What You Need to Know About CDs

Kristin Fang

Danqin (Kristin) Fang, CFA, CFP® Financial Advisor

What is a CD and what do CDs provide?

As explained by Investopedia, “A certificate of deposit (CD) is a savings certificate with a fixed maturity date and a specified fixed interest rate, and can be issued in any denomination aside from minimum investment requirements.” CD maturity terms vary from one month to five years or even ten years with different interest rates determined by both the market interest rate and the maturity terms. The longer the term is, the higher the rate is. Additionally, there is usually a $1,000 minimum required for most CDs available on the market, and a CD with a greater than $100,000 minimum is known as a jumbo CD, accompanied by a higher interest rate for the same specified term. All CDs are FDIC insured up to $250,000 per account registration.

What is the difference between a Brokered CD and a Bank CD?

CDs issued directly by depositary banks are called bank CDs, while CDs offered by brokerage institutions are called brokered CDs. The brokered CDs are bulks of CDs bought by the brokerage firms, such as Charles Schwab or Fidelity Investments, and then re-sold to investors after slicing and repacking. The advantage of owning brokered CDs is diversification because you can buy different bank CDs from one brokerage firm and see the values and due dates all listed on one aggregated brokerage statement. This also helps you to track all your CDs easily. However, the disadvantage is the additional risk associated with owning CDs from banks that go under. Also, when buying brokered CDs, it is prudent to net the brokerage fees, although de minims in most cases, off their higher nominal interest rates when comparing them to the interest rates offered by bank CDs.

What is an Early Withdrawal Penalty?

With CD investments, you are restricted from withdrawing your funds before the maturity date unless you pay a penalty. The penalty usually takes up a few months’ worth of interest, depending on the issuing institution. This allows you to redeem your CDs before their maturity and opens the door to a more sophisticated CD investing strategy to be introduced next. Sometimes paying the penalty has a better outcome.

Advanced CD Investing Strategy

Regardless of the investment time horizon for your cash, you buy a five-year CD. Should the interest rate increase the following year, you’d then weigh your early withdrawal penalty against your interest income earned in the first year. If paying the penalty is the better option, then withdraw your entire CD portfolio and buy into a new five-year CD that offers a higher interest rate either from the same bank or from a different provider. In order to make this strategy work, a careful investigation of the early withdrawal penalty rules is key. Based on my research experience, some banks charge a lower early withdrawal penalty than others, for example, 180 days’ worth of simple interest versus 540 days’ worth of simple interest for a five-year CD. Let’s look at an example here:

You have $100,000 to invest for one year and are comparing a one-year CD offering 1% APR and a five-year CD offering 3% APR from the same bank. The early withdrawal penalty is 180 days’ worth of simple interest on the five-year CD.

Scenario 1: If you choose to invest in the one-year CD, your interest income after one year will be approximately $1,000 (1% multiplied by $100,000, to simplify the math from daily compounding to a simple interest calculation).

Scenario 2: Instead, if you choose to invest in the five-year CD, after one year, your gross interest income before paying the penalty will be approximately $3,000 (3% multiplied by $100,000), but you will need to pay approximately $1,480 ($3,000 gross interest divided by 365 days and then multiplied by 180 days) in early withdrawal penalty, which is equivalent to 180 days’ worth of simple interest, in order to redeem your five-year CD before its maturity date. This will net you approximately $1,520 in interest income ($3,000 gross interest income minus the $1,480 early withdrawal penalty), which is $520 more in interest income compared to Scenario 1. Clearly, with the additional $520 net interest income pocketed in Scenario 2, you are better off to invest in the five-year CD and pay the penalty at withdrawal in one year.

Below is a chart summarizing both scenarios:

CD Blog Picture

Caveat of using this strategy:

Please keep in mind that the outcome of this strategy depends heavily on the interest rates offered and the early withdrawal penalty levied by each bank. A prudent approach is to run the math thoroughly before taking any action, because banks adjust their CD rates periodically. For questions, please feel free to contact us at Evensky & Katz / Foldes Financial Wealth Management.

Feel free to contact Danqin (Kristin) Fang with any questions by phone 305.448.8882 ext. 222 or email: KFang@EK-FF.com.

Lagniappe: Some Final Takeaways

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

I couldn’t resist using one of my favorite words—lagniappe. It means a little something extra, given at no cost, somewhat like the thirteenth doughnut in a baker’s dozen. Because there are so many topics and issues I could not cover in the previous chapters, here’s my lagniappe.

Small and Ugly May Be Beautiful. If you need more returns. One possible strategy, supported by decades of research, is to overweight a few market factors in your portfolio. Based on the original research of two well-known academics, Gene Fama and Ken French, you allocate some of your stock holdings to small companies and value stock. Over the long-term, you’re likely to be rewarded with a few extra percentage points of returns.

Maximize Quality of Life, Not Returns. It’s confusing, but after having designed many hundreds of retirement plans, it’s obvious that if you’re near or in retirement and depending on your portfolio to provide cash flow for your lifestyle, a higher allocation to bonds is likely to increase your likelihood of success at the cost of reducing the likelihood of making more money.

Hot Stocks Pay. If you’re an active trader in hot stocks, the activity will pay your broker but not you. Remember two old jokes: 1) Broker to a new client pointing out the window of his beautiful office overlooking the bay. “See that yacht; that’s my partner’s. The one next to it is Mark’s—he’s the broker next door—and the one next to that is mine.” The wise prospect asks, “Where are the clients’ yachts?” 2) How do I make a $1,000,000 in the market? Start with $2,000,000.

Safety versus Certainty. My friend Nick Murray shakes his head when he hears people talking about safe investments. He says (and he’s right): investors confuse safety with certainty. Putting your nest egg into insured CDs may offer the certainty that when they mature, you get your principal back with the promised interest; however, assuming you’re like most of us and find your expenses going up with inflation, over time your safe investment is likely to buy you less and less of the goods and services you need. This is called purchasing power erosion and it’s one of the biggest risks retirees face. The solution is to plan on a safe portfolio—one with bonds and stocks—and avoid the certainty of losing purchasing power with a safe investment.

