What is perfect tax planning when it comes to tax returns?

Michael Hoeflinger, CFP®
Wealth Manager

It’s that time of year again when millions of Americans file their tax returns before the deadline, hoping for a tax refund of some sort. But is that really the best strategy from a financial planning standpoint? The best tax planning is to have a tax balance of zero when it’s time to file, which means you would neither owe anything nor receive a refund. This would indicate that you paid exactly the amount of tax liability owed for that particular year.

This tax season will be different for filers under the Tax Cuts and Jobs Act that went into effect in 2018. Some of the major changes from the new law include a higher standard deduction ($12,000 for single filers and $24,000 for married persons filing jointly), the elimination of personal exemptions, new limits placed on itemized deductions and a new $10,000 cap on state and local deductions. The law also changed the higher standard deduction for the elderly, the blind and those with a disability. Furthermore, the IRS and Treasury department released new withholding tables, which means that the guidelines your employer follows in order to deduct the appropriate amount of income tax from your paycheck have changed.

  2017 2018-2025
Standard Deductions    
Single $6,350 $12,000
Married filing jointly $12,700 $24,000
Elderly or blind

(single and not a surviving spouse)

Add’l $1,550 Add’l $1,600

(both over age 65 and married filing jointly

Add’l $2,500 Add’l $2,600
Personal exemption $4,050 per family member Eliminated

What can you do if you are surprised after filing your 2018 tax return? First, take a look at your tax withholding from your employer and think about what you can do to adjust it. This could be as simple as reviewing your W-4 form with your employer alongside the withholding tables to help best determine your income tax load. For example, if you claim too many allowances on your W-4, your employer will withhold less tax from your paycheck, but you may owe the following year. If you claim zero allowances, you may overpay and get a refund come tax time, but you will take home less pay per month as a result of the taxes. If you need less of your income to be taxed, make sure you are contributing more to your employer’s retirement plan as well as any other tax-sheltered accounts (assuming you are not already at the maximum allowed). If you are a 1099 employee, you may need to evaluate how much you are paying in taxes each quarter to make sure you get the liability just right.

Tax planning is a critical component of your overall financial planning, and making the necessary adjustments along the way will help you over both the short and long term.

Feel free to contact Michael Hoeflinger with any questions by phone 305.448.8882 ext. 241 or email: MHoeflinger@Evensky.com

REFERENCE: www.irs.gov

For more information on financial planning visit our website at www.Evensky.com

My Own “Jiminy Cricket”

Brett Horowitz

Brett Horowitz, CFP®, AIF® Principal, Wealth Manager

Whether you are working with a doctor, lawyer, or financial professional, you need to be aware of who is watching over you. It’s not enough to simply assume that they are on your side. When someone gives us recommendations, we want them to be like the Jiminy Cricket character in Pinocchio—a trustworthy person who is looking out for us and helping us make good decisions. Let’s look at an example to help frame this discussion.

You go to the doctor’s office complaining of muscle pain, and the doctor offers you a choice of medications. He hands you Medicine A and you walk out the door, feeling comfortable that he gave you the right medication that will make you feel better in no time. Why are you so at ease with the doctor’s recommendations? The short answer is that you trust the doctor. You believe that they will follow the Hippocratic Oath, which says in summary “above all, do no harm.” You have come to expect that they are providing you with advice that is in your, the patient’s, best interest. What if I told you that the financial profession doesn’t work that way? Surprised? Confused? If you’re like most Americans, you’re not alone.

According to a recent study by the RAND Corporation, commissioned by the SEC, most Americans have trouble distinguishing between advisors and brokers. As the study’s authors note, “Our analysis confirmed findings from previous studies and from our interviews with stakeholders: Investors had difficulty distinguishing among industry professionals and perceiving the web of relationships among service providers.” When a financial professional can have dozens of different titles, ranging from investment advisor to wealth manager to financial planner, it’s not hard to see why consumers are confused. One of the major differences comes down to a popular buzzword in the industry that every investor should understand: the term FIDUCIARY.

What is a fiduciary?

Quite frankly, one of the first questions you should ask your investment professional is this: Are you a fiduciary and do you acknowledge this in writing? (If you’re already working with someone and are unsure of their status, it’s a good idea to call them up and ask them.) A financial advisor held to a fiduciary standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated, elimination of any significant conflicts of interest to the extent possible, and full disclosure of any remaining significant conflicts of interest. In other words, the financial advisor must place their client’s interests first.

Our website specifically states, “As a fee-only financial advisor, our revenues derive solely from fees paid directly to us by our clients. We have no potential conflicts associated with commissions or proprietary products.”

Our firm charges fees based on the amount of money that we are managing for our clients (i.e., assets under management). If you are a client of our firm and are interested in paying off a mortgage to free yourself of the debt, we acknowledge the potential conflict of interest that exists in you withdrawing money from the portfolio and the resulting drop in our fees, but we will help you make the right decision. In fact, over the last few years, we have helped many clients pay off their mortgage. It’s with this peace of mind that they can sleep comfortably knowing that we are on their side.

Let’s say that you just found yourself the recipient of an inheritance or a large bonus check and are thinking about possibly investing it in your portfolio. Without this fiduciary relationship, the answer would be simple: invest everything, because the more you invest, the more fees the firm will reap. But that’s not how we answer the question. We would want to know whether you expect to make any significant withdrawals from the portfolio during the next five years. We do not believe any investor should invest money in the market if they expect to need it back within the next five years. If you’re likely to need funds annually to supplement other outside income, we would make sure that you have enough cash set aside in case the markets go down so that you don’t have to sell anything in the next year and you know exactly where your grocery money will come from. Once again, the decision is not how to maximize our short-term profits; instead we are looking to make smart decisions that will benefit our clients.

On the other hand, brokers and other commission-based advisors are held to a “suitability” standard, which states that they must recommend a product that is suitable for the client, but that may not necessarily be the best recommendation for that person. For example, you’ve probably seen situations where a representative from XYZ Company recommends buying the XYZ Bond Fund, the XYZ Large Cap Growth Fund, and the XYZ International Fund. Is it really likely that XYZ Company could have the best mutual fund in every category?

Fees, fees everywhere

Some firms charge an annual rate, some charge based on assets under management, and some build the fees into the stock and bond transactions. None of these are inherently unfair as long as you know exactly how the advisor is getting paid, whether the fees are reasonable, and what their duty is to you (i.e., business standard or fiduciary). There may also be additional fees—such as mutual fund expenses, transaction fees, account opening or closing fees, and such—so it’s important to know how much those fees are and who receives those fees. At our firm, we use no-load mutual funds and exchange-traded funds. As there are no commissions involved, these investments have relatively low expense ratios, and fees are paid directly to the fund companies. There are small transaction fees as well, and these fees are paid directly to the custodian. We are paid only by our clients, who receive a bill each quarter with the calculation and amount of those fees. Performance is calculated net of fees where possible so that it’s in our best interest and the client’s best interest to limit all fees as much as possible.

You should always be aware of conflicts of interest as they pertain to fees. Will buying the mutual fund, annuity, or life insurance contract primarily benefit you or the person selling the product? The type of legalese you might look for is something to the effect of “Your account is a brokerage account and not an advisory account. Our interest may not be the same as yours … We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.” (Italics are my emphasis.)

For example, a representative at the XYZ firm may recommend a high-yielding bond to their client. What the client doesn’t know is that the firm is trying desperately to sell the bond to everyone it can so that it doesn’t have to keep the bond on its books due to expected losses (I have taken this example from the book Liar’s Poker by Michael Lewis, a nonfiction book describing his experience as a bond salesman in the 1980s). Who is the best prospect to sell the bond to? Their client, of course. They can do this because as long as the client asked for income in their portfolio, this investment would be suitable.

None of this by itself implies that there is anything wrong with compensation by way of commission. The bottom line is that you, as the client, need to understand how the advisor is getting paid, whether they are being held to a fiduciary or suitability standard, and whether these details are in writing. If in doubt, simply ask your advisor if they will sign a statement similar to the following:

  • In our relationship I will always place your interest first.
  • I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
  • I will not mislead and will provide you with conspicuous, full, and fair disclosures of all important facts.
  • I will avoid conflicts of interest.
  • I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

It’s time that we break down the confusion surrounding investment professionals so that the public understands who their Jiminy Cricket is.

Feel free to contact Brett Horowitz with any questions by phone 305.448.8882 ext. 216 or email: BHorowitz@Evensky.com

For more information on financial planning visit our website at www.Evensky.com



Unexpected Expenses When Buying a Home

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

Buying a new home can be an expensive process, and if you are not careful, you can end up paying for items you don’t need or have already paid for.

Loan Costs

When applying for a mortgage and receiving quotes from various mortgage companies, make sure you are comparing apples to apples. You will want to find out the average closing costs in your state or county and compare them to what you are being offered. There are some costs which are fixed, such as recording fees and transfer taxes, but there are other costs you can shop around for, such as title and insurance fees. These numbers can vary quite widely depending on the lender.

If you get a quote for a fixed-rate mortgage and have it locked or remove escrow, make sure you don’t see points added to your closing statement that you didn’t agree to. Paying points may not be worth it unless you plan to keep the loan for a long time. Points do lower your interest rate and your monthly payment, but it takes some time to break even.

For example, assume the monthly payment difference between paying 1.125 in points vs. no points is $64 per month, which is $768 per year. If it costs roughly $6,000 to pay points, it will take you around eight years to break even. Paying points may make sense over the long term provided you plan on living in the home indefinitely or possibly keeping it and renting it out in the future. If you think you are going to sell and move in less than eight years, paying points is more expensive.

You probably should avoid escrow if you are disciplined about setting aside funds. Paying escrow gives the bank extra funds to hold on to for you to pay taxes and insurance when you could be earning some interest on those funds in the interim.

Check your closing statement in detail and make sure everything you have already paid is included in the calculation. You may be surprised to find that the numbers sometimes don’t add up if you plug all the line items into a spreadsheet. You may save yourself from overpaying if you happen to find a mistake. You will sometimes be asked to pay a good-faith deposit when moving forward with a lender. This deposit is usually applied toward the appraisal or other fees, so make sure you are not charged twice.

Quick mortgage checklist:

  1. Compare interest rates and closing costs being offered. Are points being paid? What is the percentage difference between variable rates and fixed rates?
  2. Make sure lenders do not tack on points after they have locked your rate (unless you intentionally want to pay points and agreed to this in advance).
  3. Make sure any items you have prepaid are not included again in the closing costs.
  4. Make sure the lender does not add escrow unless you want it.
  5. The buyer has the right to use their own attorney or title company – you may be able to lower title costs if you shop around.
  6. The lender may ask you to pay a good-faith deposit, which they usually use for appraisal, etc. Make sure you get that back as a credit.
  7. Check your property tax calculation against the property appraiser’s website or property tax bill.


Homeowners associations

If the home is covered by a homeowners association, read the condo documents to make sure there are no rules and restrictions that you cannot live with, such as rules against pets (if you have them) or alterations you are planning to make. Pay attention to the association’s financial statements, since this will give you clues on potential assessments, whether there are enough reserves for large repairs, or if you will have to find a lump sum when the roof needs to be replaced or the house painted. You will also want to find out if there are any outstanding lawsuits or liabilities against the association.

Inspection and property disclosure

You are not obligated to use the inspector recommended by the realtor, title company, or lender. It is usually best to shop around for someone you trust who is independent from all the other parties that have interest in the deal. Some inspectors just go through the motions and miss checking the smaller problems, which can end up costing you money later on. You want to make sure the appliances are all in working order and that you are aware of when the air conditioner and water heater, etc., were last replaced or serviced. The inspector should check all the electricals and plumbing to make sure everything is in working order. It is advisable to verify that all permits have been closed out and that new construction meets code if the previous owner made any major renovations.

Homeowners insurance

Insurance is sometimes included in the mortgage estimate and is usually quoted higher than you would actually pay on your own. Shop around and don’t assume the number they state is what you will ultimately have to pay. You will need to purchase homeowners insurance prior to closing. Find out if the association covers any of the insurance costs, as this may be included in your maintenance fees. This lowers your costs of insurance, since you only have to insure contents and fixtures.

Homestead and property taxes

Property taxes are usually paid up once the sale goes through. Closing agents make estimates on the property taxes, which may be higher than the actual taxes stated on the county property appraiser’s website. Check the closing statement to make sure the taxes match what needs to be paid and that you are not overpaying. You should only be responsible for the portion of the year you own the home. For example, if you close on October 31, you should only be responsible for the days in November and December. If taxes are $8,500 for the year, then a rough calculation would be $8,500/365 = $23.28 per day x 61 days = $1,420.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@Evensky.com

For more information on financial planning visit our website at www.Evensky.com



Harold Evensky’s NewsLetter Vol. 12, No. 1 – January 2019

Harold Evensky CFP® , AIF®

Dear Reader:


From an interview at the end of 2018 with Greg Davis, Vanguard’s Chief Investment Officer:

“The bull market in stocks that began in many parts of the world in early 2009 is nearly a decade old. Should investors adjust their expectations?

“Based on our fair-valuation metrics, we expect globally diversified stock portfolios to deliver annualized returns in the 4.5%–6.5% range over the next ten years. That’s roughly half of their long-term historical average return. And it’s roughly a third of their annualized gains since the depths of the financial crisis a decade ago. So, yes, some investors probably are expecting too much from stocks.

“Below our headline expectations for global stock portfolios, which assume dollar-denominated investments, are somewhat higher forecasts for non-U.S. markets and somewhat lower forecasts for the U.S. market. We’re a little more optimistic about stocks outside the U.S. because their valuations are lower.”

And one more observation from an interview with WealthManagement.com:

WM: Do active managers have an edge in volatile markets?

GD: That’s always been the claim, but we haven’t seen the data really bear that out.

His observations are consistent with our expectations.

Vanguard: Our CIO talks expectations, interest rates, and blockchain

WealthManagement.com: Inside ETFs Q&A: Vanguard’s Gregory Davis


SEC’s latest on fiduciary: Advisers can customize individual client agreements

Disclosure and informed consent can limit services, allow third party pay

“When Securities and Exchange Commission chairman Jay Clayton asserted at a congressional hearing last week that investment advisers can ‘contract around’ their obligation to act in a client’s best interests, it caused some head scratching in the adviser community.

In response to being pressed by Sen. Elizabeth Warren, D-Mass., about the SEC’s investment advice reform proposal, Mr. Clayton said: ‘Advisers are allowed to contract around this standard; it’s not well known. This is something we want people to understand.’”

InvestmentNews: SEC’s latest on fiduciary: Advisers can customize individual client agreements

A head-scratcher indeed. All the more reason to be sure your financial advisor signs the OATH. See below in the “FOR SHAME” note for a copy.


What makes this proposal even more incredible are the results of a RAND study commissioned by the SEC Office of the Investor Advocate and published in its 2018 Report on Activities. These were some of their observations:

To understand investor understanding of the term “best interest,” we asked respondents “What do you think it means if a financial professional is required to act in your “best interest?” We offered respondents eight attributes to which they could respond yes, no, or I don’t know. Panel 3 of the infographic on the previous page summarizes three of the responses we want to highlight for the individuals that reported currently using a financial professional for investment advice. Current advice users overwhelmingly believed (86 percent) that a professional required to act in their best interest monitors their accounts on an ongoing basis. This is somewhat of a concern because the best interest standard, as proposed, will apply to broker-dealers who are not required to provide this service as part of their typical offerings. The next two questions relate to cost and conflicts of interest. Seventy-three percent of current advice users believed that a professional acting in their best interest “will help me to choose the lowest cost products, all else being equal.” Sixty-one percent indicated that the professional would “avoid taking higher compensation for selling me a product when a similar but less costly product is available.”

From Panel 3:

That is, most didn’t have a clue.

