Shoot the fireworks and uncork the champagne, this current bull phase is now the second longest in history at 107 months!
Our course everybody celebrates number two right?
We’re #2! We’re #2!
I am sure you heard this chant at the last Florida vs. Florida State game, right? (sarcasm)
Think about it! The longest expansion in history was 120 months from March 1991 to March 2001. This current expansion has just slipped into second place in the history books at 107 months (106 months was the previous second best).
How much longer can it goes is a great question to ask?
However, the Gambler’s Fallacy (not that this is gambling after all its investing) is assuming previous results will change future results. As an example, “I have run this 50 times, so it must be likely to drop now.”
And it really feels like it should be that way. But it's not any more likely on the 50th run or the 500th run.
Are markets random as in the flipping of a coin or are they as much about the underlying fundamentals of a given time period or market?
One could argue either way!
I would personally argue it doesn’t matter. You take what the market wants to give you whether that is 120+ months and a new record long expansion cycle or 107 months and then straight off a cliff.
Forecasting is a losers game!
Instead, we propose you should be ready to react to confirmation that something has changed.
This is the fundimental tenant of trend following, an investment strategy woven into every portfolio we run at InTrust Advisors.
Trend following is agnostic as to the direction of the markets, up or down. In fact this chart could just as easily be inverted for the trend follower.
If you remember back to the last major bear market the thing that crippled most investors was indecision. Do I stay in or get out?
Most investors just froze and did nothing and rode the market to its lows. Yes, it recovered, but it took five long years to do so!
A great many trend followers instead had 30-50% positive performance years in 2007-2008.
How would that have affected your portfolio?
We have solutions to give you or your client’s a great chance to continue making money as long this market wants to keep setting endurance records.
At the same time, we have the tools and experience to keep them from the worst of what may come at any flip of the coin!
Why not schedule an appointment with us today?
On October 3rd, 1913, President Woodrow Wilson signed into law the Underwood-Simmons Act, creating what would be the first modern U.S. income tax.
The tax legislation was only 16 pages and imposed a base tax rate of just 1%. The actual tax code and regulations were just 400 pages in total. The highest tax rate was set at just 7% for individuals earning more than $500,000 or about $12.6 million in today’s dollars.
At that time, the tax was not meant to be permanent but was to pay for the costs of World War I. In fact, the tax rates were cut some four times during the 1920s.
Today, tax code and regulations are more than 70,000 pages in length! It has so many rules and code sections you would need a tax program just to remember them all. In fact, most CPAs today rely a great deal on such software to navigate the ever-increasing code.
It was rather ironic recently when House and Senate Republicans decided that tax cuts and simplification would be a good thing!
The results of their laborious process have been bills from both houses to slash tax rates for both individuals and corporations.
These bills are now in reconciliation, a legislative process of the United States Congress that allows expedited passage of certain budgetary legislation on spending, revenues, and the federal debt limit with a simple majority vote in both the House (218 votes) and Senate (51 votes). The two bills will be combined into a single workable bill that can go to the President for his signature.
The Senate bill alone is 479 pages in length. The House version of the bill is 429 pages in length. Ironically even the tax simplification bills are longer than the original tax code and regulations from 1913.
Both House and Senate versions of the bill reduce tax rates for individual and corporate
taxpayers with subtle differences in the number of tax brackets and income thresholds for each tax bracket. They also either raise the estate tax exemption or phase out the estate tax all together.
Both bills lower the corporate tax rates substantially for both corporate and pass-through entities. The exact brackets, thresholds and rules are beyond the scope of this analysis, but each bill is different enough that it has many anxious to see what the reconciliation process produces.
However, if you stand back and you look objectively at this process, as I am sure the rest of the world has been able to do, this process has been nothing but pure theatre.
Not only did Congress not simplify the tax code, but in all likelihood, they lengthened it. We used to joke when I was in Public Accounting that whenever Congress tried to simplify the code, it just meant more work for us!
A great example of how this process really simplified nothing is how special interest groups managed to keep mortgage interest deductions, charitable and other itemized deductions in the tax code, while at the same time, Congress raised the Standard Deduction so fewer people would be able to deduct such costs.
Although they raised the Standard Deduction to roughly $24,000 in both versions of the tax bill for Married Filing Joint taxpayers, they eliminated Personal Exemptions. For example, my family of four stands to deduct $16,200 in Personal Exemptions in 2017 that in 2018 will now part of the Standard Deduction.
If you add, the 2017 Standard Deduction of $12,700 for married couples filing jointly to the Personal Exemptions and deduct $24,000, my family actually stands to lose $4,900 in deductions in 2018.
In the past, we have also benefited from using itemized deductions to cut our tax bill, but with the new higher Standard Deduction, that is now unlikely in most years. This means I am likely to have higher taxable income in the future before applying the lower tax rates.
Just a quick back of the napkin calculation based on 2017 projected income did show I
stand to possibly save $300 - $500 in taxes based solely on the lower tax rates and brackets, but it was nowhere near the $2,200 that the Tax Foundation estimated I could save.
Now, I am a past Certified Public Accountant so these kinds of calculations are quite simple for me, but how many of us have my kind of tax knowledge?
Even with all my past knowledge, there is much in the tax code that I either do not know or would be hard pressed to apply.
Truth be told, why do we need this kind complexity?
What’s wrong with a 400-page tax code (and regulations) like in 1913 where I would guess most taxpayers understood most of its provisions. Unlike now where you need a team of professionals just to navigate the annual filing requirements.
Think about how much more productive we could be if we were just focused on providing the best service or product possible and not spending and an estimated 8.9 billion hours and $409 billion as a country complying with the tax code, according to the Tax Foundation?