It Doesn’t Cost You Anything Don’t You Believe It. Unless you’re the kind of person who believes in fairy tales. No professional can afford to work for free. Good investment advice is valuable, and people providing advice deserve and expect to be compensated. So it really angers me when an investor says they were told a service shouldn’t cost them anything.

 Two prime examples are bonds and variable annuities. When purchasing a bond, it’s true that you’re not charged a commission. That doesn’t mean you’re not paying compensation. Bonds are sold based on something called a spread. You might be offered a $10,000 bond at 102.5. That means your cost would be $10,250. The broker may have been told by his bond department: “This bond is available at 100.5. How much do you want to add?” To which the broker responds, “Two.” And the trader says, “Fine. Done at 102.5.” The result: you’re purchasing a bond with a 2 percent markup. The markup is the fee to the broker and brokerage firm. Again, there’s nothing wrong with paying a markup, but make sure you’re told how much it is. The good news is that you can check by going to  http://finramarkets.morningstar.com/MarketData/Default.jsp , a website that provides the details of most bond trades.

A Variable Annuity (VA) is another investment product that, unfortunately, a small minority of unscrupulous brokers use to take advantage of clients. The line is: “Don’t worry. It doesn’t cost you anything. The insurance company pays me.” Although factually true, it’s massively misleading because it ignores the reality of where the insurance company gets the money to pay the broker. The money comes from you, the annuity purchaser. The practice is particularly egregious because VAs typically pay relatively high commissions to brokers and they have no break points, unlike mutual funds. On mutual funds the commission drops as the purchase size gets larger. The broker gets the same percentage on a VA no matter how big the purchase.

Duration, Shmuration. Who Cares? You should. You probably know, or at least have heard (especially if you read Chapter 7, “Getting Your Money Back”), that bonds are subject to interest rate risk. That’s the risk of being stuck with a poor investment if after having purchased a bond, interest rates rise.

Consider John, new owner of a $10,000 ten-year bond purchased when it was paying 4 percent. Five years later, interest rates are up and a new five-year bond of the same quality now pays 7 percent. If John wishes to sell his bond, he would be offering his now five-year bond paying 4 percent. There is no way someone will pay him $10,000 for a bond paying 4 percent when the buyer can purchase a similar quality bond paying 7 percent. So if the owner, John, wants to sell, he’d have to sell at a discount.

That discount is interest rate risk. Most investors equate this risk with maturity—they assume a ten-year bond has significantly greater risk than a five-year bond. Sounds reasonable but it’s not necessarily true. The problem is that focusing only on maturity leaves out an important factor—the coupon, which is how much the bond issuer pays annually. The higher the coupon, the sooner the investor has some funds back to reinvest at the new, higher rate so a high-coupon bond might have less interest rate risk than a shorter-maturity, low-coupon bond. For an approximate guide to the level of interest rate risk a bond has, ask about the bond’s duration. That number will provide a very rough guide to the potential loss in value if rates rise. The measure is 1 percent for every year of duration. So a bond with a five-year duration might be expected to lose 5 percent if rates go up 1 percent or 10 percent if rates rise 2 percent. Not a perfect measure but far better than maturity.

I’ll Keep an Eye on It. When I caution clients about the risk of a heavy concentration in a single investment, they often respond, “Harold, I understand, but I keep a careful eye on it.” That sounds wise. Unfortunately, as Professor Sharpe taught us about the unrewarded diversifiable risk, that’s false confidence. It’s a risk that can blindside you.

Think about the fact that many years ago a crazy person who put poison in some Tylenol bottles threatened the business of Johnson & Johnson or consider the Gulf oil disaster that almost buried BP. Years ago, I used to use as the example of a company building a major manufacturing facility over what turned out to be a toxic waste dump. Well, one day, using that story to persuade my clients to reduce their exposure to the stock they held in the company where they had both spent their careers.

Their mouths dropped open and they said, “Good Lord! You’re right! We’ll sell out.” It turned out that just a few years earlier their company had, in fact, developed a major research facility over what later turned out to be a toxic dump and it almost bankrupted the firm.

It doesn’t matter how blue the blue chip is, the risk is there. Many years ago I warned a trustee that a portfolio allocation to AT&T stock representing about half the portfolio value was a significant risk. Unfortunately, I wasn’t very persuasive and the trustee scoffed at my warning—after all, it was AT&T. About a year later the value dropped over 50 percent. The drop had nothing to do with my having a crystal ball; it might just as well have doubled in price. The point is that the risk is real.

Counting on Gurus to Predict the Future May Be Hazardous to Your Wealth. No question about it: when doing investment planning, you need to have some opinion about future market returns. In my office, I have all of the important elements, including extensive databases, sophisticated analytical software, an expensive crystal ball, and a Ouija board. The future is mighty cloudy and surprises even the best of us.

The moral? It’s not Buy and hold, it’s Buy and Manage. Make your best estimates about the future and be prepared to change. Just don’t put too much faith in any guru’s ability to tell you where the market’s going, no matter how confident he or she may be.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

The Efficient Frontier: How Much Risk Can You Stomach?

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Harold Evensky CFP® , AIF® Chairman

Anchoring on the efficient frontier may sound like something out of Star Trek, but it’s not. It’s better.

Harold Evensky (HE): Mr. and Mrs. Curtis, good morning. I’m Harold Evensky and this is my partner, Matt McGrath. Welcome to Evensky & Katz. I always like to start by asking, “What brings y’all here?”

