NewsLetter Vol. 11, No. 6 – October 2018

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Dear Reader:


Because I believe it’s so valuable that every one of my readers needs to download a copy. Prepared by Josh Mungavin, my partner and one of the best young planners in the country, it’s an invaluable resource (and the price [$0] couldn’t be better).

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

Family Info Organizer

The Family Information Organizer is here to help you navigate loss while also making sure you have everything you need in times of emergency or natural disaster. With this book, you will:
• be motivated to gather all your essential information now, rather than when it’s too late.
• have all your important information in one place.
• have peace of mind in times of loss or emergency.
• be able to make sure your family knows everything they need to when you’re not around.
• be able to share this fantastic tool with your friends and family.

Don’t be caught unprepared; use The Family Information Organizer today!

Click here to download the book for free.


Lubbock is home to six award-winning wineries, and the High Plains grows 90 percent of wine grapes in the state of Texas. 


However, the Motley Fool piece on long-term care (sent to me by friend and LTC expert Bill Dyess) is quite useful.

Click here for Motley Fool article.


Morningstar columnist Mark Miller has written an informative article called “Safeguarding Your Wealth from the Effects of Cognitive Decline.” I must admit I’m a bit biased, because this was one of his tips:

Work with a fiduciary adviser. Avoid any financial adviser who is not a fiduciary—a legal definition that requires an adviser to put the best interest of a client ahead of all else. This point—and my argument for portfolio simplicity—is illustrated by an important story that appeared recently in the New York Times detailing abusive trading practices by a stock broker in the account of a couple well into their 80s that was being monitored by their daughter.

The fall of the Obama-era fiduciary rule for advisors may complicate the task of finding a trustworthy adviser. But there really is a simple way through the maze. If in doubt, ask anyone you are considering hiring to sign the fiduciary oath—a simple, legally enforceable contract created by the Committee for the Fiduciary Standard. By signing, the advisor promises to put the client’s interest first; to exercise skill, care and diligence; to not mislead you; and to avoid conflicts of interest. You can download the oath at  by clicking here.


How much money do Americans have in their 401(k)s? From CNBC:

20 to 29           $11,500

30 to 39           $42,700

40 to 49           $103,500

50 to 59           $174,200

60 to 69           $192,800

Click here for full article.


From my friend Ron:

Reaching the status of “millionaire” used to be a big deal. But with rising inflation, a higher cost of living in cities, and changing perceptions around wealth, the six zero milestone doesn’t mean as much anymore…there are over 16 million millionaires globally, and 4.3 million in the United States alone.

Individuals with net worth > $50,000,000

Asia                        35,880

Europe                    35,180

North America         44,000

Latin America            4,220

Middle East               4,740

Russia                      2,870

Australia                   1,850

Africa                        1,190

Click here for more.


Worldwide, there are 255,810 individuals with a net worth of at least $30 million. Here are the ten cities with the most super-rich residents:

Osaka                             2,730

Washington, D.C.          2,735

San Francisco                2,820

Chicago                          3,255

London                           3,830

Paris                               3,950

Los Angeles                   5,250

Tokyo                             6,785

New York                       8,865

Hong Kong                   10,010

Click here to read more.


My friend Peter shared with me this remarkable 11-minute video, narrated by Tom Hanks, about the amazing boatlift out of Manhattan on 9/11 that rescued about 500,000 people in about 9 hours. The video has been seen by 9 million people, but just in case you have not seen it, please watch it and remember we all have the ability to come together when we must.

To watch the video click here.

TOP 1%

Even more on the rich from USA Today:

 The United States is enjoying an era of unprecedented wealth and prosperity. Economic output and household incomes are at all-time highs, while unemployment is at its lowest level in well over a decade. However, the growth has not benefited all Americans equally, and in much of the country, wealth is becoming increasingly concentrated in the hands of a few.

From the end of World War II through the early 1970s, the average income growth of the bottom ninety-nine percent of earners roughly tripled the 34 percent growth rate among the wealthiest one percent.

Since, however, the strengthening of the middle class has ground nearly to a halt, while the wealth of the one percent has grown exponentially.

