Articles tagged with: 401k

Is Your Company’s 401(k) Plan as Good as It Could Be?

Two recent court rulings may make you want to double-check.

How often do retirement plan sponsors check up on 401(k)s? Not as often as they should, perhaps. Employers should be especially vigilant these days.

Every plan sponsor should know about two recent court rulings. One came from the Supreme Court in 2015; another, from the U.S. District Court for the Central District of California in 2017. Both concerned the same case: Tibble v. Edison International. 

In Tibble v. Edison International, some beneficiaries of the Edison 401(k) Savings Plan took Edison International to court, seeking damages for losses and equitable relief. The plaintiffs contended that Edison International’s financial advisors and investment committee had breached their fiduciary duty to the plan participants. Twice, they argued, the plan sponsor had added higher-priced funds to the plan’s investment selection when near-identical, lower-priced equivalents were available.1 

Siding with the plan participants, the SCOTUS ruled that under ERISA, a plaintiff may initiate a claim for violation of fiduciary duty by a plan sponsor within six years of the breach of an ongoing duty of prudence in investment selection.1

The unanimous SCOTUS decision on Tibble (expressed by Justice Stephen Breyer) stated that “cost-conscious management is fundamental to prudence in the investment function.” This degree of alertness should be applied “not only in making investments but in monitoring and reviewing investments. Implicit in a trustee’s [plan fiduciary’s] duties is a duty to be cost-conscious.”2,3

Two years later, the U.S. District Court ruled that Edison International had indeed committed a breach of fiduciary duty regarding the selection of all 17 mutual funds offered to participants in its retirement plan. It also stated that damages would be calculated “from 2011 to the present, based not on the statutory rate, but by the 401(k) plan’s overall returns” during those six years.3

The message from these rulings is clear: the investment committee created by a plan sponsor shoulders nearly as much responsibility for monitoring investments and fees as a third-party advisor. Most small businesses, however, are not prepared to benchmark processes and continuously look for and reject unacceptable investments.

Do you have high-quality investment choices in your plan? While larger plan sponsors may have more “pull” with plan providers, this does not relegate a small company sponsoring a 401(k) to a substandard investment selection. Sooner or later employees may begin to ask questions. “Why does this 401(k) have only one bond fund?” “Where are the target-date funds?” “I went to Morningstar, and some of these funds have so-so ratings.” Questions and comments like these may be reasonable and might surface when a plan’s roster of investments is too short.

Are your plan’s investment fees reasonable? Employees can deduce this without checking up on the Form 5500 you file – there are websites that offer some general information as to what is and what is not acceptable regarding the ideal administrative fees.

Are you using institutional share classes in your 401(k)? This was the key issue brought to light by the plan participants in Tibble v. Edison International. The U.S. District Court noted that while Edison International’s investment committee and third-party advisors placed 17 funds in its retirement plan, it “selected the retail shares instead of the institutional shares, or failed to switch to institutional share classes once one became available.”3

Institutional share classes commonly have lower fees than retail share classes. To some observers, the difference in fees may seem trivial – but the impact on retirement savings over time may be significant.3

When was the last time you reviewed your 401(k) fund selection & share class? Was it a few years ago? Has it been longer than that? Why not review this today? Call in a financial professional to help you review your plan’s investment offering and investment fees.  

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

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

Citations.

1 – faegrebd.com/en/insights/publications/2015/5/supreme-court-decides-tibble-v-edison-international [5/18/15]

2 – cpajournal.com/2017/09/13/erisas-reasonable-fee-requirement/ [9/13/17]

3 – tinyurl.com/yd8s2rq3 [8/17/17]

Taking a Loan from Your Retirement Plan = Bad Idea

Why you should refrain from making this move.

Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice about that, because these loans are not only risky but injurious to your retirement planning.

A loan of this kind damages your retirement savings prospects. A 401(k), 403(b), or 457 should never be viewed like a savings or checking account. When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan.

