Retire with Peace of Mind: Recent Episodes

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July 30, 2026 • By David K. MacLeod, CFP®, CFA

In the first half of 2026, markets rebounded from the end-of-March lows amid stable U.S. economic growth fueled by artificial intelligence (AI) capital spending, strong corporate earnings growth, and easing fears about war in the Middle East. The S&P 500 Index was up 10% year-to-date, while U.S. small-cap stocks increased by 23%. Despite a strengthening U.S. dollar, emerging-market stocks gained 24%, and developed international stocks climbed higher by 10%, adding to strong returns posted in 2025. Gold fell 7%, and silver dropped 17%. Bond returns were slightly positive as interest rates ticked higher.

Economic growth has been steady with real gross domestic product (GDP) growth trending at 2%, supported by business investment, while a growing trade deficit is weighing on growth. The job market is strong with a 4% unemployment rate and regular monthly job gains combined with low layoffs. Inflation spiked over 4% in May, but that appears to have been a peak. With the Iran war ceasefire in place, oil and gas prices have dropped, which has reduced inflationary pressures. Lower energy costs combined with easing shelter costs could lead to inflation dropping below 2% by 2027. The Federal Reserve under new Chair Kevin Warsh is watching the inflation numbers closely as they weigh whether to raise interest rates a little bit later this year.

Corporate profits have been remarkably resilient in 2026, fueling the stock market higher. Large U.S. companies continue to post double-digit earnings growth year-over-year, and analysts expect the second-quarter growth rate to be about 22%. Although the largest “Magnificent 7” technology companies continue to invest heavily in artificial intelligence, their stock prices have suffered recently as the market has shifted to reward the beneficiaries of AI spending in hardware, power, and semiconductor stocks as they build out the technology infrastructure that powers AI. The largest tech companies are expected to spend over $700 billion on AI. We continue to emphasize the importance of managing the stock market’s concentration in AI stocks by recommending diversification in small, value, and international stocks.

In the financial plans we’ve written for clients since the 1980s, we’ve included a page on our investing philosophy. One point that’s stayed the same ever since is the importance of diversification in an uncertain economic environment. The economic outlook is still uncertain today. We continue to recommend a disciplined approach to investing. If we had gotten caught up in all the bad news about the war when stocks hit their recent low point, we would have missed out on the 15-20% stock market gains that followed.

On a personal note, our paraplanner Kaden Wingerd recently got married to Addie Willmer. Say congratulations to Kaden next time you visit our office.

If you haven’t already done so, please provide us with a copy of your 2025 tax returns. We plan to review client tax returns throughout 2026. As always, please feel free to call or email us if you have any questions or want to schedule a meeting.

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July 15, 2026 • By Carl Lachman, MBA, CFP®

Baseball Scouts Loved “Five-Tool” PlayersThe baseball scouts wanted to find five-tool players. They wanted players who could hit consistently, hit with power, run fast, field well, and throw accurately. They wanted the whole package in a player. They liked tall, muscular, impressive-looking players that fit their image of a Major League Baseball player. They focused on batting averages, RBIs, stolen bases, pitcher wins, and fielding percentages.

Billy Beane, the general manager of the Oakland Athletics, wanted them to ignore all of those traditional metrics and subjective judgments because they were not good predictors of actual run-scoring and winning. Instead, he wanted players who got on base a lot and had a high slugging percentage, meaning each of their hits got more bases on average than other players. He didn’t care what they looked like, how they threw, how fast they ran, or how tall they were.

He had been the perfect five-tool player when he was recruited and played Major League Baseball, but he had not been a successful player. He knew from personal experience that the traditional way of evaluating players was not the best way.

Moneyball, both the book by Michael Lewis and the film it inspired, tells the story of how Billy Beane led the Oakland A’s to impressive wins in the early 2000s while ignoring conventional wisdom and with one of the smallest MLB team budgets. His insights are now accepted by most teams in the major leagues, but at the time, everyone thought he was nuts.

As you consider how to best invest for retirement, you might follow Billy Beane’s example of ignoring a lot of conventional wisdom and focusing on the things that actually matter.

What to IgnoreYou might find financial news interesting, and you might think keeping up on what is happening in the financial markets makes you a better investor. For the average investor, though, the news is a big distraction and probably leads you astray more often than not. Most of the time, you will be better off ignoring the financial news and doing the opposite of the advice you hear on the financial programs.

The financial news commentators don’t know your financial situation, and they don’t know your financial goals. They are in the business of providing financial entertainment and selling advertising. The only way they can be successful at their work is to keep viewers glued to their screens, which is easiest if they focus on unusual, interesting, and extreme views that have nothing to do with your investing success. Ignore the commentators.

A common topic of financial commentators is telling viewers what is going to happen in the future based on the forecasts of “experts.” But how often do they go back and evaluate the long-term success of those experts and their predictions about economic growth, interest rates, inflation, and unemployment? Almost never, because their track record is so often pitiful.

Can anyone consistently tell us what the future holds? No, they cannot. The average investor needs a portfolio of investments that they can count on for long-term success regardless of what happens with GDP, interest rates, inflation, and unemployment. Ignore the forecasts.

Another daily aspect of financial shows is how the financial markets did today and why the markets were positive or negative. Again, studies often show that what actually moved the markets and investments on a particular day had nothing to do with what the shows indicated. Yet how often do the shows go back and let you know they were totally wrong?

Markets often move because of random events that cannot be seen until later. Daily market movements are about as predictive of long-term success as a junior high popularity contest — and about as scientific. How often has a winner in junior high become president, become a billionaire, entered the NFL, or won the Nobel Prize? Ignore daily market movements.

What to WatchJust like Billy Beane, you will need to pay attention to those things that can actually lead to your long-term investing success. Here is a short list of the major ones.

Pay Attention to Portfolio Allocation

At the top level, what is your percentage exposure to stocks, bonds, alternatives, and cash? Over the long term, the allocation of your portfolio is one of the best predictors of your expected returns. If you have a large allocation of your portfolio in stocks, then over the long term, you will have higher returns — but you will need to ignore the volatility of your portfolio, the up-and-down movements that happen in the short term.

Pay Attention to Diversification

If you have a diversified portfolio, then it has a lot of investments in different areas, and you are protecting yourself from single-asset failures. Diversification does not necessarily predict returns, but the better the diversification, the lower the chance of a catastrophe.

Pay Attention to Fees and Expenses

There is no free lunch in the financial industry, but sometimes investment fees and expenses are hidden. You can find out what an investment costs, but it takes work to find out what you are actually being charged.

Don’t fall into the trap of thinking that your financial advisor doesn’t charge you anything. If you don’t get a bill from your financial advisor and they don’t explain how much the investments charge in fees, then you are probably paying a lot. The advisors and investments that have competitive fees want you to know what a good deal you are getting, so they are the ones that tell you.

These fees happen every year, so over the long term, a seemingly small difference in fees can often be a million-dollar difference in your assets at retirement.

Pay Attention to Taxes

Taxes can erode your investments the way termites can weaken a house. You want investments that are tax efficient, and you want investment accounts that allow you to avoid taxes on investments for as long as possible. A tax-efficient investment is one that has low turnover (buying and selling), favors long-term capital gains, avoids short-term gains, and minimizes income distributions.

Put as much as you can into retirement accounts like IRAs and 401(k)s, which defer taxes until you take money out. And use Roth retirement accounts if you can afford to put in as much money after taxes as you would if you used a tax-deferred retirement account.

Pay Attention to Discipline

There are thousands and thousands of ways to invest your money. Hundreds of them are appropriate for you and will probably give you long-term investment success, but only if you are disciplined in your approach. If you hop between different investment approaches every year, always seeking the newest and hottest tactic, you will not be successful.

Long-term investment success usually comes for the average investor by making a handful of boring investment decisions and then sticking with those decisions for a very long time. It won’t make for fun stories to tell your friends now, but you will have a more secure retirement than your friends in the future.

Get Some Help Billy Beane didn’t win baseball games by himself as the Oakland A’s general manager. He had the players, the coaching staff, the on-field team manager, the scouts, the administrative staff, and the team executives. He led the team and made the big decisions, but he also relied on the expertise of the many other people who were part of the Oakland A’s.

Who else is on your financial team that can help you reach long-term investment success? You will most likely need a skilled tax preparer, a capable estate planning attorney, a competitive insurance agent, and an excellent financial advisor. All of these professionals should have long experience, deep expertise, and a successful track record.

At Eclectic Associates, we have a 42-year track record of effectively guiding our clients to long-term investment success and financial security. We are upfront about our competitive fees; we have a team of professionals with advanced knowledge; and we follow a disciplined investment approach. Plus, we are well-known for our relationships with some of the best tax preparers, estate planning attorneys, and insurance experts. We concentrate on the things that actually matter for our clients’ financial success, and we purposefully ignore the distractions.

Like Major League Baseball, a few in the financial industry are starting to learn that they have focused on the wrong things and are now following the approach we have had from the beginning. But the majority are still looking for investments like old-school baseball scouts. Contact us if you’d like to put your retirement plans and financial goals on the path that can help lead to more wins.

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June 30, 2026 • By Travis McShane, CFA, CFP®

The Hidden Tax Advantage Many Investors OverlookWhen investors think about taxes, they often focus on deductions, retirement accounts, or strategies to reduce ordinary income. Yet one of the most valuable tax benefits available under current U.S. tax law is frequently overlooked: the step-up in basis.

For individuals who have accumulated significant wealth through investments, real estate, or business ownership, this provision can dramatically reduce the taxes their heirs may ultimately pay. In some cases, it can eliminate decades of unrealized capital gains taxes altogether.

This doesn't mean investors should never sell appreciated assets during their lifetime. However, understanding how the step-up in basis works can help families make more informed decisions about investing, gifting, estate planning, and wealth transfer.

Let's take a closer look at why holding appreciated assets until death often creates the greatest after-tax benefit for future generations.

Understanding Cost Basis and Capital GainsBefore discussing the step-up in basis, it's important to understand two key concepts: cost basis and capital gains.

Your cost basis is generally what you paid for an asset, including certain adjustments such as transaction costs or capital improvements.

For example:

• You purchase shares of stock for $50,000.
• Ten years later, the stock is worth $250,000.

Your cost basis remains $50,000, and your unrealized gain is $200,000.

If you sell the investment, you will typically owe capital gains tax on the gain:

• Sale Value: $250,000
• Cost Basis: $50,000
• Taxable Gain: $200,000

Depending on your income level and state of residence, the combined federal and state tax burden can be substantial.

For affluent investors, federal long-term capital gains rates may reach 20%, plus the 3.8% net investment income tax (NIIT). State taxes could further increase the overall tax burden.

As a result, selling appreciated assets can trigger significant tax liabilities.

What Is a Step-Up in Basis?A step-up in basis occurs when an asset passes to heirs at death.

Under current U.S. tax law, most inherited assets receive a new cost basis equal to their fair market value as of the owner's date of death (or an alternate valuation date if elected by the estate).

In practical terms, this means the unrealized gain that accumulated during the original owner's lifetime may disappear for income tax purposes.

Consider this example:

• Original purchase price: $100,000
• Value at death: $600,000

The heir's new basis generally becomes $600,000.

If the heir immediately sells the asset for $600,000, there may be little or no taxable capital gain because the sale price and the stepped-up basis are essentially the same.

The $500,000 gain that accumulated during the decedent's lifetime effectively escapes capital gains taxation.

This feature makes the step-up in basis one of the most powerful wealth-transfer benefits available to investors.

A Simple Example: Sell Now vs. Hold Until DeathTo understand why this matters, let's compare two scenarios.

Scenario 1: Sell During LifeMary purchased a stock portfolio for $200,000 many years ago.

The portfolio is now worth $1,000,000.

If Mary sells today:

| Item | Amount | | --- | --- | | Current Value | $1,000,000 | | Original Basis | $200,000 | | Taxable Gain | $800,000 |

At a combined federal and state tax rate of 30%, the tax bill could be approximately:

$800,000 × 30% = $240,000

After taxes, Mary would retain approximately $760,000.

Scenario 2: Hold Until DeathInstead, Mary continues holding the portfolio until her death.

At that time:

| Item | Amount | | --- | --- | | Value at Death | $1,000,000 | | New Stepped-Up Basis | $1,000,000 |

If her children inherit the portfolio and sell shortly thereafter for $1,000,000, their taxable gain may be minimal.

In this case, the family potentially avoids taxes on the entire $800,000 appreciation.

The difference between the two outcomes can amount to hundreds of thousands of dollars.

Why Holding Appreciated Assets Often Creates More After-Tax WealthFor many families, the goal isn't simply maximizing investment returns. It's maximizing after-tax wealth.

The step-up in basis can be especially valuable because it addresses a tax liability that may have accumulated over decades.

Long-Term Investors Benefit MostThe longer an asset has appreciated, the larger the potential tax savings.

Examples often include:

• Concentrated stock positions
• Rental properties held for decades
• Family businesses
• Low-basis mutual funds
• Appreciated ETF portfolios

Many investors are surprised to discover that some of their largest embedded tax liabilities are hidden within assets they purchased years—or even decades—earlier.

Tax Deferral Has ValueEven before considering a step-up in basis, investors benefit from deferring taxes.

When taxes remain unpaid, more capital stays invested on your own balance sheet and continues compounding.

By not selling appreciated assets, investors may benefit from both:

1. Ongoing tax-deferred growth, and
2. Potential basis adjustment at death.

This combination can significantly increase family wealth over time.

Real Estate ExampleReal estate owners often experience some of the most dramatic benefits from the step-up in basis and have additional tools such as 1031 exchanges that can continue deferring taxes over long stretches of time.

Consider Don, who purchased a rental property in 1995 for $300,000.

Today, the property is worth $2 million.

If Don Sells During Life

| Item | Amount | | --- | --- | | Sale Price | $2,000,000 | | Basis | $300,000 | | Gain | $1,700,000 |

In addition to capital gains taxes, Don may also face depreciation recapture taxes.

The combined tax burden could be substantial.

If Don Holds Until DeathAssume the property is worth $2 million when inherited by his children.

Under current law:

• New basis = $2 million
• Prior appreciation generally disappears for capital gains tax purposes

If the children sell shortly thereafter for approximately $2 million, they may owe little or no capital gains tax.

For families with significant real estate holdings, this can represent one of the largest tax-saving opportunities available.

Business Interests Can Also BenefitPrivately held business interests may also receive a step-up in basis when transferred through an estate.

Many business owners spend decades building enterprise value.

A company that began as a modest startup may ultimately be worth millions of dollars.

Holding such interests until death can allow heirs to inherit assets with a significantly higher tax basis than the founder originally had.

The resulting tax savings can be considerable, particularly when future sales or liquidity events occur after inheritance.

When Selling During Life May Still Be the Right MoveAlthough the step-up in basis is powerful, it should not automatically dictate investment decisions.

There are many situations where selling appreciated assets still makes sense.

Portfolio RebalancingTax considerations should not override sound investment management.

An investor whose portfolio has become heavily concentrated in a single stock may face significant risk.

Selling part of the position—even if taxes are owed—may improve diversification and reduce exposure to a single company or sector.

Charitable Giving StrategiesHighly appreciated assets can be especially attractive charitable gifts.

Donating appreciated securities directly to qualified charities may allow the donor to:

• Avoid capital gains tax
• Potentially receive a charitable deduction
• Support philanthropic objectives

In these cases, gifting may be more advantageous than either selling or holding until death.

Liquidity NeedsSometimes investors simply need access to cash.

Funding retirement spending, purchasing real estate, assisting family members, or financing healthcare costs may justify realizing gains.

The investment strategy should support the investor's lifestyle and objectives—not the other way around.

Potential Tax Law ChangesTax laws can change over time.

Future legislation could alter capital gains rates, estate tax rules, or basis treatment.

While current law provides for a step-up in basis at death, prudent planning should remain flexible enough to adapt to future changes.

Common Mistakes and Misconceptions"I Should Never Sell Appreciated Investments"Not necessarily.

Taxes are important, but they are only one part of a comprehensive financial plan.

An overconcentrated portfolio, a changing risk tolerance, cash-flow needs, or investment opportunities may outweigh the tax benefits of continuing to hold an asset.

The right answer depends on the investor's broader goals.

"My Heirs Will Owe Estate Tax and Capital Gains Tax on the Entire Value"This is a common misunderstanding.

Estate tax and capital gains tax are separate concepts.

Many inherited assets receive a stepped-up basis, reducing or eliminating capital gains tax on prior appreciation. Whether an estate owes estate tax depends on separate federal and state estate tax rules and the value of the estate.

Under today’s laws, the federal estate tax exemptions are quite high at $15M per individual, so most households do not need to worry about this additional layer of taxes.

"Step-Up in Basis Eliminates All Taxes"Not entirely.

The step-up in basis generally addresses unrealized capital gains accumulated during the decedent's lifetime.

However:

• Estate taxes may still apply in certain circumstances (i.e., very large estates).
• Future appreciation after inheritance remains taxable.
• Some assets may have unique rules and exceptions.

The step-up is powerful, but it is not a universal tax exemption.

Key TakeawaysThe step-up in basis remains one of the most valuable tax benefits available under current U.S. tax law.

For investors who own highly appreciated stocks, ETFs, mutual funds, real estate, or business interests, holding assets until death can significantly reduce—or even eliminate—the capital gains taxes that would otherwise be owed on decades of appreciation.

That said, tax efficiency should not operate in isolation. Investment risk, diversification, liquidity needs, charitable objectives, estate planning considerations, and family goals all play important roles in determining the most appropriate course of action.

The most effective strategies are typically developed within the context of a comprehensive financial plan that considers both current needs and long-term legacy objectives.

Interested in learning how a financial advisor can help you make the most of strategies like the step-up in basis? Click here to schedule an introductory call with one of our advisors.

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June 30, 2026 • By Clarissa Hartono, CFP®

By this point, most of us have seen an online video that was entirely generated by artificial intelligence (AI). Now, scammers are using AI to mimic voices, making phone scams very convincing. As technology continues to evolve, so do the tactics scammers use.

In this article, we’re going to lay out a few ways you can verify whether the call you have received is truly from someone you know or from a scammer.

1. Hang Up and Call Back If you receive a suspicious call, even if the voice sounds familiar, the safest approach is to end the phone call and call the person or organization back using a trusted phone number. A trusted phone number is one that is already in your contacts or is easily found on the organization’s official website.

For example, if the caller claims to be a family member in distress, call them back using the known phone number in your contacts. If the caller claims to be from your bank, use the phone number listed on the back of your credit card to call them back.

It’s always better to be safe than sorry, and a legitimate caller will understand your caution.

2. Ask Unscripted QuestionsWhile AI voice technology can get the sound of a real human pretty well, it can still struggle with unexpected questions.

If you suspect that a call may not be legitimate, ask questions that only a real person would know. For example:

• What’s the nickname we use for Grandma?
• What did we have for dinner last night?
• What is my pet’s name?
• What’s my favorite color?

3. The Safe-Word TestFamilies and close friends may want to establish a “safe word” known only within your chosen circles.

If you receive a distress call from someone claiming to be someone you know, ask them for the safe word. If they struggle to provide the safe word, that may be a strong indication that the call is not legitimate.

4. Slow Down and Listen CarefullyMost scammers like to create a sense of urgency or panic, leaving less time for your brain to process what is happening. When emotions run high, it becomes easier to make rushed, uninformed decisions.

Before taking action, pause and gather information from your other family members and friends. Never allow the caller to pressure you into sending money right away.

It is also important to listen carefully to the caller’s voice, as there may be odd pauses or erratic breathing. Explosive consonants like “p” and “t” may be harder for AI voices to generate.

Final ThoughtsAI technology may offer many benefits, but it also has created new methods of fraud. Maintaining a healthy level of skepticism and verifying information before making any financial decisions can significantly reduce your risk.

If you’re a client and think you may have received a suspicious call regarding your finances and/or accounts, please contact our office at 714-738-0220 before taking action. At Eclectic, we are always happy to help you evaluate the situation and protect your financial well-being.

Interested in learning how a financial advisor can help you organize and protect your finances? Click here to schedule an introductory call with one of our advisors.

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June 15, 2026 • By Carl Lachman, MBA, CFP®

A summary of our investment discussion between Eclectic Associates Vice President Carl Lachman and Dimensional Fund Advisors Senior Economist Apollo Lupescu on June 3, 2026.

Want to get the full conversation? Listen to the audio or watch the video recordings from our reception.

DFA Client Reception - Audio Recording

On the evening of June 3, 2026, Eclectic Associates hosted a client reception featuring Apollo Lupescu, PhD, a senior economist and educator at Dimensional Fund Advisors (DFA). With over two decades at the firm and hundreds of presentations annually, Lupescu led an engaging discussion on the questions weighing on investors' minds — among them, artificial intelligence, market valuations, geopolitical risk, and how to stay grounded when the world feels anything but.

The World Is Different, and That's OKLupescu opened with a candid acknowledgment: Yes, the current environment feels unprecedented, and in many ways, it is. Inflation pressures, shifting interest rates, geopolitical tensions, and the rise of AI represent a genuinely unusual confluence of forces.

But his central message was that while the situation is always changing, the fundamental premise of investing does not. Companies operating in free markets consistently adapt, innovate, and generate returns, even amid wars, energy crises, and pandemics. That enduring premise, he argued, is the investor's equivalent of the fixed rules of chess: The board changes every game, but the game itself stays the same.

He also warned that emotion is often the investor's worst enemy. When uncertainty spikes, people tend to make reactive decisions — selling at the bottom, sitting out recoveries — that damage their long-term outcomes. A sound financial plan, tailored to individual circumstances and risk tolerance, is the antidote.

Who Is Dimensional Fund Advisors?DFA was founded in 1981 and manages over a trillion dollars globally, yet it remains deliberately outside the public spotlight. Unlike Fidelity or Vanguard, DFA has never marketed directly to retail investors. Instead, it works exclusively with large institutions and a carefully selected group of fee-only, fiduciary advisors — professionals such as Eclectic Associates who are legally obligated to act in clients' best interests and who receive no commissions from product sales.

DFA's investment philosophy is rooted in academic research, drawing on the work of economists from the University of Chicago, five of whom have received the Nobel Prize in Economics. DFA does not rely on star fund managers to pick winning stocks or time the market (what Lupescu called "conventional active management"), and does not simply replicate an index like the S&P 500. Instead, it occupies a disciplined middle ground: owning broad, globally diversified exposure and systematically tilting toward factors — particularly small-cap and value stocks — that academic research has shown to outperform over time.

The AI Opportunity: Real, but UncertainMuch of the evening's conversation centered on artificial intelligence. Lupescu framed it as a legitimate revolution, comparable to the internet, and drew careful lessons from the comparison. When the internet emerged in the mid-1990s, nobody could have predicted that a scrappy online bookseller would become Amazon while Pets.com and eToys would vanish. The same dynamic applies to AI: The winners will be transformative, but identifying them in advance is nearly impossible.

The capital being deployed is staggering. Four companies — Microsoft, Amazon, Meta, and Google — are collectively investing in AI infrastructure at a scale second only to the Louisiana Purchase in terms of the economy's size. More than the cost of the entire U.S. highway system. More than the cost of the U.S. railroads. All in a single year. Yet these companies are not yet monetizing AI at a rate that justifies current valuations, which is why AI-linked stocks carry high price-to-earnings ratios. Tesla, for example, was trading at roughly 300 times earnings earlier this year — a payback period of three centuries at current profit levels.

Lupescu's conclusion: AI is not a bubble in the traditional sense. The potential payoff is enormous, and rational investors are pricing in future earnings. But the uncertainty is real, and no one knows which companies will capture that value. The appropriate response is broad diversification — owning the whole race, not betting on a single horse.

The Global Supply Chain Hiding in Plain SightOne of the most illuminating moments came when Lupescu traced the AI chip supply chain. NVIDIA designs the world's most powerful AI chips, but cannot manufacture them. Only one company in the world can: TSMC, based in Taiwan. And the machines that make those chips — extraordinarily precise lithography equipment — are produced exclusively by ASML in the Netherlands.

This global interdependence, he argued, is precisely why DFA's portfolios span roughly 13,000 companies across 45 countries. Owning only Nvidia would mean missing the companies that Nvidia cannot exist without.

Concerns about Taiwan's geopolitical vulnerability were acknowledged directly. While the risk is real, Lupescu noted that TSMC's first U.S. facility is now coming online in Phoenix and that additional capacity is planned, a meaningful step toward reducing concentration risk in the global semiconductor supply chain.

Resilience as an Investment ThesisLupescu closed with a sweeping historical perspective.

U.S. investors who stayed the course from September 1939 through August 1945 — through six years of global war — would have roughly doubled their money. Ford built tanks. Cadillac built tank engines. Coca-Cola used military contracts to build a global distribution network that it still operates today. Companies adapt. People adapt.

The 1973–74 energy crisis felt catastrophic at the time, but it produced fuel efficiency standards, a push for energy independence, and ultimately a United States that today produces its own oil.

Crises, Lupescu suggested, often contain the seeds of the next era of growth.

The takeaway for investors: There is no reliable way to time the market, just as there is no reliable way to predict earthquakes. What you can do is prepare: Build a plan that matches your needs, timeline, and risk capacity, and then stay invested. Those who do, history suggests, are rewarded for it.

If you have questions about your investment plan, we are happy to help. Please schedule a complimentary consultation with one of our fee-only financial advisors.

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May 30, 2026 • By Russell W. Hall, CFP®, CPWA®

There’s a great moment in The Peanuts Movie where Charlie Brown’s little sister, Sally, comes out from her last day of kindergarten and gleefully dumps her books in the trash, declaring that she’s so glad she’ll never have to worry about school again. Sally is then brought back down after her brother tells her it’s not true — school keeps on going, and for many years.

We feel a little bit like Charlie Brown when we talk about tax planning right after most people have just finished their returns (and are hoping to avoid thinking about taxes for another year!). But we find that it’s best to start planning now, beginning with a review of last year’s tax returns. Here are a few of the things we’re looking for on Form 1040:

Dividends — Qualified vs. Ordinary (Lines 3a and 3b)Tax treatment on qualified dividends is more favorable, using long-term capital gains rates instead of standard rates like ordinary dividends. However, unless you own only individual stocks, this is a lot harder to control.

Tax treatment of dividends from pooled investment vehicles, such as mutual funds and exchange-traded funds (ETFs), is passed through, and shareholders don’t have control over what the fund pays out. Nevertheless, it’s good to be aware of how your dividends are being taxed and see if there’s any opportunity to do something different, like holding that investment in a more tax-efficient account.

IRA Distributions and QCDs (Lines 4a, 4b, and 4c)For required minimum distributions (RMDs), Roth IRA conversions, or other IRA withdrawals, we’re checking to make sure everything was reported correctly. We find that IRA donations to charity (called qualified charitable distributions, or QCDs) are particularly likely to be misreported, leading to unnecessary tax payments.

There is now a dedicated QCD checkbox on Form 1040, and custodians like Schwab are switching to a better method of reporting on 1099-R forms starting in 2027, but we think there will still be some confusion for a while.

Social Security Benefits (Lines 6a, 6b, and 6c)Up to 85% of Social Security benefits can be taxable, depending on other income, and we’re checking whether this taxability has already been maxed out. That can affect other decisions — for example, a Roth conversion would increase income and cause more Social Security to become taxable.

Recently, we’ve also been watching for clients who receive public pensions and are now eligible for Social Security benefits under the Social Security Fairness Act.

Capital Gain or Loss (Lines 7a and 7b)We pair this step with Schedule D to examine realized gains and losses from the previous year: What impact did those make, and does anything need to be changed? We’re particularly looking for carry-forward losses, which could provide planning options for selling appreciated securities in taxable accounts. However, there could be opportunities to harvest gains as well and pay lower rates on those capital gains.

Adjusted Gross Income (Line 11a)The AGI number and its cousin, modified AGI, affect a number of tax calculations, including taxation of Social Security and the IRMAA extra charges for Medicare. Lowering AGI is always a good goal, but at the same time, there are not a lot of options to do that.

Deductions — Standard vs. Itemized vs. Additional (Lines 12a, 13b)For several years, most taxpayers have been filing the standard deduction, as a $10,000 cap for state and local taxes (SALT) kept them from being able to itemize. That amount has gone up to $40,000 for the next four tax years, but will drop back to $10,000 in 2030 unless the law changes again. It begins phasing out at $505,000 of income.

The additional deductions from Schedule 1-A (shown on line 13b) include the “enhanced” senior deduction, which is up to $6,000 per person for those over 65 on top of standard or itemized deductions. That calculation is again based on MAGI and starts to phase out at $75,000 for single filers and $150,000 for married couples filing jointly. The deduction is currently available through 2028.

For clients over 70 ½, it has mostly been an easy decision to shift charitable giving to IRA accounts via QCDs, especially if donations couldn’t be itemized and deducted. We may want to revisit that for some people with the higher SALT cap, but the standard deductions are still historically high (for 2026: $16,100 for singles/$32,200 for married filing jointly; if over 65, $18,150 single/$35,500 married filing jointly), so it might still be difficult to itemize.