The average income for the top one percent spiked by 216.4 percent from 1973 to 2007, but it increased by just 15.4 percent for all other earners. From 2009 to 2015, the average income for the wealthiest Americans grew by 33.9 percent, more than triple the income growth of 10.3 percent among the remaining ninety-nine percent.

 10-2018_Top 5 States-01

To read more click here.


From an AARP survey: How frequently should an adult child call his or her mother?

Once a Day                                                     27%

Two or More Times a Week                           23%

Once a Week                                                  38%

Once a Month                                                 12%


From USA Today:

College Football’s 25 Highest-Paid Coaches

                 Name                                  School             Total Compensation

#1        Nick Saban                          Alabama                   $8,307,000

#2        Urban Meyer                        Ohio State                $7,600,000

#3        Jim Harbaugh                      Michigan                  $7,504,000

#4        Jimbo Fisher                        Texas A&M              $7,500,000

#5        Gus Malzahn                        Auburn                     $6,705,656

#25      Bobby Petrino                      Louisville                  $3,980,434

Just a tad more than professors make.


From my friend Michael:

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From ThinkAdvisor:

Cryptocurrencies are the ‘“mother of all scams,” and blockchain is “the most overhyped—and least useful—technology in human history: In practice it is nothing better than a glorified spreadsheet or database,” Nouriel Roubini, professor of economics at New York University’s Stern School of Business, told senators on Thursday.

Roubini, who famously predicted the 2008 credit and housing bust, testified before the Senate Banking Committee during a hearing on the cryptocurrency and blockchain ecosystem, that the “crypto bloodbath is in full view” and that “the new refuge of the crypto scoundrels is ‘blockchain.’”

Wonder what he really thinks.

To read more click here.


From the Wall Street Journal editorial board via my friend Knut:

Most Americans can’t pass the civics test required of immigrants

These days it’s popular to lament that immigrants are destroying America’s national identity, but maybe we’re getting it backward. When the Woodrow Wilson National Fellowship Foundation recently put questions from the U.S. Citizenship Test to American citizens, only one in three could pass the multiple choice test.

It’s embarrassing. According to the foundation, only 13% of Americans knew when the Constitution was ratified, and 60% didn’t know which countries the United States fought in World War II. Most couldn’t correctly identify the 13 original colonies, which at least is something of a teaser. But only 24% could identify something that Ben Franklin was famous for, and 37% thought it was for inventing the light bulb.

Even with a highly contested Supreme Court nomination now in play in the Senate, 57% of Americans couldn’t say how many Justices are on the Court. Older Americans did much better than younger Americans—only 19% of the under-45 crowd passed—which probably reflects the declining state of American public schools. None of this augurs well for the future of self-government.

We’ve always thought it important that immigrants must pass a test on the basics of American history and civics before they can be sworn in as citizens. Immigrants who are motivated to become citizens will take the time to learn. The real threat to American freedom is the failure of current citizens to learn even the most basic facts about U.S. history and government.


Parents Spend Twice as Much on Adult Kids Than Retirement, Survey Says:

Americans are contributing twice as much to their adult children as they are to retirement, according to a new study.

U.S. parents spend $500 billion annually supporting and giving to their adult children aged 18 to 34, double the amount they contribute each year to their retirement accounts, according to a new study conducted by Merrill Lynch in partnership with Age Wave.

While 79 percent of more than 2,500 American parents surveyed said that they give at least some financial support to their children, two-thirds of American parents report having sacrificed their own financial security for their children.

For full article click here.


Quite amazing, but for real. Use two fingers to negotiate.

Click here to view map.


From a presentation at Insiders Forum:

  • 1.3 million apps in the iTunes store
  • 323 days of video uploaded to YouTube every minute
  • 1.39 billion people on Facebook, making it the largest country on earth


Deena and Katie with our good friends Yvonne Racz Key, Artistic Director at Ballet Lubbock, and Maestro David Cho, Music Director of the Lubbock Symphony Orchestra.

10-2018_Cool Partners_03


A note from Jim about a very useful “game” from the American Academy of Actuaries:

Click here for a link to the Social Security Game. It is a neat calculator that allows anyone to plug in their preferences for solving the SS shortfall. You quickly realize that we can make the system solvent and even increase the benefits. The choices were relatively painless when I first played the game 5 years ago, but they become increasingly difficult each year we delay taking action.