Mr. Curtis (Mr. C): Well, Harold, Vickie and I are thinking about retiring in just a few years. We’ve saved quite a bit and think we’ll be in good shape, but we had some friends who retired a few years ago, who thought they were in good shape only to discover that things didn’t work out quite as well as they expected and they’ve had to do some major cutting back in their lifestyle. We don’t want that to happen to us. The Hamptons said you helped them do some planning for their retirement so we thought we’d like to work with you to do the same.

HE: Wonderful. Let’s have some fun envisioning your future. And that’s the key—it’s your future. Our job is to empower you to plan that future. Suppose we start off with an introduction: “Modern Portfolio Theory and You.” Matt, may I have a blank sheet of paper from your pad? Thanks.

Here’s a simple picture of the investment world. On one axis, we’ll plot risk and on the other, return.

The Efficient Frontier Chapter Image file - .01.png

As you’d expect, cash would not be very risky, but it would not provide much in the way of return, whereas stock might provide a high return but at some risk. Bonds are somewhere in between.

With just these three choices, we could still design thousands of portfolios. For example, 99 percent bonds and 1 percent stock or 99 percent stock and 1 percent bonds. If I put dots on my graph for the risk and return combinations of all of these combinations, I’d fill up the picture with dots. Then, if I drew a line enclosing all of those dots, I would end up with a curved line that’s called the efficient frontier.

The Efficient Frontier Chapter Image file - .02

That means, at least theoretically, there is no best portfolio but rather an infinite number of best portfolios, depending on the risk one is willing to take. We know that everyone would like to have a portfolio with no risk and lots of return. Unfortunately, the real world of potential portfolios lies on or below the efficient frontier. So what does that mean for you?

Well, it means we have to do some planning, and then you’ll have a decision to make. First, as I said starting off, we need to make a best guess as to what return your portfolio would need to earn over time to provide you the money you need to accomplish all of your retirement goals. Then we need to make a best guess as to your risk tolerance. If we just focused on your return needs, we might conclude it was possible to achieve your financial goals with a portfolio allocated 90 percent to stock. But that might not work out very well if we faced a major bear market in a few years. After you saw your nest egg lose 40 percent, you’d call us and say, “Harold, we can’t stand it. Please sell our stock and put our money in cash!”

That’s why we define risk tolerance as the point of pain and misery you can survive—with us holding onto your belt and suspenders—just before you make that call to tell us to sell out.

With those two anchors, we can now revisit our graph. Suppose the results look like this.

The Efficient Frontier Chapter Image file - .03.png

We have two portfolios for you. Portfolio A is one that provides the return you need to achieve your goals, and B is one in keeping with your risk tolerance. Which one is right? In fact, both are, but our recommendation is to plan on Portfolio A. Why? Even though we believe you can live with more risk and would end up with more money, determining risk tolerance well in advance of a terrible market is more art than science. The consequence if we’re wrong and you bail out of the market that would be catastrophic. So why take that extra risk if you don’t need it to achieve your goals?

How about if we found a different outcome? Suppose we concluded that you needed Portfolio A to provide your needed return but had a risk tolerance associated with Portfolio B in this picture.

The Efficient Frontier Chapter Image file - .04.png

That’s not very good, because now you have to decide between eating less or sleeping less. In this case, our recommendation would be to readjust your goals to meet the return expectations of Portfolio B. Why? Again, when markets seem okay, it’s all too easy to say, “I’ll take a bit more risk.” But later, when it seems the world is coming to an end, you’re not likely to remember your willingness to hang in there.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Managing Risk: Smart Ways to Avoid the Bad and Manage the Good

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Harold Evensky CFP® , AIF® Chairman

Come and join me again in my Wealth Management class.

Good morning, everyone. I hope you all had a great spring break. Anyone do something especially fun?”

“Professor E, I went home to Istanbul to visit family. It was all too short a trip but it was wonderful seeing everyone, as I’d not been home in a long time.” [That was my ace teaching assistant, Cagla.]

“Henry, how about you?”

“Well, I’ve been working on my dissertation, so I hunkered down to move it along. I still have a lot to do but it feels good having such a good start.”

“Excellent. Is everyone ready to get back to the best class in the program? [Needless to say, the class offers a resounding confirmation.]

Okay, this afternoon we’re going to begin with a discussion about two Nobel laureates, Harry Markowitz and William Sharpe. I know you all have thoroughly read the assigned material including some of their seminal works, so my question is this: how would you describe the significance of their work to a client? Katie, why don’t you start with Professor Markowitz?

Katie: Professor Markowitz recognized that in investing we need to consider risk as well as return. That may seem pretty obvious today, but at the time, the sole focus of investors was on which investment would provide the highest return. To the extent risk that was considered at all, investments were simply categorized as conservative or speculative. In fact, for decades, there were lists of legally approved, “safe” investments for fiduciaries such as banks and trusts. For our clients, the significant insight Markowitz introduced was the concept that a well-designed portfolio of individually risky investments could actually result in a safer portfolio. Professor Evensky, may I use the blackboard to demonstrate?

HE: Of course.

Katie: Okay, picture two very volatile investments. Although we expect that over the long-term their returns will be positive, on an annual basis their returns may vary significantly. Basically, this is our expectation of traditional investments such as stocks.

Here’s a simple example:

Managing Risk Chapter Image file - .01.png

Although stocks A and B are both very volatile, they both trend up. As my graph demonstrates, if we were to invest half of our portfolio in A and half in B, we’d end up with an overall portfolio with almost no volatility. Unfortunately, in the real world, we can’t find investments that complement each other so perfectly, but we can find investments that don’t move in exactly the same pattern, or as a mathematician would say, investments that are poorly correlated. That’s the wisdom that Professor Markowitz introduced. So today we don’t think in terms of risky investments but rather in terms of complementary investments; that’s why professional advisors and wise investors are so focused on portfolio diversification.

HE: Well done, Katie. David, how would you explain Professor Sharpe’s contribution to your clients?

