The Fiscal Blueprint: Retirement Built Right w/ Financial Coach Jeff Montgomery

3 Reasons Why I'm Hopeful, Even Optimistic

(1) in modern times , The human race has never before faced a SINGULAR enemy. And we are responding, in unison, in record numbers!

By my estimates, somewhere between 100 - 200 million physicians, scientists, nurses, technologists, engineers are all taking aim at this pandemic.

They are running tens of thousands of experiments in parallel and sharing information with a transparency and at speeds we've never seen before.

These advancements may seem deceptively few at the moment (as we are only hearing about the earliest treatments), but thousands of additional impromptu experiments and therapeutic approaches are being initiated globally, across hospitals, doctors' offices and research labs.

As these experiments bare fruit and yield data, I have little doubt that we will experience a tsunami of solutions that will disrupt and decimate this pandemic.

One snippet from a recent NYTimes article encapsulates this optimism perfectly:

"While political leaders have locked their borders, scientists have been shattering theirs, creating a global collaboration unlike any in history.

Never before, researchers say, have so many experts in so many countries focused simultaneously on a single topic and with such urgency. [...]

Normal imperatives like academic credit have been set aside. Online repositories make studies available months ahead of journals. Researchers have identified and shared hundreds of viral genome sequences. More than 200 clinical trials have been launched, bringing together hospitals and laboratories around the globe."

United by urgency, scientists are casting aside nation-specific territorialism, research secrecy, and academic publishing politics.

At the same time, government approval processes for clinical trials are now expedited at a historic pace. And online archives of pre-published academic research, such as medRxiv and bioRxiv, are being flooded by scientists from every corner of the globe.

New diagnostics, antivirals, vaccines, and therapeutics are rushing towards society at exponential speeds..

(2) It could have been MUCH worse — we'll be prepared for next time.

Imagine if the COVID-19 virus had the mortality rate of Ebola (25% to 90%), or even SARS (11%+), while maintaining its high infectious rate.

A lot of people treat this virus today as if it's a death sentence. Yet it's not for the vast majority of people. For many, it is a severe cold.

When Bill Gates and a multitude of scientists (e.g. Dr. Larry Brilliant) warned us about pandemics over the past decade, the majority of society ignored these warnings. We didn't prepare… at all.

I think of COVID-19 as a "practice pandemic," making us brutally aware of the failure points and weak links in our economic system, healthcare complex and communication channels.

Next time — and there will be a next time — we will be ready. A slew of exponential technologies, ranging from AI, networks & sensors, to CRISPR and gene therapy, will be there to detect it immediately, creating solutions and distributing them globally at lightning speeds.

(3) There are compelling opportunities ahead...

We are in the midst of a fear and virus-driven economic meltdown, yet once we make it through to the other side, there are going to be incredible opportunities for entrepreneurs.

These opportunities take two forms:

• First, countless outstanding employees are losing their jobs (and my heart goes out to them), and the faster we digitize, the sooner one can harness this extraordinary talent, newly available in the near future;

• Second, the stock market will soon be ripe with the best buying opportunities we've seen in a dozen years!

Bottom line, after the economic crash of 2008, what followed was a period of economic growth.

What also followed was the birth and boom of revolutionary business models and startups (Airbnb, Uber, Groupon, WhatsApp, Venmo, Slack, Square...)

We may well have another "Roaring Twenties" coming our way (once again), one that uplifts all of society.

Netflix added 15.8 million paying customers last quarter, more than double predictions, because if you didn't have a hot take about Doc Antle you were no good to anybody

Video games sales increased 35% annually in March to 1.6 billion

Domino's blew away revenue and and earnings forecasts for this past quarter

Other ideas:

1. Could this bring the cost of college down? College rate of inflation is roughly 8% per year. Where normal inflation is for the last 25 years maybe around 2%Online learning platforms have sprung up.
2. 2 trillion in stimulas effect. Now 2.5 trillion. That's going to create a lot of wealth
3. Manufacturing being brought back to the us.

Personal level:

1. In a time of social distancing it's had a strange irony that it actually has brought people closer together. Especially family.
2. Most of the people I've talk to their relationships have gotten stronger.
3. Opportunity to find new hobbies
4. Opportunity to exercise because of boredom. You know before we had competition for our time. We could go out to dinner we could hang out with friends and we might forgo hobbies or exercise to do those things.
5. Reading more!
6. Relaxing more!
7. Great time to re-evaluate your priorities. What's important to you? Life values and Life goals. Maybe the things you were spending your money on and now you can't spend that money.....maybe it wasn't that important in the first place.
8. Review your plan, cash flow, liquidity needs, emergency funds, portfolio
9. Opportunity for getting some good deals: home improvement help contractors and get a good deal at the same time, landscaping projects.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you're a client I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that's just common sense.

Everywhere you look someone's screaming about it or writing an alarming article about the new SECURE ACT! Microphones and media today are guilty of manipulating the masses in the exact same way. The truth is, many of you are likely here [today/tonight], concerned that something called The SECURE Act might leave you quite unsecure financially.

So let's take a few minutes together here and unpack this thing in language that everyone here can easily understand…because while everyone else is telling you to brace yourselves, I'm telling you that there are really only a few things that 99 percent of you listening really need to concern yourselves with, and the rest? It is complete hype.

(1:00) Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you're a client I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that's just common sense.

(1:20) Practical Planning Segment

The Coronavirus: This has been all over the news, and we know that some folks are nervous (both about the market reaction as well as about the actual virus.) So let's lend some perspective from some previous epidemics.. Obviously, past performance is not necessarily an indication of future results, and Coronavirus can certainly be different. But, we think its important to take these into account to hopefully ease some concerns.

The Avian flu: the 6 months after the pandemic was reported, the S&P was up 10.6%, 18% after 12 months. Another example from April of 2003: SARS. The next 6 months the S&P was up 14%; the next 12 months, the market was up 20%. The ZIKA virus of 2016: The market recovered by 12% over the following 6 months and 17% over the next 12 months.

Now, a negative example: AIDS in 1981: The market declined 16% in the following 12 months.

It's hard not to look at your portfolio and feel some sort of pain when watching it decline. Naturally, our instincts want to have some sort of control over this essentially uncontrollable situation. So, we recommend to our clients and we encourage folks to take a step back and ask if your reaction is emotional or logical? What is the big picture?

Go back to your original target, risk tolerance and plan for your portfolio and try to stick to that strategy! Maybe it's time to re-balance! This strategy is based off math & science, not emotion!

(13:00) SECURE ACT Q&A

Are existing Stretch IRAs grandfathered in? Yes! Short answer. If you have an existing Stretch IRA or if the person died in 2019 then the old Stretch Rules still apply.

(16:00) So, do I understand correctly that I can now wait until age 72 to take my first RMD? It depends on if you are already taking your RMD. In other words, did you turn 70 ½ last year in 2019? If you did then you must take your 1st RMD either last year or you have until April 1st of the year after you turned 701/2 SO that's this April. If you did not turn 70 ½ last year then you can wait until the year you turn 72 or by April 1st of the year after 72.

(18:15) If I inherit my mother's IRA but I pass away before the 10-year period is up can I name my child, the beneficiary and she get a new 10-year period? YES, YOU CAN NAME HER THE SUCCESOR BENEFICIARY BUT No. the original 10-year period must be honored

(22:40) So, is it your understanding that Gov plans, are not subject to the Secure Act RMD rules unless the employee/participant dies in 2022 or after? Yes……………. Includes 403(b) and 457 plans SPONSORED by government entities. Such plans can also be sponsored by other entities, such as non-profit groups. But yes, if they are sponsored by a governmental entity and the participant dies before 2022, the 'old' rules still apply!

Sources: https://www.financial-planning.com/news/secure-act-tax-law-change-undermines-stretch-iras

https://www.cnbc.com/2020/02/03/new-stretch-ira-rules-could-make-this-type-of-trust-more-popular.html

The Wall Street Journal reported, "Congress is Coming for your IRA." Source: https://www.wsj.com/articles/congress-is-coming-for-your-ira-11562713559. Accessed 12/27/19. Forbes published an article called, "The Hidden Money Grab in the SECURE Act." Source: https://www.forbes.com/sites/jlange/2019/06/11/the-hidden-money-grab-in-the-SECURE-act/#6e577e833bbd. Accessed 12/27/19. MarketWatch read: "How the SECURE Act could create a disaster." Source: https://www.marketwatch.com/story/inheriting-a-parents-ira-or-401k-heres-how-the-SECURE-act-could-create-a-disaster-2019-12-26. Accessed 12/27/19. Retirement Watch reported it could be a "Retirement Bombshell" [The Facts on The SECURE Act]. Source: https://www.retirementwatch.com/offer/rw-retirement-doomsday?source=RWDD16&gclid=CjwKCAiA9JbwBRAAEiwAnWa4QxL_QCeI6q7HeyUL3HFauhfQOExNYPi3miB8YkPP84X8P5tiLThgzhoCKTcQAvD_BwE. Accessed 12/27/19.