Two other new rules will affect the charitable decision: the new charitable deduction floor and an additional cash charitable deduction for those who aren’t itemizing. The latter allows a separate deduction of up to $1,000 single or $2,000 married filing jointly for cash gift donations only.

Tax Refunded or Due (Lines 34 and 37)Here, we’re checking whether clients had to pay too much tax or received a larger refund than expected. Either way, we may want to help adjust withholding to avoid penalties and interest, or to avoid giving the government a large interest-free loan.

We want to make it clear that we don’t prepare taxes and are not giving tax advice. But by reviewing tax returns in this way, we can help you answer questions like:

• Should you withhold more taxes?
• Should you sell an investment or a property?
• What’s the best way to donate to charity?
• How can you reduce taxable income?

If you’re interested in this type of review, please contact us. We are happy to meet with anyone for a free, no-obligation meeting. Call us at 714-738-0220 to schedule a meeting, or click here to schedule an introductory call with one of our advisors.

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May 15, 2026 • By Aimee Calderon, CFP®

When changing jobs or transitioning into retirement, there are many important factors to consider. If you own company stock and are contemplating a rollover of your 401(k), it is important to explore a lesser-known tax strategy called net unrealized appreciation (NUA). NUA represents the difference between the cost basis of the company stock (the price at which it was originally purchased) and its current market value.

The NUA strategy involves distributing company stock out of a 401(k) to a taxable brokerage account, such as a trust account or individual account. At the time of the distribution, ordinary income tax is paid on the cost basis of the stock. The appreciation (NUA) is then taxed later at long-term capital gain rates when the stock is sold.

This differs from leaving the company stock inside the retirement account, where withdrawals are taxed entirely as ordinary income based on the stock’s value at the time of distribution.

Several requirements must be met to qualify for NUA treatment:

• The stock must be distributed in-kind as part of a lump sum distribution.
• A triggering event must occur, such as turning 59½, leaving your employer, death, or disability.
• The stock must be in a tax-deferred retirement account, such as a 401(k).
• The entire retirement account must be distributed in the year the NUA strategy is executed. You cannot have taken a distribution from the 401(k) in a prior year.
• The company stock must be taken out of the retirement account and placed in a non-qualified brokerage account.
• The remaining assets in the retirement account can be rolled into an IRA.

Depending on your tax bracket and the level of appreciation in the stock, this strategy may result in significant tax savings. Below are two examples illustrating when NUA may or may not be advantageous.

Example 1

| Company Stock Basis: | $30,000 | | Current Stock Value: | $200,000 | | Current Marginal Income Tax Bracket: | 24% | | Capital Gain Tax Rate: | 15% | | Estimated Marginal Tax Bracket in Retirement: | 24% | | | | | Current Tax on NUA Distribution: | $7,200 | | Cap Gain Tax on Future Sales (assumes no further appreciation): | $25,500 | | Total Tax If Using NUA Strategy: | $32,700 | | Income Tax If NUA Is Not Used (assumes no further appreciation): | $48,000 | | Tax Savings Using NUA: | $15,300 |

Example 2

| Company Stock Basis: | $100,000 | | Current Stock Value: | $180,000 | | Current Marginal Income Tax Bracket: | 32% | | Capital Gain Tax Rate: | 15% | | Estimated Marginal Tax Bracket in Retirement: | 24% | | | | | Current Tax on NUA Distribution: | $32,000 | | Cap Gain Tax on Future Sales (assumes no further appreciation): | $12,000 | | Total Tax If Using NUA Strategy: | $44,000 | | Income Tax If NUA Is Not Used (assumes no further appreciation): | $43,000 | | Tax Savings Using NUA: | ($800) |

Please note that these examples reflect federal taxes only. For our clients in California, there is no preferential state tax rate for capital gains, so no state-level savings apply. State income tax would increase the total tax figures shown above.

In addition to the factors outlined, it is also important to consider the impact of an NUA strategy on the income-related monthly adjustment amount (IRMAA) if you are currently on Medicare or will be in the next couple of years following an NUA election. The distribution of company stock increases ordinary income in the year of execution and may result in higher Medicare premiums. Because IRMAA is essentially an additional tax, it should be factored into the overall analysis.

While NUA can be a complex strategy, it may be an effective one to reduce taxes on highly appreciated company stock. It is important to work with a financial advisor to help ensure that all requirements are met and the strategy aligns with your overall financial plan. Schedule a complimentary introductory call with a fee-only, fiduciary advisor.

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By Russell W. Hall, CFP®, CPWA®

It feels like every year we encourage clients to start planning their year-end giving earlier and earlier. This year is no exception, and now there’s another big reason to start sooner: a new charitable deduction floor introduced in the One Big Beautiful Bill Act.

Congress Giveth and TakethWe previously covered the OBBB Act in detail, but only briefly touched on charitable deductions. As with most tax law changes, there’s good news and bad news.

The good news is for taxpayers who file the standard deduction, which is now the majority of the country. Starting in 2026, they can deduct charitable contributions of up to $1,000 for single filers and $2,000 for married filing jointly.

The contributions have to be cash (as opposed to appreciated assets or in-kind donations) given to a 501(c)(3) public charity, so private foundations and donor-advised funds (DAFs) don’t count. The deduction is also “above the line,” so it reduces adjusted gross income (AGI), which could be helpful to lower taxation on other items (including our old friend IRMAA).

The bad news is for taxpayers who itemize their charitable deductions. Starting in 2026, those donations are subject to a 0.5% floor. Also, those in the highest tax bracket of 37% have their deductions effectively capped at 35% through a complicated formula.

Floor Is LavaThis new charitable contribution floor works similarly to the existing medical expense deduction floor, in that only the amount of contributions greater than 0.5% of your AGI will be deductible. Here are some simplified examples:

• AGI = $240,000 (22% federal tax bracket)
• Charitable donations = $10,000
• Less 0.5% of AGI = ($1,200)
• Deductible amount = $8,800

For an individual with much higher income:

• AGI = $900,000 (37% federal tax bracket)
• Charitable donations = $90,000
• Less 0.5% of AGI = ($4,500)
• Deductible amount = $85,500
• The actual deduction is then further limited down to 35%, since the taxpayer is in the 37% bracket.

Given these changes, what’s the best course of action? There’s no silver bullet, but existing donation options that we’ve touched on in other articles will be even more useful going forward, particularly DAFs and qualified charitable contributions (QCDs).

DAFsDonor-advised funds are set up as public charities to receive donations and give an immediate tax deduction, but the actual gifts to each charity don’t have to be made all at once. Instead, the donor can “advise” (instruct) the fund to donate to the 501(c)(3) charity of their choice whenever they want.

You get only one tax deduction at the initial donation, but this strategy lets you bunch several years’ worth of donations into one year and still spread out the actual gifts over time. There is no annual requirement that you give away a certain amount or percentage from the DAF.

If you itemize your charitable donations or would like to, you could utilize a DAF to donate an amount of appreciated securities or cash equal to what you would have given over five years. If you do that by December 31, 2025, you’ll avoid the new 0.5% floor—with a caveat.

Your total deductible giving to public charities is limited to 60% of your AGI for cash gifts and 30% for appreciated securities (there are other limits for different types of donations, but those are the most common). If your DAF donation for 2025 exceeded those percentages, the excess can be carried forward for five years. However, there is currently uncertainty around whether the new 0.5% floor will affect pre-2026 carry-forward deductions, so keep that in mind.

QCDsIn a way, qualified charitable distributions are even better since they will never be subject to the new floor.

If you’re over 70 ½ and have an IRA or inherited IRA, you can currently give up to $108,000 per year from that account directly to charity. You don’t get to deduct those donations, but since the withdrawals never touch your tax return, your income is lower. For most people, that’s even better than itemizing charitable deductions, especially with the tax law changes.

QCDs can be a great way to give in a tax-advantaged manner, not only reducing AGI but also potentially reducing future required minimum distribution amounts.

The Time to Plan …If you think the new floor will affect your deductions in 2026, don’t let the rest of this year slip away without at least considering one of these options. We’re available to help clients think through strategies, and if you’re not a client, you can schedule a 15-minute discovery call with a fee-only financial advisor.

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By Carl Lachman, MBA, CFP®

A summary of our Tax Update Reception discussion by Mike Giangrande and Carl Lachman on September 10, 2025.

The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, and with it comes many new tax provisions that may directly affect you. There are many more tax provisions contained in OBBBA beyond the ones we have noted below. The provisions we highlight in this article are the ones that will probably have the most immediate impact on you.

Extension of Expiring Tax ProvisionsThe center point of OBBBA is a permanent extension of most of the provisions of the Tax Cuts and Jobs Act of 2017 that apply to individual taxpayers and were scheduled to expire at the end of 2025. These provisions include the following, among many others:

• Lower income tax brackets with the top rate at 37% instead of 39.6%.
• A higher standard deduction, with an additional $6,000 deduction for taxpayers age 65 and over ($12,000 for married taxpayers who are both age 65 and older).
• The permanent extension of the §199A 20% qualified business income deduction for business owners, with minor modifications.
• The increased unified estate and gift tax exclusion, with a bump up to $15 million on January 1, 2026.

State and Local Tax DeductionsThe itemized deduction for state and local taxes (SALT) is temporarily increased from $10,000 to $40,000 for five years. The increased deduction is reduced for higher earners (those whose modified adjusted gross income exceeds $500,000, or $250,000 for married taxpayers filing separately).

Taxpayers who are owners of passthrough business entities and make a passthrough entity elective tax election can still use the election to maximize their SALT deductions.

Elimination of Energy CreditsOBBBA terminates many energy credits much earlier than their previously scheduled expiration date, including:

• All three clean-vehicle credits are disallowed for vehicles acquired after September 30, 2025.
• Both credits for home energy improvements expire after December 31, 2025.

What these early expiration dates mean is that if you want to claim a credit for the purchase of a clean vehicle, then you must take delivery of the vehicle no later than September 30, 2025. Keep in mind that there are multiple limitations to claiming the clean vehicle credits, so clients will want to discuss those requirements with us if you are contemplating an eligible vehicle before the credits expire.

For the home energy credits, your projects must be completed by December 31, 2025, to qualify. Eligible improvements include the installation of energy-efficient windows, doors, air conditioners, solar panels, and home batteries, among many others.

Charitable Contribution DeductionsCharitable contributions are subject to two new OBBBA provisions going into effect in 2026:

1. Non-itemizers can claim a $1,000 charitable deduction ($2,000 for married taxpayers filing jointly) starting in 2026.
2. Charitable contribution itemized deductions will be subject to a 0.5% AGI floor, starting in 2026.

Clients should discuss gifting strategies with us before the end of 2025 and how the nature of your contributions and their timing can maximize your tax deductions. That way, you don’t lose deductions due to the new AGI floor for itemized deductions.

Brand-New DeductionsThree brand-new deductions for individual taxpayers are available starting in 2025. These deductions may be known better by what they’ve been called in the news: (1) No tax on tips; (2) no tax on overtime; and (3) no tax on qualified car loan interest. Each of these provisions contains multiple limitations that should be investigated, if any of these potentially apply to you.

Business ProvisionsIn addition to the tax provisions applicable to individual taxpayers, OBBBA contains many business provisions, including:

• Permanent 100% bonus depreciation rate for assets acquired after January 19, 2025.
• An increased §179 expensing limitation for assets placed in service after December 31, 2024.
• Immediate expensing of research expenses with a special election to immediately deduct previously capitalized research expenses.
• An easing of the business interest limitation rules.

WEP EliminationIf someone has a pension from government work, such as teachers and state employees, their Social Security payments were reduced in the past. Now that reduction—or WEP (Windfall Elimination Provision)—has been eliminated.

Earlier this year, many people received a big check when WEP was eliminated, but no taxes were withheld. These people may need to pay quarterly estimated taxes or use the “Social Security Lump Sum Payment” option on their 2025 federal tax return.

Individual Trust Accounts for MinorsThese are new tax-deferred accounts for 0- to 18-year-old minors and are being called “Trump Accounts.” Up to $5,000 can be contributed per year, but no distributions can be taken before the beneficiary is 18 years old.

Contributions are not tax-deductible but can be made by parents and grandparents. Distributions from the accounts are taxable as income, but they can be rolled into regular IRAs after the beneficiary turns 18 years old.

Changes to 529 College AccountsMoney in 529 accounts can now be used to pay for not just college but also a wider range of K-12 expenses. The best use of 529 accounts, however, is when money is contributed and then left in the accounts for as long as possible so that the tax-deferred growth can happen for a long period of time. So, taking the money out quickly for grammar school expenses is not ideal.

Contact usThere are caveats and phaseouts for most of these new tax code changes for individuals and joint taxpayers, and for small businesses. Please contact us if you would like to discuss any of these provisions in detail or would like to discuss planning opportunities arising from these changes.

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By Russell W. Hall, CFP®, CPWA®

“Will I run out of money in retirement?” It’s a question that’s at the heart of the financial planning process. To answer it, we run income projections using reasonable but conservative assumptions about what the future might hold. Our goal is to establish the direction that clients are headed, while avoiding giving a false sense of security.

What’s Expected

Among the various assumptions built into retirement projections - like investment return, inflation, and cost-of-living adjustments - life expectancy stands out as perhaps the biggest unknown. Insurance actuaries have long compiled data on this, and the entire IRA required minimum distribution process is built around life expectancy factor tables provided by the IRS. Still, none of us knows exactly how long we will live.

Social Security provides an actuarial life table that can be interesting (or depressing, depending on how you interpret the data!). According to that chart, a 75-year-old male has an average life expectancy of about 10.9 years, while a female’s expectancy is about 12.7 years. An average of 5% of males and 11% of females will live to age 95. Other sources show roughly similar statistics.

The Default

If that’s the case, why do we at Eclectic and many other financial advisors use age 95 as our default life expectancy when we are running projections? Is it a case of blind optimism, or perhaps being overly cautious?

Running a projection to age 95 is definitely the more careful approach. As you can imagine, one of our main jobs as financial advisors is making sure our clients don’t outlive their money. We are more concerned with longevity risk than underspending. In other words, we would rather manage investments so that clients live below their means and leave an inheritance, instead of depleting their assets too early.

Above Average

That said, there are other reasons why we are comfortable using a higher number. The main one is that our clients generally have higher-than-median income and/or assets. That often results in access to better healthcare than average, which leads us to conclude that they likely will have above-average lifespans. That’s not true for everyone, of course, but enough that it supports defaulting to a higher life expectancy.

In a similar way, most of our clients have enough (or will have enough) for retirement through diligent savings and careful spending. They have generally made wise decisions in their life which leads to a good outcome. The same is usually true with their healthcare choices, which in turn can affect life expectancy in a positive way.

As For You…

As you think about retirement, you actually have the most insight into your own life expectancy. You may know how long your parents and grandparents lived, and certainly you know your own health and medical history. Although none of us know for sure, you would have the best idea of whether 95 is reasonable or outside the realm of possibility. If you’re a client of Eclectic, you can have a conversation with your advisor about retirement planning and life expectancy since we are happy to make adjustments on projections.

If you’re not a client or if you know someone who should consider using our services, please contact us. We are happy to meet with anyone for a free, no-obligation meeting. Call us at 714-738-0220 to schedule a meeting, or click here to schedule an introductory call with one of our advisors.

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By David K. MacLeod, CFA, CFP®

The markets and economy proved resilient in 2024. Despite numerous headwinds, stocks climbed to new highs and risk assets broadly performed well. Large cap stocks rose 25% and small cap stocks increased 9%. International developed country stocks gained 4% while emerging market stocks gained 8%. Bond funds gained 3 – 5%. Although the Fed cut short-term interest rates 4 times in 2024, long-term interest rates based on the U.S. Treasury bond market actually increased meaningfully (by 0.7%).

Although economists expected economic growth to slow dramatically in 2024, U.S. real GDP growth accelerated to a healthy growth rate of over 3% for the past two quarters. Consumer spending continues to power the economy as workers have seen 20 consecutive months of real wage growth and the unemployment rate remains at a low 4%. Household wealth grew by $15 trillion in 2024, further increasing consumers’ confidence to spend.

Looking ahead, there are reasons to be optimistic and risks, as always. President Trump and Congress are likely to pursue an extension of the current tax regime through the reconciliation process early this year. Inflation continues to trend toward the Fed’s 2% target, though if President Trump’s tariffs proposal is fully implemented it could cause inflation to reaccelerate. We think President Trump will ultimately use the proposal for negotiations and reduce or remove tariffs. It’s still too early to tell whether global trade tensions escalate this year, but we would note that tariffs were used by recent presidents prior to President Trump. President Bush imposed steel tariffs on China in 2003 and President Obama imposed tariffs on Chinese tires in 2009. President Biden maintained many of President Trump’s tariffs and added new ones of his own.

Corporate profits are expected to remain strong, growing over 10% this year, supporting the U.S. stock market where valuations appear stretched in some sectors. The so-called “Magnificent 7” stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla) contributed more than half of the S&P 500’s return last year with an average return of 48%. We don’t expect the high returns to continue when these companies experience decelerating earnings growth.

Please do not hesitate to call if you have questions or want to schedule a meeting.

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By Russell W. Hall, CFP®, CPWA®

For many years, we have helped our clients with government pension plan around two policies that reduced or completely eliminated their Social Security benefits. The Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) were meant to halt so-called “double dipping” where retirees or their spouses could receive both their pension and full Social Security benefits.

However, these policies also wound up reducing Social Security for workers who had paid into Social Security over enough quarters to receive the benefits (usually in a previous job), but were then denied them. It also could have affected their dependents, including surviving spouses who only received the pension because they inherited it and thus would see their own Social Security benefits cut. Many of our teacher, public safety, firefighter, and government employee clients were affected by these provisions.

That all changed with the Social Security Fairness Act passed last week, which repeals both WEP and GPO. That new law will affect current benefit payments as well as those for future retirees, and it is retroactive to the start of 2024 so anyone impacted will likely receive a lump sum payment for those past benefits. While the government estimates that benefits will go up an average of $360 per month, we think several of our clients could see larger increases.

At the moment, as long as you have already filed for Social Security there is no action that needs to be taken to receive the additional amount. We anticipate that it will take the Social Security Administration some time to evaluate and implement the new law, so they are just asking that workers verify that their mailing address and direct deposit information is correct on www.ssa.gov. You can also visit that site to find out about filing for benefits if you haven’t ever done so because you were receiving a pension.

If you have additional questions, please visit our website at www.eclecticassociates.com to schedule a complimentary phone call or meeting with one of our fee-only financial advisors.

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By Travis J. McShane, CFP®, CFA®

40 Years and Counting…

Since Eclectic’s inception in 1984, investing in stocks has been a pillar of most (if not all) financial plans we put together for our clients with long term goals. We find it helpful to periodically step back and review the assumptions underpinning our long-term investment philosophy which is what follows in this article.

While this analysis focuses on broad-based index returns, our investment committee continues to meet frequently throughout the year to conduct the ongoing research on the specific investments we recommend for client portfolios. Our due diligence process incorporates many factors such as assessing a manager’s track record, consistency of performance, philosophy of investing, fees as well as many other metrics. If you have questions about our due diligence process or investment philosophy, please do not hesitate to reach out and we’d be happy to discuss.

Stocks for the Long Run

For long-term investors, stocks—shares in publicly traded companies—have historically been a powerful tool for wealth accumulation. Their appeal lies in their potential for significant growth, as evidenced by nearly a century of historical data.

However, investing in stocks comes with a key caveat: short-term volatility. Price fluctuations, which can occur unpredictably, make stocks unsuitable for money that will be needed in the near term. For those planning to invest, a holding period of at least three to five years is strongly recommended to mitigate the risks of these fluctuations.

A comprehensive analysis of historical returns, spanning the period from 1926 to 2023 and based on the SBBI (Stocks, Bonds, Bills, and Inflation) dataset, sheds light on the relationship between investment duration and risk. This data reveals striking trends:

Over the entire 98-year period, the average annual return for stocks was 10.3%. In comparison, corporate bonds delivered an average annual return of 5.7%, and Treasury bills returned 3.3%. Meanwhile, inflation, as measured by the Consumer Price Index, averaged 2.9% annually. The ability of stocks to consistently outpace inflation over long periods highlights their appeal as a “reasonably safe” investment for patient investors.

The Inflation-Adjusted Advantage of Stocks

Inflation erodes purchasing power, which means that investments in vehicles like money market accounts, while considered safer, may fail to grow sufficiently. Or if we can consider fixed income instruments like corporate bonds which outpaced inflation only 67% of the time over 20-year periods. In contrast, stocks outperformed inflation 100% of the time over the same duration.

This makes a compelling case for stocks as the superior choice for long-term financial goals. Despite their reputation for risk, their historical ability to maintain purchasing power—and even grow wealth in real terms—positions them as less risky than more conservative options like bonds or cash when evaluated against the ultimate investment goal: ensuring sufficient assets when they’re needed.

Risk: A Matter of Perspective

A key insight for investors is redefining risk. Rather than focusing solely on volatility or the possibility of short-term losses, risk should be viewed as the likelihood of not having the money needed at a specific time. By this definition, the stock market is often less risky for long-term goals than cash or bonds, which carry the risk of inadequate growth.

In conclusion, while no investment is without risk, the historical evidence underscores that stocks are a powerful and relatively safe tool for long-term wealth building. Investors who can withstand short-term volatility are more likely to achieve their financial goals and protect their wealth against inflation.

If this has prompted any questions about your own portfolio and long-term goals, please do not hesitate to reach out to us hereto start a conversation. We are happy to meet by phone or in-person to see how we can help.

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By Russell W. Hall, CFP®, CPWA®

If you’re reading this article, chances are you fall into one of two camps:

1. You think financial advisors that charge 1% for their services are a rip-off. You can do what they do just as well…and for free! You’re hoping that this article is an insider’s confirmation that you don’t need to pay someone to help with your financial planning.

2. You’re already working with a financial advisor - likely Eclectic - and you are anticipating that this will be a (somewhat self-serving) confirmation that you should keep your advisor.

We hope this article presents a realistic view that falls somewhere in the middle. We also should clarify that by “pay 1%”, we mean a fee-only financial advisor who charges an annual fee starting at 1% of the amount they are managing. We don’t mean brokers or commission-based advisors who get paid from sales and transactions.

What does 1% get you?

Let’s run through a few benefits from working with a fee-only advisor:

1. Dedicated, live service. You’re hiring an advisor and their team who will meet face-to-face, will answer the phone when you call, and will respond to emails in a timely manner. You’re not communicating with a service desk or a large company where it’s difficult to get a live person on the phone.

2. Personalized financial plan. Much like a doctor wouldn’t write blanket prescriptions without having knowledge of their patients, a good financial advisor won’t just dole out investment advice. They take the time to get to know you and create a plan that fits your situation, but is also adaptable as life changes.

3. Reporting and reviews. Financial advisors will take all of your assets into consideration and will provide straightforward reporting that lets you know exactly what you own, how those investments are performing, and whether your goals are being met. They will conduct regular reviews and update meetings. Equally important, they will communicate exactly what fees you are paying and how you are being charged.

4. Planning – retirement, tax, estate, college. Financial advisors often have expertise in these areas, even if they aren’t attorneys or CPAs. For instance, we’ve found that tax preparers are usually too busy to do much more than just file the current tax return, when often more advanced tax planning would really help clients. And unlike attorneys and CPAs, a good financial advisor has helped hundreds of clients navigate their retirement.

5. Other benefits. These aren’t always obvious, but advisors can also provide help to their clients’ family members who wouldn’t otherwise qualify as clients at many firms. Also, fee-only financial advisors usually have a network of professionals that they can refer their clients to. Because there are no referral fees or kick-backs, the referrals tend to be to someone the advisor trusts and thinks will be good for their client - because their reputation is on the line as well!

You’ll note that we only briefly addressed investment returns in this benefit list. Obviously, hiring a professional to make investment decisions can be very beneficial, especially if you have limited expertise in that area. But constructing an investment allocation is only a piece of the financial planning process, not the whole thing (despite what some large companies tell you in their commercials). Many times we feel that a significant part of our value is helping clients avoid those bad investing mistakes that would really damage their financial plan.

When is it not worth it?

All that said, are there times when you should not need to pay an advisor 1%? We think so.

1. If you have the expertise yourself - and someone who can act as a good sounding board for your ideas - then you might be fine to self-manage your own financial plan. Notice that we didn’t just say “manage your own investments”, since we’ve established that financial planning is more than that.

2. If you are the type of person who is not willing to take advice from experts that you’ve hired, then frankly don’t hire them! That may sound strange, but you’d be surprised at the number of times we’ve dealt with clients who ignore all of our advice and then are upset when things don’t turn out how they envisioned.

We hope this is a helpful overview of the financial advisor/client relationship. If you’d like to know more, please contact us.

We are grateful to Bryce Sanders for his in-depth article on this subject.

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By David K. MacLeod, CFA, CFP®

As we celebrate 40 years of serving our clients this year, we reflect on all the ups and downs we have experienced in the financial markets since Eclectic Associates was founded in 1984. While the world around us has evolved, our investment philosophy has remained consistent. Our focus on out clients’ long-term goals, diversification, and taking only necessary risks has guided us through periods of economic prosperity and uncertainty alike.

In this article, we will highlight five pivotal periods that have shaped our firm’s history and include direct quotes from letters to our clients at the time: Black Monday in 1987, the Dot-Com Bubble of the late 1990s, the 9/11 terrorist attacks, the Global Financial Crisis of 2008, and the COVID-19 pandemic. We have stood alongside our clients through each of these periods, helping them stay grounded and making the best decisions for their futures.

Black Monday: October 1987

On Black Monday the Dow Jones Industrial Average fell 22.6% in a single day—the largest one-day percentage drop in history. The sudden decline created widespread fear and uncertainty, leaving many investors worried about the future of their portfolios.

In letters to our clients around that time, we sought to provide good direction and reassurance. Prior to the crash, in March 1987, we wrote, "The stock market has increased significantly in value during 1987. It has also been rather volatile with large gains and losses in the Dow Jones averages in any one day. Our view is the market has room to continue to increase... This upward movement will not be a smooth straight-line but will continue to have significant upward and downward movements."

Later, in our November 1987 letter to clients, we acknowledged the anxiety many felt in the aftermath of Black Monday: "You, like the rest of us, have to be concerned over the recent violent swings in the marketplace. None of us like what has happened, yet we all know market ups-and-downs are part of every investment."

We reminded clients of the importance of focusing on the long term, writing, "None of us are short-term speculators. We all are making investments for the long-term... Over time, ownership (stock) in private enterprise (business) has paid the most consistent and highest rewards to the investor." Our recommendations were clear: "Hang in, do not make major portfolio changes... Study and stick with basic investment practices. Do not get caught up in either extreme: panic or 'get-rich-quick' schemes."

Our commitment to these principles—remaining calm, avoiding unnecessary changes, and maintaining a diversified, long-term approach—helped our clients navigate this challenging period.

The Dot-Com Bubble: Late 1990s - 2000

The late 1990s brought a frenzy of speculation in technology stocks, ultimately culminating in the burst of the dot-com bubble in 2000. During this period, we saw firsthand how investors who chased speculative gains were left with heavy losses. Our philosophy of taking only necessary risks proved crucial.

In our January 2000 letter, we anticipated potential volatility, writing: "We expect the year 2000 to be interesting and probably volatile from an investment perspective. Currently, the economy is very strong and unemployment is very low. To us, this sounds like great news. However, from an investment perspective, it makes people more concerned about inflation returning." We reminded clients that the past several years had been extraordinary, with high returns for large growth stocks, but emphasized that such returns were unlikely to persist indefinitely: "We do not expect the high returns (20% +) to continue. Historically, we think of the stock market as growing around 10% per year."

Later in October 2000, after the dot-com bubble had begun to burst, we wrote, "From the beginning of the year through mid-March, the Nasdaq gained about 25%, and some market commentators were saying that New Economy stocks would continue their stratospheric growth forever. By that time, investors in technology companies were paying virtually no attention to the price of the shares they were buying. No matter how much they paid, they assumed they could always sell the shares for more. In striking contrast to the declines in companies that were hot, some things that people couldn't sell fast enough earlier this year have come roaring back. The principle of diversification is still very valid."

We have continually reminded our clients of the importance of diversification and a disciplined, long-term approach. Our January and October cleint letters emphasized that avoiding extreme investment allocations—whether driven by greed or fear—was critical to investment success.

9/11 Terrorist Attacks: September 2001

The terrorist attacks of September 11, 2001, were a profound moment of grief and uncertainty. On September 12th, we wrote to our clients: "Yesterday was a day of great tragedy and evil for the United States. We grieve with you the loss of lives and the loss of our nation's sense of security. We continue to pray for the families of those impacted as well as our leaders who must guide our country through this time. While our security does not ultimately lie with what man can provide, this act of terrorism does make us stop and wonder about what is safe and secure."

