by Donna Gordon on March 2nd, 2017

WHY A LIFE INSURANCE CLAIM MAY BE DENIED

Life insurance can be an important financial tool for you and your family. For example, life insurance can help replace earnings that would cease upon your death. It can provide a legacy for your children or grandchildren, and can even be used to make a charitable gift after your death.
However, the fact that you've purchased life insurance doesn't guarantee that the death benefit will be paid when it's needed most — after you've died. There are several reasons insurance companies may attempt to deny, or at least delay, paying a claim for the death benefit. Here are some possible circumstances when a death-benefit claim may be contested by the insurer

Misstatements on the application
A clause that's commonly found in life insurance contracts is the incontestability clause. A life insurance claim may be denied if the insurer finds that the applicant made misstatements on the policy application and death occurs within two years of the policy's start date. If the applicant makes statements intended to defraud the insurer, there is essentially no time limit, and the claim can be denied no matter how long the policy has been in force. That's why it is very important to provide accurate information on the policy application and not withhold information or facts that are requested by the insurer.
A good example of a policy being contested involved actor Heath Ledger, who died within seven months of purchasing a $10 million life insurance policy for the benefit of his daughter. The medical examiner ruled that the cause of death was due to an accidental drug overdose. Subsequently, the insurer denied the claim on two grounds: The death was the result of an intentional drug overdose and amounted to suicide, and the insured did not disclose on the insurance application (as requested) that he was a user of illegal drugs, which is a material misrepresentation. The policy beneficiary sued the insurer, and the case was eventually settled for an undisclosed amount believed to be much less than the policy death benefit.

Suicide clause
Most life insurance policies contain a suicide clause, which generally states that no death benefit will be paid if the insured's death results from suicide within two years from the inception of the policy. Often, policy owners inadvertently restart the two-year suicide clause when they replace existing life insurance with a new policy.
Even in the unfortunate circumstance that death by suicide occurs within two years from the policy's inception, the beneficiaries may still be able to receive at least a portion of the death benefit, depending on the circumstances. For example, whether death is intentional (suicide) or by accident is not always easily determined.

Policy lapse

A life insurance policy may not be in force because the coverage has lapsed. Policies may lapse for several reasons, including nonpayment of the premium and expiration of a stated term. Insurers generally send written notifications when a premium payment is past due, when the policy is about to lapse, and when a policy has actually expired. Sometimes the policy owner may inadvertently or intentionally neglect to make premium payments. In any case, the insurance beneficiary may not realize that the policy has lapsed until after the death of the insured.
An insurer may deny payment of the death benefit when death occurs outside the policy coverage term. Term life insurance provides death benefit coverage for a stated number of years, usually from one to 25 years, depending on the policy purchased. This type of insurance is also common through employer-provided plans. In any case, if the insured's death occurs after the policy term has expired, the claim for insurance proceeds will be denied.
What can you do?
Nothing can be more emotionally trying than having a life insurance claim denied while dealing with the loss of a loved one. Here are some tips that may help get the death benefit paid.
Whether you fill out the life insurance application or it is completed by a life insurance agent, be sure you review each section of the application and answer each question honestly. Do not withhold or falsify information.
Pay the premiums on time. Indicate an alternative address for mailing the premium notices and also name another individual to receive notices of premium lapses. If you move or change financial institutions and don't notify the insurer, you may forget about the premium payments and the policy could lapse without your knowledge.
If you have group life insurance, verify that it is still in force at least once each year. Also, review your policy with an insurance professional. You may not realize that your life insurance will end on a certain date.


401(K) WITHDRAWALS: BEWARE THE PENALTY TAX

You've probably heard that if you withdraw taxable amounts from your 401(k) or 403(b) plan before age 59½, you may be socked with a 10% early distribution penalty tax on top of the federal income taxes you'll be required to pay. But did you know that the Internal Revenue Code contains quite a few exceptions that allow you to take penalty-free withdrawals before age 59½?
Sometimes age 59½ is really age 55...or age 50
If you've reached age 55, you can take penalty-free withdrawals from your 401(k) plan after leaving your job if your employment ends during or after the year you reach age 55. This is one of the most important exceptions to the penalty tax.
And if you're a qualified public safety employee, this exception applies after you've reached age 50. You're a qualified public safety employee if you provided police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50.
Be careful though. This exception applies only after you leave employment with the employer that sponsored the plan making the distribution. For example, if you worked for Employer A and quit at age 45, then took a job with Employer B and quit at age 55, only distributions from Employer B's plan would be eligible for this exception. You'll have to wait until age 59½ to take penalty-free withdrawals from Employer A's plan, unless another exception applies.
Think periodic, not lump sums
Another important exception to the penalty tax applies to "substantially equal periodic payments," or SEPPs. This exception also applies only after you've stopped working for the employer that sponsored the plan. To take advantage of this exception, you must withdraw funds from your plan at least annually based on one of three rather complicated IRS-approved distribution methods.
Regardless of which method you choose, you generally can't change or alter the payments for five years or until you reach age 59½, whichever occurs later. If you do modify the payments (for example, by taking amounts smaller or larger than required distributions or none at all), you'll again wind up having to pay the 10% penalty tax on the taxable portion of all your pre-age 59½ SEPP distributions (unless another exception applies).
And more exceptions...
Distributions described below generally won't be subject to the penalty tax even if you're under age 59½ at the time of the payment.
Distributions from your plan up to the amount of your unreimbursed medical expenses for the year that exceed 10% of your adjusted gross income for that year (You don't have to itemize deductions to use this exception, and the distributions don't have to actually be used to pay those medical expenses.)Distributions made as a result of your qualifying disability (This means you must be unable to engage in any "substantial gainful activity" by reason of a "medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.")Certain distributions to qualified military reservists called to active dutyDistributions made pursuant to a qualified domestic relations order (QDRO)Distributions made to your beneficiary after your death, regardless of your beneficiary's age
Keep in mind that the penalty tax applies only to taxable distributions, so tax-free rollovers of retirement assets are not subject to the penalty. Also note that the exceptions applicable to IRAs are similar to, but not identical to, the rules that apply to employer plans.