Asked if financial professionals acting in an investor’s “best interest” would be required to:

  • Avoid taking higher compensation for selling one product when a similar but less costly one is available one is available …………………………………………61% said yes
  • Help them choose the lowest cost products, all else being equal ……73% said yes
  • Monitor their accounts on an ongoing basis …………………………….86% said yes




From my friend Peter



My friend the math professor says don’t try and use this PIN.

“You have an integral divided by a square root, where it appears the square root is not part of the integrand. I don’t see how this can provide a PIN; do you? Even if it were meant to be part of the integrand, there is still something wrong, because x^2-3x+2=(x-2)(x-1).”


Some thoughtful charts prepared by my associate Michael


I checked with my little brother (the Economics Professor at Syracuse) as he has the same porous memory as I do and we agreed we must be brilliant.

Open News: Neuroscientists Say Your Forgetfulness Is A Sign of Extraordinary Intelligence


“The U.S. Just Became a Net Oil Exporter for the First Time in 75 Years”

“‘We are becoming the dominant energy power in the world,’ said Michael Lynch, president of Strategic Energy & Economic Research. ‘But, because the change is gradual over time, I don’t think it’s going to cause a huge revolution, but you do have to think that OPEC is going to have to take that into account when they think about cutting.’

“The shale revolution has transformed oil wildcatters into billionaires and the U.S. into the world’s largest petroleum producer, surpassing Russia and Saudi Arabia. The power of OPEC has been diminished, undercutting one of the major geopolitical forces of the last half century.”

Bloomberg: The U.S. Just Became a Net Oil Exporter for the First Time in 75 Years


Top dog names for 2018 from NPR

FEMALES                               MALES

#1       Bella                                       Max

#2       Lucy                                       Charlie

#3       Luna                                       Cooper

#4       Daisy                                     Buddy

#5       Lola                                        Jack

NPR: Origins Of The Top Dog Names Of 2018: Pop Culture, Brunch, And Baby Names



New York Times, Friday, December 7, 4:38 a.m.

“The arrest over the weekend of a top executive at Huawei, the Chinese telecommunications giant, has complicated President Trump’s trade talks with Beijing and drawn sharp protests from the Chinese government….

Side effects: The news contributed to whiplash for global markets on Thursday, but things seem more stable today.” [Emphasis mine]

thestreet, Friday, December 7

  BREAKING NEWS  11:08 am
  Dow’s Losses Accelerate, Blue-Chip Index Tumbles More Than 300 Points

Dow Falls 500 Points as Earlier Rally Fizzles     CLOSING – DOW off 558.72



From Snaps



From WealthManagement.com

“Today, you can invest in the Vanguard 500 Index Fund for as low as 4 basis points. But some legacy index funds—which track the exact same index—charge much, much higher fees than that, and investment gurus say they are simply unjustifiable.”

“The Rydex S&P 500 Index Fund—often considered the poster child of high-fee index funds—charges a net expense ratio of 2.33 percent. That includes a management fee of 75 basis points and 1 percent 12b-1 fee, a reward to the advisor for selling the fund. But there are more than a dozen similar, plain vanilla funds—also tracking the S&P—with net expense ratios over 1 percent. Federated Investors, State Farm and Invesco are just a few providers.”

Note: Data as of Oct. 31; these are widely held, market-cap-weighted, long only funds that track the S&P 500. It does not include funds that go short or use leverage.

It seems Barron’s reached the same conclusion in “Getting Fleeced on Fund Fees.”

“Investors might think index funds are a great way to capture market returns. Most index funds charge practically nothing: One of the largest, Vanguard Total Stock, charges just 0.04% a year; the average stock index fund’s expense ratio is down to 0.09%, less than a dime for every $100 invested. That has dropped from 0.27% in 2000, according to the Investment Company Institute, the fund industry’s lobbying group.

“Yet the industry’s method of calculating fees, on an asset-weighted basis, obscures a surprising fact: Hundreds of billions of dollars are sitting in share classes of index mutual funds that charge well above 1% in annual fees. Many of these funds do nothing more than track broad market benchmarks like the S&P 500. Yet their fees are on par with actively managed funds and, in some cases, even exceed them, topping 1.6% a year.”

“Another pool of high-fee funds sits in variable annuities, insurance contracts that hold stocks, bonds, or other financial assets in “sub-accounts.” Industry-wide, these sub-accounts hold more than $106 billion in index funds with expense ratios averaging 0.59%, according to data from Morningstar. That’s partly because these funds don’t have to compete against low-cost versions that investors may buy outside the insurance wrapper, says Todd Cipperman, founder of Cipperman Compliance Services, a financial consulting firm based in Wayne, Pa.”

“Barron’s found hundreds of funds held in variable annuities with sharply higher fees than what investors would pay for identical funds outside annuity wrappers. The Rydex Variable Nasdaq 100 fund is a popular choice, showing up in sub-accounts issued by carriers such as Nationwide, Principal, and Prudential, according to Morningstar. The fund has an expense ratio of 1.66%, well above the 0.2% for Invesco QQQ Trust (QQQ), an ETF with the identical portfolio. A spokesman for Nationwide said the firm ‘does not set nor establish the expense ratios of third-party funds.’ Principal declined to comment on the expense ratio of the Nasdaq fund. Prudential did not reply to requests for comment.”

WealthManagement.com: The Persistence of High-Fee Index Funds

Barron’s: Investors Might Be Paying Too Much for These Index Funds

Wonder why I keep pitching the Committee for the Fiduciary Standard’s Fiduciary Oath?


Seems like I included a bum link in my last NewsLetter; so I’m trying again:


If you have a few minutes to kill, this is a link to an interview I did at the Financial Planning Annual Convention: CLICK HERE


For our golfer friends and clients

  1. Cabot Cliffs, Cape Breton, Canada
  2. Emirates Golf Club, Dubai
  3. Highland Course At Primland Resort, Meadows of Dan, Va.
  4. Cape Kidnappers Golf Course, Hawke’s Bay, New Zealand

Here’s an example of these courses:

  1. Leopard Creek Country Club, Mpumalanga, South Africa
  2. Yas Links, Abu Dhabi, United Arab Emirates
  3. Sandy Lane, St. James, Barbados
  4. Pebble Beach Golf Links, Pebble Beach, Calif.
  5. El Camaleón Riviera Maya Golf Club, Playa del Carmen, Mexico
  6. The Blackstone Course at Mission Hills, Hainan, China

FA: 10 Golf Courses You Must Visit Before You Die


Hot off the press from FinancialAdvisor IQ

“Wirehouse Merrill Lynch is dropping the top fees charged to its advisory platform clients for second time in two years…

“The maximum fees such clients will pay effective Jan. 1 will be 2%, according to FundFire. The current fee structure, effective since February 2017, sets the maximum at 2.2% for accounts with less than $5 million and 2% for those with more than $5 million, FundFire writes, citing Merrill Lynch’s March ADV.”

No comment.

FinancialAdvisorIQ: Merrill Lynch Lowers Max Advisory Fee to 2%



I’m sure parents of students of these schools are very pleased.

  1. University of Rhode Island, South Kingstown, R.I., Enrollment: 15,092,
  2. Colgate University, Hamilton, N.Y., Enrollment: 2,873
  3. University of Wisconsin-Madison, Madison, Wisc., Enrollment: 32,196
  4. University of California – Santa Barbara, Santa Barbara, Calif., Enrollment: 22,186
  5. Lehigh University, Bethlehem, Pa., Enrollment: 5,075
  6. Bucknell University, Lewisburg, Pa., Enrollment: 3,611
  7. Syracuse University, Syracuse, N.Y., Enrollment: 15,252
  8. Tulane University, New Orleans, Enrollment: 6,571
  9. West Virginia University, Morgantown, Va., Enrollment: 22,504
  10. University of Delaware, Newark, Del., Enrollment: 18,144

 FA: The Nation’s Top 10 ‘Party School’ Colleges


“Byron R. Wien, vice chairman in the Private Wealth Solutions group at Blackstone, issued his list of ‘Ten Surprises for 2019’ on Thursday, and it paints a rosier picture than some investors might expect, considering recent market volatility and economic signals.

“This is the 34th year Byron has released his list, which contains his views on economic, financial and political events for the coming year. Byron defines a ‘surprise’ as an event that the average investor would give a one-in-three chance of happening, but which he believes has a better than 50-50 chance of becoming a reality.”

Wien’s surprises for 2019, in his exact words, are as follows:

“Partly because of no further rate increases by the Federal Reserve and more attractive valuations as a result of the market decline at the end of 2018, the S&P 500 gains 15 percent for the year. Rallies and corrections occur but improved earnings enable equities to move higher in a reasonably benign interest-rate environment.”

FA: Byron Wien ‘Surprises’ With Rosy Predictions for 2019



From S&P Dow Jones Indices:

ThinkTank: Does Past Performance Matter? The Persistence Scorecard


From the recent S&P 500 SPIVA® Institutional Scorecard:

Similar to findings in previous scorecards, more mutual fund managers underperformed than their institutional counterparts for all equity categories on a net-of-fees basis. · For example, over the past 10 years in the large-cap equity space, 89.51% of mutual fund managers and 58.78% of institutional accounts underperformed the S&P 500® on a net-of-fees basis. … · Similarly, during the same period in the mid-cap space, 96.48% (85.37%) of mutual funds and 78.57% (62.98%) of institutional accounts underperformed the S&P MidCap 400® on a net (gross) basis. · Small-cap equity remains a challenging space for active managers. Over 80% of mutual funds underperformed the S&P SmallCap 600® (net- and gross-of-fees), while 81.61% (61.45%) of institutional accounts underperformed on a net (gross) basis in the past 10 years. The findings in the small-cap space help to dispel the myth that small-cap equity is an inefficient asset class that is best accessed via active management.

S&P Dow Jones Indicies: SPIVA® Institutional Scorecard: How Much Do Fees Affect the Active Versus Passive Debate?


From my bright friend, Leon. There are nine questions.

These are not trick questions. They are straight questions with straight answers.

  • Name the one sport in which neither the spectators nor the participants know the score or the leader until the contest ends.
  • What famous North American landmark is constantly moving backward?
  • Of all vegetables, only two can live to produce on their own for several growing seasons. All other vegetables must be replanted every year. What are the only two perennial vegetables?
  • What fruit has its seeds on the outside?
  • In many liquor stores, you can buy pear brandy, with a real pear inside the bottle. The pear is whole and ripe, and the bottle is genuine; it hasn’t been cut in any way. How did the pear get inside the bottle?
  • Only three words in standard English begin with the letters “dw” and they are all common words. Name two of them.
  • There are 14 punctuation marks in English grammar. Can you name at least half of them?
  • Name the only vegetable or fruit that is never sold frozen, canned, processed, cooked, or in any other form except fresh.
  • Name 6 or more things that you can wear on your feet beginning with the letter ‘S.’Answers to Quiz:
  • The one sport in which neither the spectators nor the participants know the score or the leader until the contest ends: boxing.
  • North American landmark constantly moving backward: Niagara Falls. The rim is worn down about two and a half feet each year because of the millions of gallons of water that rush over it every minute.
  • Only two vegetables can live to produce on their own for several growing seasons: asparagus and rhubarb.
  • The fruit with its seeds on the outside: strawberry.
  • How did the pear get inside the brandy bottle? It grew inside the bottle. The bottles are placed over pear buds when they are small, and are wired in place on the tree. The bottle is left in place for the entire growing season. When the pears are ripe, they are snipped off at the stems.
  • Three English words beginning with “dw”: dwarf, dwell, and dwindle.
  • Fourteen punctuation marks in English grammar: period, comma, colon, semicolon, dash, hyphen, apostrophe, question mark, exclamation point, quotation mark, brackets, parenthesis, braces, and ellipses.
  • The only vegetable or fruit never sold frozen, canned, processed, cooked, or in any other form but fresh: Lettuce.
  • Six or more things you can wear on your feet beginning with “s”: shoes, socks, sandals, sneakers, slippers, skis, skates, snowshoes, stockings, stilts. Don’t send it back to me. I’ve already failed it once.


From JP Morgan’s most excellent Market Insights:


NPR: Woodstock Will Return This Summer, For Its 50th Anniversary


Ancient termite megapolis as large as Britian found in Brazil

CNN travel: Ancient termite megapolis as large as Britain found in Brazil



Many Americans Think Proof Of Bigfoot Is More Likely Than A Comfortable Retirement

“It’s no wonder one in three Americans believe they have a better chance of learning the mythical creature Chewbacca is real than retiring comfortably, given their current dearth of savings and retirement planning. Many simply aren’t saving anything and have no plan to start in 2019. Fewer than half (47%) of working Americans in their 40s and 50s with household incomes from $40,000 to $99,999 said retirement was one of their top three savings priorities for 2019, according to a new AARP-Ad Council survey. Just 21 percent said saving for retirement is their top priority for the new year.”

FA: Many Americans Think Proof Of Bigfoot Is More Likely Than A Comfortable Retirement



A little perspective from Barron’s (12/28/2018):

Barron’s: Sizing Up the Market’s Recent Volatility


Winners of the Epson International Pano Award contest from my friend Leon. Lots more at:

DailyMail.com: Lightning striking the Grand Canyon and a magical dive into an abyss: The stunning winners of the panoramic photography awards revealed.

Zoom the page up for more dramatic views:




A distraught senior citizen phoned her doctor’s office. “Is it true,” she wanted to know, “that the medication you prescribed has to be taken for the rest of my life?”

“Yes, I’m afraid so,” the doctor told her. There was a moment of silence before the senior lady replied, “I’m wondering, then, just how serious is my condition because this prescription is marked ‘NO REFILLS.’”


An older gentleman was on the operating table awaiting surgery and he insisted that his son, a renowned surgeon, perform the operation. As he was about to get the anesthesia, he asked to speak to his son.


“Yes, Dad, what is it?”


“Don’t be nervous, son; do your best, and just remember, if it doesn’t go well, if something happens to me, your mother is going to come and live with you and your wife….”





The older we get, the fewer things seem worth waiting in line for.




When you are dissatisfied and would like to go back to youth, think of Algebra.


Now, if you feel this doesn’t apply to you, stick around awhile … it will!


I graduated from high school in 1960. Here are some sobering facts from that year:

Average income………………….….$5,620/year

Senator’s income…………………….$22,500/year

New home…………………………….$12,700

Gas……………………………………..31 cents/gallon

Movie ticket…………………………….51 cents

Minimum wage………………………..$1.00


Best Picture……………………………”The Apartment”

Best Actor………………………………Burt Lancaster, “Elmer Gantry”

Best Actress……………………………Elizabeth Taylor, “Butterfield 8”


Top Songs

“It’s Now or Never,” Elvis Presley

“I’m Sorry,” Brenda Lee

“Running Bear,” Johnny Preston

“Teen Angel,” Mark Dinning

“The Twist,” Chubby Checker

“Alley Oop,” Hollywood Argyles


Those were the good old days!



Jack Bogle, founder of Vanguard and a beautiful person just passed away. Below is a wonderful tribute by Ron Lieber in the New York Times.

The New York Times: The Things John Bogle Taught Us: Humility, Ethics and Simplicity


Hope you enjoyed this issue, and I look forward to “seeing you” again.

Harold Evensky


Evensky & Katz / Foldes Financial Wealth Management


Business owners, if you offer a company 401(k), you should know the difference between 3(21) and 3(38) fiduciary services.

Marcos A. Segrera, CFP®
Financial Advisor

In today’s evolving legal, regulatory, and litigation environments, it is vital for qualified retirement plan fiduciaries to understand their roles and responsibilities. The additional time and money needed to cover fiduciary duty may be hard to come by for business owners, who likely prefer to spend those resources growing their businesses rather than learning and worrying about the nuances of a corporate retirement plan. As lawsuits targeting 401(k) plan sponsors proliferate, the need and demand for investment fiduciary services has grown.