From a financial perspective, we acknowledged that these feelings of insecurity had extended to the markets: "The papers today are full of renewed worries about the stock market and a possible recession. The stock market is closed again today, Wednesday, and we do not know whether it will open tomorrow or perhaps not until next Monday. We think it is wise that the stock market was closed yesterday and remains closed today. As we saw in overseas markets, the initial reaction to an event like this is to sell stocks and buy bonds or other more secure items. Many of the overseas markets were down three to five percent overnight. But as we write this, those markets are already showing some signs of recovery."

Our message to clients was to remain steady and not make major changes: "Our perspective is to ride through this time without making major changes in the amount of money we have invested in the stock market. We may actually view it as a buying opportunity if the stock market drops significantly. Usually incidents like yesterday's cause a drop in the market and then a rebound after things have settled down. How quick the rebound occurs depends on the overall economy and the mood of the country. We do not expect a quick rebound, but if we have a drop in the stock market we expect it to be temporary. Therefore, we will ride through this time of increased volatility."

Indeed, the markets did remain closed until the following Monday. The stock market fell dramatically that month before recovering and, in fact, the S&P 500 Index ended the year 2001 5% higher than where it had closed on September 10th.

The Global Financial Crisis: 2008-2009

The financial crisis was a pivotal moment in modern financial history, marked by the collapse of Lehman Brothers and a near meltdown of the global financial system. The downturn was deep and many investors questioned whether they should continue to invest at all.

In our April 14, 2009 client letter, we addressed these uncertainties and shared some hopeful signs with our clients: "While the rally that began in November was nullified by the declines in January and February, there are reasons to believe that the economy—and therefore the market—has turned a corner. Foremost among those reasons is that large financial companies are beginning to return to profitability. The latest rally began in March when Citigroup announced that its operations would be profitable for the first quarter. In subsequent days, Wells Fargo stated that the first quarter would be one of its most profitable ever, even though the quarter included results from digesting the acquisition of a very troubled adjustable-rate mortgage business (Wachovia). Finally, this week, Goldman Sachs announced profits of about $2 billion for the first quarter, and an intention to pay back the money it recently received from the government in the form of TARP funds."

We emphasized the importance of the financial sector's recovery: "The return to health of the financial sector is key to the health of the entire economy. Banks and securities firms, through ill-advised lending practices, led us into this crisis, and they should be able to lead a recovery as well. The government has stepped into the breach and has become a lender of last resort, but we would much rather see companies reclaim that role. Profitability is the first step toward allowing that to happen."

We also acknowledged the continued uncertainty and volatility: "Uncertainty still has a prominent place in the markets and the economy. We therefore expect to see continued, although lessening, volatility. We would not be surprised to see 10-15% declines in the stock market, even during a long-term recovery, so we recommend you prepare yourself for that possibility. However, as we saw in early March, the market can reverse course dramatically, just when it seems as if there is nothing positive on the horizon."

We reassured clients about our firm's stability: "Many of you have asked us how Eclectic is doing during this time. It certainly has been a difficult time as we see and understand the impact of the recent stock market performance on the lives of our clients. As a company, we are doing reasonably well. We do not have any debt, we do not see any need for layoffs, and we certainly do not have any concerns about the long-term viability of the company. Income will obviously be down as it will be for most of you, but not enough to be a long-term concern."

This was intended to provide our clients with reassurance and confidence in our shared strategy. By maintaining our disciplined, long-term approach, our clients were ultimately rewarded as the markets recovered and again reached new highs in the years that followed.

COVID-19 Pandemic: February-March 2020

The COVID-19 pandemic in early 2020 led to one of the fastest stock market crashes in history, with U.S. stocks dropping 35% peak to trough. In our April 2020 quarterly client letter, we wrote: "U.S. stocks lost 20%, reversing recent gains, as investors fled to more stable assets due to the COVID-19 crisis. But the decline only tells part of the story. In March, the daily average percentage change of the S&P 500 index was +/-5%, an extremely high level of volatility. Energy companies suffered the worst losses as oil prices posted a record decline (-66%) on weak demand and the risk that OPEC wouldn't come to a quick agreement on production cuts."

We shared our long-term perspective: "Amidst all the bad news and fear prevalent in the markets, we return to fundamentals. We think the virus will be defeated, and the economy will eventually recover. After the recent sell-off, our outlook for stock market returns has increased for the next ten years. We are actively rebalancing portfolios, which for most of our clients means buying more stocks while they are cheap. Regardless of whether the stock market has already bottomed (which we won't try to predict), it should begin rising before the economic news improves. In the words of Robert Arnott, the strongest bull markets are not built on a foundation of good news, but on diminishing bad news."

Our focus during this challenging time was to remain disciplined, rebalance portfolios to take advantage of opportunities, and keep our clients informed of the measures being taken to stabilize the economy. This approach allowed many of our clients to participate in the subsequent sharp recovery in the markets.

Steadfast Through Change

As we reflect on these pivotal market events over the past 40 years, we see a recurring theme: periods of uncertainty, fear, and ultimately recovery. Through each of these events, Eclectic Associates has been a steady presence, helping our clients navigate market turbulence with confidence. Our principles of diversification, disciplined risk management, and a long-term outlook have been the compass that guides our decisions and recommendations.

The world will continue to change, and there will undoubtedly be more moments of upheaval in the future. But our philosophy remains the same, and we will continue to help our clients achieve their financial goals—not by predicting the next market crash or boom but by staying committed to a timeless, disciplined investment approach.

If you or someone you know could benefit from our approach, we’re always here for a conversation. Feel free to reach out or schedule an introductory call with one of our advisors.

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By Clarissa Hartono, CFP®

Have you seen advertisements for title lock insurance and felt scared about having your home title stolen? We have had clients ask us about whether they should purchase title lock insurance and where one might purchase it.

First, let us clarify that “title lock insurance” is not the same as “title insurance.” Homeowners usually purchase title insurance when they first buy their property. This title insurance protects you from having other people challenge your title, with matters like unpaid taxes, liens, or property disputes.

On the other hand, title lock insurance is less of an insurance and more of a service that occasionally monitors your title/deed to protect against title fraud. The name title lock insurance seems deceiving because the service only notifies you after fraud happens, not before. Having title lock insurance would not prevent a thief from transferring your property deed to someone else.

While title lock insurance has been marketed as a precautionary measure against title fraud, for homeowners in Orange County, California, it is often an unnecessary expense. A few factors make this form of insurance worthless, including the infrequency of title fraud, protections that the government has in place regarding existing title insurance, and a secure property recording system.

Title Fraud is Extremely Rare

While title fraud is concerning, it is an uncommon occurrence. Thieves must first use identity theft to forge documents and then transfer ownership of a property. FBI reports show that title fraud is extremely rare, especially in Orange County, California. (1)

If title fraud was as common as the title insurance companies advertised, why don’t we constantly hear it in the news or know a lot of people that have been affected by it? Other government agencies are tracking title fraud crimes and their data shows that this is not a significant issue.

Existing Title Insurance Provides Protection

As we mentioned in the beginning, most homeowners purchased title insurance at the time of closing. This insurance already covers what matters by ensuring that your ownership is authentic and clear of any prior disputes. While title insurance doesn’t cover fraud, most policies may include legal defense if title fraud were to happen. (2)

Secure Property Recording System

Title lock is an expensive notification service that probably uses the same system we could use ourselves, for free! Orange County’s public records system keeps detailed records of every property transaction. Homeowners can easily access this information and regularly check these records.

Legal Protections for Homeowners

Let’s say against all odds, that someone does fraudulently transfer your property title, what happens then? California law states that property obtained through fraudulent actions is not legally binding and cannot be retained. (3) This means that you would not lose your home. The court would eventually resolve the issue and return your title back to the rightful owner.

It may help to know that the penalties for title fraud are severe, which makes this a high-risk and low-reward act. The process is over complicated, and the paper trail is too clear for a criminal trying to stay in the dark.

Below are a few steps you can take to protect your property from fraud and they won’t cost you anything:

• Check your credit report

• Check Orange County’s public records system

• Review your bills regularly

To conclude, title fraud is not as concerning as it may seem. While this is not a common type of fraud, there are other types of fraud you should be aware of. Here’s an article that references the other types of fraud.

If you ever find yourself in a situation similar to any of these, or you think that someone is targeting you with a scam or fraud in any way, please feel free to schedule a complimentary phone call or meeting with one of our fee-only financial advisors. We would be happy to act as a sounding board as you navigate through your own unique scenario.

Footnotes:

1) FBI Internet Crime Report, Federal Bureau of Investigation. Available at: FBI Internet Crime Report

2) American Land Title Association, "What is Title Insurance?" Available at: ALTA

3) California Civil Code §1214-1221, "Title Transfer Fraud and Remedies." Available at: California Legislative Information

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By James Moore, CFP®

“Investment philosophy:

• Investment diversification is of key importance, especially in today’s uncertain economic environment.
• Take no more risk than is necessary to accomplish your goals.
• Tax savings take second place to sound economics in an investment.
• Consider the complete cost before getting into an investment: commissions, fees, management expenses.”

-Excerpt from an Eclectic Associates financial plan written for a client in 1988

Relevant Artifacts

Eclectic Associates began in 1984, which makes 2024 the 40th year that we have served our clients. One of the ways we celebrated this 40-year anniversary was by recently hosting an open house event for our clients in our Fullerton office. As a part of this celebration, we filled up our conference room with a collection of interesting financial “artifacts” that we have collected over the years. This included some of our favorite investing books, newspapers saved from significant moments in financial history, and a collection of financial plans and letters written to clients in the early years of Eclectic Associates’ existence.

I particularly enjoyed reading through some of the early financial plans and letters we had written to clients. While much has changed over the last 40 years, it was evident that our investment philosophy has remained the same. The excerpt above was written 36 years ago, but the investment philosophy section in the financial plans we write today is practically identical. Our steadfast investment philosophy is one of the primary reasons why our clients, and therefore our company, have thrived over the last 40 years.

The Why

At Eclectic, we focus on the long-term and not the short-term. We think it is impossible to predict the future. We value diversification. We think taxes and expenses should be considered as a part of all investment decisions. Risk is an inherent component of investing, but the risk taken should be appropriate for each client. We value research and due diligence before making any investment decision.

Our investment philosophy will never be exciting to everyone. We generally won’t be involved in the latest-and-greatest hot new investing trends, but we strive to have a philosophy that will allow our clients to reach their financial goals no matter the market environment.

The How

Having a consistent investment philosophy does not mean that we never change or improve in other ways. The world of investing has changed greatly over the last 40 years, and we have changed the way in which we implement our investment philosophy as well.

For example, many investment processes that used to be time consuming and paperwork intensive can now be done electronically in a fraction of the time. Rather than making trades and tracking investments directly with mutual fund companies, most publicly traded securities can now be traded and tracked with a single custodian like Charles Schwab. Individuals have more investment vehicles and choices than they did 40 years ago because technology has made it easier for companies to create new investment vehicles.

These technological improvements have generally been very beneficial for investors, but they have also led to some potential pitfalls. The amount of easily accessible investment options, combined with the overwhelming financial noise coming from new sources like social media, can make focused, disciplined investing a challenge. Convenient, real-time access to market movements and investment account balances can create an impulse to focus on the short-term and make unnecessary portfolio changes. In a way, it’s more difficult than ever to maintain a long-term investment focus, but that’s what we strive to do.

What’s Next…

“Dear Friends,

As we approach the election, we have found a number of people are concerned about the direction of the stock and bond markets. Our crystal ball was cracked a long time ago. We do not try to predict the short-term swings in the market. In fact, we do not believe anyone can consistently predict them. As long-term investors, we recommend a diversified portfolio of investments…with an appropriate balance and a long-term outlook, an investor can ride through the short-term market swings.”

-Excerpt from a letter written to clients in September 1988

With another presidential election coming up, this client letter feels especially relevant today, and displays how our timeless principles guide us in uncertain times. Many things are different now than in the 1980s, but we could send this communication to clients today and it would still be appropriate. We have the same investment philosophy now that we did back then. Elections do matter and have consequences, but we continue to believe that it is not possible to consistently predict short-term market movements. We will continue to stay diversified and focus on the long-term outlook so our clients can meet their goals.

If you know someone who should consider using our services, please send them our way. We are happy to meet with anyone for a free, no-obligation meeting. Have them call us at 714-738-0220 to schedule a meeting, or they can click here to schedule an introductory call with one of our advisors.

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By David K. MacLeod, CFA, CFP®

Stocks ended the quarter at a new high, with the S&P 500 up 6%, led by dividend payers and utilities while tech stocks cooled off. Diversification rewarded investors as small company stocks jumped up 10% and international stocks gained 9%. Value stocks performed better than growth stocks. Bonds also performed well as the 10-year U.S. Treasury yield declined a half percent to 3.8%.

Inflation has cooled for five consecutive months and is expected to reach the Federal Reserve’s target of 2% soon. Concern among economists shifted from inflation to the labor market after the U.S. Department of Labor revised lower the number of jobs added by 800,000 for the 12-month period ending March 2024. The unemployment rate remains historically low at 4% but job gains has been slowing. The aftermath of Hurricane Helene is expected weigh on upcoming jobs reports. The good news is that there are 8 million job openings according to the JOLTS program so there is still about one job opening per unemployed person.

The job market outlook will depend on economic growth. At this point, a recession isn’t in the short-term outlook. Real GDP growth for the third quarter is expected to be close to the 3% growth rate achieved in the second quarter. While housing and net imports have held GDP back a little, consumer spending has been driving the economic expansion as U.S. household net worth hit a new all-time high of $164 trillion.

One year ago, in our 9/30/2023 quarterly letter, we shared key insights from JP Morgan’s study of the past 40 years of Fed interest rate hiking cycles. The study found that after short-term interest rates peak, stocks and bonds typically perform better than CDs and money markets in the following 12 months. That proved to be true again this time with both stocks and bonds meaningfully outperforming over the past 12 months. Looking ahead, JP Morgan’s analysis also showed that after the first Fed rate cut, stock returns are positive over the next 12 months as long as the economy avoids a recession.

All attention is now on the 2024 U.S. presidential election. Research Affiliates has found that, historically, stocks tend to rise after close presidential elections. But we wouldn’t be surprised to see higher market volatility in the weeks ahead of the election. We recommend maintaining a long-term investment strategy that is resilient through presidential elections and ups and downs of the economic cycle.

Please do not hesitate to call if you have questions or want to schedule a meeting.

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By David K. MacLeod, CFA, CFP®

We want to make sure the new federal Beneficial Ownership Information (BOI) report to FinCEN is on your radar, if you are required to complete it. The penalties for late filing are stiff so we recommend you don’t put it off.

Congress passed legislation in 2021 that requires certain business entities to report who their owners are, in an effort to crack down on tax fraud and money laundering.

The report can be done online and is due by 12/31/2024. Here’s a link:

https://fincen.gov/boi

Corporations and LLCs need to disclose all owners with >25% ownership interest in the entity and anyone who exercises substantial control (President/CEO).

It should be a straightforward report for most businesses. For more complicated ownership structures, some CPAs are offering to prepare it for their clients.

This is not an annual requirement – only when there’s a change in the reported information will an updated report be required.

A number of entities are exempt from filing such as 501(c)3 charities, banks, and large corporations.

Here’s an article with more information.

Please feel free to call us if you have any questions.

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By Carl Lachman, MBA, CFP®

Farming is Not Easy

Our founder, Bill Camp, originally was a farmer in the Central Valley of California before he changed careers and started Eclectic Associates. Farming is not easy: the days are long, it takes a lot of hard work, a crop is often totally dependent on the timing of rain, and sometimes the difference between success and failure is a narrow margin. Farming also teaches you things, whether you want to learn or not.

Although he never told me this, I have to believe Bill’s experience as a farmer had an influence on how he decided to give financial advice and manage investments. Here are some of the ways I think Bill’s start in farming has influenced Eclectic Associate’s fee-only financial planning and investment management.

Seasons Come and Seasons Go

We sometimes joke there are only two seasons in Orange County, California: night and day. Farmers, however, have a life that is dictated by seasons, even in California. Spring is the season to plant, Summer is the season for growth, Fall is the season for harvest, and Winter is the season for resting and getting ready for the next time to plant. A farmer cannot control the seasons, but is ready for them and does his best to do the right thing during the right season. I think his experience with farming seasons caused Bill’s approach to financial planning and investing to understand the phases of life and financial market cycles better than many others.

At Eclectic we consider the phases — seasons — of our clients’ lives from the very start. Our financial plans are written for our client’s current financial situation, but we immediately plan for their future goals and retirement. We consider current assets and liabilities, the career and saving path a client is following, the big expense goals in the future, and use projection analysis to determine what it will take to make the desired retirement a reality.

And, just like a farmer cannot change the seasons, we manage our client’s investments knowing we cannot control financial market cycles. Rather, we put together investment portfolios from the start that we have confidence will do well in the long run, even if the markets swing up and down in the short run. We plan for those cycles and we are not surprised when they come.

Like the farmer who is constantly getting ready for the next season, as investment managers we are always getting ready for the next market cycle. The way we get ready is through a consistent and disciplined allocation approach and portfolio rebalancing. We determine a good mix of investments — an allocation — for each client, and we manage to that allocation with percentage targets for each category of investments. A simple portfolio allocation is 50% equities and 50% fixed income. If equities go up and are now at 55% with fixed income at 45%, we rebalance, selling equities and buying fixed income. It’s a discipline that forces us to sell what is high and buy what is low, and it is the right thing to do both when the market is up and down.

The Early Bird Gets The Worm

Farmers work from before sun up to after sundown. So, they know that worms often come out of fertile soil at night and disappear back into the soil at sunrise. They see the birds having breakfast on those worms when it is still a little dark, just before the sun rises. Farmers, like the morning birds, only survive if they get started early and work hard.

Bill brought that work ethic to his new business and impressed its importance on his employees. Today, our team of advisors and support staff have the same work ethic in all we do for our clients. We conduct in-depth research into the investments we recommend. We seek out innovative ways to help our clients arrange their finances to reach their goals. We look for new tax approaches that are more efficient and save money. We attend continuing education conferences and study groups. And, we proactively make investment changes and suggest financial strategies before our clients ask. Although they don’t always see the work we do, our clients see the “fruits” of these labors on statements, tax returns, estate plans, retirement projections, and in the peace of mind they experience.

Don’t Bet The Farm

If a farmer is making a decision that could cause him to lose his entire farm if it goes bad, he is betting the farm. Farmers that do that usually don’t last long. It is putting too much at risk with one decision. Every farming community has stories of a farmer who made a big, bad decision and lost their farming livelihood.

Bill Camp surely saw this happen and learned from others’ mistakes. The way he chose to invest client assets instead relied on many small investing decisions, where some could be wrong but the client’s portfolio could still do well. It’s the principle of diversification and it is a foundational part of our investing approach today at Eclectic.

Even without betting the farm, there are risks in farming. Rains might not come, seeds can be bad, insects can spoil crops, fertile soil can wear out, and crop prices can fall. A farmer needs to be strategic, understand the risks he faces with his limited resources, and do his best to minimize those risks.

From the start of our company, the mindset of taking measured risks and using strategies to minimize those risks has been part of what we do. For instance, if a retired client has more money than they will ever spend, it’s probably best to have a lower risk portfolio that still stays ahead of inflation. We minimize the risk of inflation with the investments we choose. Alternatively, if a younger client still has 40 years of working before them, a higher risk portfolio might be appropriate since they have so many years of saving yet ahead. The more aggressive portfolio risk is minimized with disciplined rebalancing. And, if a client has a large known expense in the future, we can sell investments at different times to minimize taxes, keep the rest of the portfolio in balance so overall gains are not missed, and use stable, interest bearing investments so the money is ready when needed.

Important Values for the Future

While some of what Eclectic Associates is today might be explained by our founder’s background in farming, don’t let that make you think we are stuck in the past. Rather, our 40 year old company has foundational values that are right for today and whatever the future holds. We are prepared for future market cycles. We plan for upcoming phases in our clients’ lives. We have a work ethic that seeks to do right by our clients. And, while we take appropriate risks to accomplish client goals, we strategically minimize those risks through advanced techniques.

If you know someone who could use some advice with the financial decisions they are facing, please send them our way. We are happy to meet with anyone for a free, no-obligation meeting. Have them call us at 714-738-0220 to schedule a meeting, or they can click here to schedule an introductory call with one of our advisors.

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By Russell W. Hall, CFP®, CPWA®

The vast majority of retirees say that they would like to stay in their own home for the duration of their retirement. This is often called “aging in place”. But for many people, there comes a point where they need to make hard decisions about their living situation and the future.

These decisions are often not made in advance, and are instead forced by other circumstances at an inopportune time. A caregiving spouse may have their own medical issues and can no longer take care of their partner. Dementia creeps up on a parent who has lived alone for many years, and the children do not have the ability to provide care - and sometimes don’t even know what their parent would have wanted.

The alternative is to plan in advance, which often starts with a realistic review of finances. If a retiree never wants to leave their home, are there sufficient assets (perhaps including long-term care insurance) to cover medical costs, especially the extremely high charges of 24/7 in-home care? If not, what other steps can be taken?

One common scenario: retirees plan to sell their home at some point and move to a retirement community. That can seem to provide a clear path through retirement, but also brings with it a host of other decisions, especially at the beginning. For instance, there are many types of retirement living facilities. Why are there so many, and how do you choose?

In this article we attempt to provide an overview of the various types of senior living and care facilities available. For clients here in Southern California, we include local examples of each of these categories (although some easily fit into more than one category).

We’ll start with the Retirement Community (sometimes called Senior Independent Living), since that is the broadest term and is often applied to many of the types of facilities we list here. Generally, a retirement community is residential senior housing designed to accommodate independent seniors with few medical issues. Most will usually include social activities, services (including laundry and housekeeping), and one or more meals. Some offer additional levels of care.

Continuing Care Retirement Community (CCRC)

Retirement community usually paired with assisted living and a skilled nursing facility, all on the same campus. The idea is to provide any level of care that a resident would need, although it may require moving to different areas. These communities usually require a high “buy-in” fee.

Average monthly cost: $7,000 to $10,000 (even higher for additional care levels)

Local examples: Morningside of Fullerton, Walnut Village, Capriana

Assisted Living Community (state licensed)

Retirement communities aimed at those who can live independently in their own housing, but would like on-site access to care, meals, socialization, and additional assistance if they need it. Similar to many ways to CCRCs, but cost is month-to-month.

Average monthly cost: $5,000 to $8,000

Local examples: Oakmont of Fullerton, Sunnycrest, Ivy Park, Emerald Court

Residential Care or Board and Care (state licensed)

Senior care in a small-home setting. These facilities are usually located in residential homes and most feature housing and care for 6 residents, with 2 or more caregivers living on site. Staff help with medication and activities of daily living. Often, these facilities can take residents needing memory care or those on hospice.

Average monthly cost: $4,500 to $6,500

Local examples: The Hills Senior Living, Glenwood Care

Memory Care Facility (state licensed)

Specialized care for those with dementia or Alzheimer's. Some communities only accept residents with dementia. In some larger assisted living facilities, memory care is often a separate, more secure area to prevent patients from wandering. Many Residential Care facilities specialize in memory care, and the home-like setting can sometimes be beneficial and calming for residents who are easily confused and upset.

Average monthly cost: $7,000 to $9,000

Local examples: Park Vista (Morningside), Villagio at Capriana, Crescent Landing Fullerton

Skilled Nursing Facility (SNF)

Often called nursing homes and have also been referred to as convalescent hospitals. This is the highest level of care for those needing medical attention and/or unable to perform activities of daily living (and it is probably the most expensive level of care as well). Residents often receive therapies or hospitalization along with medical care. Medicare pays for up to 100 days of a SNF.

Average monthly cost: $8,000 to $12,000

Local examples: St. Catherine, Gordon Lane

Finally, the following is some advice from a retirement living professional for how to make a good choice on a facility:

1. Staff matters more than amenities. Compassion is more important than décor.
2. Research by visiting at different times; watch activities and mealtime.
3. It’s common to take time to adjust to a new home.

We would like to thank Linda Armas, CPRS, CSA of Clear Choice Senior Services for her assistance with this article.

Schedule a 15-minute discovery call with a fee-only financial advisor if you want help thinking through some of these options.

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By Russell W. Hall, CFP®, CPWA®

“Being fee-only planners, we believe we offer our clients objective advice. We never receive commissions on anything we recommend.”

-Letter to a potential client from Bill Camp, December 1985

Big Changes

The world of investing has changed radically in the forty years since Eclectic Associates opened our doors. When we look back at the mid 1980’s, it’s amazing how difficult it was to do things we take for granted now. Something as simple as making an IRA contribution and purchasing a mutual fund required multiple points of contact and could take weeks. Custodians like Schwab were not widespread yet, so keeping track of investments at different mutual fund companies, making trades, and reporting on investment returns were complicated, labor intensive, paperwork heavy processes.

Unchanged

With that in mind, it’s interesting to read through documents from that period and see how Eclectic’s guiding principles and investment philosophies remain largely the same. Our founder Bill Camp’s quote above still applies and could have been taken from a current email. As we pointed out in a previous article, in many ways our fee-only structure was unique in 1984 and it is still the minority in the world of financial services. But why did Bill and then his son Carl choose to be fee-only advisors, and remain that way for all these years?

Objective

The answer is in Bill’s quote. Having worked in the world of real estate sales, Bill knew firsthand the experience of trying to earn a commission. That is standard practice in the real estate industry, but as a financial advisor Bill wanted to sit on the same side of the table as his new clients. In other words, he wanted to be as objective as possible. The way he chose was to only charge a fee for his advice and not be paid in any other way.

Being fee-only aligns Eclectic’s interests with that of our clients. If our recommendations perform well, client portfolios go up in value and our fee increases. If performance is not good, our income drops along with our clients’ investments. It also incentivizes us to keep other expenses like underlying investment and trading costs at a minimum, so that both we and our clients benefit in the long run.

Not Perfect

As with everything, the fee-only model has an inherent conflict of interest: managing more assets translates to higher fees. This conflict could arise when a client is considering withdrawing a large sum to pay off a mortgage or other debt, for instance. In such cases, we are careful to abide by our fiduciary duty of putting the client’s interests before our own. We will point out the issue and do our best to objectively stick to what the numbers are telling us is the best option for our client.

As an aside, we are often asked why we split our annual fee into thirds and charge every four months. When Eclectic started, the rules for investment advisors were very different. We couldn’t legally bill one or even two times per year, so we chose triannual billing (instead of quarterly) since billing was as much of a labor-intensive process as everything else in those days.

The Eclectic Choice

Over the years, the industry has evolved and now advisors are charging for their services in many different ways. Options like fee-based (commissions plus management fees), hourly/project, retainer, or flat fee are common in the industry. We have stayed with being fee-only because we believe we have “chosen it from among the best” – the definition of the word “Eclectic” that gave our company its’ name. As Bill said in 1985, we’ve never received commissions and never will, and we plan to keep giving our clients objective advice for the next 40 years and beyond.

If you know someone who should consider using our services, please send them our way. We are happy to meet with anyone for a free, no-obligation meeting. Have them call us at 714-738-0220 to schedule a meeting, or they can click here to schedule an introductory call with one of our advisors.

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By David K. MacLeod, CFA, CFP®

Stocks were mixed during the quarter, with the S&P 500 up 4%, led by tech stocks. The utilities sector has also posted remarkably good performance as investors expect strong electricity demand to power data centers for artificial intelligence (AI). Small company stocks were down 3% while international emerging markets gained 4%. Bond returns were positive as the 10-year U.S. Treasury yield remained at 4.3% and short-term interest rates were also unchanged.

Economic growth has been slowing this year, but a recession isn’t in the short-term outlook. Consumer spending has increased each month to new highs even as there are early signs that some consumers are experiencing financial stress. Early loan payment delinquencies are ticking a little higher for credit cards and auto loans. Investment spending has been resilient thanks to AI capital expenditures which have doubled in the past 3 years.

The ramp-up in AI investment hasn’t contributed much to productivity yet. But there is the potential for long-term productivity gains that could fuel years of higher GDP growth and a prolonged economic expansion. If that scenario plays out, AI could become ingrained in most large U.S. companies and would widely benefit companies in sectors beyond just the technology sector. In fact, we are underweight the high-flying technology stocks that have initially benefited from AI. Many of those companies look very overpriced on a price-to-sales and price-to-earnings basis, even considering above average business growth rates.

The stock market has been unusually calm lately, particularly in the month of June, despite uncertainty in global politics and the economic growth outlook. We caution investors not to trade based solely on 2024 U.S. presidential election forecasts. Although stocks tend to rise after uncertainty has passed, we wouldn’t be surprised to see higher market volatility in the second half of the year. We recommend maintaining a long-term investment approach that will stand through presidential elections every four years and through all phases of the economic cycle.