DUE DATE APPROACHES FOR 2016 FEDERAL INCOME TAX RETURNS


Tax filing season is here again. If you haven't done so already, you'll want to start pulling things together — that includes getting your hands on a copy of last year's tax return and gathering W-2s, 1099s, and deduction records. You'll need these records whether you're preparing your own return or paying someone else to do your taxes for you.

Don't procrastinate

The filing deadline for most individuals is Tuesday, April 18, 2017. That's because April 15 falls on a Saturday, and Emancipation Day, a legal holiday in Washington, D.C., is celebrated on Monday, April 17. Unlike last year, there's no extra time for residents of Massachusetts or Maine to file because Patriots' Day (a holiday in those two states) falls on April 17 — the same day that Emancipation Day is being celebrated.

Filing for an extension
If you don't think you're going to be able to file your federal income tax return by the due date, you can file for and obtain an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (to October 16, 2017) to file your federal income tax return. You can also file for an extension electronically — instructions on how to do so can be found in the Form 4868 instructions.
Filing for an automatic extension does not provide any additional time to pay your tax! When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the April filing due date. If you don't pay the amount you've estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension.
Special rules apply if you're living outside the country or serving in the military and on duty outside the United States. In these circumstances you are generally allowed an automatic two-month extension without filing Form 4868, though interest will be owed on any taxes due that are paid after April 18. If you served in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file.

What if you owe?
One of the biggest mistakes you can make is not filing your return because you owe money. If your return shows a balance due, file and pay the amount due in full by the due date if possible. If there's no way that you can pay what you owe, file the return and pay as much as you can afford. You'll owe interest and possibly penalties on the unpaid tax, but you'll limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the remaining balance (options can include paying the unpaid balance in installments).
Expecting a refund?
The IRS is stepping up efforts to combat identity theft and tax refund fraud. New, more aggressive filters that are intended to curtail fraudulent refunds may inadvertently delay some legitimate refund requests. In fact, beginning this year, a new law requires the IRS to hold refunds on all tax returns claiming the earned income tax credit or the refundable portion of the Child Tax Credit until at least February 15.1
Most filers, though, can expect a refund check to be issued within 21 days of the IRS receiving a return.

​1 IRS.gov (IR-2016-117, IRS Urges Taxpayers to Check Their Withholding; New Factors Increase Importance of Mid-Year Check Up, August 31, 2016)

by Donna Gordon on February 15th, 2017

​QUIZ: HOW MUCH DO YOU KNOW ABOUT SOCIAL SECURITY RETIREMENT BENEFITS?

Social Security is an important source of retirement income for millions of Americans, but how much do you know about this program? Test your knowledge, and learn more about your retirement benefits, by answering the following questions.
Questions
1. Do you have to be retired to collect Social Security retirement benefits?
a. Yes
b. No
2. How much is the average monthly Social Security benefit for a retired worker?
a. $1,360
b. $1,493
c. $1,585
d. $1,723
3. For each year you wait past your full retirement age to collect Social Security, how much will your retirement benefit increase?
a. 5%
b. 6%
c. 7%
d. 8%
4. How far in advance should you apply for Social Security retirement benefits?
a. One month before you want your benefits to start.
b. Two months before you want your benefits to start.
c. Three months before you want your benefits to start.
5. Is it possible for your retirement benefit to increase once you start receiving Social Security?
a. Yes
b. No
Answers
1. b. You don't need to stop working in order to claim Social Security retirement benefits. However, if you plan to continue working and you have not yet reached full retirement age (66 to 67, depending on your year of birth), your Social Security retirement benefit may be reduced if you earn more than a certain annual amount. In 2017, $1 in benefits will be deducted for every $2 you earn above $16,920. In the calendar year in which you reach your full retirement age, a higher limit applies. In 2017, $1 in benefits will be deducted for every $3 you earn above $44,880. Once you reach full retirement age, your earnings will not affect your Social Security benefit.
2. a. Your benefit will depend on your earnings history and other factors, but according to the Social Security Administration, the average estimated monthly Social Security benefit for a retired worker (as of January 2017) is $1,360.1
3. d. Starting at full retirement age, you will earn delayed retirement credits that will increase your benefit by 8% per year up to age 70. For example, if your full retirement age is 66, you can earn credits for a maximum of four years. At age 70, your benefit will then be 32% higher than it would have been at full retirement age.
4. c. According to the Social Security Administration, you should ideally apply three months before you want your benefits to start. You can generally apply online.
5. a. There are several reasons why your benefit might increase after you begin receiving it. First, you'll generally receive annual cost-of-living adjustments (COLAs). Second, your benefit is recalculated every year to account for new earnings, so it might increase if you continue working. Your benefit might also be adjusted if you qualify for a higher spousal benefit once your spouse files for Social Security.
For more information, visit the Social Security Administration website, ssa.gov.
1Social Security Fact Sheet, 2017 Social Security Changes