The services fall into two distinct levels: 3(21) and 3(38). These numbers refer to specific sections of the Employment Retirement Income Security Act (ERISA) of 1974. The goal of this post is to address the differences and benefits of 3(21) and 3(38) fiduciary services and highlight some of the common areas in which 401(k) lawsuits fall.

To begin, you should be familiar with two fiduciary terms: plan sponsor and plan fiduciary.

The plan sponsor is the company that provides the plan, including 401(k), profit sharing, cash balance, etc., for the benefit of the owners and employees. By default, the company is also a plan fiduciary.

The plan fiduciary is any individual with discretionary authority or responsibility for the administration of the plan, anyone who provides investment advice to the plan for compensation, or anyone who has any authority or responsibility to do so. These individuals are therefore subject to fiduciary responsibilities. Plan fiduciaries include plan trustees, plan administrators, and members of a plan’s investment committee. Business owners are often listed as a trustee, administrator, etc.; therefore, they are plan fiduciaries.

We find three main areas of concern where plan participants and the Department of Labor (DOL), which regulates ERISA plans, brings forth a lawsuit:

  1. Inappropriate investment choices
  2. Excessive fees
  3. Self-dealing

Both 3(21) and 3(38) fiduciary services can help mitigate these issues.

With regard to investment choices, ERISA does not specify which investments are appropriate or inappropriate. Often, the finding for or against a plan’s fiduciaries does not hinge as much on results—i.e., whether investment returns were too low or fees were too high—but whether a prudent process was followed and documented as well as whether the decisions made were in the participants’ best interests. The plan fiduciaries need to demonstrate that the final menu of investment options was determined using prudent decision-making that has been consistent over time. Issues can also arise when plan fiduciaries include the employer’s own stock within the plan investments.

Outside the obvious, ERISA does not specify much when it comes to fees, but it has been the major source of lawsuits during the recent surge in litigation. Again, the emphasis is on showing that a prudent process was used to select investment options and ensuring that the plan pays no more than reasonable fees for needed services. For example, ensuring that your plan offers institutional share classes of mutual funds versus the more expensive retail share class is a simple way to improve investment costs. However, many plan fiduciaries find themselves with retail share classes in their menu of options when an equivalent institutional share class is available. It is important to consistently review your current menu against what is available for your plan. In addition, the costs of plan operation, including third-party administrators, record-keepers, etc., fall under the duty to control plan costs to those reasonable and necessary.

Self-dealing refers to an instance in which the plan fiduciary acts in their own best interests rather than serving the plan and its participants. Self-dealing only accounts for a small share of total lawsuits. Most violations arise from actions taken by very large companies that include proprietary investment products in their plans. Companies are not prohibited from having proprietary products included in their 401(k)s, but issues arise when a plan fiduciary encourages participants to invest in those products. Self-dealing also plays a role in determining which expenses can be paid by the plan, i.e., essentially by the employees, versus being paid directly by the employer. The DOL divides fees into two categories: administrative expenses that are payable from plan assets and settlor expenses that cannot be paid by plan assets.

For more information regarding the causes and consequences of 401(k) lawsuits, you can refer to this study by the Center for Retirement Research.

How can 3(21) and 3(38) fiduciary services support plan fiduciaries? They help by allowing the plan fiduciaries to share in the investment liability—3(21)—or delegate the liability—3(38).

A 3(21) advisor-fiduciary is a co-fiduciary role that provides counsel and guidance. An advisor provides investment advice to the plan sponsor with respect to the investment options available on the 401(k) menu. The advisor only makes recommendations for which it has no legal responsibility because a 3(21) fiduciary has no ERISA-defined “discretion.” The plan fiduciaries retain the discretion to accept or reject the advice. Since the plan fiduciaries are co-decision makers they hold co-responsibility, and generally “the buck stops” with the plan fiduciaries. The investment advisor shares in the liability but does not assume the full liability pertaining to investment decisions. The 3(21) services add a level of investment expertise for an employer and may cost less – than a 3(38) fiduciary, but it does not remove ultimate liability from the plan fiduciaries, including the business owner.

A 3(38) advisor-fiduciary manages the investments on a discretionary basis and holds responsibility for selecting, monitoring, and replacing investments. The plan sponsor enjoys less liability in this relationship because the fiduciary risk is delegated to the advisor. The plan fiduciaries retain the responsibility of selecting and monitoring the advisor. Under ERISA, as long as the plan fiduciaries prudently monitor the investment manager, the plan sponsor will not be liable for the acts and omissions of the investment manager. These services may cost more than the 3(21) services, but they obviously provide greater protection for plan fiduciaries.

Do you know if your company-sponsored retirement plan has 3(21) or 3(38) fiduciary services in place? Unfortunately, many business owners and plan fiduciaries do not know the answer to this question, and they may assume they have a 3(38) relationship by hiring a firm to run the plan; however, simply hiring an advisor does not mean they provide 3(38) services. If you don’t know, now is the time to have a conversation with your plan provider or plan investment advisor. For most employers, the additional plan cost is well worth the protections they provide.

Feel free to contact Marcos A. Segrera with any questions by phone 305.448.8882 ext. 212 or email: MSegrera@Evensky.com 








For more information on financial planning visit our website at www.Evensky.com

The Family Information Organizer

Josh Mungavin

Josh Mungavin CFP®, CRC® Principal, Wealth Manager

“There is in the act of preparing, the moment you start caring.” —Winston Churchill

A longtime friend named Dana called me one day because she needed help. Her father had just passed away and she didn’t know what to do. Although I’ve helped clients’ children through similar situations many times, something occurred to me as I saw her left lost and alone with a scattered paper trail and no instructions to help her through: Having all essential information in one place makes a challenging time easier and leaves a legacy of respect and security. This book was created to help your family members navigate loss while also making sure you have everything you need in times of emergency or natural disaster. Receiving this book gives you a good reason to begin gathering your information now, rather than wait for a crisis to act.

Before helping Dana, I had taken our firm’s emergency planning benefit for granted because we have records of family finances at our fingertips. Our clients get an elevated level of care because we work with the professionals in their lives and have made the investment in tools, employees, and education necessary to create an objective and tailored plan to manage risks, simplify financial lives, maintain wealth, and provide for heirs. Most people don’t have that level of care, and while this is not a replacement for services we provide, it is our attempt to help our clients and those who don’t have the support we offer. This book was created to help you take care of your family through emergencies by having all essential information in one place (extra pages, which can be duplicated, are at the back of the document to provide enough space for all of your information).

For the book as a fillable PDF visit the following link:  www.EK-FF.com/Organizer.pdf 

For the free eBook click one of the following links:



Feel free to contact Josh Mungavin with any questions by phone 305.448.8882 ext. 219 or email: Josh@Evensky.com 

For more information on financial planning visit our website at www.EK-FF.com.



NewsLetter Vol. 11, No. 7 – December 2018

Harold Evensky CFP® , AIF®

Dear Reader:



For active managers. From the S&P DOW Jones SPIVA Scorecard:

Overall performance of active equity funds relative to their respective benchmarks over the medium term also improved, although the majority still underperformed their benchmarks. Over the five-year period, 76.49% of large-cap managers, 81.74% of mid-cap managers, and 92.90% of small-cap managers lagged their respective benchmarks. Similarly, over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.




In billions of notes, how much cash was in circulation in 2017?

$1        12.1

$2        1.2

$5        3.0

$10      2.0

$20      9.1

$50      1.7

$100    12.5

$100 bills as a percentage of total cash: 78%

There are 36 $100 bills in circulation for every man, woman, and child in the United States.

Where are the $100 bills?

  • $80 billion in domestic depository institutions
  • $453 billion with domestic businesses and individuals
  • $1.07 trillion held abroad!




From Deena’s office:

Great Minds Discuss Ideas

Average Minds Discuss Events

Small Minds Discuss People



Some basic but wise advice from The Bogleheads’ Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk, by Taylor Larimore, via my friend Alex:

  1. A 100% stock portfolio can be dangerous.
  2. Believing a broker is your friend can be dangerous.
  3. Avoid the lure of individual stocks.
  4. Past performance does not forecast future performance.
  5. Investment newsletters are a waste of money, and market-timing doesn’t work.
  6. Past performance does not forecast future performance (some advice requires repeating).
  7. Avoid expensive stockbrokers and their hidden fees.
  8. Buying high and selling low is a losing strategy.

The Boglehead Philosophy

  1. Develop a workable plan.
  2. Invest early and often.
  3. Never bear too much or too little risk.
  4. Diversify.
  5. Never try to time the market.
  6. Use index funds when possible.
  7. Keep costs low.
  8. Minimize taxes.
  9. Invest with simplicity.
  10. Stay the course.




Most dairy farmers don’t bottle and sell directly to grocery stores. They work with regional dairy plants, which act as middlemen. You can see what dairy bottled your milk. Just grab a gallon and look at the code!

Here’s what to do:

  • Find the secret code—usually located near the expiration date. It looks like: 01-12345 or 01-02.
  • Pull up Where Is My Milk From (http://whereismymilkfrom.com/#) and type in the code to see where your milk was bottled.




The title above is not mine; it is the heading of an article by Evan Simonoff, my friend and the editor of Financial Advisor magazine. It seems Cramer’s poor performance isn’t his fault but everyone else’s (although readers of my Newsletter will know I don’t necessarily disagree with Evan’s characterization of Mr. Cramer). From the article:

One doesn’t have to be Isaac Newton to realize that when a security goes vertical like some tech and credit card stocks have for almost this entire, extended bull market, they can also go the other way. Momentum stocks have been experiencing some tough times over the last five weeks. After 10 years of sensational performance, many think they were due for a major correction.

But Jim Cramer of Mad Money fame penned a piece Thursday in which he seems convinced that some of his favorite stocks, notably Amazon, Visa and Mastercard, are trading like “Mexican jumping beans” all because of evil “voyeuristic ETFs” that are “completely hidden.”

So which ETF is the most serious culprit ruining Cramer’s life? It is iShares Edge MSCI USA Momentum Factor ETF (MTUM). Incidentally, I suspect Cramer’s mood is not in a better state this week with the Dow down more than 600 points.

Apparently, MTUM is one of several “totally abusive ETFs out there that really do unlevel the playing field and make a mockery of the whole business,” he wrote.

So who is he calling morons and doofuses? It’s the “moron managers flitting all over the place, the kind Warren Buffett calls out as expensive doofuses,” who are constantly engaging in the risk-on, risk-off trades that always appear to poop on Cramer’s parade. And their current instrument is MTUM.

MTUM may be one of many vehicles raining on the parade, but it’s likely there are many other far more powerful algorithmic strategies making momentum investors miserable. In recent weeks, wizards like AQR’s Cliff Asness have sent apologies to investors talking about their underwhelming investment performance in recent weeks [see “Hope Springs Eternal” later in the Newsletter].




From CBS News:

Tough Retirement Realities for Baby Boomers

The vast majority of older working Americans don’t have sufficient savings to retire full-time at age 65 with their pre-retirement standard of living. That’s one of the sobering conclusions from the recent Sightlines report issued by the Stanford Center on Longevity (SCL).

As a result, the report noted, workers approaching retirement will either need to work beyond age 65, reduce their standard of living, or do some combination of the two. This should cause some soul-searching among older workers, their families, and their employers…According to the SCL report, almost one-third (30 percent) of them have saved nothing toward retirement.




From my friend Leon:

  • More people live in New York City than in 40 of the 50 states.
  • The word “Pennsylvania” is misspelled on the Liberty Bell.
  • There is enough water in Lake Superior to cover all of North and South America in one foot of water.
  • In 1872, Russia sold Alaska to the United States for about 2 cents per acre [about $25 at 5%].
  • It would take you more than 400 years to spend a night in all of Las Vegas’s hotel rooms.
  • There is enough concrete in the Hoover Dam to build a two-lane highway from San Francisco to New York City.
  • Kansas produces enough wheat each year to feed everyone in the world for about two weeks.
  • The Library of Congress contains approximately 838 miles of bookshelves—long enough to stretch from Houston to Chicago.
  • The entire Denver International Airport is twice the size of Manhattan.
  • A highway in Lancaster, California, plays the “William Tell Overture” as you drive over it, thanks to some well-placed grooves in the road.
  • The total length of Idaho’s rivers could stretch across the United states about 40 times.
  • The one-woman town of Monowi, Nebraska, is the only officially incorporated municipality with a population of 1. The sole 83-year-old resident is the city’s mayor, librarian, and bartender.
  • The number of bourbon barrels in Kentucky outnumbers the state’s population by more than two million.



An excellent interview with Dan Berkowitz, an investment analyst with Vanguard Investment Strategy Group:

“Active or passive? What investors and advisors need to consider”

You often hear that actively managed funds tend to outperform in bear markets. Is that true, and can you speak to some of the misconceptions around fund performance?

Dan Berkowitz: Yes, this one has come up increasingly so, given where equity and fixed income valuations are these days. It’s a natural question. And it’s a common assumption that active managers as a group provide a better degree of downside protection in poorly performing market environments, or bear market environments, whether through a greater allocation to cash or through portfolio management skill. And there certainly are strategies in the active and index universe that are designed to provide a degree of downside protection.

But when we look at active managers again as a group, we just don’t see that they provide, at a high level, a degree of downside protection.




From my BFF Patti—the first one is her theme song:

  • A true Southerner knows you don’t scream obscenities at little old ladies who drive 30 MPH on the freeway. You just say, “Bless her sweet little heart.”
  • There is no magazine named “Northern Living” for good reason. There ain’t nobody interested in moving up there, so nobody would buy the magazine!
  • Southerners know everybody’s first name: Honey, Darlin’, Shugah.
  • Only a Southerner knows the difference between a hissie fit and a conniption fit, and that you don’t “HAVE” them, you “PITCH” them.
  • Only a Southerner can show or point out to you the general direction of “yonder.”
  • Only a Southerner knows exactly how long “directly” is, as in: “Going to town, be back directly.”
  • Only Southerners grow up knowing the difference between “right near” and “a right far piece.” They also know that “just down the road” can be 1 mile or 20.
  • Only a Southerner both knows and understands the difference between a redneck, a good ol’ boy, and po’ white trash.
  • And to those of you who are still having a hard time understanding all this Southern stuff, bless your hearts, I hear they’re fixin’ to have classes on Southernness as a second language!

Now, Shugah, send this to someone who was raised in the South or wish they had a ‘been! If you’re a Northern transplant, bless your heart—fake it. We know you got here as fast as you could.



Some recent market prognostications:

March 2013

Welcome, 2016: The Coming End of the 16-Year Bear Market

Two well-regarded forecasters, the Leuthold Group and Jeremy Grantham of GMO, both see low single digit returns from stocks over the next 7 years from current levels.

Could still be, but we’re 5¾ years into the 7 years, and the annual total return has been 14%. To meet an annualized 6% return, the market loss will have to annualize at –14% until March 2020.


December 2013

Dow is up more than 5% five consecutive years now. A sixth such year has not happened before in history. A 5-year bull trend only occurred once before, in the 1990s, and was followed by 3 down years. Russell 2k rallies of similar size and duration to 2013’s (excluding accelerations from major bear lows) are shown below. In each case all the gains were given back the following year…

To sum up, from a pure statistical perspective, removing any notion of the bigger picture, the probability for 2014 is at best a flat year for equities with a significant drawdown on the way, and at worst a significant down year. Stats are just a guide, but we see united predictions across a range of measures, drawn together at the top of the page.

Yet the bullish momentum of the market and “this time is different” thinking (Fed trumps all, equities need revaluing due to suppressed bonds and cash yields) are making for widespread complacency about (and dismissal of) the parallels…

Whilst we should not overly rely on any one indicator or discipline, it’s the collective case that gives me such conviction on the short side (disclosure: short stock indices).

