Investors working with The Cairns Murray Thomson Group of Baird. No Increase for Social Security Benefits in 2016

Transcription

1 The Cairns Murray Thomson Group 4th Quarter 2015 Planning Points To: Investors working with The Cairns Murray Thomson Group of Baird From: Michael R. Murray, CFP, CRC Vice President Senior Investment Consultant Private Wealth Management Welcome to Planning Points, our quarterly newsletter designed to educate, entertain and Improve Your Financial Planning. IN THIS ISSUE No Increase for Social Security Benefits in 2016 Sequence of Return Risk Life Insurance (Types of Products) Robert W. Baird & Co. Inc. does not offer tax or legal advice. Main: (262) Securities offered through Robert W. Baird & Co. Inc. Toll Free: (800)

2 Quotes of the Quarter: It has been my experience that folks who have no vices have very few virtues. Abraham Lincoln I cannot endure to waste anything as precious as autumn sunshine by staying in the house. attributed to author Nathaniel Hawthorne A computer once beat me at chess, but it was no match for me at kick boxing. Emo Philips Robert W. Baird & Co. Inc. does not offer tax or legal advice. Main: (262) Securities offered through Robert W. Baird & Co. Inc. Toll Free: (800)

3 It has been a splendid Fall season weather wise in Wisconsin and our Packers are dominating the Central Division. The financial markets are even cooperating again after fighting off a case of China Syndrome! This quarter I draw your attention to three items. First, an update on Social Security for 2016; second, a powerful illustration of why managing investment risk is a primary focus for us, and finally I ve included an excellent overview of life insurance product types and riders commonly available. Our team works with outstanding insurance specialists who, as part of our network, give our clients access to the best products in the marketplace as solutions for their individual needs. Please let us know if we can help you review your insurance needs. Have a delightful Thanksgiving Holiday! Sincerely, The Cairns Murray Thomson Group Charles S. Cairns Michael R. Murray, CFP, CRC Gregory J. Thomson, CMT Senior Vice President Vice President Vice President Senior Investment Consultant Senior Investment Consultant Private Investment Manager Private Wealth Management Private Wealth Management Private Wealth Management ccairns@rwbaird.com mmurray@rwbaird.com gthomson@rwbaird.com Dee M. Warpechowski Client Specialist dwarpechowski@rwbaird.com Chris A. Rossman Client Specialist crossman@rwbaird.com Certified Financial Planner Board of Standards Inc. owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER and federally registered CFP (with flame design) in the U.S., which awards to individuals who successfully complete CFP Board s initial and ongoing certification requirements. Robert W. Baird & Co. Inc. does not offer tax or legal advice. Main: (262) Securities offered through Robert W. Baird & Co. Inc. Toll Free: (800)

4 Private Wealth Management Products & Services No Increase for Social Security Benefits in 2016 Since 1975, Social Security benefits have been adjusted each year to keep pace with increases in the cost-of-living. For the third time in the past eight years, however, the Social Security Administration has announced there will be no inflation adjustment to benefit amounts for The Department of Health and Human Services has not yet announced if there will be an increase in Medicare premiums for The Hold Harmless Provision in the Social Security law would protect approximately 70% of Social Security and Medicare recipients from seeing a decrease in net Social Security benefit payments if Medicare premiums do increase. Cost-of-living adjustments are measured from the beginning of the fourth quarter of the previous year through the end of the third quarter of the current year, and are based on the CPI for Urban Wage Earners and Clerical Workers (CPI-W). As determined by the Bureau of Labor Statistics, there was no increase in the CPI-W from the third quarter of 2014 to the third quarter of In order for benefits to increase in 2017, the CPI-W will need to increase above its mark from the end of the third quarter of Benefits were increased by 1.7% in 2015, which was slightly higher than the 1.5% increase in 2014 and equal to the inflation increase in Because Social Security benefits will not increase, there are several other Social Securityrelated thresholds that will also remain the same in % 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Annual Social Security COLAs* * Source: Social Security Online, The maximum amount of wages subject to Social Security tax will remain at $118,500 for The earnings limit for workers who are younger than full retirement age (age 66 for people born in 1943 through 1954) and collecting Social Security will remain at $15,720. There is a deduction of $1 in benefits for each $2 earned over $15,720. Lastly, the earnings limit for people turning 66 in 2016 will remain at $41,880. There is a deduction of $1 in benefits for each $3 earned over $41,880 until the month the worker turns age 66. There is no limit on earnings for workers who are full retirement age or older for the entire year Robert W. Baird & Co. Incorporated. Member FINRA & SIPC. Robert W. Baird & Co. 777 East Wisconsin Avenue, Milwaukee, Wisconsin RW-BAIRD. First Use: 10/2015. Page 1 of 1

