the P/E ratio is at a more reasonable 16.1. Because of this, we might be able to avoid a more severe bear market later on.⁵
  • Corporations profited from a huge tax cut, from 35% down to 21% in the new Tax Law. The benefits of the tax cut are going to be felt later in the year. Consequently, the strong earnings by corporations in the first quarter can only get better.

Most investors are trying to accomplish long-term goals, intending for the growth of their investments to fund college for their children, a home purchase, or retirement. Because of a better diet, more exercise, and improved medical care, many couples spend 25 to 30 years in retirement. Over a long period of time, the ups and downs of the market even themselves out, and the potential for a good return becomes more predictable.

The increased volatility in the first quarter is just a reminder that the market never goes up in straight line. The bull market that we had last year was only temporary. If we enter a bear market, when stocks go down, that will end too. In the context of long-term goals, the performance of the market during a quarter or even a year shouldn't scare you from sticking to your plans.

¹ Wilshire index data: http://www.wilshire.com/Indexes/calculator/

² Russell index data: http://www.ftse.com/products/indices/russell-us

³ International indices: https://www.msci.com/end-of-day-data-search

⁴ S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

http://money.cnn.com/2018/04/01/investing/stocks-week-ahead-valuation/index.html

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Trade Tariffs and Your Investments

Earlier this month, President Trump roiled the stock market by announcing that he would impose a 25% trade tariff on steel imports coming into the U.S. from foreign countries, and a 10% tariff on aluminum imports. The Dow Jones Industrial Average stock market index immediately dropped 2%.

Then last week, Trump proclaimed additional tariffs on $60 billion of imported goods from China, sending the market tumbling further.

The worst-case scenario would have been a global trade war, in which countries engage in a tit-for-tat retaliation against each other. The European Union, for example, would impose tariffs on U.S. motorcycles, bourbon, peanut butter and orange juice.

Trump used national security as a justification for imposing these tariffs. He would have had difficulty getting approval from the World Trade Organization. Many of the countries he targeted, like Canada, Japan and the European Union, already have mutual defense treaties with the U.S. A tariff on aluminum would have no impact on national security. The manufacturing process for aluminum requires bauxite, and the last U.S. bauxite plant closed 30 years ago.¹

Even from the point of view of protecting jobs in the U.S., the tariffs make no sense. Steel tariffs, for example, might have benefited 140,000 American steel workers, but it would have endangered the jobs of 6 1/2 million workers in construction, auto manufacturing, oil and gas pipelines, beer cans, agriculture and food processing.²

Already, Trump has granted exemptions to the foreign metal tariffs to Canada, Mexico, the European Union, Australia, Argentina, Brazil and South Korea. These exempted countries account for more than half of the $29 billion in steel sold to the U.S. in 2017. He also left the door open to other allies, like Japan, that did not get an initial exemption. Instead of tariffs, Trump is now talking about quotas. Quotas, compared to tariffs, might be welcomed by foreign exporters, since they would benefit from higher prices. With tariffs, the U.S. government collects the higher duties.³

It may be that Trump had no intention of actually imposing broad tariffs, but wanted to use the threat of tariffs as a bargaining chip to wrest concessions from other countries. The U.S., Canada and Mexico are in the midst of renegotiating the North American Free Trade Agreement (NAFTA). South Korea is also renegotiating its own free-trade agreement with the U.S.

One of Trump's main beefs with China was its requirement for U.S. companies manufacturing or trading in China to have a Chinese corporate partner, who would own 51% of the joint venture, and would have access to the American company's trade secrets and intellectual property. Even before the tariffs were announced, the Chinese government had agreed to lift the majority stake rule for U.S. securities firms and insurance companies. After three years, all caps would be removed. It will be the largest liberalization of China's financial services industry in eleven years.⁴

Global currency markets are very sensitive to trade flow because currency pricing is dependent on the stability or disruption of trade. However, the South Korean won, the Taiwanese dollar and Singapore dollar are all trading near their strongest levels in three years. World trade overall is expanding at the fastest rate in six years. China has responded with their own tariffs against U.S. products, but in a very muted way -- $3 billion in tariffs against U.S. products, versus $60 billion in tariffs against Chinese products.⁵ 

Since the initial panic, investor sentiment has warmed, and the market has already made back half of its initial losses. It seems as though the President is pursuing his common pattern of tapping out a dramatic tweet, followed by quietly walking back from his initial pronouncements. In the end, the "tariff turmoil" may turn out to be much ado about nothing.

¹ Wall Street Journal 3/9/2018

² Marketwatch 3/5/2018

³ New York Times 3/22/2018

⁴ South China Morning Post 11/10/2017

⁵ www.bobveres.com 3/1/2018

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

 

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Medicare Under Attack

In our last article, we talked about a cynical aspect of the Social Security "Cost of Living Adjustment." The 2% increase is actually fully offset by a simultaneous increase in Medicare premiums. We have seen other "give with one hand, take with the other" strategies in the new tax law. For example, the increase in the Standard Deduction is cancelled out by the repeal of the Personal Exemption. 

However, these shell games pale in comparison to the overall impact of the new tax law. The main beneficiaries of the tax law are mega-corporations. Not only did they receive a "tax holiday" on $620 billion of tax-free profits sheltered overseas, but they were granted a massive tax cut from 35% down to 21%. Unfortunately, only 6% of this windfall has gone towards employee raises and bonuses.¹

Back in 2008, the government bailed out banks with taxpayer money during the recession. In a similar way, the new tax law gifts mega-corporations but leaves taxpayers to pay for the resulting $1.5 trillion federal budget deficit. Lawmakers have been somewhat vague about what they will do to reduce the federal debt, but deficits have consequences, and what they have already said is telling --

House Speaker Paul Ryan said, "We're going to get back to entitlement reform, which is how you tackle the debt and the deficit."²  Senator Marco Rubio (R-Fla), after voting to create the gigantic deficit, announced, "The driver of our debt is Social Security and Medicare."² It seems likely that Congress will use the pretext of higher deficits to attack Medicaid (Medi-Cal in California), Medicare, Social Security and anti-hunger programs.

Medicare began in 1965 when seniors were unable to go out and buy health insurance on their own. Insurance companies did not want to sell affordable policies to older people because they were more expensive to insure. We have now come full circle -- Republicans are proposing that seniors get a voucher in place of Medicare. The voucher would defray some of the cost of buying a health insurance plan, but once again, elderly Americans would be on their own to try to get coverage.³

Before he resigned last September, Secretary of Health and Human Services, Tom Price, wanted to replace the Federal Medical Assistance Percentage, which is the federal government's commitment to fund Medicaid. Instead, he proposed block grants given to states. Block grants are typically small and fixed, and shift the healthcare burden to states. In the event of an economic downturn or emergency health crisis, states would find it difficult to fund necessary services. Price is gone, but Congress continues to promote his policies.

The existing cost of Medicare is already a significant burden to many people. The National Committee to Preserve Social Security and Medicare reports that, "45% of retirees spend more than 1/3 of their Social Security benefits on health care, from co-pays, to premiums, deductibles, and out-of-pocket fees for services -- such as going to the eye doctor, dentist or audiologist -- that are not provided."³

Indicative of things to come, Trump signed into law a dismantling of Medicare's Independent Payment Advisory Board. This board was authorized to serve as a check to prevent higher Medicare premiums.

It's fairly certain that cuts to Medicare and Social Security will be the next target for Trump and the Republican leadership. It's only a question of when. It will be difficult for Republicans to press for these cutbacks ahead of the 2018 midterm elections. There is an anti-Trump wave building in many of the swing states and districts that Republicans want to hold onto, and there is a growing contingent of well-funded Democratic challengers, many of them women. Republicans recognize that Medicare is a very popular program to the very people that voted for Trump. After the midterm elections, however, GOP representatives won't have to worry about retribution from angry voters and can proceed with, "entitlement reform."

If the 2018 midterms result in a Democratic surge, the soon-to-be replaced Republican majorities may try to push through cuts to Medicare and Social Security during a lame duck session after the November elections, but before the next Congress is sworn in in January 2019. 

[1] http://money.cnn.com/2018/03/05/investing/stock-buybacks-inequality-tax-law/index.html

² https://www.washingtonpost.com/news/wonk/wp/2017/12/01/gop-eyes-post-tax-cut-changes-to-welfare-medicare-and-social-security/?utm_term=.754575565af9

³ http://www.truth-out.org/news/item/39715-you-re-on-your-own-republicans-plan-attack-on-medicaid-medicare-and-social-security

https://www.washingtonpost.com/news/monkey-cage/wp/2017/01/18/republicans-want-to-fund-medicaid-through-block-grants-thats-a-problem/?utm_term=.ca16b768bde8

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Don't Forget About Inflation Risk

At a time when we're experiencing renewed volatility in the stock market, it's easy to be influenced by fear. When you turn on the news, the media tends to focus on just one risk -- stock market risk. They rarely mention a risk that may be even greater -- inflation risk.

The annual rate of inflation averages out historically to 4 – 4 ½% per year. It doesn't sound like much. However, over the course of 25 to 30 years of retirement, it can become a big deal. When the market is in the midst of a correction, it's tempting to move retirement assets to the low, but guaranteed, interest offered by banks, or the somewhat higher income presented by fixed annuities.

Returns from the stock market are not guaranteed. That's why your investment prospectus tells you, "Past performance is no guarantee of future results." However, it is this risk that forces the stock market to give the potential to receive much higher returns than guaranteed, fixed investments. When there is a growing gap between rich and poor, and the middle class is paying for big tax breaks to corporations, the stock market may be one of the few ways for average people to participate in the growth of the economy.

In order to not lose ground financially, we have to find ways for our assets to grow at least as fast as inflation. To give you an idea of the impact of inflation over a long period of time (like your retirement), check out this free, online calculator at:

            https://www.calcxml.com/do/ret05

Input your current age, the income that you are receiving, and the year in which you think you might pass away. Don't be too conservative about your life expectancy. A study by the Society of Actuaries Committee on Post-Retirement Needs and Risks stated that, "For a couple 65 years old, there’s a 25% chance that the surviving spouse lives to 98!"¹ The calculator will tell you what your income will need to be at some point in the future in order to maintain your purchasing power, and maintain your current lifestyle.

For example, suppose that you are age 65 today, and you are receiving an income of $100,000 per year from an annuity, and that income stays the same over your lifetime. How much of your future lifestyle will that annuity sustain by the time you're 90? The calculator shows that when you assume an inflation rate of 3% per year, you would need $209,378 at age 90 to enjoy the same lifestyle you enjoy today. In other words, the annuity would provide less than half of what you need at age 90.

Remember that I said that average inflation is closer to 4 to 4 ½% per year. If we use a 4% inflation rate, the future income needed to match today's $100,000 rises to $266,584.

I'm not saying that all annuities are bad. There are good annuities and bad annuities (we'll get into that at another time).  A good annuity is appropriate in the right circumstances as part of an overall retirement strategy, especially for people who aren't so fortunate to retire with a pension. However, when you see the results of your own calculation, you can understand why it makes sense for many retirees to assume a moderate amount of risk in a broad, globally-diversified portfolio.

Investments that grow over time may make it possible for you to afford a comfortable future retirement. The safety of bank CDs and guaranteed fixed income from annuities can have a place in your retirement strategy, but if they are the only assets you have, you may be swapping a guarantee not to lose money for a guarantee that you will run out of money in retirement.

¹ USA Today, 10/5/2016

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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The Past, the Present, and Your Long-Term Goals

The past year, 2017, was by any measure, an amazing year. The U.S. and international markets ignored North Korean missile threats, Presidential fire and fury, hurricane devastation, a ballooning national deficit, and yet produced the following broad market gains:

* The Wilshire 5000 Total Market Index -- the broadest measure of U.S. stocks -- finished the year up 20.99%.¹

* The Standard and Poors 500 Index of large company stocks returned 19.42% by the end of 2017.²

* The Russell Midcap Index finished 2017 up 18.52%.³

* The Russell 2000 Small-Cap Index gained 14.65% for the year.³

* The technology-based Nasdaq Composite Index rose 28.24% for the year.⁴

* In international stocks, the broad-based EAFE Index of developed foreign economies ended the year up 21.78%.⁵

* Emerging market stocks of less developed foreign countries, represented by the EAFE EM Index, posted a 34.35% gain for the year.⁵

* In the bond market, the coupon rate on 10-year U.S. Treasury bonds rose 2.41%.⁶

* Thirty-year municipal bonds yielded 2.62%.⁷

Last year's market performance caps a span of time from 2009 up to the present in which there have been no significant downturns, and returns have been generally upward. The questions on many people's minds are "How long can this last?" and "When should I get out?" Many investors who tried to time the market concluded over a year ago that the party was over, and cashed out their holdings. Then, they watched on the sidelines as the Dow Jones Industrial Average captured record high after record high. It's a demonstration of how difficult it is to predict market performance. 

Timing the market is made even more difficult by the fact that you have to be right twice -- when to get out, and when to get back in. The result for most people is missing out on periods of exceptional returns, taking a hit to the value of their portfolios, and suffering a setback on achieving their most important life goals.

The penalty for mistiming the market is high. For example, investors who stayed in large cap stocks for all 5,218 trading days between the beginning of 1997 and the end of 2016, achieved a compound annual return of 7.7%. If they missed only the 10 best days of stock returns in 19 years, they would have received only 4.0%. If they missed the 50 best days, they would have lost 4.2% per year.⁸

Trying to avoid bear markets (markets when stock values go down) is not that productive for long-term investors because bear markets tend to be short, and eventually come to an end. Bear markets have lasted on average less than two years since 1970. As long as you didn't panic, even the terrible Great Recession of 2008 and 2009 was not a disaster. You would have recovered in four years.⁹ By comparison, many people spend 25 to 30 years in retirement.

A broad, globally-diversified portfolio that balances all the asset classes is effective at tempering market fluctuations, and is well-suited to achieving long-term goals. Rather than stewing over when to get out of the market, your time and energy may be better spent maintaining a long-term outlook for your investment strategies, and working with your advisor to develop a comprehensive financial plan that is aligned with your life goals.

¹ www.wilshire.com/Indexes/calculator/

² www.standardandpoors.com/indices/sp-500/en/us

³ www.ftse.com/products/indices/russell-us

⁴ www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

⁵ www.msci.com/end-of-day-data-search

⁶ www.bloomberg.com/markets/rates-bonds/government-bonds/us/

⁷ www.bloomberg.com/markets/rates-bonds/corporate-bonds/

⁸ Loring Ward, 360 Insights, winter 2018

⁹ Associated Press, March 5, 2013

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Balance

Balance is important in your portfolio, just like balance between work and play, office and family are important to your life and personal well-being.

Because we use a strategy for our clients based on broad, global diversification, regular rebalancing is especially important. Our portfolios typically contain many different "asset classes" --  U.S. large, medium, and small companies, international large, medium and small companies, emerging market holdings (such as China and India), real estate and bonds. There are often more than 6,000 different companies represented in a broadly, globally diversified investment. Diversification spreads your risk, and is just the opposite of "putting all your eggs in one basket." It tends to give you more consistent performance and good downside protection.

As you might expect, all these different asset classes don't all go up together -- they take turns, and each asset class usually has its day in the sun at different times. In a diversified strategy, rebalancing helps you to take advantage of the individual performance of each asset class.

You probably know that your investment portfolio is being rebalanced on a regular basis, but you might not know why.  Is it for higher returns?  For maintaining the agreed-upon balance of investments that is in your risk tolerance comfort zone?  Does rebalancing help manage portfolio risk?

The answer to the above is “yes,” “yes,” and “yes,” but with a qualification.  Rebalancing an investment portfolio is most importantly a form of discipline, a way to reduce the impact of those dangerous emotions of greed and panic in the investment process.

During a bull market, stock prices rise faster than bond values, causing them to make up a larger percentage of the portfolio than you signed on for.  Similarly, in a bear market, stocks will fall, while bonds often rise, causing your portfolio to become more conservative.  Real estate investments and commodities often rise or fall at different times than stocks or bonds, pulling your overall percentage allocations away from the target mix.

When you rebalance, you’re selling some assets that rose in price and buying the ones that went down. For us, if an asset class rises in value more than 2 to 5% in a 3-month period, depending on the asset class, we will usually sell some if it while it's up high, locking in some of the gains. Then, we use the proceeds from the sale to buy some of another asset class that looks like a bargain at the time. This discipline results, over time, in consistently buying low and selling high.

 

THREE WAYS TO REBALANCE  

1) The easiest is to use whatever new money is coming into the portfolio, monthly or quarterly, to buy the assets that have gone down, allowing you to make consistent adjustments that keep the portfolio at its recommended allocations.

2) Another possibility is to rebalance at certain times of the year—every three, six or twelve months.

3) Or you could follow a more sophisticated process, and rebalance whenever assets deviate by more than certain set percentages from the baseline asset allocation.

Using a simple mix of 60% stocks and 40% bonds shows that rebalancing using the percentage deviation method tends to lead to higher overall returns from the beginning of 2000 to January 2016.¹  Wider bands sometimes produce higher returns (and fewer rebalances), although of course there is no guarantee that this would be the case in the future.

Perhaps most importantly, rebalancing brings you back, over and over again, to the allocation that you established when you started your investment. If you are working with a Certified Financial Planner™ or CPA, this allocation was designed to give you the long-term returns that would best accomplish your most important goals in your comprehensive financial plan. 

When it comes to making decisions in a time of crisis, having a rebalancing policy in place ensures that buys and sells will be made with discipline, rather than emotion.

¹ 5/22/2017 Seeking Alpha

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

 

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Giving Thanks

How did we get to the end of the year so quickly? Now that they start playing Christmas music after Halloween, the years seem to fly by more quickly than ever.