Here’s how the Academy describes the game. “While Social Security isn’t in danger of collapse, changes will be need to be made to pay full retire benefits after 2034. Everyone thinks it’s easy to solve Social Security’s financial problems, but can you? Play the game to explore options for Social Security reform and how changes will affect younger workers, retirees, and the program’s long-term health.”


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Receiving the Frankel Fiduciary Prize for contributions to the preservation and advancement of fiduciary principles in public life. The prize is named after Professor Tamar Frankel of the Boston University School of Law.

Click here for video.

10-2018_It's Been a Few Good Months_06

Receiving the Committee for the Fiduciary Standard Fiduciary Award from my friend Patti Houlihan.

10-2018_It's Been a Few Good Months_07

Deena receives the Leadership Award bestowed at the Insider’s Forum, a conference that brings together the leading figures of the financial planning profession during a main stage presentation.

10-2018_It's Been a Few Good Months_08

10-2018_It's Been a Few Good Months_09

Named for P. Kemp Fain, Jr., this award is the pinnacle of recognition in the financial planning profession, honoring one exceptional individual who has made outstanding contributions to the financial planning profession. Fain was a pioneer in the financial planning profession, blazing trails in professional associations, the CFP®certification, and the profession at large. In keeping with Fain’s example, nominees for the award are individuals who have made significant contributions to the financial planning profession in the areas of service to society, academia, government, and professional activities.

Click here to watch video.


From the Wall Street Journal via my friend Monty:

The new venture, Aperture Investors LLC, builds on a concept he championed in his last months at AllianceBernstein: Money managers should only charge higher fees than exchange-traded funds when they beat the market. Armed with as much as $4 billion in money to manage from Italian insurer Assicurazioni Generali SpA, Aperture has hired two portfolio-management teams. One will invest in stocks and bonds from emerging markets and the other will buy or bet against corporate debt.

Aperture is putting more than its fees at stake. Employees will also be paid based on how they perform against the market.

Click here for full article.

Four “catches”:

  • When the manager beats the “market,” the fee can rise to 2+%.
  • What’s the “market”? Selection of the benchmark is an easy but insidious way to game the system.
  • If the managers don’t beat the “market,” the fund and managers still get paid. So much for identity of interest.
  • No element of “risk adjusted” return. If they’re having a lousy quarter, the managers have nothing to lose by going for broke and taking significant risk. If the portfolio tanks, they still get paid and the investors are left holding the bag.

Needless to say, I’m a skeptic when it comes to performance-based compensation. 


From my friend Judi, who collects quotes:

  • Discovery consists of seeing what everybody has seen and thinking what nobody has thought. (Albert Szent-Gyorgi)
  • Go confidently in the direction of your dreams. Live the life you have imagined. (Henry David Thoreau)
  • Success is moving from failure to failure with no loss of enthusiasm. (Winston Churchill)
  • Never doubt a small group of thoughtful, committed people can change the world. Indeed, it’s the only thing that ever has. (Margaret Mead)
  • Everybody can be great, because anybody can serve. You don’t have to have a college degree to serve. You don’t have to make subject and object agree to serve. You don’t have to know about Plato and Aristotle to serve. You don’t have to know Einstein’s Theory of Relativity to serve. You only need a heart full of grace; a soul generated by love. (Martin Luther King)
  • Life moves pretty fast. If you don’t stop and look around once and a while, you could miss it. (Ferris Bueller)

And a few of mine:

  • When all the experts and forecasters agree—something else is going to happen. (Bob Farrell, Merrill Lynch)
  • Investment survival has to be achieved in the short run, not on average over the long run. That’s why we must never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average. Investors have to make it through the low points. (Howard Marks)
  • Just as markets anticipate eight of the next five recessions, so too they can look forward to eight of the next five bull market recoveries. (Howard Marks)
  • Millions saw the apple fall, but Newton was the one who asked why. (Bernard Baruch)
  • I am proud to be paying taxes in the United States. The only thing is—I could be just as proud for half the money. (Arthur Godfrey)
  • People who complain about taxes can be divided into two classes: men and women. (anonymous)
  • There are two kinds of economists, those who don’t know and those who know they don’t know. (anonymous)
  • In theory, there is no difference between theory and practice. But, in practice, there is. (Jan La van de Snepscheut)
  • The better the meal, the lousier the deal. (Veteran Broker)


According to Prudential’s first-ever Financial Wellness Census, the nation is almost evenly split between people who are doing well financially (46 percent) and those who are struggling (54 percent). Roughly 30 percent of respondents have an inaccurate perception of their financial state, according to the report. 