So in borrowing from a 401(k), 403(b), or 457, you siphon down your invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you maybe repurchasing investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense.1

Most plans charge a $75 origination fee for a loan, and of course they charge interest – often around 5%. The interest paid will eventually return to your account, but that interest still represents money that could have remained in the account and remained invested.1

Your contributions to the plan may be halted. Some workplace retirement plans suspend regular employee salary deferrals when a loan is taken. They can resume when you settle the loan.1

Your take-home pay may be docked. Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored.1

If you leave your job, you will quickly have to pay 100% of your loan back. This applies if you quit; it applies if you are laid off or fired. You will have 30-60 days (per the terms of the plan) to repay the loan in full, with interest.2

If you are younger than age 59½ and fail to pay the full amount of the loan back, the IRS will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty.1,2

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.1

Would you like to be taxed twice? When you borrow from an employee retirement plan, you invite that prospect. One, you will be repaying your loan with after-tax dollars. Two, those dollars will be taxed again when you withdraw them for retirement (unless your plan offers you a Roth option).1

Why go into debt to pay off debt? If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks.

You should never confuse your retirement plan with a bank account. Some employees seem to do just that – in 2013, Fidelity researched participants in its retirement plans and found that 66% of those who had borrowed from 401(k)s had done so more than once. No doubt they became acquainted with the above dilemmas in the process.1

In a recent TIAA-CREF survey, 44% of those who had taken loans from their 401(k) plans said they regretted doing so. Why risk joining their ranks? Look elsewhere for money in a crisis, and borrow from your employer-sponsored retirement plan only as a last resort.2

Mike Moffitt may be reached at phone# 641-782-5577 or email:  mikem@cfgiowa.com

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

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

Citations.

1 – cnbc.com/id/101848407 [9/14/14]

2 – mainstreet.com/article/why-you-cant-borrow-your-401k-and-only-way-you-should [7/24/14]

Are You Retiring Within the Next 5 Years?

What should you focus on as the transition approaches?

You can prepare for your retirement transition years before it occurs. In doing so, you can do your best to avoid the kind of financial surprises that tend to upset an unsuspecting new retiree.

How much monthly income will you need? Look at your monthly expenses and add them up. (Consider also the trips, adventures and pursuits you have in mind in the near term.) You may end up living on less; that may be acceptable, as your monthly expenses may decline. If your retirement income strategy was conceived a few years ago, revisit it to see if it needs adjusting. As a test, you can even try living on your projected monthly income for 2-3 months prior to retiring.

Should you try to go Roth? Many pre-retirees have amassed substantial retirement savings in tax-deferred retirement accounts such as 401(k)s, 403(b)s and traditional IRAs. Distributions from these accounts are taxed as ordinary income. This reality makes some pre-retirees weigh the pros and cons of a Roth IRA or Roth 401(k) conversion for some or all of those assets. You may want to consider the “Roth tradeoff” – being taxed on the amount of retirement savings you convert today in exchange for the ability to take tax-free withdrawals from the Roth IRA or 401(k) tomorrow. (You must be 59½ and have owned that Roth account for at least five years to take tax-free distributions.)1

Should you downsize or relocate? Moving to another state may lessen your tax burden. Moving into a smaller home may reduce your monthly expenses. In a perfect world, you would retire without any mortgage debt. If you will still be paying off your home loan in retirement, realize that your monthly income might be lower as you do so. You may want to investigate a refi, but consider that the cost of a refi can offset the potential savings down the line.

How conservative should your portfolio be? Even if your retirement savings are substantial, growth investing gives your portfolio the potential to keep pace with or keep ahead of rising consumer prices. Mere gradual inflation has the capability to erode your purchasing power over time. As an example, at 3% inflation what costs $10,000 today will cost more than $24,000 in 2045.2

In planning for retirement, the top priority is to build savings; within retirement, the top priority is generating consistent, sufficient income. With that in mind, portfolio assets may be adjusted or reallocated with respect to time: it may be wise to have some risk-averse investments that can provide income in the next few years as well as growth investments geared to income or savings objectives on the long-term horizon.