On a personal note, we are pleased to announce that our employee, Clarissa Hartono, earned the CFP® certification after passing the education, comprehensive exam, experience, and ethics requirements. Please say congratulations to Clarissa the next time you see her.

Please do not hesitate to call if you have questions or want to schedule a meeting.

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The Eclectic Associates Story By Carl Lachman, MBA, CFP®

We are often asked why we call ourselves “Eclectic Associates”. It’s a good story.

Financial Advisors Often Use Their Own Name

Before I explain where our name came from, it is important to understand why our founder Bill Camp did not use his own name as part of the company name. Why didn’t he call it, “Bill Camp & Associates”?

It is a rather common practice for a financial advisor to use their name, their initials, or at least their last name, as part of the name of their financial planning firm. In Fullerton alone there is a Montagna & Associates, a Hall Wealth Management, a Clark Group Asset Management, and a variety of others. It is a pretty common approach, it is rather dull, and it is not too creative.

But Bill Camp wasn’t trying to be exciting or particularly creative. Rather, he did not use his name for a different reason: he wanted his firm to continue when he was gone. Bill wanted the firm he started to last a long time past his life and that of his son, Carl Camp. He wanted his firm to grow, develop, innovate, and continue for years and years to come, without being stuck with the name of a founder that was no longer around. Bill didn’t want his firm’s name to be good for only a short time. His decision to name the firm the way he did is a good example of why he was a good financial planner: he was always planning for the long term, trying to make the best long run decision.

Bill, Anita, and a Dictionary

Bill Camp and his wife, Anita, decided on the company’s name in early 1984. Over a number of days they considered a lot of different names, but finally decided on the word “eclectic” while searching out words in the dictionary. They were particularly drawn to one definition of the word “eclectic” which means “chosen from among the best”.

Chosen From Among the Best

What does it mean to be “chosen from among the best”? The following may not all have been in Bill’s and Anita’s thoughts in 1984, but it is what we try to do today to live up to our company’s name.

• We try to choose our employees from among the best applicants.
• We try to choose investments from among the best available.
• We try to choose our financial planning strategies from the best the industry has to offer.
• We strive to be chosen by our clients from among the best financial advisors in Orange County.

Planning for the Long Term

We are hired by our clients to help with important, long-term decisions, so it should be reassuring that our company was founded on decision-making that was made with the long-term in mind. Bill Camp and his son, Carl Camp, set the example of making good long-term decisions, which we continue to follow today. There are many fads and short-term ideas that come and go in the financial industry every year, but because of the way these founders taught our first advisors, we continue to keep a long-term perspective.

Eclectic Continues with the Same Values

Today, we still hold close to the values and methods that Bill and Carl Camp instilled into our company’s fabric from the start. We are still a fee-only financial advisory firm. We are not stockbrokers, we don’t sell insurance, and we don’t receive any compensation from investments we recommend or professionals we suggest to our clients. We are still held to the fiduciary standard, giving advice that puts our client’s interests before our own.

If you know someone who should consider using our services, please send them our way. We are happy to meet with anyone for a free, no-obligation meeting. Have them call us at 714-738-0220 to schedule a meeting, or they can click here to schedule an introductory call with one of our advisors.

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By David K. MacLeod, CFP®, CFA

Whether you’ve lived in Orange County for 2 years or 25 years, you probably still have a mortgage.

That’s because our beautiful county, home to year-round golf and the magic of Disneyland, boasts a median home value of $1,200,000 – more than 10 times the median household income in the county.

This isn’t a new thing. For all the wonderful amenities Orange County has to offer, housing prices here have been significantly more expensive than the national average for decades. So, you probably took on a pretty large mortgage when you purchased your home.

Perhaps you’re starting to see retirement and Social Security checks on the horizon. If you still have a mortgage, you may be wondering: “Should I plan on paying off this mortgage before retirement?”

The short answer is, yes. Although individual circumstances will vary, we generally advise being debt free in retirement. That means your credit cards are paid off, cars are owned free and clear, and you are mortgage free.

That said, before you decide whether to pay off your mortgage before retirement, there are some things to consider.

Income Tax Deduction

People often desire to keep their mortgage in retirement for the tax benefit. But only 1 out of 9 tax returns claim itemized deductions. That means 8 out of 9 taxpayers see no tax benefit from paying mortgage interest.

Mortgage interest is deductible on Schedule A as an itemized deduction. For mortgages that were in place prior to December 2017, interest is deductible on a principal mortgage balance of up to $1,000,000. For mortgages taken out after that date, the limit is $750,000. Other common itemized deductions include medical expenses, state and local taxes, and charitable donations.

When a taxpayer’s itemized deductions are less than their standard deduction in any given year, they simply take the standard deduction. If you claim the standard deduction, you don’t get a tax benefit from homeownership.

The IRS increases the standard deduction annually for inflation. For this reason, it’s possible you could claim the standard deduction this year even if you have always claimed itemized deductions in the past.

As an example, let’s consider Jane and John Smith, married 66-year-old Fullerton homeowners with a remaining $200,000 mortgage balance. In 2024, the Smiths will pay $10,000 in state and local taxes, $8,000 in mortgage interest, and they will donate $8,000 to charity. They will have no other itemized deductions this year to claim.

In 2024, the Smith’s won’t claim any of these deductions because the standard deduction that applies to them of $35,400 is greater than the $26,000 they could claim by itemizing deductions.

Approximately 89% of taxpayers are expected to claim the standard deduction this year and get no tax break for homeownership.

Also note that even if you do itemize your mortgage interest, your tax bill is not reduced dollar-for-dollar (as a tax credit would be). Your tax break would be based on your marginal tax rate.

House Rich, Cash Poor?

If paying off your mortgage would mean depleting your emergency fund or emptying retirement accounts, we strongly advise reconsidering. You could face steep taxes and penalties by withdrawing from retirement savings. Emptying your emergency fund would make you more vulnerable when the rainy days come.

Investment Return vs Mortgage Rate

If you refinanced your fixed rate mortgage in 2020 or 2021 you locked in a historically low interest rate.

If you can earn more than your mortgage by investing elsewhere, why wouldn’t you? While you’re working and contributing to an employer retirement plan, the tax savings from plan contributions make investing more attractive than paying down a mortgage.

Another way of looking at this question is to consider what guaranteed return can be earned compared with your guaranteed fixed mortgage rate. For example, if you have a mortgage fixed at 3.5% and Treasury bonds earn 5% interest, then you would have a higher guaranteed “return” by saving and investing. Many people in this situation choose to save toward a “mortgage payoff” brokerage account until it makes sense to pay off their mortgage in a lump sum.

Freedom!

Numbers aside, the psychological benefit of being debt free is significant. Clients who pay off their mortgage before retirement often report feeling free. Of course, there are plenty of homeownership expenses that don’t go away even after the mortgage is paid off (property taxes, maintenance, insurance). But not having to make a payment to the bank every month can be a real weight off your shoulders.

Too much house?

As retirement approaches, it’s a good time to re-evaluate whether your current home is right for you in the next phase of life. Often, Orange County retirees live in homes that are a lot larger than they need to live comfortably – especially after the kids move out. One way of eliminating your mortgage is to downsize and pay cash for a new home. Some find a smaller local home or move to a more affordable state such as Arizona, Florida, or Nevada.

Sometimes people think of their primary residence as an investment, but we disagree. It doesn’t generate cash flow and you always need somewhere to live. Economist Robert Shiller’s research has shown that over the past 100 years, U.S. home values have kept up with inflation but underperform other asset classes such as stocks and corporate bonds.

This doesn’t mean home ownership is unattractive – it absolutely is for other reasons. It just makes a good argument for limiting the value of your house as a percentage of your personal net worth and to diversify into other asset classes that have higher expected returns.

Conclusion

It’s a worthy goal to become totally debt free before retirement. Consider the points discussed in this article before deciding. If you decide you want to pay off your mortgage before retirement, we suggest start making additional monthly mortgage principal payments to reach your goal or saving toward a mortgage payoff account that can safely earn more than your fixed mortgage rate.

Please do not hesitate to call if you have questions or want to schedule a meeting.

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By Aimee Calderon, CFP®

Unfortunately, one of the realities of being a financial advisor is that we see clients get divorced. Going through a divorce can be emotionally challenging, but it’s crucial to address the financial aspects as well. Seeking professional financial advice during this process can significantly impact your future stability.

Not only does divorce impact your current assets, it also affects your future income. When planning for retirement, divorcees need to understand all the impacts divorce has on their retirement income. One of the key contributors to most Americans’ retirement is Social Security benefits. Even if you haven’t contributed to Social Security during your lifetime, you may be able to collect benefits based on your ex-spouse’s work history.

1. Eligibility Criteria

To qualify for Social Security benefits as a divorced spouse, consider the following:

· Marriage Duration: Your marriage must have lasted at least 10 years.

· Divorced for Two Years: You need to be divorced for at least two years.

· Age Requirement: You should be at least 62 years old.

· Unmarried: You must not be remarried.

· Benefit Comparison: Your own Social Security benefit should be less than the divorced spouse benefit.

· Ex-Spouse Eligibility: Your ex-spouse must be entitled to Social Security retirement benefits.

2. Benefit Amount

· A divorced spouse can receive up to 50% of their ex-spouse’s full retirement benefit.

· You are entitled to the greater of your own benefit or the benefit of your ex-spouse.

· Wait until full retirement age (usually between 66 and 67) to claim the full benefit.

· Although you can start receiving benefits at age 62, filing early may result in a permanent reduction of up to 30%.

3. Planning Strategies

Consider these strategies to maximize benefits:

· Coordinate with Other Income: Retirement income (such as covered pensions, annuities, or investments) doesn’t affect Social Security benefits. You can collect both simultaneously.

· Working in Retirement: If you work while receiving benefits, your payments may be reduced. Plan accordingly to avoid exceeding income thresholds.

· Consult a Financial Advisor: Seek professional advice to optimize your Social Security strategy.

Seeking the help of a financial advisor to understand the rules and plan strategically can help divorcees make the most of their Social Security benefits during retirement.

Schedule a 15-minute discovery call with a fee-only financial advisor if you want help thinking through some of these issues.

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The Eclectic Associates Story By Carl Lachman, MBA, CFP®

Eclectic Associates started in Fullerton, California in 1984, which makes 2024 our 40-year anniversary. In the world of financial advisors, that type of longevity is about as rare as a black bear swimming in a Fullerton pool - it can happen, but not very often!

For the next twelve months, we plan to celebrate this occasion with a variety of articles that tell our past, explain the present, and look forward to our company’s future.

A Family of Farmers

Our founder was Bill Camp, who was originally a farmer in the Central Valley of California. Bill came from a family of farmers and had parents and siblings with farms in the area around Shafter, California near Bakersfield. Bill’s father, Wofford Benjamin Camp (known as W.B.), came to California in 1917 and started farming. W. B. Camp is rather famous as the “Cotton Man”, since he brought a scientific approach to finding the best cotton strain to grow in California. His research eventually resulted in the cotton strain of Acala #8 which is still dominant in the California cotton industry. Today several Camp relatives continue to have large farms in the same area.

A Different Career

Bill Camp eventually decided that he would rather pursue a career in real estate, so he moved his family to Fullerton in the 1970s. He was active in Rotary and had a good business as a real estate agent. The part of his job that he enjoyed the best was helping couples and families figure out their finances, get a mortgage, and buy a house. He didn’t charge his real estate clients to help them figure out what they could afford, but he found it very satisfying when they followed his suggestions and bought a house that fit their budget. That fulfillment led to Bill thinking that he would like to somehow have a business that gave financial advice.

The Fee Only Solution

Bill Camp started investigating financial advisors in the early 1980s. At that time, most professionals who called themselves financial advisors were really stockbrokers, paid with sales commissions and transaction fees. They were always on the lookout for the next sale, regardless of whether an investment or product was the best thing for their client. Bill wanted to give financial advice in such a way that removed the conflict of interest inherent with sales commissions and transaction fees, and he ultimately discovered there were some financial advisors that used the term “fee-only” to describe how they were paid.

A fee-only advisor charges their clients a fee and sends them an invoice. The client can pay with a check or have the fee deducted from an investment account. A fee-only advisor does not get paid any commissions or transaction fees, and does not receive any payments from investment companies, insurance companies, or other professionals. The only way a fee-only financial advisor gets paid is when their clients pay their invoices.

When Bill Camp decided to be a fee-only financial advisor in 1984, there were maybe only 20 such advisors on the West Coast. Even today, the number of fee-only advisors is small compared to the financial advisor industry as a whole. According to the Wall Street Journal, "Of the roughly 285,000 professionals in the U.S. who offer clients financial advice, fewer than 2% are fee-only advisors who follow a true fiduciary standard that prohibits commissions on products recommended to clients, and legally requires the advisers to always put their clients’ interests first."

Why Bill Made The Decision

Bill Camp had a family to support and was a successful real estate agent. Why did he choose to start a new career again, after the already big change from farming to real estate? Bill discovered that he could not always overcome the skepticism of his real estate clients, who often were concerned that his recommendations were motivated by the commission he would get when the real estate transaction was completed. He didn’t like that his word wasn’t trusted, and that the conflict of interest limited the trust he was given.

So, because Bill liked helping people make good financial decisions and because he found a way to give fee-only financial advice without the conflict of sales commissions, he took the risk and started Eclectic Associates.

From that start in 1984, the 40-year journey to where Eclectic is today was not always straight or secure. Our founder and his son, Carl Camp, had to overcome plenty of obstacles, and we will dive into some of that history in future articles.

Eclectic Continues with Bill Camp’s Vision

Today, we still hold close to the values and methods that Bill Camp instilled into our company’s fabric from the start. We are still a fee-only financial advisory firm. We are not stockbrokers, we don’t sell insurance, and we don’t receive any compensation from investments we recommend or professionals we suggest to our clients. We are still held to the fiduciary standard, giving advice that puts our client’s interests before our own.

If you know someone who should consider using our services, please send them our way. We are happy to meet with anyone for a free, no-obligation meeting. Have them call us at 714-738-0220 to schedule a meeting, or they can click here to schedule an introductory call with one of our advisors.

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By Russell W. Hall, CFP®, CPWA®

As pointed out thousands of years ago, there’s nothing new under the sun. And indeed, the main structure of scams hasn’t changed much. They typically include:

1. Unsolicited contact from a stranger

2. An offering of something valuable or desirable

3. Request for personal and/or financial information

4. Pressure to act quickly

That said, technology seems to be creating more ways for scammers to try and take advantage of us.

QR Codes

QR is short for “Quick Response”. These black and white square codes can be scanned and read by a smartphone camera. They usually link to a website and are everywhere nowadays. Restaurants in particular are heavy users, sometimes replacing their menus entirely with a QR code posted at the tables. But other uses include advertisements (bus stop, mall, in magazines), learning environments (schools, museums), forms and paperwork, and directing payments.

The last two categories have more potential for a possible scam. QR codes can be altered or simply replaced to point to fake and malicious websites that look and feel very similar to their real counterparts. Criminals can steal personal information, redirect payments, and even load malware into our phones. The FBI published an alert on this issue back in early 2022, with some helpful tips on how to protect yourself.

Deed and Title Theft

Although fears of someone stealing your home out from under you are somewhat overblown, there is definitely a scam out there where your house’s title can be changed without your knowledge. In the majority of cases the theft was done by someone close to the victim - think of an adult child taking advantage of their elderly, disabled parent.

There’s no advanced warning for this type of theft, so it doesn’t follow the main structure of scams that we outlined above. For that reason, there’s a lot of fear and misconception around this issue.

Because most counties will send out notices any time there is a change to your title, it’s relatively unlikely that your home would be sold. The bigger risk is that by stealing your identity, the criminals could take out a loan or refinance the house. There’s also more risk with other types of real estate you might own that could be vacant at times, such as a vacation home or a rental property.

Any kind of forged deed is not legally valid, so ultimately the responsibility will fall on the buyer or lender who accepted the document. That doesn’t mean it won’t be a mess and very difficult to clear everything up - and for those victims who aren’t able to defend themselves, it can be devasting.

There’s not a lot you can do to protect yourself from this scam, but one recommendation is to check with the title company annually (in much the same way you check your credit reports each year). And watch out for title theft insurance or title lock companies; they aren’t an actual scam, but they’re not really doing more than you could just do yourself.

If You’re a Victim…

First – you’re not stupid! Anyone can make a mistake, and scammers are getting more sophisticated. We all need to slow down and be more careful.

But if you’ve been scammed, then within 12-72 hours:

1. Freeze your credit reports (more information about that below)

2. Notify your bank and put an alert on your accounts

3. Notify and freeze your credit cards

4. File a police report

For online fraud, you can also file a report with the FBI’s Internet Crime Complaint Center at https://www.ic3.gov.

There is no longer a cost to freeze your credit reports. However, you’ll need to unfreeze them if you want to apply for credit yourself in the future. To set up the freeze, contact each credit reporting company:

Equifax – 888-298-0045

Experian – 888-397-3742

Transunion – 888-909-8872

Much of this information came from a presentation by Karen Rossi of the Orange County Council on Aging. We greatly appreciate the Council’s work of keeping the public informed about these issues.

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By James I. Moore, CFP®

"It’s tough to make predictions, especially about the future."

The above quote is commonly attributed to Yogi Berra, the Yankees catcher famous for his unique and memorable sayings. I’m not sure if Yogi was actually the first one to say it, but regardless, the quote always makes me chuckle. It would sure be a lot easier to make predictions about things that have already happened, wouldn’t it?

Even though we all know we can’t predict the future, it doesn’t seem to stop us from trying. We do it all the time, from filling out March Madness brackets (always a humbling experience) to guessing who will win the upcoming election. The news is filled with predictions and opinions from various “experts” doing the same thing.

When it comes to the world of investing, predictions are especially common. Will the Fed lower interest rates this year? How many times? Will the proposed tax legislation pass? What will be next month’s CPI number?

These are valuable issues to consider, but it is important to avoid overconfidence when dealing with the unknown. And we shouldn’t lose sight of the fact that these things really are ultimately unknowable, even though there’s no shortage of overconfident “experts” making it seem otherwise.

But what if you actually could predict some of these things with accuracy? Would you be able to consistently make successful investment decisions based on those predictions? Here are a few examples where knowing a piece of information in advance could have led to overconfidence and ultimately a poor short-term investment decision.

Example 1

Netflix released their earnings results in April 2024. Let’s pretend that before the official company announcement, you successfully predicted that Netflix would beat their quarterly earnings and revenue estimates as well as increase their subscriber count by more than what Wall Street expected. Using that information, what would be your prediction for what would happen to the stock price? Of course the stock price would go up, right?

Netflix stock ended the day down 9%. Why would the stock be down so much after “good” news? Well, in addition to the earnings report, Netflix also announced that they would no longer be reporting on the number of subscribers going forward. That announcement seemed to alarm investors, who interpreted the announcement as a lack of confidence in the company’s future growth. Netflix’ report was a mixture of positive and negative news, and investors seemed to react more strongly to the negative news this time around.

This scenario highlights how many factors are involved with investing. It’s not just the numbers on a spreadsheet that matter, but the real-life business factors behind those numbers as well as the subjective response of investors to the totality of all that information.

Example 2

What if you could go back in time to the beginning of 2020 to give yourself a message that says, “There will be a huge global pandemic this year. Governments will issue stay-at-home orders and economies will be hit hard as many industries are essentially shut down.” Knowing this information, would you make any changes to your investment strategy for the year? The news does sound pretty scary. What if you decided to sell everything and stay out of the market for 2020 to “protect” yourself?

Selling would have looked smart for a while, but it would end up being a terrible mistake. Even though the stock market dropped to start the year, it rebounded fairly quickly and the S&P 500 ended the year with a total return of 18%.

Of course, we all remember the fear and volatility that 2020 brought. It wasn’t easy, but if you had an investment plan and stuck to it, your investments likely ended up doing well that year. Even if you somehow predicted ahead of time what was coming, there’s a chance that prediction could have led you to make a poor investment decision because of overconfidence.

One of my takeaways from that period is that even if the “scary thing” that we think might happen actually does happen, it’s very possible that the market won’t react as negatively as we thought it would.

Example 3

In 2011, Standard & Poor’s downgraded United States government debt from AAA to AA+. This was the first time US debt was rated less than AAA, the highest quality rating that can be given.

Let’s pretend you were trading U.S. treasury bonds and somehow predicted this would happen before it happened. What would you do to profit from the situation? Bonds 101 says that if a bond gets riskier, it requires a higher yield to compensate for that risk, which in turn means that the price of that bond will decrease. So of course, after the shocking announcement that US debt has been downgraded, treasury bonds would drop in value, right?

Well, after the downgrade announcement, U.S. treasury bonds actually increased in value! It broke the fundamental rules for how bonds work. However, it also made some sense from a different perspective in that the downgrade sparked fear and led to a flight to safe assets. And apparently, most investors still viewed U.S. treasury bonds as one of the safest assets you could hold, regardless of what the rating agency just said.

This story again highlights the challenges involved with predicting short-term market reactions. Even if you correctly predicted the downgrade was coming, you would have also needed to correctly predict how both domestic and international investors would interpret the news and react to it.

Final Thoughts

“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” – Mark Twain

The real world is complex. There are many factors that influence economies and investment markets. The world is also filled with humans, who make rational decisions as well as emotional decisions. All of this should lead to caution and humility when assuming simple cause-and-effect relationships between things, especially over short-term time horizons.

That said, it’s not bad to make predictions and forecasts. It’s important to understand what is going on in the market and the world and to be prepared for the future, and predictions and forecasts can be helpful tools for that. However, we must always be aware of the overconfidence that those predictions and forecasts can bring.

Crazy, confident predictions are exciting and draw attention. It’s harder to become popular by saying “I’m not sure”. That’s always something I try to keep in mind whenever I’m reading any financial commentary.

At Eclectic Associates, we prefer the peace of mind that comes from having a sound financial plan with a long-term approach that is set up to withstand whatever the future may bring. If you have any questions about your personal finances, please feel free to schedule a complimentary phone call or meeting with one of our fee-only financial advisors.

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By David K. MacLeod, CFA, CFP®

Stocks started the year strong with the S&P 500 gaining 10%, continuing the late 2023 rally. Tech stocks led, while value stocks, especially in the energy and financial sectors, also saw robust gains. Bond returns were modest due to a slight rise in long-term interest rates as the 10-year U.S. Treasury yield rose to 4.3%.

As we mentioned last quarter, U.S. economic growth has exceeded expectations, boosting corporate profit outlooks and driving the stock market higher. The Fed’s models project first quarter real GDP growth to be close to 3%, defying economists’ predictions that growth would stall out this year. Inflation pressures are easing, but the higher prices realized since 2020 are here to stay. Economists now say the next recession won’t arrive until at least 2025. That would mean higher interest rates will stick around longer than expected.

As we look ahead, there’s little doubt that the 2024 U.S. presidential election will lead the news cycle. Market volatility often increases around the presidential primary season. However, according to Capital Group, patient investors benefit as U.S. stocks tend to perform better than average in the 12 months following the presidential primaries. As always, we don’t try to time the markets around election expectations, recognizing the inherent uncertainty of future policy changes (and unexpected consequences).

Despite significant risks – both short-term, like potential technology sector supply chain disruption from a conflict in Taiwan, and long-term, such as a U.S. debt crisis – the stock market continues to reach new all-time highs. Record highs sometimes make investors uncomfortable, yet stocks remain a high potential return asset class for fundamental economic reasons. So, it’s not uncommon for stocks to hover near or at record levels.

Please do not hesitate to call if you have questions or want to schedule a meeting.

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By Russell W. Hall, CFP®, CPWA®

First off, this update from the IRS only affects certain Inherited IRAs and Inherited Roth IRAs - those where the original account owner (referred to as the decedent) passed away in 2020 or later. If you have that type of inherited account, keep reading!

As a refresher, the SECURE Act imposed a ten-year withdrawal window on most Inherited IRA accounts. That means the account must be emptied within ten years of the year of inheritance. For example, if the decedent passed away in 2021, the beneficiary would have until 12/31/2031 to withdraw the entire balance. There are certain exceptions, including surviving spouses, minor children, and disabled inheritors.

In February of 2022, the IRS tried to “clarify” the rules (as only the IRS can!). They added a minimum distribution requirement (RMD) during those ten years IF the decedent had already been taking RMDs. If the decedent was not subject to RMDs, then that requirement was waived for the beneficiary and only the 10-year rule applied.

As we’ve stated in previous articles, this caused a tremendous amount of confusion; so much so that the IRS waived the penalties for not taking the annual distributions for tax years 2021, 2022, and 2023. And the big news is that the IRS just waived the penalty again for 2024, essentially meaning that Inherited IRA owners can skip this year’s withdrawal.

That said, you might still want to withdraw from your inherited account this year. The main issue we think about is that even if the IRS waives the penalty every year, the 10-year deadline is still looming. For many inherited IRA accounts, putting off distributions until year 10 would result in a big tax hit that could actually be more onerous than taking withdrawals annually (and in effect smoothing out your tax rates along the way).

If you’re not sure if this rule change applies to you, or if you have additional questions about your Inherited IRA, please visit our website to schedule a complimentary phone call or meeting with one of our fee-only financial advisors.

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By Carl Lachman, MBA, CFP®

Emergencies Are Not Planned

We don’t plan to have a medical emergency. Rather, something happens and we need to rush to the emergency room of a local hospital. We have a medical problem and we need help fast, which is why ERs exist. Most of the time, we get the help we need and the dire problem is solved by doctors and nurses who live every day helping people who need immediate assistance.

But what also usually happens is that a couple of months pass and then we get a surprise billing for some part of that ER visit that we did not expect. Wait a minute, isn’t that hospital in-network with my health plan?!? I know I checked that when we got our health insurance! Why is this doctor sending me a huge bill? I don’t think they even bothered to check with my health insurance company! What is going on?

Not a Happy Surprise

You have unfortunately discovered that one or more of the doctors in the emergency room are not in-network with your health insurance. Emergency room doctors are needed by people who do not have the time to pick and choose an in-network doctor since they are having an emergency. So, doctors who work in emergency rooms have generally stopped going through the annual struggle to negotiate with health insurance companies about what they should be paid for their emergency expertise. They don’t have to be in-network because in an emergency no one has the time to shop around for a good emergency room doctor. So, most ER doctors are out-of-network.

Same for Ambulance Companies

The same is true for ambulance companies. Do you have the time to check which ambulance companies are in-network when an emergency strikes? No. If you need an ambulance, you need one quickly and out of the blue. So, again, why should ambulance companies go through the hassle and pain of trying to negotiate their rates with huge health insurance companies? They don’t have to be in-network.

Heartless and Greedy?

You may think that these ambulance companies and ER doctors are heartless and greedy, taking advantage of others’ misfortune, but I don’t think that is the case. After all, they were there for you in your time of need, and they used their skills and expertise in a stressful, dire situation, even ready to save your life. I am confident that the vast majority of doctors and ambulance companies are good ones and that there are only a few bad ones.

And frankly, if you or I worked as an ER doctor or owned an ambulance company, I think we would actually do the same thing: stay out-of-network. If we could skip the annual hassle of negotiating our rates with mammoth health insurance companies, I think we would. I don’t know if ER doctors and ambulance companies actually make any more money doing it this way. Maybe some do, but others don’t. I do think that skipping the hassle of an annual in-network negotiation is a big win, though.

The Health Insurance World Is What It Is

So, back to your surprise bill. We are not going to change the health insurance system before your bill is due, so what should you do? With a little research, you will find out that you do have options.

A few years ago a family member ended up in the emergency room and we received a large bill from an ER doctor. I tried contacting the doctor and their billing department, but no one was willing to discuss the bill. I have contacted providers and billing departments for maybe a hundred medical bills over the last 30 years and generally had good experiences, but I found the billing department for this particular doctor to be particularly irritating and rude, so I started to do some research. I discovered there were some rules about surprise ER bills in our state of California that seemed to apply to my situation. When I brought this to the attention of the doctor’s billing department they played very dumb and claimed to have never heard of the rules I was quoting to them. But, in my research, I also discovered that the State of California’s Department of Insurance had a complaints department that was willing to help me out.

There is Consumer Protection Available

Insurance is regulated on a state-by-state basis, so I am unsure what your state offers, but the State of California’s Department of Insurance is ready to help. You can go to it’s website right now and start reading here: Consumer Protection from Surprise Medical Bills.

In my case, I filed a complaint and I received a personal email from a real person at the Department of Insurance just a few days later. Then, within about two weeks of getting help from one of the Compliance Officers at the Department of Insurance, the surprise ER doctor bill was cut down by about half. I was surprised, grateful, and heartened that my state’s massive bureaucracy was able to go to bat for me so quickly.

The Laws and Regulations are Changing

Some laws and regulations are slowly changing this surprise medical bill situation. I don’t think it is fully implemented and not every situation is covered, but a lot more is being done than just a few years ago.