It’s very exciting to see the future of our profession. These are two students of Dr. Sean Pfeiffer (my former teaching assistant) in the financial planning program at Edinboro University that I met at the Financial Planning Association Convention.

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From the Financial Times:

Retirement savers will need to educate themselves and take greater ownership of their fate…

Barbara Roper, a Colorado-based director of investor protection at the Consumer Federation of America, is disappointed that “we are back where we were.” The onus once again falls almost entirely on retirement investors to protect themselves, she says.

I would revise that to say “ALL investors.”

To repeat—time to be sure you use the Committee for the Fiduciary Standard “Putting Your Interest First” Oath.

Click here for Financial Times article.


From CNBC:

This bull market run has echoes of the late 1920s, Nobel Prize–winning economist Shiller says.”

Also from CNBC:

Recession risk is ‘below average’ for the next three years, Goldman says.

I think my friend Alex captured it best:

“Reminds me of what my one of my Chief Master Sergeants once told me: ‘Colonel, I feel strongly both ways!’”




Click here to read more.




From my friend Leon:



You are a participant in a race. You overtake the second person. What position are you in?



#1 ANSWER: If you answered that you are first, then you are absolutely wrong! If you overtake the second person and you take his place, you are in second place! Try to do better next time. Now answer the second question, but don’t take as much time as you took for the first question, OK?



If you overtake the last person, then you are…?



#2 ANSWER: If you answered that you are second to last, then you are…wrong again. Tell me, sunshine, how can you overtake the last person?




Very tricky arithmetic! Note: this must be done in your head only. Do not use paper and pencil or a calculator. Try it.


Take 1000 and add 40 to it. Now add another 1000 now add 30. Add another 1000. Now add 20. Now add another 1000. Now add 10. What is the total?


#3 Did you get 5000?

The correct answer is actually 4100. If you don’t believe it, check it with a calculator!

Today is definitely not your day, is it?


Maybe you’ll get the last question right…maybe.



Mary’s father has five daughters: 1. Nana, 2. Nene, 3. Nini, 4. Nono, and ???

What is the name of the fifth daughter?



#4 Did you answer Nunu? No, of course it isn’t! Her name is Mary! Read the question again!



A mute person goes into a shop and wants to buy a toothbrush. By imitating the action of brushing his teeth, he successfully expresses himself to the shopkeeper, and the purchase is done. Next, a blind man comes into the shop who wants to buy a pair of sunglasses; how does he indicate what he wants?


It’s really very simple: he opens his mouth and asks for them.

Does your employer actually pay you to think? If so, do not let them see your answers for this test! 


I know I’m biased, but that doesn’t mean it’s not true.

From Mary Beth Franklin’s excellent “ONRETIREMENT” column in Investment Advisor:

Widows get bad Social Security info—Agency gives wrong guidance 82% of the time, so survivors must prepare.

From a Merrill Lynch/Age Wave survey “Widowhood: The Loss Couples Rarely Plan for—and Should.”

More than three-quarters of the widows—78%—described becoming a widow as “their single most difficult and overwhelming life experience,” and 53% said they and their spouse did not have a plan for what would happen if one of them passed away.

Half of the widows experienced a decline in household income of 50% or more. At the same time, widows also faced the complex tax of juggling multiple incoming assets, including Social Security survivor benefits, life insurance, their spouse’s pensions, and retirement savings. For more than four in 10 women, widowhood is a trigger to begin working with a financial advisor, according to the survey.

Click here for full article.



Click here to see more.