S&P total annual return (dividends reinvested) 2014 … 15.9%


February 2014

The Bear Market of 2014–2017 Is Starting. Why, How & When (Revisited)

As markets opened up on January 2, 2014, everyone was excited. After all, what was not to like? The stage was set for the bull market to continue, or so everyone thought.

How little did they know. What they didn’t (and still don’t) know is that the bull market topped out just two days earlier, on December 31, 2013, at 16,588 on the DOW (mathematical top, the actual top will come later in the year), ushering in the final stage of the Cyclical Bear Market that will take us into the final 2017 bottom.

S&P total annual return (dividends reinvested) from 2014 to the end of 2017 … 15.9%



February 2015

Opinion: 7 danger signs of stocks’ coming bear market

Protect your portfolio now before the downturn begins

With the US stock market trying to surpass its all-time highs, many investors still don’t see the problem. After all, if the market is going up, why worry? Lately, many bulls feel invincible.

The problem is that if you wait until a bear market is formally announced, you will have lost a chunk of your paper profits. The key is to slowly take money off the table now. You may also protect your stock portfolio using hedging strategies, such as buying options.

S&P total annual return (dividends reinvested) to October 2018 … 11.5%


January 2017

Despite Trump euphoria, Wall Street’s 2017 forecast is the most bearish annual outlook in 12 years

S&P total annual return (dividends reinvested) 2017 … 20.9%


And how about other gurus?

USA Today April 2007

From an interview with Steve Ballmer, CEO of Microsoft

“There’s no chance that the iPhone is going to get any significant market share. No chance,” said Ballmer. “It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get.”

iPhone Sales in billions

2007 – 1.39

2012 – 125

2017 – 216.8





From my friend Leon:

Here are some statistics for the year 1910:

  • The average life expectancy for men was 47 years.
  • Fuel for this car was sold in drugstores only.
  • Only 14 percent of homes had a bathtub.
  • Only 8 percent of homes had a telephone.
  • There were only 8,000 cars and only 144 miles of paved roads.
  • The maximum speed limit in most cities was 10 mph.
  • The tallest structure in the world was the Eiffel Tower!
  • The average US wage in 1910 was 22 cents per hour, and the average US worker made between $200 and $400 per year.
  • A competent accountant could expect to earn $2000 per year, a dentist $2,500 per year, a veterinarian between $1,500 and $4,000 per year, and a mechanical engineer about $5,000 per year.
  • More than 95 percent of all births took place at home.
  • Ninety percent of all doctors did not have a college education. Instead, they attended so-called medical schools, many of which were condemned in the press and the government as ”substandard.“
  • Sugar cost 4 cents a pound; eggs were 14 cents a dozen; coffee was 15 cents a pound.
  • Most women only washed their hair once a month and used Borax or egg yolks for shampoo.
  • Canada passed a law that prohibited poor people from entering into their country for any reason.
  • The population of Las Vegas, Nevada, was only 30!
  • Crossword puzzles and iced tea hadn’t been invented yet.
  • Two out of every 10 adults couldn’t read or write, and only 6 percent of all Americans had graduated from high school.
  • Marijuana, heroin, and morphine were all available over the counter at the local corner drugstore. Back then, pharmacists said, “Heroin clears the complexion, gives buoyancy to the mind, regulates the stomach and bowels, and is, in fact, a perfect guardian of health.”
  • There were about 230 reported murders in the entire United States!


From my friend Peter:

If they raise the minimum wage to $1.00, nobody will be able to hire outside help at the store.

When I first started driving, who would have thought gas would someday cost 25 cents a gallon. I’m leaving the car in the garage.

Did you see where some baseball player just signed a contract for $50,000 a year just to play ball? It wouldn’t surprise me if someday they’ll be making more than the president.

The fast food restaurant is convenient for a quick meal, but I seriously doubt they will ever catch on.

No one can afford to be sick anymore. At $15.00 a day in the hospital, it’s too rich for my blood.


From YouTube Pun Based Humor:


You probably need to be an academic to have ever heard about SSRN, but “it’s an open-access online preprint community providing valuable services to leading academic schools and government institutions…SSRN is instrumental as a starting point for PhD students, professors, and institutional faculty to post early-stage research, prior to publication in academic journals.”


SSRN’s eLibrary provides 828,739 research papers from 406,723 researchers across 30 disciplines.

“Congratulations, Harold. You are currently in the top 10% of Authors on SSRN by all-time downloads.”



These organizations topped the Chronicle’s new cash-support ranking.

1 United Way Worldwide $3,260,274,867
2 Salvation Army $1,467,750,000
3 ALSAC/St. Jude Children’s Hospital $1,314,189,700
4 Harvard University $1,283,739,766
5 Mayo Clinic $1,140,619,378
6 Stanford University $1,110,664,853
7 Boys & Girls Clubs of America $909,035,450
8 Compassion International $819,417,089
9 Cornell University $743,502,739
10 Lutheran Services in America $731,566,533



From Financial Advisor magazine:

AQR Quant Genius Apologizes to Clients over Performance

Wall Street’s quant wizards often argue that many of their math-driven strategies are designed for the long-term. But they’ve rarely had to shout this loud.

Global equities posted the worst run in six years in “Red October,” and it tore through the investing styles that slice and dice assets based on traits like momentum and growth. Most factor funds, as they are known, fell in concert with stocks. That not only capped an already miserable year, it threw into doubt their diversification benefits—forcing advocates onto the defensive.

Cue Cliff Asness, godfather of quant investing and co-founder of the firm which helped popularize factors, AQR Capital Management. In a 23-page, 17,000-word blog post in October he acknowledged the strategies AQR favors have had “tough times,” predicted no miracle bounce back, but argued that evidence and common sense dictate they will ultimately prevail.

Cliff is one of the smartest and most professional money managers I know, and his honest, thoughtful response to his funds’ performance is a reflection of his quality. Although I’m a skeptic, we continue to follow his work.




If you have a few minutes to kill, here is a link to an interview I did at the Financial Planning Annual Convention:




From my friend Bill G.:

One of my favorite authors, Upton Sinclair, is credited with saying, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

Kind of reminds me of regulators and politicians.



An excellent summary by Michael Kitces of Mark Hulbert’s excellent review of Fama and French’s excellent article “Volatility Lessons” in the Financial Analysts Journal.

It’s generally understood that markets can be volatile in the short-term, and that it’s necessary to evaluate an investment strategy (or the performance of an investment manager or financial advisor) over an extended period of time in order to really judge their efficacy. However, in a recent paper by Eugene Fama and Kenneth French in the Financial Analysts Journal, it turns out that even over 10-year periods—generally viewed as “long-term” by most advisors and clients making evaluations of investment results—stock market volatility is great enough that there’s still a material risk that a superior strategy or factor will underperform. For instance, their analysis suggests that otherwise-long-term-outperforming value strategies still lag in 9% of randomly created 10-year investment horizons using historical data…implying that the underperformance of value over the past decade is still well within the range of normal statistical noise (and not necessarily a signal that value investing itself has lost its value). Similarly, given their even-higher volatility, there is a 24% chance that small-caps will underperform over a 10-year cycle (even when assuming their historical return premium is persisting) and a 16% chance that stocks will underperform Treasuries (even if their historical equity risk premium remains valid). On the one hand, the important implication of the research is that even 10 years is not necessarily long enough to determine if a manager (or a factor) has lost its ability to outperform. On the other hand, when the researchers also find that even over 20 years, there’s an 8% chance that equities will underperform Treasuries despite the equity risk premium…






Keep your eye on China…

From my friend Peter:




From my friend Judy:

The following questions were set in last year’s GED examination. These are genuine answers (from 16-year-olds)…and they WILL breed.

Question Answers
Name the four seasons. Salt, pepper, mustard and vinegar.
What causes the tides in the ocean? The tides are a fight between the earth and the moon. All water tends to flow towards the moon because there is no water on the moon, and nature abhors a vacuum. I forget where the sun joins the fight.
What guarantees may a mortgage company insist on? If you are buying a house they will insist that you are well-endowed.
In a democratic society, how important are elections? Very important. Sex can only happen when a male gets an election.
What are steroids? Things for keeping carpets still on the stairs
Name a major disease associated with cigarettes. Premature death
How can you delay milk turning sour? Keep it in the cow (simple but brilliant).
How are the main 20 parts of the body categorized (e.g., the abdomen)? The body is consisted into 3 parts—the brainium, the borax and the abdominal cavity. The brainium contains the brain, the borax contains the heart and lungs and the abdominal cavity contains the five bowels: A, E, I, O, U.
What is a terminal illness? When you are sick at the airport.
What does the word ‘benign’ mean? Benign is what you will be after you be eight.
What is a turbine? Something an Arab or Shreik wears on his head




Two headlines a few hours apart:

Apple Beats Q4 Expectations with Best September Quarter Ever


Apple Stock Falls on Light Sales Guidance for Holiday Quarter




States to live in according to USA Today:

BEST (Top 5)

#1 – Massachusetts

#2 – New Hampshire

#3 – Connecticut

#4 – Colorado

#5 – Minnesota


WORST (Bottom 5)

#50 – Mississippi

#49 – West Virginia

#48 – Louisiana (at least my home state wasn’t #50)

#47 – Alabama

#46 – Kentucky



#33 – Texas

#28 – Florida

Obviously weather wasn’t a major factor.




Student loan debt is now a crisis, says U.S. Department of Education Secretary Betsy DeVos.

The Latest Student Loan Debt Statistics

Personal finance website Make Lemonade says that the student loan debt is now the second highest consumer debt category—second only to mortgages and higher than credit card debt.

According to Make Lemonade, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt. The average student in the Class of 2016 has $37,172 in student loan debt. The average student in the Class of 2017 has almost $40,000 in student loan debt.

“Our higher-ed system is the envy of the world, but if we as a country do not make important policy changes in the way we distribute, administer and manage federal student loans, the program on which so many students rely will be in serious jeopardy,” DeVos said, according to her remarks released by the Education Department.




From my friend Alex:


Thanks to my partner Josh, the electronic version of my book, Hello Harold, is now free on Amazon.

Here’s the story:

Welcome to Hello Harold (that’s me, Harold Evensky). I’ve been a practicing financial planner for over three decades; financial planning is my avocation as well as my vocation. I’ve had the privilege of participating in the growth of my profession, serving on the national Board of the International Association for Financial Planning, as Chair of the Certified Financial Planning Board, the International Certified Financial Planning Board of Standards, as well as on advisory boards for Charles Schwab and TIAA-CREF.

In those three decades plus, I’ve seen a great many changes, not only in the markets but also in how investors—and their advisors—respond to them. Some of those responses make very little sense. Financial planning is a powerful tool that can help you develop and maintain the quality of life you want. Unfortunately, there’s a ton of noise and nonsense foisted on investors that can undermine their financial success.

Maybe you’re one of the many unlucky folks who’ve tried using a broker or financial advisor and wound up with one of the few less than ethical ones who had you invest in easy-answer funds that did more for the advisor’s bottom line than yours. Maybe you decided to go it alone. Unfortunately, investing is not a simple task, and without a grasp of the fundamentals, many investors wind up making costly mistakes. Although there are innumerable books—many of them very good—designed to help you invest wisely, many are too long, too technical, too boring, too commercial, or too simplistic to hold the reader’s attention.

So it’s my turn. I decided my book would be just right—not too long, not too short, not too technical, not too simplistic, not commercial, and, most important, fun to read. Hello Harold gives you the foundation you need to navigate the markets and plan your financial future. I take you along with me on phone calls and meetings, conferences and classrooms, and let you eavesdrop on my thoughts, conversations, and brainstorming sessions with clients, colleagues, and students. I introduce you to actionable concepts that will make you a far better investor, with a sound plan for your future. You may even have some fun along the way.

Unlike with most books, don’t feel obligated to move from page one through to the end. Each chapter stands on its own, so you can skip and jump to your heart’s content, chasing subjects you find of interest in any order that appeals to you. No matter where you land, whether it’s cash flow or market timing or taxes or any of a myriad of essential topics, you’re likely to find something you hadn’t considered before in quite that way. Each chapter is designed to give you insights that will improve your financial bottom line and your chances of achieving your financial goals.




I’ll close with a few pieces of advice.

  • Don’t get seasick; don’t pay attention to the daily financial pornography. It’s noise, not news.
  • Plan for the long term, not the last 10 minutes.
  • If the world doesn’t come to an end and you plan an investment intelligently for the long term (that’s what we do for our clients), your financial life will be solid. If the world really comes to an end, you won’t care.

Hope you enjoyed this issue, and I look forward to “seeing you” again in a couple months.

Harold Evensky


Evensky & Katz / Foldes Financial Wealth Management

Check out the link below for Harold’s previous NewsLetter:

NewsLetter Vol. 11, No. 6 – October 2018

NewsLetter Vol. 11, No. 5 – September 2018



IRS Increases 2019 Retirement Plan Contribution Limits

David Garcia

David L. Garcia, CPA, CFP®, ADPA® Principal, Wealth Manager

Every October, the IRS considers whether, due to inflation, the limits for retirement account contributions should be increased. For several years now, a low inflationary environment has meant increases have been scarce. At times, there was even fear that contributions may be reduced due to negative inflation. The Federal Reserve has increased interest rates seven times since December 2016, so that is no longer a concern.

Below we have listed the new contribution limits for various retirement account types.

  • IRAs. The contribution limit for IRAs and after tax Roths has increased from $5,500 in 2018 to $6,000 in 2019. Note, the catch-up contribution for individuals over 50 remains the same in 2019 at $1,000. Therefore, an individual over 50 can make a maximum contribution of $7,000.
  • 401(k), 403(b), Federal Thrift Savings Plans, and most 457 plans. The IRS has increased the annual contribution limit for these plans from $18,500 in 2018 to $19,000 in 2019. The increase also applies to after-tax 401(k) or Roth 401(k) contributions. Like IRAs, the catch-up contribution for employees over the age of 50 stays the same for 2019 at $6,000. Therefore, an employee over 50 can make a maximum employee deferral of $25,000.
  • SEP IRAs. Self-employed individuals’ contribution limit on SEP IRAs increased from $55,000 in 2018 to $56,000 in 2019. Contribution amounts are calculated based on a percentage of compensation. The compensation limit increased from $275,000 in 2018 to $280,000 in 2019.
  • Phase-outs for deductible IRA and Roth IRA contributions. For a married couple filing a joint return, where the spouse making the IRA contribution is not covered by an employer plan but is married to someone who is covered, the deduction is phased out between AGI of $193,000–$203,000. If you are the spouse participating in an employer plan, the deduction is phased out between AGI of $103,000 to $123,000. For a married couple filing a joint return, your ability to contribute to a Roth IRA phases out between AGI of $193,000 to $203,000. For folks who make too much to contribute to a Roth, opening a nondeductible IRA and performing a Roth conversion may be an option.

Not everyone may be able to max out their retirement contributions. However, even if you contribute less than the maximum, it is one of the best things you can do for your financial future. This is especially true for those with employers who provide 401(k) matching. This is where employers match employee contributions up to a certain percentage. It’s basically free money. According to research data, only 48% of workers participate in employer-sponsored plans for retirement.[1]  Among millennials, participation is even lower, at only 31%.[2]  The key is starting as soon as possible and taking advantage of the incentives for saving for retirement.

Feel free to contact David Garcia with any questions by phone 305.448.8882 ext. 224 or email: DGarcia@EK-FF.com.

[1] Pew analysis of 2012 Census Bureau Survey of Income and program Participation data

[2] Pew analysis of 2012 Census Bureau Survey of Income and program Participation data

Employee Benefits: Quality of Life

The following is a chapter from Employee Benefits: How to Make the Most of Your Stock, Insurance, Retirement, and Executive Benefits by Josh Mungavin CFP®, CRC® and Edited by Chris Boren & Tristan Whittingham.