This has been an eventful year for the market, which has built on gains that have totaled 359%¹  since the beginning of the rally in March 2009. Our clients have been happy with the performance, but also a little nervous. They are aware that every eight to ten years on average, the U.S. market goes through a correction or downturn in the market. It's actually healthy for the market to find its correct price, cool down, and eventually go on to hit new highs.

We believe the expected correction will be a relatively mild one, because the underlying U.S. economy is very strong, much stronger than most global economies. On that basis, many economists feel that the market should do well for at least the next couple of years, even if we have a correction.

Investors who have a broad, globally-diversified portfolio should do well. Diversification means spreading your risk as widely as possible, just the opposite of putting all your eggs in one basket. This approach helps alleviate a correction because different assets behave differently, often just the opposite of one another. When the U.S. market goes through a rough patch, the international market tends to do quite well, and pick up the slack. It's fortuitous that currently, the international market is already doing very well, hitting record highs.

Thanksgiving is also the time of year that we send out Required Minimum Distributions on retirement accounts (like an IRA, 401k, 403b, etc.) for our clients who are age 70 ½ or older. This is mandatory, and the penalties for non-compliance are harsh -- if you don't take your RMD like you're supposed to, the IRS can penalize you 50% on what you should have taken out. If your financial advisor is on top of things, he or she should have already calculated your RMD for this year, and let you know that it will be sent to you before the end of the year. If you haven't already received this notice, you may want to be proactive and make sure that your RMD is in the works.

Your Required Minimum Distribution is re-calculated every year. Your financial advisor will take the value of your retirement account on December 31, 2016, and divide it by a factor based on your age. At age 70 ½, your RMD is about 4%. The percentage gradually increases as you get older. Many people think that the value of their retirement account will decrease once they start taking RMDs, but this doesn't have to be the case. It's not unreasonable for a retirement account to grow 7% per year or more on the average in a highly-diversified strategy. Even if you have to take a 4% RMD, your account can still grow. This can give you the peace of mind that you're not going to run out of money in retirement.

The end of the year is a good time to harvest losses in your investment. Tax loss harvesting is the practice of selling a security that has experienced a loss. You are able to offset taxes on both gains and income. If you have a passive gain (e.g., from selling an investment or real estate), you can wipe out or reduce the taxes by harvesting a similar loss. If you have no passive gains, you can reduce up to $3,000 per year of ordinary income with a long-term passive loss.

If you have carry-over passive losses from previous years, you can take advantage of those losses by selling some investments at a gain. Your Certified Financial Planner™ and CPA can collaborate to match gains and losses. This way, you can sell some investments on which you would normally pay capital gains taxes, and pay no taxes at all!

Finally, this is a good time of year to consider supporting your favorite community organization, church or temple with a charitable contribution. If you donate appreciated investments, you can escape paying capital gains taxes, and the charitable organization (because it pays no income or capital gains taxes) will receive the full amount. It's a win-win. 

If you haven't decided which organizations you want to benefit, but want to take the tax deduction this year, think about opening a Donor Advised Fund. You'll be able to take an immediate tax deduction, and decide later on who you want to gift to. Because you can keep the money invested and growing in a Donor Advised Fund, it's the type of gift that can keep on giving.

You can donate your Required Minimum Distribution as well. One of the most effective ways to do this is through a Qualified Charitable Distribution. The QCD is written directly from the investment to the organization. This way, your Required Minimum Distribution bypasses the calculation for Adjusted Gross Income, and helps to keep down the taxation of your Social Security benefits, and your Medicare premium.

Consult with your Certified Financial Planner™ or CPA to determine what type of contribution would benefit you the most.

We hope you have a happy and healthy holiday season!

¹ WSJ 11/18/2017, based on the performance of the Standard & Poors 500 index

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

 

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Behavioral Finance Takes Nobel Prize for Economics

This month, University of Chicago economist Richard Thaler was awarded the 2017 Nobel Prize in Economics by the Royal Swedish Academy of Sciences. This was a controversial decision, for a number of reasons. 

Thaler is a proponent of behavioral finance, which is the study of economics and finance from a psychological perspective. Up until recently, mainstream economic theory was based on the assumption that people behave rationally. Professor Thaler's theories, on the other hand, pioneered the view that people, especially when it comes to personal finance, often behave in ways that contradict traditional economic rules and reason. 

The traditional economic approach was to view human financial choices like particles in physics. The outcome could be predicted by a few established rules. All of us—and especially professional financial planners—know that these assumptions are far from what we have observed in the real world. After receiving the award, Professor Thaler commented, "In order to do good economics, you have to keep in mind that people are human." 

Thaler spent his entire career exploring the differences between these unrealistically idealized economic assumptions and actual human behavior.  He demonstrated that people take mental short-cuts—called “heuristics”—when they make what they believe to be logical decisions.  He showed that in the real world, human decisions are often impulsive, and self-control is more often an aspiration than a reality. Although investment selection and globally-diversified asset allocation are important investing tools, it is often behavior that ultimately determines whether a portfolio will help an investor achieve fulfillment and satisfaction in life.

Thaler also developed a theory of “mental accounting,” which explained how people make financial decisions by creating separate accounts in their minds—one for college funding, say, and another for retirement, and still another for vacations or a new car.  He explored those mental short-cuts and found that people tend to expect more in the future of what they’ve recently experienced (short-term bias), and often believe they have more knowledge about their decisions than they actually do. 

Although his views have been regarded by radical by some traditionalists, they have already had broad impact in the real world. In his 2008 book, "Nudge," Thaler and his co-author Cass Sunstein discussed ways to help people make better financial decisions, and argued for public policy changes that would help average people by "nudging" their behavior in a positive direction. For example, there was a pervasive problem that most people were not saving enough for retirement. It was difficult for many people to control their impulses. If they had money in their hands, the tendency was to spend it, rather than put it away for the future.

Thaler suggested "opt-out" retirement savings plans. Previously, employees had to take individual action to enroll in their company's 401(k) retirement plan. Even though the money they contributed to the 401(k) would grow tax-deferred, would reduce their taxable income, and in many cases would be supplemented by an employer's matching contribution, many employees failed to enroll. Thaler's studies sparked a sweeping shift towards automatic enrollment into employer-sponsored retirement plans. In other words, participation is now the default option, and you have to take individual action if you choose not to enroll. This shifted inertia to the side of the preferred decision.

Thaler's thinking is especially relevant today. In a perfectly rational world, all-knowing investors and consumers would never have market bubbles or market crashes, since every market price is right and fair at any particular moment. We have had 8 years of fairly-sustained growth in the market, but we know that every 8 to 10 years on the average, we have a market correction of 10% or more. This is normal and healthy for the market, and is a way for stocks to find their true value. If we were perfectly rational people, we would recognize that the market has always recovered from these corrections, and will likely proceed to hit new highs. However, the emotional, irrational side of us could take over, and cause us to sell all our holdings at the bottom on the market. Not only would we be locking in the losses, but losing the long-term growth could prevent us from accomplishing important, long-term goals. As financial advisors, we do our most important and valuable work when markets are down, guiding our clients through those difficult periods and helping them manage their behavior.

Thaler’s prize suggests that the world of economics is starting to catch on to the messy decision-making that actually goes on in the real world.

 

Sources:

* Washington Post, 10/9/2017

* The Guardian, 10/11/2017

* New York Times, 10/9/2017

* The Economist, 10/23/2017

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Little-Known IRA Penalty Could Cost A Lot

A 2015 ruling by the Tax Court can affect your flexibility in moving from one Individual Retirement Account (IRA) to another, and it's still catching people by surprise today. It's easy to become confused, because the Internal Revenue System's own Publication 590 took awhile to catch up with the new ruling and gave contradictory recommendations. It's important to understand the stricter interpretation of the law, because making a mistake can subject you to unnecessary taxes and penalties, and could cause you to lose your IRA.

A couple of years ago, moving money from one IRA to another was fairly straight-forward, as long as you followed the "60-day rule". What this meant was, you could withdraw money from an IRA, but as long as you deposited the money into another IRA within 60 days, you would not be taxed on the distribution, and your money would continue to grow tax-deferred in the new IRA. This gave valuable flexibility to many people -- they could take money out of their IRAs and use for 60 days tax-free. If they put it back into an IRA within 60 days, it was like it never even happened. 

Before 2015, the understanding was that you could apply the "60-day rule" to multiple IRAs in the same year. Let's say you have $50,000 in IRA 1, and $100,000 in IRA 2. You decide to liquidate the $50,000 IRA, and within 60 days, you put it back into another IRA. Later that year, you liquidate the $100,000 IRA. Same as with the first IRA, you deposit the money back into an IRA within 60 days. No taxes, and no penalties. 

That was under the old rules. Unfortunately, the Tax Court felt this was a loophole they needed to close. Now, you can only apply the "60-day rule" to ONE IRA within a 12-month period, no matter how many IRAs you have. Using the same scenario above, the first IRA transfer of $50,000 would be allowed, but the second IRA transfer of $100,000 would be disallowed. The IRA owner would have to pay tax on $100,000, and the IRA would come to an end. To make matters worse, the IRA owner could also incur a 6% annual penalty for excess contributions because annual IRA contributions are limited to $5,500 ($6,500 if you're over 50 or older). The penalty would continue until the excess contribution was corrected.

You should also be aware that there are many different types of IRAs -- there are Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. Among all of these IRAs, only ONE rollover can occur every 12 months, NOT one rollover for each type of account.

The good news is that there is a way to move from one IRA to another IRA that avoids the restrictions and penalties. It's called a "trustee-to-trustee" (also known as a "custodian-to-custodian" transfer). Every IRA has a trustee or custodian.  The trustee-to-trustee transfer is not considered a distribution because the IRA owner doesn't have direct access to the money. And because it's not considered a distribution, it's not subject to the only-1-per-12-month limit. 

The trustee-to-trustee transfer is best done by direct transfer. This means the money goes directly from Trustee A to Trustee B and never touches your hands. From the IRS' point of view, this is clearly not a taxable issue. Another way to do the trustee-to-trustee transfer is to have the check written payable to the trustee. For example, the check might read "Payable to Charles Schwab, custodian FBO Your Name." FBO means "For the Benefit Of." Unlike the IRA-to-IRA rollover, there are no limits on the number of trustee-to-trustee transfers that can be made each year.

Because the consequences can be dire if you make a mistake, and there is little recourse once you've made an error, it may be wise to consult with a CPA or Certified Financial Planner™ when you want to do an IRA rollover or transfer.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Penalties Retirees Can Avoid

For those of you who are contemplating retiring soon, you will be joining the approximately 10,000 Baby Boomers who are turning age 65 every day. By 2060, there will be 98 million Americans age 65 or older, making up 25 percent of the general population.¹

This large group of retirees will have to make many important decisions. You only get one chance to make some of these decisions. The errors can be costly, but are easily avoided. I'd like to explore some of these danger areas, as well as ways to stay out of trouble.

DON'T CLAIM SOCIAL SECURITY BENEFITS TOO EARLY

Although it's possible to start receiving Social Security benefits as early as age 62, it might not be the best thing to do, depending on your circumstances. When you start taking Social Security benefits at age 62, you receive a reduced level of benefits permanently for your lifetime. This is because you're triggering benefits before your Full Retirement Age. If you were born between 1943 and 1954, your Full Retirement Age is 66. If your birthday falls between 1955 and 1959, your Full Retirement Age is 66-67. Finally, those born in 1960 or later have a Full Retirement Age of 67. 

As a rough rule-of-thumb, your Social Security benefits increase by about 8% for every year that you wait to start benefits. Therefore, if you start Social Security at age 67, your benefit will be about 40% higher than if you started it at age 62. This can make a significant difference in your lifestyle if you live a long time.

If you wait to age 70 to collect Social Security, your benefit will be about 64% higher compared to age 62. However, it doesn't pay to wait beyond age 70, because there are no increases after that point.

ENROLL IN MEDICARE AT THE RIGHT TIME

If you're already enrolled in Social Security and you're approaching age 65, you will automatically receive your Medicare card 3 months before your 65th birthday, and your coverage will start at the beginning of the month in which you turn 65. 

However, if you have not yet started Social Security when you turn 65, you have to remember to enroll yourself. You have to do it within a six-month window, starting 3 months before your turn 65, to 3 months afterwards. It's best to pay a visit to your Social Security office 3 months before your turn 65, so your coverage can start as soon as you turn 65. 

If you miss the six-month Initial Enrollment Period window, you will pay a penalty of 10% of the Part B premium for every year that you delay. This penalty is permanent, for as long as you receive Medicare.

DON'T FORGET TO TAKE YOUR REQUIREMENT MINIMUM DISTRIBUTION (RMD)

Want to avoid a 50% penalty? Don't forget to take your annual Required Minimum Distribution, starting at age 70 ½. If you don't take your RMD like you're supposed to, the IRS can take 50% of what you were supposed to take. 

This rule applies to the money in your retirement accounts, like Individual Retirement Accounts (IRAs), employer-sponsored plans like 401(k)s and 403(b)s, and those created by self-employed individuals, like Simplified Employee Pensions (SEPs). Because the Internal Revenue Service wants to collect taxes on this money, it requires you to start taking out some money (and being taxed) from these accounts every year starting at age 70 ½. 

The annual RMD is not a large amount, about 4% at age 70 ½. For example, if you were age 70 ½ this year, you would take the cumulative value of all of your retirement accounts on December 31, 2016, and divide this sum by a denominator based on your age. At age 70 ½ the denominator is 27.4, making your RMD about 4%. In reality, your investment management company or Certified Financial Planner™ should do this calculation for you each year, and make sure you receive your distribution before the end of each year. 

Fortunately, the rest of your money can continue to grow, tax-deferred. Many people are under the impression that once they turn 70 ½, the value of their retirement accounts will dwindle each year. This is certainly possible if you have your retirement accounts in a bank savings account or CD. If you have to take out 4% or more each year, and the account is earning 1% or less, the balance will eventually disappear. However, in a broad, globally-diversified portfolio of investments, it's very possible to get an average return higher than 4% per year. Even though you have to take Required Minimum Distributions, you retirement accounts can still grow. Potentially, you can pay for your retirement expenses and still leave a legacy for your children or grandchildren.

Of course, the best choice for you on these decisions depends on your personal circumstances and goals. Consult with your CPA, Certified Financial Planner™, or estate planning attorney for advice when you are entering retirement. They can help you make the right decisions to maintain your lifestyle in retirement, and avoid needless penalties and taxes.

¹ Population Reference Bureau 1/2016

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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How to Prepare for a Downturn

This is an unusual time for the market. Our clients have been happy about how well their accounts have been growing, even in conservative portfolios. At the same time, many are unnerved about the daily chaos coming out of Washington, and worry about an impending crash if Trump should do something unexpected that would upset the U.S. market.

There is reason for concern. The U.S. market has been on a tear for the last 8 years, and we know that on the average, we have a market crash every 8 to 10 years.¹ A correction in the U.S. market would be a normal and healthy occurrence, and is overdue.

Moreover, U.S. companies are currently overvalued. The ratio of a company's share price to its per-share earnings, known as the Price-Earnings or P/E Ratio, is an average 23.8 for U.S. companies. Since 1988, the average P/E ratio has been 18.8.¹

However these statistics don't tell the whole story. When the media and pundits talk about the market, they tend to put the blinders on, and focus on the U.S. market alone. However, the U.S. market represents only 36% of the world’s total stock market capitalization.² An investment strategy that is based on broad, global diversification keeps this fact in mind. Under this approach, you are not invested just in the U.S. market, but in every market around the world -- just the opposite of putting all your eggs in one basket.

We saw first hand in the Great Recession of 2007 how lack of diversification can be a disaster. The Standard and Poors 500 Index, representing the 500 largest companies in the U.S. based on capitalization, fell 60%. Many investors who had only the S&P 500 or similar investments in their portfolio panicked and sold everything at the bottom of the market. They not only locked in their losses, but failed to benefit from the strong rally from 2009 to the present.

Yes, the U.S. market is overvalued, but the media has been saying that every year for the last 10 years, and the market has continued to rise. If you have a diversified portfolio, you would also have international investments that have reasonable valuations (the P/E for German companies is 16)², and also in emerging market investments (countries like China and India) where the P/E is even lower. In fact, emerging market investments were among the best-performing asset classes in 2016.

We learned valuable lessons from the Great Recession that we would do well to remember at this time:

•  Don't try to time the market and pick stocks. They say "the Hall of Fame for market timers is an empty room".

• Don't try to skew your investments in anticipation of expected future events, no matter how plausible they sound -- they might not happen for a very long time, if ever.

Warren Buffett stated it best when he said there are 3 certainties in life: death, taxes, and rising markets. The Great Recession was the worst crash we had seen since the Depression, but as long as you didn't panic and sell everything, you would have broken even in 4 years, 5 months.³ That would be just a blip, compared to the 25 to 30 years we are likely to spend in retirement. For many people, a diversified investment portfolio makes it possible to maintain their lifestyles in retirement. By comparison, avoiding all risk by keeping all your money in the bank could make running out of money a guarantee.

Buffett looks forward to market downturns as a buying opportunity. Remember when Bank of America stock was $3 a share in 2008? When you employ automatic quarterly rebalancing, you can buy low automatically. Here's how it works -- when you have a globally-diversified investment, you have about 15 distinct asset classes in your portfolio. They don't all go up and down at the same time -- they take turns. If any asset class increases 4% or more in a 3-month period, you sell some it while it's up high (like taking some of your winnings off the table in Vegas) and put the proceeds into another asset class that is a bargain at the time. Just doing quarterly rebalancing can make a dramatic difference in long-term performance.

