Election Mayhem And The Markets – Our Thoughts

Is this really our new world that we are all witnessing? Given what we see on the nightly news, the venom we read on the internet, and the level of acrimony that exists between the two warring sides of the 2020 election, you’d think the end of times are at hand.

Listening to each side with less than six weeks to go, one would assume they live in different countries or even on different planets (supposedly there is life on Venus!)

But in reality, they are watching different cable news channels and reading different websites in an unyielding effort to achieve confirmation bias. It’s as if one cable news channel is always right, and the other guy is always wrong. Does anybody really believe that?

If two cable channels with entirely opposing views are wrong, mislead, or purposely avoid sharing information at least 30% of the time (pick your own estimate, it’s as good as mine), then what portion of their programming is false? Fact checkers to the rescue…well unless they too are biased!

So, our options are these…we can be partially informed, uninformed, or misinformed…what a choice! How is the average voter supposed to decide?

One Thing is Certain…

…Financial markets hate uncertainty.

Polls are telling us something close to what happened in 2016, which is to say they are a function of the assumptions made by pollsters. Who is being sampled? What are they being asked? Who is willing to sit through a polling call? How many questions are being asked? Are the people being polled registered voters? Are they likely voters? Are they telling the truth about who they will vote for? How are they going to vote? When are they going to stop counting the votes? Who gets a ballot mailed to them? What ballots are going to be rejected?

Our job at Modernize Wealth is to try to pick the bones out of all of this…and anticipate how the markets are going to react. Really?

Guided by History

History, as is often the case, gives us clues. We have endured pandemics before, as well as contested elections. Rutherford B Hayes won a heavily contested election in 1876 after losing the popular vote to Samuel J Tilden but winning the electoral college after…wait for it…disputed ballot counts. Sound familiar?

We are spending a fortune to overcome the pandemic, and it may yet bankrupt our nation. We’ve been there before. The US was bankrupt after the Revolutionary War, Civil War, the Panic of 1873, 1893, 1896, 1907, 1910, after World War I, the Great Depression. Too long ago? Some of you may remember 14% unemployment and 21% interest rates in 1980? We should easily recall the Tech Bubble bursting, and the financial panic of 2008? Yet how soon we forget.

So… What Do We Plan to Do?

The team at Modernize Wealth is planning to deal with this potential mess and mayhem by hedging our positions as we get closer to the election to preserve wealth for our clients; then removing our hedge positions as the fog of election mayhem subsides.

We need to recognize that investments will be significantly affected by the eventual outcome, which may not be known for some time after the election. Tax policy, regulations, the Courts, labor policy, foreign policy, education policy, not to mention domestic security are going to be affected by the outcome. Throw in the wild card of COVID-19 vaccines and new treatments, and you’ve got a perfect storm with no clear way to stop it.

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Our aim in the coming months is to ride out this perfect storm; to plan for wealth preservation and to look for opportunities when they invariably surface. Caution: this upcoming ride will not be for the faint of heart or the inexperienced investor.

If you would like to share your thoughts on this topic with us, we welcome the discussion! Let’s talk! Call us at 480-346-1283, or email hello@modernizewealth.com and we will schedule a conversation.

Buckle up…2020 has been a year unlike any other….but its not over yet!

Smart Retirement Planning Tips for the Savvy Business Owner

Understandably many business owners are focused on “just getting through the year” right now, while others are thriving, pivoting, and looking only forward to maximize growth from new opportunities. A successful or savvy business owner is always thinking, “What’s next?” It could be as simple as what’s the next opportunity, or what’s the next challenge? After all, it’s been that kind of year!

But the biggest questions like, “What’s next for me? Is retirement an option?” are those that only the smartest, most successful business owners ask of themselves and their financial advisors.

Do you have a business retirement plan?

Creating a comprehensive retirement plan for business owners requires a careful understanding of the unique characteristics of the individual’s needs and goals, their family dynamics, the size, and type of business they operate, and the amount of time prior to retirement.

Some businesses are set up to expand and hire more employees, while others have little desire to expand beyond the owner and family members.

Finally, some businesses are sellable and are designed to provide the owner with a substantial portion of their retirement funding needs, while others are primarily set up to generate regular income throughout the owner’s working life. In the latter situation, the owner is less inclined to depend on the sale of their business to adequately satisfy their financial needs for retirement.

What factors should I consider?