Employee Benefits - cover


Quality of Life


Time-off/Sabbatical Policy

Time off for sabbaticals may be paid or unpaid depending on the employer, the duration of service, and the type of service (i.e., full or part time). Taking a sabbatical can be beneficial both in the short and long term for both the employee and the employer. The employee can return to work with an overall sense of well-being, having recharged their batteries and stepped away from the day-to-day grind of working, allowing them to come back with long-term positive changes to thinking and creativity. While an employee is typically more inclined to check in with work during a vacation, a sabbatical may provide the employee the ability to “check out” of the office for one to three months. This also gives the organization time to make sure the other employees have been properly cross-trained to ensure that the organization would be stable if they lose any employee.


Planning for a sabbatical should begin far in advance by cross-training the other people in your department. This can be a learning experience for everyone involved, leading to a stronger organization overall. The people who are cross-trained to fill in for the employee while the employee is on sabbatical can become more effective and responsible by the time the sabbatical taker returns because they can see the organization from a different viewpoint and gain wider experience working within the organization. Employees may find creative ways to grow the business that they would not have otherwise been inspired to pursue had they not spent time away from the company seeing things from the outside or from a different cultural viewpoint. Ideally, no team should be so dependent on any one person that everything falls apart if that person leaves, and a sabbatical is an easy way to test that.

The sabbatical also gives the individual a chance to view themselves and the world around them from a new direction, take on a new project, volunteer for something they care about, do research, write a book, learn a new language, pick up a hobby, reconnect with friends, work on a passion project, explore new ideas, travel, improve their health, spend time on their retirement or estate planning, take care of their family, or learn something new. All these activities lead to a better mental state upon the employee’s return to work and their ability to concentrate on the work in front of them since they have already taken care of the personal things that they had either put off or that were weighing them down during the work day. An employee coming back from a sabbatical often feels rejuvenated, like they have a new job, and no longer shows signs of burnout, returning with renewed focus on their work and sense of purpose.

A sabbatical can also be a great time for employees not on sabbatical to step forward and act in the role of the person on sabbatical by gaining valuable experience and showing management that they have the ability to step into that role if that position becomes available. Extra work taken on during a coworker’s sabbatical should be seen as an opportunity to be trained in a new area and to achieve expanded potential within an organization.

It may be wise to consider taking a sabbatical before leaving a company since your desire to leave the company may be a sign of burnout rather than an issue with the company. Used properly, the sabbatical can not only change your life but also provide valuable insight for your firm and a renewed sense of vigor to push through to the next level of your career.


A sabbatical is not like a typical vacation in that you only need to spend a short period preparing the office for a vacation. The planning for a sabbatical should start a year or years beforehand so cross-training is thoroughly done and everything is thought through and planned far in advance of the sabbatical. Always be thoughtful when scheduling and coordinating your sabbatical so you do not wind up with multiple people out of the office, placing stress on the employer and employees who remain to cover multiple shifts rather than just yours.

If your sabbatical is thoroughly prepared for, you may find that rather than coming back to a desk full of work, you come back to employees who are more self-reliant and accustomed to solving problems, having taken care of everything in your absence. If things are handled well during your absence, you can see that you don’t need to micromanage people and rely more heavily on your coworkers and subordinates. On the other hand, if you come back and things have fallen through the cracks that were an employee’s responsibility, you can get further insight into that employee’s capabilities and shine a light on their work in their current position, ultimately affecting their further employment or promotion opportunities in the future.

Some employers will allow you to combine your leave with your paid time off, whereas some will not. In general, paid time off and sabbatical policies are based on an employee’s tenure with the employer. Make sure you know what will happen to your health benefits while you are on leave so you know if you will need to pay for health benefits, if your employer will pay for the health benefits, and whether FSA or dependent care accounts will stay in place. You’ll need to know if your job will be available upon your return and if there is there a penalty for failure to return to work (either monetary or through a complication in benefits).

Before taking a sabbatical, it’s important to make sure you are financially ready and secure to cover your living expenses for the time you are away if it is not a paid sabbatical. It may be possible to split your sabbatical in two or combine the sabbatical with PTO to extend the time you can be gone. You will also need to note the effect the sabbatical has on all your benefits, including health benefits; retirement savings (including 401(k) contributions and matches or pension years of service in your pension calculation as taking an unpaid sabbatical during the last three years of employment if your pension is based off your last three years of salary can cause significant long-term detrimental effects); and insurance coverage, such as life insurance and disability insurance.

It’s also important to know whether you can take a paid job during your sabbatical since your company may limit you to not taking paid positions; if you are allowed to take a paid position, you may be restricted from working at a competitor’s firm. In addition, note that it is important to know whether anything you produce during your sabbatical will be considered your employer’s intellectual property.

Paid Time Off, Vacation, and Sick Leave

Paid time off (PTO) can be a specific number of days per year after a certain number of years of service, or you can be given a certain number of PTO hours per hours worked as a credit towards the number of hours in a bank you can use. Most PTO expires at the end of a certain period, but occasionally employers will allow you to roll PTO over from year to year. There may even be an opportunity to sell your PTO days back to your employer at certain periods, such as banking PTO days throughout your career and selling back a large block of them to your employer before retirement.

PTO vs. Vacation and Sick Days

Employers generally have vesting periods for employees to start PTO so employees can’t take PTO immediately; for example, you may have to wait 60 days or a year. There may be PTO or vacation and sick days, with sick days requiring that you actually be sick. Employers have recently been moving to PTO days rather than a combination of vacation days and sick days, which has sometimes come to the advantage or disadvantage of employees. It is often the case that the combined number of sick days and vacation days are greater than the number of PTO days given under new policies, but there is more flexibility in PTO days for healthy employees. Some states or cities may require that a certain amount of paid sick leave be given per year, so you may find that you have a combination of PTO and a minimal amount of sick leave as prescribed by law. It might be a good idea to look at work-from-home options if you are sick and you must work because of a lack of remaining PTO or a desire to not lose a vacation day.

One major concern with the change to PTO banks is that it encourages people to come to work sick rather than losing out on a day of vacation, which may be a good reason to work from home if you have the ability to do so. There are also issues with employees trying to use all their PTO near the end of the year so they don’t leave any days on the table, in turn leaving the employer with far too few employees to cover the employer’s needs near the end of the year. This makes it very important to make sure your days off are scheduled well in advance and thought through so your employer is not put in a bind.

How to Get the Most out of PTO

You can make your PTO days go further by strategically combining them with three-day weekends throughout the year rather than taking random weeks off. You may find that by combining your PTO days with three-day weekends, you can fit in an extra week of vacation or have a few spare days over the course of the year to either stay home or to use for sick days. Some employers will allow you to combine your leave with your PTO, whereas some will not.


Flextime allows employees to have flexible schedules where they can customize their work hours within a certain range of hours and days. Flextime can come in the form of compressed work weeks, flexible daily hours, or telecommuting, and it provides the flexibility to meet family needs, personal obligations, and responsibilities. Some options can save you money and stress, such as shaving time off your commute to work by shifting your commute from rush hours to times when traffic is not as heavy. It can help you avoid burnout, allow you to work when you feel the most productive, or give you control over your working environment if you work from home. It may also decrease childcare costs if parents can stagger their work times to reduce or eliminate childcare.


Some employees who thrive in an office environment may be disadvantaged by people working flexible schedules or working remotely. To remedy this, some employers require employees to keep core days or hours so there are at least some days or times when everyone is in the office to coordinate and collaborate. For instance, an employer that requires core hours may require the employee to be in the office from noon until 3 pm everyday so the office benefits from coordinated efforts and people working together for at least a few hours out of the day while allowing employee flexibility.

It’s also important for people who choose to work at home to make sure to check in and show progress to those who choose to go into the office; it can be easy for office colleagues to perceive that those working remotely aren’t working if there aren’t tangible outcomes from the remote work.

Flextime Options

Some employees may be given unlimited or limited ability to work from home or telecommute while working remotely since many jobs do not require a person to be in the office to be productive. Some employers may allow compressed work weeks, e.g., working longer hours four days out of the week and taking the fifth day off, working shorter hours four days a week and having one long day to make up for the difference, or working shorter hours six days a week.

Some employers allow employees to work from alternating locations; in other words, the employee may work from the office for four days a week and then work from home or a remote location on the fifth day. If used properly, any flextime arrangement can lead to a significant increase in quality of life and the ability to be more productive since you can take advantage of working on things when you are most creative and productive. You can also coordinate things in your personal life that need to be coordinated while helping prevent burnout. Make sure you stay active in communication and collaboration as much as possible if you are working under a flex arrangement so you are not seen as taking advantage of the benefit and as a productive member of the team.

Work from Home

Some people work best in an office environment, while others work best and stay most productive working from home. So, it is important for you to know which camp you fall into before committing to working from home or the office. For the right people, working from home can increase productivity and decrease stress.


For employees who work best in quiet, stable environments, working from home can reduce the amount of distractions faced because people do not come into their offices to disturb them while they are concentrating. At the same time, you cannot stop by a coworker’s office to coordinate on an assignment as easily, so it’s important to set up proper systems to collaborate while maintaining a distraction-free work environment. Working remotely may allow you to avoid office politics that you would otherwise be pulled into. Often, workers will need large chunks of uninterrupted time to really make progress on a project, which they can get through working remotely, but it’s important to set up times during the day to check in on the people in the office and others working remotely. Introverts may find even more significant benefits from working from home because of the solitude it provides. Make sure to stay in touch with the office to not only keep up with changes in important information but also show you are working and engaged.

The lack of time spent commuting can save dozens of hours every week that can be put to better use in both your personal life and your work life if used appropriately. Some people use a combination of working from home and flextime to bifurcate their work day so they can wake up early, get started on work while they’re most productive, take a midday nap or work out, and then come back to work having had some time away and some physical exercise so their minds are working at full capacity. Even something as simple as taking a walk around your neighborhood or through a local nature trail can be incredibly valuable over the course of the day since it provides a mental reset.

You may be able to save money by making your meals at home rather than eating out and by having more casual attire rather than the normal wardrobe expenses and trips to the dry cleaner. In addition, you may be able to work in a newer, more comfortable environment. Working remotely can also allow you to spend time with your family and pets that you otherwise might not have; things like working from an aging parent’s home can be incredibly valuable to you now and in the future since that is time you can’t get back, which may give you fond memories of your parent you might not otherwise get to have.

What to Be Aware Of

Make sure that if you work from home to decrease stress levels that you are not “always on” when you normally wouldn’t be; otherwise, you risk compounding your stress and ending up burned out. It’s too easy to let the desire to make sure people know you are doing well at your job while working remotely take over your personal life if there is no dividing line between work and home, which can cause you to overwork yourself so you’re not seen as a slacker.

Dependent Daycare Expenses

Your employer may have a dependent care assistance program, which could allow you to allocate up to $5,000 per year (unless you file married filing separately in which case you can allocate up to $2,500 per year) for child-care expenses pre-tax. This money can generally be used for a nanny or daycare.

Rules and Limitations

While these tax-benefited savings are generally used to take care of dependents while a legal guardian is at work, it can also be used for children of any age who are physically or mentally incapable of self-care or adult daycare for senior citizen dependents who live with you. The person for whose benefit the funds are spent must be claimed as a dependent on your federal tax return. The funds can’t be used for summer camps, other than day camps, or for long-term care for parents living elsewhere. A dependent care FSA is federally limited to $5,000 per year per household.17 An FSA for dependent care is not fully funded at the beginning of the plan year by the employer, unlike medical FSAs. Unused amounts for dependent care also cannot be carried over, unlike some healthcare FSAs may allow.

The money allowed to be put in a dependent care FSA can be further limited if one of the spouses is not working and the non-earning spouse is not disabled or a full-time student.18 This can cause some very odd issues. For instance, if a single person elects to withhold the full $5,000 for childcare expenses and gets married to a non-working spouse before having filed claims for any of the money, the $5,000 would be forfeited because the newly married person can no longer take advantage of the dependent care FSA since the spouse is not employed; however, the $5,000 put into the plan would also be taxable. Thus, you would get no benefits and still have to pay taxes on the $5,000 you never received.


Your employer may provide housing to employees; thus, it is important to know whether the housing is provided in a manner that will cause you to have to pay taxes so you are prepared at tax time. You may be exempt from paying all or part of the taxes on employer-provided housing if it’s provided for the convenience of your employer, it’s a temporary work location, or it’s lodging furnished by an educational institution.


If you are provided with housing by your employer, you should ask for documentation containing a description of your responsibilities, a description of the lodging being furnished, the reasons why the lodging is required for you to perform your duties, a listing of taxable and non-taxable utilities, and services provided (such as phone, internet, housekeeping, and landscaping services). In addition, any events you have at the house connected with the business should be recorded in case of an audit. You should be very clear as to which utilities you will need to cover for the house. Furthermore, there are some very complex rules covering what is taxable and what is not, so make sure you understand what your tax liability will be after speaking to your CPA. If the employer owns or rents the home, it is also important to note who is allowed to occupy the property, if any pets are allowed, what rules are imposed on staying at the property, if smoking is allowed, if there are any quiet hours, if the employer can come in and inspect the property, any upkeep required for the property, and who is required to pay for utilities.

Potential Costs and Assistance

Housing assistance can come via specific dollar amounts for down-payment assistance or housing education programs and credit counseling. The employer may also provide closing-cost grants, deferred loans, mortgage guarantees, shared-appreciation mortgages, or donated or discounted land and buildings for development or redevelopment. Some states may also offer to match a certain amount of funds given to the employee by the employer for house down payments or closing costs. If you are staying in a home your employer owns or leases, make sure you know whether you are a tenant or under license. It may be easier for your employer to kick you out if you are under license if something happens at work and you are laid off, which creates a significant increase in insecurity.

Student Loan Repayment

Optimal Use
Your employer may offer to make payments on your student loans. In such cases, it may be wise to think about not paying off any student loan amounts your employer might pay off for you if you plan on staying with the company so no money is left on the table. There may be a period that you have to wait before you start collecting contributions, such as working at the employer for one year before they start repaying loans, and there will likely be a cap (either per year or over the course of your career) on what they will repay on your behalf.

If you know you are taking a job with a company that offers student loan repayments after you graduate, it may be wise to think about taking on a certain amount of college debt even if you otherwise wouldn’t have to in order not to leave money on the table.

29. Studen Loan Repayment 1

General Considerations

Do not let student loan repayment be a driving factor in which job you accept because many benefits can add up to a more beneficial pay package over the course of your career. In other words, like every other benefit, it’s wise to look at the combined benefits package rather than any benefit in isolation before choosing a job and negotiating for any missing benefits in the best benefit package offered to you before accepting a job. You want to look at the whole picture, including pay and the benefit package, rather than one benefit in particular, even if there is an emotional pull towards one benefit.

Special Considerations

  • Remember that any payments to you are currently considered income, so you’ll have to pay taxes on the benefit.
  • Note that there is the potential to deduct student loan interest from your taxes while your employer pays your student loan off for you.
  • Some employers will offer to match student loan payments up to a certain amount with non-taxable contributions to retirement accounts rather than paying off the student loan directly, so you get a tax benefit from the employer benefit.
  • Some employers will offer monthly payments while others will offer lump sums, so it’s important to understand the design of the plan.
  • Some will require you to have received your degree within a certain period before employment; for instance, you may have had to receive the degree within last two to three years to be eligible for student loan repayment.
  • Some employers will pay a certain amount per year with no cap, and some will make a certain payment amount per year with a lifetime cap.
  • Keep in mind that if you paid off your debt, you may not be able to get retroactive benefits for debt that no longer exist.
  • An employer may require you to refinance the student loan with a certain company. If they do, make sure the forgiveness terms, interest rate, and any loan servicing fees don’t change the loan. Otherwise, be comfortable with how they will change the terms of the loan and consider converting only some of your student loans so you get the max employer benefit but keep the other preferable terms of your currently existing loan.