In a volatile and uncertain market, diversification and rebalancing can be your best friends. Not only do they allow you to sleep better at night, but they will make it possible to stick to your plan, accomplish your long-term goals, have a comfortable retirement, and pass something on to your children and grandchildren.

¹ Investment News, 5/2017

² CNBC, 3/13/2017

³ Bloomberg, 6/2017

⁴ Business Insider, 11/6/2016

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Target-Date Funds After Retirement?

If you worked for a large company and participated in their 401(k), 403(b) or 457 retirement plans, they may have put you in one of their Target-Date Funds. This type of fund uses your projected retirement date as a "target," and works backwards. When you are young and many years away from retirement, the asset allocation is more growth-oriented. Every few years, as you get closer to retirement, the fund adjusts its asset allocation to gradually become more conservative (i.e., a greater proportion of bonds to stocks). The reasoning is that as retirement approaches, you want a more defensive stance in case the market goes down just when you're about to retire. For this reason, target-date funds have become a popular choice when you're in the accumulation phase of your life. About half of all 401(k) participants now use target-date funds, according to the Investment Company Institute. But is leaving your retirement nest egg in target-date funds the best choice after you leave your job?

A strategy for accumulating money for retirement can be very different from the one you use once you're in retirement. A target-date fund can be very appropriate for accumulation because it runs by itself and you don't have to think about it -- it's like being on auto-pilot.

However, once you retire, everyone has different goals -- some people want to catch up on travel and need a lot of income in the first several years of retirement; some people retire early and need to maintain the growth of their retirement nest egg in order to fund 25 to 30 years of retirement; some are fortunate to have more than enough income and assets, and can put all the retirement money in the bank.

Target-date funds, on the other hand, are one-size-fits-all. The target-date fund picks an allocation that it thinks is "right" for the average person. One of the largest target-date funds holds only 38% in stocks at the retirement date. This might be too conservative for those employees who retire early, or whose families are very long-lived, because they need the money to keep growing in order to not run out of money in retirement.

Most employees don't look "under the hood" at their target-date fund to see what mutual funds and asset classes are actually in the portfolio. They might be surprised if they did. There are over 15 different asset classes that make up a broad, globally-diversified portfolio. We have seen many target-date funds that are quite skimpy, and completely exclude U.S. small companies or international investments. In a year like 2016 when the Russell 2000 small cap index went up 19.5%¹, the omission of an asset class can significantly hurt performance.

There are also conflicts of interest in target-date funds. The brokers who sell 401(k)s to companies often fill up the target-date fund with mutual funds that offer more compensation to the broker, or make more money for the investment management firm that puts together the 401(k) plan. The investor has no discretion over the choice of those funds.

What may be one of the most important deficiencies of target-date funds is their inability to enhance growth through quarterly rebalancing. In a globally-diversified portfolio, not all of the asset classes go up at the same time -- they tend to take turns. You can take advantage of this characteristic by reviewing the performance quarterly, and selling a little of what made the most gains, and putting the proceeds from the sale into another part of your allocation that represents a bargain at the time. By doing this, you are buying low and selling high every 3 months. Just doing regular rebalancing can make a big difference in long-term performance.

The problem is that target-date funds are locked into a particular allocation. Any withdrawals are made proportionately across all of the fund's assets. You cannot buy or sell just a particular component within a target date fund. Consequently, quarterly rebalancing is not possible.

The limitations of target-date funds exist not because of bad design, but because target-date funds were meant for the accumulation phase of your life. They weren't intended for efficient withdrawals and growth after you retire. They expected that when employees retire, they would move their assets from their 401(k), 403(b) or 457 plan to an Individual Retirement Account (IRA). Not only would the transfer be tax-free, but the tax-deferred growth would continue. The retiree would then benefit from more investment choices than were available in the employer-sponsored plan, greater control and customization, and potentially better performance through lower investment costs.

Once you're retired, you can work with a fiduciary, like a Certified Financial Planner or CPA, who is required to act in your best interests. They can help you create an IRA tailored to accomplish your particular goals. Having the right IRA will help your retirement assets grow to keep pace with inflation, provide income for your lifetime, and pass remaining assets to your children and grandchildren through Inherited IRAs.

¹ Morningstar

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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So You're Turning 70...

If you're turning age 70 this year, you have a lot of company. You will be joining 2.5 million Baby Boomers, including Elton John, Glenn Close, and David Letterman. Turning 70 is not only a milestone to celebrate, it can also have financial consequences that you should be aware of.

Age 70 is an important marker in terms of your Social Security benefits. Although you can claim Social Security benefits as early as age 62, your benefits will be lower for your lifetime. The rule of thumb is that for every year that you wait to trigger Social Security, your benefits will increase by about 8% per year. However, once you turn 70 your benefits max out, so there's no advantage to wait any longer -- you'll just be passing up money you're entitled to. Contact your Social Security office a few months before you turn 70.

A closely-associated milestone is age 70 ½. This is the age at which you must begin taking annual Required Minimum Distributions (RMDs) from your retirement accounts, like Individual Retirement Accounts (IRAs), 401(k)s, 403(b)s, and 457 Deferred Compensation accounts. The IRS has many penalties for not complying with their rules, but the one governing RMDs is one of the most severe -- if you don't take your RMD like you're supposed to, the IRS can penalize you 50% on what you should have taken out. For instance, if you fail to take your Required Minimum Distribution of $10,000, the IRS can fine you $5,000.

The way to calculate your RMD is straightforward. For example, if you're turning 70 ½ this year, take the value of your retirement account on December 31, 2016 and divide it by 27.4. Therefore, at age 70 ½, your RMD will be about 4%. If your IRA was worth $500,000 on 12/31/2016, and you're turning 70 ½ this year, your RMD would be $18,248.

Each year, the amount will be different because your retirement account may have grown, and the denominator changes based on your age. Your Certified Financial Planner should be able to calculate your RMD for you each year, and make sure you receive it on time.

The very first year you take an RMD, the rules offer a little flexibility. You can delay taking your first RMD to April 1 of the year following the one in which you turned 70 ½ . However, it also means in that year, you will have to take two RMDs. This sometimes makes sense. When you retire, some companies pay out all your accrued vacation and sick time. This, combined with receiving your RMD, could push you into a higher tax bracket. Even if you have to take two RMDs next year, it could help to even out your tax liability.

Many people think that once they turn 70 ½ and they have to start taking RMDs, the value of their retirement accounts will fall every year and eventually go to zero. However, this doesn't have to happen. If you have your retirement accounts in a globally-diversified, balanced portfolio, it's not unusual to have the average growth of your account exceed 4 or 5% per year. Even after you start taking RMDs, your accounts can continue to grow. Consequently, you can not only enjoy some money from your IRAs each year, but also pass on what's left to children and grandchildren in Inherited IRAs after you're gone.

By the time you get to age 70, you may have accumulated a number of retirement accounts over a lifetime of work. When you turn 70 ½ you can take the correct RMD from each one of these accounts, but as long as the total RMD amount is correct, you can take it from any of your retirement accounts -- the IRS doesn't care. Therefore, it makes sense to take the total RMD from the retirement account that is growing the slowest, preserving the retirement account that is growing really well.

Some people have Required Minimum Distributions so large that they need to plan ahead regarding tax withholding. The assets in your retirement accounts represent money that has never been taxed before, so any distribution you take is taxed at ordinary income rates, just like you had extra working income that year. Federal and State tax withholding is optional on Required Minimum Distributions. However, if you are paying Quarterly Estimated Taxes and then receive a substantial RMD at the end of the year without any tax withholding, you could face an underpayment penalty from the IRS. You can avoid surprises at the end of the year by having the taxes withheld.

There's one important exception to the Required Minimum Distribution rule. If you're still working after age 70 ½ (and you don't own 5% or more of the company), and you have a 401(k) at the firm, you don't have to take an RMD from the 401(k) until the year you stop working. You will still need to take RMDs from your other retirement accounts.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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How To Survive Retirement

For our parents, retirement may have been less of a challenge than it is today. People didn't live as long as they do now, and tended to work longer. Consequently, they didn't have to fund so many years of retirement. In addition, many companies in those days had defined benefit pension plans for their employees. You didn't even have to contribute to the plan as an employee, and the plan guaranteed income for life! For some people, retirement planning was simple -- they put all their retirement savings in the bank, and drew from it until they passed away.

Today, it's common to spend 20 to 30 years in retirement. Here are some pointers on how to survive retirement in today's more demanding environment.

Don't be afraid of the market

It's understandable why a retiree would be leery of putting money into the stock market. There are no FDIC guarantees, and sometimes, the roller coaster ride can make you lose sleep at night. Last year was a good example. January kicked off the year with a loss of 5%. Then, there was a 5% drop in June when Britain elected to exit from Eurozone. Nevertheless, by the end of the year, the Standard and Poors index of the 500 largest U.S. companies was up 9.8%. If you count dividends, the total return was about 12.25%.

It would be nice if you could get a fairly consistent, good return while reducing some of the volatility of the market. The good news is, there is. There are 15 different asset classes in the market. They don't all go up and down at the same time, which is a good thing. You can structure your portfolio so that all the asset classes are represented, and balance those asset classes to give you the most consistent performance. This is the opposite of "putting all your eggs in one basket." This strategy has been proven to reduce market volatility and provide better downside protection when the market goes through a correction.

Have a plan

Depending on your financial circumstances, and how much you were able to save for retirement, you might be able to spend freely in retirement, or you might have to make some adjustments to stretch the money farther. How can you tell? Have your Certified Financial Planner™, CPA, or Registered Investment Advisory firm create a Comprehensive Financial Plan for you. This is especially useful just before you give notice to your employer that you're retiring. It's a financial roadmap that lets you know if all your retirement goals can be accomplished successfully. If there are gaps, your financial advisor can give you recommendations on how to fill them. Typically, the plan is updated every few years to make sure you're still on track.

Tap into your assets in the right order

Over the course of a lifetime, you probably have assets in many different places and types of investments: stocks, bonds, mutual funds, IRAs, 401(k) accounts, annuities, and pensions. Retirement is a good opportunity to consolidate these accounts, and devise a smart withdrawal strategy.

There's no one size that fits all, so your financial advisor can give you suggestions based on your unique circumstances. However, there are some general guidelines that make sense for many people --

▪  If you have bonds or CDs that have matured, they may no longer be earning interest. Since they are already liquid, this would be a good place to begin your withdrawals.

▪  Annuities are effective vehicles for accumulating money for retirement. They grow without getting taxed each year, so you have good compounding working for you. However, they are not great for passing on to the next generation. Any taxes that were due to you would also have to be paid by your beneficiaries. Therefore, it's often good to spend down annuities during your lifetime.

▪  When you turn 70 ½, you have to start taking annual Required Minimum Distributions from your retirement accounts, like Individual Retirement Accounts (IRAs), and employer-sponsored retirement plans like the 401(k), 403(b) or 457. At age 70 ½ the annual distribution is 4%. It goes up gradually. By the time you're 80, the distribution is about 5%. If your retirement account is invested in the market, it's very possible for the account to keep growing, even as you're taking out the RMDs.

▪  Finally, take withdrawals from taxable accounts. You only have to pay tax on the amount that the accounts grew, not on the principal. The capital gains tax is 15% for most people. For many retirees, it can be even better. People in the lowest two income tax brackets pay no capital gains tax at all.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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No Fiduciary Rule to Protect Consumers

This was the month that the Department of Labor's "Fiduciary Rule" was supposed to be implemented. It was intended to require all financial advisers who work with retirees to always work in their best interests, and disclose any conflicts of interest.

This was before President Trump issued a memorandum in February to delay implementation until June 9. His excuse was that "it could hurt investors' ability to access financial advice." However, from an investor's point of view, why would anyone want the advice of an adviser who isn't working in their best interest? What it means for consumers is that the Fiduciary Rule will likely be watered down until it's ineffective, or scrapped altogether.

At the same time, Trump is repealing the Dodd-Frank regulations that were designed to prevent a replay of the Great Recession of 2008 and 2009. That recession was caused by banks' greed in selling subprime mortgages, and then packaging those mortgages as A-rated investments. When the house of cards collapsed, hundreds of thousands of Americans lost their homes, but not one banker went to jail. Trump is also dismantling the Consumer Financial Protection Bureau, a government agency that makes sure that banks, lenders and other financial companies treat you fairly. It's clear that more than ever, investors have to do their own due diligence when seeking financial advice and investment management.

It's important to note that all of the following refer to themselves as "financial advisers," although they operate under different standards --

* A bank employee who is instructed to sell annuities that are expensive, and tie up an investor's money for a long time.

* A wire house employee who only sells mutual funds from a particular company that their firm wants him to use, because they are particularly profitable for the firm.

* A registered representative for a broker dealer who makes recommendations to clients based on what compensates him the most, even though there are comparable investments that are lower-cost, and have a better performance history.

In anticipation of the Fiduciary Rule being implemented, some mutual fund companies have made changes to clean up their act. One fund company came out with "clean" funds. Compared to their old (I assume "dirty") funds, the broker's commission is not built-in to the fund, but tacked on as a separate item, making it easier for investors to know how much they're paying for the fund, and how much the broker is making for selling the fund.

Another mutual fund company came out with T-shares, which carry a maximum 2.5% sales charge, which is about half the cost of their traditional funds. Even at this reduced price, they are still quite expensive.

The problem is that with the likely revocation of the Fiduciary Rule, there is little incentive for non-fiduciary financial advisers to recommend these new offerings. If you have a financial adviser, you can protect yourself by probing for conflicts of interest, and asking him or her the following questions --

* How are you paid?

* What is your criteria for recommending one investment over another?

* Are you committed to putting my interests first?

* Can I see your Form ADV? (This report discloses any regulatory problems as well as services and fees.)

If you want your adviser to make a solid commitment to act in your best interests, you can ask him or her to sign a fiduciary oath. The Committee for the Fiduciary Standard has prepared an oath that you can download at: http://www.thefiduciarystandard.org/fiduciary-oath/

If you're looking for a new financial adviser, seek one out who will act in your best interests. Registered Investment Adviser firms are held to a fiduciary standard. You can find them listed at the Security and Exchange Commission's Investment Adviser Public Disclosure website: www.adviserinfo.sec.gov.

 

Certified Financial Planners must also be fiduciaries in order to retain their credentials. You can find them listed at the Certified Financial Planner Board of Standards: http://www.cfp.net

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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How Not To Defeat Your Own Retirement Plan

Unlike previous generations of people who were planning for retirement, this time around very few have the benefit of guaranteed lifetime income from pensions. We have to rely on our own discipline to save for retirement, and we have to make decisions about what investments we put those savings into.

There are added challenges as well. Because this generation tends to live much longer than previous generations, we have to plan for 25 to 30 years of retirement, possibly longer. It's no wonder that only one in five workers is confident that they will have enough money for retirement.¹

There are many different types of employer-sponsored retirement plans:

▪  401(k) plans for profit-making corporations

▪  403(b) plans for educators, hospital workers and public employees

▪  457 deferred compensation plans for local government workers

▪  Thrift Savings Plans for federal workers

▪  Solo 401(k) plans for self-employed people

The advantages are great when you participate in an employer-sponsored plan. Not only do your contributions reduce your taxable income, the money you contribute grows without being taxed each year, taking full benefit from compound growth. Unfortunately, because participation in these plans is voluntary, there continues to be low participation. Of those who are eligible to participate in an employer-sponsored plan, only 49% make contributions.²

Many employers also put in their own money to match employee contributions, often up to 6% of employee compensation. One of our clients could not convince her son to participate in his company's 401(k) plan until she pointed out to him that he was losing the company's matching contribution. She calculated that he was leaving about $6,000 per year of free money on the table. About 20% of employees whose companies offer matching contributions are not taking advantage of it.³ Don't let this happen to you.

Even if you're not eligible for an employer-sponsored retirement plan, everyone can contribute to an Individual Retirement Account (IRA). This year, you can contribute as much as $5,500 into an IRA. If you're age 50 or older, you can add a $1,000 "catch-up" contribution, bringing the total to $6,500. Like the employer-sponsored plan, your IRA contribution will reduce your taxable income, and grow tax-deferred without an annual 1099.

When time is on your side, even a small annual contribution to a retirement plan can have impressive results. For example, if you're age 22, and you contribute $2,000 per year from age 22 to age 30 to a Traditional IRA or Roth IRA, that $18,000 will grow to $398,807 by the time you're 65 (8% per year growth assumption). If instead you started contributing $2,000 per year starting at age 31 and continued those contributions all the way to age 65 (total contributions of $70,000), the account would be worth $372,204 by age 65. In other words, the person who put in $18,000 did better than the person who put in $70,000, just because he or she started a few years earlier and harnessed the power of compound growth. Starting early pays off.

Sometimes, people do a great job of contributing to their 401(k), but then they take loans from it to buy a car or home. Loans from 401(k)s sometimes have very low interest rates, and the interest you pay can go back into your account, so taking a loan can be very tempting. Avoid it if you can. There is an opportunity cost -- the interest rate is lower than what you would likely earn in the market, so your retirement account will not grow as quickly. If you don't pay the money back in time, you will have to pay income taxes and possibly early-withdrawal penalties as well. It's generally better to create a separate emergency account holding six months to a year of your living expenses. Emergencies always happen, and if they happen when the market is doing well, you won't be sacrificing growth.

Finally, when it comes to paying for college for your children, restrain yourself from cashing out your 401(k) or suspending contributions. Among financial planners, there's a saying, "You can borrow money for college, but no one is going to lend you money for your retirement." For college, there are loans for students, loans for parents, grants, scholarships, financial aid, and work-study. College cost comparisons can be revealing -- a college that sounds more expensive initially can end up costing less because it has more financial assistance available.