5 Private Wealth Management Products & Services Sequence of Return Risk The risk of receiving lower or negative returns early in a period when withdrawals are made from an investment portfolio is known as sequence of return risk. If you are taking withdrawals from your portfolio, the order or the sequence of investment returns can significantly impact your portfolios overall value. Consider the following hypothetical investment scenarios for Mr. Green and Mr. Brown: Mr. Green and Mr. Brown both started with a $1 million investment portfolio at age 65. Both averaged a 6% annual return that grows to the same value after 25 years, but they experience their annual returns in an inverse order from each other. See the chart below demonstrating their different paths to their ending values. "Up" Market Mr. Green "Down" Market Mr. Brown Annual Annual Age Return Year End Value Return Year End Value 65 $1,000,000 $1,000, % $1,050,000-25% $750, % $1,344,000-14% $645, % $1,639,680-10% $580, % $1,557,696 16% $673, % $1,869,235 21% $814, % $2,224,390 5% $855, % $2,736,000-16% $718, % $2,982,240 8% $776, % $3,459,398 14% $884, % $4,255,059 24% $1,097, % $5,191,172 14% $1,250, % $3,841,468 5% $1,313, % $3,265,247-15% $1,116, % $3,428,510-26% $826, % $3,908,501 22% $1,007, % $4,846,541 23% $1,239, % $5,525,057 16% $1,437, % $5,967,062 9% $1,567, % $5,012,332 23% $1,927, % $5,262,949 19% $2,294, % $6,368,168 20% $2,752, % $7,387,075-5% $2,615, % $6,648,367 22% $3,190, % $5,717,596 28% $4,083, % $4,288,197 5% $4,288,197 Average Return 6% 6% In this case, the sequence of investment returns had no bearing on portfolio values because the average annual rate of return was the same and no distributions were taken from the account. Page 1 of 2

6 Sequence of Return Risk, continued. Now let s look at how the sequence of returns can impact a portfolio when taking distributions: Mr. Green and Mr. Brown still start with an initial $1 million investment portfolio. But in this example, they start taking 5% withdrawals (of the initial value) beginning immediately at age 65. Mr. Green begins taking withdrawals in an up market, giving him the optimal environment to maintain his portfolio value long-term. Unfortunately for Mr. Brown, he starts taking income in a down market and depletes his entire portfolio before reaching age 83. "Up" Market Mr. Green "Down" Market Mr. Brown Age 5% Annual Withdrawals Annual Return Year End Value 5% Annual Withdrawals Annual Return Year End Value 65 $1,000,000 $1,000, $50,000 5% $1,000,000 $50,000-25% $700, $50,000 28% $1,230,000 $50,000-14% $552, $50,000 22% $1,450,600 $50,000-10% $446, $50,000-5% $1,328,070 $50,000 16% $468, $50,000 20% $1,543,684 $50,000 21% $516, $50,000 19% $1,786,984 $50,000 5% $492, $50,000 23% $2,147,990 $50,000-16% $363, $50,000 9% $2,291,309 $50,000 8% $342, $50,000 16% $2,607,919 $50,000 14% $340, $50,000 23% $3,157,740 $50,000 24% $372, $50,000 22% $3,802,443 $50,000 14% $374, $50,000-26% $2,763,808 $50,000 5% $343, $50,000-15% $2,299,237 $50,000-15% $241, $50,000 5% $2,364,199 $50,000-26% $129, $50,000 14% $2,645,186 $50,000 22% $107, $50,000 24% $3,230,031 $50,000 23% $82, $50,000 14% $3,632,235 $50,000 16% $45, $50,000 8% $3,872,814 $50,000 9% $0 84 $50,000-16% $3,203,164 $50,000 23% $0 85 $50,000 5% $3,313,322 $50,000 19% $0 86 $50,000 21% $3,959,120 $50,000 20% $0 87 $50,000 16% $4,542,579 $50,000-5% $0 88 $50,000-10% $4,038,321 $50,000 22% $0 89 $50,000-14% $3,422,956 $50,000 28% $0 90 $50,000-25% $2,517,217 $50,000 5% $0 Average Return 6% 6% The sequence of investment returns can significantly impact your investment portfolio when taking distributions. It is important to manage this risk in retirement by maintaining sound asset allocation strategies, product diversification, and an understanding of how best to respond to changing market conditions. Your Baird Financial Advisor can assist you in planning for retirement and managing these risks for the long haul Robert W. Baird & Co. Incorporated. Member NYSE & SIPC. Robert W. Baird & Co. 777 East Wisconsin Avenue, Milwaukee, Wisconsin RW-BAIRD. Page 2 of 2