Financial Advisor Fee Payment

The best form of this benefit is when the employer gives you a stipend to use to hire a financial advisor of your choosing. This ideal scenario is not universally used since your employer may also decide to contract with a single firm (which can create a false sense of security because you believe the information comes through or comes blessed by an employer). The employer may pay the upfront planning costs and depend on you to pay any ongoing costs, or they may pay a certain amount yearly for your benefit. This benefit can be provided on a one-on-one basis, through in-depth in-person workshops, or over the phone and computer consultations.

Potential Risks

Given what I do for a living, one would assume that I would be unabashedly for this benefit. However, it may come with strings attached that you need to be aware of. Sometimes, the person coming in to the company to give financial advice has volunteered to give the advice for free. This costs the employer nothing, and the advisor typically expects to make their money from commissions and other charges to the employee. A large red flag appears when you sit down with someone and within an hour, you end up with a recommendation to buy something that could affect the rest of your life. If that happens, you’re likely talking to a salesperson and not an advisor. A skilled, experienced advisor working on a team of very competent people can take tens of hours to create and truly understand your financial plan and how everything fits together. So, even the best, most well-intentioned advisor can only do so much during a one-hour phone call.

It is important to learn from the advisor your employer may provide to you, but always remember that you shouldn’t take for granted that the advisor has been vetted by the employer. It may be that the employer simply chose the person or company in charge of some of the company’s other benefits. Similarly, even though your employer is paying for the financial planner to come in and talk to you, it doesn’t mean that the advisor actually has your best interests in mind or that they won’t try to sell you something to line their, or their firm’s, pockets. This threat is ever present, making it important for you to make educated decisions about any options presented to you.

As with the college benefit, something that is free is not always without cost. This means bad advice, even if it’s free, can be very expensive in the long run. It is important to be very careful to evaluate the person with whom you are speaking. You may be routed to an individual in a call center reading off a script who has little financial knowledge. A good way to make sure you are dealing with somebody who is at least minimally competent is to make sure they have the Certified Financial Planner® designation. This designation does not speak to how good somebody is at financial planning but simply shows that they are minimally competent at performing financial planning.

Key Considerations and Regulations

Other financial advice can typically be found in the 401(k) education provided by the employer; you should take advantage of this information. There is a general legal requirement that as a fiduciary, a 401(k) educator must have your best interests in mind, whereas a financial planner or advisor who is not acting as a fiduciary is not obligated to have your best interests in mind but instead the best interests of their firm. That said, when working with your 401(k) or any other financial matter, it is always to your benefit to use an advisor who is a fiduciary. It’s important to have an ongoing engagement with the person who knows you and your financial plan due to the complexity and in-depth thought involved in financial planning. Oftentimes, an internet or call-in service is largely devoid of value outside very basic questions and financial education.

Some companies will pay you or give you health insurance premium discounts for participating in financial wellness activities or education, so it is always worth researching what is available to you.

Relocation Assistance

Employer-provided relocation services may be provided as a lump sum or a direct reimbursement, or your company may provide paid moving services with a company with which they have contracted. The moving benefit generally covers the movement of household goods and people; it can sometimes include scouting trips so a new employee can visit the new location with their family and decide where they would like to live while they are beginning to assimilate to the new community. It may also include retention bonuses to employees if they stay with the new company or stay with the old company that’s relocating them for a specific time frame. The employer may also provide trailing-spouse assistance for a spouse who stays behind while the employee sets up their new life in a new location. Housing benefits may come in the way of loss-on-sale benefits, quick-sale bonuses, and other incentives to help employees sell their homes and buy new homes.

Here is a general list of relocation expenses that may be reimbursable by your employer:

  • Travel
  • Hotels
  • Flights
  • Meals
  • Transportation costs
  • Household goods
  • Automobile relocation
  • Storage options
  • Miscellaneous cash allowances
  • Home search expenses
  • Real estate commissions
  • Temporary housing costs
  • Early lease cancellation
  • Home sale or purchase costs
  • Rental deposits
  • Home sale marketing
  • Physical move packing
  • Cost of turning off and on utilities
  • Cancelation fees to any clubs
  • Reinstatement fees to any clubs

*This list is by no means comprehensive. If you think that an expense might be reimbursable, ask your employer. It’s better to ask and be told “no” than not to ask and find out later you left money on the table.

Potential Advantages

It is almost always a good idea to use any rental or temporary housing available to you in a new city so you can make sure you are comfortable living in the area of town you plan to live in. The ability to rent a place for a few weeks or a month while you keep everything in storage at your employer’s expense and search for a place you are happy with is of substantial value, and you should utilize it if it all possible.

Potential Risks

Generally speaking, if the moving benefit is in the form of a lump sum or the reimbursement is given directly to you, it will likely have to be counted as income for tax purposes; this means you will have to deduct moving expenses from your taxes. If the money is paid directly to a third party, however, it may be excluded from work income. Make sure to work with your new company and your accountant to make sure you get the best after-tax benefit possible before beginning your move.

Key Considerations and Regulations

If a relocation package isn’t brought up during salary negotiations, it’s your responsibility to start the conversation; otherwise, you may not get an offer for relocation, especially if you have already signed a contract with the employer. Before negotiating, know what you’ll need, including any special assistance for services; any special moving needs, including boats and paintings; and the sale and subsequent purchase of a house. You’ll also want to know about how much your move will cost for each of the components so you have a baseline on which to negotiate. Make sure that when you are moving and you have a relocation package you know what it covers. Some may or may not cover packing or unpacking items; moving the car or second car; or moving exercise equipment, paintings, boats, and other items you may choose not to relocate given the personal cost to you if it’s not covered under the relocation agreement. Make sure you keep track of all expenses and keep all receipts in case you must justify anything to the IRS or your employer.

It is important to know when to expect the reimbursement if you are being reimbursed for travel services or any of the other housing allowances. You don’t want to depend on being reimbursed immediately and find out that reimbursement takes a number of years after vesting with the new employer before you receive any money. Following your move, your employer may provide relocation benefits in amounts paid incrementally rather than a lump sum.

It is always wise to get a quote from a moving company after they’ve seen everything in your current home since phone estimates are notoriously inaccurate. Make sure to walk through your house while recording a video of all your things on your phone so you have some documentation in case something is broken during the move. Finally, always make sure you deal with a licensed, bonded moving agency.

Legal Plan

An employer may offer a group legal plan that provides access to a network of attorneys who have agreed to provide legal services at discounted rates. This may or may not be a benefit to you.

Here is a short list of different services lawyers may provide:

  • Informational and advice consultation;
  • Review and creation of legal documentation; and
  • Litigation and negotiation representation.

Potential Advantages

It is worth looking at the value of the plan, especially if you do not already have estate documents including your healthcare power of attorney, durable power of attorney, and will at the very minimum. These are essential documents in any financial plan, and the ability to obtain such documents at a discounted rate can be invaluable.

Potential Risks

It is always recommended to have an attorney draw up these documents rather than using online form templates to create your own. As is so often the case, we do not know what we do not know. Trying to draw up your own estate plan leads you into very deep waters that very talented people have made careers of understanding. The cost for estate documents can be high, but the consequences can be exponentially higher.

Volunteer and Gift Matching

Volunteer and gift matching are excellent benefits that add value to employees, employers, and the community at large. With volunteer matching, your employer will usually donate money to an organization for which you volunteer for every hour you spend volunteering. With gift matching, your employer will match the money you donate to a cause you care about. For both of these benefits, your employer may set matching percentages up to a certain limit.

The types of volunteering work that qualify under volunteer matching can include all types of projects, from hands-on projects in the community to pro bono work in the area of your expertise. This can be personally rewarding for you and give you leadership experience, the chance to form connections with colleagues in your corporation, or the opportunity to mingle with people in varying industries outside the corporation. This leads to marketing for the firm and the ability to establish your personal brand.

Potential Benefits

Volunteering can provide a way for you to develop skills that are beneficial for your job and increase your value in the eyes of your employer. It also involves giving to a cause that you care about while your employer contributes to the same cause. This is a win–win for everyone involved: the cause, your employer, and you. Your employer gets a more well-rounded employee who gives back to the community in a meaningful way while potentially bringing in new business and garnering goodwill from the community that knows the employer is sponsoring the employee helping the cause. This brings about healthier communities that reap the rewards of employees and employers combining forces for the good of society.

Some companies not only match cash contributions but also contributions of securities to charitable organizations. This means there are additional benefits if you have highly appreciated stock you would like to donate to a charity. You get the tax benefit from gifting highly appreciated stock instead of cash, and there’s a match benefit from the employer so that in after-tax terms, you give much less but the charity gets significantly more. You may also think about gifting directly from an IRA account if you are over 70.5 years old since such gifts can be counted toward your required minimum distribution; you not only get to give money to a charity and have your employer match it but also avoid paying taxes on the part of the required minimum distribution that went directly from the IRA to the charity.

Potential Risks

It is important to be cognizant of any conflicts of interest in using this benefit. In cases in which money is given to private foundations or donor-advised funds, gifts that provide benefits to you or your family (including advertisements) may be out of line with the intent of the program, leading to more than a few raised eyebrows within the organization. This type of conflict of interest may have consequences up to, and including, termination, possible civil or criminal liability, and a demand to return the matching gift amount from either the charity or from you, the employee.

Key Considerations and Regulations

To get the gift-matching benefit, an employee may be able to simply provide receipts; some cases may require a payroll deduction to have the company match dollars given. Some companies only match contributions to certain charities and limit the program to certain employees. This makes it very important to know how much can be paid out and the process for getting that amount paid out. You may need to keep documentation along the way or ask your HR department for approval of the charity before the gift is given. There is no reason to leave money on the table by not following the stipulations of the program, thus leaving the charity with less than they would have gotten if you had followed the program’s rules. Gifts may have to be made during certain periods, and you may have to follow up with the organization you have given money to and confirm that the matching gift from your employer was made and received. It’s also important to make the distinction that employer matching is not a deductible charitable contribution for the employee.

With respect to volunteer matching, an employee may need to show volunteer hours logged to get the company to provide gifts matching the hours volunteered.

Tuition Reimbursement or Assistance

Your employer may pay for continuing education, part of your college tuition, or some tuition and college-related expenses for your family members. It’s important to know what type of education your employer will pay for, and it’s generally worth not leaving free money on the table when you can spend some of your employer’s money to further your own education, either through college or continuing education courses. Some tuition reimbursement assistance programs will help pay for GEDs or language classes, while others require you to only take courses in your particular field or classes the employer deems useful for its purposes.

Potential Advantages

Some employers also choose to reimburse for expenses associated with higher education. These reimbursements can include books and an internet connection as long as one of your courses is online or has some internet component. This opens availability for someone who has an interest in learning, maybe about a specific course or subject they feel will increase their value in the job market, but who don’t necessarily want to complete a degree program to gain the education they desire, and free internet or subsidized internet.  In the right situation, you can actually make money by agreeing to take college courses that you get an A in because the value of the internet subsidy, and any other costs covered by the employer, are paid for while you increase your value as an employee. To extend the time during which you receive these additional education-related subsidies, it may make sense to think about taking one course at a time rather than several courses simultaneously if the employer will cover the full cost plus additional fringe benefits. This is recommended even if you aren’t interested in furthering your education but are interested in having a certain number of subsidies from your employer.

Potential Risks

Some employers have teamed up with certain colleges, which can be a good or bad thing. The employer may have contracted, for a discount, with a for-profit school that is otherwise suffering for students and needs to attract the business. This could be troublesome since even after the discount, you may not get the value you are paying for. It is also important to consider that getting a discount on something worthless is far worse than paying for something that’s worthwhile at full price. Think about the end goal of taking the courses: can you receive another degree through the college that will be of value, and if not, are the courses transferable? If the answer is no to both those questions, then it may be worth considering paying full price elsewhere to achieve your goals.

It is possible that all the discounts on college tuition you receive are a reduction from the university expenses and not actually a contribution from your employer. An employer may give a scholarship of a certain level of discount after factoring in any financial aid available. This means, you may use up some of your lifetime financial aid benefits by pursuing the employer-sponsored education plan, get a small discount on an education that is otherwise nearly worthless, and be unable to use the same benefits for the education you actually want. As stated earlier, a discount on something that is overpriced to begin with or that has no value is not a discount—it’s a sales tactic.

Some of the discounted or free college education programs available to you might include online courses only. These can have value in terms of training you, but they may lack the value a normal college brings in terms of interactivity, such as getting to spend time with other people in your industry and growing your network, which can become a substantial asset over time.

There will almost always be an annual dollar cap on employer-provided educational assistance. In 2017, the IRS allowed your employer to reimburse you for or pay directly for any educational assistance up to a maximum of $5,250.19 Anything over that cap would be counted as income and taxed as ordinary income. This is an important distinction to keep in mind when it’s time to file your tax return.

Key Considerations and Regulations

It’s important to account for the cost of tuition and associated fees when deciding how to take advantage of this benefit since your employer may put a limit, either annually or per credit hour, on any courses taken.

Your employer may also require that you clear the specific course through HR so your program of study matches the employer’s needs for you as an employee. You will likely be required to receive at least a certain grade point average in the courses you are reimbursed for, and you may find that there is a depreciating reimbursement depending on your grade (e.g., as being paid out at a higher rate than Cs and so on).

It’s also important to know before taking a course when you will be reimbursed since your employer may not reimburse you until you have met a certain number of stipulations or certain vesting. You may also be required to provide proof of enrollment and your grade point average for all completed courses.

The amount of reimbursement you’re eligible for may depend on the length of time you’ve been with the company, and there may be a cap on the number of classes you can take at a time or overall throughout your entire career. Keep in mind that some of these programs require you to remain with the company for a set period; otherwise, you may be required to pay your employer back for any tuition reimbursement received.

Employee Assistance Programs

Employee assistance programs are meant to assist you with personal or work-related problems. They may offer confidential assessments, short-term counseling referrals, and follow-up services for those in your household. These programs generally provide short-term counseling and refer you to an outside resource. You may have only a few sessions or quite a number of sessions to take advantage of over the course of the year. The sessions can be either by phone or in person depending on your company.

Counseling sessions can be for any of the following issues:

  • Substance abuse
  • Occupational stress
  • Emotional distress
  • Major life events (accidents/death)
  • Healthcare concerns
  • Financial concerns
  • Legal concerns
  • Family issues
  • Personal relationship issues
  • Work concerns
  • Aging parent concerns
  • Marital trouble
  • Divorce conflicts
  • Depression
  • Weight loss
  • Mediation
  • Conflict resolution
  • Domestic violence
  • Workplace violence
  • Personal emergencies

*This list is by no means comprehensive. If you believe an issue is worthy of assistance, ask your HR representative for guidance and clarification.

There is a wide array of services offered by employee assistance programs and at your disposal. These benefits are generally also only given to family members covered by an employee’s health insurance, but they may also cover other household members.

Potential Advantages

These programs are a great way to discuss grief and concerns regarding personal and workplace issues. They can help you with guidance and communication through difficult situations, such as mergers, layoffs, or when employees die on the job. In certain cases, employers may provide leave for victims of domestic or sexual violence. These programs may also work with management and supervisors to plan ahead for situations such as organizational changes, legal considerations, emergency planning in response to traumatic events, and support for disaster and emergency preparedness.

These programs can also help you find childcare resources and even resources for elder care assistance for parents and other family members. Some programs can find information about schools or colleges and connect you with nannies, childcare centers, and summer camps. Counselors can help find in-home caregivers, help navigate Medicare and Medicaid services, and provide support while you deal with emotional and other stressors associated with being a caregiver. You may also be able to ask them about the best assisted-living facilities or nursing homes in your area, and they may be able to make a call on your behalf to narrow the field of choices based on what you’re looking for.

You can turn to financial counseling through these programs for ideas on budgeting, credit problems, foreclosure, bankruptcy, credit card debt, or any other financial issues that may bother you. They will in turn provide you with a base level of financial education and refer you to a good source for follow-up if necessary.

