Social Security, If Not Now-When?

Social Security benefits are a component in the retirement planning of most Americans. However, those benefits pose questions for both younger and older employees. Younger employees are faced with the long term viability of the system (see our previous posting of “Social Security, Medicare, and You”. Older employees are faced with the question of how, and when, to start taking their benefit.
 
Social Security benefits are a function of age, length of working career, and earnings level. Therefore, we urge you to contact the Social Security Administration to determine your specific benefits. Our discussion here will be more general in nature and cover only the Old Age & Survivor Insurance (OASI) benefit.
 
Full Retirement Age (FRA)
 
Full retirement age is the age at which one is eligible to draw 100% of Social Security benefit earned. Retiring earlier than FRA reduces the amount received; retiring later increases the amount of benefit. Once benefits are begun, the amount is constant, subject only to cost of living adjustments (COLAs); that adjustment amount is tied to inflation. Full retirement age for benefits is shown in the following table:

 

Full Retirement Age

Year of Birth	Age Required for Full Benefits
1954 or Earlier	66 years
1955	66 years + 2 months
1956	66 years + 4 months
1957	66 years + 6 months
1958	66 years + 8 months
1959	66 years + 10 months
1960 and Later	67 years

The earliest age at which one can begin drawing benefits is 62. However, for those born in or before 1955, starting Social Security before FRA reduces the in full benefit by 6.25% per year. For those individuals born in 1960 or later, the reduction is 6.0% per year. Waiting until after FRA to begin drawing benefits increases the benefit by 8% per year until age 70. There are no further benefit increases after age 70.
 
Cost of living adjustments for Social Security are tied to inflation. In 2017, benefits increased by 0.3%. There have been years in which benefits did not increase; however, the average cost of living adjustment for 1985-2017 has been 2.6%.
 
Age 62 or Later?
 
When should one begin drawing Social Security benefits? Should one draw a lesser amount for a longer period of time (longer life expectancy) or a greater amount for a shorter period of time (shorter life expectancy)? That’s a complex question with many variables. What is one’s current financial situation (i.e. does one need the money)? What’s the long term prognosis for life expectancy (current health, heredity, etc.)? How can a couple plan benefits to maximize lifetime income received? There is a “breakeven” point which can be calculated. Consider the following example:
 
John Smith is entitled to $1500 monthly benefit at his FRA of age  66. If he chooses to begin benefits at age 62, his FRA amount will be reduced by 25% (i.e. 6.25% for 4 years) resulting in a benefit payment of $1125 per month. If he waits until FRA and begins  drawing $1500 per month, he will forgo the $1125 per month that he could have been receiving or $54,000 ($1125 x 48 months =   $54,000). If he begins benefits at age 66, that forgone amount will be recovered at $375 per month ($1500 benefit at 66 vs. $1125 at 62) which will require 144 months ($54,000 ÷ $375 = 144 or 12 years). Therefore, John’s breakeven age is 78. If he dies before   age 78, he made the correct decision to take benefits at age 62; if he lives past age 78, delaying until FRA would have been more  advantageous.
 
Obviously, life expectancy is a key component here. In previous postings we have referenced mortality tables. For the above example, the probability of a male at age 62 living to at least age 76 is 73%. There is a 60% probability he will live to age 80, and a 21% probability of living to age 90.
 
To compound the problem, beginning Social Security benefits prior to FRA and continuing to earn income has consequences. There is an annual earnings amount allowed ($16,920 in 2017); for each $2 earned above that amount, Social Security benefits are reduced by $1. That restriction no longer applies if one draws benefits at FRA. There are special rules that may apply here, so individual circumstances must be considered.
 
The Bottom Line
 
Social Security benefits are a key component in retirement planning. How and when those benefits are begun can have a significant impact on long term financial well-being. We at Paragon Financial Advisors can assist our clients in planning for their future. Please call us to discuss your specific circumstances.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

 

 

Social Security, Medicare, and You

Each year the Trustees of the Social Security and Medicare trust funds provide a report on the financial status of these programs—current and projected. The information below is from a summary of the 2016 Annual Reports www.ssa.gov, Office of the Chief Actuary, 2016 Trustees Report-Jacob J. Lew, Sec. of the Treasury and Managing Trustee, and Thomas E. Perez, Sec. of Labor, and Trustee).
 