TAX TIPS FOR THE SELF-EMPLOYED

Being self-employed has many advantages — the opportunity to be your own boss and come and go as you please, for example. However, it also comes with unique challenges, especially when it comes to how to handle taxes. Whether you're running your own business or thinking about starting one, you'll want to be aware of the specific tax rules and opportunities that apply to you.
Understand the self-employment tax
When you worked for an employer, payroll taxes to fund Social Security and Medicare were split between you and your employer. Now you must pay a self-employment tax equal to the combined amount that an employee and employer would pay. You must pay this tax if you had net earnings of $400 or more from self-employment.
The self-employment tax rate on net earnings (up to $127,200 in 2017) is 15.3%, with 12.4% going toward Social Security and 2.9% allotted to Medicare. Any amount over the earnings threshold is generally subject only to the Medicare payroll tax. However, self-employment and wage income above $200,000 is generally subject to a 0.9% additional Medicare tax. (For married individuals filing jointly, the 0.9% additional tax applies to combined self-employment and wage income over $250,000. For married individuals filing separately, the threshold is $125,000.)
If you file Form 1040, Schedule C, as a sole proprietor, independent contractor, or statutory employee, the net income listed on your Schedule C (or Schedule C-EZ) is self-employment income and must be included on Schedule SE, which is filed with your Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed. You can deduct one-half of the self-employment tax paid (but not any portion of the Medicare surtax) when you compute the self-employment tax on Schedule SE.
Make estimated tax payments on time
When you're self-employed, you'll need to make quarterly estimated tax payments (using IRS Form 1040-ES) to cover your federal tax liability. You may have to make state estimated tax payments as well.
Estimated tax payments are generally due each year on the 15th of April, June, September, and January. If you fail to make estimated tax payments on time, you may be subject to penalties, interest, and a large tax bill at the end of the tax year. For more information, see IRS Publication 505, Tax Withholding and Estimated Tax.
Invest in a retirement plan
If you are self-employed, it is up to you and you alone to save sufficient funds for retirement. Investing in a retirement plan can help you save for retirement and also provide numerous tax benefits.
A number of retirement plans are suited for self-employed individuals:
SEP IRA planSIMPLE IRA planSIMPLE 401(k) plan"Individual" 401(k) plan
The type of retirement plan you choose will depend on your business and specific circumstances. Explore your options and be sure to consider the complexity of each plan. In addition, if you have employees, you may have to provide retirement benefits for them as well. For more information, consult a tax professional or see IRS Publication 560, Retirement Plans for Small Businesses.
Take advantage of business deductions
If you have your own business, you can deduct some of the costs of starting the business, as well as the current operating costs of running that business. To be deductible, business expenses must be both ordinary (common and accepted in your field of business) and necessary (appropriate and helpful for your business).
Since business deductions will lower your taxable income, you should take advantage of any deductions to which you are entitled. You may be able to deduct a variety of business expenses, such as start-up costs, home office expenses, and office equipment.
Deduct health-care expenses
If you qualify, you may be able to benefit from the self-employed health insurance deduction, which would enable you to deduct up to 100% of the cost of health insurance that you provide for yourself, your spouse, your dependents, and employees.
In addition, if you are enrolled in a high-deductible health plan, you may be able to establish and contribute to a health savings account (HSA), which is a tax-advantaged account into which you can set aside funds to pay qualified medical expenses. Contributions made to an HSA account are generally tax deductible. (Depending upon the state, HSA contributions may or may not be subject to state taxes.)

CAN THE IRS WAIVE THE 60-DAY IRA ROLLOVER DEADLINE?

If you take a distribution from your IRA intending to make a 60-day rollover, but for some reason the funds don't get to the new IRA trustee in time, the tax impact can be significant. In general, the rollover is invalid, the distribution becomes a taxable event, and you're treated as having made a regular, instead of a rollover, contribution to the new IRA. But all may not be lost. The 60-day requirement is automatically waived if all of the following apply:
A financial institution actually receives the funds within the 60-day rollover period.You followed the financial institution's procedures for depositing funds into an IRA within the 60-day period.The funds are not deposited in an IRA within the 60-day rollover period solely because of an error on the part of the financial institution.The funds are deposited within one year from the beginning of the 60-day rollover period.The rollover would have been valid if the financial institution had deposited the funds as instructed.
If you don't qualify for this limited automatic waiver, the IRS can waive the 60-day requirement "where failure to do so would be against equity or good conscience," such as a casualty, disaster, or other event beyond your reasonable control. However, you'll need to request a private letter ruling from the IRS, an expensive proposition — the filing fee alone is currently $10,000.
Thankfully, the IRS has just introduced a third way to seek a waiver of the 60-day requirement: self-certification. Under the new procedure, if you've missed the 60-day rollover deadline, you can simply send a letter to the plan administrator or IRA trustee/custodian certifying that you missed the 60-day deadline due to one of 11 specified reasons. To qualify, you must generally make your rollover contribution to the employer plan or IRA within 30 days after you're no longer prevented from doing so. Also, there is no IRS fee.
The downside of self-certification is that if you're subsequently audited, the IRS can still review whether your contribution met the requirements for a waiver. For this reason, some taxpayers may still prefer the certainty of a private letter ruling from the IRS.