How will you live? There are people who wrap up their careers without much idea of what their day-to-day life will be like once they retire. Some picture an endless Saturday. Others wonder if they will lose their sense of purpose (and self) away from work. Remember that retirement is a beginning. Ask yourself what you would like to begin doing. Think about how to structure your days to do it, and how your day-to-day life could change for the better with the gift of more free time.

Many retirees find that their expenses “out of the gate” are larger than they anticipated – more travel and leisure means more money spent. Even so, no business owner or professional wants to enter retirement pinching pennies. If you want to live it up a little yet are worried about drawing down your retirement savings too fast, consider slimming transportation costs (car and gasoline expenses; maybe you could even live car-free), landscaping costs, or other monthly costs that amount to discretionary spending better suited to youth or mid-life.

How will you take care of yourself? What kind of health insurance do you have right now? If your company sponsors a group health plan, you may as well get the most out of it (in terms of doctor, dentist and optometrist visits) before you leave the office.

If you retire prior to age 65, Medicare will not be there for you. Check and see if your group health plan will extend certain benefits to you when you retire; it may or may not. If you can stay enrolled in it, great; if not, you may have to find new coverage at presumably higher premiums.

Even if you retire at 65 or later, Medicare is no panacea. Your out-of-pocket health care expenses could still be substantial with Medicare in place. Long term care is another consideration – if you think you (or your spouse) will need it, should it be funded through existing assets or some form of LTC insurance?

Give your retirement strategy a second look as the transition approaches. Review it in the company of the financial professional who helped you create and refine it. An adjustment or two before retirement may be necessary due to life or financial events.

Mike Moffitt may be reached at ph# 641-782-5577 or email:  mikem@cfgiowa.com

Website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

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

Citations.

1 – turbotax.intuit.com/tax-tools/tax-tips/Retirement/The-Tax-Benefits-of-Your-401-k–Plan/INF22614.html [5/7/15]

2 – investopedia.com/articles/markets/042215/best-etfs-inflationary-worries.asp [4/22/15]

 

IRS Raises Retirement Plan Contribution Limits

Roth & traditional IRAs won’t get 2015 COLAs, but other plans will.

A little inflation means a little adjustment. As the Consumer Price Index is up 1.7% over the last 12 months, the federal government is giving Social Security benefits a 1.7% boost for 2015 and lifting annual contribution limits on key pension plans as well.1

401(k), 403(b), 457 & TSP annual contribution limits increase by $500. You will be able to defer up to $18,000 into these plans in 2015. The catch-up contribution limit will also rise by $500 to $6,000 next year, so if you are 50 or older in 2015 you are eligible to contribute up to $24,000 to these retirement savings vehicles. (The above adjustments do not apply to all 457 plans.)2

SIMPLE IRAs get a similar COLA. Their base contribution and catch-up contribution limits also go up $500 for 2015. The limit for the base contribution will be $12,500 next year, and the catch-up limit rises to $3,000.3

Limits also rise for SEP-IRAs and Solo(k)s. Small business owners will want to take note of the new maximum deferral amount of $53,000 for 2015, a $1,000 increase. As for the compensation limit factored into the savings calculation, that limit will be $265,000 next year, $5,000 more than the 2014 limit. A side note: the threshold for an employee to be included in a SEP plan goes up $50 to $600 next year (i.e., that worker has to receive $550 or more in compensation from your business in 2015).2,3

Take note of the slightly higher phase-out range for Roth IRA contributions. Next year, you won’t be able to make a Roth IRA contribution if your AGI exceeds $193,000 as a married couple filing jointly, or $131,000 should you be a single filer or head of household. Those figures are $2,000 above the 2014 eligibility thresholds. Joint filers with AGI of $183,001-193,000 and singles and heads of household with AGI of $116,001-131,000 will be able to make a partial rather than full Roth IRA contribution next year.3     