Retirement is your reward at the end of many years, sometimes decades, of hard work. Like any long journey, you're likely to get blown off course. Getting there successfully depends on your ability to recover, find your bearings and get back on course.

¹ 2016 Retirement Confidence Survey, Employee Benefit Research Institute.

² Bureau of Labor Statistics, 2016

³ Plan Sponsor Council of America, 2016

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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The Trump Rally Revisited

The Labor Department had some good news for February -- 235,000 new jobs, and unemployment down to 4.7%. This caps a nearly 8-year bull rally in the stock market, and a surge of nearly 10% since last November's elections. Over the past four quarters, 71% of companies in the S&P 500 have reported quarterly earnings that beat expectations.

Although everyone is happy about the good performance, many are also worried. When is a correction coming? What can I do to take advantage of the growth, but also prepare in the event of a pullback?

The good news is that the market is already settling down from the initial euphoric highs, and moving towards more modest long-term growth. From the election to Inauguration Day, the Dow Jones Industrial Average jumped 8.2%. Since then, the DJIA has continued to move up, but at a more sedate 2.3%.

There is still room for growth. The strong and improving global economy plus above-average cash holdings held by investors supports the opinion that stocks can go even higher.¹ Consumer optimism is also high. This is important, since consumer spending drives two-thirds of the economy.² In other words, we are on a roll.

Whether the market can take advantage of the positive numbers depends a lot on the order in which President Trump implements his campaign promises. The post-election enthusiasm of the market was driven by Trump's promises of tax cuts, corporate and financial deregulation, repatriated earnings and fiscal stimulus. These moves could potentially increase earnings and drive the market to new highs. Instead, since the Inauguration he has led with protectionist trade policies, anti-immigration legislation, border taxes, and nationalism, which tend to be economic drags.

However, Trump recently indicated that in the next two to three weeks, he plans to introduce a plan to reduce corporate and individual taxes. He also signed executive orders to possibly roll back Dodd-Frank banking regulations, and the requirement that financial advisors act as fiduciaries. 

At this time of uncertainty, investors do not want to miss out on potential future growth, but would also like to protect themselves from a possible correction. The sectors that could benefit the most from economic growth include industrials, financials, energy, technology, and non-essential consumer goods. It also makes sense to put some money into defensive strategies, such as companies that pay out strong and consistent dividends. These companies tend to support strong dividends no matter what is happening to their stock price.

This would be an excellent time to rebalance your portfolio. U.S. large companies have done well in the last few months, and U.S. small cap value has leaped 35% in the last year.³ Even if you started with a balanced, diversified portfolio, it is probably now overweighted in those asset allocations. By rebalancing, you are locking in the highs, and buying other asset classes that are currently a bargain. It is a disciplined way to "buy low and sell high".

This is also a good time to review your bond investments. The Federal Reserve Bank is likely to raise interest rates this week, and may raise interest rates further before the end of the year. When interest rates go up, bond values go down. The bonds that will be most affected are long-maturity bonds that have maturities of 10, 15 years or more. If you have these in your portfolio, you may want to shift to bonds that have shorter maturities of one to three years. These short-maturity bonds still provide downside protection during a market dip, but are the least affected by increasing interest rates.

Do not let politics divert you from your long-term plan. Successful investors tend to stick to their plan no matter what is happening with the market. The market will always have volatility in the short-term, but your retirement can last 25 to 30 years. Current swings in the market may have little consequence even a few years down the road.

¹ Wall Street Journal 3/11/2017

² Kiplinger Feb 2017

³ Bloomberg 1/31/2017

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Medicare Mistakes to Avoid

Over the next few decades, there will be one American turning 65 every 10 seconds, according to AARP. This means that a record number of people will be applying to Medicare when they turn 65. Since this is the first and only time for most people, it makes sense to know the rules and plan ahead.

Medicare covers the bulk of your health care expenses after you turn 65. But Medicare's rules can be confusing and mistakes can be costly. If you don't make the right choices to fill in the gaps, you could end up with high premiums and big out-of-pocket costs. Worse, if you miss key deadlines when signing up for Medicare, you could have a gap in coverage, miss out on valuable tax breaks, or get stuck with a penalty for the rest of your life. Here are some common Medicare mistakes you can avoid.

Forgetting That You Should Sign Up for Medicare at 65

If you're already receiving Social Security benefits, you'll automatically be enrolled in Medicare Part A and Part B when you turn 65 (although you can turn down Part B coverage and sign up for it later). But if you aren't receiving Social Security benefits, you'll need to take action to sign up for Medicare. If you're at least 64 years and 9 months old, you can sign up online. You have a seven-month window to sign up—from three months before your 65th birthday month to three months afterward (you can enroll in Social Security later).

You may want to delay signing up for Part B if you or your spouse has coverage through your current employer. Most people sign up for Part A at 65, though, since it's usually free—although you may want to delay signing up if you plan to continue contributing to a health savings account. See the Social Security Administration's "Applying for Medicare Only" for more information. If you work for an employer with fewer than 20 employees, you must sign up for Part A and usually need to sign up for Part B, which will become your primary insurance (ask your employer whether you can delay signing up for Part B).

Not Picking the Right Medigap Plan

If you buy a Medicare supplement plan within six months of enrolling in Medicare Part B, you can get any plan in your area even if you have a preexisting medical condition. But if you try to switch plans after that, insurers in most states can reject you or charge more because of your health. It's important to pick your plan carefully. Some states let you switch into certain plans regardless of your health, and some insurers let you switch to another one of their plans without a new medical exam.

Keeping Your Part D Plan on Autopilot

Open enrollment for Medicare Part D and Medicare Advantage plans runs from October 15 to December 7 every year, and it's a good time to review all of your options. The cost and coverage can vary a lot from year to year—some plans boost premiums more than others, increase your share of the cost of your drugs, add new hurdles before covering your medications, or require you to go to certain pharmacies to get the best rates. And if you've been prescribed new medications or your drugs have gone generic over the past year, a different plan may now be a better deal for you.

It's easy to compare all of the plans available in your area during open enrollment. Go to the Medicare Plan Finder at www.medicare.gov/find-a-plan and type in your drugs and dosages to see how much you'd pay for premiums plus co-payments for plans in your area.

Buying the Same Part D Plan as Your Spouse

There are no spousal discounts for Medicare Part D prescription-drug plans, and most spouses don't take the same medications. Consequently, one plan may have much better coverage for your drugs while another may be better for your spouse's situation. Compare the plans based on the coverage for your specific drugs. Be careful if you and your spouse sign up for plans with different preferred pharmacies—some plans only give you the best rates if you use certain pharmacies, so you could end up paying a lot more if you get your drugs somewhere else.

Going Out-of-Network in Your Medicare Advantage Plan

If you choose to get your coverage through a private Medicare Advantage plan, which covers both medical expenses and prescription drugs, you usually need to use the plan's network of doctors and hospitals to get the lowest co-payments (and some plans won't cover out-of-network providers at all, except in an emergency). As with any PPO or HMO, it's important to make sure your doctors, hospitals and other providers are covered in your plan from year to year. After you've narrowed the list to a few plans, contact both the insurer and your doctor to make sure they'll be included in the network for the coming plan year. You can switch Medicare Advantage plans during open enrollment each year from October 15 to December 7.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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The American Dream and Your Investments

The "American Dream", as defined by James Adams in his 1931 book, was "a land in which life should be better and richer and fuller for everyone." A disturbing study was released recently by a team of the nation's leading economists at Stanford, Harvard and the University of California at Berkeley. The study reported that it has become extremely unlikely that this generation of American children will earn more than their parents, after adjusting for inflation.¹

The change over the last few years has been alarming and dramatic. If you were born in 1940, the probability of success was much better. Ninety-two percent of children at that time would do better than their parents. This was a virtual slam-dunk, regardless of whether the children went to college, got divorced, or suffered a layoff. The economy was growing strongly, and benefited the rich, the middle and working classes alike.

Unfortunately, this was short-lived. If you were born in 1980, only 40% of children would earn more than their parents. This lack of mobility hit the middle class more than the poor, and not surprisingly, struck the industrial Midwest states particularly hard. Going backward has now become the norm.

Paradoxically, this national glass ceiling is not due to a slowdown in growth, or a reduction of wealth. We actually have more wealth as a nation. Harvard economist, Nathaniel Hendren, found that the American economy is far larger and more productive than in 1980, and per capita Gross Domestic Product is almost twice as high.² He found that the reason for the growing gap was that nearly 70% of income gains from 1980 to 2014,went to the top 10% of the wealthy in America.

Wealth inequality is even more pronounced than income inequality. The richest 10% of American households owns a whopping 76% of all the wealth in the U.S.³ The source of net worth is also vastly different. The top 1% owns nearly half of the total wealth in stocks and mutual funds. By comparison, the bottom 90% holds most of its wealth in their principal residences.⁴ As a result, the Great Recession of 2008 and 2009 had little consequence for the wealthy, while it devastated hundreds of thousands of Americans who lost their homes.

Trump's campaign tapped into the anxiety and anger of working Americans who felt that the American Dream was slipping out of their reach. However, he did not address the inequality. Hendren's study of Trump's tax-cut plans found that they would do little to improve the finances of struggling families. Instead, they disproportionately benefit high earners. This, combined with the loss of health insurance, the privatization of education, and other proposed changes may lead to more economic insecurity for most Americans.

What does this mean for your investments? If you have investments at all, count yourself among the fortunate few. Over half of Americans have zero money in the market, including money invested through pension funds, 401(k) accounts, Individual Retirement Accounts, mutual funds and Exchange-Traded Funds, as well as individual stocks.⁵

Investing in the market remains one of the few ways that you can participate in the growth of the economy, and keep up with inflation. For example, between March 2009 and now, if you were not invested in the market, you would have missed out on one of the strongest rallies in history. The Standard and Poors 500 Index, which tracks the 500 most well known publicly-traded U.S. companies, rose over 200%.

The biggest barrier to investing in the market is fear.⁶ People feel they don't know enough about the market, or don't trust stockbrokers and banks, or think it's too risky. There are good reasons for this apprehension. Most financial advisors are not fiduciaries who are required to act in their clients' best interests in order to keep their licenses and certifications. Clients could not be sure if the advice they were receiving, or the investments that were recommended to them, were the best-performing and least expensive choice to accomplish their goals, or best for the advisor. Positive change was in motion last year when the Department of Labor passed a ruling requiring any advisor who gave advice on retirement accounts to be a fiduciary. Trump opposes this ruling, and plans to reverse it or stall its implementation. In the meantime, investors must do their own due diligence and check whether their advisor is a fiduciary.

Many people are not aware that there are proven strategies available to reduce the volatility of the market and increase downside safety when they invest. These more conservative strategies, based on balancing asset classes and broad, global diversification, have helped families weather the ups and downs of the market, maintain their purchasing power in the face of inflation, and achieve their hopes and dreams.

If you have investments, congratulations! Work with your advisor to make your money work for you and capture some of the wealth of the nation for your family. If you are not investing, consider meeting with a fiduciary advisor to learn more about the benefits of planning and diversification. At the same time, keep in mind that many Americans are not as blessed as you, and support efforts to protect healthcare, civil rights and education for all people.

¹ Washington Post, 12/8/2016

² New York Times 12/8/2016

³ Organization for Economic Cooperation & Development, 5/2015

⁴ Household Wealth Trends in the U.S., Edward Wolff 12/2014

⁵ BankRate Money Pulse 4/2015

⁶ CNN Money 4/2015

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Financial Decision You May Regret in Retirement

Getting to retirement is a tricky and lengthy proposition that takes a lot of planning and forethought. Unfortunately, many people spend more time planning their 2-week vacations than they do planning for a 30-year retirement. It's easy to make a mistake along the way that you may regret for years. Here are some tips for avoiding some common traps, and making the right choices.

Relocating -- Look Before You Leap

In the exuberance of retirement, you may decide to move to another city or state that has always been attractive to you, because it's warmer, has entertainment and educational opportunities, and is exotic.

Some retirees who have taken the leap have found that living in a new place can be very different from visiting as a tourist. Once you have lived somewhere for a few months or years, you may find that the pace is too slow or too fast. You may miss your friends and neighbors. Even playing golf daily, or taking long walks on the beach may have sounded terrific in a brochure, but can get old over time.

If you decide to retire in another country, it can become even more complex, when learning a new language, new currency, new tax laws and customs can become overwhelming. Remember that when you're a senior, familiar and comfortable surroundings can make life easier, and dramatic change often becomes more difficult. Consider leasing or renting before you buy.

Falling for Scams

The offers can sound very tempting -- guaranteed, spectacular returns in a year without risk. The old adage still holds true -- "If it sounds too good to be true, it probably is." The Federal Trade Commission reports that in 2015, Americans lost $765 million in get-rich-quick schemes. Thirty-seven percent of the victims were age 60 and over.

Look for these warning signs:

* Requirement to wire money or pay a fee before you can receive a prize.

* Demands for personal and sensitive financial information, like your bank account, credit card information, or Social Security number.

* Pressure to make an immediate decision.

* Discouragement about getting advice from an impartial professional advisor.

Planning to Work Indefinitely

Many Baby Boomers intend to work until age 70. This may be because they are still recovering from the Great Recession of 2008 and 2009. It may be because they got to 65 before they knew it, and didn't save enough during their working years.

The disturbing reality, according to a Willis Towers Watson survey, is that only 6% of retirees actually report working in retirement as a source of income. Good intentions are often dashed by circumstances beyond our control -- organizational changes at our company, downsizing, or purchase by another company.

One of the biggest factors causing us to stop working before we would like to is health issues. According to a Transamerica survey, 37% of those who retired early did so because of their own declining health, or that of a loved one.

Consequently, it makes sense to hope for the best, but plan for the worst. Many people like to work because of the income, the paid benefits, and the camaraderie. Work as long as you can, but don't neglect to contribute diligently to an employer-sponsored plan, like a 401(k) or 403(b), or to your own Individual Retirement Account.

Putting Your Children First

It's common in our community and culture to make great sacrifices for the sake of our children. It's an admirable choice, but it's often not a sound one from a financial point of view. For example, many parents tap into their 401(k)s or IRAs to pay for college for their children. However, there are many ways to pay for college, including scholarships, grants, student loans, and work-study. There's a common saying among financial planners, "You can get a loan for a college education, but no one will loan you money for retirement."

If you raid your retirement nest egg to pay for your child's college, you're likely to reduce or suspend current contributions while you're repaying the loan. You may also miss out on any employer matching, and on the tax-deferred growth of your contributions. It's a tough decision, but it may be better to opt for less expensive in-state schools, or to take two years at a community college before transferring to a four-year college. If you're not prudent now, you may end up depending on your children later on.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Identity Theft and Taxes

Identity theft is one of the fastest growing crimes in America affecting millions of unsuspecting individuals each year. A dishonest person who has your Social Security number can use it to obtain tax and other financial and personal information about you.

Identity thieves can get your Social Security number by:

●  Stealing wallets, purses, and your mail.

●  Stealing personal information you provide to an unsecured website, from business or personnel records at work, and from your home.

●  Rummaging through your trash, the trash of businesses, and public trash dumps for personal data.

●  Posing by phone or email as someone who legitimately needs information about you, such as employers or landlords.

Tax-related identity theft occurs when a thief uses your Social Security number to file a tax return and claim a fraudulent tax refund. In 2015 alone, the IRS stopped 1.4 million confirmed identity theft tax returns, protecting $8.7 billion in taxpayer refunds.¹ The IRS has become increasingly diligent in its efforts to thwart identity theft with a program of prevention, detection, and victim assistance.

Stay Vigilant

By remaining vigilant and following a few commonsense guidelines, you can help keep your personal information safe. Here are a few tips to consider:

●  Protect your information. Keep your Social Security card and any other documents that show your Social Security number in a safe place.

●  DO NOT routinely carry your Social Security card or other documents that display your number, in case your wallet or purse is stolen.

●  Monitor your email. Be on the lookout for phishing scams, particularly those that appear to come from a trusted source such as a credit card company, bank, retailer, or even the IRS. Many of these emails look authentic, but will direct you to a phony website that will ask you to input sensitive data, such as your account numbers, passwords, and Social Security number.

●  Safeguard your computer. Make sure your computer is equipped with firewalls and up-to-date anti-virus protections. Security software should always be turned on and set to update automatically. Encrypt sensitive files such as tax records you store on your computer. Use strong passwords and change them routinely.

●  Be alert to suspicious phone calls. The IRS will never call you threatening a lawsuit or demanding an immediate payment for past due taxes. The normal mode of communication from the IRS is a letter sent via the U.S. postal service.

●  Be careful when banking or shopping online. Be sure to use websites that protect your financial information with encryption, particularly if you are using a public wireless network via a smartphone. Sites that are encrypted start with "https." The "s" stands for secure.

●  Google yourself. See what information is available about you online. Be sure to check other search engines, such as Yahoo and Bing. This will help you identify potential theft sources and will also help you maintain your reputation.

Fear You Have Been Scammed?

If you feel you are the victim of tax-related identity theft - e.g., you cannot file your tax return because one was already filed using your Social Security number - there are several steps you should take.

●  File your taxes the old-fashioned way -- on paper via the U.S. postal service.

●  Print an IRS Form 14039 Identity Theft Affidavit from the IRS website and include it with your tax return.

●  File a consumer complaint with the Federal Trade Commission (FTC).

●  Contact one of the three national credit reporting agencies -- Experian, Transunion, or Equifax and request that a fraud alert be placed on your account.

If you have been confirmed as a tax-related identity theft victim, the IRS may issue you a special PIN that you will use when e-filing your taxes. You will receive a new PIN each year.