by Donna Gordon on February 15th, 2017

​GROWTH, VALUE, OR BOTH

The terms growth and value are often used to describe two different investment strategies, yet many investors may want both qualities in an investment. Famed investor Warren Buffett put it this way in a 2015 interview: "I always say if you aren't investing for value, what are you investing for? And the idea that value and growth are two different things makes no sense.... Growth is part of the value equation."1
Even so, analysts may look at specific stocks as offering more growth potential than value, and vice versa. And these concepts are used to construct many mutual funds and exchange-traded funds (ETFs). So it's helpful to understand the opposing ideas, even if you want the best of both in your portfolio.
Poised to grow?
As the name suggests, growth stocks are associated with companies that appear to have above-average growth potential. These companies might be on the verge of a market breakthrough or acquisition, or they may occupy a strong position in a growing industry.
Growth companies may place more emphasis on reinvesting profits than on paying dividends (although many large growth companies do offer dividends). Investors hope to benefit from future capital appreciation of growth stocks, which tend to be considered higher risk than value stocks. However, it's equally important for growth and value stocks to have strong fundamentals.
Undervalued?
Value stocks are associated with companies that appear to be undervalued by the market or are in an industry that is currently out of favor. Unlike growth stocks, which might seem expensive and overvalued, value stocks may be priced lower in relation to their earnings, assets, or growth potential.
Established companies are more likely than younger companies to be considered value stocks, and these firms may emphasize paying dividends over reinvesting profits. An investor who purchases a value stock typically expects the broader market to eventually recognize the company's full potential, which may result in rising share prices. One risk with this approach is that a stock considered to be undervalued because of legal or management difficulties or tough competition might not be able to recover from the setback.
Focused funds
Identifying specific growth or value investments requires time, knowledge, and experience to analyze stock data. A more convenient and accessible way to add growth or value stocks to your portfolio may be through mutual funds or ETFs that focus on these categories. Such funds often have the word "growth" or "value" in their names. However, there could be a wide variety of objectives and stock holdings among funds labeled growth or value.
Also keep in mind that you might find growth, value, or both in a broad range of investments that do not employ growth or value strategies.
Diversification
Holding growth and value stocks and/or funds is one way to diversify the stock portion of your portfolio. Over the past 20 years, the average annual return for value stocks was about 1.5 percentage points higher than that of growth stocks (8.54% versus 7.02%). Yet growth stocks outperformed value stocks in eight of those years — in some years by large margins. This suggests that growth and value stocks may respond differently to varying market conditions.2
Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
The return and principal value of stocks, mutual funds, and ETFs fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares.


KEY RETIREMENT AND TAX NUMBERS FOR 2017

Every year, the Internal Revenue Service announces cost-of-living adjustments that affect contribution limits for retirement plans, thresholds for deductions and credits, and standard deduction and personal exemption amounts. Here are a few of the key adjustments for 2017.
Retirement plans
Employees who participate in 401(k), 403(b), and most 457 plans can defer up to $18,000 in compensation in 2017 (the same as in 2016); employees age 50 and older can defer up to an additional $6,000 in 2017 (the same as in 2016).Employees participating in a SIMPLE retirement plan can defer up to $12,500 in 2017 (the same as in 2016), and employees age 50 and older will be able to defer up to an additional $3,000 in 2017 (the same as in 2016).
IRAs
The limit on annual contributions to an IRA remains unchanged at $5,500 in 2017, with individuals age 50 and older able to contribute an additional $1,000. For individuals who are covered by a workplace retirement plan, the deduction for contributions to a traditional IRA is phased out for the following modified adjusted gross income (AGI) ranges:
  2016 2017Single/head of household (HOH) $61,000 - $71,000 $62,000 - $72,000Married filing jointly (MFJ) $98,000 - $118,000 $99,000 - $119,000Married filing separately (MFS) $0 - $10,000 $0 - $10,000
The 2017 phaseout range is $186,000 - $196,000 (up from $184,000 - $194,000 in 2016) when the individual making the IRA contribution is not covered by a workplace retirement plan but is filing jointly with a spouse who is covered.
The modified AGI phaseout ranges for individuals making contributions to a Roth IRA are:
  2016 2017Single/HOH $117,000 - $132,000 $118,000 - $133,000MFJ $184,000 - $194,000 $186,000 - $196,000MFS $0 - $10,000 $0 - $10,000
Estate and gift tax
The annual gift tax exclusion remains at $14,000.The gift and estate tax basic exclusion amount for 2017 is $5,490,000, up from $5,450,000 in 2016.
Personal exemption
The personal exemption amount remains at $4,050. For 2017, personal exemptions begin to phase out once AGI exceeds $261,500 (single), $287,650 (HOH), $313,800 (MFJ), or $156,900 (MFS).
These same AGI thresholds apply in determining if itemized deductions may be limited. The corresponding 2016 threshold amounts were $259,400 (single), $285,350 (HOH), $311,300 (MFJ), and $155,650 (MFS).
Standard deduction
These amounts have been adjusted as follows:
  2016 2017Single $6,300 $6,350HOH $9,300 $9,350MFJ $12,600 $12,700MFS $6,300 $6,350
The 2016 and 2017 additional standard deduction amount (age 65 or older, or blind) is $1,550 for single/HOH or $1,250 for all other filing statuses. Special rules apply if you can be claimed as a dependent by another taxpayer.
Alternative minimum tax (AMT)
AMT amounts have been adjusted as follows:
  2016 2017Maximum AMT exemption amountSingle/HOH $53,900 $54,300MFJ $83,800 $84,500MFS $41,900 $42,250Exemption phaseout thresholdSingle/HOH $119,700 $120,700MFJ $159,700 $160,900MFS $79,850 $80,45026% on AMTI* up to this amount, 28% on AMTI above this amountMFS $93,150 $93,900All others $186,300 $187,800*Alternative minimum taxable income


HOW CAN I PAY OFF THE CREDIT CARD DEBT I RACKED UP OVER THE HOLIDAYS?