David: Well, I’d start with this picture:

Managing Risk Chapter Image file - .02.png

Professor Sharpe demonstrated that there are two fundamental types of risk—unsystematic and systematic. Unsystematic risks are those uniquely associated with individual investments. This kind of risk is considered unrewarded because it’s risk that provides no expectation of extra return.

There are many reasons an individual investment might fail. A company may be badly managed and go belly up, or it might be well managed but fall prey to unfortunate market conditions, such as an energy company facing a collapse in oil prices. From the investor’s standpoint, it doesn’t matter whether the business failure is due to poor management or market forces. If the business fails, the investor is the loser.

At least theoretically, an investor may eliminate this unsystematic risk by diversifying. For example, a real estate investor owning and renting out a single-family home that ends up unoccupied would face a total loss of income, but if he or she owned ten homes, a single vacancy would mean only a 10 percent loss. Here’s what unsystematic risk looks like in the stock market:

April 20, 2010 – BP Deepwater Horizon Oil Spill

Stock Price April 20, 2010 ……..……………….. $50.20

Stock Price Three months later ……………….. $28.74

I can buy a portfolio of five hundred of the bluest blue chips—all the stocks in the S&P 500—but if the market drops 20 percent, that means my diversified blue chip portfolio took a major beating. In my pie graph, that risk is the first wedge of systematic risk—market risk. Many investors say, “I know that and that’s why I buy only high-quality municipal bonds.” Well, as we know, bonds are subject to something called interest rate risk. That means if I buy a bond and a few years later interest rates go up, the value of my bond goes down.

Some astute investors respond by saying, “I know that. That’s why I buy only one-year CDs and roll them over. That way, when rates go up, I get the new, higher return.” That also sounds as if it makes sense, but rates can go down and the investor’s income can drop precipitously. That risk is called reinvestment risk. (See Chapter 18, “Flight to Safety.”) So, although many investors think of bonds as a simple, safe alternative to stocks, the reality is that they come with their own unique kinds of risks.

Finally, there is the last wedge—purchasing power erosion. We all know that throughout time the costs of things we buy and the services we need go up due to inflation. That’s the other real risk of depending on bond income as the sole source of cash flow. Many investors get in trouble by confusing certainty with safety. Bond returns may be certain, but when you factor in inflation as a primary source of income, they’re certainly not safe.

HE: David, well done. I believe your future clients will be well served by your educating them about the wisdom of the laureates.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Deducting Hurricane Casualty Losses on Your Tax Return

Deducting Hurricane Casualty losses on Tax Return_DG_Blog Correction Image

David Garcia

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

Many of us in Florida or Texas endured major hurricane events in 2017.  If you suffered damage to property you may be able to deduct the property loss on your tax return as a casualty deduction.  The IRS has very specific rules that govern how much property loss you can deduct.  You’ll have to go beyond just estimating the value of the lost property.

First, you need to reduce any losses by the amount you are reimbursed from an insurance company since the deduction only applies to unrecoverable losses.  Next, you need to determine what your actual loss is.  The actual loss is the smaller of your tax basis in the property or the decrease in the fair market value.  Generally, your tax basis in the property is how much you bought it for.  For example, suppose you purchased a boat 3 years ago for $40,000.  The boat is now worth $32,000 and is destroyed in a hurricane.  For tax purposes, the loss is the decrease in fair market value since it is lower.

Once you’ve determined the actual loss you must reduce it by $100 and then by 10% of your adjusted gross income to arrive at the amount that you can claim as a deduction on your tax return.  To claim the deduction, you must be eligible to itemize your deductions on schedule A.  This means your total deductible expenses for the year exceed the standard deduction.

The government provides additional relief when the area you live in is a federally declared disaster area.  For example, you can claim the loss in the year of the disaster event or the prior tax year.  For further information, please click on the IRS links for Irma and Harvey below.



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

Steps for Identity Theft – Equifax


Anne Bednarz, CFP®, AIF® Financial Advisor

As many of you have likely heard by now, Equifax (one of the three credit reporting bureaus) recently experienced an extensive data breach. Therefore, we are encouraging everyone, including those who were not directly affected by this breach, to take preventive and proactive steps to protect their credit.

We have outlined below main steps to take regarding protecting your credit and identity.  First, we believe in today’s environment a prudent step would be to enroll in a credit monitoring and identity protection service.  Additionally, two other options exist of additional protection layers, a fraud alert or a credit freeze.

Check Equifax

You can first check to see if Equifax believes your information was stolen by entering your last name and the last six digits of your social security number here. Be sure to check any names you have used in the past, such as a maiden name.

If your information is deemed to be compromised, you can go through the steps provided to sign up for a credit monitoring service called “TrustedID Premier.” However, there is skepticism in the industry regarding the effectiveness of utilizing TrustedID Premier to protect one’s credit as the service is owned by Equifax.

Below are additional options available to protect your credit:

Credit Freeze

A credit freeze does not impact any of your currently established credit. However, the freeze does make it more difficult for identity thieves to establish new credit in your name. Placing a credit freeze on your accounts will require you to “thaw” your accounts if or when you need to apply for new credit. There may also be a nominal fee to place and lift a credit freeze. Note, that it takes about 3 days for your credit to “thaw,” so be sure to plan accordingly if you foresee a need to access credit in the near future.

If you decide to move forward with a credit freeze, then you must do so at each of the four credit bureaus listed below. Bear in mind that when you enact a freeze, you will be given a PIN; this PIN must be used to “thaw” your credit report if you need to establish new credit. If you lose the PIN, you will have to go through a fairly grueling process to get another PIN reissued.

Below are links to place a credit freeze at each credit bureau.

Consumers Union provides a list of credit freeze charges by state. 

Fraud Alert

Another viable option to protect your credit is to place a fraud alert on your accounts. This option requires creditors to confirm your identity. You can place a fraud alert with any one of the credit reporting bureaus; that bureau will then notify the others. The alert will only remain active on your account for 90 days, so be sure to mark your calendar to renew if you wish to maintain the fraud alert in the future.