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

(1:40) Practical Planning Segment: This is a topic that obviously doesn't appeal to a vast audience and YES, I guess I'm kind of a nerd and like to learn new things and find this stuff interesting. However, we can tell by the number of podcast downloads what shows are popular and what shows are not J and suffice it to say these last few shows aren't breaking any ratings records

So, lets tackle LLCs and S Corps and wrap up this series! Let's start with LLCS and our format has been to:

1. give a quick overview of how they work and are formed
2. Talk about taxation
3. Talks about liability

So, as a quick overview, LLC's are created under State Law, not federal law. The precise rules will vary from State to State. They are designed to try to get the best of both pass through taxation like Sole Proprietorships and Partnerships but also have a measure of liability protection at the same time.

You will file Article of Organization typically completed by a lawyer to the secretary of state of your state. Article must include the following:

• LLC's name and address
• Names of the members of the LLC (usually the owners)
• The nature of the business
• Name and address of the registered agent

Side notes as well……. if you plan to do business in another state other than the one where the LLC is formed you may have to file with that state as well.

Also, as mentioned last week with a partnership. If your LLC is going to have multiple owners/members, you should create an operating agreement as well. Just like the partnership entity with the same basic characteristics

1. How expenses will be divided
2. How profits will be allocated. Many times, there are multiple partners with different ownership percentages
3. How and when profits will be distributed. Sounds like item 3 but as well soon find out how profits are distributed is not always the same as how profits are allocated
4. The division of tasks within the business. Who does what?
5. Under what instances can one partner sell his or her interest in the partnership
6. What occurs in the event of a partner's death, disability, etc.?
7. And how will major disagreements be handled and resolved

(6:20) Taxation: Well this is simple! As far as the Feds are concerned LLC's don't really exist. The Internal Revenue Code treats LLCs as if it were SP's or Partnerships as Pass Through entities. The income passes through to their personal tax returns.

Now there is a little wrinkle in the fact that an LLC can elect to be taxed as a C-Corp or and S-Corp… which we will get into in a little bit when we talk about those entities. There could be some tax advantages to electing to file your taxes as an S Corp or C Corp. (Refer to our last few shows on how partnerships and Sole Proprietorships are taxed)

(7:30) Liability: Generally speaking, the reason to form an LLC is to obtain some protection from unlimited liability. Sole Proprietorships and General Partnerships as we mentioned last week have Unlimited liability, meaning that the owners could be held personally liable for all debts and lawsuits of the business itself. With an LLC, that protection is afforded to the owners and in general the LLC does a pretty good job. Rather than talk about all the ways it protects owners let's talk about what it doesn't protect:

1. Not Protected! Personally guaranteeing business debt; Many start up need to borrow funds and when a new company goes to a bank chances are the bank it going to require the owners to sign personally for the loan.
   1. So, the lender will be able to hold the owner personally liable

1. Not Protected! Liability resulting from a Tort- legal term referring to wrongful acts that result in legal liability to someone
   1. Negligence and Fraud

(9:45) Corporations: If you are looking at it from a 30,000-foot view, Corps are either a C-Corp or an S-Corp. The only difference is how they are taxed!!!!

You can do the research and form a corporation on your own, but most would hire an attorney or possibly even use an online service. What makes the situation different than an LLC or other entities is the level of complexity in the formation. Requires more things with the potential of those things getting messed up. I would recommend using an attorney that is familiar with forming corporation

It's also probably a good idea to get your tax professional involved as well especially if you are transferring from one type of entity to the other. Corps are separate entities from owners and when you transfer assets to the corporation there could be some type of tax consequence.

Sounds like a big headache. So why would you want to go that route and not the LLC route? The simple answer is again liability and possibly taxation.

(11:41) Taxation: C-Corporate taxation is different than S-Corp taxation and is unique in that the corporation ITSELF is subject to income tax. Unlike SP, P's, and LLCs where the owners are subject to income tax, which are pass through entities. C-Corps are not!

C-Corp income tax is unaffected by the number of owners (called shareholders) it has or how much profit is distributed to the owners. The Corporate tax rate was lowered by the passage of tax cut and jobs act 2017 and lowered it to 21% flat tax. Prior to that it was a progressive tax just like individual have.

Now when a corp makes a distribution of profits to its owners/shareholders called a dividend and those shareholders pay tax on those dividends. In other words, Corporate profits are TAXED twice! At the corporate level and when /if profits are distributed to the shareholders as dividends

So, as a result of this taxation C-Corps are NOT USUALLY advantageous compared to pass thru entities. One way to avoid this double taxation is for the Corp to pay the owners a salary or year-end bonus that would leave the corporation with exactly ZERO income!

Salaries paid to employees count as deductions to the corp. Now , of course, the amount received as a salary or bonus to the employees will be taxed as ordinary income.

Still don't see the advantage??? Well in certain situations where there are "high earning" owners of a business that be taxed at 37% and they do not need that amount of income to pay personal bills and live. They could choose to organize as a C-corp and leave those profits in the business.

(16:30) Income splitting; so, they would split the profits………. pay themselves a salary taxed as ordinary income rates and leave the rest in the corporation taxed at those lower flat tax rates. The profit is either never distributed or distributed later when the owners is in a much lower income situation and faces a 0% tax rate on dividend's

(17:30) Liability: For most legal purpose's corporations are distinct entities. They can own things, rent stuff, sure or be sued……. etc.

The reason behind making them distinct entities' is that it allows the owners to NOT WORRY about being personally liable for the debts of the business………that includes lawsuits………. outside of Torts mentioned earlier.

This is one of the fundamental elements that makes our economic system the best in the world! Without this protection it would be hard to imagine anybody investing in a McDonalds, Chipotle, Boeing, Apple, Amazons, etc. Could you imagine being sued as an investor (owner) of McDonald stock if someone got sick at one of the restaurants and being held personally liable?

If a corporation didn't offer that protection hardly anyone would ever invest in new companies and our way of life would be dramatically different!

(19:10) S-Corps and some of the differences compared to a C Corp. S-Corps are simply C-Corps that have elected to receive a special kind of tax treatment. The only difference between S Corp and C corps is taxation

Electing S Corp taxation is as simple as filling out a single tax form 2553. There are some eligibility requirements to elect this type of taxation (example no more than 100 shareholders), etc. So, double check ALL the rules

S CORPS, like partnerships and LLCs, are pass through entities. NO FEDERAL TAX AT THE CORPORATE LEVEL!

The big benefit here is NO SELF EMPLOYMENT TAX for the shareholders (owners.) Yes, when you are self-employed the full share of the tax is your responsibility 15.3%. If you recall when you work for an employer and earn a salary/wages, you pay half and the employer pays the other half

Well with an S-corp you as the owner and also an employee has to pay yourself a "reasonable salary" ………. not well defined and very ambiguous from the IRS.

(21:00) So, what's a reasonable salary? This is often the topic of debate in tax court when the IRS challenges a business owner on the amount of salary, they are paying themselves. So be wary and make sure you are paying yourself a reasonable salary!!!

But everything else (profits) from the business can be paid out to the owners without the extra 15.3% SE TAX.

Of course, remember no matter what, the profits are taxed as income whether they are distributed or not BUT you avoid the extra 15.3% SE tax.

WORD OF CAUTION! Definitely consult with your tax advisor and make sure you really nail down an appropriate amount of "reasonable compensation!!!!

(23:00) Coachable Segment: We have an offer for the listening audience for the next 30 days after this show is published for the first time.

For those of you that made it this far through the show ………… I will mail you a FREE copy of Mike Piper book titled LLC vs S-Corp vs C-Corp explained in 100 pages or less.

Mike is known in the industry for his series of books explaining difficult subjects in 100 pages or less. They are really well written and easy to read very quickly

So, this is a closed offer and expires in 30 days for US residents only. All you must do is send us an email to [email protected] and in the subject line just write "Great Show! Send me my free book!" Don't forget your mailing address and we will ship your free copy of Mikes Book!