It's a common occurrence once the holiday season winds down — you reluctantly look at your credit card statement and wince at all the purchases you made over the holidays. Fortunately, there's no need to panic. Consider using one of the following strategies to help pay it off.
Make a lump-sum payment. The best way to pay off credit card debt is with a single lump-sum payment, which would allow you to pay off your balance without owing additional interest. Look for sources of funds you can use for a lump-sum payoff, such as an employment bonus or other windfall. However, most individuals find themselves getting into credit card debt due to a lack of cash on hand in the first place, so this may not be an option for everyone.
Pay more than the minimum due. If it's not possible for you to pay off your balance entirely, always be sure to pay more than the required minimum payment due. Otherwise, you'll continue to carry the bulk of your balance forward without actually reducing your overall balance. You can refer to your monthly statement for more information on the impact that minimum payments will have on your credit card balance.
Prioritize your payments. If you have multiple credit cards that carry outstanding balances, another payoff strategy is to prioritize your payments and systematically pay off your credit card debt. Start by making a list of your credit cards and prioritize them according to their interest rates. Send the largest payment to the card with the highest interest rate. Continue making payments on your other cards until the card with the highest interest rate is paid off. You can then focus your repayment efforts on the card with the next highest interest rate, and so on, until they're all paid off.
Transfer your balances. Another option is to transfer your balances to a card that carries a lower interest rate. Many credit card companies offer highly competitive balance transfer offers (e.g., 0% interest for 12 to 24 months). Balance transfers may enable you to reduce interest fees and pay more against your existing balance. Keep in mind that credit cards often charge a fee for balance transfers (usually a percentage of the balance transferred).



by Donna Gordon on February 15th, 2017

​Job Growth: Strong Enough for a Rate Hike, Weak Enough to Frighten

World markets generally didn't do very much this week after strong volatility in previous weeks because of the U.S. presidential election. However, almost all equity markets were down for the week as the excitement of potential Trump tax cuts and stimulus was tempered by economic data, especially a jobs report that was less than expected.
Auto sales were no gem, either, with increased incentives, fleet sales, and extra selling days unable to drive year-over-year growth any higher than 3.6%. Adjusting for the added selling days, sales were down 4.7% from a year ago.
Revised third-quarter GDP growth data (from 2.9% to 3.2%) was good news and bad news. The good news is the total GDP growth wasn't as bleak as we believed just a few weeks ago. Consumption was revised sharply upward, but a lot of business spending categories now look a little worse. The bad news is that growth will be more difficult to achieve in the fourth quarter. This is especially true since the consumption and employment data reported this week started the quarter off on a bad note. Employment data looked OK month to month, but was substantially below year-ago levels, which won't be great news for holiday sales.
Worries about stimulus, tax cuts, and a highly likely interest-rate increase by the Federal Reserve in December kept bond markets on their heels, especially at the beginning of the week (before some softer economic data rolled in on Thursday and Friday). The U.S. 10-year Treasury bond yield was almost unchanged for the week at roughly 2.4%, well off the 1.6% low of the year and much higher than the measly 0.25% rate increase the Fed is expected to make in two weeks. A lot of other bond markets, particularly municipals, fared a lot worse than the 10-year Treasury. Markets are now way out in front of the Fed, potentially blunting the impact of the actual rate increases, when and if they are announced. Obviously, markets believe the Fed's hand will be forced harder and faster than expected in 2017.
Commodities were the star of the week, gaining 3.4% in aggregate, driven by higher oil prices. Those in turn were driven by much higher oil prices that resulted from an oil producers' meeting that promised some substantial production cuts. While this may indeed help oil prices set a firmer floor, I still believe that with U.S. shale producers being the new swing producers, the days of setting oil prices between just a few countries in a smoke-filled room are behind us. Also, I don't think markets have figured out that demand is also an issue, with increased conservation measures really taking hold.
The revisions to GDP, consumption, and especially consumer incomes were large and comprehensive. They substantially changed the trajectory of economic growth that had begun to look very dismal. Unfortunately, there wasn't even time to heave a sigh of relief as the data for the rest of the week seemed to indicate that the bad prospects had merely been pushed out to a later date and not eliminated. Potentially compounding the weakness is the fact that sharply higher mortgage rates could stifle growth in the housing market. Higher rates in general will not be helpful for those businesses and individuals wishing to borrow more. We fear that the pain of higher rates and potential trade issues will begin to bite before any of the tax cuts or stimulus measures are even voted on.
Employment Growth Fails to Accelerate Much
Friday's employment report was a mixed bag. Total job growth of 178,000 was better than last month's total and in line with the average for the past 12 months. Other job-related reports this week (Challenger Gray lay-offs and ADP) had raised everyone's hopes for much better numbers. We certainly raised our expectations in this week's preview video, but cautioned that everyone's expectations were driven by high hopes for seasonal retail sales help, which failed to materialize.
Still, the number doesn't look horrible relative to recent months.
​However, comparing this November to last November, things didn't look so great for private-sector employment. Last November, job growth was almost a 100,000 higher than this year, comparing the left most and right most bars of the graph above.
Historically, November has been one of the strongest months of the year for job growth.
​In that context, the 156,000 private-sector jobs created last month (government kicked in another 22,000) seem like a cause for worry and not for cheering.
Year-Over-Year Averaged Data Continues to Slump
We always prefer looking at the jobs data on a percentage basis, year over year and averaged. That eliminates a lot of the fluky month-to-month data that is so hard to rationalize.
Private-sector growth continues to drop, as shown by the blue line in the graph below. That rate has fallen from a high of 2.5% to 1.8%, a nontrivial drop. Still, we wouldn't panic, because strong 2015 results were partly due to an easy comp: winter 2014 was cold and stormy compared to a mild and tame 2015 winter.
​Components of Total Wage Growth Continue to Shift
Normally, much slower job growth would be a reason for panic. However, hourly wage rates are just as critical, if not more, to total wage growth as the level of employment. The graph below shows that wage growth and employment growth have just about reversed places, cushioning the blow.
​However, lower hours growth (actually a decline now) has moved total wage growth down a smidge. Perhaps the truncated scale makes it look like more than a smidge, but in the scheme of things this isn't much of a change, especially given the weather-related booms and busts.
​Nominal Wage Growth Acceptable, but Inflation-Adjusted Data, Not So Much
We characterize the overall, nominal total wage shrinkage as a smidge, but inflation-adjusted data shows a dramatic drop, which won't be good news for the all-important consumption sector that makes up 70% of GDP.
​Adjusted for much higher inflation today than a year ago, growth in total wages paid has been cut nearly in half from almost 5% to 2.5%.
Consumption and Wages Generally Track Each Other Closely
Most of the time, wage growth is very close to consumption. They move in tandem without one consistently leading the other. With wage growth now at about 2.5%, there is a very real possibility that consumption will fall from its current 2.7%.
​Like employment growth, consumption rates have slowed, as reinforced by this week's consumption report. While the consumption moderation is not as severe as the wage data, it is still well below peak level.
Still, there have been huge shifts in some of the underlying categories. Much cheaper grocery prices have driven up grocery store sales dramatically and put a real damper on restaurant sales, as shown below.
​Healthcare Growth Diminishing 
As a lot of healthcare insurance programs have been fully implemented, expenditure growth has slowed dramatically in the second-largest consumption category behind only housing.