For more information on tax-related identity theft visit the IRS website, which has a special section devoted to the topic: https://www.irs.gov/individuals/identity-protection

¹ The Internal Revenue Service, "How Identity Theft Can Affect Your Taxes." IRS Summertime Tax Tip 2016-16, August 8, 2016.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Caring for Loved Ones at Home

If you provide home-based care to a loved one, you are not alone. Millions of Americans provide unpaid family care every year. 

Being a caregiver can be overwhelming, particularly if you are juggling other responsibilities, such as working or raising a family. Knowing where to turn for help can make a difference -- both in the quality of care your loved one receives and in lessening the stress and responsibilities on you. Here are some of the resources you can turn to for help.

Where to Go for Assistance: Elder Care Support

If the person you are providing care for is 65 or older, there are many resources available to you. One of the first stops to make is the U.S. Administration on Aging (AoA), which can be found online at www.aoa.gov. The AoA is dedicated to helping "elderly individuals maintain their dignity and independence in their homes and communities."

The AoA also maintains a Web site called the Eldercare Locator (www.eldercare.gov) that can help caregivers find local agencies that provide home and community-based services such as transportation, meals, home care, and support assistance.

Other helpful online resources:

■  The Medicare website (www.medicare.gov) details the various types of home health care services that are covered under Medicare and furnishes tools designed to help those in need of care choose home health care providers. Be sure to access the booklet "Medicare and Home Health Care."

■  ElderCarelink (www.eldercarelink.com) is a referral service consisting of over 50,000 senior care providers across the United States and includes nursing homes, assisted living facilities, adult daycare, and home care services.

■  The Visiting Nurse Association of America (VNAA) website (www.vnaa.org) has a database of visiting nurses in your area. The VNAA is an association of individuals who provide cost-effective health care to the elderly and the disabled.

■  If your loved one is a veteran, the U.S. Department of Veterans Affairs (www.va.gov) provides a detailed listing of VA health care benefits. Additional services can be obtained from the nonprofit Disabled American Veterans (www.dav.org), including claims assistance and transportation to VA hospitals.

■  The consumer-facing site of the National Association for Home Care and Hospice (www.nahc.org/consumer) offers guidance and resources to help caregivers find services in their area.

■  Both the National Cancer Institute (www.cancer.gov) and Cancer.Net (www.cancer.net) have extensive sections devoted to caregivers that include guidance on finding support services, including home health care.

Where to Go for Assistance: Caregiver Support

The National Family Caregivers Association (NFCA) has a wealth of resources for caregivers at its Web site (www.thefamilycaregiver.org), including an online support network and a library of helpful tips on topics ranging from reducing stress to care management techniques. Other resources include:

■  The Family Caregiver Alliance (www.caregiver.org) started as a small task force created to assist San Francisco-based caregivers. It has now grown into a national organization dedicated to advancing the development of high-quality, cost-effective programs for caregivers in every state.

■  AARP (www.aarp.org) has a number of online communities devoted to caregivers, including those specific to loved ones who are suffering from cancer and Alzheimer's. There is no age requirement to participate in any of AARP's communities.

■  The National Alliance for Caregiving (www.caregiving.org) also has online resources to help those who are providing help to others, including its Family Caregiving 101 site (www.familycaregiving101.org), which offers education and support.

The average family caregiver works either full or part-time -- in addition to nearly 20 hours of care per week. The stress of meeting those responsibilities can mount quickly. Do your best to heed the advice of the many advocacy groups encouraging caregivers to carve out some time to take care of themselves, both physically and mentally.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Student Loan Interest Reduced

Many graduating college students are facing a considerable student loan debt burden that has been estimated at more than $1 trillion nationally. It is the highest form of consumer debt. Even more troubling, approximately 25% of those loans are in default.¹

There's some good news for families with students heading off to college -- interest rates on all newly-issued federal loans have been reduced for the coming academic year -- but those reductions are much more pronounced for student borrowers than for their parents.²

For instance, the interest rate on Stafford subsidized and unsubsidized loans for undergraduates will decline to 3.76% from 4.29% last year.² For graduate students, the Stafford loan rate will fall from 5.84% to 5.31% for the coming academic year.²

In contrast, the rate on Federal PLUS loans for parents is a full percentage point higher at 6.31%.²  That rate is down from 6.84% for PLUS loans issued for the 2015-2016 academic year, but it still will nearly double the cumulative interest paid on a $50,000 loan over 20 years when compared with an undergraduate Stafford loan.¹ (Note that rates are set each year for new loans, but those rates remain fixed for the life of the loan.)

On the surface, one doesn't need a college degree to see the benefit of having the student in your family take out education loans in his or her name. But looking past the numbers, there are other variables at play that must be taken into consideration. Per graduate, total student debt breaks down to an average of $29,000 in student loans.³

Lives Interrupted

This debt load has made it harder for young adults to get on with their post-college lives. For instance, one study found that 27% of those polled who had taken out student loans were finding it difficult to afford daily necessities; 63% said that debt had impacted their ability to make larger purchases, such as a car; three out of four said college debt had affected their decision or ability to buy a home; and 43% said it had caused them to delay starting a family.⁴

For their part, parents need to assess whether and to what degree they are willing and able to help share the responsibility for paying off their child's college costs.  Many are spread thin financially, as this may coincide with their goals to save aggressively for their own retirement.  Additionally, many in the sandwich generation, are also providing some level of care and/or financial support to their aging parents. 

Repayment Plan Choices

Fortunately, for those concerned about strategies for repaying federal student loans, there are many options -- and an abundance of information about them. As a starting point, visit the Federal Student Aid website (https://studentaid.ed.gov/sa/repay-loans/understand/plans#direct-and-ffel) for a detailed summary of the many repayment resources available to you. For an at-a-glance summary of the interest rates, loan limits, and other terms for federal student loans issued from July 1, 2016 through June 30, 2017, go to http://ticas.org/sites/default/files/pub_files/loan_terms_2016-17.pdf

¹ Fortune, "Students Loans: These Schools are Driving Defaults," 9/10/2015

² Squared Away Blog, "Parents, Start Student Loan Homework!" July 5, 2016.

³ The New York Times, "Rates on Student Loans Are Falling,"June 24, 2016.

⁴ American Student Assistance®, "Life Delayed: The Impact of Student Debt on the Daily Lives of Young Americans," October 3, 2013.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Help Protect Yourself from Bad Investments

You've probably seen the current news about unethical and illegal sales practices by Wells Fargo and other banks. You probably also receive many invitations to "free lunch" seminars on financial and retirement topics. It's abundantly clear that families have to be more careful than ever about being led into expensive and unsuitable investments that are hard to get out of.

Although the restaurant menu on the invitation may be tempting, remember that "There's no such thing as a free lunch." Here are some key strategies and important questions that can help you avoid a costly mistake.

Promise yourself not to purchase anything or open an account on the spot

One strong indication that the "financial advisor" is actually an aggressive salesperson is that they will want you to act immediately and make a commitment right away. Making a financial purchase is an important decision that could affect you for years to come. Don't be persuaded to rush into it. Would you trust a doctor who urges you to go into surgery without knowing anything about you, or doing any tests? Get a second opinion from a financial professional you trust, and then proceed.

"What kind of investor is this product good for? Who is it not good for?"

Everyone's circumstances, financial needs and goals are different. If the "financial advisor" replies that the investment is good for everyone, it should be a red flag for you. An investment or strategy that is ideal for one person can be a disaster for another person who has different objectives and tax sensitivities. If the advisor doesn't take the time to find out about your unique history, financial condition, and hopes and dreams, he or she is more focused on the sale than on you.

"Are you a fiduciary?"

A fiduciary is someone who, in order to keep their licenses and designations, must always act in their client's best interest. In other words, they cannot sell you a more expensive, poorer-performing investment with worse features because they will make a higher commission, or to satisfy the sales goals of their broker-dealer, bank, insurance company or wire house. They must provide clear and full disclosure of all important facts, and avoid conflicts of interest. Attorneys, CPAs and Certified Financial Planners™ must act as fiduciaries.

"What does it cost initially, and what are the additional or ongoing costs?"

Some sales people will swear, "It doesn't cost you anything!" This should set off warning buzzers. The sales person has to pay for the "free lunch" and his business overhead, and make a living as well. If the financial product is "free" it can often mean that you're paying a lot in ways that the sales person is not disclosing. This can be through high internal expenses, onerous penalties for early withdrawal, and restricted access to your funds, among others.

"How liquid is this investment? Are there penalties or fees when I cash it in?"

The devil is in the details, which may be in fine print, buried in the sales material. Some investment products, at the discretion of the company, are allowed to suspend withdrawals, or allow distributions only if you become disabled or die. Some financial products have a "surrender penalty" (penalty for early withdrawal) that can be as high as 15 to 20%. These penalties can last a long time, or never go away. Unfortunately, many of these are marketed to seniors. One of our clients purchased this kind of product at her bank, and only found out later that she would have to be over 100 before she could cash out her investment without penalty. 

"Is this investment registered? With which regulator?"

For your protection, your investment (and the financial advisor) should be registered with one of the regulatory organizations. Some examples are the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA) and the State Insurance Commissioner. These bodies make sure that any investment that is approved by them meets strict standards. There are many horror stories of people who bought into an unregulated investment, received only a promissory note in return, and lost all their investment in a Ponzi scheme.

If the "financial advisor" in front of you cannot answer all these questions to your satisfaction, the investment may not be right for you. Do your due diligence investigation, and get a second opinion before you make any commitments or sign any documents.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Growth vs. Value Approaches to Investing

Growth and value are two fundamental approaches, or styles, in stock and stock mutual fund investing. Growth investors seek companies that offer strong earnings growth, while value investors seek stocks that appear to be undervalued in the marketplace. Because the two styles complement each other, they can help add diversification to your portfolio when used together.

Growth Defined

Growth stocks represent companies that have demonstrated better-than-average gains in earnings in recent years and that may have the momentum to continue delivering high levels of profit growth, although there are no guarantees. The growth strategy takes advantage of that momentum -- it's a strategy of "buying high and selling higher."

The key characteristics of growth funds are as follows:

●  Higher priced than broader market. Investors are willing to pay high price-to-earnings multiples with the expectation of selling them at even higher prices as the companies continue to grow.

●  High earnings growth records. While the earnings of some companies may be depressed during period of slower economic improvement, growth companies may potentially continue to achieve high earnings growth regardless of economic conditions.

●  More volatile than broader market. The risk in buying a given growth stock is that its lofty price could fall sharply on any negative news about the company, particularly if earnings disappoint on Wall Street.

Value Defined

Value fund managers look for companies that have fallen out of favor but still have good fundamentals. For example, after the attack on the World Trade Center on September 11, 2001, the stock values of airline companies and resorts plunged and became value investments, not because anything had changed within those companies, but because of external circumstances.

The key characteristics of value funds include:

●  Lower priced than broader market. The idea behind value investing is that stocks of good companies will bounce back in time if and when the true value is recognized by other investors.

●  Priced below similar companies in industry. Many value investors believe that a majority of value stocks are created due to investors' overreacting to recent company problems, such as disappointing earnings, negative publicity or legal problems, all of which may raise doubts about the company's long-term prospects.

●  Carry somewhat less risk than broader market. However, as they take time to turn around, value stocks may be more suited to longer-term investors and may carry more risk of price fluctuation than growth stocks.

Growth or Value... or Both?

Which strategy -- growth or value -- is likely to produce higher returns over the long term? The battle between growth and value investing has been going on for years, with each side offering statistics to support its arguments. Some studies show that value investing has outperformed growth over extended periods of time on a value-adjusted basis. Value investors argue that a short-term focus can often push stock prices to low levels, which creates great buying opportunities for value investors.

History shows us that:

●  Growth stocks, in general, have the potential to perform better when interest rates are falling and company earnings are rising. However, they may also be the first to be punished when the economy is cooling.

●  Value stocks, often stocks of cyclical industries, may do well early in an economic recovery but are, typically, more likely to lag in a sustained bull market.

The two groups of stocks typically do not move in the same direction or to the same extent. This is called "inverse correlation." Investors can advantage of this characteristic, and potentially reduce risk by combining the two approaches. This allows investors to reduce volatility, and smooth out returns over time.

Consult with your Certified Financial Planner™ or CPA to learn more about how growth and value fit into a globally-diversified investment strategy and how it can benefit the performance of your portfolio.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Unexpected Life Insurance Cost Increases

In the last few months, you may have received a letter from your insurance company about your Universal Life policy. The letter would have informed you that the company is increasing the monthly Cost of Insurance (COI) within your policy. Several life insurance companies have raised the COI at about the same time, and it's likely that many other insurance companies will quickly follow suit. ¹

The problem is that most consumers have no idea what "COI" means when they receive the notice in the mail. COI is how the life insurance companies pay for the death benefit when you pass away. It is deducted from your policy's cash value each month. In the past, life insurance companies resisted increasing the COI to avoid damaging the trust built up over decades with their agents and policyholders. Until 2015, the instances of insurance companies raising the COI were very few and far between.

This changed dramatically in the aftermath of the Great Recession in 2008 and 2009. Insurance companies typically invest premium dollars received in long-term bonds. During the recession, interest rates plummeted, and so did the returns offered by bonds. However, insurance companies were locked into paying the guaranteed minimum interest rates promised in their Universal Life policies, usually 4%, but sometimes much higher. Policyholders recognized that 4% was a good deal when they could only get 1% in a CD. Consequently, the rate at which they terminated their policies dropped. The insurance companies realized they were on the hook for a big liability.

Insurance companies seized upon COI as one way they could pass on this unexpected business cost to their policyholders. Even better, they could make this change without having to get approval from the state insurance commissioners. The insurance companies seem to be targeting policies owned by seniors over the age of 70, an expensive group to insure. The increases appear to range from 5% to over 200% in some instances.

What does this mean to your policy? You may have purchased your policy with the expectation that as long as you continued to pay the stated premium, it would stay in force to age 100 or longer. With the increased COI, your policy may run out sooner. I found that my own life insurance policies would run out at age 85 because of the increased costs. In order to keep them in force just a few additional years, I would have to double the premium payments immediately.

This may be different for you, depending on your age and how much your COI has increased. Nevertheless, this would be a good time to review your policy and get an updated in-force illustration that shows the impact of the increased COI. This will inform you about the choices that are most appropriate for you. The most common options are:

a) Do nothing, keep the policy going until it runs out of cash value, and then terminate it. This would make sense if the main purpose of having the insurance was to cover a short-term liability, like your home mortgage balance, or college funding for your children.

b) Reduce the death benefit. You might be able to keep paying the same premium but reduce the death benefit ("face amount" in life insurance lingo) so that your policy will last longer.

c) Increase premiums now in order to keep the policy going for the original intended period. If you wait to increase premiums until after the policy has run out of cash value, the cost may be so high as to be prohibitive.

d) Terminate the policy and receive the cash value. If you have had the policy for many years, the risk that you intended to cover at the beginning may no longer exist. The cash value (the savings component built into your policy) is typically yours when you terminate the policy. If you hold onto the policy until the cash value depletes to zero, you may receive nothing. There might be some taxation on the cash value, if it is more than the total amount you paid in premiums.

As you can imagine, consumer groups and life insurance associations have already written letters of complaint to state insurance commissioners. Lawsuits are likely to follow. Because the outcome of such lawsuits is uncertain, it will be important for you to act prudently now, and not ignore the issue. Contact the insurance company, or the insurance agent who sold the policy to you.

¹ Wall Street Journal, 8/9/2015 www.wsj.com/articles/cost-of-universal-life-insurance-stings-retirees-1439172119

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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The Little-Known "Retirement Savings Contributions Credit"

You probably know about the benefits of tax-deferred investment accounts. But did you know that there is a special IRS provision that potentially allows you to save money just for being a retirement saver? The so-called "saver's credit," formally known as the Retirement Savings Contributions Credit, permits certain low- to middle-income workers to claim a tax credit for making eligible contributions to an IRA or most qualified workplace retirement plans.

However, this tax break is currently going largely untapped. According to a study by the nonprofit Transamerica Center for Retirement Studies, only about a third of U.S. workers are aware of the saver's credit.¹

Rules for the Retirement Savings Contributions Credit

In order to claim the credit, the IRS ² requires that you:

● Are at least 18 years old;

● Are not a full-time student; AND

● Cannot be claimed as a dependent on another person's tax return.

Retirement plans eligible for the credit include:

● Traditional or Roth IRAs

● 401(k)s and 403(b)s

● SIMPLE IRAs

● SARSEPs

● 501(c)(18) or governmental 457(b) plans

● Voluntary after-tax employee contributions to qualified retirement and 403(b) plans.

The Amount You Can Claim

According to the IRS, "The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A)."

Here's a breakdown for tax year 2016:

Credit rate

Married filing jointly

Head of household

All other filers*

50% of contribution

AGI not more than $37,000

AGI not more than $27,750

AGI not more than $18,500

20% of contribution

$37,001-$40,000

$27,751-$30,000

$18,501-$20,000

10% of contribution

$40,001-$61,500

$30,001-$46,125

$20,001-$30,750

0% of contribution

more than $61,500

more than $46,125

more than $30,750

*Single, married filing separately, or qualifying widow(er).

To learn more about the saver's credit visit the IRS website. For help shaping up your retirement planning and/or tax planning strategy contact your CPA or Certified Financial Planner™.

¹ Transamerica Center for Retirement Studies, "Retirement Throughout the Ages: Expectations and Preparations of American Workers," May 2015.