(US Residents only)

Final Disclaimer: "We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

To continue our discussion of different legal structures for your business, today we are going to tackle partnerships. Have you ever been asked to join a business? Maybe you already have a business and are thinking about bringing on a new partner. There are a few things to consider: Taxes, liabilities, & succession. Let's dive right in!

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to advise clients. So, unless you're a client I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that's just common sense.

(1:47) Practical Planning segment: As you'll soon see, partnerships are very similar to Sole Proprietorships in many ways, beginning with how they are formed. Remember last week when we said in an SP from the Federal govt perspective you just need to start doing business?

Overview: Well, a partnership is automatically formed when 2 or more people go into business. No official documentation is needed for a partnership to be formed.

However, there is one thing you will need from the Fed govt perspective that's different from the SP. You will need to get an EIN employer identification number commonly called a Tax ID number. As mentioned last week, obtaining an EIN is fast and free. Go to IRS.Gov and search for the EIN application.

Also, just like SP's you will most likely face some local requirements such as licenses and DBA forms which we discussed in last week's show. Partnerships almost always have a name that is separate from its owners

So far partnerships are simple much like SP's. Now let's talk about something that is not required when forming a partnership but is nonetheless recommended and very important….

(5:00)A partnership agreement. If you plan on going into business with someone, don't you think it's smart to have some type of agreement between the parties? I'm sure there are certain items you want to make sure are in that agreement.

This is where the help of a professional may be a good idea rather than a DIY approach. However, if you go the DIY route, at the very least you should have the following:

1. How expenses will be divided
2. How profits will be allocated. Many times, there are multiple partners with different ownership percentages
3. How and when profits will be distributed. Sounds like item 3 but as well soon find out how profits are distributed is not always the same as how profits are allocated
4. The division of tasks within the business. Who does what?
5. Under what instances can one partner sell his or her interest in the partnership
6. What occurs in the event of a partner's death, disability, etc.?
7. And how will major disagreements be handled and resolved

For example, let's say we have a business with two partners and each partner is married and has a spouse. If one partner passes away most likely the deceased partner's spouse would inherit that share of the business. Well, what if the existing partner doesn't want to work with the spouse?

How is that potential conflict remedied? Well, it should be spelled out in the operating agreement. And how that is typically handled is a buyout from the surviving partner to the deceased partner's spouse.

(10:45) How is that funded? Depending on the buyout amount, of course, it could come from personal assets of the surviving partner being paid to the spouse. IF we are talking about a successful business worth a lot of money that it is typically funded by a life insurance contract on each partner and a change in the operating agreement explicitly mentioning how those proceeds are to be paid to exercise the buyout provision. This is commonly called a buy/sell agreement

(12:00) Taxation: Partnerships themselves are not subject to federal income tax………instead just like SP's they are pass-through entities. Each of the partners taxed on their share of the income. Remember, on an SP they would use schedule C to calculate profit and loss? Well, partnerships would use Form 1065.

They would list all revenues and all expenses on page 1, answers some questions on pages 2 and 3 and the 4th page of form 1065 is called a schedule K and K-1.

Schedule K breaks down all the income categories like ordinary business income, maybe some rental income on the property the business owns, interest income from savings accounts possibly, etc.

Then K-1 breaks down each partner share of that income which is then carried over to each of their 1040's. Pretty Simple!

SE TAX of 15.3%: Just like from an SP the ordinary business income from a partnership is generally subject to SE tax when passed through as well

(14:20) Do they get that deduction we talked about for ½ of the tax paid? Yes, but remember it's a tax deduction, not a tax credit.

And, just like an SP each partner can take an additional deduction of 20% until 2025 based on the tax cut and jobs act of 2017. Again, it's important to talk to your tax advisor to see if the business itself qualifies for that 20% deduction and whether there are other limitations for income, etc.

So Definitely consult your tax advisor on those thresholds and to see if your business qualifies for that additional 20%

One other important note to talk about regarding taxation for partnerships is something called tax basis. Which is essentially what you invested in the business to get it started.

Often a surprising thing happens around tax time with partnerships and owners of those partnerships when first formed and they complete their first tax year...

(16:00) Partners get taxed on their share of the profits even if those profits are not distributed to them personally. Profits from the business don't always get distributed. Sometimes they stay in the business to be used later. Well, of course, those profits don't escape taxation.

So, as a general rule………owners get taxed on their share of the taxable income regardless of how much is distributed

However, they are not taxed by the amount of the distributions received unless those distributions are more than the tax basis mentioned earlier.

The tax basis changes based and increases on amounts invested by the partners, a partner share of taxable income and its decreased by partnership losses and distributions they receive.

(18:00) Liability: Ok well it's probably obvious that before you form a partnership with someone, you should make sure you trust that person implicitly!

Why is this so important in a partnership? Because……… you have UNLIMITED LIABILITY EVEN FOR EACH OTHER!

In a general partnership, each partner has unlimited liability for all the partnerships debts. This is different from a limited liability partnership which we'll discuss in a second.

It's exactly like in an SP with one critical difference: You're responsible for all debts of the business even if you didn't create them

(19:14) For example; let's say two people own a restaurant together and one of the partners decides to expand on his or her own without the other partner's knowledge and signs a lease for a new location or worse yet buys a location with partnership assets and debt.

The partner that knew nothing about this now liable for those debts.

Partners are agents for the business. What this means is each parent can be held responsible for liabilities resulting from a lawsuit or stemming from a contract signed by one without the other's knowledge. Another reason to have this spelled out explicitly in the partnership agreement

Usually, when someone uses the word partnership, they are talking about a general partnership. However, with a Limited Partnership, there must be at least one General Partner with Unlimited liability………. the other partners could be Limited Partners with limited liability

So, limited partners much like shareholders of a company cannot lose more than their investment in the partnership You might ask why everyone wouldn't want to be a limited partner……. Well, one important rule with a limited partnership is you cannot participate in the day to day decisions and operations of the partnership. If they do, they will lose their limited liability status. Typically, GPs are the original founders and LPs are usually just investors.

(22:00) Coachable Segment: Let's run through everything we just learned in a quick summary:

1. If owners don't take any action to incorporate or form an LLC, a multiple owner business will be a partnership by default
2. P must obtain an EIN and usually are required to file a DBA
3. It's not required but a really good idea to create a partnership agreement
4. Like SP's, partnerships are pass-through entities for taxation purposes
5. Form 1065 is used to calc profit and loss and schedule K and K1 are part of form 1065 and break down the partnership's income and each partner share of that income
6. Ordinary business income is subject to SE tax when passed through to each partner
7. In a Partnership, partners are taxed upon their allocated share of taxable income even if it's not distributed
8. Partners are not taxed on the amount of the distributions received unless those distributions are more than their individual tax basis.
9. In general, each partner has unlimited liability for all partnership debts
10. Each partner is an agent of the partnership and has the power to bind the partnership to a contract within the scope of the business
11. In an LP limited partners are essentially investors and have limited liability
12. LPs must have at least one General Partner
13. LP's cannot engage in the management or day to day operations of the partnership

Final Disclaimer: "We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

Montgomery Financial Services

Are you thinking about starting a business in 2020? Maybe you've had an idea for a long time and now you feel like you are finally ready to implement that idea. Maybe you recently retired from your field of expertise and are thinking about starting your own consulting business.

How you decide to structure your business is critical and can affect all kinds of things from taxes on your profits, potential lawsuits, succession planning, to even what type of account your bank will let you open to handle the business affairs.

Structure your business the wrong way and you could end of paying more taxes than necessary and open yourself up to the risk of a potential lawsuit that could jeopardize your home and other personal assets.

If your 2020 goal is to start your very own business, lets start out the year by discussing the best legal structure for you.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you're a client I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that's just common sense.

(2:00) Practical planning segment: We have a special 4-part series discussing legal structures to consider when starting a new business. It may not sound like the most fun topic to discuss and some maybe be wondering why were even talking about this on The Fiscal Blueprint podcast because we usually tackle retirement planning subjects

Well I have noticed a recent trend in our practice and many of the soon to be or already retired folks don't………………… really want to retire in the traditional sense.

Now don't get me wrong……………. the majority still do! They are DONE with work and are ready to travel, build that 2nd home, spend time with the kids and grandkids, volunteer, play pickleball, etc. However, I also notice quite a few starting 2nd careers and many of those second careers involve starting a business.