​Inflation Accelerates, but It Isn’t the 1970s Again

Equity markets generally continued to rally this week, especially the Russell 2000, which made a new all-time high. However, emerging markets continued to worry about what a Trump victory means and had another rough week. Bonds also continued to express their concern about Trump, with some rates, but not all, moving higher this week.  
Economic news this week was generally positive, especially on a month-to-month basis. Retail sales, industrial production, and housing starts all showed nice progress, lifting the cloud of impending doom that was hanging over many economic statistics. We do caution that most of these metrics made little improvement on a year-over-year basis, but they did not get any worse. Inflation did heat up, causing some concern, with the October data showing a 0.4% increase. (Most of today's piece focuses on why higher inflation worries us.) Clearly, U.S. Federal Reserve Board Chair Janet Yellen is also concerned, hinting that rates would move higher soon. The market seemed untroubled about the Fed this week, for a very refreshing change of pace.

This week's release of October price data showed acceleration across both year-over- year and month-to-month data. The month-to-month data looked particularly ominous, increasing 0.4%, which approximates a 4.8% annual rate. Year-over-year inflation was also at the highest rate of the year, 1.6%, slowly and methodically approaching the core inflation rate of 2.1% (excluding food and energy items), which has changed little over the past 12 months. Together, this seems like a reason for at least some worry, and suggests that the Fed may need to take action sooner than later. 


However, We're Not Going Back to the 1970s
As much as we would like to say 'we told you so' in terms of higher inflation, the October report was not as dire as some of the headlines suggested. Gasoline, which was up a stunning 7% on seasonal factors and pipeline issues, and shelter prices that were up 0.4%, drove over half of the huge month-to-month inflation increase. Remember, a large part of the shelter number is owner-equivalent rents, which don't represent 'cash' outlays. I am sure the Fed has done the same analysis, probably looking at core inflation rates, which still haven't changed much.
 
​Though, no one really wants to see core rates move higher than the 2.2% rate, which the is current year-over-year three-month averaged rate. That suggests that some action was warranted as long as a year ago, but things have necessarily worsened a lot lately. As we have said again and again, headline inflation is the number-one indicator of recessions, not some hypothetically constructed 'core rate.'


The graph below shows that inflation does help predict how well the economy will do. The relationship between total CPI and consumption is quite tight. In fact, inflation generally leads consumption. Higher prices lead to lower consumption by several months. Periods of inflation should line up with periods of high consumption. That's why the red line, representing prices, forms peaks and troughs before the orange consumption line. To make the relationship clearer, we reversed the scale for inflation so that lower inflation rates are at the top and higher rates at the bottom. Consumption data is shown the conventional way with highest values on the top, using the right hand scale.

 
​To follow up with a real-world example, in 2008, inflation reached its peak in August 2008, the lowest red point on the line, or 5.4%. Consumption reached its nadir in May 2009, the very lowest point on the graph at negative 2.9% year-over-year change in consumption. Likewise, inflation (really deflation) was at its lowest in August 2009 and consumption peaked in January 2011. The headline CPI data correctly predicted the 2016 slowdown in consumption. So far, consumption has slipped from 3.5% to 2.6% as headline inflation has moved from 0.1% to 1.6%. That suggested that consumption growth has more room to fall, especially because it will be all but impossible for the CPI data to move up given now-increasing energy prices.


Core inflation, excluding food and energy prices, can provide some of those same clues as headline inflation. There's a number of theoretical and observational reasons to favor using the headline number, at least for economic forecasting.
​As seen in this graph, most of the time total CPI provides more lead time than core. Note the red line usually, but not always, moves ahead of the blue line. Additionally, the fact that total CPI moves over a broader range of values means that it can be easier to spot trends. That is why we had to use two different scales to make the data line up.


On a theoretical level, food and energy represent more than 20% of consumer spending, so tossing them out of the calculation is eliminating some of the real pain that consumers are feeling. It might make a little sense to toss out food and energy if a very short-term price spike will quickly reverse itself. However, using our year-over-year averaging methodology accomplishes much the same thing.


Slow-Moving Wages and Fast-Moving Inflation Are Often Key Causes of Recession
The reason inflation is so devastating is that higher prices, especially food and energy, must be paid for almost immediately. However, wage increases come but once a year. The same is true of Social Security recipients, an increasingly larger part of the consumption base. The pressure might not be so bad if consumers could switch to purchasing other goods instead of the more expensive items, but that is particularly difficult in the case of food and energy.