In general, both programs (as currently scheduled) are facing funding shortfalls. Social Security and Medicare accounted for about 41% of Federal program spending in 2015. Both programs will have cost growth in excess of Gross Domestic Product (GDP) growth through the mid-2030s. This shortfall is due to: 1) growth in the aging population (baby boomers beginning retirement—about 10,000 per day) eligible for benefits, and 2) fewer employees entering the labor market (because of lower birth rates) to fund the programs. Medicare expenditures per beneficiary are also projected to increase above the growth in per capita GDP over the same time period.
 
Social Security
 
Social Security has two separate trust funds to provide benefits for two programs: 1) Old Age and Survivors Insurance (OASI), and 2) Disability Insurance (DI). Although the trust funds are technically separate, the Trustees typically combine the funds to provide the actuarial financial status for the total plan. Funding for plan benefits comes from combined payroll taxes from both employees and employers. Current benefit payments to plan recipients are paid from these payroll taxes and any excess payment is scheduled to be added to a “trust fund” to provide for future benefit payments. In the 2016 report, the Trustees project that combined fund asset reserves will exceed projected benefit costs through 2028; benefit payments will then begin to dip into trust fund reserves. Trustees currently project that those trust funds will be depleted in 2034. When the funds are depleted, projected tax income is sufficient to pay about three-quarters of projected benefits through 2090.
 
Medicare
 
The Medicare program also has two trust funds: 1) Hospital Insurance Trust Fund (Part A), and 2) Supplementary Medical Insurance Trust Fund (Parts B and D). Part A of Medicare helps pay for the cost of hospitalization, home health care following hospital stays, skilled nursing care, and hospice care for the elderly and disabled. Part B of Medicare helps pay for the costs of physicians, outpatient hospitalization, and home health services. Part D subsidizes the cost of drug coverage.
 
The Trustees project that the Part A trust fund will be depleted in 2028 (two years sooner than projections in the 2015 report). Part A expenditures have been exceeding income received since 2008; at fund depletion in 2028, revenues are projected to pay 87% of Part A costs. Parts B and D are adequately funded because current law allows funding from both general revenues and beneficiary premiums. However, because of an aging population and increasing health care costs, the cost of Parts B and D are expected to grow from 2.1% of GDP in 2015 to about 3.5% of GDP in 2037.  Trustee projections in the 2016 report are that total Medicare expenditures will grow from about 3.6% of GDP in 2015 to 5.6% of GDP in 2040. The costs are projected to increase to about 6.0% of GDP in 2090.
 
The Bottom Line
 
Social Security and Medicare benefits are a key component in long range planning for most individuals. The 2016 Trustee Report indicates that changes in these plans will be forthcoming. Please contact us at Paragon Financial Advisors to see how your future plans may be affected.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Navigating Retirement

Ahhh—the good ole’ days. We’ve heard that expression applied to many things. It used to apply to retirement. Work 35 to 40 years for the same company, get a gold watch at retirement, then collect a pension check from the company for the rest of your life. But things changed. Pension plans (defined benefit plans) were phased out in favor of 401k plans (defined contribution plans). This change essentially shifted risk for providing retirement benefits from the employer to the employee. In addition, employees began changing jobs/careers more frequently; the long-term employee with a single company became the exception rather than the rule. Retirement resources historically were a “three-legged stool”—the benefits came from 1) a pension from the employer, 2) personal savings, and 3) Social Security.