I’ve been teaching my Wealth Management class for many years to be wary of the common rule of thumb that someone will need 70–80% of their prior expenses in retirement. Well, my former TA and now Professor Cagla shared with me a Wall Street Journal article, “How Much Money Will You Really Spend in Retirement? Probably a Lot More Than You Think,” by Dan Ariely, Professor of Psychology and Behavioral Economics at Duke University, and Aline Holzwarth, a Principal of Dan Ariely’s Center for Advanced Hindsight at Duke:

It’s the question that plagues pretty much everybody as they look ahead: How much money will I need in retirement? Most likely, a lot more than you think…

The answer most people gave was about 70%. Did you also choose a percentage around 70%–80%? You’re not alone. In fact, we, too, thought that 70% sounded reasonable. But reasonable isn’t the same as right. So we asked the research participants how they arrived at this number. And we discovered that it wasn’t because they had truly analyzed it. It was because they recalled hearing it at some point—and they simply regurgitated it on demand. The 70%, in other words, is the conventional wisdom. And it’s wrong…

The results were startling: The percentage we came up with was 130%—meaning they’d have to save nearly double the amount they originally thought.


The U.S. Department of Education unveiled the My Student Aid app to help make the 2019–20 FAFSA (Free Application for Federal Student Aid) application process easier.

Click here for NPR article.


The active versus passive debate continues. From Kiplinger’s Personal Finance:

“John Rogers is a double anomaly. At a time when investors are increasingly turning to index funds, he picks individual stocks. And at a time when the markets prefer growth-oriented companies, he buys value-based shares…he launched Chicago-based Ariel Investments in 1983….The firm’s flagship public fund, Ariel Fund, opened three years later….Rogers became convinced in the 1980s that smaller companies that were less understood offered significant opportunities.” U.S. News ranked Ariel #11 out of 397 Mid-Cap Value funds.

I need to preface this with the observation that Mr. Rogers is one of the finest and most respected active managers in the country. I also share his value and small cap bias. Unfortunately, as reflected in the Morningstar data below comparing Ariel to a S&P Mid-Cap Value ETF, that does not ultimately translate to investment success.


Sharpe Ratio—A measure that indicates the average return minus the risk-free return divided by the standard deviation of return on an investment.

Tax Cost Ratio—The Morningstar Tax Cost Ratio measures how much a fund’s annualized return is reduced by the taxes investors pay on distributions. For example, if a fund had a 2% tax cost ratio for the three-year time period, it means that on average each year, investors in that fund lost 2% of their assets to taxes.

Passive wins once again.


A last minute tip from my friend Alex:

Click here to view video.

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 NewsLetters:

NewsLetter Vol. 11, No. 5 – September 2018

NewsLetter Vol. 11, No. 4 – August 2018

Employee Benefits: Insurance

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




Health Insurance Options

Health insurance options change every year, so it’s important to look over new healthcare options every year. Think about how these options are presented to you, think of everything that will affect you and your family, and reanalyze the math you did the year before to make sure the plan you’re in, if still available, is the right plan rather than just staying in a plan that may no longer be right for you. You have to look beyond the premium. While a low-cost plan might be nice if you don’t expect anything to happen, remember that everyone is healthy until they’re not.

Optimal Use: Strategies and Analysis

You must look at copays (i.e., the fixed amount you pay for services), deductibles (i.e., the amount you pay before your insurance starts paying), coinsurance (i.e., the percentage of costs covered after you meet the deductible), and out-of-pocket maximums (i.e., the most you’ll have to pay before the insurance pays 100% of any remaining costs). Depending on your health that year, going with a lower premium might end up meaning you need to pay higher out-of-pocket expenses. Things to think about include new babies, newly diagnosed illnesses, or a recent marriage. You also want to know if you have dental and vision coverage and how long it has been since you’ve used either. It’s also important to look over which health plan will be most beneficial to you over the year and not let the “tax tail wag the dog” by looking at the tax and savings benefits of a Health Savings Account (HSA) and whether a plan without a high deductible will be more beneficial for you over the course of the year since taxes aren’t everything (HSAs are discussed in more detail in the next section).

Generally, plans cover preventative care such as annual physicals, gynecologist visits, mammograms, and immunizations at no cost, but that varies from plan to plan. Make sure that you can use the doctors you want to go to under the plan you choose and that you’re not limited to a doctor who works for an insurance company you may or may not be happy with when you already have an existing physician.