We have folks that are turning their hobbies into businesses that can earn a profit or more commonly we have folks that retired from a particular industry with a very high level of expertise and create their own consulting businesses

SO, in each episode we are going to talk about a certain business structure and with each structure we'll give an overview, talk about taxes and how they are handled with each structure, and the liability you may face with each structure.

(5:00) The 4 basic types of legal structures are; Sole proprietorships, Partnerships, LLC's and Corporations (S-Corp and C-Corp's.

Today were going to talk about Sole Proprietorships. This is by far the simplest type of structure. From the Federal governments perspective all you must do to form a sole proprietorship is to start doing business.

Any business that's is started by a single person is automatically a sole proprietorship unless the owner decides to form some other type of entity.

Now you may have noticed I emphasized from the FEDERAL government's perspective. You can almost bet from your local government, state, county's perspective they will most surely want some type of other requirement be fulfilled in order to do business in that location

That requirement would typically be in the form of money by way of a licensing fee in order to obtain a business license. They would want to know what type of business you are starting, and different business may require very different licenses such as restaurants, contractors, realtors, etc.

EIN Number… Do you need one? For a sole proprietorship you don't need one, but you can still get one.

If you plan on doing business under a name other than your own, you'll also need a DBA (Doing Business As). The reason for a DBA is for accountability purposes. If the sole proprietorship breaks the law, they would need to trace it back to a name on file.

Example: Let's say you hired "ABC construction Co" to build a new Deck on your home and the deck failed and injured someone. The company name cannot be sued because it's a sole proprietorship and without the DBA on file there would be no record of the owner. More on this later.

(9:00) Taxation: Sole Proprietorships are known as pass-through entities". As name implies is that profit and loss is passed through to the owner. The profit will show up on tax form 1040

Schedule C would be the form where you calculate the profit or loss from the business. The bottom-line number on the schedule C is known as you Net profit or Loss which is carried over to your 1040 and less your deductions your taxable income would remain and be taxed at your individual tax rates as SINGLE OR MFJ

That's regular income tax, right? Any other types of taxes to be concerned about? Yes, in addition to reg income taxes you as a sole prop you are also subject to self-employment tax

This is calculated on schedule SE by multiplying your net earnings which is slightly less than your net profit (to be exact its 92.3% of your net profit) by 15.3%

It may seem unfair to have to pay another 15.3% just because your self-employed but SE tax is just like social security and Medicare taxes that are paid on wages for non-self-employed people. The difference is when you work for an employer you split the 15.3%. When you SE there is no employer to split it with so it's all on you.

Also, when you run a sole prop you do get to deduct ½ of the SE tax you pay on schedule 1 of form 1040. So, I guess congress thought about that as unfair as well and decided to create a tax deduction when calc your gross income.

There is one other possible deduction for Sole P's. for tax years 2018 to 2025 to reduce your taxable income, it's called the pass-through deduction and is equal to 20% of your income from the pass-through business. Not all business qualify and there are also income thresholds to be aware of as well. Definitely consult your tax advisor on those thresholds and to see if your business qualifies for that additional 20%!

(15:45) Liability: The major downside to the Sole Proprietorship structure is that the proprietor is personally liable for all debts of the business. This is known as UNLIMITED LIABILITY"

If anyone has a reason to sue your business, they can come after all your personal assets not just the money you have in the business checking account. If the suit is large enough you could end up losing all of your personal possessions…………. savings, car, home, etc.

That's pretty scary, and that's why most people start to research other forms of business structures. Before you do that, think about the worst-case scenario for your type of business. Whether you provide a product or a service, what is the worst possible outcome if everything goes wrong? For example: If you are an author that writes fiction you probably don't have much liability compared to a construction co or electrical contractor if everything goes wrong.

(18:00) Coachable Segment: In our coachable segment today Let's run through everything we just learned in a quick summary:

• Any single owner business will be a Sole P unless the owner takes an explicit action such as incorporating
• The Fed govt doesn't require you to file any documents to form a SP
• Your local govt, City, State, County may require you to get a license
• Many state and counties require you to file a DBA if you plan to use a name other than your legal name
• SP are known as pass through entities for tax purposes
• The P&L from a SP is calc on schedule C
• Earnings from a SP are subject to Self-Employment tax at 15.3% (2.9% above the annual max for SS)
• You will get a deduction for ½ of your SE tax reported on schedule 1 of your 1040
• For 2018 to 2025 you may be eligible for a 20% pass-through deduction. Check with your tax advisor
• SP have unlimited liability for any debts against the business
• Depending on the nature of your business unlimited liability sounds scary but may not be a big deal

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

Montgomery Financial Services

Episode 27: The SECURE Act

Welcome to our last podcast of 2019! The hot topic in the retirement planning community is the recent passage of the SECURE act.

So, on today's episode, I am going to highlight some of the most important changes that will affect retirees moving forward. Make no bones about it! This is the most significant change to our nation's retirement system in more than a decade.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you're a client I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that's just common sense.

(1:10) Practical Planning segment: On December 20th, 2019 President Trump signed into law THE SECURE ACT which stands for SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT.

It was inserted into the federal government spending bill which is so often the case……. right? It puts leverage on the passage of the act because when it's attached to a spending bill…………if it's not passed, we face another government shutdown.

So, what are the pros and cons of the SECURE ACT?

We are going to highlight the items I think are important to our listeners of the podcast. There are other items in the ACT such as MEP'S (multiple employer plans) and other exceptions for taking funds out of retirement accounts prior to age 59 ½ …………which we will not cover today, maybe we'll get into those on a future show.

Today we are going to look at 3 major changes in the SECURE ACT. Two of them I think are positive changes and the 3rd one is a big negative for non-spouse beneficiaries.

(4:00) #1 There is no longer an age restriction on Traditional IRA contributions!

In other words, as long as you have EARNED INCOME (same as before) you can contribute to a Traditional IRA after age 70 ½. This was not the case prior to the ACT for a T IRA. It was the case for a ROTH IRA. There was never an age restriction to contribute to a ROTH IRA ……. you just needed to have earned income.

So now the same rule applies to a Traditional IRA!

So again, for tax years after 2019, the secure act repeals the age restriction on contributions to a traditional IRA, so for tax years beginning in 2020 and beyond, you can make contributions after reaching 70 ½

(6:00) Key Point: The deadline for making a contribution for your 2019 tax year in April 15th of 2020, but you cannot make a 2019 contribution if you attained age 70 ½ by December 31st of 2019. Now thanks to the new law, you can contribute for 2020 and beyond…….as long as you have earned income.

(6:45)#2 New RMD start date of age 72!

You know RMDs from IRAs and 401ks are (believe it or not) for some retirees are sometimes unwanted, for lack of a better word. In other words, they wish they did not have to take their RMD because they don't really need the money at that time.

However, as we all know the government is hungry for the tax revenue that the requirement produces from the millions of retirees that have these plans.

Under the SECURE ACT the starting age for your first RMD is now the year you turn age 72. It was previously the year you turned age 70 ½ ……………which really confused some folks.

Now ………. there was never an RMD for a ROTH IRA and that is still the case for the new law.

Very Important: IF you turned age 70 ½ in 2019 and you have not taken your RMD yet, the old rules still apply to you. You have until April 1st of 2020 to take your first RMD which satisfies your 2019 RMD. You must also still take another RMD prior to year-end of 2020 to satisfy your 2020 RMD

SO again, if you turn 70 ½ in 2019 you must follow the old rules.

The new AGE 72 only applies if you have not already turned 70 ½. I hope that makes sense!

Now for the bad news.

(11:20) #3 The "Stretch IRA" is basically eliminated for Non-spouse beneficiaries

Yes, for all intents and purposes the ability for non-spouse beneficiaries to stretch out distributions over their individual life expectancies for IRA's has been eliminated.

THE NEW LAW SAYS THE IRA ACCOUNT MUST BE DRAINED WITHIN 10 YEARS AFTER THE ACCOUNT OWNERS DEATH.

There are a few exceptions which we will go over, however, the important point is that prior to the SECURE ACT non-spouse beneficiaries could stretch out IRA distributions from an inherited IRA account over the Life Expectancy.

(13:40) For example, if your rich uncle Bob, left you a 750,000 IRA when you were 40 years old the current LE table according to the IRS says you'll live another 43.6 years. You must start taking RMDS from the Inherited IRA and using your LE table………… you can stretch those distributions over that 43-yr. period. Your 1st W/D were only amount to 2.3% of the account.