And it gets worse. Wage increases generally move in line with core inflation and not total inflation.
​Workers Paid on Core Inflation, not Headline Inflation
In the short run, workers get raises that have some relation to core inflation. Again, there are practical and theoretical reasons for this. On a theoretical level, over the long run core and total inflation are about the same. Although food and energy prices are exceptionally volatile, over the long term, inflation rates in the key categories are relatively similar. Given this pattern, paying on core rates of inflation could make some sense. Otherwise, wages would need to go both up and down, which is something that both workers and businesses find distasteful. However, this does set up the economy for recessions as consumption slows as wages decline in real terms.
​To close this thought, inflation is a key cause of recessions, no matter how it is measured. Currently, inflation is getting worse and explains the lower consumption rates we have seen in 2015 and 2016. If wage growth accelerates to cover higher inflation, the economy will do fine. With labor markets now exceptionally tight as baby boomers retire, for the first time in decades that is least a possibility. Also, the stronger dollar could keep goods inflation lower than we expected and falling food prices have been a surprisingly potent force in both helping consumers and keeping headline inflation manageable. While any gap between inflation and wages is not a good thing, the gap would need be a lot wider than we are seeing at the moment to trigger a recession. Generally, headline inflation needs to be close to 4% to trigger a recession. While we see a clear path in relatively short order, to 2.5%-3.0% inflation, a move to 4% doesn’t seem like the most likely case over the next year.


Inflation Experiences a Changing of the Guard
We used the table above to show that inflation rates by broad category tend to converge over time, as shown by the averages at the bottom of that table. Also interesting is that there has been a large shift in category data over the past year. Energy price changes that had been dropping at a rate of 17% a year ago are now falling at only 4% in the most recent year-over-year averaged data (on a single-month to single-month basis energy gained 0.9%, the first increase since 2014, all but assuring energy inflation in the months ahead). Food, on the other hand, continues to fall. While not as volatile as energy, food inflation has fallen from 1.6% a year ago to deflation of 0.2%. The food category carries a weight 3 times higher than energy, and hits a wider swath of consumers.


Goods Deflation Continues
Goods deflation, generally one of the lower inflationary categories because of the impact of imports, also remains below long-term averages at 0.6% deflation year over year. A strong dollar and an aging population that consumes fewer goods (and consumes more healthcare) are likely keep the pressure on the nonenergy goods category.
​Services Got a Little Worse Month to Month, but Stabilized Year Over Year
Services make up about 60% of the CPI and have been running hot for some time. They have moved up modestly from 2.7% to 3.1% over the past year, but are off their peak of 3.2%. This category is driven largely by owner-equivalent rent, real rents, and healthcare. We had hoped that the completion of many new apartment complexes would have helped put a lid on rents, but rents are still up 3.5%. Higher home price inflation, which likely helps determine owner-equivalent rents, isn't helping, either. At least healthcare took a bit of a breather, registering two months in a row of zero declines. Still, year-over-year medical services are up 4.1%. Though it goes in the goods bucket, drug price growth slowed for at least one month, but the year-over-year data is still at a whopping 5%.



by Donna Gordon on February 15th, 2017

​Annual Asset Flows

Looking at where investor money is going may provide useful insight into what’s happening in a financial market. The image below illustrates annual flows for U.S. open-end mutual funds and exchange-traded funds, divided by U.S. category group.
From 2009 to 2012, fixed-income funds received the great majority of money because investors were shying away from equities after the crisis. That trend switched in 2013 and 2014, as U.S.- and international-equity categories came back into favor and received strong inflows. In 2016, there was a drastic shift, with both equity categories losing assets and strong flows into fixed income and commodities, fueled by increased uncertainty in the wake of the January sell-off and strong returns from most bond categories.
​Emerging Markets Not So Sought-After in September

The diversified emerging-markets Morningstar Category has been receiving significant inflows for the past few months. In September, the MSCI Emerging Markets Index posted a 1.3% return. Flows into emerging-markets funds remained positive but diminished considerably from July and August, as illustrated in the chart.




Return (%) 
2016 YTD
S&P 500
7.8
MSCI EAFE
1.7
MSCI Emerging Markets
16.0


The annual meeting of the International Monetary Fund and the World Bank took place in Washington, D.C., on Oct. 7–9, 2016. While taking part in a panel discussion on emerging markets, central bankers observed that “emerging market economies are well prepared to handle any fallout from a Federal Reserve interest rate increase, in contrast to the situation in 2013, when they were caught off guard by currency volatility during the so-called taper tantrum.” The central bankers added that they now have “a sufficient buffer to deal with short-term, volatile capital flows.”
Investors should remain cautious, however, because emerging markets carry unique risks, and returns can be much more volatile than those of developed markets. Shocks that cause drops in developed-markets returns tend to amplify and hit emerging markets much harder.
​A Crash Course in Long-Term Care 

If you've helped an elderly friend or relative find and figure out how to pay for long-term care, or you've done so yourself, you likely confronted a bewildering maze of unfamiliar terms as well as extreme financial complexity.


What's the right type of care given the person's needs? What type of care is covered by Medicare? When does your private insurance--either health or long-term care insurance--pick up the slack? And what expenses must be paid out of your own coffers? Can a spouse hang on to any assets before Medicaid kicks in and provides coverage for long-term care needs?


Unfortunately, many people are navigating the long-term care maze at times when they're contending with other major challenges. Older individuals may be confronting declining physical health and/or mental faculties at the same time they're attempting to make important long-term care decisions. And because long-term care may also bring a loss of independence, contemplating it can cause emotional distress for both older individuals and their loved ones.


Rather than having to sort out long-term care on the fly, it helps to be pre-emptive. Get familiar with the various types of care, as well as the financial ramifications, before you actually need to put the information to use. This article explains the key terms and variables that consumers should be aware of when navigating long-term care.


Activities of Daily Living (ADLs): Basic activities that are used to measure a disabled or elderly individual's level of functioning. The key ADLs are bathing, dressing, eating, ambulating/transferring (moving from place to place, or from standing position to chair), grooming, and toileting.