 

Today’s retirement picture is significantly different. Let’s look at today’s retirement factors but do it in a framework of “control.” There are some factors over which we have complete control, some factors over which we have partial control, and some factors over which we have no control. For example:

Complete Control

1. Saving- today’s worker has complete control over the amount he/she chooses to save and when that saving starts (the sooner the better!!).
2. Spending-spending choices directly affect the amount saved; again, a choice made by the individual. Less spending means invested funds last longer.
3. Asset allocation-with 401k plans, the plan participant chooses how the money is invested. A greater the allocation to stock means a greater possible gain (or loss).
4. Location-cost of living in retirement varies significantly by geographic location. Relocation may mean a reduced need for daily living expenses. Of course, there are social considerations (friends, family, etc.) that affect this choice.

Partial Control

1. Employment earnings during working years-choice of jobs, education, work location can affect career earnings significantly. Aptitudes and personal preferences play a role here.
2. Duration of working career-how long one chooses to work significantly affects life style standards in retirement. Working longer means greater contribution to savings and fewer years those savings must cover in retirement.
3. Life span-while everyone has a genetic makeup that affects life span, so does life style choices. Proper diet, exercise, etc. can affect both longevity and quality of life in retirement.

No Control

1. Investment returns-asset allocation is an individual choice relating desired goals with acceptable risk. However, the actual performance of investments in each of those asset categories (stocks, bonds, etc.) is something over which we have no control.
2. Governmental polices/regulations-tax policies (and rates) and government regulations have an impact in retirement. Individuals with significant holdings in qualified plans (IRAs, 401ks) have a significant partner in those plans—the Infernal Revenue Service (note: not a typo)!

We at Paragon Financial Advisors assist our clients in navigating the path to and through retirement. Possibilities and pitfalls abound; please call us to discuss your specific circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 



   

Road Map To Retirement

The 2016 elections have certainly brought about some changes in the political landscape. One thing hasn’t changed however—an ageing population that is moving toward retirement. Baby boomers began turning 65 in 2011 and their number is increasing by about 10,000 per day. In 2017, the leading edge of the boom will turn 70 (complete with required minimum distribution requirements from retirement accounts). Considering this trend, we are beginning a series of postings on navigating the road to (and through) retirement.

First, we’ll look at some of the possibilities facing individuals as they approach retirement. Will older Americans continue working? How long is “retirement”? What about Social Security? How should one plan for spending and inflation?

Then, we’ll look at some of the “pre-retirement” planning that should be done. How much should one save for retirement? Should it be done in company savings plans? IRAs (traditional or Roth)

Spending in retirement is a key factor. How much is “too much” for investment withdrawals? Tax management (for investment withdrawals, taxes paid (income-federal and state; and local (personal property, real property) are no minor consideration. Health care (and long term care) costs are also an item of uncertainty and concern.

Finally, how does one pay for retirement? The reduction in defined pension plans and replacement with 401k plans has put the investment risk on the retiree. Quality of retirement is, in large part, how successful one is in managing his/her financial resources. We will begin some discussions on these topics.

“Plan your work, then work your plan.” That is the basis of financial planning that we at Paragon Financial Advisors assist our clients in doing. Please call us to discuss your specific circumstances, and stand by for more discussions on navigating the retirement road. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

What’s New in Social Security?

Changes in 2017.

Changes in Social Security benefits for 2017 have been announced. The cost of living adjustment is an increase of 0.3% (an increase of $5 per month for the average recipient). A small increase, but an increase none the less; there was no increase in benefits for 2016.

 

Social Security taxes are paid by both the worker and the employer. Each pays 6.2% of earnings (or 12.4% of pay in total) to support the Social Security system. There is a maximum amount of earnings on which that tax is paid (the “taxable wage base”); no taxes are paid on earnings above the taxable wage base. In 2016, the taxable wage base is $118,500. The wage base will rise to $127,200 in 2017.

 

Individuals who elect to start taking their benefits before their full retirement age (66 years or more) have their Social Security benefit reduced for each dollar of earnings they have over a certain amount. For each $2 a beneficiary earns above that amount, Social Security benefits will be reduced by $1. The earnings limit in 2016 is $15,720; in 2017 that amount increases to $16,920.

 

What’s Next?