Employee assistance programs may also provide support for veterans’ issues for people returning to the workplace as well as unique issues that may surface during a veteran’s career both at work and home, including dealing with post-traumatic stress or readjusting to civilian life.

Key Considerations and Regulations

These programs are generally confidential; employers may request reports from the people who run these programs to see how much the service is being used and for what purpose, but they’re only allowed to get aggregate information that doesn’t identify any individuals using the service. However, when the counseling is mandatory due to disciplinary problems, the supervisor or HR representative may be told whether the employee is attending required sessions, and they may inquire about the employee’s progress. Otherwise, these programs are usually run by a third party that is federally bound not to release any individual information about services used.

Keep in mind that the service may have certain hours of availability, although many have 24-hour hotlines so the systems can be used whenever you’d like. This way you can call from home so you’re not worried about calling from a work phone.

Adoption Assistance

Employer adoption assistance programs can provide information, financial assistance, and parental leave. Informational assistance can include:

  • Referral to licensed adoption agencies
  • Support groups
  • Access to adoption specialists
    • A specialist will walk you through the adoption process, answer any questions you may have, and help with special situations such as special-needs adoptions and non-domestic adoptions. These services can all be done either in person or over the phone.

Financial assistance can include a lump sum payment for an adoption fee and partial reimbursement to employees for expenses associated with the adoption. Financial assistance can cover costs related to the following:

  • Public agency fees
  • Private agency fees
  • Court costs
  • Legal adoption fees
  • Medical costs
  • Temporary foster care charges
  • Transportation costs
  • Pregnancy costs for birth mother
  • Counseling costs
  • Home study fees
  • Translation services
  • Travel and lodging
  • Immunization fees
  • Immigration fees
  • Lost wages for time taken off through the adoption phase

*This list is by no means comprehensive. If you believe an issue is worthy of assistance, ask your HR representative for guidance and clarification.

 Potential Advantages

Employers may offer flexible time off and flexible work schedules for a set period after an adoption. A new adopted parent can generally take up to 12 weeks of unpaid leave after the adoption of a child, and it can be very wise to take advantage of this time with your new child to get them acclimated to their new home. The programs may also provide some employee education about adoption and post-adoption resources. These benefits can prove to be invaluable resources for you as new parents.

Potential Risks

You may find that the benefits paid to you for adoption assistance are taxable as ordinary income. This makes it extremely important to account for this additional income in any tax withholding that takes place over the course of the year and when filing your taxes at the end of the year. Make sure to speak with your CPA about how this assistance may affect your taxes as well as whether the adoption tax credit is available to you.

The employer may just provide a lump sum payment for the adoption rather than covering certain fees. You may also find employers that cover certain expenses or a certain percentage of expenses. In other situations, employers may only give a total dollar amount regardless of actual expenses.

Considering all these different scenarios available for adoption assistance, it’s important to know beforehand what your employer will reimburse, what they will not reimburse, and the manner in which they go about covering the expenses. This also makes it important to keep track of everything, including receipts, as you work your way through the adoption process in case anything is called into question or is needed for tax purposes.

Key Considerations and Regulations

Your employer may require you to meet certain criteria, such as length of employment, full-time employment, or participation in the company-sponsored health plan to be eligible for the program. In some circumstances, the type of adoption can also affect the benefits (things like adopting a stepchild or an older child may not qualify you for adoption assistance, whereas adopting a child with special needs may give you enhanced assistance). In addition, remember that some employers may only pay for a single child adoption, whereas others may pay for you to adopt multiple children.

Your window to adopt may come across suddenly, and immediate action may be required. It’s important to look at all the details of your employer-sponsored plan once you think about adopting and get everything lined up so you can act on a moment’s notice.

Some qualified adoption assistance benefits may be excluded from the rules taxing fringe benefits. This makes it important to keep an itemized list of all expenses the company has reimbursed you for and those they have not reimbursed you for. This allows your CPA to take advantage of any and all exclusions to income that may be achievable through adoption benefits. Keep in mind that although these payments may be excluded from federal taxes, they may be included in Medicare, Social Security, or state taxes. The IRS may also cap the exclusion amount you’re allowed to exclude from your income for any adoption assistance given to you by your employer per year, and it may also phase out the deductions allowed depending on your income; so that high-income individuals may not get the same tax benefits associated with adoption assistance programs as lower or middle-income individuals.20

Family Caregiver, Maternal, and Paternal Leave

The Family and Medical Leave Act allows certain employees to take up to 12 weeks of unprotected, unpaid leave per year.21 This can be expanded upon by the state or the employer. The employer will continue to pay the employer-paid portion of your health premium (you may have to continue paying your portion of the premium during the leave). Upon returning from leave, you must be restored to the same job or an equivalent job. This means that, the leave does not guarantee that the actual job you held prior to going on leave will still be available and yours upon your return. However, you should get a job that is virtually identical in terms of pay, benefits, and other employment terms and conditions, including shift, location, and overtime. You should also be able to get any unconditional pay increases that occurred while you were on leave, such as cost-of-living increases.

The Family Medical Leave Act allows you to take time off at any time during your pregnancy or even after childbirth within one year of your child’s birth. You may be able to take leave as a mother before and after having or adopting a baby, which is called maternity or pregnancy leave. Paternity leave for fathers is less common but is available at some firms.

If enough leave is not provided by your employer, you may be able to negotiate for more leave or negotiate to work from home or on a flex schedule to better suit your adjustment to life with a new child.

Potential Advantages

Some employers may allow you to continue working part or full time while technically on leave so that only days taken off to deal with acute issues qualify as leave. This provides the benefit of shortening the amount of leave time you need to take to deal with an issue and/or lengthening the amount of time over the course of the year you can stay on leave and still be considered an employee with benefits.

In certain cases, some states require employers to provide paid leave rather than just unpaid leave. Similarly, any loans taken from a retirement account may be allowed to have repayment suspended during the leave. Some employers will also provide community services, counseling, respite care, legal and financial assistance, and caregiver support groups for those on leave dealing with associated issues that would require those services.

After the birth of your child, a short-term disability insurance policy may cover part or all of your salary for a certain period. It’s worth knowing what is covered in advance since some insurance companies may pay out for longer periods if you experience complications or have a C-section. Going on leave for a disability may also qualify you to begin pulling out any non-qualified deferred compensation money that has been put aside for your benefit to be paid at a later date.

Some states have short-term disability plans that pay for a certain period of maternity leave out of the office even if the employer does not carry any short-term disability insurance; so, it’s important to know what is offered through the state for maternity or short-term disability leave. You may have to file within a certain period to take advantage of anything offered by your state in this regard. The state may cap the benefits at a certain level per person or at a percentage of your ordinary income.

Potential Risks

It’s important to make sure you know whether your short or long-term disability policies will stay in place while you’re on leave, especially if you may need to go on disability after the leave. If you find that going on leave may cancel your short or long-term disability policies, it may be worthwhile to debate going directly on disability rather than using leave. Short-term disability policies may also require you to use your sick time or vacation days before you start receiving payouts. Under these circumstances, you may strategically use your sick time and vacation days before the birth so your short-term disability policy kicks in sooner. The policies may also require you to be physically absent from your workplace for a certain period before receiving benefits.

Keep in mind that any decision to work part time before or after the birth may affect your ability to collect short-term disability payments.  So, it is wise to know what your short-term policy covers (and under which conditions) before going to work part time or remotely for your employer during the time you take as maternity leave. It is also important to know whether you may have to pay back any of the short-term leave on maternity pay in the event that you do not return to work or quit within a certain period after returning to work.

Time spent on leave may or may not count towards vesting of benefits for defined benefit plans and may decrease the average pay you received over your years of service in pension benefit calculations. Deciding whether to take leave or retire (for in cases in which your final average pay may be lower if you take unpaid leave in one of your final years) may be necessary to make sure you receive the highest pension payment possible. You wouldn’t want to decrease the pension payments for the rest of your life because you took leave for the last three months of your career, which makes any calculation of your last three years of pay much lower than it would have been.

Keep in mind that you may lose any bonuses, incentive pay, or equity-based pay during your leave of absence, typically depending on the type of pay and your role in the firm. Being out on maternity or other leave may affect things like raises, bonuses, seniority, participation in your company’s 401(k) plan, vesting of the company’s matching contributions, or stock options. In addition, you may not be able to contribute to your 401(k) or FSA while you’re on leave.

Dependent care FSAs are not required to continue during leave, unlike standard FSAs. There may be a period during which you will have some coverage for dependent care but after which you will not be allowed to get any reimbursement for dependent care even if you put money into the account. This makes it very important to pre-plan this if possible.

Employers likewise keep FSAs in place during leave, but the coverage can lapse if you elect to cancel the coverage—during which time your employer is not required to make any reimbursements for expense claims. Even if you decide to discontinue coverage, the employer can keep the FSA coverage in place, and any amounts given to you during this period must be repaid by you whether you return to work after leave.

Some other potential risks to keep in mind include the following:

  • Sometimes, even an employee on leave can be laid off (e.g., due to downsizing or if the employee is a highly compensated employee who does not meet certain standards).
  • Employee assistance plans may or may not continue while on leave.
  • Any insurance acquired through work may or may not provide coverage for employees on leave. Make sure to inquire about the continuation of any life, health, dental, and vision plans and how you will continue to pay premiums for any available plans.
  • If the employer continues to pay your portion of insurance premiums during a leave period, you may be required to repay those sums after the leave has ended.

Key Considerations and Regulations

To be covered by federal regulations, you are required to work for your employer for at least one year and at least 1,250 hours over the previous 12 months (as long as the employer has at least 50 employees within 75 miles).22 You may be required to provide 30 days of advance notice when the leave is foreseeable. Under some circumstances, the employer may require you to use all PTO and sick leave as part of your unpaid leave.

Some other key considerations to keep in mind include the following:

  • Vacation may continue accruing while you are on leave, or you may be required to use all vacation days while you’re on leave as part of the time you’re away from the office.
  • Smaller employers and part-time employees are generally exempt from any leave policies required by the federal government; however, some may still be covered under state law, or the employer may opt to provide leave even though it is not legally required.
  • It’s important to know how the health benefit coverage works while you’re on leave so you can elect for money to be withheld to pay premiums from any checks you receive or prepay or write a check for coverage while you are gone.
  • Federal law does not cover the care of your father-in-law, mother-in-law, brother, sister, grandmother, grandfather, or adult child because “family” is defined a spouse, parent, or child under the age of 18, except relatives or other people who helped raise you or for a grown child who is severely disabled.

 Military Leave

An individual leaving on military leave may be entitled to pay increases they would have normally received had they stayed at the employer during the time of the leave, although there are some exceptions. They are also entitled to be reemployed in the same or a similar position and the same benefits upon returning to work (with some exceptions, including circumstances in which reemployment is impossible or unreasonable or in which reemployment would impose an undue hardship on the employer).

Potential Advantages

You are not required to use your vacation pay while on military leave like you may be required to for general leave. It may be worth thinking about using your vacation pay during the leave time to use optimal tax planning strategies and to provide additional income you may not otherwise realize if you do not return to your employer. For example, since pay while you’re deployed isn’t taxable, using your PTO first means you get paid tax free, and you can then take unpaid leave in another year to lower a second year’s taxes. This strategy is better than having to pay taxes for your PTO days and being in a higher tax bracket than necessary the following year. Any time when you are deployed and not paying taxes on ordinary income may also be a prime time to convert some of your retirement plan money into Roth IRA money.

Keep in mind that leave provided by the government is unpaid leave, so the employer may choose to provide some pay during your absence. Under certain cases, if you perform work for the employer while you are on military leave, you must be paid your full salary from the employer minus any military pay.  Unpaid leave is required in some amount for certain employees. However, some companies may opt to cover non-required employees during leave, have extended leave, or provide a combination of these two solutions.

While deployed, the military provides its own benefit of allowing you to put up to $10,000 into a savings account, giving you a guaranteed interest rate of around 10% during the deployment period. It is generally worthwhile to maximize your contributions to this plan.

As long as you continue your health coverage, the full amount of your FSA, minus any prior expenses for the year, must be available to you at all times during your leave period. However, if your coverage under the health plan terminates while you are on leave, you are no longer entitled to receive reimbursement for claims during the period in which the coverage was terminated.

Military members returning from military leave who have defined contribution retirement plans must be given three times the period of their leave of absence, as long as it’s not greater than five years, to make up for any contributions missed during the leave period.23 This can be very beneficial in terms of allowing the military personnel to overcontribute to a deductible 401(k) plan, thus lowering their taxes for the years following the return from deployment.

It’s worth keeping four other potential advantages in mind:

  • Your state may have greater protections than federal law, so it’s important to look at not only federal law but also what your state has passed to protect you before going on military leave.
  • For pension purposes, returning service members must be treated as if they have been continuously employed for purposes of participation vesting in accrual of benefits.
  • You may be able to take leave to care for yourself or certain family members (e.g., parents, relatives, or even non-relatives depending on your employer).

Potential Risks

It is important to know which work benefits will be put on hold and what will stay in place. Don’t assume that disability insurance, life insurance, or any other benefits will stay in place while you are on leave, whether you are receiving pay from the employer, working part time for the employer, or just on leave. It is important to talk to your HR department so you know in advance what benefits will stay and what will disappear while you are gone.

Generally, employers don’t have to pay the cost of health insurance if you’re on military leave unless you’re on leave for less than 31 days. For longer leaves, you may have COBRA rights, which may require you to pay the full cost of your participation in your employer’s health plan. If there are any lapses in paying any of the employer health insurance money due, you may find that even though your employer agreed to pay health insurance while you are on leave, your health insurance lapses and you are pushed onto a COBRA. So, it’s very important to keep up with all necessary payments because you may need to write checks for the coverage since you are not receiving paychecks from your employer, which would otherwise withhold pay and send medical insurance premiums to the insurer.

If you have an FSA, you may find yourself in a position in which the Heroes Earnings Assistance and Relief Act (HEART) of 2008 (H.R. 6081) waives the “use it or lose it” clause of the FSA program. It’s important to know whether you will need to spend down any of this money for any given period and what happens to this money if something happens to you during deployment so all contingencies can be planned for.

For dependent care reimbursement accounts, remember that you will have to maintain eligibility to use this money; otherwise, the money will no longer be available. For instance, if the spouse who is not deployed quits their job, the family may no longer be eligible for their dependent care reimbursement account.

Key Considerations and Regulations

Keep in mind that to get these military leave benefits, you must follow all applicable rules (including giving notice for the need to leave for military service). You must also be released from service under honorable conditions, and you must not exceed five years of military leave with any one employer (with some exceptions, such as annual training and monthly drills; these do not count against the cumulative total). The five-year limit does not include active duty training, annual training, involuntary recall to active duty, involuntary retention on active duty, voluntary or involuntary active duty in support of war, national emergencies, or certain operational missions.

There are also benefits for military caregivers. Military caregiver leave entitles an eligible employee who is the spouse, son, daughter, parent, or next of kin of a covered service member to take up to 26 work weeks of leave in a 12-month period to care for a covered service member with a serious injury or illness.24

It’s important to note that you’ll have to report back to your civilian job in a timely manner and submit a timely application for employment. This timeliness depends on how long you were deployed for, so it’s important to keep track of all the rules and check off every box on your way back into civilian life.

Some other key considerations to keep in mind include the following:

  • Make sure you thoroughly read through anything your employer has you sign since you may be signing something that waives some of your legal entitlements.
  • You must report back to your civilian job by the appropriate deadline, which can range from eight hours to 90 days depending on the length of service.
  • Military leave coverage may vary for National Guard members performing state service rather than federal service for deployment.