So, most of the IRA account remains invested and continues to grow tax-deferred less your yearly distributions.

Now under the new ACT, the non-spouse beneficiary such as a son, daughter, niece, nephew, friend, etc.………… has to drain the IRA account within a 10-year period after the year of death.

So, what this essentially does is increase the w/d amounts which of course increase the amount of tax revenue the govt collects.

Think about it, the distributions for the beneficiaries are much larger and those distributions get tacked onto their existing income and could potentially greatly increase their tax bracket.

*According to the congressional research service, the new law has the potential to generate about 15.7 billion in additional tax revenue over the next decade.

(16:30) Now some exceptions:

1. Existing inherited accounts are grandfathered. So, prior to 2020 all existing inherited IRA accounts from Non-spouse beneficiaries are grandfathered under the old rules.
2. Does not affect spouses. You can still leave your IRA to your spouse and as a spouse they can treat the IRA as their own and take RMDs according to their LE
3. Minor children of the deceased owner can inherit the IRA and begin to stretch out the RMD's. However, when they turn the age of majority in their state, they must then start the 10-year clock
4. A beneficiary who is no more than 10 years younger than the deceased. For example, a sister or brother that is less than 10 years younger that the deceased can use the old rule.
5. A chronically ill beneficiary can use the old rule.

(19:45) Coachable Segment: So, the bottom line is the SECURE ACT has both good and bad news for folks. The new law also includes some other items that we have not covered here……….so make sure you do your research prior to making any irrevocable decisions. Here are a couple of articles below:

https://www.kiplinger.com/slideshow/retirement/T047-S001-how-the-secure-act-will-impact-retirement-savings/index.html

I also see some planning opportunities with the new law which I am going to study and explore for 2020.

For example; it may make sense for some that are "legacy inclined" …. meaning it very important to leave a legacy to their children to speed up Roth conversions from a T IRA.

For example; If a child (let's say age 40) has to withdraw a large IRA within 10 years and it happens to be right in their prime earning years………………. than those w/ds get tacked onto their regular income. This means more of the traditional RA goes to the federal govt and less to the child.

So it may and ( I emphasize may)make sense for the parent to do a series of Roth conversions prior to death to get as much as possible into the Roth IRA at their tax rate rather the much higher tax rate for the child.

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

Today we are going to talk about establishing good habits. We'll look at a study that tells us how long it takes to establish a good habit and then apply that to 7 habits of highly effective investors.

So, grab a note pad and pen and get ready to start taking some notes!

Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. Think of this as helpful hints and education only! And please, before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.

(2:00) Practical Planning Segment: On today's show we're going to talk about the 7 habits of highly effective investors and we might even throw in a few more, so if you're home get your pad and pen ready to jot these down its going to be a great show. https://jamesclear.com/new-habit

Maxwell Maltz was a plastic surgeon in the 1950s when he began noticing a strange pattern among his patients. When Dr. Maltz would perform an operation — like a nose job, for example — he found that it would take the patient about 21 days to get used to seeing their new face. Similarly, when a patient had an arm or a leg amputated, Maxwell Maltz noticed that the patient would sense a phantom limb for about 21 days before adjusting to the new situation.

Maltz started to think about his own adjustment period to changes and new behaviors, and he noticed that it also took himself about 21 days to form a new habit. Maltz wrote about these experiences and said, "These, and many other commonly observed phenomena tend to show that it requires a minimum of about 21 days for an old mental image to dissolve and a new one to jell."

(4:00) In 1960, Maltz published that quote and his other thoughts on behavior change in a book called Psycho-Cybernetics (audiobook). The book went on to become a blockbuster hit, selling more than 30 million copies. And that's when the problem started.

You see, in the decades that followed, Maltz's work influenced Zig Ziglar, Brian Tracy, Tony Robbins. And as more people recited Maltz's story — like a very long game of "Telephone" — people began to forget that he said, "a minimum of about 21 days" and shortened it to, "It takes 21 days to form a new habit."

And that's how society started spreading the common myth that it takes 21 days to form a new habit (or 30 days or some other magic number). It's remarkable how often these timelines are quoted as statistical facts. Dangerous lesson: If enough people say something enough times, then everyone else starts to believe it.

(5:15) How Long it Really Takes to Build a New Habit. Philippa Lally is a health psychology researcher at University College London. In a study published in the European Journal of Social Psychology, Lally and her research team decided to figure out just how long it actually takes to form a habit.

The study examined the habits of 96 people over a 12-week period. Each person chose one new habit for the 12 weeks and reported each day on whether they did the behavior and how automatic the behavior felt.

Some people chose simple habits like "drinking a bottle of water with lunch." Others chose more difficult tasks like "running for 15 minutes before dinner."

The answer?

(6:20) On average, it takes more than 2 months before a new behavior becomes automatic — 66 days to be exact. And how long it takes a new habit to form can vary widely depending on the behavior, the person, and the circumstances.

In Lally's study, it took anywhere from 18 days to 254 days for people to form a new habit.

In other words, if you want to set your expectations appropriately, the truth is that it will probably take you anywhere from two months to eight months to build a new behavior into your life — not 21 days.

(8:00) 7 habits of highly effective investors:

1. Invest early and often: successful investing takes time because of the power of compounding.
   1. 20 yr. vs 35 yr. old: For example, invest $3,000 every year starting when you're 20 years old and, if you retire after age 65, you will have accumulated almost $680,000 (assuming a 6% annual growth rate and no tax). If you wait until age 35 and start saving $3,000 annually, you'll accumulate only about $254,000. And, if you wait until age 45 to start saving, you'll accumulate only about $120,000 by the time you retire.

1. It's never too late to start. As a matter of fact, if you're over 50 you are allowed what are called "catch up contributions" if you have earned income.
   1. For an IRA account individual over 50 can contribute an additional $1k over and above the 6000 max amount: total of $7,000 for 2019
   2. 401k account max contribution is 19,000/yr. over if over 50 add an additional 6000 for a total of $25,000
2. Rule of 72: take the number 72 and divide by any interest rate and you'll come up with the number of years it takes to double your money.

1. Save more: investors spend less than they make and invest the difference. Reducing expenses by $200 per month and investing those funds. 8% yr. return an investor could amass 700k over 40 years. No think about that if you are in your 20's
   1. Can you change your spending habits by just $200 per month? I bet you could.
   2. YOLO mindset
2. Don't try to market time: the average investor typical buys high and sells low. They buy with confidence when the market is rising and then they sell with fear as it falls. We saw this just this year in the month of August. SP500 lost about 3% in August of 2019. Overall, passive U.S. equity funds saw approximately $900.0 million in outflows while active U.S. equity funds had $18.9 billion in outflows.

1. Keep fees to a minimum: we've talked in the past about fees and specifically hidden fees. I love this line by Robert Berger" fees are to investments what termites are to a home". Fees seem small at first but can slowly eat away at your returns. So effective investors choose a low-cost strategy to invest. Active vs passive
2. Prefer asset class funds: better than index funds are asset class structured funds that invest in an asset class.
   1. Index funds are a better choice than active funds but Reconstitution of Index
   2. Over the long run their performance beats most active manage funds: SPIVA study; over 5yrs ending 12/31/2018……… 82.14% of Large Cap active managers failed to beat the index and 94.39% of Small Cap Value active managers failed to beat the index.
   3. Low turnover, ideal for taxable accounts; doesn't trigger unnecessary cap gains
3. Stay Disciplined and Rebalance: this is critical. Studies show that simply rebalancing your portfolio periodically can add 1 to 2% to your returns on average.
   1. It starts with designing a structured portfolio that mimics the entire market. So highly diversified and based on your individual risk preference.
   2. Asset class move up and down in price
   3. Risk Management helps with the discipline component

(26:00) Funny story about discipline when it comes to investing.

Fidelity reportedly conducted an internal study—a performance review of accounts between 2003 and 2013 to find which accounts did the best.

They found that the best performing accounts were from investors who were DEAD! In second place were investors who had FORGOTTEN they had accounts at Fidelity.

This was an internal study that made its rounds when asset manager James O'Shaughnessy relayed it on Bloomberg radio. However, it's certainly not the first study to show that lazy portfolios work. Over time, slow and steady seem to win the race when it comes to investing. While active investors will tell you it's possible to time the market and make a killing by playing stocks, the data seems to show otherwise, there is something to be said for set and forget investing.