 

Now that the election is over, President Elect Trump and Congress will face some challenges with the “entitlement” programs of Social Security, Medicare, and Medicaid. According to the Wall Street Journal (Wed, Nov. 9, 2016, pg. A18), those programs account for 10% of the US economy and that percent is rising. The deficit in 2016 is projected at 3.2% of GDP (in an economy growing at less than 2%). Medicaid spending has been increasing with the increased coverage under Obamacare. In addition, the US (and other developed economies) has an increasing population age. More individuals will become eligible for entitlement benefits. Our current system is not sustainable; be on the lookout for more changes to come.

 

We at Paragon Financial Advisors assist our clients in evaluating their Social Security options. Please call us to discuss your specific circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

 

 

Paragon Perspectives

The first thing every investor should know and accept is that there is no such thing as a sure thing when it comes to investments.  Risk is a part of the investing process; we need some risk in order to generate profits.  There is always the possibility that your investment won’t be profitable.  Or worse, you can lose some or even all of what you have invested. In this quarter’s newsletter we will examine how you can manage total portfolio risk by reducing systemic risk though asset allocation and by reducing non-systematic risk with portfolio diversification.


At first glance, dividends and income-producing securities may seem like an attractive way to generate income in retirement.  But investing exclusively with income distributions may end up being riskier than you thought.  Income producing securities can leave retirees susceptible to the current interest-rate environment and the possibility of a decrease in revenue.  We will also discuss how a diversified portfolio may be a more stable way to generate revue in retirement.


In order to avoid unnecessary risk and account for living expenses in retirement you should adjust your portfolio accordingly. Even if you are comfortable with a decent amount of risk, the closer you get to retirement, the more conservative your investment portfolio may need to become. 



At Paragon Financial Advisors, we try to assist our clients in doing a thorough risk analysis to determine their risk tolerance.  We also design portfolios with diversification and asset allocations that suit the client’s current investing and income needs.   Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

If you are not on our email list for our quarterly newsletter and would like to be added please email info@paragon-adv.com to request a copy of Paragon Perspectives.

How do annuities alleviate the risk of outliving your money?

An annuity is a stream of income paid to the client over a specified time period.  Generally, annuities can be either:

1. Fixed or variable-where the amount paid is based on the nature of the underlying investments,
2. Single premium or flexible premium-how the annuity fee is paid,
3. Immediate payout or deferred payout- which determines when the annuity payments begin.

Aside from these basic categories, annuities have a broad range of additional options available to customize the type of policy for the appropriate needs of the client.  Annuities have four main parties:

1. The insurance company providing the annuity contract,
2. The owner who purchases the annuity contract,
3. The annuitant over whose life benefits are paid, and,
4. The beneficiary who may receive payments after the death of the annuitant. 

Payouts are determined based on the life expectancy of the annuitant.  Payments are initially made to the annuitant then finally to the beneficiary based on the payout and survivor benefits selected.  Payouts can be for a certain period of time (term certain) or for the life of the annuitant with some portion to the remainder beneficiary.

Growth of annuity assets is tax deferred while the investments are in the annuity account. Tax treatment when benefits are distributed depends on the method of payment of the annuity contract. Non-qualified annuities are purchased with money on which income taxes have been paid. According to Section 72, withdrawals and annuity payments from a non-qualified annuity are taxed using an exclusion ration so that a portion of each payment is return of principal and a portion is taxable.  Return of principal (basis) is tax free while the rest is taxed at ordinary income. 

Qualified annuities are generally sponsored by employers, meaning that most of the purchase cost of the annuity contributions will be pre-tax (i.e. not taxed) when added to the account.  As such, they are subject to required minimum distributions at age 70.5 with taxes due on the entire distribution amount as ordinary income.  Distributions before age 59.5 are assessed a penalty and taxes for both non-qualified and qualified annuities.

Once the appropriate retirement spending need has been identified, it is possible to discern which expenses make up the base level of spending versus the discretionary level of spending.  One useful strategy is to purchase an annuity to provide the base level of expenses while keeping assets aside for the discretionary expenses and potential medical expense shocks that may occur. 