The following are important considerations in the development of a solid, well-designed retirement plan to meet the needs of business owners:

• The size of the business and the number of employees can make some retirement programs undesirable, while others can create a substantial amount of tax-deferred or even tax-free income at retirement. For example, a 401k may be suited to a business that has many employees, while a simple IRA would be better suited to a business with few employees.
• The composition of a closely-held business can provide opportunities not practical or cost effective for owners of a larger business with many employees. For example, the implementation of a Defined Benefit plan can allow the participants to set aside significantly larger amounts of pre-tax contributions that will lower the business owner’s and the business’s taxes. The inability to limit inclusion of the plan for a business with many employees would make the costs prohibitive and dwarf the tax benefits.
• How a business is legally constructed can create both retirement plan benefits, as well as estate planning benefits. For example, a family partnership can allow a business owner to create a private annuity sale, allowing the owner in the family partnership to transfer business ownership without estate tax credit limitations and selling the business over an extended period of time to reduce annual income taxes.
• The type of business, and the industry it is a part of, can be instrumental in determining whether a business is sellable and if it will be able to provide the owner with a sizable portion of their retirement funding. For example, owning a local sandwich shop or delicatessen may provide the owner with adequate income during their working years. But the owner is unlikely to depend on the sale of their store to provide them with sufficient funds for retirement. Whereas, the owner of a mid-size plumbing business has a much better chance of achieving a higher percentage of their retirement funding from the sale of their business.
• The length of time a business owner has prior to retirement can either restrict or allow for a wider number of retirement planning options. A younger business owner in reasonably good health might chose to look at cash value life insurance policies to build tax-free distribution later, instead of tax-deferred income. Additionally, tax considerations at the time of retirement can play a significant role. Tax-deferred income once distributed becomes taxable and can push the taxpayer into a higher tax bracket, whereas tax-free income avoids that problem.

There is lots more to discuss…

Obviously, this list is a very limited discussion of all of the options available. Your goal should be to strategically create a business retirement plan that minimizes taxes, takes advantage of various aspects of the business, the ownership structure, size, and scope of the business, as well as build-in succession and exit planning strategies.

That’s what we work towards with our business owner clients – we call it developing a Business Owner Master Plan. In fact, we’ve written a 17-page white paper about creating such a plan – give us a call at 480-346-1283 and we will email you a PDF.

Finally, your business retirement plan, and your Master Plan if you go that route, must be adaptable to changing circumstances, such as tax rules, economic conditions, technological innovations, family circumstances, owner health, change in time, and emerging opportunities. Remember retirement planning is an ever-changing, on-going activity the requires constant vigilance and maintenance…that’s why we meet with our clients three times a year…not just once.

Contact us

Our passion is helping business owners make their success their legacy. We specialize in working with business owners to create integrated financial plans for your personal life and your business; essentially organizing your complete financial life in one place.

Please reach out to us at 480-346-1283, or email hello@modernizewealth.com if you have any questions, or just want to discuss further.

Covid-19 & the Current State of the Economy

By John Hebert, CPM^® CFP^®

This morning, like most mornings, I got up, made myself a cup of coffee and turned on the business news. The commentator “buzz” was centered entirely on the upcoming Department of Labor jobs report for July. The estimated number was expected to be around 1.5 million new jobs added from June, as nervous analysts scrambled to come up with a narrative to explain anticipated disappointing numbers. Then the host cut off the conversation and turned to the reporter waiting to relay the results; the numbers flashed 1.763 million new jobs!

This pandemic has had an extraordinary impact, but it has unfolded like no other. At no other time in American history has the government sought to shutdown large swaths of the economy. The Spanish Flu of 1918 killed more than 675,000 Americans, and yet only a few towns shut down. Then came the Hong Kong Flu in 1968 which was estimated to have killed over 100,000 people in U.S., with little or no economic shutdown. Hence shutting down the economy was a shot in the dark.

As I write, we are now ending the first week in August and we know quite a bit more. GDP fell 3.4% in the first quarter and fell 9.5% in the second quarter (annualized rates were 5% and 32.9% respectively). All expectations are that the third quarter will show a substantial upside bounce.

The overall unemployment rate peaked in April at 14.7% and has fallen to 10.2% in July, reflecting a third monthly decrease in a row. Forecasts are that the unemployment rate is likely to fall consistently for the remainder of the year, but at a slower pace.

Continued improvement will depend on where and how quickly the economy opens up, as well as success in lowering the virus mortality rates. The overall consensus is that as every month goes by, more parts of the economy will re-open going forward. In total about 22.2 million people became unemployed during the March / April peak, and as of now over 9.3 million are back to work. This represents about a 42% re-employment level, and despite the wave of infections is the southwest, the re-employment effort continued.