1. Use 3rd party custodian: Protects you from investment fraud.
   1. Advanced technology protects you from investment fraud:
   2. Insurance carried by custodians protects you from fraud
   3. Monthly statements; they must report all activity directly to you
   4. Withdraws are sent directly to you or direct deposited into a linked bank account

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

Episode 25: The Rebalancing Act… continued!

So last episode we started our conversation about rebalancing a portfolio. We defined the term rebalancing and discussed the #1 reason for rebalancing your portfolio.

For those that may have missed that show that REASON came down to one simple term and that term was RISK!

The reason we rebalance is to control the amount of RISK inside our portfolio! So on today's show we are going to give you some hypothetical examples of well-designed diversified portfolios and show you what happens over time when you don't' rebalance and then we will show you the simple process of how to rebalance a globally diversified portfolio

(1:50) Practical Planning: Ok so in our practical planning segment we are going to look at a hypothetical portfolio of 50% equites and 50% fixed income.

Now this may be difficult from a visual perspective to demonstrate this over a podcast format. So, if you're not driving you might want to take out a blank piece of paper and a pencil and draw a big circle on it and then draw a line right down the middle of the circle dividing the circle in halves.

Let's look at a hypothetical portfolio of 50% equities and 50% fixed income. Now in reality when you have a professionally engineered mix you will have a lot more slices to the pie representing exact percentages of various asset classes. Why? In order to take advantage of the benefits of rebalancing it is critical to have a well-diversified portfolio built from several asset classes with dissimilar price movements. This asset classes won't move in perfect correlation to each other and that's generally a good thing!

So normally, in our equity portion we will have US small stocks, US small value, US large, US large value, International large, and international small. In our fixed income portion, we will use short-term high-quality treasuries. But, for the purpose of this example we are going to keep it simple and use 50% equities and 50% fixed income.

(5:00) The amount we start out with in the fixed income portion is only used to control the initial amount of risk a client is willing to take.

One thing you'll notice is there is no "stock picking" going on here. We are simply buying the entire asset class, or in other words, every company/holding within that asset class. If you don't know how to do that in a low-cost and efficient manner, then feel free to contact me and I will point you in the right direction.

For our purposes today we are keeping it simple and just have 3 slices to our portfolio mix

(6:40) Portfolios that are NOT Rebalanced become RISKIER over time.

From this point we must understand that portfolios that are NOT rebalanced become riskier over time. It's important to introduce a mathematical concept currently. It is called standard deviation and rather than going into a long explanation and showing you the formula and how it's calculated, the important thing to know is that it can be used to measure the risk of the asset classes in your portfolio.

If standard deviation can measure the risk of each asset class, then it can also measure the risk of the entire portfolio as a whole. In the simplest terms, the higher the standard deviation the more volatile your portfolio will be and the more the portfolio will deviate from the mean!

The more volatile your portfolio is, the more the variability of returns will be, much like a roller coaster at your favorite amusement park. Think of the monster roller coaster as having a high standard deviation- huge swings to the upside and downside and then think of the roller coaster in the kiddy park as having a low standard deviation- very mild swings to the upside and downside.

Feeling nauseous yet? Give me time….

So, if we look at this hypothetical portfolio over a period from 1973 to 2013, we can see the effects of rebalancing at various times vs. never rebalancing. Although you see the return increased to 11.96% by not rebalancing, the important thing to notice is what happened to the standard deviation of the portfolio. As you see, it increased over 40%. That's 40% more risk. See exhibit C below.

Now this increase in risk goes back to our earlier discussion about choosing a mix that fits your risk/return preference. For example, if the original portfolio was chosen carefully and thoughtfully to meet your personal tolerance then an increase of 40% in risk is way outside of your comfort zone!

As a matter of fact, if the market randomly tanks (think of 2008) and you were assuming 40% more risk in your portfolio then you were initially comfortable with, then there is a really good chance you are going to "HIT" the panic button and sell when your portfolio drops.

By the way, this is exactly what we saw in the market crash of 2008. People panicked when the market crashed selling out of stocks at a peak in March of 2009 and moving to cash and fixed income just before the market began to rebound and went on to make new all-time highs.

If you had been properly rebalancing throughout that time……………your portfolio would not have been any risker than when you began.

And in that extreme example of a market crash like 08', you would most likely have not hit the panic button. Why? Because you maintained the original risk number you were comfortable with! Now it wouldn't have felt good…….08' was bad but having never rebalanced it would have been a lot worse and could have caused you to sell out at the very worst of times!

And by the way, at the end of 2008, by properly rebalancing you would have been selling fixed income –selling high and buying more stocks-buying low. The exact opposite of the average investor. This would have been the correct strategy to follow.

Exhibit C

(12:00) So what caused this increase in risk? Equities have historically tended to increase in value more frequently than fixed income and when they do, they have done so to a larger degree. In this hypothetical moderate portfolio, this resulted in the equity allocation increasing over time, which significantly increased the overall volatility as measured by standard deviation.

But the good news here is that the precise market movement that led to this increase in risk has also provided an opportunity to rebalance our portfolio back to its original allocation. This is a pure non-emotional strategy of selling just enough of the asset classes that increased and buying just enough of the asset classes that decreased and therefore, bringing us back to our original target.

Buy something at a low price, hold it, and eventually sell it at a higher price for profit in order to purchase something at a low price again. That is the goal of rebalancing in a nutshell.

(14:00) Let's go back to our simple 50/50 mix and demonstrate a 2008 event:

For illustrative purposes only, let's look at a very simplified two asset class portfolio of 50% US Large cap stocks and 50% US intermediate/long term bonds and compare how the average investor handles a market crash like 2008 vs. how an investor that follows a strict, risk target, rebalancing strategy would handle that same market decline.

We know US large cap stock as represented by the S&P 500 declined approximately 37% in 2008 and at the same time long term government bond index increased in value by approximately 26%. After 2008 this hypothetical portfolio would have had an asset mix of 67% fixed income and 33% US Stocks far from the starting point of 50/50.

The average investor at the end of 2008, spurned by the losses in their portfolios and the "overactive" media hype shouting "Armageddon" in the financial markets, dumped their equity holdings with a veracity we have never seen before. And, at the same time, loaded up on intermediate and long-term bonds.

Essentially, there was what is commonly called a "flight to safety". I on the other hand, have dubbed this a "fright to safety". People were frightened about their losses and they chased after performance in a purely emotional decision-making strategy.

As a matter of fact, according to Morningstar US Open Flow Asset Update, this continued all the way through 2012. The following was published in Morningstar in January of 2013: "outflows from actively managed U.S.-stock mutual funds in 2012 surpassed those seen in 2008 even though the S&P 500 was up 16% for the year. Even when exchange-traded fund flows are included, large-cap U.S.-stock funds have seen net outflows over the trailing five-year period and in each of the past four years. Meanwhile, the S&P 500's cumulative return over the five-year period is a respectable 8.59%. Investors haven't just sat out the uneven stock market rally that began in March 2009; they have run from it and never looked back".

(16:20) So what happened? WHAT HAPPENED IN 2009 AND MOST YEARS SINCE THE 08' CRASH?

The result of this "fright to safety" was as follows. The following year, in 2009, large cap stocks represented by the S&P 500 increased by 26% and the asset class of long-term bonds declined by 14%.

So, the average investor did the exact opposite of what they were supposed to do. They essentially sold low and bought high, compounding their losses from the year before.

(17:00) SO NOW LETS CONTRAST THIS WITH WHAT A PRUDENT INVESTOR FOLLOWING A NON-EMOTIONAL REBALANCING STRATEGY THAT IS ON AUTOPILOT WOULD HAVE DONE DURING THAT SAME TIME FRAME

In this simplified example their portfolio would have been out of balance with the fixed income portion of long-term bonds representing a higher percentage of 67% of the portfolio than the equity portion of US large stocks at 33%.

So the strategy would have been as follows; rebalance the mix by selling the 17% of the fixed income class and buying 17% of US large stocks asset class, selling the asset class that increased (TOO HIGH) and buying more of the asset class that decreased (TOO LOW) based on our original target allocation of 50/50 that was chose based on your personal risk/return preference!

The following year you would have been rewarded with US stocks gaining in value 26%. By the way, if US stocks declined again the following year you would have rebalanced again buying more at a lower price.