When a family member recently had to be moved in the middle of the night from one hospital to another, there wasn’t a choice on medical transportation and the hospital got the first available ambulance. A couple of weeks later, long before I received a bill from the ambulance company, my health insurance sent me a letter telling me what to do if the ambulance company sent me a bill. My insurer’s letter explained that the ambulance company was going to send me a huge bill, but I couldn't ignore it. My insurer wrote that the ambulance company was out-of-network, was going to be paid the correct amount by the plan, that I did not need to pay the ambulance company any additional amount, and told me to ignore bills from the ambulance company.

Sure enough, I received a very large bill from the ambulance company a month later saying there was still a large amount due. The company continued to send me a bill every 6 months for several years. I never paid any additional amount and they finally gave up after about 5 years. I guess many people don’t know about this situation and just go ahead and pay the bills, but with a little information you can avoid falling for this.

Your Rights and Protections

In the last two weeks, I received an explanation of benefits from my health insurance company and they included a page with the heading, “Your Rights and Protections Against Surprise Medical Bills.” This single page says many of the same things I am explaining with this article and you can read what my insurance company says online here: https://www.uhc.com/legal/federal-surprise-billing-notice

You will note that this surprise medical billing notice is a “federal” notice, so what is written might not apply in every situation in every state. But I think it will be worth it for you to do a little research when you get one of these surprise bills. At the federal level, the “No Surprises Act” went into effect on January 1, 2024, and in California, Governor Newsom recently signed a bill to end surprise ambulance billing for Californians. So, maybe these problems are soon going to be solved.

Does Your Financial Advisor Look Out for You?

Our fee-only financial firm doesn’t sell health insurance. We don’t sell any sort of insurance or annuity. But, insurance is a big part of financial planning and our clients pay us for advice in all areas of their financial lives, from investments, taxes, estate planning, retirement, and insurance. So, we study, research, and attend seminars every year on these varied topics and areas of expertise, including health insurance.

In my case, I have personally gone through a couple of different surprise billing situations and found out how to deal with them from personal experience, but this is the sort of subject that our financial advisors are also exposed to each year in our reading and continuing education. Not every financial advisor has to complete the amount of continuing education that our advisors have to complete each year. So if you are thinking about using a new financial advisor, you might want to inquire about how they stay sharp and keep growing in their expertise.

You also should find out how your financial advisor gets paid. Are they compensated in such a way that they will put your interests before their own? Or, are they paid a commission and only looking for the next sale?

If you schedule a free meeting with me and let me tell you more about Eclectic Associates, I will be happy to answer any health insurance questions that might have been prompted by this article. Click here to schedule an appointment.

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By Scott A. Rojas, MBA, CFP®

At Eclectic Associates, we believe that getting a look at a client’s entire financial picture, not just their retirement and brokerage accounts, guides us in making sound and well-informed decisions for our clients. Not only is it important for us to have a holistic view of a client’s overall wealth, but there are many times when a client does not yet have a grasp of their own true net worth.

Before being able to make investment recommendations and run retirement projections, we must have an accurate starting point. That’s why a balance sheet is the first page of our financial plan for new clients; it helps to get us both on the same page.

What is a Balance Sheet?

A personal balance sheet (also called a net worth statement) is a financial statement that shows your assets, liabilities, and net worth at a specific point in time. It provides an overview of your financial position and is a useful tool for evaluating your financial well-being. While having a professional build one is helpful, you can put this together for yourself as well.

Here's how:

1. Compile a list of your assets, which could include:

2. Savings and checking accounts

3. Investment and retirement accounts
4. Property, such as cars, trailers, and real estate

5. Personal possessions, such as family heirlooms or engagement rings. Depending on the asset, it might make sense to get it appraised.

6. List your liabilities. This is not as enjoyable, but it is almost more important to get this information listed correctly than your list of assets. You need to know what you owe and the interest rate you are paying. Liabilities could include mortgages on primary residences or rental properties, personal loans, credit card balances, car loans, etc.

7. Calculating your net worth is then a simple subtraction problem: the total balance of your assets minus the total balance of your liabilities.

Once you have completed this process, you now have a snapshot of your financial health. This can be a useful tool for deciding what your investment allocation should look like, tracking your progress toward financial independence, and identifying areas that may need some extra attention.

Next Steps

We recommend that you update your balance sheet at least annually. Our clients receive their latest balance sheet once per year, when we ask them to update their assets and liabilities. By doing so, we continue to have an accurate and comprehensive picture, which allows us to provide the best guidance and management possible. But even if you manage your own finances, a balance sheet will help you be better informed and make better decisions.

If you would like help building your own net worth statement, please make an appointment with one of our financial advisors.

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By Travis J. McShane, CFP®, CFA®

“Congratulations on the new baby!!”

“Where are you registered?”

“What size diapers should I drop off?”

AND…. “Have you opened a 529 account yet?”

Seems like an odd question out of the gate (and you should probably wait until the Social Security card comes in the mail) but recent changes in the tax law have expanded on the rules for 529 accounts, making them an extremely useful tool for helping the next generation get ahead whether they end up going to college or not.

We were often asked:

“What sort of savings account should I set up for my son/daughter (or grandson/granddaughter)?”

The response used to be:

“Will this be general savings to use for perhaps a car, future down payment on a house, or kickstarting long term savings?”

-or-

“Would you like to begin funding future college and higher education expenses?”

Which then puts you in an interesting spot of trying to guess how the next 18 years of a newborn’s life will pan out. For the college minded, the recommendation to open a 529 account was a slam dunk, and for those not wanting to tie the gifts to education specifically, it generally made sense to use a UTMA/UGMA account.

UTMA/UGMA accounts behave much like a regular brokerage account on a year-to-year basis. A gift is made to an account which is then usually invested with the appropriate time horizon in mind. That investment then spins off interest/dividends each year and/or generates capital gains/losses if any investments are sold. If those amounts add up to over $2,500 in 2024, then "Kiddie Tax" rules will need to be considered.

529 accounts behave a lot like Roth IRAs so long as any distributions are directed at qualified education expenses. Like UTMA/UGMA accounts, a gift is made to an account invested with an appropriate time horizon. All interest/dividends/capital gains are sheltered from taxes from year to year which eliminates the “Kiddie Tax” worry, and when college expenses finally come due, then using the 529 funds will escape any taxes on investment growth and income.

Now comes the fun part. With the passage of SECURE 2.0 legislation in late 2022, there is a new rule that allows $35,000 of “leftover” 529 money to be rolled into a Roth IRA on behalf of the beneficiary of the 529 account. This is a lifetime maximum rollover amount, and the 529 must be open for a minimum of 15 years. The funds to be converted also need to have been contributed more than 5 years in the past. For any unused 529 assets that qualify, annual Roth contributions ($7,000 in 2024) are permitted to be “rolled in” to a Roth IRA until the $35,000 lifetime limit is reached.

In effect, this takes some of the guesswork out of the “will they go to college?” conversation because your gift today could eventually turn into a Roth IRA account, opening the door for a literal “lifetime” of tax-free compounding of returns. It’s best to get that 15-year clock going early which opens this door.

As a side note, if your newborn is a child actor, a budding superstar, or has some other way of generating “earned income”, just let us know and we can skip the maneuvering above and simply open a custodial Roth IRA to fund from those earnings each year. For the rest of us, the 529 to Roth option creates flexibility for anyone looking to lend a hand to the next generation for college…. or not.

If you have any questions on this strategy or to get a 529 account started for someone you care about, don’t hesitate to contact one of our advisors here.

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An Interview with Daniel R. York, Elder Law Attorney

By Russell W. Hall, CFP®, CPWA®

As financial advisors, we have to be familiar with estate planning for our clients including a good understanding of wills, trusts, powers of attorney, and other documents. However, we don’t practice law ourselves and instead refer out to local attorneys that we know well and who we trust to do great work.

One of those attorneys is Daniel (Dan) York, who practices in the Fullerton area. During a recent presentation, Dan mentioned his concentration on elder law and how it differs from general estate planning. We thought that was an intriguing and perhaps often misunderstood topic, so we asked Dan to discuss it further in the following interview. Dan’s responses have been edited for brevity and clarity in this article, and we plan to post a longer video of the interview soon.

Russell Hall: Dan, what is your educational background? What drew you to practice law in the first place, and particularly estate planning?

Dan York: I have a history degree from the University of California at Berkeley, and a law degree from Western State University here in Fullerton. I have also taken many continuing education classes over the almost 36 years that I’ve been practicing.

I didn’t arrive at estate planning or elder law right away. I came to it because I was a speech communication major – actually a double major with art – and I found out very quickly that I wasn’t going to be able to make a real living in art, so I had to figure out how I was going to use speech.

The matter of getting into elder law and estate planning is a longer journey. I first started out with 17 years of practice doing mostly litigation - contested cases in the courts. It’s a form of civilized combat…but it is combat. After doing that for a number of years, I was looking for something different. What I found is that there are a lot of people out there who needed guidance because they were retired and they were going through a lot of changes in their lives. There is a lot of complexity to planning for care and integrating government programs as well as dealing with personal assets. I found in elder law a very supportive, professional community that was less about combat and more about cooperation.

You’ve talked about how elder law attorneys differ from other types of lawyers, but couldn’t any lawyer do estate planning?

Attorneys that are licensed in our state jurisdiction can draft wills and trusts. But if you don’t have the base of experience or have not devoted time to special issues, there is risk that you might miss something. Estate planning can be very specialized as to age groups and particular needs. If the attorney is not well-informed in those needs, he can miss important issues. Eventually those estate plan documents will “mature” and the written instructions will be tested during illness or after death. This is when we see many issues that weren’t taken into account.

Elder law requires focus on the needs of older adults. It is difficult to do that in a general practice where the attorney’s attention is spread among other practice types. Elder law developed because the world of government benefits got complicated and our life span increased. We found that because people were living longer, they needed care for a longer period of time, and their medical conditions tended to be quite costly. So, the short answer to your question is that coordinating all of these elements can be quite complicated, and if you don’t have a working understanding of the various government benefit programs and the local laws that apply, you can get in over your head. That’s why most elder law attorneys don’t diversify too much outside of those areas.

And elder law itself has developed niches. I would say that if an attorney believes that they can dabble in elder law, they’ll quickly find out that’s hard to do.

Can you go further into elder law versus estate planning? For a lot of people, they converge the two in their mind.

Elder law is an expansion of traditional trust and estates practice. Estate planning can be something as simple as a two-page will.

However, if you’re dealing with an individual that has a diagnosis of neuro-degenerative disease (dementia), then you have to know how to determine whether that person still has the ability to understand and communicate about personal choices in the area of estate planning. The question of simply preparing a will becomes more complicated.

The other thing to understand is that generic estate planning tends to focus on end of life and what becomes of the things you own. There is often focus on lifetime documents like a power of attorney. But elder law attorneys realize there are a lot of sub-issues, particularly regarding capacity.

Not all elder law attorneys spend their time doing estate planning; some spend their time on contested litigation. They may actually sue people that have committed elder financial abuse or emotional abuse or physical abuse or neglect. So elder law has some fuzzy edges where it can blend into the area of litigation and even into other areas (quite complicated tax planning, for example). It just happens that my area of practice tends to focus in those areas regarding aging, medical care, caregiving, and financial management.

Is there an organization or group that certifies elder law attorneys? Is more education or background needed?

The history of elder law associations and attorney organizations is interesting. In California, there is a certification for elder law, but that certification is not one that most elder law attorneys pursue. The education you acquire through practice and various memberships actually contributes to that base of knowledge that makes you good at what you do. So most practicing elder law attorneys do not pursue the certification. I don’t want to express a preference for one approach or the other. Some elder law attorneys have it, but most do not.

Elder law as a practice area developed around an organization called the National Academy of Elder Law Attorneys, and NAELA has a fine website at www.naela.org that can explain areas of practice. NAELA is a nationwide organization that was founded in 1987, because attorneys were running into these issues of aging, disability, caregiving and government programs. These attorneys wanted to share information and collect ideas. NAELA provided that community of knowledge. NAELA also provides a directory of attorneys to the public at no charge. NAELA also tracks and influences legislation that will benefit seniors.

Why would someone seek out an elder law attorney specifically, versus an estate planning attorney?

You should consider an elder law attorney if you are concerned about the costs of care as you age, the effect of Alzheimer’s or some other progressive disease, the appointment of someone to oversee your finances or personal care, government programs to help you pay for your care and any other issues related to disability or aging.

For example, some estate plans do not include provisions allowing for Medi-Cal eligibility planning. Sometimes a spouse loses capacity to sign documents to alter the estate plan to make needed adjustments. That is when we may need to go to court for an order. Anytime I talk about going to court to get permission to do something, you should translate that into dollars, delay, and frustration – lots of frustration. What we’re trying to do is keep our clients out of court, generally speaking. There are some times you can’t avoid that, but in general good planning is that which attempts to keep control in the hands of the individual and the persons they chose, to control costs, and to keep it private and hopefully reflect the wishes of that person.

I’m going to get on a little bit of a soapbox here - for folks that may be procrastinators. It is important that you get your planning done while you are still able to make informed consent decisions and understand what you are deciding and signing. It is not good enough to simply put a pen in someone’s hand and tell them to sign something. Ethical attorneys will not allow that; they have to be satisfied that this person knows what they are signing. When you see a practitioner early, it means that the person with the diagnosis can participate, they can be satisfied that the choices they’re making are their choices, and it makes for a more satisfying experience. It also puts the family at ease knowing that their loved one made these decisions. One of the most anguished statements I hear from families is “I don’t know what mom or dad really wanted”. That can lead to disagreements and confusion.

We often tell clients to expect that if they’re going to a new attorney to update their documents, the new attorney might prefer to just completely rewrite everything (and it might be cheaper to do so). Have you found that to be the case?

I’ll try to give you a practical perspective on that. When someone asks for an amendment or a large change to their estate planning papers, as a matter of practice the first thing I do is to ask to review the existing documents. The best analogy is going to a doctor that you’ve never seen before. He or she will take your history, run some blood tests probably, and try to determine your physical status.

We’re doing a similar kind of thing. I will want to read those documents because it may be that I can amend documents without having to do a restatement of the trust. I don’t automatically insist on a restatement; but having said that, I will point out to the client that there are certain areas that may be deficient. By that I mean the old plan documents may not accomplish what the client currently wants. And the law may have changed since their documents were written. So based on the client’s current wishes and current laws, we might recommend improving the language or refining it. It’s kind of like the decision of whether you replace the tire, or you put fifty patches on the tire. I will point out to the client when I will not be able to “patch the tire.” Sometimes it will cost far more to “patch” than simply write an entirely new document.

The other thing on a practical level is that when you put too many amendments on a document, it becomes incredibly hard to read and understand because you’re flipping back and forth between pages of the original document and the amendment pages. Remember that the person in the future reading this document – your trustee or executor – will be a layman trying to figure out what all these patches mean.

Anything else you would like people to know about elder law?

DY: When I see families finish this process, you can visibly see them breathe a sigh of relief knowing that their wishes are reflected in their documents and that a lot of different outcomes have been anticipated. A sign of good planning is not assuming just one possible outcome but planning for many possibilities. For that reason, estate planning is a gift to your family. They can be confident that things are ready.

But don’t assume that you can get to that point without spending time. Too often I have people call me assuming they can come into the office in one visit, sign a couple of documents, and be done in a week’s time. Very often they’ve thought about the obvious issues, but what they may not have taken into account are other items. For example, if they have an executor/ trustee, what happens if that person dies, becomes incapacitated, or declines the job or for some other reason is not able to do it? What if one of their beneficiaries passes away – what becomes of that share? There are many other things to consider.

One way to think of this is that the client has lived this entire life, done a lot, saved and provided for their family, and is now thinking about what to do with what remains and how to make it last for their own care. What we’re trying to do is summarize their vision for the future so that their wishes are honored when they can no longer personally do that job. That involves a lot of careful thought. Those decisions shouldn’t be made in the space of a few days. I would urge people not to think they can do that on their sickbed That’s not a good time to be doing detailed planning.

Thank you for your time, Dan.

If you have any questions, please feel free to schedule a phone call or meeting with one of our advisors.

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By David K. MacLeod, CFA, CFP®

Election season is in full force here in the United States, but Tuesday, November 5th, 2024 still feels a long way away. Between election uncertainty and geopolitical events, we shouldn’t be surprised if stock market volatility rises. You may be wondering what to expect from the rest of this presidential election year.

For the purposes of this article, we’ll focus on the influence of an election year on the U.S. stock market. As financial planners located in Orange County, CA, we’ve been in business for eleven U.S. presidential election cycles. When we opened our doors in 1984, Ronald Reagan and Walter Mondale were the frontrunners in the election that would re-elect Reagan later that year. We have market insights to share that may be relevant for the current cycle.

We want to first stress that we do not advocate trading or market timing based on election forecasts. We also want to discourage following a seasonal investment strategy that moves in and out of the stock market based on historical patterns around elections.

At one time, the Presidential Election Cycle Theory was a relatively popular theory proposed by Yale Hirsch. Hirsch believed that the third and fourth years of a presidential term have the best stock market returns. But there are exceptions to the average. If you had followed this theory and invested more aggressively in early 2008 (an election year and George W. Bush’s final year in office) you would have been more than a little disappointed. There is no rule that says any season or year is the best time to invest.

When we review presidential election history, election results have made no meaningful difference to how the stock market performed. Looking back to 1932, according to Capital Group research, U.S. stocks have trended up regardless of whether a Democrat or Republican won the White House. That said, investing through an election year can be nerve-wracking.

Market volatility tends to increase during the uncertainty of presidential primaries. You’ve undoubtedly heard reports on the news of big point swings up and down in the stock market in recent times. However, according to the Capital Group, patient investors benefit as the U.S. stock market tends to perform better than average in the 12 months following the end of presidential primaries. As always, however, we don’t try to time the markets around election expectations.

Whether Joe Biden, Donald Trump, or another candidate in the race wins the White House, we wouldn’t necessarily recommend making dramatic changes to a sound investment plan. If you don’t feel confident in your current plan, feel free to call us and speak with one of our Certified Financial Planner (CFP®) advisors. You can also schedule a time with us here.

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By David K. MacLeod, CFA, CFP®

Despite numerous risks, the markets climbed “a wall of worry” and reversed much of the losses from 2022. Most of the gains were earned in the last nine weeks of the year. The last time U.S stocks increased for nine consecutive weeks was in January 2004. Large cap stocks rose 26%, small cap stocks increased 16%, and international stocks gained 18% in 2023. Bond funds gained between 6 – 9% thanks to higher yields. Oil prices fell 10% which brought some relief at the gas pump.

Most economists expected a recession in 2023, according to a Wall Street Journal survey conducted in 2022. Not only did the U.S. avoid a recession, growth accelerated to a 5.2% real gross domestic product growth rate in the third quarter. Economists aren’t usually this wrong but it does serve as a good reminder not to put too much faith in short-term predictions. That said, we wouldn’t be surprised if economic growth slows down this year. The unemployment rate remains very low and the job growth rate will probably slow to <1% growth by later this year.

Due to expectations of slowing growth and inflation getting under control, the Fed is likely to cut interest rates. This would lead to both lower money market yields for savers, and lower mortgage and auto loan rates for borrowers. However, we don’t expect interest rates to drop back to near-zero where they were for much of the past 15 years due to all levels of U.S. government running high deficits and an aging population.

As we head into a presidential election year, we do expect higher volatility especially around the primary season. We want to stress that we don’t advocate trading or market timing around election forecasts and fears. While election years can be nerve-wracking, we don’t think there are any reliable trading strategies around elections.

Please don’t hesitate to give us a call if you have any questions about your personal investment portfolio.

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By Aimee Calderon, CFP®

While IRMAA sounds like the name of your long-lost aunt, it actually stands for Income Related Medicare Adjustment Amount and is essentially a Medicare surcharge or tax. Social Security uses your tax return to determine how much you should pay for Part B and Part D of Medicare. Your MAGI (Modified Adjusted Gross Income) is the figure that determines how much you pay for part B and part D of Medicare. MAGI is equal to your AGI plus tax-exempt interest or foreign earned income. IRMAA calculations have a 2-year lag time so your 2024 rates are dependent on your 2022 tax return.

If your 2022 MAGI as a single person is under $103,000 or $206,000 as a married person, you will pay the baseline amount of $174.70/mo for Part B coverage and $55.50/mo for Part D coverage in 2024. If your MAGI is more than these amounts, then you will pay an additional surcharge for these coverages due to IRMAA.

Here are the monthly income brackets and surcharges for 2024 based on 2022 MAGI:

It is important to note that unlike income tax brackets that are marginal, IRMAA uses a “cliff” style assessment. If you are $1 over the cut off for the next tier, you will pay the higher monthly amount. If you are married and your 2022 MAGI was $260,000, you and your spouse will EACH pay $349.40 per month for Part B and $88.80 per month for Part D.

If you do get pushed into IRMAA, there are some circumstances under which you can appeal the surcharge. You must have a life changing event to qualify for an appeal. Following are Social Security’s approved life changing events:

• Marriage
• Divorce/Annulment
• Death of your Spouse
• Work Stoppage
• Work Reduction
• Loss of Income-Producing Property
• Employer Settlement Payment

Determination letters from Social Security indicating that you are getting pushed into IRMAA are typically mailed out at the end of the calendar year. If you receive a letter, it is important to consult your financial advisor or accountant to see if you are eligible for an appeal.

To appeal the surcharge, you must complete a Medicare IRMAA Life Changing Event Form SSA-44. You will need to provide documentation of your life-changing event and your decrease in income. You can estimate your current year’s income for the appeal but you must eventually submit a tax return to prove the decrease.

The IRMAA surcharges are steep and can be a real surprise for many taxpayers. It is important to be aware of them, so you don’t inadvertently get pushed off an IRMAA “cliff”. Required minimum distributions and unexpected capital gain distributions can sometimes be the culprits. Tax planning for the current year and future years becomes even more essential when trying to avoid IRMAA.

Schedule a 15-minute discovery call with a fee-only financial advisor if you want help thinking through some of these issues.

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By Amber Shrosbree, CFP®

Someone was recently asking me for advice on how to improve their credit score. They were telling me about the steps they had already taken between loan consolidation, paying off some balances, and closing accounts. They were shocked when I told them that closing accounts was actually detrimental to their credit score, and that they may end up paying even more by consolidating their debt.

Credit Balance

Managing your credit card balance and overall credit usage percentage is a critical part of maintaining a good credit score. A good rule of thumb is to keep your credit utilization below about 30%. For example, if you have about $15,000 worth of credit available to you through your credit cards, the goal should be to keep your usage at $4,500 or lower.

There is a bit of a dance that goes on when managing your credit card balance. While the goal should be to get your credit card balance to $0 on a monthly basis, this should not mean you cut your cards up to prevent yourself from using them at all.

The sweet spot is when it has been established that you have been able to keep your credit usage low without forfeiting the use of your credit altogether. It takes more discipline to use your credit card wisely than to not use it at all. This is when you will see a really healthy credit score.

The advice that has always stuck with me is if you do not have a plan to pay for it you should not buy it with credit. Only put on credit what you know you can afford with your paycheck.

Do not close accounts

This ties into the final point above. It does not necessarily benefit you to cut yourself off from your cards, or close your accounts. In fact, closing an account is something that can actually harm your credit score. Your credit score not only takes into account your credit usage, but how long you have had your accounts open. The longer an account remains open and established, the better it is for your credit score. Of course, as noted above, the account needs to be properly managed. No open account benefits you quite as much if it is constantly maxed out and never gets paid down.

Tricks to paying down debt

It is not uncommon to end up with more debt than you would like. Life happens, but there are ways to pay it down more efficiently to get yourself out of the hole faster.

1. Make payments more often.

Even if they aren’t huge payments, by making payments more than once a month, you give your balance less time, and less of a balance to continue to rack up interest.

1. Pay more than the minimum requirement.

Pretty straight forward, but by paying more than the minimum required payment monthly you ultimately shorten the lifespan of your debt and the overall amount you will pay to pay off the debit. The smaller your payments, the more you pay in the long run.

1. Pay highest Annual Percentage Rate (APR) off first

Prioritize the accounts that are generating the most interest. Pay the minimums on your other accounts while you focus your attention on the one growing at the fastest rate.

1. The Snowball Method

This is an alternative to paying off the highest APR first. Here, you focus on paying off the lowest balance first. Once your lowest balance has been paid off you move onto your next lowest balance and roll the funds you were putting towards the first bucket toward your new lowest balance bucket and so – on.

Be wary of debt consolidation offers

While the idea of getting all of your credit card payments bundled into a single monthly payment sounds nice and more manageable, there are things to consider before moving forward with debt consolidation.

· How long is the life of this new loan compared to your current ones?

· Is the rate I am being offered fixed or variable? In other words, will the low rate I’m being offered now end up growing down the road?

· How does the rate I’m being offered compare to the weighted average interest rate of my existing debt?

Once you have gathered this information, you need to figure out if you will truly end up paying less by consolidating, or if you’re actually going to pay more in the long run.

Of course, there is no one perfect way for everyone to manage their debt. Each situation is unique, and life inevitably throws curveballs and can derail a perfect plan. As always, we are available for any of our clients who may feel as if their debt has become overwhelming and are seeking guidance on how to manage it and where to start.

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Russell W. Hall, CFP®, CPWA®

If you, like so many others, are putting off making your charitable donations until it gets closer to the end of the year, we suggest you start on that right away. This is the busiest time of year for many charities and brokerage firms, and the last thing you want is for a donation to be late and not count toward your 2023 taxes.

Unsure of the best way to donate? Here are a few ideas.

Give from your IRA

If you’re over 70 ½ and have an IRA (or younger and have an Inherited IRA), you can give up to $100,000 per year away to charity directly from your IRA. You don’t get to deduct those donations, but since the withdrawal never touches your tax return, your income is lower - and for many people that’s even better than a deduction. This is called a Qualified Charitable Distribution (QCD).

You may be wondering: if Congress increased the required minimum distribution (RMD) age to 73 and I don’t have to take withdrawals until then, why should I give from my IRA now?

If you’re not able to itemize deductions – true for many Americans nowadays - doing QCDs can be a great way to give in a tax-advantaged manner. For some who will have larger required distributions than they might need for living expenses, giving now can also help reduce future required minimum distribution amounts.

Give away gains

Most charities these days are able to receive donations of appreciated assets, so if you’re sitting on unrealized gains in a taxable account, it could make sense to give those gains away instead of giving cash.

We think best practice is to gift investments that you’ve owned for over a year that have a relatively large gain. Instead of selling that holding to cash and having to pay taxes on the gain, you could gift it to charity and let them sell it to realize the (now non-taxable) gain. In addition, if you wanted to continue to own the security you gifted, you could then immediately repurchase it and you’d be starting with a new tax basis.

One caveat for generous donors is that you are limited by your Adjusted Gross Income (AGI) when it comes to deducting charitable gifts. You’re limited to 30% of your AGI if donating to a public charity, versus a 60% limitation if you’re giving cash. The good news is that the portion you can’t deduct gets carried forward for up to five years.

Give a lot all at once

What if you’d like to donate appreciated securities or cash, but you are filing the standard deduction and are unable to itemize? One strategy is to “bunch” deductions, where you’re giving away two or three years worth of donations in one year. That allows you to itemize in the current year and get the tax benefit of your contributions, and then file standard deduction in the off years.

The downside of that strategy for many people is that they’d like to make regular contributions to organizations they support, and that is where a Donor-Advised Fund (DAF) comes into play.

These funds are set up as public charities to receive donations and give an immediate tax deduction, but the actual gifts to each charity don’t have to be made all at once. Instead, you as the donor can instruct (technically advise, hence the name) the fund to donate to the 501(c)3 charity of your choice, whenever you want.

You only get the one tax deduction at the initial donation, but this strategy lets you bunch deductions and still spread out the actual gifts over time. There also isn’t a requirement that you give away a certain amount or percentage from the DAF each year, which can be a handy feature as well.

Give wisely

We feel a bit like a broken record here, but will say it again - any decision to donate should start with a charitable intent, not just trying to get a tax deduction. Giving away $1.00 to charity just to save $0.25 on your taxes is not a good wealth building strategy. But if you really do want to give it away to charity (and we fully support that!), we hope these strategies will help you.

Schedule a 15-minute discovery call with a fee-only financial advisor if you want help thinking through some of these issues.

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By James Moore, CFP®

It’s that time of year again! As we enter into the final months of 2023, the deadline to comply with the Required Minimum Distribution (RMD) rules is quickly approaching.

Over the past few years, Congress has passed multiple tax laws that have changed the RMD rules. Some of the changes have been relatively easy to understand, but some of the changes have caused a decent amount of confusion. In fact, the IRS has still not decided how they will be enforcing one of the major new RMD rules pertaining to Inherited IRAs (more on that later).