Credit Monitoring Services

Lastly, there are companies that can both monitor your credit and alert you of any fraudulent activity on your accounts. In addition to credit monitoring and fraud alerts, many companies also provide insurance for losses incurred due to identity theft. If you plan to utilize a credit monitoring service you should activate the service prior to placing a freeze on your credit so they are able to monitor your information; otherwise, they are locked out of the information.  You should evaluate the proper service for you based on monitoring of both credit and identity, the frequency of monitoring, and any insurance available to protect against identity theft and restoration.  Other benefits available from monitoring services are availability of credit score, credit reports, etc.

Be Diligent

Other effective methods to protect your credit include keeping a watchful eye on your accounts and immediately reporting any suspicious activity as soon as you are aware of it. Furthermore, get in the habit of implementing sound personal-finance practices such as checking your credit report at least annually, filing your taxes early, using multi-factor authentication when available, and avoiding checking your accounts when connected to public, unsecured Wi-fi.

Essentially, always be cautious when entering personal, identifying information online.

Additional Help:

Report identity theft: https://www.identitytheft.gov

Correct errors on a credit report: https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports

Access your free annual credit reports: https://www.annualcreditreport.com/

Data security breach list (not comprehensive): https://oag.ca.gov/privacy/databreach/list

Additional information regarding Identity theft:


Feel free to contact Anne Bednarz with any questions by phone 806.747.7995or email: ABednarz@EK-FF.com.

Special Needs Planning: Resources and Issues to Consider

Brian Fischer

Brian Fischer, CFA, CFP® Financial Analyst

Special needs planning is often narrowly thought of as simply creating a special needs trust. However, depending on the individual’s situation and needs, it may require much more. This article will focus on the resources and strategies available to those with special needs and their families who care for them.


Federal legislation requires local governments to provide children with disabilities education and other related services that are designed to meet their needs. These resources include Early Intervention (EI) services for children younger than age three and special education that is directed by an Individualized Education Plan (IEP) for children up to age 21 (26 in Michigan). Taking full advantage of what is available to your child not only can help him or her reach full potential, but can also help conserve your resources and identify things to consider while planning for your child’s life after school.

It’s important to note that eligibility for special education benefits is not affected by income and asset ownership. EI services and special education vary by state; more information about each may be found at Autism Speaks1 and the Center for Parent Information & Resources.2

 Government Benefits

Government benefits are subject to strict eligibility rules. Although income and assets do not affect eligibility for special education benefits, they do affect eligibility for Social Security and Medicaid. Consequently, an important aspect of special needs planning involves protecting eligibility to receive government benefits.

While a child may not utilize these benefits prior to the age of 18, planning to preserve eligibility well in advance may be prudent. Even if monetary assistance isn’t needed, remaining eligible may be necessary to obtain services such as life skills training.

Social Security

Social Security Income (SSI) and Social Security Disability Income (SSDI) both provide income to those who meet Social Security’s disability eligibility requirements.3 SSI is a needs-based program available to those with minimal income and resources, while SSDI is an entitlement program for individuals, and possibly their dependents, who have paid into Social Security. Some information about each is outlined below.


Assets are limited to $2,000 for an individual or child under the age 18 living at home with one parent, and $3,000 per couple or a child living at home with both parents. Some assets not counted include your primary residence, a vehicle, and household goods.

  • Monthly benefits for 2017 are $735 per individual and $1,103 per couple. These payouts are offset by income. Social Security’s calculation to measure income against these limits is rather complex and can be viewed here.4
  • Also, as an added benefit, some states provide a supplement to SSI.


  • Benefits received are based on work history and family size.
  • There is a monthly earned income limit of $1,170. There are no unearned income or asset limits.
  • The 2017 maximum benefit per individual is $2,687 with a total family benefit somewhere in the range of 150-180 percent of that number.


Similar to SSI, Medicaid is a need-based program. However, Medicaid is administered on the state level. As a result, benefits and eligibility vary by state. Typically, if an individual qualifies for Social Security, he or she will qualify for Medicaid as well.

Children’s Health Insurance Program (CHIP)

This program provides health insurance to children under the age of 19 in families that are ineligible for Medicaid because their income is too high. Income eligibility varies by state.

Home and Community-Based Services

Provided through Medicaid, these services help individuals continue living at home or in the community instead of at another residence or in an institution. Services provided vary by state.

Life Insurance

Although a stay-at-home caretaker may not have income, the care he or she provides has value. Replacing the loss of this care can be expensive. As a result, it may be prudent to consider purchasing life insurance on all primary caretakers, regardless of income. The amount and type of life insurance will depend on your family’s needs. Some broad questions to ask that may help in determining what kind (term, permanent, second-to-die), if any, life insurance is to be purchased:

  • How long is the insurance needed?
  • How much can be afforded?

Keep in mind, to preserve eligibility for government benefits, it may make sense to name a trust or someone other than the special needs individual as the beneficiary of life insurance proceeds.

Special Needs Trust

A special needs trust can be an integral part of special needs planning. Generally, it can be used to preserve eligibility for government benefits and provide supplemental resources to the beneficiary. Additionally, it can set clear expectations for the use of funds. For example, giving a special needs individual’s inheritance to a sibling to manage may create confusion and the possibility of the special needs individual not getting the resources he or she needs.

There are many rules regarding the creation and use of special needs trusts, and these rules vary by state. Consider consulting a lawyer if a trust is needed. An attorney familiar with special needs trusts may be found at Special Needs Answers5 or Special Needs Alliance.6

There are two kinds of special needs trusts: first- and third-party. A first-party trust is funded by the individual with special needs or, in other words, the beneficiary. It generally is created when the beneficiary receives an inheritance or a legal settlement. A third-party trust, on the other hand, is funded by anyone other than the beneficiary. Aside from the source of funding, these trusts differ in what happens to the assets after the beneficiary dies. A first-party trust’s remaining assets pay back Medicaid, whereas a third-party trust’s remaining assets may be distributed to named heirs. (First-party trusts are also known as Medicaid payback trusts.)