Skilled Nursing Facility (sometimes called a SNF or 'Sniff'): A type of facility that provides skilled nursing care, usually medical care and/or rehabilitation services. Medicare covers, in full, the first 20 days of care in a skilled nursing facility following a qualifying hospital stay (defined as three days in a row in the hospital as an inpatient). For days 21-100 in a skilled nursing facility (again, following release from a qualifying hospital stay), you must pay a copayment (often covered by your supplemental health-insurance policy) while Medicare covers the remainder of the cost. For days 101 and beyond, Medicare does not cover the costs of care in a skilled nursing facility.


Nursing Home: A facility that helps individuals with the activities of daily living, including eating, bathing, and getting dressed. Nursing homes are also likely to coordinate and/or provide medical care for individuals who need it, but their central focus is to help residents with their daily lives. In contrast to care provided in a skilled nursing facility to people who have had a qualifying hospital stay, nursing-home care (sometimes called 'custodial care') is not covered by Medicare. Instead, costs are covered out of pocket, by long-term care insurance (for those who have such policies), or Medicaid for individuals with limited assets.


Assisted Living Facility (ALF): A type of facility geared toward people who need assistance with the activities of daily living but who do not need the type of extensive care provided in a nursing home. Most assisted living facilities, like nursing homes, help patients coordinate medical care, but providing medical care to sick individuals is not the central focus. Many ALFs now have locked 'memory care' units geared toward people with Alzheimer's disease or dementia. As with nursing homes, stays in ALFs are not covered by Medicare; instead, such care is covered out of pocket, by long-term care insurance (for those who have it), or Medicaid.


Continuous Care Retirement Community (CCRC): A type of community geared toward providing a gradation of care to older adults--from independent living to assisted living to nursing-home care. The goal of the CCRC is to help older individuals reside in the same community for the remainder of their lives. Such communities tend to be the most costly of all elder-care options, often requiring an upfront sum as well as monthly charges that will vary depending on the level of care the individual is receiving. As with nursing homes and assisted living facilities, most of the care provided within CCRCs is not covered by Medicare, unless it's medical care or skilled nursing care that is normally covered by Medicare (see 'Skilled Nursing Facility,' above). The financial arrangements of CCRCs can be devilishly complicated; this article delves into some of the particulars.


Custodial Care: Non-medical care provided to assist older adults with the activities of daily living. As a rule, custodial care alone is not covered by Medicare; instead, such costs must be covered out of pocket with long-term care insurance, or by Medicaid for eligible individuals.


Hospice Care: Care provided to individuals at the end of their lives; the focus is on keeping the patient comfortable rather than extending life. Such care may be provided at home, in the hospital, or in a skilled nursing facility. Hospice care is covered by Medicare if your doctor and the hospice director certify that you're terminally ill and have less than six months to live. To be covered by Medicare, hospice care cannot be delivered in conjunction with any curative treatment. This document provides more details on the interaction between hospice and Medicare.


Palliative Care: Care geared toward providing pain relief and emotional support to individuals with serious illnesses. In contrast to hospice care, which is for terminally ill patients, palliative care can be provided to individuals undergoing curative treatment. Medicare Part B may cover some of the prescriptions and treatments offered under the umbrella of palliative care.


Adult Day Services: Services, including social activities and assistance with activities of daily living, provided during the day to individuals who otherwise reside at home. Approximately half of the individuals who take part in adult day services have some form of dementia, according to the National Adult Day Services Association; thus, adult day services frequently focus on cognitive stimulation and memory training. Medicare may cover adult day services in certain limited instances, but generally does not.


Institutionalized Spouse: A spouse who has moved into a nursing home or other long-term care setting.


Community Spouse: A healthy spouse who remains in the community even after the other spouse has moved into a nursing home and requires Medicaid benefits.


Exempt (or Noncountable) Assets: Assets that can be owned by the institutionalized person without affecting Medicaid eligibility. Specific parameters depend on the state where you live, but exempt assets typically include $2,000 in cash, a vehicle, personal belongings, and household goods. In most states, a primary residence is also considered an exempt asset, even if an individual ends up moving into a nursing home, so long as a spouse or child lives there. The individual's equity in the home cannot exceed certain limits, usually $552,000 in most states. Moreover, the state can attempt to recover any money paid out through Medicaid when the owner dies and the home is sold.


Countable Assets: Assets that are counted when determining Medicaid eligibility. The specific parameters depend on the state in which you reside, but countable assets usually include checking and savings accounts, retirement-plan assets, and additional vehicles (in addition to the one vehicle that is considered exempt).


Community Spouse Resource Allowance (CSRA): The amount of assets that the community (in other words, healthy) spouse can retain, even as the institutionalized spouse qualifies for Medicaid. Those assets typically include a house, a car, and financial assets equal to one half of the couple's assets, subject to minimum and maximum thresholds. (The maximum allowable figure was recently $119,220.)


Lookback Period: The five-year period prior to an individual's application for Medicaid benefits. If assets were transferred to children or any other individuals during this five-year period, it will trigger a period of ineligibility for Medicaid benefits. The length of the penalty period is calculated by dividing the amount of the transfer by the average monthly nursing-home costs in the region or state where the individual resides. The goal of this provision is to keep otherwise-wealthy individuals from transferring assets to qualify for long-term care coverage under Medicaid.


Elimination Period: Similar to a deductible for other types of insurance, this is the amount of time during which one must pay long-term care costs out of pocket before insurance kicks in. The longer the elimination period, the lower the premiums will be.


Benefit Triggers: Triggers used by insurers to determine whether a long-term care policy will begin paying benefits. These triggers typically depend on the individual's ability to complete a certain number of activities of daily living.





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