As much as we can dream of a slimmer tax code, the reality is that the length of the federal tax code and regulations have grown steadily over the past sixty years.
In 1955, the tax code and regulations were a mere 1.4 million words in length. Since then, they have grown at a pace of about 144,500 words per year. Where today the federal tax code is roughly six times as long as it was in 1955, while federal tax regulations are about 2.5 times as long as you can see in the chart below.
Washington just doesn’t seem to have the will to actually simplify our tax system and code. It is obvious to most that special interest groups and corporate lobbyists control a large portion of our elected officials and thus what does or does not happen to our tax code.
Obviously, the only thing one can do is fight fire with fire!
That is dig into this mammoth tax code and find the advantages that allow you to prosper while less savvy persons pay more than they probably need to or should!
This is something we help our clients do every day. In fact, I issued a Tax Planning Alert just a few days ago to our affluent clients on a couple of simple suggestions that struck us about the recently passed House and Senate bills.
When these House and Senate bills are reconciled and signed into law, I believe there will even be more opportunities to save valuable tax dollars just by arranging your business or investment affairs in such a way as to minimize future tax drag.
As famed author Robert Kiyosaki likes to say, “it’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
We can help you keep more, make it work harder for you and preserve it for multiple generations! Schedule your free consultation today!
In Part I of The Unexpected Downside of Longevity, we alluded to a study by Harvard that showed that between 1992 and 2008, life expectancy for people aged 65 increased from 17.5 years to 18.8 years. This means that the average American can now expect to live much longer than their parents due to the wonders of modern medicine.
We outlined three unexpected side effects that this increased longevity created:
The bottom line is not only will junior be waiting longer to inherit assets, but he or she is likely inheriting much less. Exhausting one's assets in retirement is a growing concern for many in America.
In Part II, we will look at ways to sustain your savings and income for your lifetime and for future generations.
Let's start first with a few ideas to sustain your savings and income over your increased lifespan:
First, as mentioned in Part I, long-term care (LTC) is something 70% of the population will need going forward but is a cost that only 30% of the population insures against. It is costly to be in a skilled nursing facility with costs running upwards of $100,000 per year in many parts of the country. With an average stay is skilled nursing home stay of 835 days, according to LifeHappens.org, this cost can quickly destroy a nest egg.
The simple solution to this is to purchase long-term care insurance but many do not because it is costly and it is a "use it or lose it" cost and rightly or wrongly many do not like to purchase insurance they may never use.
The solution is permanent life insurance with a living benefit rider. This is life insurance that builds cash value that can be used for future medical costs or even lifestyle needs in retirement. If it is not used for medical or lifestyle, it will become a benefit for ones heirs. It is cost effective and most people need some form of life insurance anyways!
Second, is a suggestion that might seem obvious but is ignored by much of the population and that is to work longer and wait on retirement. Did you know the average retirement age for Americans is 63?
This means the average person cannot even wait till 65 or the current full retirement age for most Americans for full social security of 67 years. Just continuing to work to age 70 will do two things: 1) it will allow you to save longer and delay drawing on accumulated assets, and 2) it will allow you to delay taking social security.
Most people don't know that for each year you delay taking social security, it adds 8% to your benefit. That is a great investment return with no or limited downside!
Third, if you have an existing annuity and enough assets for retirement, consider converting part or all of that annuity in a tax free exchange to annuity with a continuation of benefits rider. In many cases you will get a magnified LTC benefit AND in certain policies will get to pay those future LTC costs with annuity funds that come out tax free. This works well for those with very low or zero cost basis annuities.
Next, here are a few ideas to on how to get the younger generation some of their inheritance earlier, while they can still enjoy it. Obviously, this only applies to those families who have plenty for their retirement and financial needs.
First, is an absolute "no-brainer" for affluent families. However, I see very few affluent families fully utilizing this option. The tax law currently allows an individual to gift $14,000 without gift tax to as many persons as he or she would like per year.
This means a couple can gift up to $28,000 per year to as many heirs as they would like annually. Over a series of years, this can be a pretty big deal to those heirs.
The best news here is this idea is something you can do right now and is not dependent on whether Congress or the President simplify the tax code (and potentially the estate tax regulations) or not. It still makes sense!
Second, the tax law allows you to pay for educational costs and medical costs for an heir if paid directly to the provider and this is on top of the $14,000 per annum per person.
The good news is that payments for medical insurance also qualify for this exclusion. Except in rare circumstances, you cannot deduct the medical expenses you pay for another person, and they cannot deduct the expenses either, since they did not pay the expenses. Thus, careful consideration should be given regarding whether you make the gift directly to the individual, subject to the $14,000 annual limit – which would allow the recipient of your generosity to pay the medical expenses and claim the medical deduction on his or her tax return – or whether you pay the medical expenses directly.
Educational payments can be for any level of schooling including elementary, secondary and post-secondary. Unfortunately, the cost of room and board aren't eligible as direct payments, nor are contributions to qualified tuition programs (such as Section 529 plans). When you pay the qualified post-secondary education tuition for another individual, it does not mean – as is usually the case for medical expenses – that someone cannot benefit tax wise. Tax law says that whoever claims the exemption for the student is entitled to the American Opportunity Credit or Lifetime Learning Credit for higher education expenses if they otherwise qualify.
The Take Away
You are going to be impacted by this trend of increasing longevity. Living longer is great, but it will likely lead to many more Americas who flat out run out of resources in retirement.
A great way to overcome this hurdle is to make sure you are prepared by making sure they are taking advantage of all available saving options, such as maximizing contributions to a 401(k) or some other retirement plan. Additionally, that you have some form of LTC insurance as you approach your 60s.
Probably most importantly you need a financial plan to navigate all those years in retirement. This is someplace where we can help you, click here to find out more.