Interestingly, the re-employment rates could significantly intensify in August, September and October as federal unemployment benefits expired at the end of July. Currently, the fourth stimulus bill is stalled in Congress. At issue, the federal benefit of $600 per week is thought to discourage many workers from re-entering the labor force since unemployment benefits exceed their employment income. Now those who have jobs waiting for them will likely return, and once that happens, in September and October we’ll get a clear picture of the long-term unemployment problem.

Now that the effects of COVID are clear; school re-openings, unemployment benefit levels, continued low interest rates, a potential executive order for a payroll tax holiday, as well as a vaccine and new treatments, will unquestionably determine the rate of re-employment and economic growth for the next six to twelve months. Oh, and by the way, in case you’d forgotten, there’s an election in less than three months!

What does this mean for the business owner? Our view at Modernize Wealth is that an extension of the Payment Protection Program, if there is one, will be more targeted towards smaller businesses, or focus on the most severely damaged industries. Additionally, the additional federal unemployment benefits, once negotiated, will likely settle in the 70% range, when you add the state and federal supplemental payment, of the individual workers’ prior employment salary to create a strong incentive to return to work.

We may quite possibly see an employer payroll tax holiday by use of Executive Order, though the constitutionality will be fought in the courts. The Fed has pretty much stated that Fed rates will stay at or near 0% until 2024, provided there isn’t an unforeseen uptick in the rate of inflation which is a serious log-term concern.

Finally, no deal will be struck by the Administration and the Senate with the House without liability protection for business against frivolous lawsuits related to COVID. Other parts of a stimulus bill will be geared towards state and local governments, while most of the rest of the House bill are unlikely to survive. Be forewarned; the is no guarantee that a deal will be reached, so plan accordingly.

COVID-19 has impacted all aspects of the global economy over the past several months.
Take the first step in minimizing the long-term financial impact on your personal and/or business finances by downloading this must-have checklist outlining the steps you can take today to help insulate your own financial plans.

If you’d like more discussion, please feel free to reach out to me by email at  john@modernizewealth.com, call the office at 480.346.1283. I encourage you to check out our News section; it  has lots of useful resources, videos, and information for business owners.

About the Author

Modernize Wealth specializes in working with business owners to create integrated personal/business financial plans, innovative investment solutions, and planning strategies. John Herbert’s financial industry gravitas comes from almost 30 years’ as a Certified Financial Planner and Certified Portfolio Manager. An accomplished educator, John taught Economics at Chapman University and the University of Phoenix for many years.

Underappreciated Tax Reduction Strategies for Business Owners

I think that we can all agree that 2020 has been a long, long year, but one thing that is finally over is 2020’s never-ending tax season! Entrepreneurs feel that they can now move on from that painful task and focus solely on running their businesses…ahhh, but should you? Not so fast!

As of writing this, even though 2020 already feels 18 months long, there are less than five months left in the year. Why does that matter? Because some of the very best tax reduction strategies require time to analyze and implement.

The more intricate the tax strategy, the more analysis, planning and implementation time will be required. Truth be told, some strategies require as much as two months to administratively and operationally complete. In addition, there are important deadlines for setting up these plans for 2020.

Here are a couple of underused strategies that you should talk with us and/or your CPA about sooner rather than later.

The Qualified Business Income Deduction

One of the most underutilized tax reduction strategies is the Qualified Business Income deduction or QBI. It was an important part of the Tax Cuts and Jobs Act tax bill passed in December of 2017, and it allows for the deduction of up to 20 percent of business income, plus qualified real estate investment trust dividends, and publicly traded partnership income.

Do I qualify?

To qualify you must be a sole proprietor, partnership, or S Corp. Additionally there are limitations on the type of trade or business, and the amount of W-2 wages paid. Importantly, income from capital gains, or dividends aren’t considered. As such, for the business owner who may receive both W-2 income and a dividend from the K-1 for their S Corp, strategic planning for wage versus dividends becomes critical.

Specifically, there income limits on who can take advantage of the deduction, after which phase out begins; $163,300 for single taxpayers and $326,600 for married couples. So long as the dividends paid to the owner from the business K-1 is deemed reasonable, and the household income is below the threshold, the more that is paid in dividends, the bigger will be the deduction from the QBI before the dividend is paid. Again, this requires some planning, so consult your CPA or tax professional early on any such strategies.

The 412(e)(3) Plan

Another important strategy that is little understood, even by many tax and financial professionals, is called a 412(e)(3) plan. It has very specific benefits for the right situation. It allows for the owners of a small business with fewer than five employees to contribute substantially more to their defined benefit plan than otherwise would be the case, allowing for a greater tax deduction for this and future years.