² IRS, "Retirement Savings Contributions Credit," updated February 22, 2016.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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The Presidential Election and the Market

The current Presidential election has been more entertaining than most in recent history, but it has also been one of the more troubling. Emotions have run high, and many clients have asked what they should do in anticipation of either Donald Trump or Hillary Clinton becoming President.

Whether the next administration is Democratic or Republican is almost irrelevant as far as the market is concerned. Many corporations make political contributions to both parties. What is more important to the market is if one party or the other has a landslide victory and gains a huge majority in both the House and Senate. This could cause rapid and dramatic change in laws governing taxes and corporations, and the market doesn't like change. The market tends to respond well when there is a good balance between the political parties, because any change tends to be moderate and gradual.

The Founding Fathers may have had this in mind when they created our tripartite system of government, with all its checks and balances on power. Presidents generally have a limited ability to single-handedly influence markets or the economy. It is Congress that is directly responsible for budgets and spending, and Congress itself has often been divided. Since 1945, there have been only 13 years when both chambers of Congress were controlled by the same party.¹

Since 1928, only four presidential election years saw negative returns, and the average election year return on the Standard and Poors 500 index of large U.S. companies has been only slightly lower than the average return for all years.² One reason for the stability of returns may be because any governmental policy change takes time to affect the economy. Policy changes made today may not produce tangible results in the economy for several years. Consequently, presidents take office under the economic conditions that were created, good or bad, by their predecessors.

This Presidential election has been more heated and contentious than usual. In many ways, the U.S. election and "Brexit", the United Kingdom's referendum to leave the Eurozone, are related. In both the U.S. and in Britain, there is a growing wealth and income gap between rich and poor. The recovery from the recession in 2008 and 2009 has been enjoyed primarily by the ultra-rich, with the middle and working classes losing ground financially. This has created great bitterness and frustration, and a tendency among voters to blame refugees and immigrants, who are victims themselves. Whoever becomes President will have to deal with these inequities or face continued political upheaval.

Investing in the market or in real estate have been one of the few ways that average people have been able to participate in economic growth and opportunity. Creating a globally-diversified portfolio has been key to weathering the many challenges that we face today. Yesterday it was "Brexit" -- next week it will be another crisis. In a typical diversified account, the total investment in the United Kingdom would have represented only 6 to 7% of the holdings, and other asset classes in the account would have continued to grow well. Doing just the opposite of "putting all your eggs in one basket" helps you to get more consistent performance, and more downside protection.

The most successful investors tend to be those who stick to their long-term plans and don't panic and pull out of the market at every downturn. "Brexit" was a good example of this. Although the initial reaction was doom-and-gloom and a significant hit on global markets, the European market recovered to pre-Brexit values within a few days, and last week the U.S. market had the best one-week performance for the year and hit a new record high.

Your long-term goals should never depend on which party or candidate wins an election. Those who stay invested and don't make changes based on election results will probably fare the best.

¹ United States Election Project; Data Source: DFA Returns 2.0

² Morningstar Direct November 2015. U.S. stock market return represented by the S&P 500 index. Past performance is not indicative of future results. All investments involve risk including loss of principal. Indexes are managed baskets of securities in which investors cannot directly invest.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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QTIP Trust for Blended Families

Many estate planning decisions that are simple for traditional families can prove very complicated in today's age of multiple marriages and "blended families." There are many scenarios in which a QTIP (Qualified Terminable Interest Property) trust can be used to prevent future problems. It can give your spouse an income stream for life and choose who will receive the trust property at your spouse's death.

Several years ago, Jack's father died. Jack grieved not only for his father's passing, but also for his widowed mother who had been married to Jack's father for 35 years. In due course, Jack's mother remarried. However, when she eventually passed away, Jack suffered a double loss: Jack not only lost his mother, but also most of his inheritance. Just the year before, she had given her second husband a substantial sum to start a new business.

Jack's father could have preserved Jack's inheritance, while at the same time providing for Jack's mother, with a qualified terminable interest property (QTIP) trust.

How It Works

With a QTIP trust, rather than simply leaving your assets to your spouse outright in your will, you specify that all or a portion of your assets should be transferred to the trust upon your death. The trustee you choose is legally responsible for holding and investing the assets as you provide. The QTIP trust pays your spouse a life income. After your spouse dies, your children (or anyone else you choose) will receive the trust principal. With a QTIP trust, your spouse cannot prevent the trustee from transferring the assets to your intended beneficiaries.

Current federal estate-tax law allows an unlimited marital deduction for assets that pass from one spouse to the other. To secure the deduction, assets generally must pass to the surviving spouse directly or through a qualifying trust. Thus, it's important to structure your QTIP trust so that the trust assets qualify for the marital deduction. This will allow your estate to avoid paying taxes on the trust property. The trust assets will be included in your spouse's gross estate for estate-tax purposes. However, your spouse's estate will be entitled to a unified credit that could eliminate some -- or perhaps all -- of the estate tax.

Problem Solver

In a remarriage involving children from a former marriage, a QTIP trust can help control the ultimate disposition of assets. The trust also can be used when professional management of assets is desirable for the surviving spouse. After all, placing assets directly in the hands of a spouse who may lack investment or financial experience can be a costly mistake.

Inheritance Insurance

By setting up a QTIP trust, you make sure that your trust assets will eventually go to the individuals you choose to receive them. The result will be the same even if your spouse remarries, drafts a new will, or experiences investment losses. You'll be able to provide for your spouse and preserve assets for your children or other beneficiaries, regardless of how your family's circumstances may change.

Experience Is Essential

A problem-free QTIP trust requires an experienced professional trustee who can manage the trust for your surviving spouse and children in accordance with your wishes. Your Certified Financial Planner™ or CPA can help you secure the services of a qualified legal professional with experience creating and administering QTIP trusts. As a team, they can help to ensure that your assets are well cared for throughout the term of the trust.

This communication is not intended to be legal/estate planning advice and should not be treated as such. Each individual's situation is different. You should contact a qualified legal/estate planning professional to discuss your personal situation.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Debt and Retirement

Will sizeable debt follow you into retirement? The number of Americans in or nearing retirement who are still holding significant mortgage, auto, even student loan debt has been rising in recent years. According to recent data released by the Federal Reserve Bank of New York, the average 65-year-old borrower has 47% more mortgage debt and 29% more auto debt than 65-year-olds had in 2003, after adjusting for inflation.¹

One key takeaway from the trend, as cited by a Federal Reserve economist, is that since the Great Recession there has been a significant shift in the allocation of debt away from younger consumers with weaker repayment records to older individuals with strong repayment histories.²

While on the surface, this shift should not be cause for concern, if debt levels were to rise to the point where older Americans were struggling to repay debt as they entered retirement, the story could play out quite differently.

Is Debt an Obstacle to Your Retirement Readiness?

The Employee Benefit Research Institute's annual Retirement Confidence Survey has consistently made a connection between the level of debt and retirement confidence. For instance, citing reasons why they are not saving (or not saving more) for retirement, workers pointed to their current level of debt as a key obstacle. Just 6% of workers who describe their debt as a "major problem" say they are very confident about having enough money to live comfortably throughout retirement, compared with 35% of workers who indicate debt is not a problem. Overall, 51% of workers and 31% of retirees reported having issues with debt.³

Types of Debt Held by Workers and Retirees

Type of Debt

Workers

Retirees

Home mortgage

46%

23%

Car loan

38%

17%

Credit card

37%

27%

Student loan

23%

3%

Health/medical

21%

14%

Home equity line of credit

15%

17%

Loan from workplace retirement plan

5%

1%

Home improvement loan

4%

4%

Other

17%

9%

Source: Employee Benefit Research Institute and Greenwald & Associates, 2015 Retirement Confidence Survey.

If you are concerned with the impact your current debt load may have on your ability to save for retirement or on the quality of your lifestyle once you retire, speak with a financial advisor now. Together you can craft a plan to lower and/or eliminate your lingering debt.

¹ ² The Wall Street Journal, "People Over 50 Carrying More Debt Than in the Past," February 12, 2016.

³   Employee Benefit Research Institute and Greenwald & Associates, 2015 Retirement Confidence Survey.

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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The Senior Start-Up

Not that long ago, retirement meant being put out to pasture, with long days punctuated by occasional games of golf and bridge. But today, with lengthening life expectancies, good health and dwindling pensions, many Americans are looking to retirement as an opportunity to start a new business -- the Senior Start-Up!

Senior Start-ups: Common Characteristics

Older entrepreneurs have an important edge. Retirement packages, nest eggs, or home ownership affords them flexibility in the initial stages of a start-up, where funding is often critical. Because they can often rely on other sources for current income, they are often in a better position to take greater entrepreneurial risks than someone who is younger and has a mortgage and small children.

Start-up funding may also be easier to come by for seniors, who can draw from personal savings and a lifetime of business and professional contacts. Senior start-ups may also be looked on more favorably by lenders, who often associate older entrepreneurs with a lower risk of default.

Older entrepreneurs bring to the table a lifetime of creativity and business acumen. Having been tested again and again in their lives, they're not afraid of failure or worried about what others will think. Instead of that urgency to "make it,'' they get their satisfaction from the process of building their companies.

The type of businesses typically started by seniors varies widely. Consultancies, small retail businesses, and bed-and-breakfast establishments are perennial favorites. For many, Web-based business start-ups offer particular appeal, since they can be operated right out of your home in the early stages, often requiring no more than a high-speed Internet connection and a phone line.

While many senior start-ups are related to an individual's former career, some break into completely new territory. This is often the case with "serial" entrepreneurs -- those who have started up many different businesses over their lives and are experts at the start-up process itself. Whatever business you might consider, make sure you first do your homework. Talk to owners of similar businesses and scope out the market for such products or services in your area. Then, take the time to draft a formal business plan.

Not For Everybody

As attractive as starting a new business in retirement may sound, there are several considerations you should bear in mind before taking the leap. Start-ups can be physically and emotionally draining for a retiree. Seniors tend to work fewer hours and take more vacations than their younger counterparts. Ask yourself: Are you willing or able to work the long hours that may be required in a fledgling business?

There is also the matter of elder health concerns. For seniors, health problems can come at any time. Even if you are in top shape, you should factor in contingencies for unexpected health issues for yourself and your spouse.

Then there's financial vulnerability. Failing at 60 is not like failing at 30, when you have lots of time to rebuild your assets. Seniors also rely much more on personal investments to supply a portion of their income. For these reasons, seniors are advised not to sink too great a portion of their investment portfolio into a new business and should avoid pledging personal assets such as a home as loan collateral.

Successful post-retirement start-up tips:

▪  Build on already established contacts and expertise. Seniors have a distinct advantage over younger entrepreneurs in their experience and long-established business network, which can give them a lead in virtually any business.

▪  Start small. When starting up a new business in retirement, many begin with a small consultancy and gradually work their way into a full-blown business. This will give you time to assess whether you're willing or able to take on another full-time career.

▪  Don't bet the farm. If you're retired, you probably rely on personal investments for a portion of your income. Consider your income needs before investing a portion of your nest egg in a new business and think twice before taking on any personal debt.

To jump-start your ideas, here are some practical businesses that are popular among retirees --

▪  Adult Day Care

▪  Driving Service / Elderly Transport

▪  Home Handyman

▪  Sales

▪  Real Estate Agent

▪  Business Consultant

▪  Home / Pet Sitting

▪  Arts / Crafts

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Qualified Charitable Distributions Now Permanent

Many Individual Retirement Account (IRA) owners who are 70 ½ or older like to donate their annual Required Minimum Distributions (RMDs) directly to the charity of their choice using a strategy called Qualified Charitable Distributions (QCD).

There are several advantages to using the QCD:

  • It helps to keep your income below the next higher tax bracket.
  • It also helps to keep your income below the threshold for the Medicare high-income surcharge. Otherwise, your Part B and Part D premiums could be increased if your Adjusted Gross Income (AGI) is above $85,000 for single persons, or $170,000 for joint filers.
  • It helps to reduce the amount of your Social Security benefits that are subject to taxes.
  • Those who use the Standard Deduction on their taxes can now get a tax break for a contribution to charity. Previously, you had to itemize to reduce your taxes with charitable contributions.

 

The problem, until recently, was that the ability to do a direct distribution from an IRA to a charitable organization was temporary under the "Tax Extenders" series of tax provisions. This was subject to an annual approval from the IRS, which usually came at the very end of each year. The timing made it difficult to do tax planning

Thankfully, the ability to do a QCD is now permanent under the Consolidated Appropriations Act of 2016. This lets people over age 70 ½ transfer up to $100,000 from their IRA to charity and have it count as their Required Minimum Distribution (RMD) without increasing their AGI.

For example, if you need to take a $20,000 RMD for this year, you could do a $20,000 QCD and satisfy your RMD. You can even contribute more than your RMD, up to an annual limit of $100,000. The amount transferred from your IRA to the charity is not included in your AGI for the year.

For those who are unfamiliar with how Requirement Minimum Distributions (RMDs) work, here are the basics. If you are age 70 ½ or older, you generally must withdraw a minimum amount (about 4% to 7%, depending your age) from your Traditional IRAs and employer-sponsored retirement plans, like 401(k)s and 403(b)s. Roth IRAs are excluded. The money you're required to withdraw gets added to your taxable income, unless you're doing a QCD. If you fail to take your RMD, the IRS could penalize you 50% on what you should have taken out. 

 

There are some important exemptions that apply to the Qualified Charitable Distribution:

  • QCDs may be made from any IRA or individual retirement annuity, but not from an ongoing Simplified Employee Pension (SEP) or SIMPLE retirement account, or an Inherited IRA.
  • The QCD can only be made on or after the date the IRA owner actually reaches age 70 ½, not simply in the year when the owner turns 70 ½. Supposing you are going to turn 70 ½ on August 1st, 2016. You can't make a QCD until on or after August 1st.
  • Contributions to a Donor Advised Fund do not qualify for the QCD.

 

Here are some of the steps for completing a Qualified Charitable Distribution properly:

  • The charity you have in mind must meet the IRS definition of a qualified charity under IRS Section 509(a)(3).
  • Contact the charity to determine the exact payee name for the check.
  • Using that name, instruct your IRA trustee or custodian to make a transfer from the IRA directly to that charity. It won't qualify if the check is made out to you.
  • Many IRA owners prefer to have the check for the charity sent to themselves. They then make a copy for their own records, and forward the check to the charity with a cover letter.
  • The charity must provide a contribution acknowledgment in order for you to claim the charitable income tax deduction.

We recommend that you consult with your CPA or Certified Financial Planner™ to make sure that your Qualified Charitable Distribution strategy makes sense for you, not only from an income tax perspective, but also from estate planning and other aspects of your financial life.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

 

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Understanding Medicare A, B, C & D

UNDERSTANDING MEDICARE A, B, C & D

If you are approaching age 65, you have a lot of company. There are 75 million Baby Boomers on the verge of retirement. Over the next twenty years, an average of 10,000 each day will reach age 65.¹ And when you turn 65, you have to apply to Medicare.

Medicare contains four components: Parts A, B, C, and D. Each component contains many rules that beneficiaries and their caregivers are required to learn. Following are some of the main points you should know --

Medicare Part A: Hospital Insurance

This insurance is designed to help cover the following:

●  Inpatient care in hospitals, including rehabilitation facilities

●  Care provided in a skilled nursing facility or hospice for a limited period

●  Home health care

For inpatient hospital care, Medicare typically covers a semi-private room, meals, general nursing, drugs, and other hospital services and supplies. For Long Term Care, Medicare may cover a maximum of 100 days during a benefit period if a doctor certifies that a patient needs daily skilled care.

Cost: No premium if you or your spouse paid Medicare taxes while you were working. For 2015, there is a deductible of $1,260 before coverage begins. You may expect to pay a portion of the cost for a hospital stay of more than 60 days during a benefit period.

Medicare Part B: Medical Insurance

Part B helps to cover physician services, outpatient care, preventive services, durable medical equipment, and certain home health care. Although the scope of Part B is extensive, there are many services -- such as dental care, routine eye exams, hearing aids, and others -- that are not covered as part of this program.

Cost: A deductible of $147 for 2015 plus 20% of Medicare-approved amounts for medical services. With Original Medicare, the standard 2015 premium is $104.90 per month. Single beneficiaries with incomes above $85,000 and couples earning more than $170,000 pay higher premiums.

Medicare Part C: Offered by Private Insurers

Also known as Medicare Advantage plans, Part C consists of insurance plans provided by private carriers. Medicare pays a fixed amount every month to a private insurer for providing care. In return, Medicare Advantage plans include drug coverage, emergency and urgent care. Some plans may cover services that are not covered by Medicare, which may result in lower out-of-pocket fees for beneficiaries.

Cost varies according to the level of coverage. You should contact the plans that interest you to learn the details and to compare the costs and levels of coverage with Medicare Part A and Part B.

Medicare Part D: Prescription Drugs

If you have Original Medicare (Part A plus Part B), you can add drug coverage by obtaining it from an insurer approved by Medicare through Part D. Sign up for Part D as soon as you become eligible for Medicare. If you wait and try to sign up during a subsequent enrollment period, you may be charged a late enrollment penalty and be required to pay higher premiums for life.

Costs: There is a monthly premium, an annual deductible, and copayments. There is a coverage gap, commonly called the "donut hole" that works as follows: After a beneficiary and the insurer pay $2,860 for prescription drugs during a benefit period, the beneficiary will pay 47.5% of the plan's covered brand-name prescription drugs until out-of-pocket expenses total $4,700, at which point catastrophic coverage takes effect. Effective the following calendar year, a new benefit period begins with applicable premiums, copayments, and other costs.

Part D may be included if you have a Medicare Advantage plan. Find out whether your plan includes prescription coverage as part of its program.