Phase-out ranges on the deduction of regular IRA contributions have also been altered. Here are the 2015 adjustments to these thresholds (this gets pretty involved). If you are a single filer or file as a head of household and you contribute to a traditional IRA and you are also covered by a workplace retirement plan, the AGI phase-out range for you is $1,000 higher next year ($61,001-71,000). If you file jointly and contribute to a traditional IRA and are also covered by a workplace retirement plan, the AGI phase-out range is $98,001-118,000. Above the high end of those phase-out ranges, you can’t claim a deduction for traditional IRA contributions.2

If you contribute to a traditional IRA and your employer doesn’t sponsor a retirement plan, yet your spouse contributes to a workplace retirement plan, the AGI phase-out on deductions of traditional IRA contributions strikes when your combined AGI ranges from $183,001-193,000.2

And if you are married, filing separately and covered by a workplace retirement plan, the phase-out range on deductions of traditional IRA contributions is $0-$10,000 (this never receives a COLA).2,3

AGI limits for the Saver’s Credit increase. Americans saving for retirement on modest incomes will be eligible for the credit next year if their AGI falls underneath certain thresholds: single filers and marrieds filing separately, adjusted gross income of $30,500 or less; heads of household, AGI of $45,750 or less; joint filers, $61,000 or less.3

Contribution limits for profit-sharing plans rise as per limits for 401(k)s. A participant in such a plan is looking at a 2015 elective deferral limit of $18,000 ($24,000 if s

Mike Moffitt may be reached at phone# 641-782-5577 or mikem@cfgiowa.com or website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC.  Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor.  Cornerstone Financial Group and AIM are separate entities from LPL Financial.

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

Citations.

1 – tinyurl.com/lxbv6rq [10/21/14]

2 – irs.gov/uac/Newsroom/IRS-Announces-2015-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$18,000-to-their-401%28k%29-plans-in-2015 [10/23/14]

3 – forbes.com/sites/ashleaebeling/2014/10/23/irs-announces-2015-retirement-plan-contribution-limits-for-401ks-and-more/ [10/23/14]

4 – irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions [10/23/14]

he or he is old enough to make catch-up contributions). The yearly compensation limit on such plans will be $5,000 higher in 2015 at $265,000.4

 

The Right Beneficiary

Who should inherit your IRA or 401(k)? See that they do.

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or annuity? You may be able to answer such a question quickly and easily. Or you may be saying, “You know … I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit – perhaps more than a bit?

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.
In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

Beneficiary designations commonly take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she is in line to receive the death benefit when you die, regardless of what your will states. Beneficiary designations allow life insurance proceeds to transfer automatically to heirs; these assets do not have go through probate.1,2

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)
How your choices affect your estate. Virtually any inheritance carries a tax consequence. (Of course, through careful estate planning, you can try to defer or even eliminate that consequence.)

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.3

When the beneficiary isn’t your spouse, things get a little more complicated for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of his or her taxable estate, and his or her heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.4

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.5

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give me a call or send me an e-mail – I’m happy to help you.

Michael Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

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

Citations.
1 – smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]
2 – www.dummies.com/how-to/content/bypassing-probate-with-beneficiary-designations.html [1/30/13]
3 – www.nolo.com/legal-encyclopedia/estate-planning-when-you-re-married-noncitizen.html [1/30/13]
4 – individual.troweprice.com/staticFiles/Retail/Shared/PDFs/beneGuide.pdf [9/10]
5 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes [8/1/12]

Income inequality and your investment account

A new article came out recently stating that the top 1% of the world population controls $110 trillion of wealth. http://www.oxfam.org/sites/www.oxfam.org/files/bp-working-for-few-political-capture-economic-inequality-200114-summ-en.pdf . I understand that many folks consider this a travesty, but before they get too excited about righting this inequality of wealth, they need to actually “run the numbers” and try to avoid being a hypocrite.