A 412(e)(3) plan also provides for secure guaranteed retirement income; it is most desirable for an older business owner with younger employees, especially highly profitable businesses that are likely to continue to be profitable for the foreseeable future. Also, this plan is generally exempt from lawsuits.

Top line…How does it work?

The guarantee comes in the form of a life insurance contract if health is not an issue, or an annuity if otherwise. The contributions can be made by the employer or a custodial trust. The payments are made in frequent level installments until the age of retirement.

Questions?

Have either of these strategies caught your interest? There are many other considerations that will need to be examined, since these programs have many restrictions and requirements. But if you would like to learn more about them and see if one or both may apply to you, please reach out to the Modernize Wealth team at 480-346-1283, or email hello@modernizewealth.com.

Learning how emotions affect decisions can make you a better investor.

Here’s a question for you… “Are you a better-than-average driver?” We all put our hand up in the Modernize Wealth office! (Brandon certainly needs to put his hand back down!)

Chances are, you answered yes. That’s because nearly three-quarters of people think they are better-than-average drivers.[1] Besides being mathematically impossible, this statistic is an example of overconfidence — and is just one illustration of how certain biases can influence our thought patterns.

These behavioral biases sometimes help us make smart decisions. But they also can cloud our judgment and lead us to make irrational decisions. That’s especially true when it comes to investing. At a time when markets are down and it’s impossible to predict what tomorrow will look like, our perceptual distortions can make a difficult situation worse.

The good news is recent evidence suggests that we can learn to overcome these biases and improve our decision-making. But first we have to understand how they work.

Here’s a look at three of the most common behavioral biases that can impair our investment decisions.

Anchoring

You’ve fallen victim to anchoring when your emotional attachment to the past value of an investment keeps you from recognizing its present value. For example, let’s say you own stock that was recently selling for $100 per share but has since dropped to $60. But you may be anchored to that $100 figure, convinced that’s the right value for that stock. As a result, you may hold onto your stock convinced it will soon rebound. However, there’s no guarantee that it will.

When assessing your investments, ask yourself whether your evaluations are based on the current reality of the assets or your past feelings about them. Weigh the merits of keeping an investment based on current information and whether it’s still a good fit for your financial plan.

Recency Bias

Recency bias can lead to putting too much emphasis on the latest information — and often ignoring other important data. For example, say stocks begin to climb and that uptick inspires a surge in buying. As more investors pile on, prices climb even higher, surpassing historically expensive levels. Yet investors may ignore this red flag, assuming recent trends outweigh long-term data. However, bubbles like these can pop and falling prices can potentially leave investors with heavy losses.

You can avoid recency bias by taking a long-term approach to investing. Strategies such as dollar-cost averaging, when you make a series of regular investments regardless of the market’s ups and downs, can help erase the temptation to chase returns or panic when prices fall.

Overconfidence

Confidence is useful and, in many cases, necessary. Investing a chunk of your income in the stock market takes confidence. And it’s confidence that allows you to keep risks in perspective and sit tight in a turbulent market rather than rushing to sell your assets and locking in losses.

But overconfidence can be dangerous. It can lead you to believe that you know better than experts, that you can predict market movements successfully (spoiler: you can’t), or that you can spot investment opportunities others have missed. Worst of all, it can lead to emotional decisions in response to market moves, such as buying when prices are high and selling when prices are low.

Combat a tendency toward overconfidence by basing investment decisions not on emotion, but on careful research. Once you’ve made a decision, stick with it and avoid the temptation to try to outsmart the market by jumping in and out of investments.

Recognize the Issue

Recognizing how behavioral biases influence investing can help you keep them in check. Like any aspect of life, once you recognize an issue, it becomes easier to create a plan to address and overcome it. As a result, you’ll be more likely to make investment decisions that align with your long-term financial plan — and to avoid the irrational decisions that may knock you off track from that plan.

Contact Modernize Wealth

It’s time to set behavioral biases aside and get on the path to creating generational wealth for your family. If you would like our help with creating a financial plan, and then staying on track with your investing, please give us a call at 480.346.1283 to schedule a discovery session, or use our contact form.

Choose to partner with the Modernize Wealth team and you will benefit from the experience of wealth management specialists who can deliver innovative investment strategies, as well as bespoke financial guidance that will help you keep your plans on track.

[1] AAA, “More Americans willing to ride in self-driving cars,” 2018.