One way to compare a traditional healthcare plan and a high-deductible plan is as follows: take the annual premium, deductible, coinsurance after the deductible, out-of-pocket limit, any employer contributions to the HSA, and the tax break you get from the HSA to do a little math. The math works as follows: look at the cost of coverage if you need absolutely nothing over the course of the year. To do that for the traditional plan, use the annual premium as the total cost. To do that for the high-deductible plan, use the annual premium minus the tax benefit of fully maximizing the HSA plan if you plan to fully do so or the tax benefit of any amount contributed to the HSA plan.

17. Traditional plan Annual premium Total costSo, if the annual premium for the traditional plan is $1,000 a month, its yearly cost to you is $12,000 if you don’t need any medical care at all.

18. Traditional plan Annual Premium 1000 monthIn this case, if the high-deductible plan costs $500 per month, the yearly cost is $6,000 minus the tax benefit of the HSA deduction.

19. High-deductible plan Annual premium 500 monthIf you maximize the HSA as a family with the full $6,900 per year allowed and you are in the 20% tax bracket you get a tax benefit of $1,380 (Note that your personal tax rate makes a big difference, so one person’s decision may be completely different than another’s given the same circumstances and the same plan but different tax rates). From there, take the yearly cost of a high-deductible plan coverage of $6,000 and subtract the tax benefit of $1,380 for a total yearly cost of $4,620.

20. Maximizing the HSA as a family

If you do not need any medical care, subtract any employer HSA contributions for the year from your effective yearly number (for this example, we’ll use no money from the employer so the calculation is easy). The high-deductible plan coupled with the HSA also allows the benefit of tax-free growth on the investment of $6,900, which is a benefit you would see above and beyond the effective yearly premiums, being $7,380 less expensive (calculated as $12,000 traditional plan annual cost – $4,620 HDHP annual cost after adjusting for the HSA tax benefit, all as illustrated above).

Next, we’ll look at how much the plans would cost if you maxed out your coverage for the year. In this case, let’s say the traditional plan has an out-of-pocket maximum of $3,000 and the high-deductible plan has an out-of-pocket maximum of $10,000.

21. Traditional plan Out of Pocket maximum 3000For the traditional plan, add the $3,000 out-of-pocket maximum to the $12,000 yearly cost of premiums for a total insurance cost of $15,000 as a worst-case scenario.

22. 12000 premium yearly cost

For the high-deductible plan, add the $4,620 “effective” premium to the $10,000 out-of-pocket maximum for a worst-case scenario of $14,620.

23. 4260 Premium yearl costIn this case, taking the high-deductible plan would be something of a no-brainer. The math changes substantially if the cost for the yearly premium under the traditional plan is only $7,000. In this case, the worst-case scenario would be the $7,000 yearly premium plus the $3,000 maximum out-of-pocket for a total worst-case scenario of $10,000.

24. Traditional plan Yearly Premium 7000

You would then compare the traditional plan’s worst-case scenario of $10,000 to the high-deductible plan’s worst-case scenario of $14,620 to see a difference of $4,620 dollars in a worst-case scenario per year.

25. 14260 High deductible worst case

Now look at the difference between the $7,000 traditional yearly premium and the $4,620 effective high-deductible yearly premium, and you’ll come up with a difference of $2,380 per year of an effective premium difference.

26. 7000 Traditional yearly premium

Now you will calculate the number of years it will take you to break even by dividing the $4,620 difference in a worst-case scenario by the $2,380 per-year effective premium difference to come up with 1.9 years to break even.

27. 4260 Difference in worst case scenario

This means that as long as you don’t max out your insurance every other year, you are better off with a high-deductible healthcare plan even though you will max out the high-deductible healthcare plan in some years, making you worse off for that year. In this case, you will have saved money over the long run by going with the high-deductible healthcare plan as long as you can afford to pay for your medical costs in the years with high expenses. If you find that the break-even point is three, four, or five years, it may be worthwhile to look more closely at the traditional plan. If you expect to have regular healthcare treatment needs or plan to have some level of expenses every year, you may need to alter this calculation so the 1.9 years to break even becomes a little bit longer since you will have to pay everything out of pocket using the high-deductible healthcare plan, whereas you may have some help paying in the years with a moderate amount of healthcare costs with a traditional healthcare plan.