With all the recent RMD changes, we thought it would be helpful to provide a quick refresher regarding a few of the new rules.

RMDs now start at age 73

Beginning in 2023, the new RMD start age is 73. If you will have turned 73 by the end of the year, then you will need to take your first RMD by December 31st.

Technically, you could wait until April 1st of the following year to take your first RMD. However, if you chose to do that, you would end up having to take two RMDs in that following tax year. Usually that doesn’t make sense for most people.

New IRS life expectancy tables

In January of 2022, the IRS released updated life expectancy tables for calculating RMDs. Even though these were effective for 2022, we’ve noticed that not everyone is aware of these new tables. Whether you’ve been using the Uniform Lifetime table, Single Life table, or Joint Life table, it is important to switch to the updated table to make sure you are using the correct factor in your RMD calculation.

If you are just now realizing that you used one of the older tables to calculate your 2022 RMD, there is no reason to panic! Luckily, the new life expectancies are more favorable tax-wise. The tables assume higher life expectancies across the board and therefore all the factors are higher, which will cause RMDs to be lower compared to the older tables. In other words, if you used the older table to calculate your 2022 RMD, you can be assured that took enough to satisfy your RMD for the year. However, going forward, it’s important to use the updated table to make sure you aren’t taking a bigger RMD than you need to!

Inherited IRAs

The SECURE Act significantly changed the RMD rules for Inherited IRAs. Perhaps most notably, the “stretch” provision for non-eligible beneficiaries (most beneficiaries who are not included in one of the categories that qualify for special treatment, such as a surviving spouse) was eliminated. Instead, non-eligible beneficiaries inheriting an IRA generally have to take RMDs using the 10-year rule.

However, there’s been some confusion regarding the 10-year rule. The initial understanding of this rule was that the beneficiary had to withdraw the entire balance of the IRA within 10 years of inheriting it, but they had flexibility within those 10 years. For example, the beneficiary could choose to take no withdrawals for the first 9 years and then withdraw the entire account balance in the final tenth year. As long as the entire account balance was withdrawn within 10 years, the 10-year rule was satisfied. This interpretation was the general consensus of tax experts and seemed to be consistent with Congress’ intent regarding the law.

However, in early 2022, the IRS released proposed regulations that were contrary to this interpretation. The IRS said that the understanding described above was correct only if the original account owner HAD NOT started RMDs before he or she passed away. If the original account holder HAD started RMDs before he or she passed away, the beneficiary would be required to completely withdraw the account balance within 10 year AND take an annual RMD each of those 10 years.

This caught many people, including tax and financial professionals, off-guard. The IRS was aware that their interpretation was causing a lot of confusion, so they waived the penalties for failing to take the annual distribution described above for 2021 and 2022. And this July, the IRS released Notice 2023-54, which announced that they would again delay the penalties for 2023 (in essence waiving the distribution requirement).

Even though the SECURE Act was passed in December of 2019, the IRS has still not issued final guidance on this issue.

As it stands now, if you own an Inherited IRA under the 10-year rule, you are not required to take a distribution for 2023. However, even though you won’t be forced to take a distribution, it could actually be in your best interest to do so. Depending on your situation, it might make sense to take smaller distributions throughout the 10-year period so you don’t have a larger distribution toward the end, causing a spike in income.

Questions?

If you have questions about how these new RMD rules impact your unique situation, our Fullerton financial advisory firm is happy to talk with you. Please feel free to visit our website at www.eclecticassociates.com to schedule a complimentary phone call or meeting with one of our fee-only financial advisors.

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By David K. MacLeod, CFP®, CFA

Enclosed are your investment reports for the third quarter of 2023. The following table shows the total return performance of select market indexes for the past year, the last 5 years, and the last 25 years. The 5-year and 25-year numbers are annualized.

We think investors are susceptible to making a couple of mistakes in the current market.

For aggressive investors, it’s tempting to chase after recent returns in U.S. technology stocks. The stock prices of these technology stocks are extremely high relative to earnings and cash flows. This doesn’t necessarily mean the technology sector will crash like it did in 2000-2002. But we do expect lower returns going forward from this sector compared to the extraordinarily high recent returns.

For conservative investors, it’s tempting to allocate too much to short-term Treasury bills and CDs. This is an excellent idea for those with too much money sitting in the bank earning next to nothing. However, Treasury bills and CDs are a lower return asset over the long run than other fixed income sectors.

It’s worth highlighting a J.P. Morgan study of previous Fed interest rate hiking cycles. In the past 40 years, after short-term interest rates peak, the broader bond market typically performs better than 6-month CDs in the following 12 months. We don’t know when the Fed will stop increasing interest rates, but the market appears to believe that another rate hike is unlikely in the current cycle.

Our investment style emphasizes diversification, fundamentals, and a long-term approach. We have seen time and again that asset classes eventually revert to their long-term averages. We expect U.S. small cap and international stocks, and diversified bonds, to do better going forward.

We sincerely appreciate working with you. Please do not hesitate to call if you have questions about the enclosed reports or any other area of your personal finances.

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By Kelly Perkins and Scott A. Rojas, CFP®, MBA

The Medicare Annual Enrollment Period (AEP) is here. This is the time frame each year when eligible individuals can make changes to their Medicare insurance coverage for the following year. This period runs from Oct 15th to December 7th and allows beneficiaries to make changes to their current Medicare Advantage plans or Part D Prescription Drug plans. It also allows you to switch from Original Medicare to a Medicare Advantage Plan or switch from a Medicare Advantage back to Original Medicare and enroll in a Part D plan. It is a great time to review your Medicare insurance plan coverage and make sure it matches your current needs. With so many plans in the area, we know this is not an easy task to navigate. We have resources both online and have a trusted agent available to meet with you in person. Below is a quick summary of items to think about as you evaluate your coverage over the next few weeks.

1. Understand Your Current Coverage

The first step to reviewing your coverage is understanding what you have. Medicare insurance coverage has several options, including Original Medicare (Part A and Part B), Medicare Advantage (Part C), and Medicare Part D (prescription drug coverage.) Do you get your coverage through Original Medicare with a stand-alone prescription drug plan (Part D) and a Supplemental Medi/Gap plan, or do you get your coverage through a Medicare Advantage Plan (Part C)? Knowing this information will help guide you on the changes you can make.

1. Obtain your Annual Notice of Change (ANOC) and Evidence of Coverage (EOC) documents from your current plan provider.

By now you should have received these documents that outline any changes in coverage, costs, or benefits for the upcoming year.

1. Review Your Health Needs & Medication list

Each year formularies (which is a fancy way of saying covered drugs) will change on both Part D plans and Medicare Advantage (MAPD) plans. AEP is the time to review your medication list and make sure your drugs are still adequately covered by your plan. The price of a medication can vary from plan to plan so it is good to compare. You will also need to verify that your preferred doctors, specialists, hospitals, and pharmacies are in-network for any plan you are considering. Evaluate if the extra benefits that some Medicare Advantage plans offer like dental, vision, hearing, and wellness programs are important to you.

1. Compare Costs & Benefits

There are several ways to compare plan changes. You can work directly with an independent insurance agent at no cost to you or you can visit the official Medicare website (www.medicare.gov) and use the Medicare Plan Finder tool which allows you to enter your current prescriptions and healthcare needs to compare Medicare Advantage and Part D plans available in your area. You can also contact your State Health Insurance Assistance Program (SHIP) for help.

1. Review Star Rating

Medicare Advantage plans and Part D prescription drug plans are assigned star ratings by Medicare. These ratings give you an idea of the plan's quality and performance. Plans with higher star ratings may offer better quality of care.

1. Enrollment Periods

In addition to the Annual Enrollment Period, there are other enrollment periods available in certain circumstances that can be utilized. For example, there is the Open Enrollment Period (OEP) that runs from January -March. This is for Medicare Advantage members who made a plan change but that plan isn’t working for them. Maybe they were enrolled by a call center and didn’t realize until they went to the doctor and were told their doctor doesn’t accept that insurance. There are also special enrollment periods throughout the year if you are diagnosed with a chronic condition, if you move, if you go to a skilled nursing facility, etc.

In conclusion, reviewing and updating your Medicare health plan is essential to ensure that you have the most suitable coverage for your healthcare needs and budget. Be sure to do your research, compare plans, and seek assistance if needed to make informed decisions.

Overview of Key Upcoming Dates:

● 9/30 – Annual Notice of Change and Evidence of Coverage sent from health plan provider

● 10/15 to 12/7 – Open Enrollment Date

● 1/1 – Your new Medicare plan goes into effect

What is Medicare?

Medicare is the federal health insurance program for people who are 65 or older, certain younger people with disabilities, and people with end-stage renal disease (permanent kidney failure requiring dialysis or a transplant)1. Medicare has four parts: Part A (hospital insurance), Part B (medical insurance), Part C (Medicare Advantage), and Part D (prescription drug coverage)1.

Depending on your eligibility and preferences, you can choose how to get your Medicare coverage. You can enroll in Original Medicare, which includes Part A and Part B, and pay for services as you get them. You can also add a separate drug plan (Part D) or a supplemental insurance policy (Medigap) to help pay for some of the costs that Original Medicare does not cover. Alternatively, you can enroll in a Medicare Advantage plan, which is offered by private companies that contract with Medicare. Medicare Advantage plans provide all the benefits of Part A and Part B, and usually include extra benefits such as prescription drug coverage, vision, dental, and hearing care1.

To qualify for Medicare, you must be a U.S. citizen or a legal resident who has lived in the U.S. for at least five years. You must also meet one of the following criteria2:

● You are 65 or older and you or your spouse has worked and paid Medicare taxes for at least 10 years.

● You are under 65 and you have a disability that qualifies you for Social Security or Railroad Retirement Board benefits for at least 24 months.

● You have end-stage renal disease or amyotrophic lateral sclerosis (ALS), regardless of your age.

To enroll in Medicare, you can apply online at the Social Security website, call Social Security at 1-800-772-1213, or visit your local Social Security office. You can also contact the Railroad Retirement Board if you worked for a railroad. If you are already receiving Social Security or Railroad Retirement Board benefits, you will be automatically enrolled in Part A and Part B when you turn 65 or become eligible due to disability2.

We hope that this information helps you understand what Medicare is and how it works. If you have any more questions, feel free to give us a call or reach out to Kelly Perkins, co-author of this article and a Medicare Health Plan Specialist. You can reach Kelly by phone at (657)799-6484, email her at kpkinsurance@gmail.com, or visit her website at shineoninsurance.com. To schedule a free consultation with her you can do so using this link: Request a Consultation (shineoninsurance.com).

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By Amber Shrosbree, CFP®

With the rise of AI and no shortage of creativity for scammers and fraudsters these days, we have come across story after story of ways that even the brightest of people have fallen victim to scams and fraud. As much as each of us would like to say: “that will never be me”, it is important to remember that 10% of American adults join the ranks of scam victims each year, and 1.3 million children have their identities stolen annually.

Don’t be too quick to assume that the elderly population is the most at risk, because according to 2022 fraud complaints lodged with the Federal Trade Commission, the highest number fell between ages 30 and 39, closely trailed by ages 60-69. This just goes to show that scammers do not discriminate amongst age, and that we all need to be wary, no matter how “tech savvy” we view ourselves.

We have all learned the obvious red flags: strange email handles, asking for payment or personal information via email, phone calls from numbers you do not recognize involving payments due, or winning a prize. But even with all of this knowledge, scammers know that as soon as emotion becomes involved, the lines get blurry.

The Alarming Phone Call

Imagine getting a phone call with an urgent voice on the other line claiming that your daughter was in trouble and that you needed to provide funds immediately to ensure that she is ok. Although the logical path would be to question this unknown caller, their story is just plausible enough that you jump to the emotional and very human reaction that any parent would and ask what it will take to help her and how quickly you can do so. Before you know it, you’ve wired most of your savings to the voice on the phone willingly, knowing that you are helping your daughter. Shortly after hanging up, you find that your daughter has no knowledge of this and was never in trouble.

The Online Love Interest

That scenario doesn’t connect with you? Okay. Imagine now that you are a widower, have been for some time, but you are ready to get back out there. It’s been a while and the dating world has changed drastically. You’re using an app and have been chatting with a lovely woman for almost a year. You’ve shared a lot about yourself, and trust has been built between you both. You feel connected to this person and a void has been somewhat filled. You may not be in love, but you are in what I like to call, the “heavy like” stage. She messages you one day admitting she’s in a bit of a bind financially. She has become a big part of your life (even if it is not in person), and she has never given you a reason to doubt her throughout your entire year of conversation. You feel that you know her better than anyone at this point, so you are more than willing to share bank account information with her so that she can use it to float some expenses from time to time. But when you are slammed with tens of thousands of dollars in credit card debit and wire charges, you realize you have been what we call “catfished” or tricked by an online relationship, and this person is not who you thought she was.

The Billing Text

After reading these stories you’re thinking the emotional angle would never fool you, you’re young and teach savvy – you never even talk on the phone. Fair enough. But what if you got a text from your wireless provider one day saying you have an outstanding payment due? Your card information is pre-saved in your phone along with all of your login information, so you never have to type this information in. Transactions on your phone barely require a thought. Your cell phone company does in fact have your cell phone number, so it’s not odd that they can contact you via text. You don’t pay much attention to your cell phone bill, so when your carrier says you owe $50 you just handle it quickly. It must be an annual charge. One, two, three, done. You quickly check your phone and see a fraud alert from your bank. Was a $5,000 charge authorized? No, it was the scam artist you just gave your debit card information to. Your bank protected you this time, but you might not be so lucky the next.

What could they have done differently?

In the first story, the victim could have hung up immediately from the unknown number and called his or her daughter directly to avoid sending the wire. In the second scenario, he broke the rule of giving out bank information over unofficial online chatting with someone who technically falls into the “stranger” category. In the third, although the amount seemed harmless and the text seemed to make enough sense, you responded via text message with personal bank information, rather than calling your carrier directly, or logging into your account online to verify if you truly had a balance due or not.

Whatever your age and whatever your personal life looks like, there’s a scam out there for you. Always slow the process down. It is far better to take the time to do your due diligence than act too quickly and make an irreversible mistake. Look for official letters, then verify the address and phone numbers and websites on those letters to determine if it all lines up. It is better that you initiate any calls using verified numbers that you already have, rather than trusting the number giving you the phone call. Sometimes text messages regarding billing are legitimate, but not if they are asking you to text back with any information. When in doubt, pick up the phone and call whoever scammers are claiming to be to verify things for yourself.

If you ever find yourself in a situation similar to any of these, or you think that someone is targeting you with a scam or fraud in any way, please feel free to give us a call. We would be happy to act as a sounding board as you navigate through your own unique scenario.

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By David K. MacLeod, CFP®, CFA

Pastors serve an important role in communities across the country. It’s not an easy job; they conduct worship services, preach on Sundays, provide one-on-one spiritual counsel, lead church staff, and perform weddings and funerals. Unfortunately, pastors also have complicated taxes partly because of the benefit of ministers housing allowance. It’s important for American pastors to understand ministers housing allowance and seek out trusted counsel to make sure they take advantage of this tax benefit.

Origin of MHA

Minister’s Housing Allowance (MHA, for short), has long legal precedent and was originally codified in the Revenue Act of 1921, not long after income taxes were upheld as constitutional in the 16th Amendment. Congress and the U.S. Tax Court re-codified and clarified MHA in the 1950s and 1960s.

MHA allows pastors to receive church-provided housing income tax free, which is a significant tax savings to pastors. Initially, the law applied only to a home on church property but later included a designation of a pastor’s salary to cover housing expenses.

Rick Warren v Commissioner of Internal Revenue (2000)

A legal challenge to MHA was brought when Pastor Rick Warren of Saddleback Church was audited by the IRS in 2000. He appealed a tax penalty related to MHA that ultimately went to the U.S. Supreme Court. That prompted Congress to act to clarify MHA with new rules that still stand today. The Clergy Housing Allowance Clarification Act of 2002 passed unanimously in both the House (408-0) and Senate and was signed quickly into law by President Bush only 6 weeks after the bill was first introduced. More recently, in 2019 a federal appeals court upheld the constitutionality of MHA.

Three-Part Test

The 2002 law introduced the three-part test which is critical for understanding MHA today.

For pastors who designate part of their salary for housing, MHA is limited to the LESSOR of three amounts:

1) The amount officially designated as MHA by the church board at the beginning of the year (in advance of any payment) as compensation for ministerial services.

2) The total of actual housing expenses such as: rent, mortgage payment, property taxes, utilities, insurance, lawn care, etc.

3) The fair rental value of the home, including furnishings and utilities.

The lessor of these three amounts calculated every year is the maximum allowed MHA for that year.

When pastors prepare tax return every year, any excess MHA amount determined by the three-part test should be added to income on the first line of Form 1040 with “Excess Allowance” written beside the amount, according to Richard Hammar, editor of Church Law & Tax.

For example, a church pays its pastor $70,000 per year. The church holds a board meeting in January to officially designate $35,000 for MHA. At the end of the year, the fair rental value of the pastor’s home for that year is determined to be $40,000 and the actual expenses for the year were $32,000. The actual expense amount of $32,000 is the lowest of the three amounts and that’s the MHA for the year that is income tax free. Since the church reported MHA of $35,000 through payroll, the pastor is responsible for reporting the $3,000 difference as excess allowance on their tax return for that year.

MHA in Retirement

A common misunderstanding among pastors is what happens to MHA when they retire from the church. It is possible for pastors to receive MHA in retirement on a pension or retirement plan, such as a 403(b)9 Plan account.

Policies vary across denominations and retirement plan administrators. It’s important to seek advice for your situation to find out if you qualify for retiree MHA.

For example, some denominations disqualify MHA treatment of retirement plan withdrawals if a pastor has completed a rollover of their retirement account. We should also note that a large denomination was advised recently by the IRS that retiree MHA is under study, and it may get challenged. Retiree MHA may not be around forever.

Common MHA Pitfalls

· A church board cannot retroactively designate MHA. If the church doesn’t act at the beginning of each year and record the designation in its minutes, it deprives pastors of this significant tax benefit.

· A rollover of a pastor’s church retirement plan account may risk losing the MHA benefit in retirement.

· Pastors who own their home could lose a large tax benefit when they pay off their mortgage. A cost-benefit analysis is recommended for pastors who are inclined to pay off their mortgage early with a large one-time payment. However, the psychological benefits of being debt-free may outweigh the economic benefits to a pastor. Also note that there are housing expenses other than a mortgage that qualify for MHA.

· Pastors must document the fair rental value of their home and keep good receipts of actual expenses, in case of an audit.

· MHA provides an exemption from income tax, but NOT from self-employment (SECA) tax that a pastor pays. MHA is subject to SECA tax.

· A pastor’s surviving spouse is not eligible for retiree MHA when a pastor passes away. This is important for tax planning and often overlooked.

Eclectic Associates is a fee-only fiduciary financial advisory firm in Fullerton, California. Feel free to call us to discuss your situation. We would be happy to talk to you to see if we can help.

Schedule a 15-minute discovery call with a fee-only financial advisor.

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By Carl Lachman, MBA, CFP®

Of Course!

It seems like a rhetorical question, especially if you ask someone that sells insurance. Do I need the insurance you are selling? Insurance agent answers, “There is never a bad time to secure your future.” How much should I buy? Agent says, “Tell me your income, assets, investments, and net worth, we will use our software to optimally help you spend all of your extra money on insurance. You are in good hands!”

As financial planners at Eclectic Associates, we approach insurance differently because we don’t sell it and we don’t get paid on a commission. The best answer? It depends.

It’s About Risk Management

Life has risks and we live with those risks every day. The vast majority of those risks are exceedingly small, and we might live our entire lives without encountering them. But the most common of those rarely occurring risks can be managed with the purchase of readily available insurance. The reason insurance is a good idea for many of those risks is because, if some of those risks happen, they can ruin a person’s financial security for years or maybe the rest of their life.

Take for instance a family’s house burning down. The cost for rebuilding and being displaced can cost $500,000 or more. It might never happen to you, but a policy that costs less than $100 a month to avoid that catastrophe makes a lot of sense.

Life insurance is similar. The death of a person who earns the primary income a family depends on can be catastrophic. Again, a policy that can replace that income in the unlikely event that the person dies can help to avoid a ruinous financial result.

So, at Eclectic, we see the wisdom for certain insurance as a risk management tool, but almost always, that’s it. Will the insurance help prevent some sort of rarely occurring financial ruin?

It’s Not About Eliminating All Risks

Insurance does not eliminate the risks and hazards. Those will still exist. But insurance can often lessen or eliminate the consequences of many risks and hazards. If you want to lessen or eliminate risks and hazards, you need to live your life in such a safe way that you will encounter fewer of those hazards. For instance, an electricity-free and fireplace-free all-concrete house will probably not have a bad fire, but it won’t be a fun place to live.

So, insurance helps to lessen the financial impacts of these rare events, but it is up to you to make wise choices to try to lessen the chances of the risks.

Perhaps You Can Self-Insure?

The idea with self-insurance is that you have the financial resources to absorb some bad outcomes without the need for insurance. For instance, if you buy an excellent electronic product and you take care of it, you probably don’t need an extended warranty, which is a form of insurance. New tire “certificates” are another form of insurance you can probably skip. The certificates usually cost about 1/4th the cost of each new tire, so if buy four tires at a time and you generally have to replace a tire only every other time you buy a complete set, you will come out ahead if you self-insure.

Homeowners & Auto Insurance

You usually can’t self-insure your home, since the mortgage company requires homeowner’s insurance. And, you can’t self-insure certain parts of auto insurance, since the State of California requires a certain minimum amount of auto insurance coverage. But, in both of these areas the bad outcomes are so bad, insurance is an easy and low-cost (in comparison to the bad outcomes) way to manage the risks and save your finances from a multi-year hit.

Life Insurance

Life insurance has a different answer. If you have people depending on your income that can’t work (children, disabled spouse, elderly parent), then life insurance might be a critically good idea. But, when others don’t depend on your income, and won’t be hurt financially if you die, then maybe you no longer need life insurance. Also, when one retires, that person is usually saying that he or she has all the assets and resources they need to afford the rest of their life without working, so usually no one that retires needs insurance.

Long-Term Care Insurance

This is a tricky one and the best answer depends on a lot of things. First, it is a costly insurance and can go up dramatically. Second, it is a dollar-limited and time-limited insurance, so it never covers everything forever. Third, you may have the resources to self-insure. Most care that LTC insurance will pay for is needed for less than 36 months. So, while that care is costly, it is not out of the realm of possibility that a person has resources could pay for that care. Fourth, usually the care that LTC insurance covers ends in death. So, sorry to point it out, but it probably doesn’t matter if your finances are used up with your care, because you won’t need them end the end of the sort of situations that LTC insurance covers. Fifth, you may have family that can take care of you and you’ll probably prefer that care if they can do it. You can have LTC that covers in-home care, but having strangers in your home all day can be rather hard, too. So, it is not easy to say if you need this insurance or not.

Insurance Only Covers The Actual Cost of The Loss

Many people don’t understand this point. Once you understand it, you won’t buy more insurance than is needed.

An example of this is homeowners’ insurance that will cover up to $600,000 of the cost to rebuild your home, but your home would actually only cost $500,000 to rebuild. If this is the case, you have paid for an extra $100,000 of insurance that will never benefit you. If you have too much fire insurance, you don’t get to build a bigger house funded by your insurance company.

Another example is auto insurance. Most policies don’t replace your car with the same car in the same condition. You can get a guaranteed replacement policy, but it costs significantly more. This is why if your car is totaled and not worth fixing to the insurance company, they give you cash for what the car was worth before the accident, but that usually is not enough to replace the car just as it was.

So, whatever insurance you are buying, make sure you get the right amount. A huge amount of coverage doesn’t give you a huge payoff in most cases, even if the worst happens.

How About A High Deductible?

If you follow Eclectic’s advice on an emergency fund worth 3-6 months of living expense, you can probably save some money with generally higher deductibles on insurance policies. Such an emergency fund will probably be in the $10,000-20,000 range, which is ready to be used to cover a $1,000-2,000 auto insurance deductible pretty easily. After a couple years of good driving and no accidents, you will save more than your deductibles with lower policy costs and come out ahead pretty quickly.

Travel Insurance

If you read the fine print and follow the rules, you can often have this coverage with a premium credit card in your wallet, but it is not always clear what the rules are. I had a covered loss on a premium credit card, but when I applied for compensation, I discovered I was not covered because I did not also charge the “triggering event” charge on the same credit card. That charge was on a different card. The triggering event was the purchase of an airplane ticket. So, if I had known that, I would have placed all charges for that trip on the same card and had coverage. If you want to avoid purchasing travel insurance and use the coverage that you think you have with your credit card, just make sure you thoroughly understand all the steps you must take to have that insurance for your next trip.

Investments and Other Financial Reasons for Insurance

Insurance agents work every day earning sales commissions by convincing their clients to buy intangible products. They are often excellent at their job. They make excellent points with carefully crafted presentations. They are usually people you like. But, that doesn’t mean you need what they are selling or that there isn’t a better, less costly solution. Especially when it comes to the other financial products, more exotic life insurance, and no-lose investments that insurance companies sell these days, we almost always find that there are better solutions, with better returns, for less money from other sources or approaches. So, be careful when you go to buy insurance and quickly get pitched other products. Usually, we can show you that you don’t need those other products. Ask us the next time we meet.

Conclusion

We don’t sell insurance at Eclectic, but we do see it as a valuable tool to manage the potentially catastrophic financial results for many of life’s risks and hazards. We include insurance analysis as part of our regular services for all of our clients. If this article causes you to think you need us to take a look coverage or help with an insurance decision, please schedule a meeting with your Eclectic advisor. If you aren’t one of our clients, give us call us for a complimentary meeting. We will be happy to answer your insurance questions and explain how we help our clients achieve peace of mind with their money and their futures.

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By Russell W. Hall, CFP®

Behold…the beneficiary designation. Capable of passing your assets along to your loved ones exactly as you would like, but able to ruin the most well-thought-out estate plan if you’re not careful.

The Basics

Naming beneficiaries is a relatively simple way to direct where your retirement and some other types of accounts will go when you die. You can name individuals, charities, or even entities like a trust.

It seems straightforward enough, right? A common scenario for a married couple is to name each other as the 100% primary beneficiary of their IRAs, with their two grown children as equal 50% contingent (also called secondary) beneficiaries. If both spouses passed away at the same time, their children would each receive half of the IRA accounts in the form of inherited IRAs.

Details, Details

Where the “fun” begins is when things aren’t so clear cut. What if it’s a second marriage for the couple and they each have children from a previous marriage?

What if they want to leave some of the IRA money to a charity?

What if the children are minors? Or grown and married? What if the parents don’t like who their kids are married to?

Some of these problems – minor children, disabled beneficiaries, excluding a child’s spouse - usually should not be solved with just a beneficiary designation form. It might be best to name a trust as the beneficiary where more complicated issues can be ironed out. See our article for more information about naming trusts.

But there are ways to modify a beneficiary designation form to make it more flexible if the situation calls for it. One solution is to use per capita or per stirpes.

It’s All Latin

Per capita means “by head”, and it refers to splitting up the account among the remaining living beneficiaries but not any of their heirs.

If all of the 3 grown children were alive when their parents died, they would get their share of the IRA (about 33.3%). However, if one of them has already passed away, their two siblings would then get 50% of the account and the deceased child’s family would get nothing.

The other option is per stirpes, meaning “by representation”. Each beneficiary’s portion is assigned to them and also to their heirs if they died. In our example, if one of the children had already passed away, the two living children would get their 33.3% and the family of the deceased child would get 33.3%.

Be aware that custodians can interpret per capita and per stirpes differently, and some even have other options. If in doubt, we suggest checking with your financial advisor or estate planning attorney to make sure the paperwork is being completed correctly.

Don’t Set it and Forget it

Sometimes, people tend to treat estate planning as if they only have to do everything once and then let it sit. The problem is that life changes, and it’s best to review your documents every 7-to-10 years to make sure they still reflect your wishes.

This is especially true for beneficiaries. The courts have stated time and time again that the named designation overrules all other estate planning documents, including wills and trusts. It’s happened too often that an ex-spouse received an entire IRA account because the beneficiaries were not updated after a divorce. Children have been left to deal with large tax bills, or have had to go through the extended and expensive probate process, because their parents did not take the time to designate a beneficiary.

Your Task

We’ll close with something we said in a previous article:

As with many things, you often don’t know there’s an issue with estate planning until it is actually put to use (when it’s too late to fix, or at best expensive and time-consuming to do so).

This is worth repeating and considering. Go check your beneficiary designations!

Schedule a 15-minute discovery call with a fee-only financial advisor if you want help thinking through some of these issues.

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By David K. MacLeod, CFP®, CFA

Although fears of an economic slowdown still linger, the markets posted gains across the board. The S&P 500 index of large U.S. stocks had another good quarter with an 8.7% return, led by technology stocks. Bonds held steady during the quarter as interest rates went up slightly. Real assets and commodities struggled as the price of an ounce of gold dropped 3% and crude oil declined 6%.