Medicare's rules can be confusing for many people. Their website, www.medicare.gov, can be a valuable resource. Every year, Medicare also mails "Medicare & You" to beneficiaries and makes this fact-filled publication available online. You may want to review it to make sure you have an up-to-date understanding of the Medicare program.

¹  U.S. News & World Report 3/23/2012

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Short-Term Volatility, Long-Term Gains for 2016

SHORT-TERM VOLATILITY, LONG-TERM GAINS FOR 2016

Last year, we saw an unusual market that seemed split in two. The U.S. market was relatively stable because the U.S. economy continued to do well. Corporations made good profits. The housing market had good gains, with analysts predicting that it would continue to grow for another four years. As a result, construction hit record numbers. Lower gas prices at the pump put more money in people's pockets and stimulated growth. Nevertheless, the U.S. market was negatively affected by overseas uncertainty. The Dow Jones Industrial Average, a basket of thirty large U.S. companies, ended the year losing 2.2%. The Standard and Poors 500, representing the 500 largest U.S. companies, fell 0.7%.¹

The international market encountered one challenge after another. It started over a year ago, with Russia's invasion of Ukraine. This was followed by the Greek debt crisis, then the slowdown of growth in China, and finally the terrorist attack in Paris. International market performance mirrored this volatility. Many analysts were surprised that after a roller-coaster year, the Shanghai composite index ended the year up 9.4%, and the Stoxx European index closed up 6.8%.² The lesson is that even during a period of heightened volatility, long-term gains can be quite good.

In 2016, markets will experience continued short-term volatility, as we have seen with the January 3rd drop in reaction to slowed growth in China. In the long-term, however, we are apt to see continued growth in Europe as a result of lower interest rates implemented late last year. China should stabilize as well, as it shifts its economy from one fueled by trading with other countries, to one that is driven more by internal consumer spending, similar to the U.S. Although China's growth has slowed to 6.3%, this is still twice the U.S. growth rate, and is a more sustainable number.

Last year, the U.S. market experienced uncertainty over when the Federal Reserve Bank would begin to raise interest rates. Fortunately, this is now behind us. Janet Yellen, the chair of the Federal Reserve Bank, raised interest rates by ¼% in December. She will probably continue to implement small increases over 2016. This should have a minimal impact on market returns, since interest rate increases have been anticipated for over a year, and the impact is already priced into the market.

This will be a year to avoid high-yield or "junk" bonds and long-maturity bonds. This is because investors tend to move their money out of riskier investments like high-yield bonds if they can get a decent interest rate in safer investments like Treasuries. They are also inclined to move money out of long-maturity bonds in a rising interest rate environment because they don't want to be locked into low-interest investments.

History has shown that the best-performing asset class doesn't hold the position very long, and changes quickly. U.S. large company investments, like the Standard and Poors 500 index, have had a good run since the bottom of the recession in March 2009. It's possible that in the coming period, U.S. small companies may start to do better than U.S. large companies.

International investments are also overdue for a rally. In 2000, when international was the worst-performing asset class, many investors were impatient and sold their international holdings. In just a couple of years, international went all the way from the bottom to the top, and held that position for nearly a decade. It pays to not let yourself be thrown off course by by the emotion of the moment.

The uncertainty over who will be elected president this year, and which party will come into power, will probably be reflected in increased market volatility up until the elections. The market likes a balance between the parties, because tax laws and government policy are unlikely to change very drastically. This is likely to be the case in this election, and the market following the elections may be characterized by greater stability and smoother growth.

One of the more reliable strategies in a volatile market is to build a portfolio that is just the opposite of "putting all your eggs in one basket." It's difficult to guess the best-performing asset class for the year, even for research firms that study investments 24/7 with analysts stationed around the world. When you have a globally diversified portfolio that balances all of the available asset classes, no matter which asset class is performing well, you will have some assets in that asset class and benefit from its good performance.

Although 2015 was a down year in general for the market, it was far better than the 40% dive that the Standard and Poors 500 took in 2008 when the country was in financial crisis. We know the market never goes up in straight line, and a year of poor performance is normal. The market can be unpredictable in the short-term, but the long-term performance is impressive. Today, the Dow Jones Industrial Average is 17,159. In January 2009 it was 8,953. Taking advantage of the market's long-term potential is one of the better ways to beat inflation and accomplish your family's most important goals.

¹ Wall Street Journal 12/31/2015

² Wall Street Journal 1/3/2016

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Year-End Tax Reduction Tips

Even though April 15 now seems a distant deadline for filing your 2015 tax returns, in order to take advantage of some of the biggest tax reduction strategies, you have to act before the end of this year. Here are three strategies that you may want to execute by December 31.

1. Maximize Contributions to Tax-Advantaged Accounts

Contributing to your employer's retirement plan is one of the smartest tax moves you can make. For 2015 (and 2016) you can shelter up to $18,000, or $24,000 if you are age 50 or older. Because contributions are typically made on a pretax basis, qualified plans such as 401(k)s and 403(b)s help to lower your current taxable income. Plus, the money in the account is allowed to grow tax deferred until you begin taking withdrawals, usually in retirement.¹

If you have maxed out contributions to your employer's plan, but want to save even more, consider funding a Roth IRA. You can contribute up to $5,500 in 2015 and 2016, or $6,500 if you are 50 or older. For many employees who are participating in an employer-sponsored retirement plan, contributing to a Roth IRA may be preferable to contributing to a Traditional IRA. This is because if your Adjusted Gross Income is $61,000 or more if you are single, or $98,000 or more if you are married and filing jointly, contributions to a Traditional IRA might not give you a tax deduction.

Even though you have until tax day -- April 15, 2016 -- to fund an IRA for 2015, why wait? Funding it by year-end potentially gives it all the more time to grow tax-deferred.

2. Consider Tax-Loss Harvesting

Tax-loss harvesting is the process of offsetting portfolio gains with losses to help minimize your exposure to capital gains tax. In a year like 2015, in which the stock market experienced a significant late-summer swoon, such a strategy may be particularly attractive.

Generally, the IRS allows you to offset capital gains with capital losses to the extent of your total gains. If you have no gains, you may be allowed to deduct up to $3,000 against ordinary income each year, thus potentially lowering your tax liability. Losses in excess of that limit can be carried over to the next year. To be sure you are doing this correctly, consult with your Certified Financial Planner™ or CPA.

Before you sell, consider the length of time you have held a security. Securities sold within a year of their purchase can generate short-term capital gains, which are taxed at the investor's ordinary income tax rate -- up to a maximum rate of 39.6% for the highest earning individuals.

Gains from the sale of securities held for more than one year are considered long-term gains and are taxed at a maximum rate of 15% for most Americans, but that rises to 20% for those with taxable incomes of over $400,000 ($450,000 for joint filers). In addition, the Medicare surtax on net investment income, which includes capital gains, results in an overall top long-term capital gains tax rate of 23.8% for high-income taxpayers.

The bottom line on tax-loss harvesting? If you are considering employing this strategy, evaluate carefully the investments you may select for sale, then discuss your plan with a trusted financial advisor.

3. Timing Is Everything

If you expect your taxable income to be higher than normal for the 2015 tax year, you may want to accelerate tax deductions and, where possible, to defer income. For instance, you could increase your charitable deductions or make advance payments for state and local taxes, insurance premiums, interest payments, medical procedures, or other deductible expenses for which you may be able to control the timing. Similarly, you may be able to delay some forms of discretionary income or hold on to stocks that have performed exceptionally well at least until early 2016, being mindful of what you expect your tax/income situation to be next year.

These are just some of the many steps you can take to help keep your taxes in check. Work with your financial and tax advisors to make tax planning an integral part of your overall financial plan.

This communication is not intended to be tax advice and should not be treated as such. Each individual's tax situation is different. You should contact your tax professional to discuss your personal situation.

¹ Withdrawals from traditional IRAs are taxed at then-current income tax rates. Withdrawals prior to age 59½ may be subject to an additional federal tax.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Keep Track Of Your 401(K)

When you retire or change jobs, don't forget to take some action on your retirement account balance. If you provide no instructions as to what you would like to have happen to your account, the money left sitting in your retirement plan could be subject to a forced-transfer to an IRA -- or cashed out -- without your consent.

Americans are on the move, not only in their leisure pursuits, but in their jobs as well. According to the Bureau of Labor Statistics, about 38% of U.S. workers change jobs every year. If your employment situation changes, do you know what your choices are for managing the money in your 401(k) account?

Generally, workers have four options available to them:

1) Leave the money in their former employer's plan

2) Transfer the money into their new employer's 401(k) (if allowed)

3) Roll the money into an IRA, or

4) Take a cash distribution.

What many individuals don't realize is that if they fail to choose one of those options -- and their account balance is small enough -- the decision can be made for them.

Specifically, current law allows employers to force participants with vested balances of $5,000 or less out of their 401(k) plans into an IRA without their consent. Further, if the account balance is less than $1,000 when the participant separates from the employer, the plan is allowed to cash out the account, triggering taxes and penalties if the participant does not take action in a timely manner to redeposit the money in another retirement account.

These practices are more prevalent than many people realize. According to the Plan Sponsor Council of America, more than half (57%) of 401(k) plans transfer account balances of between $1,000 and $5,000 to an IRA when a participant leaves the company and/or cash out those accounts with balances of less than $1,000.¹

High Fees, Low Returns

According to one study conducted by the Government Accountability Office (GAO), the trouble with these so-called "forced-transfer" IRAs is that the value of most balances decreased over time if they were not transferred out and reinvested. This is due to the fees charged and the low returns earned by the conservative investments they are required to invest in.²

Specifically, the GAO studied 10 forced-transfer IRA providers, including information about the fees they charged, the default investments they used, and the returns earned. The typical investment return (prior to fees) ranged from 0.01% to 2.05%. However, these accounts were dinged with account initiation fees ranging from $0 to $100 and subsequent annual fees of $0 to $115. "This can steadily decrease a comparatively small stagnant balance," the study found. The GAO found that 13 of 19 balances decreased to $0 within 30 years.²

Given these circumstances, it is easy to see how a worker who changes jobs frequently and accumulates several forced-transfer IRAs could be putting his or her retirement savings in jeopardy. Consider the following tips to help keep your savings growing, not stagnating.

  Make your wishes known -- an employer can only roll your account balance into a forced-transfer IRA if you provide no instructions as to what you would like to happen to your account balance.

  Keep contact information current -- when leaving one job for another, be sure you provide up-to-date contact information to the 401(k) plan administrator.

  Save more -- forced transfers only apply to low-balance accounts. By keeping your account above the $5,000 mark you ensure that it stays protected from any unintended or unwanted actions.

A visit with a Certified Financial Planner™ can help you avoid losing your retirement savings unnecessarily. A tax-free rollover to an IRA can make it more likely to preserve your hard-earned retirement savings, provide the growth you need to keep pace with inflation, and maintain your lifestyle in retirement.

¹ U.S. News, "How to Avoid Being Forced Out of Your 401(k)," January 13, 2015.

² United States Government Accountability Office, "401(k) Plans: Greater Protections Needed for Forced Transfers and Inactive Accounts," November 2014.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Calculating Taxes on Mutual Funds

CALCULATING TAXES ON MUTUAL FUNDS

When planning for tax season, don't forget about the taxes that you may owe on any mutual funds you own. Your CPA or Certified Financial Planner™ can help you organize your paperwork and assess the particulars of your situation.

 For mutual fund investors, earnings come from two sources: fund distributions -- dividends or capital gains -- and the sale of fund shares.¹ Income from these sources may be taxable. Fund companies typically send year-end statements to shareholders that summarize the information used to report investment gains or losses to the IRS. Here's a look at how taxes on your mutual funds are calculated.

Taxable Distributions: Dividends and Capital Gains

For non-IRA accounts, you must pay taxes on dividends or capital gains passed on to you in the year they were received, even if they were automatically reinvested to buy additional fund shares. In general, dividends and capital gains attributable to a fund's underlying investments are taxed as follows:

Long-term capital gains and qualified dividends are taxed at 0% for taxpayers in the 10% and 15% tax brackets, 15% for taxpayers filing as singles with incomes less than $413,200 ($464,850 for those who are married filing joint tax returns), and are subject to a top rate of 20% for single taxpayers with income in excess of $413,200 and joint filers with income in excess of $464,850. In addition, net investment income for taxpayers with Adjusted Gross Incomes in excess of $200,000 (single filers) or $250,000 (married filing jointly) may be subject to the 3.8% Medicare surcharge.

Regular interest income and short-term capital gains on securities held in a fund for less than 12 months are taxed at your ordinary federal income tax rate. Keep in mind that funds with higher turnover (i.e., funds that buy and sell securities often) can result in higher tax liabilities even if you haven't sold any shares. Tax-managed strategies can help to keep this tax hit small.

Capital Gains from the Sale of Fund Shares

Gains can also be realized when you sell fund shares that have appreciated in value since purchase. Before you can calculate the tax owed on the sale, you have to know your cost basis -- or how much money you paid for the shares, including shares purchased with distributions.

If you sell all of your shares, your cost basis is how much you paid for your total investment (all purchases and reinvested distributions). If, however, you sell some of your shares, determining your cost basis is a little more complicated. The next section outlines the IRS-approved accounting methods for conducting this calculation.

Calculating Your Cost Basis

● Specific shares: You identify which shares to sell. This method gives you the most control over the amount of gain or loss you report.

● First-in, First-out: This method assumes the first shares purchased are the first to be sold. If you do not indicate otherwise, the IRS assumes you use this method.

● Average cost, single method: With this method you calculate your gain or loss based on the average price you paid for all shares, regardless of how long you have held them. This is the method most mutual fund companies use to provide information to you.

● Average cost, double method: This is the same calculation as above, except shares are divided into short-term and long-term categories and a separate average cost is computed for each.

Keep in mind that net losses incurred from fund investments may be deductible from your income taxes. Your Certified Financial Planner™ may be skilled at offsetting gains with losses to minimize your net tax when you want to create cash. Investments in tax-deferred retirement plans, such as a 401(k)s, traditional IRAs, or variable annuities, allow you to defer taxes on all investment earnings until the funds are withdrawn.²

Because federal tax laws are complex and fast changing, consult CPA to determine how they apply to your situation.

This information is general in nature and should not be construed as tax advice. Always consult a qualified specialist regarding tax affairs.

¹ Investing in mutual funds involves risk, including loss of principal. Mutual funds are offered and sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. For more complete information about any mutual fund, including risks, charges and expenses, please contact your financial professional to obtain a prospectus. The prospectus contains this and other information. Read it carefully before you invest.

² Withdrawals from qualified plans taken before age 59½ are generally subject to a 10% additional federal tax -- on top of any regular income taxes owed -- although there are a few exceptions to this rule.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Should You "Fix" Variable Rate Debt?

Is the time right to consider converting your variable rate debt to a fixed rate? There are pros and cons associated with both methods, and timing and market cycles can play a large role in the decision.

While investors are keeping a close watch on the Federal Reserve for indications of when it will start raising interest rates, the consensus among economists is that it will begin its credit-tightening cycle at some point this year.

Of course there are two sides to the interest rate coin: the investor and the borrower. Rising rates are generally good news for savers and investors, but they represent an expense for borrowers and increase the cost of taking out loans and mortgages.

In the current environment, individuals may be evaluating the potential benefits of converting variable-rate loans, including adjustable rate mortgages (ARMs), home equity lines of credit, and student loans, to a fixed rate.

Only One Way to Go

Interest rates are still at historic lows and are only likely to go up from here. Personal finance experts typically favor refinancing, when practical, to a fixed rate for the stability it provides the borrower. With a fixed-rate loan the borrower will not have to be concerned if there is a sudden spike in interest rates. What's more, individuals with fixed-rate debt have much more control over their budget and can plan ahead with more confidence, as they have a clear, predictable picture of their monthly income and expenses.

While adjustable-rate loans may have lower initial interest rates than fixed-rate loans, the lower interest rate is only for a set period of time. At the end of the fixed period, the monthly loan amount "adjusts" based on the market rate or index. In this case, refinancing may be a smart choice if your ARM is adjusting to an interest rate that is higher than the current market rate.

How Low Are Rates?

Just how low are short-term rates now, historically speaking? Most lenders base their variable rates off a LIBOR rate, which stands for London Interbank Offered Rate and works as a benchmark rate for banks internationally.¹ As the LIBOR changes, so does the variable rate. The LIBOR is low today, compared to its 10-year and 20-year averages (see table below), but once it begins to increase, borrowers holding adjustable rate loans will see an increase in their regular payments. While most variable rate loans will have an upper interest rate cap, it is important to know what that maximum rate is -- and whether you could handle that potential debt load -- before signing any documents.

LIBOR -- Then and Now

 

10-year average

20-year average

July 6, 2015

6-month LIBOR 

1.95%

3.09%

0.44%

12-month LIBOR

2.17%

3.29%

0.76%

Source: Federal Reserve Economic Data (FRED). For the dates indicated. The 10-year and 20-year averages are for the period ended July 6, 2015.

Generally, a variable rate loan is a safe bet for individuals who plan to repay their loan quickly. And while the Federal Reserve is expected to begin raising rates soon, it is likely to take a very measured, slow path.

¹ U.S. News.com, "Fixed or Variable: Which Interest Rate Should You Choose?" July 14, 2015.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Key College Planning Facts

College planning is a major financial goal for countless American families, and it can be a source of much anxiety and confusion. This "Test Your Knowledge" quiz can serve as a refresher course for some, or an introduction for others, to the world of financial aid and 529 college savings plans.

"Trends in College Pricing 2014," revealed that the inflation-adjusted average published price for in-state students at public four-year universities is 42% higher than it was 10 years ago and more than twice as high as it was 20 years ago. In the private nonprofit four-year sector, the increases were 24% over 10 years and 66% over 20 years.