If costs or limited resources make the use of a trust prohibitive, a pooled trust may be a viable alternative. Pooled trusts maintain assets for the benefit of a group of individuals under the umbrella of a single trust, thus potentially reducing costs. Funds are distributed to the beneficiaries in proportion to what they contributed.

 ABLE Plans

As mentioned earlier, keeping income and assets to a minimum to preserve eligibility for government benefits is an ongoing issue. The enactment of the Achieving a Better Life Experience (ABLE) Act in 2014 created a savings option that may provide some relief in keeping assets to a minimum to preserve eligibility for government benefits.


  • Funds in the account may be used for any “…expense related to the designated beneficiary as a result of living a life with disabilities.”7 Expenses may include basic living expenses, housing, transportation, and health care.
  • Investment earnings are not taxed if funds are used for qualifying expenses. If funds are used for unqualified expenses, taxes and a 10% penalty on earnings may apply.
  • Depending on the state, there may be a tax deduction for contributions.
  • They can potentially be a relatively inexpensive and more flexible alternative to a special needs trust.
  • If desired it can be managed/controlled by the beneficiary. This independence can be a source of pride for the beneficiary.
  • You can use any state’s plan.


  • The beneficiary must have been diagnosed with a disability before age 26.
  • Plan limits vary by state. However, there is a $100,000 account limit to maintain eligibility for government benefits. If the account’s balance exceeds $100,000, the individual will stop receiving Social Security benefits until the account balance is reduced to $100,000. Medicaid eligibility is unaffected.
  • There is a $14k annual contribution limit from all sources.
  • Only one account may be used per individual.

The National Down Syndrome Society has aggregated website links to the various state plans here.8

Letter of Intent (LOI)

A letter of intent is a set of instructions. Although not legally binding, it provides future caregivers the information needed to properly administer care. Information included may vary. It may be limited to medical care and financial information, or may be much more thorough with instructions describing the individual’s daily routine, for example, details describing what works and what doesn’t work for the individual while bathing or preparing for bed.

 Concluding Thoughts

There certainly is a lot to consider while planning for an individual with special needs. A few general observations that may be helpful to keep in mind throughout the planning process are:

  • Don’t wait until a crisis to act. Creating a plan now avoids needing someone to create a plan when you can’t. Without a plan, that someone whom steps into your shoes may be left guessing as to what is needed and most appropriate.
  • It can be challenging to identify and obtain available resources. Having confidence while going through this process along with being persistent and patient can go a long way.
  • Communicate your planning desires and wishes with those who are a part of the special needs individual’s life. Don’t assume the people you select to be a trustee, executor, or guardian are willing and able to perform the responsibilities that come along with those jobs.


Feel free to contact Brian Fischer with any questions by phone 305.448.8882 ext. 235 or email: BFischer@EK-FF.com.


Advocacy Groups and Other Resources 

There are numerous advocacy and charitable organizations that are focused on providing help to the special needs community. A few that may be of interest are listed below.

Early Intervention Services by State – State websites aggregated by Autism Speaks.

Resources for those with Disabilities by State – State websites aggregated by Center for Parent Information & Resources.

The Arc – The Arc promotes and protects the human rights of people with intellectual and developmental disabilities and actively supports their full inclusion and participation in the community throughout their lifetimes.9

Special Needs Alliance – The Special Needs Alliance (SNA) is a national organization composed of attorneys dedicated to the practice of disability and public benefits law. Individuals with disabilities, their families, and their advisors rely on the SNA to connect them with nearby attorneys who focus their practices in the disability law arena.10

Easterseals – For nearly 100 years, Easterseals has been the indispensable resource for people and families living with disabilities.11

Autism Speaks – Autism Speaks is dedicated to promoting solutions across the spectrum and throughout the life for the needs of individuals with autism and their families through advocacy and support, increasing understanding and acceptance of people with autism spectrum disorder, and advancing research into causes and better interventions for autism spectrum disorder and related conditions.12

Special Needs Answers – The Academy of Special Needs Planners consists of special needs planning professionals such as attorneys, financial planners, and trust officers that assists them in providing the highest quality service and advice to persons with special needs and to their families.13

Other Professionals

Find a Certified Public Accountant (CPA) – The American Institute of CPAs is the world’s largest member association representing the accounting profession, with more than 418,000 members in 143 countries and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education, and consulting.15

  1. https://www.autismspeaks.org/early-access-care/ei-state-info
  2. http://www.parentcenterhub.org/find-your-center/
  3. https://www.ssa.gov/disability/determination.htm
  4. https://www.ssa.gov/ssi/text-income-ussi.htm
  5. http://specialneedsanswers.com/
  6. https://www.specialneedsalliance.org/
  7. http://www.ablenrc.org/about/what-are-able-accounts
  8. http://www.ndss.org/ableprograms
  9. http://www.thearc.org/
  10. https://www.specialneedsalliance.org/
  11. http://www.easterseals.com/
  12. https://www.autismspeaks.org/
  13. http://specialneedsanswers.com/
  14. http://www.letsmakeaplan.org/choose-a-cfp-professional/find-a-cfp-professional?gclid=CjwKEAiA9om3BRDpzvihsdGnhTwSJAAkSewLIgB1GH95lrTy3VJcGVIZSW8HPzAjHhIrZIMoPLldXRoCt3Pw_wcB
  15. https://www.aicpa.org/ForThePublic/FindACPA/Pages/FindACPA.aspx

Dangerous Measures: The Fine Art of Calculating Returns

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Harold Evensky CFP® , AIF® Chairman

The person responsible for translating the math chapter of my book, Wealth Management, into Japanese told me, “You give me much headache.” Welcome to the math chapter.