The highly anticipated recession of 2023 hasn’t happened yet and there are signs that it won’t happen this year. Despite high inflation, a regional banking shock, Fed tightening, and a last-minute debt ceiling crisis averted, the markets are unconcerned with an economic slowdown. By all appearances, the U.S. economy is still growing and the labor market is strong. Employers have added 1.6 million net new jobs since January 1st. A record high number of Americans traveled over the Independence Day holiday surpassing the previous record over Thanksgiving 2019. According to JP Morgan, U.S. households still have $800 billion in extra savings that was amassed from Covid relief from March 2020 to August 2021. The past year has been yet another reminder that short-term economic forecasts by smart people on the news are often wrong and we shouldn’t place much confidence in them.

This doesn’t diminish the challenges that remain in the intermediate term outlook. If the Fed remains committed to a restrictive monetary policy to get inflation below 2%, we expect the economy to eventually slow down once Americans’ excess savings are spent. High interest rates negatively affect a lot in our economy; small businesses pull back capital spending when it’s more expensive to borrow, and people are less inclined to take out a 30-year mortgage at 7% interest or an auto loan at 9%. That said, the market does expect the Fed to cut interest rates next year.

In the financial plans we’ve written for clients since the 1980s, we’ve included a page on our investing philosophy. One point that’s stayed the same ever since is the importance of diversification in an uncertain economic environment. The economic outlook is still uncertain today. We continue to recommend a disciplined approach to investing. If we had gotten caught up in all the bad news around a recession 9 months ago when stocks hit their recent low point, we would have missed out on the 15-25% stock market gains that followed.

Please provide us with a copy of your 2022 tax returns after you file them. We are actively reviewing returns as they come in. Feel free to send a digital copy or drop off a hard copy to our office.

On a personal note, one of our associates, Daniel Nandor, recently got married to Loren Schneider. Say congratulations to Daniel if you see him the next time you visit our office.

Please don’t hesitate to give us a call if you have questions.

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Aimee Calderon, CFP®

My first-born child will soon spread his wings and leave the nest. He will be attending a private university in Southern California and living on campus. Naturally, I worry if he is fully prepared and know that I am not quite ready, but time marches on. Below I have provided a few tips that we learned through the college application and admissions process that may be helpful to you or to someone you know.

My son applied to 6 small private faith-based universities in California and Arizona, none of which were particularly difficult to get accepted into. Please note that the tips below are specific to these types of colleges and will not be applicable to some state schools or highly competitive colleges.

1. Create a spreadsheet. The application and admission process can be confusing and different for every school. It is important to stay organized. We created a spreadsheet where we tracked the cost of the schools my son applied to, the scholarships and other aid he was being offered, and the next steps needed for each individual application.

2. Apply early. All of the colleges my son applied to offered a free application period (usually ending around October 1st) during the fall of his Senior year. Some of the schools even offered extra early admission scholarships.

3. Fill out the FAFSA. Even if you don’t think you will qualify for true financial aid (federal grants), the individual schools usually require a FAFSA to be completed before making an aid offering which will include scholarships and loan opportunities.

4. Develop a relationship with the admissions counselor. Some of the admissions counselors reached out and contacted me, some contacted my son, and some didn’t initiate any contact. If I had not yet been contacted, I would reach out to them and initiate the conversation. While they may start conversing with your child, not all 17 and 18 years olds are equipped to have financial aid discussions.

5. Be a salesperson. While it doesn’t come naturally to me, I realized when talking to the admissions counselors that I needed to “sell” our family and situation. I first explained some of our financial situation that was hidden from the FAFSA. For instance, I have three kids and some of them go to private school. This expense does not show up on the FAFSA. The private universities that my son applied to appreciate the fact that we are sending younger siblings to private school and therefore take that into account when looking at our “expected family contribution”.

6. Pay attention to how loans are offered. If your child qualifies for a subsidized or unsubsidized loan, this will be available to them at any school. While you may decide to use a loan, you do not necessarily need to consider it as part of the financial aid offer. Some schools include it in the offer, and it may appear that they are giving you more money, but don’t be fooled.

7. Negotiate. Beyond the initial offer from the financial aid departments, most universities’ admissions counselors have some flexibility in awarding more aid. I openly told some schools that other schools were offering my son additional grants and asked if they could offer more aid to stay competitive. Each school that I did this with came back and offered more money.

Once you have done this work, sit down and examine your spreadsheet. Like my son, most kids have whittled down their options to a couple schools during this process. While I do not have the answer to making this process necessarily easy or by any means “fool proof”, these steps did at least make it manageable and less daunting. My son was able to choose his school based on solid information and can now move forward with as much confidence as possible heading into his first year of college.

If you have any questions regarding college education planning for your own children, or even your grandchildren, feel free to give us a call. We would be happy to help.

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By Scott A. Rojas, MBA, CFP®

We’ve covered long-term care (LTC) in greater detail before (notably here and here), but in this article we specifically wanted to give an idea of the costs and options in California.

Despite our overall living costs being among the highest in the nation, California’s long-term care costs are not the costliest (that dubious honor belongs to Alaska) or even in the top ten high-priced states. However, even above average LTC costs are very expensive.

According to the Genworth Cost of Care Survey 2021 for the state of California, the median monthly cost of a semi-private room in a nursing home is almost $9,800, while a private room costs around $12,170 per month. An assisted living facility would run you about $5,250 per month. And finally, the median monthly cost of a home health aide would run you about $6,100.

These are just averages, and the cost can vary widely depending on a variety of factors, including the type of care needed, the location, and the provider. If you’re evaluating LTC options for yourself or a loved one, it is imperative that you spend time doing research, comparing costs from multiple providers, and utilizing experts in the field who can serve as knowledgeable resources.

How do you pay for long-term care?

For those with very low income and assets, there are programs (included Medicaid – MediCal in California) that may be available to help those lacking the resources to pay for appropriate care on their own.

For those with a very high level of assets and income, they can likely pay for their own coverage out of pocket should they need it (called self-insuring).

For the larger majority of people in the middle, whether or not to buy long-term care coverage depends on a variety of factors, including age, health status, family history, financial situation, and personal preferences. LTC insurance can provide a safety net for those who need long-term care services in the future and can help cover the costs associated with those services.

However, long-term care insurance can be expensive, and historically premiums have increased significantly over time. Currently a policy for a couple in their early sixties could run $6,000 per year and up, depending on the amount of coverage and whether the benefits increase over time to offset inflation. Premiums are usually less expensive the earlier the coverage starts, so we encourage clients to start thinking about it in their late fifties and early sixties.

Should you buy an LTC insurance policy?

It's important to carefully consider the benefits and costs of long-term care insurance and to compare policies from multiple providers before deciding. Additionally, it's a good idea to consult with a financial advisor or even an attorney who specializes in elder law to help guide you as you navigate long term care planning. These types of professionals can help you evaluate the pros and cons of long-term care coverage and develop a plan to help cover the costs of long-term care if you need it.

When we are talking to our clients about the decision, we usually focus on their family health history, their goals for retirement (do they want to stay in their home at all costs?), and capacity to self-insure. There have been times we recommended purchasing LTC insurance, but the clients decided that the annual premiums were too high for them. At other times they purchased a policy, but never wound up using the benefits. There have also been several instances where we feel having the LTC insurance truly saved the couple’s finances. But that is the nature of almost every type of insurance - you are paying a relatively small amount to cover a potentially large liability, and at the end of the day you’re really hoping you never have to use it.

We encourage you not to wait until you find yourself in a situation where you need long- term care to start thinking about it. It is never too early to begin proper planning and education to mitigate the burden on not only yourself, but your loved ones as well.

If you live in California and are considering LTC insurance, we are happy to serve as a resource. Schedule a 15 minute introductory call with an advisor here.

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By James Moore, CFP®

During tax season a few years ago, we had a client reach out to us with a question. This client was comparing tax returns with a friend. The friend had asked our client, “Why did you make a Roth IRA contribution? You don’t get a deduction for that. You should undo that contribution and put the money into a Traditional IRA instead. You’ll save lots in taxes!”

Tax Planning is More Than Maximizing Deductions

It was a good opportunity for us to revisit the tax strategy we had in place with our client. He was young, and his income put him in a low tax bracket for the year. Based on some reasonable assumptions, it was likely that his income would increase significantly over time as he progressed in his career, which would put him in a higher tax bracket in the future.

Because of that, it was better to forego the deduction now and recognize the income while he was in a low tax bracket, which he might not be in again for a long time. Getting money into a Roth IRA, to grow tax-free and not taxed upon eventual withdrawal, would save this client taxes over the long-term.

So while this client’s friend was technically correct that a Traditional IRA contribution would have saved him taxes this year, it was not the ideal long-term strategy for him. Our goal for this client was not to pay the least amount of taxes this year - it was to pay the least amount of taxes over his entire life. Sometimes that means paying less in taxes now, but sometimes that means paying more in taxes now on purpose!

No one likes to pay taxes, and the idea of intentionally recognizing income and purposefully paying more in taxes might seem a little counterintuitive. However, there are quite a few scenarios where it could actually save you taxes in the long run.

Roth vs Traditional

As stated in the example above, if you make a contribution to a pre-tax retirement account, like a Traditional IRA or 401k, you are able to take a deduction on your current tax return. However, when you eventually withdraw the money from these accounts, the amount will count as taxable income to you.

If you make a contribution to a Roth retirement account, you receive no current tax benefit. However, the money inside the Roth account will grow tax-deferred and any withdrawals you make will generally be completely tax-free.

At a very high level it usually makes sense to contribute to a Roth account if you think your current tax bracket is lower than it will be in the future, when you will eventually withdraw the money. However, if you are currently in a high tax bracket and you think your tax bracket will be lower when you will eventually withdraw the money, then it usually makes sense to contribute to a pre-tax retirement account so you can use the deduction now.

New Retirees

If you have just retired or are planning to retire soon, you may have a significant tax planning opportunity. As an example of what this might look like, let’s consider a couple who both decide to retire at age 67. Let’s assume this couple has been saving diligently for decades, and their substantial retirement savings includes a 401k account (which they rolled over into a Traditional IRA) as well as a brokerage account in the name of their trust.

This couple will soon need to start taking withdrawals from their various accounts in order to provide income for their retirement. Compared to their working years, in retirement they now have a greater amount of control over when they recognize income for tax purposes. If they wanted to, they could really limit their taxable income by only withdrawing money out of the brokerage trust account for the first few years. Withdrawals from this account would not count as taxable income to them (their only tax liability would be capital gains and dividends inside the trust account). If they decided to use this withdrawal strategy at the start of their retirement, they could have a few years with some very small tax bills!

However, having a few years with small tax bills would not be the most optimal strategy for this couple. While they could delay taking withdrawals from the Traditional IRA for a while, Required Minimum Distributions (RMDs) will begin for them at age 73, at which point they would have to start recognizing significant taxable distributions. These taxable withdrawals would push them into a higher tax bracket. Because of their sizable IRA, these taxable withdrawals will continue for the rest of their lives, which means that they will likely never be in a low tax bracket again.

Instead, a better strategy for this couple would be to take advantage of those first few years of retirement before the RMDs start at age 73. Even though they aren’t required to, they should start taking money out of the Traditional IRA while they are still in the lower tax brackets. And, instead of just simply withdrawing funds from the Traditional IRA, they could instead do Roth conversions with some of the funds. A Roth conversion is essentially a way to convert taxable money (Traditional IRA) into an account that will never be taxed again (Roth IRA).

By being strategic in their early years of retirement, this couple could save a lot in taxes and set themselves up well for the future.

Capital Gain Harvesting

You may already be familiar with the idea of tax loss harvesting—intentionally selling investments that have gone down in value inside a non-qualified account so you can recognize a capital loss and claim a deduction on your tax return. It’s a helpful strategy and is a nice way to get something positive out of a bad investment or bad market environment.

But there is also a more counterintuitive counterpart to this strategy called capital gain harvesting—intentionally selling an investment that has gone up in value with the purpose of recognizing that gain on your taxes that year. You are able to harvest gains even on investments you want to keep. There is no wash sale rule like there is for tax loss harvesting, so you could sell an investment and immediately buy it back if you wanted to. This way, you can keep the same investment, but it will now have a reset cost basis, which means less of a future tax liability.

Generally, deferring gains and taking losses makes the most sense if you are in a higher tax bracket. However, if you ever find yourself in a year where your income is a little lower than normal, it could be a great time to look at doing some capital gain harvesting. It’s important to note that long-term capital gains and qualified dividends have completely different tax brackets compared to ordinary income. Because these brackets have a broader range and the rates are more favorable, it could be possible for you to pay a low tax on capital gains even if you have a decent amount of other income that year. You might even be able to recognize some gains at a 0% federal tax rate.

A Few Cautions

Intentionally recognizing income can be very beneficial, but it also requires careful planning. The tax code is complicated and you need to fully understand the impact additional income might have on your situation. Are you receiving Social Security? A different percentage of your benefit will be taxable depending on your income level. If Social Security provides the majority of your income, recognizing additional gains could potentially cause your benefit to go from 0% taxable to as much as 85% taxable.

Are you on Medicare? Your premiums are affected by your Modified Adjusted Gross Income amount. It’s important to be aware of the applicable thresholds and that you consider any potential premium increases in your calculations and planning.

One final caution—whenever you do something for tax purposes, first consider your overall goals. Tax savings should not take precedence over wise investment decisions.

Don’t Wait!

If you miss a year of recognizing income in a lower bracket, that opportunity is gone forever! If you want to do a Roth conversion or realize capital gains in a taxable account, you have to do it by December 31st of that year. This is why proactive tax planning is important.

Your financial situation is unique, and the best way to approach tax planning will be unique for you. If you have any questions, schedule a complimentary phone call or meeting with one of our fee-only financial advisors.

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By Scott A. Rojas, CFP®, MBA

Just because we are financial advisors does not mean that we believe that everyone needs our services. While we are confident that we add value for those we do advise, we have laid out some factors below to help guide you as you decide whether you should hire someone like us.

Whether or not you need a financial advisor depends on your individual circumstances, financial goals, and level of financial knowledge.

Here are some factors to consider when deciding whether to hire a financial advisor:

1. Complexity of your finances: If you have complex financial needs or investments, such as owning a business, multiple properties, or a large investment portfolio, you may benefit from the expertise of a financial advisor. The more complex your situation, the more of an impact every move you make has when it comes to tax planning, estate planning, and your investments. You do not want a surprise bill at the end of the year when you file your taxes! Although we do not draft estate documents or prepare taxes, we have expertise in these areas and are up to date when it comes to things like tax law changes, which do tend to trickle down into every part of your financial picture, whether it’s obvious or not.

2. Lack of financial knowledge: If you lack financial knowledge or feel overwhelmed by financial decisions, a financial advisor can provide guidance and help you make informed decisions. This ties into our point above. If you are already working 40 hours a week, then taking kids to soccer practice in the evenings, you do not have time to do a deep dive on all the items mentioned above. You benefit from that being our job.

3. Time constraints: If you don't have the time or interest to manage your finances or investment portfolio, a financial advisor can take on that responsibility for you. Sometimes, life moves quickly, and your portfolio needs to be able to react and adapt to your changing circumstances. We take it a step further and look for ways to be proactive with our clients’ portfolios. We do our best to anticipate needs and life changes. If you are in the midst of a hectic life event, wouldn’t it be nice to just shoot us an email or give us a quick call so that we can make any changes necessary while you go deal with life? We think so. We have the time, and you do not. Again, it’s our job.

4. Financial goals: If you have specific financial goals, such as saving for retirement or buying a home, a financial advisor can help you develop a plan to achieve those goals. Our recommendations are tailored specifically to your needs and goals. If you need to forego savings in one area temporarily to meet a goal in another, we will help you find a way to make it work the best we can. There is always more than one way to approach a problem, and we are ready to help you with yours.

However, if you have a good understanding of financial concepts, have simple financial needs, and feel confident managing your own investments, you may not need a financial advisor. This is perfectly okay as well. There are many people who are very competent when it comes to managing their portfolio and more. We don’t take it personally. We think that’s great too.

If you do need a financial advisor, it is important to do your research and carefully evaluate potential financial advisors to ensure that they have the qualifications, experience, and credentials to meet your specific needs. You will find that each advisor here at Eclectic Associates not only has his or her college degree, but are also CFP professionals, as this is a requirement at our firm. We also have a few advisors who are MBA holders, and CFA charterholders as well. Among our advisors we have well over 100 years of combined experience and counting. If you think you could potentially benefit from our services, visit us at eclecticassociates.com to schedule an initial complimentary phone call with us.

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How long should you keep financial records and important documents?By Carl Lachman, MBA, CFP®

There Are Two Kinds of People

According to various movies and other experts, there are two kinds of people. For example, one movie says, “There are Ford people and Chevy people.” Another says, “There are people who like Neil Diamond, and those who don’t.” And a final expert says, “There are people who finish what they start, and so on…”

When it comes to keeping financial records and other important documents, there are hoarders and purgers. There are people that keep everything and people that want to get rid of everything. Maybe you don’t like those terms? How about savers and Spartans? Whatever you call them, you do not really want to be either of these.

The Problems with Saving All Records

Why not save it all? It is an option, but it’s not great. You will have to devote time to keeping everything organized or it will be hard to find things when you need them. The records will take up a lot of space, there are numerous insects that eat paper, and boxes full of paper are heavy to move. Also, your heirs will have a lot of work sorting and going through things when you are gone.

Perhaps you think that you can scan everything or simply download statements? In these cases, you can have everything on a computer hard drive or in an online cloud service. Even if you decide to keep everything in a digital format, it will cost you a lot of time and money. Have you ever tried scanning documents? Unless you are willing to invest thousands in a fast, vacuum-feed scanner, it will take a lot of time, papers will get jammed, and little receipts will have to be handled a separate way. There are photo scanning apps for cell phones which work well, but a stack of papers takes a lot of time to scan this way. Plus, make sure you have a physical hard drive backup, as well as an online backup. Hard drives do eventually die.

Maybe there are better uses of your time and money?

The Problems with Saving Nothing

In Sweden they call it “döstädning” or “death cleaning”. This is going through all of your things and sorting, organizing, and decluttering them so that your heirs are saved from the burden of doing it when you die. Sounds like a helpful idea, but not if you toss all your financial records. That can leave a difficult detective problem for your heirs.

Others approach life with a “fast and light” approach, getting rid of anything they don’t need because it will otherwise slow them down. I do this when I backpack, but there are problems if you approach your important records in this way.

If you do not save the right financial papers, for instance, you could easily pay more in capital gains taxes when you sell your home. If you do not keep supporting tax records, you might not be able to justify your deductions when you are audited. If you do not keep the original, signed version of your will, your heirs will have trouble convincing a probate judge the photocopy they have is valid.

As a sub-note, there are more problems converting everything to digital records that were not mentioned above. Digital records or scanned copies can only be the primary source in some circumstances. There are circumstances where only the original will be accepted. Plus, does your spouse and your heirs know where these digital records are kept on your hard drives and old computers? Do they know your password? If you go this route for a lot of records, make sure you have a digital records and digital access paragraph in your wills and trust. A good estate planning attorney will know exactly what I am talking about.

Shred and Destroy, Don’t Actually Toss

When it comes to getting rid of old documents and records, do not just toss them in the garbage. I wrote “Toss” in the title of this article, but do not take that word literally. Instead, shred them and destroy them. Identity thieves are very shrewd at piecing together your financial lives so they can steal from you, and if you give them a bag of financial records, you are making their job easy. You can buy a cross-cut shredder, but you will have to pay quite a bit for one that can shred more than around 3 pages at a time. Instead, ask your financial advisor if they have a shredding service that will destroy your documents for free. We do this for our clients and have an annual drive-thru shredding day when they can drop off boxes of old documents.

Here are Some Guidelines on What to Keep

The following sections have some brief guidelines of what you should save and for how long. Also, click here to see our more detailed list of “Recordkeeping Guidelines.”

Keep Forever

You will want to keep your tax returns as either a permanent digital record or hard copy. Not every supporting document, but just the returns. Also, make sure you keep the following in the original form: birth and death certificates, Social Security cards, marriage licenses, divorce papers, military discharge documents, wills, and trusts. And keep the following in at least digital form forever: IRA contribution records, life insurance policies, real estate purchase and sale documents, and records of major financial events (legal filings, inheritances, etc.).

Generally, you want to make sure you always have the most recent originals of wills, trusts, powers of attorney, amendments, codicils, and advance health care directives. But you probably also want to keep an old out-of-date copy of each that has a big “X” across each page. Why? To prove what the old documents said and that they have been replaced. Be careful with this, though, and make sure your records are clearly marked up so there is no confusion between the new and old documents. Make sure you clean up your files and get rid of all drafts of old documents.

Keep 3 to 7 Years

The IRS can ask you for supporting tax documentation for 3 to 7 years after you file a return. If you plan to illegally evade taxes or file fraudulent taxes, the IRS has no time limit for when they can come after you, so take note if you are planning on a life of crime! Supporting tax documentation includes the following: canceled checks, receipts, tax deductions, W-2s, 1099s, bank statements, brokerage statements, tuition payments, charitable donation records, medical bills, etc.

Although a lot of recordkeeping guidelines are driven by IRS requirements, your insurance company and creditors may have different recordkeeping requirements. So, depending on the level of materiality (relevance, significance, or amount of money on the line), make sure you understand the documentation you might need to have for a future claim.

An example of this is a client that had an environmental cleanup project on a piece of real estate. The need for the cleanup was not understood until about 30 years after a tenant spilled chemicals on the land. Our client was able to file a claim and receive compensation from the insurance company that insured the property 30 years ago. If our client had not kept good records, he would not have been able to collect $250,000 from that prior insurance company.

This is a good time to remind everyone reading this article that these guidelines are only guidelines. I know a few things about recordkeeping, but I cannot anticipate all future situations that you might encounter. You need to use your own good judgement, too.

Keep 1 Year

Keep a hard copy of your various monthly statements for bank accounts, credit cards, brokerage accounts, investment accounts, etc. Increasingly these statements are available for several years online from the companies that provide these services, so you might be able to skip the hard copy. But make sure you know how to log in and access your online statements and have a good system of recording your login and password credentials.

Apple, Google, and Microsoft all provide good password management systems built into their software and there are independent password apps from Dashlane, 1Password, LastPass, and others. There are also physical password keys you might want to consider from Yubico, Titan, and uQontrol. Which one is best for you? I am not sure. All these systems have strengths and weaknesses, and you should research and compare several since I am not a software expert.

Additionally, don’t forget to turn on some sort of two-factor authentication (2FA) system for all of your online financial accounts. A two-factor authentication system is when you log in and then get a text message with a number that you also must enter to gain access. There are also 2FA systems that use apps on your phone to generate these additional numbers.

Keep 1 Month

Most people do not need to keep utility bills, deposit records, withdrawal receipts, cable bills, or cell phone bills for more than a month. You can dispose of these once the transaction is complete and you have checked your monthly bank statement. Bear in mind that if you are self-employed, you may need these records for tax purposes for 3-7 years.

Use Common Sense

I am sorry most of these guidelines are not definitive and that you will need to use your own judgement. If you have taken the time to read this article, then you are a thoughtful person and I think you will make good decisions using your own common sense and discernment. Remember, the chance that any individual record will be needed is likely a low probability event, so keep enough, but not too much.

Ask Your Financial Advisor

Do you have a trusted fee-only financial advisor that puts your interests before their own? Advisors at our firm regularly field client questions about all aspects of personal financial planning, including those questions about saving financial records. Part of our service is being available to be a sounding board and being willing to think through tough decisions. Our all-inclusive fee covers the entirety of our clients' financial lives. If you schedule a free meeting with me and let me tell you more about Eclectic Associates, I will be happy to answer your recordkeeping questions. Click here to schedule an appointment.

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By David K. MacLeod, CFP®, CFA

Despite the recent demise of Silicon Valley Bank and increased volatility, we are pleased to report that both U.S. and international stocks performed well as the U.S. continued to experience economic growth. The S&P 500 had a strong quarter, returning 7.5%, with growth stocks leading the way. Additionally, small-cap stocks rose 2.6%. The 10-year U.S. Treasury bond yield declined to 3.5% due to signs of cooling inflation.

As we wrote in our March 13th update, the failure of Silicon Valley Bank caused concern in the markets about a possible larger banking crisis. We are glad to report the situation has stabilized after the Fed, Treasury, and FDIC announced a new program to support uninsured bank deposits and prevent further bank failures. While this may pose a moral hazard down the road, it is positive news in the short term. Deposit flows have stabilized, and small banks even experienced a small increase in deposits toward the end of March. It’s reassuring to know that banks are much better capitalized today than they were before the 2008 financial crisis.

Inflation remains the primary focus of global central banks. The Fed raised short-term interest rates by 0.25% in March. Month over month inflation data shows core services, including rent, are still experiencing high levels of inflation even as goods inflation is falling. However, according to real-time survey data, the hottest rental markets are beginning to cool and even decline in some cities. The markets expect overall inflation will cool over the next couple of years, which should allow the Fed to gradually cut short-term interest rates to a more normal level of 2.5 - 3.0%.

We’ve heard commentators raise concerns about the U.S. dollar and its status as the world’s reserve currency. India, for example, has offered to settle trade with other countries in Indian rupee instead of dollars. It remains to be seen how many countries will take them up on that offer. Even if there is less demand for the U.S. dollar in the future, it may not be a bad trend. The strength of the dollar has contributed to America’s large trade deficit, which hurts U.S. exporters. This year, U.S. agriculture is expected to run a trade deficit, with agricultural imports exceeding exports by $3.5 billion. Additionally, international and U.S.-based multinational companies can do well when the dollar weakens because currency translations contribute to profits. We don’t think U.S. investors should fear a weakening dollar.

Please provide us with a copy of your 2022 tax returns after you file them. We are actively reviewing returns as they come in. Feel free to send a digital copy or drop off a hard copy to our office.

We are holding our annual Shred Day on Wednesday, May 10th at a parking lot adjacent to our office on Brea Blvd. Keep an eye out for more information as the date approaches.

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By Amber Shrosbree, CFP®

If you have inherited an IRA recently, you may be aware of the changes made in the 2019 Secure Act to Required Minimum Distribution (RMD) rules. We’ve summarized those in more detail here (So You’ve Inherited an Inherited IRA) and here (Changes to Required Minimum Distributions), so in this case study we are focusing on a non-spouse, non-eligible designated beneficiary scenario. We believe there is an opportunity for proactive planning when it comes to RMDs for inherited IRA accounts.

Case

Ms. Smith, age 44, recently inherited an IRA from her mother who passed away. Ms. Smith’s mother had just turned 74 and started taking RMDs, and the balance of her IRA account was about $800,000. Ms. Smith makes $120,000 per year in wages, and for the sake of simplicity we assume that her wages do not increase year over year. She has asked us to invest this account for her, and over the next ten years it will grow by about 6% on average per year.

Ms. Smith comes to us for advice on how to handle her inherited IRA. Her current plan is to take only her RMD each year until the final year when she will withdraw the balance of the account. Her reasoning is that it seems to be the simplest and least costly way to handle the taxes due, as she will be taking as little income from this account as she can for as long as is permitted.

While Ms. Smith would not be penalized for this approach and it is technically one correct way to take her distributions, we also see it as unnecessarily costly. Instead, we suggest an alternate recommendation where she takes equal distributions every year from the account:

Assuming her inherited IRA is fully invested and she needs to have it emptied by the tenth year, Ms. Smith will need to withdraw about $93,000 per year. That withdrawal combined with her wages puts her in the 32% tax bracket, since she is filing single, with a total federal tax of about $43,000. Multiplying that tax by ten years results in a total tax bill of about $430,000.

Next, we review the approach she had in mind to compare:

If Ms. Smith were to only take the minimum required distribution each year, by the end of the tenth year it will have grown to about $1,165,000. While her tax bill each year for the first nine years is only around $20,000 to $25,000, the tax bill for that final year comes out to be around $431,000 due to letting the bulk of the account continue to grow. All of a sudden, Ms. Smith jumps from her usual 24% federal tax bracket to being in the 37% bracket. The total tax burden over those ten years comes out to be about $650,000, 66% of which she has to pay all in that final year.

By taking more income sooner, she is able to spread out the tax burden and actually pay about $220,000 less in taxes.

Keep in mind that this is a simplified case in order to display the value of tax planning when it comes to the 10-year rule. For example, we have not included the effects of inflation or of time value of money. And there are countless nuances that can be added to this case that could change the outcome and even our recommendation. The point of this is to show that although you might be tempted understand this rule to mean you have 10 years to address it, it is in your best interest to be proactive and do more than minimal planning for your inherited IRA distributions.