Test Your Knowledge

Here's your chance to test your knowledge about college planning and 529 plans¹. We hope that the information shared here will shed new light on some of the details of the process.

 

1)  What form do all colleges require of students applying for financial aid?

_____ CSS Financial Aid PROFILE

_____ FAFSA

_____ EFC

Answer: FAFSA. Any college or university that awards federal student aid requires the Free Application for Federal Student Aid (FAFSA). For the majority of colleges this is the only aid application required. The CSS Financial Aid PROFILE is required by some private colleges for assessing eligibility for the specific college's institutional aid dollars. The Expected Family Contribution (EFC) is a number calculated by the financial aid forms.

 

2)  Saving for college in a 529 college savings plan negatively impacts eligibility for financial aid.

_____ True

_____ Maybe, but often the effect is minimal in the financial needs-analysis process

_____ False

Answer: Maybe, but often not enough to worry about. The value of a 529 savings plan account set up by a parent or legal guardian is reported as a parental asset on the FAFSA and only increases the EFC by a maximum of 5.64% of the total account value. 529 plans and Coverdell Education Savings Accounts tend to be two of the better options for saving for college without jeopardizing financial aid. Income is generally more of a determinant of need-based financial aid eligibility.

 

3)  Assets held in a 529 college savings plan can be used to pay for what type of school?

_____ Four-year college or university

_____ Two-year community college

_____ Qualified trade school

_____ All of the above

Answer: All of the above. With a 529 savings program, you can use your account at any accredited college or university in the country (and some outside of the country).

 

4)  What happens to the 529 college savings funds if the student does not go to college?

_____ The money can be used by another family member to pay for qualified expenses

_____ The federal government will seize the account

_____ Nothing

_____ The plan will be declared void, and the money returned to the plan owner

Answer: You may generally change the beneficiary. That money can be used by a sibling, cousin, or other family member for qualified higher education expenses, without penalty.

 

5) 529 plan distributions from a parent-owned 529 account do not increase the family's EFC.

_____ True

_____ False

Answer: True. Unlike distributions from a grandparent-owned account, distributions from a parent-owned 529 plan that are used to pay for a dependent student's college expenses are not reported on the FAFSA and do not typically count as income in the federal needs-analysis process.

 

How did you do? Hopefully this information has helped you to better understand the financial aspects of college planning -- in particular the powerful but somewhat complex 529 college savings plan. To learn more about 529 plans and selecting the right plan for your situation, contact a qualified Certified Financial Planner™.

¹ Investing in 529 plans involves risk, including loss of principal. Before you invest in a 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.

² Note that some private colleges may treat the needs-analysis process a little differently from what is reported here, and generally the comments in this document apply to the federal needs-analysis process. Individual situations will vary.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Home Equity Loans vs. Lines of Credit

Thinking of tapping the equity in your home to do a renovation, buy a second home, or consolidate debt? Home equity loans and lines of credit are two options you'll want to explore. Before you decide which borrowing option is right for you, it's important to understand the main differences between the two.

Home Equity Loan

Home Equity Line of Credit (HELOC)

Fixed interest rate for the life of the loan

Variable interest rate over the life of the loan

Repayment in regular installments over a specific period of time

Option to re-borrow as loan is paid, up to approved credit limit

Typically used for single large purchase, such as a car

Typically used to fund ongoing expenses, such as home renovations, borrowing only as needed

Entire amount of loan received upon approval

Checks can be written at any time, up to approved limit

 

Comparison Shop

Both types of credit are sometimes referred to as "second mortgages," because, like your first mortgage, they are secured by your property.

Home equity loans are fixed, installment loans. They work more like a mortgage -- you borrow a determined amount for a specific term with a fixed rate of interest. Regular installment payments are made each month for a set amount. Once you receive the lump sum check, you cannot borrow additional funds.

HELOCs are revolving, borrow-as you-go arrangements. They act more like a credit card in that you borrow as you need the money and pay off your balance according to the interest rate being charged, which is variable, and the amount of credit you have used. The term of the credit line is determined by the lender and may be extended/renewed at the lender's discretion. When the term expires, the credit line must be paid in full.

Keep in mind that Janet Yellen, chairman of the Federal Reserve Bank, has already announced that she intends to let interest rates rise before the end of the year. Although most economists expect that rising interest rates will be gradual, it is inevitable after such a long stretch of historically low interest rates. What this means for a variable-interest loan like the HELOC is that the payments you are making now will probably go higher in the future.

Both home equity loans and HELOCs must be settled with the lender if and when you sell your home.

Match the Type of Loan to Your Need

Generally the choice between the two types of credit depends on your intended use for the money and your time frame for repayment. For instance, if you have a set amount in mind for a specific expense - a wedding, a new septic system or roof -- and you have no further foreseeable expenses, then a fixed rate home equity loan makes sense. If however, your needs are more open-ended -- a major home renovation that will span a year or two, or to supplement a child's college tuition each year for the next four years -- then the more flexible HELOC could be the better option.

Used for Debt Management

Perhaps one of the most popular reasons homeowners tap into the equity in their homes via a loan or a line of credit is to consolidate credit card debt. While recent conditions in the housing market may have deterred some from considering this option, generally speaking, home equity is one of the lowest cost loan options, and unlike credit card debt, the interest paid on home equity loans and HELOCs is tax deductible.

To learn more about tapping home equity or to access current rate tables, one consumer-oriented website, bankrate.com may be a useful reference for you.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Where You Live Matters: Counting the Cost of Long-Term Care

It probably comes as no surprise that the cost of long-term care services -- including nursing homes, assisted-living facilities, and home-based care -- continues to rise steadily across the country.

Among the various services tracked by Genworth's annual Cost of Care Survey, home-based care costs are rising at a slower pace than other forms of care. Specifically, Genworth's most recent report found that, on a national basis, home-based care rose just 1% to 1.5% over the last five years, while costs at nursing homes and assisted-living facilities have increased 2.5% to 4% over the same five-year period. ¹

Long-term care costs vary widely nationwide. Genworth's annual Cost of Care Survey tracks the costs of nursing homes, assisted-living facilities, and home-based care across the country. Genworth also tracks long-term care cost data on a regional and state-by-state basis. For planning purposes -- either your own or for an aging parent or other loved one -- this is vital information to know and discuss with your financial professional when forecasting retirement income scenarios.

Following are the 10 most expensive states for a private room in a nursing home -- the top-of-the-line care tracked by the annual study -- and the most expensive mode of care available today. Along with the median annual cost for each state is the comparable median annual cost for home health aide services.

Top 10 States for Cost²

State

Median Annual Nursing Home Cost (private room)

Median Annual Home Health Aide Cost

Alaska

$281,415

$59,488

Connecticut

$158,775

$50,336

Massachusetts

$139,580

$57,200

New York

$136,437

$52,624

Hawaii

$135,050

$56,056

New Jersey

$127,750

$48,506

New Hampshire

$122,275

$54,912

Delaware

$117,895

$50,336

Pennsylvania

$113,150

$47,911

Maryland

$110,230

$45,760

National Median Cost

$91,250

$45,760


It may surprise you that California is not among the top ten most expensive states. California's median annual rate for a private room in a nursing home is $104,025. Review the Genworth 2015 Cost of Care website (https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/130568_040115_gnw.pdf) to find cost information for all types of long-term care services in California.

While the impact of long-term care can be staggering on one's finances, it can also take a significant toll on families and careers. To learn more about strategies for coping with this potential need, speak with your Certified Financial Planner™.

¹ Financial Planning, "LTC: 10 Most Expensive States for Nursing Homes," April 27, 2015.

² Genworth 2015 Cost of Care Survey, March 20, 2015.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Don't Let Fear Keep You on the Sidelines

Fear is a powerful emotion and market losses can be fear inducing. But history shows that emotion is a poor compass for charting your investment course.

While the U.S. stock market, as represented by the S&P 500 Index, has risen a stunning 205.66% as of March 31, 2015, since its low on March 9, 2009, some investors are still reluctant to participate after the turbulence that accompanied the 2007-2008 "Great Recession".¹

Fleeing the market certainly may have felt like the right thing to do in the depths of the financial crisis. However, history shows that making investment decisions based on emotion has rarely proven successful. Greed may have led an investor to own too many technology stocks when the bubble burst on that industry in 2000. Earlier, fear may have caused investors to cash out of stocks following the crash of 1987 and miss some or all of the subsequent rebound.

Fast forward to 2015. The reality is that investors who missed the extraordinary rally that has occurred since March 2009 may have helped to put their long-term accumulation goals at risk. This is especially true for investors with shorter time horizons, such as those approaching retirement.

Consider the following: From 2010 through 2014, U.S. stocks recorded an average annualized return of 15.5%, compared to 0.1% for money market securities.² The nearly nonexistent returns associated with cash-like investments could have a powerful impact on your purchasing power over time.

 

Maintain Balance to Manage Risk

One of the key determinants to investment success over the long term is having a disciplined approach to balancing short-term risk (stock price volatility) with long-term risk (loss of purchasing power). Finding a "middle ground" in your investment philosophy -- and portfolio allocation -- may go far toward helping you manage overall risk and realize your investment goals. Your Certified Financial Planner™ can help you to determine the correct balance between your risk tolerance and lifetime goals.

History indicates that stocks have tended to outperform other asset classes as well as inflation over long periods of time.³ However, investors who are too focused on the long term may over-allocate their portfolios to stocks -- and over-expose themselves to short-term volatility risk. Alternatively, investors who are extremely averse to short-term risk may do the opposite and face increased risk of not meeting long-term objectives.

 

Easy Does It

How might this balanced approach to risk be used to get investors back in the market? One of the best ways to take emotion out of investing is to create an investment plan (called an Investment Policy Statement) and stick with it.  

One of the best ways to ease into investing during a period of high market volatility is through a systematic investment plan called Dollar Cost Averaging (DCA).³ Dollar Cost Averaging is a process that allows investors to slowly feed set amounts of money into the market at regular intervals.

Although DCA does not assure a profit or protect against a loss in declining markets, it can help achieve some important objectives. First, it gives investors a measure of control while eliminating much of the guesswork -- and emotion -- associated with investing. Second, DCA can help investors take advantage of the market's short-term price fluctuations in a systematic way -- by automatically buying more shares when prices are low, and buying fewer when prices are high.

It is important to remember that periods of falling prices are a natural part of investing in the stock market. By maintaining a long-term focus and following a balanced approach to managing investment risk, you may better position yourself to meet your financial goals. Your Certified Financial Planner™ can help you identify which strategies may be best for your situation.

¹ Wealth Management Systems Inc. Stocks are represented by the daily closing price of Standard & Poor's Composite Index of 500 Stocks (the S&P 500), an unmanaged index that is generally considered representative of the U.S. stock market. The percentage increase represents the gain through March 31, 2015. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

² Wealth Management Systems Inc. For the five years ended December 31, 2014. U.S. stocks are represented by the S&P 500 Index. Money market securities are represented by Barclay's 3-Month Treasury Bill rate. Example does not include commissions or taxes. Past performance is no guarantee of future results.

³ Dollar cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares through periods of high and low prices. This plan does not assure a profit and does not protect against loss in any markets.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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The Greek Debt Crisis and Your Long-Term Investment Strategy

By Alan Kondo

You have probably seen the news coverage about the Greek debt crisis, and have wondered what impact it may have on your investment portfolio. As with previous global events, the media is quite good at stirring up fear, because their goal is to capture your attention. However, when it comes to long-term decisions about your financial future, you need as much sound and objective information as possible.

Greece missed the International Monetary Fund debt payment of nearly $2 billion. Its nationwide referendum July 5thconfirmed that 61% of Greeks reject creditors' austerity demands that would require pension cuts and an increase in the value-added tax. This could pave the way towards Greece exiting from the Euro Zone, but a compromise between the country and the International Monetary Fund is still possible. Many Greek citizens have been making runs on the bank to withdraw their deposits. In response, the Greek government has closed the banks and stock market, and have limited ATM withdrawals to 60 Euros ($66) per day.

The reaction of the European stock market has been relatively modest. Economists have mixed opinions on whether losing the weakest country in the European Union would help or hurt the currency.

How do these events affect your investment, if you have a broadly-diversified portfolio? To put things in perspective --

* Because globally-diversified portfolios spread their risk to all parts of the market (just the opposite of putting all your eggs in one basket), your direct investment in Greece would probably be very low, about 1/100thof 1%. For example, if you had a $1 million investment, your exposure to Greece might be about $85.

* Greece historically has been a fragile economy. Greece has been either in the process of rescheduling its debt or been in default 51% of the time since 1800. This is one of the reasons diversification is so important, to avoid losses due to a single country, sector or industry.

* The media are often wrong. Back in 2012, many media analysts considered Europe the worst place to invest because of the severe debt crisis, the potential breakup of the European Union, and the potential collapse of the Euro. Nevertheless, the MSCI Euro Index posted a stunning 23% return for 2012.

The reality is that we live in an uncertain world. Uncertainty (while uncomfortable) is a natural part of investing, and is why we receive such good long-term returns from the market.

In our quest for certainty, some of us may be tempted to make changes to our portfolios based on headlines or market forecasts. In most cases, however, you would be better-served to stay focused on your long-term investment strategy and avoid impulsive moves based on hunches about the future.

The global and U.S. economies are very resilient. Even if Greece returns to the Drachma, we believe that any fallout can be contained to Greece.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Retirement Health Care Costs

by Alan

The issue of health care costs in retirement -- and planning for them well in advance of retirement -- is becoming key to any retirement planning discussion.

A recent study by Employee Benefit Research Institute (EBRI) sheds light on different types of health care costs to consider in retirement. It projected that in 2014, men and women who wanted a 90% chance of having enough money to cover out-of-pocket health care expenses in retirement would need to have saved $116,000 and $131,000 respectively by age 65.¹ This is a sobering goal when you consider that just 42% of workers in their 50s and 60s report total savings and investments in excess of $100,000.²

Part of the problem with putting a price tag on retiree health care expenses is that every situation will vary depending on an individual's health, the type of health care coverage they carry, and when they hope to retire. That said, EBRI has identified some "recurring expenses," or standard elements of cost that can be estimated and planned for in advance as well as "non-recurring" expenses that are less predictable but tend to increase with age.

Recurring vs. Non-Recurring Expenses

EBRI was able to categorize utilization patterns and expenses into these two separate types of health care services using data gleaned from the Health and Retirement Study (HRS). HRS is a longstanding, highly respected study of representative U.S. households evaluating individuals over age 50.

● Recurring services -- These include doctor visits, prescription drug usage, and dentist services. Since these services tend to remain stable throughout retirement, it is possible to calculate an average out-of-pocket expense among individuals age 65 and older of $1,885 annually.³ EBRI's study projected forward, and factored in the following assumptions: a 2% inflation rate, a 3% rate of return on investments, and a life expectancy of 90 years. The study estimated that one would need $40,798 at age 65 to cover the average out-of-pocket expenses for recurring health care needs throughout retirement. It should be noted that this calculation does not include expenses for any insurance premiums or over-the-counter medications.

● Non-recurring expenses -- This category includes overnight hospital stays, overnight nursing home stays, home health care, outpatient surgery, and special facilities. Unlike recurring expenses, the cost of most non-recurring services increases with age. For example, average annual out-of-pocket expenses for nursing home stays are estimated at $8,902 for those in the 65 to 74 age group, $16,948 for those aged 75 to 84, and $24,185 for individuals aged 85 and up.³

Because the likelihood of utilizing these services and the degree to which they will be needed is largely unknown, projecting the savings needed to cover these costs throughout retirement is an elusive exercise. One way to estimate expenses for yourself is to start with the total out-of-pocket health care savings goals of $116,000 for men and $131,000 for women cited earlier. Then, divide these estimated expenses into recurring and non-recurring costs.

Bigger Picture Planning

Certified Financial Planners™ often recommend taking a holistic approach to calculating income needs in retirement, by factoring in such costs as taxes and debt payments along with other typical expenses including health care. In addition to the out-of-pocket health care calculations discussed above, consider what you think you might have to pay in annual premiums if you were to apply for health insurance today. Lastly, and perhaps most important, add in an allowance for inflation -- both general and health care inflation.

Your Certified Financial Planner™ can help you get started by creating a Comprehensive Financial Plan that includes a projection for health care costs in retirement. This is especially useful just before you "pull the trigger" on your decision to retire, and give notice to your employer. Knowing that your plan will work can give you the confidence to move forward.

This article offers only an outline; it is not a definitive guide to all possible consequences and implications of any specific saving or investment strategy. For this reason, be sure to seek advice from your CPA and Certified Financial Planner™.

¹ Employee Benefit Research Institute, news release, "Needed Savings for Health Care in Retirement Continue to Fall," October 28, 2014.

² Employee Benefit Research Institute, 2014 Retirement Confidence Survey, March 2014. (Not including the value of a primary residence or defined benefit plans.)

³ Employee Benefit Research Institute, "Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees," February 2015.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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EDUCATIONAL WORKSHOPS


 

2018 SCHEDULE 

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 14, 2018

10:30 a.m. - 12:30 p.m.

La Canada Flintirdge Library

4545 N. Oakwood Ave.

La Canada Flintridge, CA 91011

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 21, 2018

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

INVESTING AFTER AGE 70.5 AND RMDS

Saturday, September 8, 2018

9:00 a.m. - 11:00 a.m.

South Pasadena Library Community Room**

1115 El Centro Street

South Pasadena, CA  91030

**this activity not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

INVESTING AFTER AGE 70.5 AND RMDS

Saturday, September 22, 2018

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 


Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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