Okay, class, today we’re going to be discussing one of the most common activities for financial planners, namely, the calculation of investment returns. Accounting in some measurable way for changes in investment values is fundamental to the work of financial planners. It may come as a surprise to you that such a simple concept is fraught with danger. The danger lies in the potential misuse of valid measurements.

There wouldn’t be much room for confusion if there were only one valid measure of investment return. Unfortunately, the mathematics of finance offers many choices. Among the most common are:

  • Current return
  • Total return (holding period return)
  • Real return
  • Compounded return
  • Time-weighted return
  • Dollar-weighted return (internal rate of return (IRR) and modified IRR)
  • Arithmetic return
  • Risk-adjusted return
  • Sharp ratio

Let’s consider each and I’ll simplify the discussion by assuming that we’re referring to the income received for a full year.

Current Return

This is perhaps the most popular measure with investors and some mutual fund marketing mavens. It is frequently referred to as the yield or payout. It’s an attractive measure because it provides a simple measure of the annual payout on an investment.

Dangerous Measurs Chapter Image file - .01

Although simple, this measure has a major problem. Consider the number we use for total income. That single number doesn’t distinguish the nature of the income. Is it interest income or principal payments, or capital gains, or some combination of those? There’s no way of knowing how consistent an income stream will be in the future. I’ll promise to pay you a current return of 20 percent per year as long as you don’t ask me for any money after five years.

Dangerous Measurs Chapter Image file - .02.png

Okay, let’s focus on the interest income. Will that resolve the problem? Not necessarily. The bond fund we’ve invested in may hold many premium bonds. Those are bonds that were issued when interest rates were much higher, so although we receive significant current annual income, some of that is actually a return of principal. When bonds mature they will be paid off at par not at the bonds’ current market premium value.

Now we can talk about some measures that may be more useful.

Dangerous Measurs Chapter Image file - .03.png

This simple measure eliminates potential misleading factors that affect current return, but it fails to answer a number of important questions. Measuring total return is only a starting point in evaluating investment returns.

Real rate of return = Total return minus Inflation rate

Another simple but very important calculation determines what investment advisors call “real return”—how much did an investor actually make after inflation. Earning 10 percent if inflation is 3 percent would be nice, but if a few years later inflation is 8 percent and they’re still earning 10 percent total return, that wouldn’t be so nice. All our clients live in the real world, so all of your planning should be based on an “after inflation” real return.

Compounded Return

Now we’re getting to the number most investors are looking for: “What did I earn last year?” The most common measure is called the Internal Rate of Return (IRR). It’s also known as the dollar-weighted return. This calculation considers the timing of additional investments your clients made and/or withdrawals they took during the year and the return of the investments in the portfolio.

Time versus Dollar-Weighted Return

We’re not done yet, one more to go. The power of IRR to include interim additions and withdrawals from the portfolio is also its Achilles’ heel. If you’re evaluating the performance of a portfolio when you have control of the external cash flows, the IRR provides a valid measure. If you have no control of the external cash flows—when your client adds or withdraws money—you need to consider using two measures. The IRR will provide a valid measure of your client’s portfolio performance; however, it will not answer the question of how successful your recommendations were.

To answer that question, you need an alternative investment-return calculation known as the Time-Weighted Return (TWR). Basically, this measure calculates how the investment would have performed if no new additions or withdrawals had been made during the year. After all, if you and your selected money managers have no control of the timing of external cash flows, your performance should not be penalized (or rewarded) for your client’s unfortunate (or fortunate) investment timing.

For example, consider the results of two investors, each of whom invested in the same mutual fund. Investor A invested $90 at the beginning of year one and an additional $10 at the beginning of year four. Investor B placed $10 in the portfolio at the beginning of year one and $90 at the beginning of year four. Here are the results of their investments:

Dangerous Measurs Chapter Image file - .04.png

So there you have it, two investors, investing in the same portfolio, resulting in six different performance numbers. What do those numbers tell us? The average annual return? Not much. The dollar-weighted return? Investor B was lucky and invested the bulk of his money at opportune times and the advice was credited with a 9 percent annualized return.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Market Timing: A Fool’s Game

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Markets don’t care about what you need.

The Trujillos visited me a few months after the technology market crashed in 2002. They were a lovely couple—both in their mid-seventies—Mr. Trujillo was dapper in his tailored blue blazer, and Mrs. Trujillo was beautifully coiffed and dressed in a lovely St. John suit (my wife’s favorite high-end store). They had scheduled the meeting after sustaining significant losses during the tech market crash. After the traditional introductory “how are you” courtesies, Mr. Trujillo came right to the point.

Mr. Trujillo (T): Mr. Evensky, our investments were decimated in the market crash and we’re desperate to recover those losses. We’ve cut our expenses to the bone. The only basic needs remaining are our club and golf dues and our annual cruise. We’re hoping that you, as a professional, can help us.

Harold Evensky (HE): Mr. Trujillo, I’m sorry to hear about your losses. Perhaps you can give me some idea of how you believe I may be of help?

Mr. T: Well, we thought that by judicious market timing and sophisticated stock picking we can earn returns well beyond what we could by just tracking the market.

HE: I understand. Tell me how you were investing prior to the market crash.

Mr. T: Given the extraordinary returns in technology and all of the news about the new era of the nineties, we were heavily concentrated in technology funds. We recognized the risk of putting all of our eggs in one basket, so we diversified among several well-respected technology funds. For a year, we were doing extremely well; our returns were more than 80 percent. Unfortunately, no one warned us prior to the market crash, and in less than a year our portfolio was down 70 percent! I still don’t understand why we lost so much. It seems that if we made 80 percent and lost 70 percent, we should still be 10 percent ahead.

HE: I understand. Let me do some analyses to see how you’re positioned so I can determine what recommendations may be appropriate. Can we get together next week?

Mr. T: That would be fine.