Discounts and Special Programs

Large employers often create an employee perk program with vendors, and possibly with other companies, to give employees discounts on everything from travel and cars to event tickets and physical goods. It’s important to keep track of and know the criteria for the discounts you and your family can receive for goods and services from your employer and from other companies that have agreements with your employer. This can be a matter of using a special coupon code any time you go on to a certain website to buy a good or a service, downloading a form from the internet to order the good or service, or arranging for the purchase of the good or service through your HR department.

Your employer may also reimburse you for travel-related expenses or provide you with a company car; in such cases, free money should generally not be left on the table. If your employer does not provide for these expenses, they may still sponsor a qualified transportation plan that allows you to take up to $230 tax free per month out of your paycheck to pay for transit-related costs, including public transportation or even parking while at the office.

These discount and special programs have the potential to be extremely advantageous for employees. Knowing the benefits offered by your employer can lead to significant savings on things you would ordinarily spend money on.

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Feel free to contact Josh Mungavin with any questions by phone 1.800.448.5435 extension 219, or email: JMungavin@EK-FF.com.

Click here for the previous chapter: Highly Compensated Employees and Executive Benefits

For more information on financial planning visit our website at www.EK-FF.com

Employee Benefits: Highly Compensated Employees and Executive Benefits

The following is a chapter from Employee Benefits: How to Make the Most of Your Stock, Insurance, Retirement, and Executive Benefits by Josh Mungavin CFP®, CRC® and Edited by Chris Boren & Tristan Whittingham.

Employee Benefits - cover


Highly Compensated Employees and Executive Benefits


Deferred Compensation Plans

Deferred compensation is a written agreement between an employer and employee in which the employee voluntarily agrees to have part of their pay withheld by the company, invested on their behalf, and then given to the employee at a predefined time in the future. This allows the employee to potentially defer paying taxes on money earned until the employee is in a more preferable tax environment. Employees must pay taxes on deferred compensation at the time they are eligible to receive it and not when they draw it out.

You generally want to think about a nonqualified deferred compensation plan contribution as an unsecured loan between you as the employee and the employer, in which you lend your employer the amount of money based on the agreement that your employer will pay you that amount of money plus any earnings subject to the investment or a fixed stated rate of return at a certain point in time. Some employers may be worthy of this loan, while other employers are unlikely to pay it back; you must consider this reliability before you elect to contribute to a nonqualified deferred compensation plan.

Strategies and Timing

Deferred compensation can be significantly beneficial, especially when used in tandem with other employee benefits such as RSUs. The employee can sell the vested RSUs they would have to pay ordinary income tax on in that year anyway and live off the proceeds while deferring their regular wages in a retirement account, deferred compensation account, or other tax-deferred savings account.

The employee can also defer ordinary compensation (potentially until after they have left the employer) so they receive ordinary income during a period in which they might not receive any income, thus lowering the amount they are being taxed on during their working years. Although this can be very beneficial, it is not without risk, specifically employer-specific risk. This risk is realized when the employee participating in a deferred compensation plan is working for a company that declares bankruptcy or goes out of business. In this scenario, the employee is standing in line with other creditors of the business to collect on any portion of the deferred compensation plan they can during the bankruptcy proceedings.

You may also think about participating in the deferred compensation plan if you are on the border of receiving a financial aid award for children going to college, which can lower your income in the eyes of financial aid offices. This allows your children to potentially receive some financial aid that they might not otherwise receive. Furthermore, if you are involved or potentially involved in litigation, it may be worthwhile to put some of your assets into a deferred compensation plan since lawyers may be more focused on assets available now rather than money that will be available at some point in the future.

Typically, an employee chooses how much they would like to defer; any payout terms, including amounts in a period; or triggering event. When opting for the deferred compensation plan with little flexibility to change these options in the future, it is important to not only think about your current tax, income, and expense situation but also plan for the future to make sure you’ve done your best so it is unlikely that you will need to make any changes to the plan later.

It is also important to remember that the money is at risk any time it is held in the plan so you do not defer compensation for too long; the longer the money sits in the plan, the riskier it becomes. The deferred compensation amount also becomes larger, and what is known about your company now and for the next year may certainly change 10, 15, or 20 years down the road.

It’s generally recommended to make the maximum contributions to a retirement plan before thinking about enrolling in a nonqualified deferred compensation plan. There is a tax benefit to contributing to your retirement plan and the potential to take loans out of the retirement plan along with a potential match from your employer and protection from your employer’s bankruptcy. You generally have the ability to choose how much to defer from your salary bonuses and other forms of compensation every year, so some changes can be made.

Plan Portfolio and Risk

You may be able to guide the investment broadly in the deferred compensation plan, but you will generally be unable to make precise investments, such as choosing individual stocks to invest in, during the time it is invested for your benefit. However, you may be allowed to direct what percentage of your money goes into specific allocations of funds, such as how much goes into U.S. stocks vs. international stocks or into stocks vs. bonds.

Rather than allowing employees to invest money in the deferred compensation plan, some companies may pay a fixed or variable amount of interest on that deferred money, which may be a benefit in and of itself if you don’t need to live off the income. You may end up getting a higher percentage guaranteed return from the deferred compensation plan than you would expect to receive from a portfolio based on your risk profile (keeping in mind that putting the money in a deferred compensation plan certainly overexposes you to a single company by essentially accepting an IOU from your employer).

Tax Implications

When looking at your tax situation, it’s important to not only consider federal taxes and Medicare but also whether you plan to move from a high-tax state to one with low or no state income taxes or vice versa. In other words, if you move from a state like California, which has high income taxes, to one like Texas, which has no income taxes, you may be better off receiving the income while you live in Texas than while you live in California even if your federal tax rate remains the same. Likewise, if you plan on moving from Texas to California, it may be worth thinking about not participating in the deferred compensation plan even if your federal tax bracket will be lower in California. The difference between the lack of state taxes in Texas compared to the state taxes that will be due in California may push you into a higher overall tax bracket, meaning that it is worthwhile to receive the money while you are in a higher federal tax bracket while working in Texas—plus, you have the added benefit of not having to deal with the company-specific risk.

It is not necessarily the case that your tax rate will decrease during retirement even if the tax law stays the same since you may have Social Security earnings, required minimum distributions, and pensions, which could take you into a similar or higher tax rate than what you had during your working years. In that case, it may not be worthwhile to participate in a deferred compensation plan, especially given the company-specific risk you would be taking with both the deferred compensation plan and your earning power as an employed worker if your employer goes out of business.

As always, tax laws can and will change, and we may see income taxes rise in the future. This means that, even if you personally earn less money since it slowly comes through the deferred compensation payout at a lower rate than what you earned during your working years, that money may still be taxable in a higher bracket because the tax brackets have changed. As such, it is important to at least be aware of the risks faced by deferring compensation.

Remember that you may be able to receive a higher rate of return on the money if you can invest it in any way you want compared to the rate of return your employer’s investment options will provide you. This is very clearly a case of not letting the “tax tail wag the dog” and deciding whether it is worth accepting a lower rate of return for a lower tax bill or worth paying the taxes immediately and receiving the higher rate of return on your investments without being overexposed to individual company risk. The plan’s investment options may be limited to insurance options and fixed percentage return, or it may have limited investment options with high expenses.

Keep in mind that you will have to pay Social Security and Medicare taxes on any amount you choose to defer in the year in which it is deferred. This may mean that if you defer the money and your employer declares bankruptcy, you may not receive the money that was deferred, and you may have paid Social Security and Medicare taxes on that money in the past.

Plan Payout

As with everything that has a value for which it is possible to name a beneficiary, it is wise to speak with your HR department about naming a beneficiary on any deferred compensation plans just in case something happens to you while you are participating. The purpose of naming a beneficiary in this context is so your money will go directly to your beneficiaries rather than through probate.

Keep in mind that some circumstances can force you to realize the entirety of your deferred compensation plan payout earlier than you intended, pushing you into a higher-than-normal tax bracket. Such circumstances include being terminated from employment, passing away, or your company being acquired. This may force you to realize the entirety of your deferred compensation while you are still work. Hence, it is important to understand all the risks you face along with any potential changes to your employer before opting for a deferred compensation plan, even if doing so can be very profitable under the right circumstances.

When enrolling in the plan, it’s important to consider the distribution schedule your employer allows. Do they require you to take the payment as a lump sum distribution so your income is much higher for a single year than it would normally be, pushing you into a very high tax bracket when you would ordinarily not be in that tax bracket, or can you take money added over several years? Are you allowed to take money out of the plans before retirement, or do you have to wait until retirement? All these details should be laid out in the plan document, which will list the payment schedule and the event that will trigger the payments, every time the amount is deferred. Possible triggering events are a fixed date, a separation from service, a change in ownership or control of the company, disability, death, or an unforeseen emergency. This means that, it can be very important to monitor the health of the company you’re employed by so you know what may happen to your deferred compensation plan and then plan accordingly. You may find yourself in a position where you know the company finds itself on weak financial straits (which is not a triggering event) so you know you will be likely to have to attempt to get your deferred compensation through your employer’s bankruptcy proceedings if you stay with the company. With this knowledge, you can strategically retire or separate from service so you may be able to remove the deferred compensation from the plan before your employer goes bankrupt and not lose all or significant portion of your money.

Keep in mind that a nonqualified deferred compensation plan may also impose conditions on receiving the money, such as a non-compete agreement after retirement, so any decisions to change employer after separation from service can cause a claw back of the money in the nonqualified deferred compensation plan. Depending on how the deferred compensation program is written, you may end up forfeiting all or part of your deferred compensation by leaving the company early, which means you leave a substantial amount of money on the table.

Unlike a 401(k), you cannot take a loan from a nonqualified deferred compensation plan, and the funds are not accessible before the designated distribution event. In some cases, you may be able to change the election for when you will receive the deferred compensation. However, these changes must generally be made at least 12 months before the date on which the original payment is scheduled to begin, the election must delay the payment for at least five years from the previously scheduled payment date, and the election will not be effective until at least 12 months after it is made. This means that if you previously decided to retire at age 60 and you receive your nonqualified deferred compensation but decide to continue working until age 65, you may be able to extend the length of your nonqualified deferred compensation payout by the age of 59, 12 months before you turn 60 and are previously scheduled to receive the payout. So, you receive the payout at age 65 when you now intend to retire.

Capital Accounts

Capital accounts are the initial and subsequent contributions by partners to a partnership in the form of cash, assets, or profits as well as losses earned by the business and allocated to partners. The amount of money you get from liquidating your capital account does not necessarily equate to the reported balance of the account (whether prior to the business’s liquidation or the partner’s departure from the firm). Capital contributions can be variably based off a set amount of partner contribution tiers determined by years of service, the level of compensation, or the amount of equity you have in the firm.

Potential Advantages

Capital accounts can be very beneficial for employers and partners. The employer gets to show an asset on the books as long as it is kept in the books and not directly spent or distributed to partners with ownership shares. The company does not need to go to a bank for a loan when they can rely on partners for a loan. In addition, partners will often not closely look at the books—or not be allowed to look deeply into the books—before deciding whether the company is creditworthy. That being said, the interest rate given by the employer can be very enticing, and if the employer is stable, it can be very profitable for the partners who contribute to a capital account.

Like many things, this can be used for good or evil. The employer can get a loan cheaper from its worker than a bank, and the partner is less likely to have the ability to put the employer’s financials through a thorough underwriting process. It can be a win–win or a very one-sided affair, so it’s important to know whether you’re putting skin in the game or getting skinned.

Potential Risks

When contributing to a capital account, it is important to realize that in essence, you are giving an unsecured loan to your employer or partnership; thus, you are subject to the risk associated with loaning your company money. This is often seen as ownership in a partnership, but in reality, a number of capital accounts arrangements are calculated by way of a formula rather than as a true ownership in the partnership. This means your capital contributions may have a fixed valuation when you want to withdraw from the capital account, and they may earn a fixed interest rate or none at all while the money is held in the capital account (rather than giving you participation in the upside of the business’s growth). It’s not uncommon for the employee to receive a rate of interest tied to the return of some benchmark.

Your capital could be used to fund the short-term needs of the company or to shore up unsustainable distribution levels for partners. This may make the proposition look appealing in the short term, but it can have long-term consequences, similar to a Ponzi scheme held up by bringing in new partners’ capital and the ongoing operating cash flow of the business. In such a case, the capital account slowly destroys the firm for the benefit of a few people, and it’s a matter of getting your money out before the ship sinks.

Another important question to ask is whether the capital money being contributed is being used to run the business so no debt is taken on or if it is being wasted on bad decisions, expansions by management, or equity partner distributions that are higher than they should be. In other words, having funds in capital accounts can spur management to need to deploy the funds in investments, which in turn creates additional risk rather than shoring up the balance sheet.

Remember that the firm can find itself at a point where the equity partners making the decisions have the choice whether to continue an unsustainable path or to correct the path the firm is on. Under some circumstances, it may be in the best interests of the equity partners to continue on the destructive path and then jumping with their client base and starting over at a new firm. This may be substantially more lucrative to them than correcting the problems at the existing firm, which in turn makes the equity partnership look less valuable. Similarly, some partners in leadership positions have income levels that are well above what their book of business would be worth if they were to relocate, which means they can’t replace their income if they leave for another firm. This means the, the leaders at the firm may decide to continue the status quo to serve their best interests rather than serving the interests of the firm, and even if they wanted to, they be unable to change the firm’s business model due to the fiscal or political environment.  So, remember that while this may often be very beneficial, in some cases it is less risky and more profitable for a firm’s leadership to allow the firm to sink rather than save it. So, any capital accounts kept above the minimum account balance required by the firm should be well researched, thought out, and debated before any decision is made to contribute. It’s also important to note that the firm may have a model for calculating partners’ capital accounts upon departure, and the liquidation of a firm may not provide sufficient liquidity to pay out all partners’ capital accounts in full.

The economic environment is also an important factor to keep an eye on. Even a well-run firm can run into problems during a sharp downturn since the ability to get partner capital during a financial crisis can come when business is slow, banks aren’t lending to firms, and there is increased weakness in financials; this all happens at a time when the dollar opportunity cost is high for the partner who contributes and the employer that needs money to continue running the business. This can mean some partners become hesitant to throw good money after bad in a downturn so they decide to invest elsewhere, causing a larger-than-normal need for a business that was otherwise sustainable.

Key Considerations and Regulations

It is very important to know the terms that govern the return of your capital. It’s not uncommon for a firm to stretch out the period during which it will return capital to any departing partner. The firm may also have a period during which you will not be allowed a return of your capital if you take a job at a rival firm. You may also have a vesting period; during that time, if you leave or something happens to you, you may not get a return of capital even if you do not work for a competitor once you leave. It’s also important to know what happens to your capital account if you get let go.

Make sure you understand whether you have any equity interest in the firm as a partner or if you have explicitly waived your interest in the form of equity and agreed to essentially be a partner providing a cheap loan to the equity partners. In other words, is the value of becoming a partner worth the amount contributed since your money may be gone the moment it’s contributed?

When looking at the financials of a partnership, it’s important to consider that the liabilities encompass not only the direct liabilities we think of, like loans and capital contributions, but also things like leases on furnishings, equipment, and real property. All these can add up to a significant level of leverage across the firm.  This means, a company with no debt may still have a substantial financial risk.

It’s also important to know whether buying into the partnership will reduce your take-home pay and, if so, to account for that reduction in any decision of whether to be a partner in a firm that requires capital calls.

You may also find that high-ranking partners have special agreements to raise their flexibility in terms of partner capital, such as the ability to draw on non-interest-bearing loans, credit distributions against future draws, or guaranteed minimum distribution amounts.


To download the book – for free! – click the following links:


Barnes & Nobles

Feel free to contact Josh Mungavin with any questions by phone 1.800.448.5435 extension 219, or email: JMungavin@EK-FF.com.

Click here for the previous chapter: Insurance

For more information on financial planning visit our website at www.EK-FF.com