Everyone’s individual circumstances vary, and a Financial Planner can be a great resource when it comes to understanding the complexity of Required Minimum Distributions and your Inherited IRA. If you think that you could use some counsel in this area, feel free to give us a call at (714)738-0220, or visit our website to schedule a complementary call at eclecticassociates.com.

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By Russell W. Hall, CFP®

With the Secure 2.0 Act and other recent tax laws, there have been many updates to Required Minimum Distribution (RMD) rules that we wanted to summarize in one place.

First RMD

Starting in 2023, you must take the first RMD from your IRA or other retirement account in the year in which you turn 73.

Then, starting in 2033, the first RMD is in the year in which you turn 75.

For your first RMD, technically you could wait until April 1 of the following year to make the withdrawal. However, in most cases you don’t want to do that because you would then have two distributions in the following year.

RMDs are calculated using the previous year-end value of the account and a life expectancy factor that the IRS provides (more information here).

Inherited Retirement Accounts

For IRA or other retirement accounts inherited before 2020, there are no changes to the RMD process.

For accounts inherited in 2020 and after, the RMD schedule now depends on whether the decedent (the person who passed away) was taking RMDs or not.

If the decedent had not started RMDs, then the balance of the inherited account must be withdrawn within ten years (with exceptions for “Eligible Designated Beneficiaries” (more Information here).

If the decedent had started RMDs, then there is an annual RMD requirement starting the year after the decedent died (based on IRS single-life expectancy table) AND the balance must be withdrawn within ten years. Note that there was so much confusion about this that the IRS waived the annual RMD requirements for 2021 and 2022. See chart below.

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Russell W. Hall, CFP®

I recently attended the first in a master class series on tax planning. The host, industry expert Debra Taylor, says our current situation in the US is “tax chaos”. She’s referring to the fact that some form of tax legislation has been passed almost every year since 2017, with the changes from Congress seeming to come faster and more furious than they have previously. But as Taylor also pointed out, with that chaos comes opportunity!

We recently wrote on some of the tax law changes that came with the Secure 2.0 Act (linked here), but there are a couple of additional items that we’ll cover here, along with regular updates for tax year 2023.

We also want to note that for our clients in most of the counties in California, there is an automatic disaster extension to file and pay Federal and California tax obligations until October 16. Taxpayers do not have to be directly affected by the winter storms, just live in one of the counties listed by the IRS (all except Imperial, Kern, Lassen, Modoc, Plumas, Shasta, and Sierra).

Tax Rates and Deductions

The rates on tax brackets haven’t changed, still ranging from 10% to 37%. Income thresholds were increased with higher cost-of-living adjustments, so if your income remains the same as it was in 2022, you’ll pay a bit less in taxes.

The standard deduction for married filing jointly filers increases to $27,700, with that being $1,500 higher for each taxpayer over 65 or blind. Single filers had the deduction increase to $13,850 (plus $1,850 if over 65 or blind).

Many of our clients have been switching to filing standard deduction in the last several years, as their deductions are no longer large enough to itemize. In that scenario, we recommend examining deductions to see if any can be “bunched” (combining multiple years of deductions into one year) or handled in other ways (gifting from IRA accounts).

Retirement Account Contributions

IRA and Roth IRA contribution limits have increased to $6,500, or $7,500 for taxpayers age 50 and over. Roth IRA contributions are limited for taxpayers with an income greater than $138,000 (single) or $218,000 (married filing jointly), and fully phased out at $153,000/$228,000.

IRA contributions are fully deductible when an individual is not covered by an employer’s retirement plan, regardless of income. When covered by an employer’s plan, IRA contributions are limited with an income greater than $73,000 (single), $136,000 (married filing jointly – covered spouse making contribution), or $218,000 (married filing jointly – non-covered spouse making contribution).

For other retirement plans like 401(k), 403(b), and 457 retirement plans, participants may make elective salary deferrals of up to $22,500. Those age 50 and over can add an additional $7,500, for a total of $30,000.

Participants in SIMPLE IRA and SIMPLE 401k retirement plans may make elective salary deferrals of up to $15,500 ($19,000 if age 50 and over).

The total limit on annual additions to defined contribution retirement plans was increased to $66,000.

We usually encourage clients who are able to save the maximum amount to their retirement account to do so.

Capital Gains

Long-term capital gains tax rates have not changed, but as usual the tax brackets have been updated:

Higher income amounts than those shown will result in a 20% capital gains rate. There is also an additional 3.8% Medicare tax on gains for those with income over $200,000 (single) or $250,000 (married filing jointly).

Gift and Estate Tax

The annual gift exclusion is now $17,000, so gifts up to that amount can be made to any person without needing to file a gift tax return. The total gift and estate tax exclusion increased to $12,920,000, with the estate tax rate still at 40% for amounts above that.

Along with other provisions, the higher gift/estate tax limits are set to drop by about half in 2026. We have been discussing strategies with clients who could potentially be affected by those changes, so let us know if you’d like to talk that over.

Social Security and Medicare

For taxpayers who are still working, compensation of up to $160,200 is subject to FICA taxes for Social Security.

For those age 62-66/67 who are still working and receiving Social Security benefits ages 62–66, an earnings test is applied. The maximum amount one can earn without having benefits reduced is $21,240. After that, the benefit is reduced by $1 for every $2 of earned income.

Medicare Part B premiums are set based on income from two years in the past (i.e., 2023 rates are based on the 2021 tax return). Taxpayers with income greater than $91,000 (single) or $182,000 (married filing jointly) are charged higher premiums. This is known as IRMAA - Income-Related Monthly Adjusted Amount – and it can really take some people by surprise, especially if their income is higher than usual for just one year.

More from Secure 2.0 Act

Many of our clients take advantage of Qualified Charitable Distributions (QCDs) from their IRA accounts. The maximum annual QCD donation has been $100,000 for a while, but starting in 2024 that limit will be linked to inflation instead.

Another change is that previously QCDs could only go directly to a 501(c)3 charity and not to any other type of charitable entity. That is still mostly true – you cannot send QCDs to a private foundation or donor-advised fund. However, there is now a one-time opportunity to direct a QCD donation of up to $50,000 into a “split-interest” entity like a charitable remainder trust or charitable annuity arrangement.

Those vehicles can be complicated and are beyond the scope of this article, but in general they offer the ability to pass money to a charity while receiving some kind of payment back. That can allow deferral on income from an IRA that otherwise would have been immediately taxable. That said, we think this is a provision with limited appeal, especially with the relatively low limit of $50,000.

One more interesting provision – seemingly out of left field – covers 529 college savings accounts that have been open for 15 years or longer. Starting in 2024, 529 account owners can transfer unused account balances to a Roth IRA in the name of the beneficiary. There’s no income limit as there would be with regular Roth IRA contributions, but of course there are several caveats. The rollover must be from money that wasn’t contributed in the last five years, the annual transfer limit is the IRA contribution limit for the year, and a maximum of $35,000 can be moved to the Roth.

This also probably has limited appeal, since given the high cost of college most 529 accounts will likely be depleted by the time the beneficiary graduates. There is also a great deal of flexibility built into 529s, with the ability to change the beneficiary to other family members or even to the account owner. Still, we can see it being a valuable strategy in some situations where there’s “leftover” money in a 529 account.

If you have any questions regarding tax planning, schedule a 15-minute discovery call with a fee-only financial advisor.

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By Carl Lachman, MBA, CFP®

Am Important Question

If you are approaching retirement or already retired, I am sure you have wondered if you have enough. Will my money last? Did I save enough for my retirement? Retiring from work and relying on the assets you have saved to support yourself is not an easy step to take and most people have at least a little anxiety about this change in their life. In order to get a little more peace of mind, many people try using some of the online retirement calculators that are available to double-check their plans.

Helpful? Maybe.

There are thousands of online retirement calculators and projection wizards that attempt to help people know if they have enough to retire and how much they can spend in retirement. Some of these are very good, while others are terrible.

Recently I taught a class near our office in Fullerton at a local community center about how to use online retirement calculators. I highlighted a couple of them and showed the class exactly how I would use them to help with retirement saving and spending decisions.

Although I used specific online calculators in the class, I don’t specifically recommend any of them. After all, like most things available online, the good retirement calculators today will probably not be the good ones you should use tomorrow. So, I tried to help my class learn guidelines that they can follow in choosing and using online retirement calculators going forward.

They Are Not Perfect

The first guideline I tried to impress on my class was that retirement calculators are not perfect. No matter how impressive they appear, they cannot predict the future and they will not give results that are perfectly accurate 20 years from now. Rather, the good calculators and projections can help to determine if you are in the ballpark. They are approximately helpful. They can let you know if you are headed in the right direction and if you are on-track. They can help you determine generally if you have saved enough, how much you can spend, and if your money will probably last.

Be Cautious

Please be cautious when you try using a retirement calculator. They are not all the same and they sometimes use your data differently in the calculations they produce. Make sure you really understand how each calculator defines its terms and how it makes the calculations. The good calculators give explanations that are easy to find and understand. You may only need to hover your cursor over a term or an entry box to find out. Take the time to understand what is being asked and make sure you are entering the correct data in the right place.

I know not everyone loves math, but please take some time to read the online explanation of what the retirement calculator is trying to accomplish. Some are trying to help you check to see if you have enough to retire, while others are written to help you not spend too much, and still others are trying to help you find the right investment mix. If you use the wrong calculator for the question you are asking, you will probably not get good guidance.

Be willing to keep looking for the right retirement calculator. If the first one you find is not going to be helpful for you to use, then keep looking. So many exist online that I am confident that the one that will be most helpful for you is out there. But, it might take some work to find it.

Be Conservative

If you use rosy inputs for a retirement calculator, it will give you rosy results. Don’t fall into this trap. Make sure you are conservative and realistic in the assumptions you enter. If you guess and are not thoughtful in your assumptions, you could be given very bad results by an online calculator. If you then make decisions based on those bad results, the consequences can be severe. I have seen retirees make poor decisions by relying on rosy retirement projections from investment salespeople that work on commission. Retirement projections can be made to say whatever you want them to say, so be careful.

When I suggest conservative assumptions, what do I mean? Assume you will live longer than you think, like 95 or 100. Assume your investments are just okay, with a return like 5%. Assume inflation is a little higher than the long-term average, so maybe 3.3%. Don’t include your home or your emergency fund in your assets available for retirement spending. And, don’t guess on your Social Security, but get your real numbers from the SSA.gov website. In every input, pad it a little and be conservative.

Simpler Is Usually Better

An overly complex retirement calculator could easily lead you astray. I have seen software that allowed approximately 250 inputs and had 100 pages of beautiful, colorful graphs and illustrations. It was very impressive, but it was dramatically more complex than needed or than could be relied upon. There were too many ways it could hide a bad assumption and then give dramatically bad results. You should stay away from retirement calculators that are too complex.

At the other end of the spectrum are retirement calculators that are a sort of “black box”. They are very simple, require a few inputs, and then spit out an answer without really explaining what is going on. It is my guess that most of these sorts of black box calculators are making a bunch of assumptions that are probably not applicable to your situation. Unless those assumptions are clearly delineated and match your situation exactly, I recommend you keep looking for a better online calculator.

Fewer Assumptions

So, if too complex is not good and too simple is not good, what should you look for? Again, this may not be the best suggestion for your specific case, but in my experience the best retirement calculators have something in the range of 7-12 input boxes for your assumptions. This seems to be a happy medium.

Additionally, the best retirement calculators allow a variety of Social Security inputs or adjustments. Although some will do all of the Social Security calculations for you, it is usually better to use your actual numbers from your official statement from the Social Security Administration. Look for a retirement calculator that can accommodate you entering your Social Security numbers.

One way that some retirement calculators accommodate Social Security customization is simply to allow you to add various income streams in retirement. This is a good function if it is available and not too complex. If you are asked for a cost of living adjustment (COLA) or an inflation assumption for your Social Security, I recommend you use a number in the 2% to 2.5% range, to be conservative.

The final input that is helpful in a retirement calculator is the ability to handle a lump-sum assumption. For instance, if you think that in 5 years you will sell your home and downsize, netting $100,000 of cash when the move is complete, that is a lump-sum of cash you will have in the future. A good retirement calculator usually allows you to include an assumption for a future lump-sum.

Pre-Tax Numbers

It would be nice for a retirement calculator to produce gross and net results, which correctly predict your state and federal taxes in the future, but this is a pipe dream. If a retirement calculator is making assumptions about future tax rates and what tax bracket you will be in, then I suggest you not use it. How can the programmers of the calculator know what tax rates will be in the future if no one at the IRS or in Washington, D.C. has that answer? Future tax rates are too unpredictable to include in a projection.

Rather, all of the numbers you enter into a calculator, and all of the numbers it gives you at the end, should be pre-tax. Then, you can use your tax payment experience to guess at your future taxes and estimate what you might have available for expenses after state and federal taxes are paid. If you are forced to do this thinking, it reminds you that all of this work just helps you determine if you are headed in the right direction. The calculator doesn’t know your future and it won’t get the numbers exactly correct. When I produce retirement projections for my clients, I do all of those projections pre-tax and then we discuss the range of taxes they will probably encounter. That is about as close as we try to get the results of the projections.

Run It Every 1-3 Years

Because the retirement projections are estimates and we are not relying on them to be perfect, some might question if they are worth the effort. In my experience, a well designed and thoughtful projection with good assumptions is often rather accurate for a few years. It can be pretty close to what happens, but after a few years, then it usually starts being further and further from what occurs. So, we revisit and update retirement projections every 1-3 years in most cases. It is very helpful to go back, check assumptions, update balances in accounts, and produce a new retirement projection to see if the most important financial planning is still on track.

Besides updating retirement projections every 1-3 years, these calculators are also very helpful if a big financial change occurs or is considered. If a career change happens, a large amount is spent out of savings, or if an inheritance is received, these are good times to update a retirement calculator and run the numbers again. Say, for instance, someone is considering $100,000 gift to a child or for a downpayment on a vacation home? Maybe taking that money out of the assets and updating the retirement projection will help everyone see what the impact on retirement will be. The projection may show that it will make a big or small difference. Rather than guessing at the result of the decision, update the retirement projection to get some real numbers.

I Tend to Avoid Monte Carlo Analysis

The promise of Monte Carlo analysis suggests that we can estimate the probability of your retirement plan success by “rolling the dice” maybe 10,000 times. This sort of analysis takes part of the retirement calculator – like the investment returns – and randomly chooses a return within a range of returns each time it runs the calculator. After running the calculation with a variety of random numbers 10,000 or more times, it graphs the outcomes and shows what is most likely. This sort of analysis can be very helpful when used properly by a knowledgeable person. But, in my experience, there are relatively few financial advisors and even fewer members of the public that know how to correctly use Monte Carlo analysis for retirement planning. They usually jump to the wrong conclusions.

The discussion of Monte Carlo analysis for retirement projections cannot be adequately covered in this article, but my suggestion is that you avoid it. Most people who rely on Monte Carlo analysis tend to think that if they run it once and get a good answer, they are done with their retirement planning, since the computer simulated 10,000 outcomes. I recommend that you use a more straightforward retirement calculator and run it once a year, updating it with your actual numbers and conservative assumptions. That will help you more than running a Monte Carlo calculator once with 10,000 simulations.

Do a Reality Check

Before you finalize any financial decisions from your use of a retirement calculator, please step back and do a reality check. Maybe run the results by a trusted friend or advisor that has some math skills. Friends who are engineers are often helpful in this area, for instance. If you do some simple calculations on the back of a napkin, do you more/less come to results similar to what the retirement calculator says?

Another way to check a retirement calculator before you rely on it is to input a simple situation with round numbers. Use numbers that you can double-check with your own simple calculations. If your calculations and the retirement calculator are in agreement, that is probably a good sign that you can start adjusting the inputs for the calculator to be more like your actual situation.

There is very sound research to suggest that a 4% withdrawal rate from a 40% stock and 60% bond portfolio will successfully allow withdrawals for 30 years. It is a rule of thumb that is often mentioned with retirement projections, but it is not perfect. For you, however, it can help you do a reality check on your projection.

How much does your projection say you can withdraw each year from your retirement accounts? If it is in the range of 3.5% to 5.5%, then it is probably in the ballpark. But if it is dramatically different then that range, say lower or higher, then you probably need to check and double-check the calculator before you rely on it.

Final Thoughts

If used correctly, retirement calculators and projections can be very helpful in making financial decisions when you approach retirement or are already retired. They can truly set your mind at ease and help you with your decisions. But, if used incorrectly, they can also create a lot of pain. If you are going to use a retirement calculator, please consider the guidelines suggested in this article.

And, if you are now convinced that using a retirement projection is not something you should attempt by yourself, please consider using a fee-only financial advisor to help with retirement planning. When new clients start working with our firm, one of the first pieces of analysis we complete for them is a customized retirement projection. And, after including a retirement projection in the initial financial plan, we almost always update it many times in future years, especially as they near retirement or make big financial decisions in retirement. If you would like to learn more about how we use retirement projections with our clients, please consider a complimentary meeting with us in-person or on the phone, and we will be happy to discuss it with you.

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Learn the basics of personal financial planning from Eclectic's president, David Little. Saving, Investing, Insurance, Estate Planning, Taxes, & Retirement. This presentation was originally given to a local conference in March of 2022. This episode was hosted, produced, and edited by Carl Lachman. The music is from Bensound.com. Learn more about the fee-only financial planning and investment management services that Eclectic Associates offers at www.retirewithpeaceofmind.com

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What are the basics of estate planning? This podcast explains what you need to know. Austin Dillon, an estate planning attorney in Fullerton, California, originally recorded this interview in May of 2022. This episode was hosted, produced, and edited by Carl Lachman. The music is from Bensound.com. Learn more about the fee-only financial planning and investment management services that Eclectic Associates offers at www.retirewithpeaceofmind.com

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By Amber Shrosbree, CFP®

As you have probably heard by now, in late December Congress passed the Consolidate Appropriations Act, which also included the Secure 2.0 Act. Below are a few things that we have pulled from it that we think are worth highlighting, although this is in no way an exhaustive list.

First and foremost – if you were anticipating having to start taking a required minimum distribution (RMD) this year from your personal retirement account, you won’t have to do that.

The new start age for RMD’s has been pushed back to 73 - if you are turning 73 between 2023 and 2032 – and back to 75 for everyone else. Therefore, if you are turning 72 this year and were anticipating having to start taking your RMD, the good news is that you get to punt it just a bit longer.

Another positive change is that retirement plan Roth accounts (401k, 403b) no longer require RMDs. So, if you currently have a Roth 401k through an employer and were anticipating taking an RMD soon, you no longer need to. There is still an argument to be made for rolling over a Roth retirement plan account into a Roth IRA once you are no longer working for that employer.

The rules for surviving spouses in relation to taking RMD’s from inherited accounts has changed for the better as well. The surviving spouse can now choose to be treated as themselves or the decedent, meaning if the surviving spouse is older than the decedent, they now get to withdraw less or even delay the distributions if they choose.

While our goal for clients is that they’ll never run into RMD problems, it is still worth noting that the penalties for missing an RMD have been reduced to 25% of the amount you failed to withdraw and reduced further to 10% if corrected within a certain amount of time. The penalty was previously set at 50%, although in practice the IRS seldom actually levied that penalty if the issue was corrected. However, we think going forward the IRS will really start charging the new penalties.

Another Roth-related change this year is the availability of the Roth Sep-IRA and Roth SIMPLE IRA. While technically you could open one of these at your custodian, there isn’t a high likelihood that they have the paperwork ready for this just yet. Custodians may need some time to catch up to this new allowance.

Starting in 2025, catch-up contributions to retirement accounts will receive a bit of a bump up for a specific subset of savers – those age 60-63 at that time. Instead of the current $7,500 for those over age 50 (with that amount increasing with inflation), that limit increases to the greater of $10,000 or 150% of the standard catch-up. We like this change, although it does bring more complexity.

Another note regarding catch-up contributions in your employer plans: starting in 2024, if in the prior year you had over $145,000 in wages for the same employer, your catch-up contribution goes through “Rothification”, meaning the catch-up amount cannot be pre-tax and will be Roth savings. Keep in mind that this strictly relates to wages, and therefore does not apply to self-employed earners.

Give us a call if you have questions on changes that we did not cover in this article, or on how the ones we did touch on may affect you.

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By David MacLeod, CFP®, CFA

Amid a dramatic rise in interest rates, stocks and bonds posted negative returns in 2022. U.S. stocks reversed strong 2021 returns with the S&P 500 Index down 18% for the year, returning to prices last seen in March 2021. Below the surface of that average was a wide disparity across various sectors and styles of investing. Technology stocks were hurt the most with significant losses across the board including stocks such as Facebook/Meta (-64%), Netflix (-51%), and Amazon (-49%). Value stocks performed relatively well and were down less than 10%, on average. In fact, many had positive returns for the year including Johnson & Johnson (+7%), Coca Cola (+10%), Raytheon (+20%), and Exxon Mobil (+81%).

Bond yields jumped as the 10-year U.S. Treasury bond yield closed at 3.9%, up from 1.5% at the start of the year, leading to negative returns for bonds and bond funds. Losses in bond funds were mainly due to the rise in interest rates, rather than an increase in default rates. We expect bond fund losses to be made up over time. As bonds held inside a bond mutual fund mature, they get replaced with the higher yielding bonds being offered now. Current yield is an excellent indicator of future 5 to 10-year returns so we have a higher expected return for fixed income portfolios today than we did at the beginning of 2022.

As inflation pressure begins to ease, the economic outlook for 2023 depends a lot on how much the Federal Reserve further tightens monetary policy through additional interest rate hikes and balance sheet reductions. The market expects that the Federal Reserve will raise interest rates by 0.25% three more times, before pausing. There may be a temptation to hit pause sooner if technology sector layoffs accelerate and retail sales numbers weaken. For now, unemployment remains very low and in the 4th quarter U.S. Real GDP probably grew at a healthy rate.

Looking ahead, we continue to recommend staying the course with a disciplined approach to investing. We do not recommend attempting to time the stock market around recession probabilities. We don’t know if stocks will continue a downward patten or rebound this year. Statistically, the S&P 500 averages a 9.2% return in the year following a down year, only slightly lower than the average for all other years. It’s also worth highlighting that the stock market tends to bottom six months before the unemployment rate peaks in a recession. As the old Wall Street saying goes, “nobody rings a bell at the bottom.” Since the recent market bottom in late September, stocks have rebounded by 8-10%.

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By James Moore, CFP®

It has been a challenging time for some who own or are looking to purchase a long-term care (LTC) insurance policy. Over the last few years, premiums for existing policies have increased significantly, sometimes as much as 90%. And it’s not just existing policies that have been affected—new policies have become much more expensive as well.

These cost increases have led many to look for alternatives to traditional LTC insurance. One alternative growing in popularity is the hybrid LTC policy, which combines LTC insurance with life insurance or an annuity. The main selling point for these products is that they usually contain a guarantee that LTC premiums will never increase for the policy holder. With all the recent rate increases, that promise sounds really appealing on the surface!

With rising LTC premiums, is a hybrid policy the best solution to protect against potential premium increases in the future?

Unfortunately, these hybrid policies are not a silver bullet. While they have interesting features that could make sense for some individuals, the premium guarantee is mostly an illusion.

The main challenge with products like these is that they are so complicated—there’s often a life insurance component, cash value component, and a LTC component among other things. This allows the insurance company to play some games by moving money around those different buckets. The insurance company is not necessarily being nefarious, but the contracts are typically so complicated that most people probably don’t fully understand how the products work.

So how can an insurance company promise they will never raise premiums? After all, the LTC insurance cost is a real cost—if an insurance company doesn’t receive enough in premium payments to cover what they pay out to cover claims, the insurance company will fail. Insurance companies are heavily regulated and have lots of smart actuaries creating these products, so you can bet they are not (intentionally at least) handing free money out.

The main reason why hybrid LTC policies can guarantee no premium increases is that they control the rate of return on the cash value portion of the policies. They either set up the policy to have lower-than-market returns or they maintain the right to lower the interest rate on the cash balance at any time. For example, if true LTC costs go up by $500 one year, the insurance company can simply under-pay on interest by $500 to cover that cost. It may feel less “painful” to avoid explicitly paying higher premiums, but by receiving a lower investment return on the policy cash value, the end result is the same.

Are there any other downsides to a hybrid long-term care policy?

Hybrid LTC policies have some of the same problems found in other annuities and whole life insurance policies (see our other articles on annuities). You are often better off in the long run by keeping insurance and investments separate. Just as it usually makes sense to buy term insurance and invest the rest, it likewise often makes sense to buy pure LTC insurance and invest the rest.

At the end of the day, it’s important to recognize that there’s no free lunch with the premium guarantee unless you think that these products have been poorly underwritten – in other words, if you believe the insurance company has made a mistake in pricing the policy too cheaply. While that could be a possibility, we strongly encourage you to read the entire contract and fully understand all the details even if you think that’s the case.

It’s also worth mentioning that fears of future LTC premium increases could end up being overblown. We tend to focus on what has happened in recent memory and we have to be careful not to overreact. It is likely that the recent painful premium increases have made current LTC policies priced more reasonably than they were before. Insurance companies know a lot more about LTC pricing than they did a few decades ago, so the risk of drastic underpricing seems like less of a possibility now. But even if LTC policies are priced more accurately now, they are still very expensive for most people!

Could a hybrid LTC ever make sense?

Yes, a hybrid LTC policy might be appropriate for certain individuals. Some particular hybrid LTC policies have more relaxed underwriting standards than traditional LTC policies. If you are in poor health and do not qualify for traditional LTC insurance, it is possible that you may qualify for some type of hybrid LTC policy. Assuming that LTC insurance makes sense for your circumstances, a hybrid LTC policy might be the only way to obtain the coverage.

Ultimately, the best way to approach long-term care depends on your specific situation. Our Fullerton financial advisory firm is happy to help you evaluate your options. Please feel free visit our website at www.eclecticassociates.com to schedule a complimentary phone call or meeting with one of our fee–only financial advisors.

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If you’re one of the 66 million Americans receiving income from Social Security, look for an increase in your benefit starting in 2023.

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To have a better shot of matching inflation, you may be thinking about investing in I Bonds – but is it worth doing?

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Scams that target seniors have always been extremely common, but it feels like they have intensified over the last several years.

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This episode is an update to an article by the same name that Russell Hall wrote a few years ago for Eclectic Associates. Russell is a 20-year veteran of financial planning and has particular expertise in taxes. He has written extensively on a variety of topics, and you can find those articles at our website under the Education tab. This episode was hosted, produced, and edited by Carl Lachman. The music is from Bensound.com. Learn more about the fee-only financial planning and investment management services that Eclectic Associates offers at www.retirewithpeaceofmind.com

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Almost every industry has its own jargon, and financial services is no exception. At Eclectic Associates, we do our best to explain investing and financial planning in terms that are easier to understand…

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A new California law is going into effect which will soon require employers with 5 or more employees to offer a retirement plan. The registration deadline is June 30, 2022 for companies with 5-50 employees.

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“Are you tired of the stock market roller coaster? Protect your money from market decline while participating when the market goes up!”

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When should you sign up?

If you’re not working, sign up at 65. You can enroll anytime during the 3 months before your birth month, during the month you turn 65, or for 3 months following that. There is a lifetime penalty that may be assessed if you’re eligible and miss that enrollment window.

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A little work on your estate plan will pay enormous dividends down the road.

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A new California law is going into effect which will soon require employers with 5 or more employees to offer a retirement plan.

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As colleges and students struggle to adapt to a changing environment, this year has brought up a number of questions about 529 college savings accounts.

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It’s common to wonder when you should start taking Social Security. Here are points to help you feel more confident about this decision.

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These two words are foundational in the world of finance, but without any additional context they can be difficult concepts to grasp.

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Congress passed the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, on March 27, 2020. What does this mean for you?

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Rates may fluctuate up and down, the government may change rules to incentivize or discourage behavior, but one truth remains – taxes aren’t going away!

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With expensive premiums as a backdrop, it’s reasonable to wonder if this is the best time to buy long-term insurance or if it’s better to wait.

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Is California tax friendly for retirees? How does California differ from other states, and what can you do about it?

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After a volatile but overall slightly positive week for the markets last week, we’ve seen more large declines this week.

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Do presidential election years affect the stock market? We look at the numbers and provide our perspective.

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Here are some points to consider when trying to decide how much money to leave your children.

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As you already know, stock markets around the world have continued to decline. Sentiment has reversed dramatically. Just last week, U.S. stock market indexes hit an all-time high.

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We don’t want people to pay more taxes than they have to. Here are strategies for high-earning individuals and others to reduce their tax bill.

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Getting divorced? Some financial points to consider before you sign the settlement.

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Thinking of doing an IRA rollover? Here’s what you need to know to avoid running afoul of the IRS.

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Ken Fisher hates annuities, and we don’t like them either. Here’s why.

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As humans, we are wired to our investing disadvantage. We retain all the behavioral biases we had in junior high, and they cause us to be poor investors.

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