7 Private Wealth Management Products & Services Life Insurance Types of Products Life insurance is a contract between a life insurance carrier and a policyowner whereby the carrier agrees to pay beneficiaries a predetermined dollar amount upon the death of the insured person(s) subject to the contract terms. The primary reason for purchasing life insurance is to provide dependents with financial protection in the event of an untimely death; however, numerous other applications exist such as: estate planning, business continuation and succession planning, retirement planning, and other wealth transfer utilizations. Furthermore, certain types of life insurance may provide living benefits, where cash values grow on a tax-deferred basis and may be accessed without incurring income tax liability. 1 There are two basic forms of life insurance, term and permanent, which may be further sub-divided as detailed below. The appropriate product is based on your needs and objectives determined by your Baird Financial Advisor during the financial planning process. Term Life Insurance Term insurance provides death benefit coverage only during the term of the contract and does not accumulate cash value. Coverage terminates at the end of the contract term or earlier if premium payments cease. Most term insurance policies may be converted to permanent insurance with the same company for a specified period of time without providing evidence of insurability. Premiums for term insurance are the least expensive of all life insurance policies. Common Types of Term Life Insurance Annual Renewable Term (ART) Death benefit remains level Premiums increase each year on the each policy anniversary date Policy renews annually, if premiums are paid, up to a specified age Level Premium Term Death benefit and premiums remain level for the entire term period Terms typically range from years Policies typically move to ART at the end of the policy term period Return of Premium Term (ROP Term) Death benefit and premiums remain level for the entire term period Terms typically range from years Provides a schedule for a return of premiums paid with a full refund at the end of the term 2014 Robert W. Baird & Co. Incorporated. Member NYSE & SIPC. Robert W. Baird & Co. 777 East Wisconsin Avenue, Milwaukee, Wisconsin RW-BAIRD. Reference Number: Page 1 of 4