Specifically, an immediate life annuity could serve as the fixed income portion of the overall portfolio along with an equity portfolio.  An annuity is considered as an alternative to other fixed income because as explained by Pittman (2013, November) "Annuities are designed to perfectly hedge one's retirement spending liability, and they tend to have a higher yield to the retiree than a bond due to mortality credits" (p. 56).  Purchasing the immediate annuity could take place at multiple times depending on specific needs with consideration given to liquidity, bequest motives, longevity, and maximization of income.  Pittman (2013, November) confirms that this combination will allow the annuitant to:

1. maintain liquidity for as long as possible, have the option to fulfill bequest motives for longer should death occur prior to the annuity purchase,
2. secure income for core expenses through the remainder of their life thus partially transferring the longevity risk to the annuity company, and
3. receive a higher income than a combination of bonds with equities by adding in the mortality credits from the annuity contract (p. 60).

Annuity contracts are complex investments and require considerable analysis to ensure the annuity contract purchased is the best vehicle for the client. We, at Paragon Financial Advisors, will assist in the analysis of those contracts. As fee only advisors, we do not sell annuities—we only attempt to verify they are in the best interests of our clients.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

References:

Pittman, S. (2013, November). Efficient retirement income strategies and the timing of annuity purchases. Journal of Financial Planning, 56-62.

 

IRA Transfers

Happy New Year; 2014 is a year of memories and 2015 is a year of promises. Some of those promises might not be pleasant for individuals transferring an Individual Retirement Account (IRA) unless they follow very specific rules.

The Transfer

IRAs can be transferred to a new advisor or trustee in one of two ways:

 

1. Direct transfer- where the IRA funds move from one trustee to another trustee without the account owner ever receiving the money, and
2. Indirect transfer- where the account owner receives funds from the IRA in the form of a check made payable to the account owner. The account owner can then deposit the IRA check into another IRA within 60 days and have no tax obligation for the “rollover.”  This 60 day withdrawal has also been used by some IRA owners to temporarily access IRA funds for short term purposes. An account owner has been allowed to access each IRA account he/she owned once in a 12 month period with no tax consequences as long as the 60 day rule was met. This once per year rule was allowed for each IRA account an individual had.

 

The Change

There has been a major change in these IRA rollover rules beginning January 12, 2015. Now, only one IRA (defined as traditional IRAs, Roth IRAs, SEP IRAs, and Simple IRAs) can be transferred or accessed in the preceding twelve months regardless of the number of IRAs the individual has. A tax court case in early 2014 changed the interpretation of once per year per account to once per year per individual.

The Consequences

The result of this change is that any subsequent transfer or access to another IRA within the same 12 month period will be considered a taxable distribution—subject to income tax and 10% pre-mature distribution tax if applicable (i.e. the individual is under age 59 ½). There are no provisions for remediation of an erroneous second transfer in the same 12 months—the second transfer is taxable.

Consider the following example. An account owner accesses his/her account for a small distribution in March. In January of the following year, the account owner decides to transfer the same (or a different) IRA to another trustee. If the account owner receives the funds for the transfer, the second distribution is a taxable distribution. A significant tax burden may be incurred inadvertently.

Clarifications

Given the complexities involved, some clarifications are warranted. This rule does not apply to rollovers from an employer sponsored plan (401(k), 403(b), etc.) into a self-directed IRA. Rollovers from an IRA back into an employer plan are also exempt. Roth conversions (rolling funds from a traditional IRA to a Roth IRA) are excluded from the rule.

In Summary

In summary, individuals transferring IRA accounts to another trustee should always use a direct transfer (where funds are transferred directly from the old trustee to the new trustee or the check is made payable to the new trustee if it comes to the IRA owner). Short term, 60 day access to IRA funds should be done with great care—only once in any 12 month (not calendar year) period regardless of the number of IRA accounts owned.