(19:00) Rebalancing may provide the opportunity of higher returns

While rebalancing is mainly about risk management in many periods, it can also provide the opportunity for obtaining additional premiums. One recent study on rebalancing a portfolio was conducted by Matson Money. According to this study, during one of the worst markets in recent history, rebalancing could have mitigated losses by maintaining appropriate portfolio weightings. In a diversified moderate portfolio of 50% equities and 50% fixed income, rebalancing during the period of January 2007 and December 2009 would have produced an increase in return of 2.79% versus not rebalancing.

(20:00) How often should you rebalance your portfolio?

The question then becomes how often should rebalancing take place? The basic answer to that question is "it depends". That is, it depends on is how much your portfolio veered from its target allocation. So, it's more important to look at this tolerance rather than the actual time frame. I recommend looking at your allocations on a quarterly basis and allowing a 5% tolerance from your target.

For example, if you have an extremely diversified portfolio consisting of multiple asset classes that can be summarized or grouped as 50% fixed income, 30% US equities, and 20% International equities than as long as you are within 5% of those targets when reviewed on a quarterly basis, than rebalancing would not have to take place. When the account allocation exceeds that 5% tolerance than rebalancing may be necessary.

Now, this does not mean we should ignore time frame all together. There are important tax considerations in a taxable account to consider when rebalancing. You should always consult a tax professional if you have any questions regarding your taxable investment account. If your portfolio has not been rebalanced in a year or so tax considerations become less important and maintaining your target asset allocations are far more important.

(22:40) Also, whenever possible it is wise to rebalance by using any cash that has accumulated either through regular periodic contributions or credited dividends to your cash account. This allows you to rebalance more efficiently by being on only one side of the trade rather than having to initiate both a sell and a buy order and therefore, saving you a transaction fee.

Although it appears there is a lot to consider when rebalancing your portfolio this can be set up once and then placed on autopilot throughout your investing time frame.

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Gambling: The sure way of getting nothing from something." Wilson Mizner

You may say that's a strange way to start a podcast about rebalancing your portfolio with the famous Kenny Rogers Song "The Gambler"!

After all what does gambling have to do with rebalancing? Surprisingly, it has a lot to do with rebalancing and, in my opinion, rebalancing is the antithesis of gambling with your investments.

In this series of episodes (maybe 2 or 3) we are going to dive in and explain why it is crucial for you to rebalance your portfolio,

• what is rebalancing,
• how often you should rebalance,
• and give you concrete examples of what a prudent investment strategy really looks like.

So, the question is, do you really want to gamble with your retirement savings? You know, the money you saved over most of your adult life, the money that is meant to fulfill your personal values and personal goals in your retirement years?

Our opinion is that it's way too important to gamble with!! So having an investment strategy that is #1 Prudent and #2 rebalancing that investment strategy is absolutely critical , in our opinion, to your success as an investor and (by the way) is the exact opposite of gambling by stock picking, forecasting or trying to predict the future, and trying to time the market!

(2:30) I'm sure there are some folks out there that get a dopamine rush from gambling with their portfolios. I mean we run into them all the time. They place trades so often it's like placing chips on the craps table at their local casino.

What's even worse is that some of them use brokerage firms and let the brokers stock pick and gamble on their behalf and this is extremely harmful behavior to your long-term success as an investor.

Numerous studies show that the vast majority of investors buy high and sell low. One recent study shows the discrepancy of investors' returns vs. the S&P 500 index. The DalBar Corporation publishes a yearly study on investor behavior measuring the effects of investor decisions to buy, sell, and switch into and out of mutual funds. The results of this study are truly mind blowing and can be seen below.

(5:00) Some highlights from the study:

CATEGORY

1985-2018 Annualized Return

S&P 500 Index

10.86%

Dalbar Average Investor - Equity Fund

3.67%

CPI (representing Inflation)

2.59%

Over a period of 30 years, from 1985 to 2018, the S&P 500 index has an annualized return of 10.86%. However, during that same time frame the average equity fund investor experienced returns significantly lower, coming in at a paltry annualized 3.67%.

There are many factors that explain why the average investor performs so badly compared to the index, but in my opinion their behavior is a significant factor that explains this dismal performance.

More precisely, the risk the average investor assumes when creating their portfolios is directly related to their behavior when it comes to hitting the panic button and stopping the pain of their latest stock picking maneuvers when markets crash!

(8:00) I think it would be helpful to explain what is called the Uniform Prudent Investor ACT UPIA.

It is based on the original "Prudent Man Rule" in Massachusetts common law written in 1830 and revised in 1959 and its been updated since

The key takeaways are this:

• The Uniform Prudent Investor Act (UPIA) is a statute that sets out guidelines for trustees to follow when investing trust assets, an update to the Prudent Man Rule.
• The Prudent Man Rule stated that a trust fiduciary was required to invest trust assets as a "prudent man" would invest his own assets.
• The UPIA requires trustees to consider a diversified portfolio approach that follows modern portfolio theory and a total return approach.

So, it all starts with a well-diversified portfolio of asset class funds.

No stock picking and No market timing. Let me explain. An asset class fund is a fund (similar to an Index find) but not quite. That tracks an entire asset class. For example, a fund that own all the stocks that represent Large US Growth or a fund that owns all the stocks that represent small US stock,

There are a lot of other asset classes out there. Funds that mirror small value and large value us stocks, international stocks both large, small, growth and value-oriented asset categories………and Fixed income asset class funds as well.

(11:50) So, under the UPIA……. a Fiduciary trustee would consider a well-diversified portfolio owning all the asset class funds and that well diversified portfolio will be based on the client's personal risk tolerance (controlled by the percentage of $$$ allocated to each asset class) and personal return preference.

The key here is to design a portfolio mix that is appropriate for the clients risk/return preference using an engineered approach of a variety of these asset funds to maximize return with as little risk as possible and that is what Nobel Prize winning economist, DR Harry Markowitz deemed "Modern Portfolio Theory"

So, the language of the uniform prudent investor act states that a portfolio should follow Dr. Markowitz's Nobel prize winning research dubbed Modern Portfolio Theory.

Yes…. that's stunning isn't it. That shows you the weight of how important his work was back in the 1950's for today's Prudent Investor! The problem is most investors are not Prudent! They don't follow MPT! They go to the wall Street casino or let their brokers go to the walls street casino on gamble and speculate with their money rather than prudently investing it.

There's a big difference in speculating and gambling vs investing… And I think a lot of folks get them confused and think they are one in the same!

(14:20) How does rebalancing help the average investor fight the need to speculate and gamble with their portfolios?

Well let's start with the definition of rebalancing! The technical definition is "realigning the weightings of your portfolio through periodic review and simultaneous buying and selling of assets to maintain your target asset allocation." In simple terms it's the process of restoring your portfolio to its original target allocations. Now, if you've never had an original target allocation to begin with then we have a problem.

So, it makes sense to start there. Start with a portfolio of asset classes based on your own unique risk/return preference as mentioned earlier.

(15:40) What if someone listening has never thought about their personal risk/return preference?

Seek out some help. Work with a fiduciary that will help you identify your own risk tolerance based on your personal values around money and your goals. In essence a good investment coach.

Such as our firm……. hahaha shameless plug!

Did you notice how many times we have said RISK during this episode?

That's not by accident, and that's the precise reason WHY WE REBALANCE! Let me say that again……. it's is too important for you not to hear.

The main reason why you should rebalance your portfolio is to control the risk inside your portfolio.

By rebalancing to control the risk in your portfolio you are eliminating the gambling from your strategy and essentially buying low and selling high.

(18:00) Isn't this the most basic and logical tenet of investing; buy low and sell high?

EXACTLY!............But unfortunately, as the Dalbar study shows, very few people do it correctly.

So, I think this is a good stopping point for this episode and what we will do next week is discuss what a prudent portfolio really looks like and then get into some concrete hypothetical examples of rebalancing.

(19:30) Coaching Segment: On this episode we really concentrated on the definition of RISK and why it so important to start with a portfolio mix that fits your personal risk/return preference!

But what we find, very often, when we meet with new folks that come into our office is that they don't really know how much risk they are assuming in their portfolios because they have never measured the risk number and compared to their actual tolerance.

I personally feel that this is the most important decision in investing.

It's not enough to tell your advisor and use terms like "Moderate Investor" or Conservative Investor", etc… those terms are way too general and may mean different things to different people. For example, you may tell your advisor that you are a conservative investor and that a loss of 5 to 10% in a year is acceptable…. not fun!!!, but acceptable.

However, your advisor's idea of conservative could be completely different like 10 to 20% loss. So, you are not really speaking the same language.