Upon doing a little math, I found many of my clients are in that top 1%. That’s right! Before you get too impressed, consider this: the richest 1% globally control $110 trillion of wealth. There are 7 billion people on earth, so $110 trillion divided by 7 billion equals about $1.5 million each. A farmer client who owns 240 acres of Iowa land (a small farm for those who might not know) or a small business person who owns her business debt free, along with a home and a $500,000 401k, could also fall in that 1%. Heck, a person who can save $275/month and increases that with the inflation rate can get to $1.5 million by retirement age.¹

So to be more fair to the less rich, let’s just take from the “super rich”. That would probably do it, right? Well, according to Forbes list of richest people in the world, the top 50 have roughly $1.2 trillion of wealth.² If you confiscated ALL their wealth, it wouldn’t come close to paying down the total public (government) debt in the world of $52.6 trillion (http://www.economist.com/content/global_debt_clock). It wouldn’t even pay the interest on the debt! And, the $1.2 trillion spread out evenly over every man, woman and child on earth, would give everyone $171.43. Would that pay your cell phone bill for 5 months? Or if you confiscated ALL the wealth of the top 1 percenters and spread it out evenly, everyone would get $15,714.28. For those in third world countries who face REAL poverty, that’s certainly a lot. But in the U.S., although it’s considered poverty, it’s not enough to help most people for any length of time.

How does this affect your investments? When the government attempts to help those in poverty, it spends money on social programs. Since it doesn’t currently bring in enough money through taxes, it borrows the difference from investors with help from the Federal Reserve (our banking system in the U.S.)

Our Federal Reserve creates money out of thin air (“prints” money to increase the money supply) and has been using that money to buy U.S. government-backed debt. That extra money enters our economy.³ Some of it ends up in the hands of citizens. Some spend it, but some save it. For those who save it, some ends up being invested in stocks, some in their businesses, and some in real estate, among other places. This typically pushes asset values higher, which makes those people appear richer….on paper.

They may not be poor but many of them saved that money themselves and they don’t consider themselves rich. When the stock market last crashed, in 2008-2009, many of those people lost nearly 50% of that wealth. Not all of those folks were born with a silver spoon in their mouth. Their plans for a successful retirement hinge on a decent 401k and Social Security. And Social Security is funded by a trust fund expected to be exhausted in around 20 years, with the source of this information being the 2013 Annual Reports summary on the Social Security website itself (http://www.socialsecurity.gov/oact/TRSUM/tr13summary.pdf) and run by a government that is $17 trillion in debt (http://www.treasurydirect.gov/NP/debt/current). The unfunded (future) liabilities of the United States government are projected to be over $127 trillion…more than $1.1 million for every taxpayer alive today.4

So as easy as it is to despise rich people, not all are evil and taking from them won’t come close to solving the problem anyway. And as much as we’d like to think government is the answer, not all government is good and as the debt increases, it probably means much larger problems and much less wealth for everyone when the bubbles pop again like some did in 2008-2009.

Towards that end, we run what-if stress testing scenarios for our clients simulating multiple economic events that could impact their life’s savings, helping them understand the very REAL consequences of actions by governments, terrorists, and the like. Being informed about, and in charge of, your portfolio is the best way to understand and deal with the certainty of uncertainty that affects our life.

Finally, if you really think that rich people have more influence over government than poor people, you may be right. But by that logic, we should all vote for smaller government. There would be fewer people in the government to influence and a chance to reduce the federal debt, which may help save Social Security in the future for us and our kids. If we achieve wealth equality, we’ll need it!

¹annual interest rate 7.5% for 45 years, increasing contributions by an inflation rate of 2.5% and compounding annually. For illustrative purposes only. Not based on any specific investments. Investing in securities involves risk, including potential loss of principal.

² http://www.forbes.com/billionaires/list/

³http://www.independent.com/news/2012/feb/25/how-us-federal-reserve-creates-and-destroys-money/

4http://www.usdebtclock.org/

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

Investing involves risk including loss of principal.