We at Paragon Financial Advisors will assist our clients as they prepare for accessing their IRA accounts. Which accounts should be accessed first and asset allocation within accounts for investment purposes can have significant long term implications on your retirement planning. Consult your tax professional if you are contemplating indirectly transferring your IRA in this new year of “promise.”  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Live Long and Prosper

On Monday, October 27, 2014, the Society of Actuaries issued new estimates of life expectancies in the U.S. A 65 year old female has a life expectancy of 88.8 years, an increase of 2.4 years from the 2000 age projection. Males age 65 have a life expectancy of 86.6 years, an increase of 2 years from the 2000 projections. The good news—we’re living longer; the bad news—we’re living longer.


This increase in life expectancy has financial planning implications. Many defined benefit pension plans are currently underfunded. The Society of Actuaries predicts that the underfunded status of these plans could increase between 4 and 8% because of the increased life span. Defined contribution plans—such as 401(k) and 403(b) plans which shift retirement benefits to the employee’s successful management of funds invested—will require a greater time period of income coverage. Such increased coverage should come from increased savings, more aggressive investment management, delayed retirement, reduced spending in retirement, or some combination of all the preceding.


Syndicated columnist Scott Burns provided additional statistics with planning implications. He quoted data from a 2012 study by the Census Bureau that showed what the average group of 65 year olds could expect by age 80:


          Thirty eight (38) percent will have passed away.


          Thirty four (34) percent will have some form of severe disability.


          Nine (9) percent will have some disability.


          Eighteen (18) percent will have no form of disability.  (There is some rounding error in totals.)


The first three categories may require special financial planning problems. Given their relative likelihood, planning now may be a prudent course of action.


We at Paragon Financial Advisors can help our clients as they plan for their “golden years.” Please call us with questions. We do not sell any products (i.e. insurance, etc.) but we will help clients analyze those options available to them.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

IRA Changes

Individual Retirement Accounts (IRAs) have been a popular savings vehicle for a long time (since 1974). They became more popular with the Economic Recovery Tax Act of 1981. Contributions made into an IRA were usually tax deductible (depending on your income level) and grew tax deferred until money was taken from the IRA. There were contribution limits (the smaller of 15% of taxable income or $1500 in 1974 and $5500 today for those under age 50). There are also penalties if the money was withdrawn before age 59 ½. No taxes were due on the earnings until payments were taken from the IRA; that payment was then taxed as ordinary income. There was also a “required minimum distribution” (RMD) at age 70 ½. Failure to withdraw your RMD was subject to a 50% penalty plus ordinary income tax on the amount that should have been withdrawn.


Since contributions were limited, one would think that IRA accounts have modest account values. However, rollovers from corporate benefit plans have been allowed. Such rollovers did not result in a taxable distribution from the benefit plan to the employee, and the rolled amounts could continue to grow tax deferred. The net result is that significant amounts (trillions) of dollars are now contained in IRAs. There have been some recent changes in IRA laws which warrant planning consideration. We discuss some of those below.


Asset Protection

In many states, IRAs were protected assets; i.e. they were not subject to attachment by creditors as long as the IRA was established under the Employee Retirement Income Security Act (ERISA). Such plans had an anti-alienation provision which prevents an employer or plan administrator from releasing benefits to a creditor. In July, 2014, the Supreme Court of the United States ruled that “inherited” IRAs were not protected from creditors. An IRA passed to a non-spousal heir was not protected because the non-spousal owner: 1) could not add to the account, 2)had immediate access to the entire account without penalty, and 3) was required to take annual distributions from the IRA regardless of age. There are still state considerations which may come into play, but the case does show that IRA creditor protection is worthy of planning.

Exemption from Required Minimum Distributions

As previously mentioned, IRAs are subject to a required minimum distribution at age 70 ½. However, there is an exception to that rule. An exemption is given to funds put into a deferred annuity. The IRA owner can purchase an annuity and defer the start of benefit payout until age 80. The purchase amount is limited to the smaller of 25% of the IRA or $125,000. That annuity is excluded in the calculation of the annual RMD amount. The basic intent was to allow the individual to provide guaranteed income protection later in life from the IRA holdings. While such a plan provides protection from minimum distribution requirements, the economic advisability warrants another complete analysis.