After the Trujillos left, I gathered the information they had provided regarding their current investments and all of their financial goals. Factoring in assumptions for taxes, future market returns, and inflation, I entered all of the information into our planning software, MoneyGuide Pro, and ran several scenarios with varying allocations between bonds and stocks.

It was bad news: no matter how I jiggled the allocations, my conclusion was the Trujillos could reasonably spend only about one-half of what they considered a bare-bones lifestyle. That’s not the sort of news a planner looks forward to sharing with a client. Unfortunately, although Mr. Trujillo said they needed a return that would enable them to maintain their lifestyle, the reality is that the markets don’t give a damn.

How about Mr. Trujillo’s solution of market timing? As I explained to David Samuel in Chapter 14, “Market Timing for Fun and Someone Else’s Profit,” trying to find the pot of gold at the end of the rainbow is not a viable investment strategy. Unfortunately, their experience with the boom and bust of their portfolio didn’t convince them of the market-timing fallacy. Rather than the impossibility of consistently making the right call on market turns, Mr. Trujillo complained that no one warned them prior to the market crash. He ignored the fact that no one warned him because no one knew in advance. If you think about it, had the impending crash been obvious to professional investors, they would have moved to cash prior to the crash. Of course, they didn’t, and across the board, professionals, including the managers of the Trujillos’ diversified funds, were blindsided, as both investors and professionals have been with every market correction and crash.

You may be thinking about people you know who managed to avoid much of the loss during a bear market, and I’m sure that’s true. In fact, one of the major arguments for active management is that it may not work all of the time, but it comes to the forefront during bear markets because an active manager can reduce his or her equity exposure, whereas an index fund must stay fully invested. Although that statement is true, the conclusion is not.

In 2013, my graduate assistant (who’s now a professor), Shaun Pfeiffer, and I researched this argument. We found two fatal flaws: 1) The majority of active managers did not avoid bear market losses. 2) Even more importantly, those who managed to avoid losses in one bad market generally fail to do so in subsequent bad markets.

As for Mr. Trujillo’s confusion about his loss versus his expected 10 percent gain, it’s a classic—and dangerous—mental math trap. Big losses have far greater ramifications than most investors understand. Suppose the portfolio was valued at $1,000,000 before the big 80 percent gain. It would have grown to $1,800,000. If it then lost 70 percent, the 70 percent was a loss on the $1,800,000 portfolio, leaving a balance of only $540,000! Even worse, to get back to the $1,000,000, the Trujillos would need an 85 percent return. Not likely.

What did I tell the Trujillos? As tactfully as I could, I walked them through the numbers and tried to explain the reality of their financial position. Unfortunately, I was unsuccessful and they continued to insist that having cut expenses to the bone, they would have to simply find someone who could help. I wished them the best but feared they would simply be digging themselves into a deeper hole with progressively less opportunity to at least mitigate the pain.

The moral? Markets don’t have feelings or morals. They do not care what an investor needs and there is no investment or strategy that has consistently provided returns well in excess of those earned in the broad markets. Consequently, if you care about your financial future, don’t base the quality of your life on hopes, dreams, and the expectation of being the first person to find that pot of gold or win the lottery. Do your planning based on the reality of the markets.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.

Flight to Safety: The Portfolio that Makes for an Uncertain Future

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Harold Evensky CFP® , AIF® Chairman

Certainty Isn’t Safe

Harold Evensky (HE): Kirin, good to see you. Where’s Autumn?

Kirin (K): She’s out shopping. I wanted to see you alone. I’m very upset and concerned about my investments; I don’t want her to know and get worried.

HE: Kirin, what’s worrying you?

K: Well, as you know, most of my money is in a series of large, one-year CDs that I’ve been rolling over every year. A few years ago, I was getting almost 9 percent. It’s been going down every year, and now I’m facing rolling them into CDs that are paying only 1 percent! Harold, we can’t live on 1 percent.

HE: I hear you and, indeed, rates have come down significantly. We might find a bank paying a tad more, but it would be a small increase. Let’s talk about repositioning at least some money into a balanced portfolio.

K: A balanced portfolio? That sounds like it has stocks?

HE: Indeed, the idea is to balance your investments between stocks and bonds—probably somewhere in the range of 50 percent bonds and 50 percent stock.

K: Harold, forget it! The market’s too risky. No way am I buying stock.

HE: Okay, Kirin, let’s talk about designing a laddered bond portfolio.

K: What’s that?

HE: Well, we would buy a series of high-quality bonds maturing each year during a period of time. If you invested $100,000, we might buy ten bonds, one maturing in one year, the next in two years, and so on until the last $10,000 was invested in a ten-year bond. That way, if interest rates go up in a year, you’ll have the money from the maturing bond to invest at the new higher, ten-year rate, and if rates go down, you’ll have most of your money invested in bonds paying a higher return than the current market.

K: Sounds cleaver, but forget it. No way am I tying up my money that long.

HE: Okay, Kirin, I give up. Stop buying your one-year CDs and buy five-year CDs. At least they pay a little bit more.

K: Harold, no way. Long-term to me is a green banana.

HE: [By now, I was more than a little frustrated.] Kirin, go ahead make my day—die. [Normally, I wouldn’t be so blunt, but Kirin was not only a client but also a long-time friend and I thought he needed a significant wake-up call, so I went on.] If you really did die, I would be distraught because you’re a good friend, but what keeps me awake at night and should keep you awake at night is not dying and having no financial assets to support your lifestyle. As my friend Nick Murray would say, your problem is confusing safety and certainty.

CDs are certain in that you can have confidence that you will receive the interest payments promised and your full principal back at maturity. In the real world, the friction of taxes and inflation is likely to result in your certain payments buying less and less. That means your standard of living will gradually be eroded. That is not safe. The moral? Don’t confuse certainty and safety. A safe investment portfolio has a high probability of allowing you to maintain your standard of living. For most of us, that means investing in both bonds and stocks.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.