8 Life Insurance: Types of Products, continued. Consider Term Insurance if You: Are concerned about affordability (lower premiums allow you to buy higher coverage) Have a specific temporary need to cover (mortgage, car payment, college costs, etc.) Don t have a need to build cash value Have permanent insurance to cover your other needs Permanent Life Insurance Permanent life insurance is intended to provide a death benefit for the life of the insured, subject to the terms, design and performance of the contract. A key difference between term insurance and permanent insurance is the tax-deferred cash value element offered by permanent insurance. When properly structured, cash values may be accessed on a tax-advantaged basis through the use of withdrawals and/or loans. 1 Common Types of Permanent Life Insurance Whole Life Insurance Premiums required for the life of the insured or for a specified period of time (e.g. 10 years or age 65) Cash value grows at a rate that will enable it to equal the death benefit at policy maturity Participating policies return a portion of the premium as a non-guaranteed dividend Universal Life Insurance Premiums may be flexible Cash value grows at a fixed interest rate, typically declared annually at anniversary, with a contractuallyguaranteed minimum Some emphasize guaranteed death benefit protection and de-emphasize cash value Variable Universal Life Insurance 2 Premiums may be flexible (like universal life) Cash value and, in most cases, death benefit are based on the performance of mutual fund-like investment options (sub-accounts) chosen by you and/or your advisor Some provide limited or full death benefit guarantees regardless of sub-account performance Survivorship Life Insurance One policy covering two lives and based on joint life expectancy Lower premiums than separate policies on each insured Proceeds are payable upon the death of the second insured May come in the form of universal life, variable universal life or whole life Consider Permanent Insurance if You: Need long-term protection against life s uncertainties Desire the potential for tax-deferred cash accumulation Are funding an estate or business succession plan Page 2 of 4

9 Life Insurance: Types of Products, continued. Life Insurance Riders When you buy a life insurance policy, you will probably have the opportunity to select one or more riders to add to the policy. Riders are amendments that expand or restrict a policy s benefits, typically for an additional premium. Some of the more common riders are: Accidental Death and Dismemberment Pays an additional benefit for death resulting from an accident or for a specific injury such as the loss of both legs or both arms, or blindness in both eyes Child Rider Provides death benefit protection for children of the insured Children born or legally adopted after the policy is issued are also covered Coverage typically purchased in units (e.g. $1,000 per unit) Coverage typically continues until age 21 Chronic Illness Rider Accelerates the death benefit to help pay for costs associated with a chronic illness Eligibility requires a physician to certify that the illness is likely to last the rest of the insured s life May not be marketed or presented as a long-term care rider Generally benefits paid from the Chronic Illness rider reduce the death benefit dollar-for-dollar Any portion of the death benefit not used will be paid to the beneficiaries as a death benefit Typically there is no residual death benefit in excess of the original death benefit amount Long-Term Care (LTC) Rider Accelerates the death benefit to help pay for the costs of long-term care services Eligibility requires that the insured be unable to perform at least two of six Activities of Daily Living (ADLs) without substantial help for at least 90 days or diagnosed with a cognitive impairment Generally benefits paid from the LTC rider reduce the death benefit dollar-for-dollar Any portion of the death benefit not used will be paid to the beneficiaries as a death benefit Maximum monthly benefits according to the IRS per diem limits apply Typically has a residual death benefit of 10-25% of the original specified amount Waiver of Premium Premium is waived if you become disabled or seriously ill Usually requires disability for a specified amount of time, such as six months before benefit takes effect Page 3 of 4

10 Life Insurance: Types of Products, continued. This material is provided courtesy of Baird and its Financial Advisors. It contains references to concepts that have legal, accounting and tax implications. It is not intended as legal, accounting or tax advice. Consult your own attorney and/or accountant for advice regarding your particular situation. Death benefit proceeds are generally received federal income tax free as provided in Internal Revenue Code Section 101(a). There are some exceptions to this general rule, including certain changes in ownership and payment of any additional interest at death. 1 Both loans and withdrawals from a permanent life insurance policy may be subject to penalties and fees and, along with any accrued loan interest, will reduce the policy s account value and death benefit. Depending upon the performance of the policy, the account value may be worth more or less than the original amount invested in the policy. Assuming a policy is not a Modified Endowment Contract (MEC), loans are free from current Federal taxation and withdrawals are taxed only to the extent that they exceed the policyowner s basis in the policy. Distributions from MEC s are subject to Federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax, with certain exceptions. 2 Investors should carefully consider the investment objectives, risks, charges, and expenses of variable universal life product and the underlying investment options before investing. This and other information can be found in the prospectus or summary prospectus for the variable universal life product and the prospectuses or summary prospectuses for the underlying investment options, which can be obtained by contacting a Baird Financial Advisor. Please read them carefully before you invest. Page 4 of 4