So, this is where the term "Risk Number" comes from. We need to actually "measure" the risk inside your portfolio so we can get a baseline and then look at that risk number and translate that into dollars of gain or loss in different market conditions!

That number goes from a scale of 1 to 100 with 1 being very little risk and 100 being maximum risk.

So, if you have a risk number of a 75, what exactly does that mean in terms of potential dollar lost in a bad market and potential dollars gained in a good market.

With this level of clarity many people can structure a more acceptable asset-class based portfolio and what we find is that they are more likely to follow the rules of investing

One of them being REBALANCING BACK TO YOUR TARGET!

Go to the top left corner of our website: "WHATS YOUR RISK NUMBER?" to get you personal risk number!

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

Episode 23: Health Care Before Medicare- Medi-Share Programs

Over the past few weeks on the Healthcare Before Medicare series, we have been taking a look at some different ways to answer the question of how to pay for medical insurance before you reach Medicare age.

On this week's episode, were going to explore a different kind of option! We are thinking outside the box of regular insurance and we are exploring the idea of 'Medi-Share' arrangements.

Medi-Share is not typical insurance, so we will learn what the difference is between these programs and traditional medical insurance. So, if you are thinking of retiring before Medicare age or simply interested in insurance alternatives you will want to see if this is a good option for you.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. Think of this as helpful hints and education only! And please, before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.

(1:30) Practical Planning Segment: Last week, we had a pretty thorough discussion on the ACA commonly referred to as Obama Care and what you need to consider when checking into the ACA.

I feel that Spending lots of time on the ACA website can really help you find clarity in the muddy pool of the U.S. healthcare system.

The biggest factors in premium costs are:

Your MAGI which is your modified adjusted gross income and which state you live in. If you want to get the best deal that works for your family, it will take a lot of diligent research and some income planning.

Today is about looking at some other alternatives available that many people may not be aware of. One of those other options are Medi-Share programs.

If you kind of conduct your own personal poll, if you will, and you ask folks if they've heard of these types of programs, many will, most likely, tell you they have no idea what you're talking about.

(3:40) Let's define what Medi-Share is and where folks can find more information on these programs. To Be very clear; Medi-Share is not insurance. They are Christian Health sharing ministries

Medi-Share is an alternative to traditional health insurance. Medi-Share is a medical cost-sharing program, an arrangement between a group of people to share medical expenses.

Although it is not traditional health insurance, there are some similarities between the two. There is a monthly fee similar to a health insurance premium and there is a yearly out of pocket portion that your family is expected to reach before asking the Medi-Share community for help.

They call the monthly fee the "monthly share amount" which in traditional insurance would be called the premium

They call the upfront portion that you have to pay before coverage begins "annual household portion" which in traditional insurance is called your household deductible.

(6:00) Again, Medi-Share is not insurance, it's more of a community.

Correct………The biggest difference between health insurance and a Medi-Share ministry is that the money you pay each month goes to help another member of your community.

When you pay your "monthly share" amount, this money goes directly to another member who needs care.

Healthcare sharing companies are nonprofit Christian-based cost-sharing programs. There are quite a few of these organizations, each with a few different rules. Some of the most popular are

1. Medi-Share or https://mychristiancare.org/medi-share/which was Established in 1993, medishare.com, Medi-Share has a proven track record as the leader in Christian healthcare sharing with nearly half a million members across America who have shared over 4 billion in medical costs. They have plans for Individuals, families, and even groups.
2. The 2nd one is Christian healthcare ministries, chministries.org. They have around 375,000 members and have shared over 3.5 billion in all 50 states
3. Third is liberty HealthShare which is located at libertyhealthshare.org. they've been around since 1995. My impression is there program is a little more simplified with 3 options available, single, couple, family and whether you are over 30 or under 30. Monthly premiums range from 250/mo. for a single under 30 to around 550/mo. for a family with a member over 30.
4. Samaritan located at https://samaritanministries.org/ . they have been around for over 25 years

(10:00) These ministries sharing programs are non-profit. With…….

• Direct Member to Member sharing experience, the ministry is faith based and they connect others within the community. You have the ability to know who you are sharing with.
• As you can see, most of them have been around since the early to mid 90's.
• There was actually a provision in the ACA for healthcare sharing ministries, where participation in one of these programs met the former ACA requirement to have some sort of healthcare solution and not be subject to a penalty. That penalty was, of course eliminated in the tax cut and jobs act.
• Annual household portion, which equals = the amount of financial responsibility that you are taking on, before your bills get presented to others (i.e.; the deductible in normal health insurance) is typically as low as $500 and up to $10,000. Completely Customizable.
• There is no "open enrollment period". You can join anytime. We mentioned the ACA has an open enrollment period from Nov. 1st to Dec. 15th of this year to sign up for 2020 coverage.

(13:30) What kind of experience would you have as a Medi-Share member if you go for care?

Each sharing program mentioned above will have some differences.

With the 1st one "mychristiancare.org" it seems likes the experience is very similar to typical of normal health insurance.

You would have a membership card, pay a provider fee, and the provider sends the bill directly to Medi-Share. However, I noticed some of these programs require the insured (patient) to pay upfront and then get reimbursed by the community. So, check that out first.

Members are encouraged to use an in-network provider due to lower costs (CHM has over 700,000 providers in their PPO network)

(15:40) Check into each organization and how they handle prescriptions. For example:

Christian Healthcare Ministries, chministries.org, members receive a CHMRx prescription savings card, which can be used immediately and as often as you visit the pharmacy. The card provides substantial savings on prescription costs.

Gold level members: Incident-related prescription costs are eligible for sharing.

Silver and Bronze members: Silver and Bronze do not include provision for any prescription medication.

All programs: Prescriptions used for maintenance treatment cannot be shared by CHM members.

This is obviously a major consideration when choosing a sharing program!! To see what and if prescription medications are covered in any capacity.

(18:10) There are some disadvantages to Medi-Share, for example;

No Health Savings Account (HSA)……..

Since Medi-Share is not insurance, you can't qualify for an HSA. HSA's as you know, require you to have a high-deductible health insurance plan. This is a major bummer.

Medi-Share is working with Congress on a bill that might allow HSAs to be used with sharing programs but who knows how long, if ever, that will take to get into place.

Don't worry if you already have funds in an HSA. You can still use them for qualifying medical expenses.

So, if you already have funds in an HSA account and you decide to switch to a Medi-Share plan, you could use those funds for things that may not be covered like prescription drugs?

No Tax Deductions!

Health insurance premiums are tax-deductible. Medi-Share contributions are not. That said, medical expenses are still deductible, subject to a threshold based on a percentage of your adjusted gross income. > 10% of AGI.

If you Have a business with a few employees? You may be able to deduct the cost of reimbursing them for their Medi-Share monthly share. Something to speak to your CPA about.

(21:30) Medical Providers may not want to Bill Medi-Share

There have been a few anecdotal cases of doctors and hospitals refusing to bill Medi-Share, and instead, asking the patient to pay out-of-pocket. It's incumbent on Medi-Share Members to call PHCS directly to confirm that the provider you want to see is covered under the Medi-Share PHCS system. You can also go to https://www.multiplan.com/ccm. And see if your doctor is in the network.

The Medi-Share network of doctors and specialists (known as a PPO) is called PHCS, which stands for Private Health care Systems. It includes over 700,000 healthcare professionals.

I can tell you from experience that if there is a particular doctor or healthcare facility that you normally use, the odds are very good that it is part of the PHCS network.

So that was a brief overview of how these programs work…………Lets go wrap it up and get coachable!

(22:40) The bottom line is… do your homework on all these options and compare them to the more traditional insurance options available. And a word of caution, when searching on the net you can find anything you are looking for whether you are pro Medi-Share or anti Medi-Share.

If you go into it with a pre-conceived bias one way or the other…………. you can find an opinion on the net that will support your viewpoint!! So, it's difficult, but try to keep an open mind when researching all your health care options and read a lot of reviews!

There are a couple of articles I found helpful.

One article I would characterize a pro to neutral on these medi-share programs and the other article is definitely not pro. It's more a cautionary tale and what to look out for when joining a medi-share program

The web addresses are too long to say over the air on the podcast so we will list them in the show notes on the podcast page.

Why Medi-Share: https://ptmoney.com/medishare-review/

Why Not Medi-Share? https://www.wellsteps.com/blog/2018/01/06/medishare-insurance-medishare-review/

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!