Temporary Withdrawals

Currently an IRA owner is allowed to withdraw from an IRA with no tax implications if the total amount withdrawn is replaced into the IRA within 60 days. Such a withdrawal is allowed once every 12 months and can be done from each IRA account. For example, an individual with two IRA accounts could do two such withdrawals and replacements every 12 months with no income tax consequences. That rule will change beginning in January, 2015. After that date, an IRA owner can make only one temporary withdrawal within 12 months from IRA accounts—regardless the number of accounts.

We, at Paragon Financial Advisors, assist our clients in management of their IRAs. If you have questions or concerns about your particular situation, please call us.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Paragon Perspectives

Retirement brings many changes. The old adage of “twice as much spouse and half as much money” is humorous; other aspects of retirement are not. In this issue, we discuss some of the planning issues that retirement brings. We also look at what may lie ahead for rising interest rates.


The first article discusses longevity. No one knows how long they will live, but prudent planning says “run out of time before you run out of money.” There are some things that we can do to plan for an extended life span. Three are discussed in the first article.


The second article explores financial issues surrounding the  death of the first spouse. In many households, one spouse is the primary financial manager. If that spouse dies first, the remaining spouse may be faced with financial decisions at an obviously stressful time. What can be done to remove some of the financial stress? That is the topic of discussion in article two.


Finally, how long can these low interest rates last? No one knows for sure—even the Federal Reserve Board of Governors. However, there are some historical items that might give a clue. The third article shows the historical difference between the rate of inflation and the 10 year U.S. Treasury bond. Looking at the current “spread rate” might provide some indication of what lies ahead.


Sincerely,


Wm. Jene Tebeaux CFP® CFA® CAIA®



If you did not receive a copy of this quarter's newsletter please email info@paragon-adv.com to request a copy. 

Investing Beyond Stocks and Bonds

When you think of “investing”, what comes to mind? Did you think of the US stock market? You might have thought about bonds or other fixed income securities. What about real estate, commodities or other alternative investments? Although less common, they can provide significant benefits when combined with stocks and bonds. How can these investments benefit you? The answer lies in their correlation, or relatedness to other investments. Alternative investments typically have lower correlations with stocks and bonds; they often “zig” when others “zag”. These alternative investments increase the overall diversification of the portfolio, thus reducing risk (i.e., think fewer eggs in a single investment basket). Below are some examples of alternative investments and the importance of their inclusion within a portfolio.

Commodities

Inflation, or the general rise in prices, typically reduces company profits due to an increase in costs (e.g., cost to borrow money, cost of input materials, and cost of transportation). Commodities typically increase in value when interest rates are steady or rising. They may provide the investor a way to benefit when stocks are not performing well. Gold, and other commodities, typically have very low and often negative correlations with stocks. Commodities can also provide significant income from the production and transportation of oil and gas.

Other Investments

Due to the finite and absolute necessity characteristics of real estate, investors can benefit in a number of ways. Investors seeking income may find Real Estate Investment Trusts attractive due to their high yields. Others may prefer investments that benefit from the long-term appreciation of property values. Foreign investments provide exposure to markets less correlated to the United States; other economies sometimes expand when the US economy contracts. Access to frontier and emerging markets allow investors to benefit from faster growing economies and increased consumption from an expanding middle class. Very small companies often provide niche services or goods, frequently sheltering them from adverse events that affect larger companies.

Commodities and other alternative investments reduce risk by increasing exposure to a diverse set of asset classes. They frequently outperform when US stocks and bonds fumble. Although they are typically a small portion of a portfolio, the benefits of inclusion may be significant. In a diversified portfolio, alternative investments should lessen the volatility of the entire portfolio. Despite the correlation benefits, investors must realize that the individual alternative investment may have greater risk than traditional investments.

Have you reviewed your alternative investments lately? We at Paragon Financial Advisors look beyond the realm of US stocks and bonds, seeking investment opportunities across the globe. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.