Generally, a high-deductible healthcare plan with an HSA will be more attractive to younger people in good health who aren’t expecting to have any children or major medical issues. The good news here is that if you make the wrong decision, it’s only the wrong decision for one year and you’re not locked in forever since you can move to the other plan at the end of the year. Furthermore, if you have any money in an HSA, you can keep that and use the HSA money whether you decide to use the high-deductible healthcare plan or a traditional healthcare plan the next year.

It’s important when working through a health insurance analysis to look over the health insurance options available through your spouse or domestic partner’s employer (if the employer covers domestic partners) to make sure you choose the best plans since you may want to split coverage or have both of you covered under one of the plans.

General Considerations

Will you have access to a flexible spending account (FSA) or an HSA? Both options allow you to set aside pre-tax dollars to cover future medical expenses, but there are differences between the two.

If you have the option of setting up an FSA with your insurance company, do so. Doing this allows you to use the money in the account for copays; however, remember that those funds are use-it-or-lose-it, so make sure you have a back-up plan for how to spend the money by the end of the year, such as new glasses or dental work.

Keep in mind that while HSA savings amounts are federally tax deductible, they may not be deductible for state tax purposes depending on what state you live in.

Health Savings Accounts

According to a 2018 study, the average couple who is 65 years old today will require an estimated $280,000 in today’s dollars for medical expenses in retirement, excluding long-term care.9 It is likely that the amount needed for those who are younger will be even higher. This is one reason, but not the only one, to fully fund an HSA every year in which you are eligible. In fact, I think an HSA is one of the most powerful savings tools currently available, especially if it is used optimally.

Specifically, an HSA is a tax-advantaged account created for individuals covered under high-deductible health plans (HDHP) to save for medical expenses those plans do not cover.10

Optimal Use of an HSA

In 2017, only 18% of the money that went into HSA accounts stayed invested until the end of the year. This means most people use HSA money to pay off current bills. Putting only enough money in an HSA to cover your current year’s medical bills is a straightforward way to get a tax break for your non-deductible medical bills for the year, but I think there’s a better way.11

A large portion of the long-term benefits of an HSA comes from the tax-free growth of the account through the years. This means that the longer you invest in the HSA, the higher your likely lifetime benefit. To get the most value from the HSA investment vehicle, fund the HSA with the most you can every year but hold off on using the funds (absent an emergency) until late in life. Retirement healthcare expenses should be one of the first uses of HSA funds. In addition to regular out-of-pocket medical expenses, you can generally use HSA funds to pay for premiums for long-term care (with the qualifying amount based on age), health insurance continuation coverage (i.e., COBRA), health insurance while receiving unemployment, and Medicare if you’re over age 65 (not including Medigap).

Receipts for medical expenses that were not deducted through the years should be saved along the way. There is currently no deadline for self-reimbursements, so if you have paid out of pocket, have not deducted the expense on your taxes, and have the records, you can theoretically reimburse yourself for years’ worth of expenses if you need extra money and do not have anywhere else to withdraw from or if you have more money in your HSA than you will need for lifetime health expenses.

Furthermore, if you find yourself with sufficient funds to fully reimburse yourself for all past medical expenses and cover all future medical costs, you can consider taking distributions from the HSA for living expenses. While HSAs do not have any minimum distributions after age 70.5 like IRAs, you do have the option to use the funds for anything, paying only taxes with penalties after age 65.

If the HSA account is severely overfunded and there is charitable intent, this may be the first account to turn to for charitable bequests by naming the charity of your choice as the beneficiary of your HSA. Otherwise, you may think about intentionally beginning to draw the account down slowly so taxes are spread out over the course of years. Unlike retirement accounts, HSA accounts are liquidated upon the death of the account owner, and all taxes are due as ordinary income in the year of death.  Meaning, a highly funded HSA could push you into a much higher tax bracket than normal.

Finally, remember that we are always subject to changes in tax law when you are planning a very long-term tax and investment strategy (as we plan the government laughs).

HSA Providers and Account Costs

There are quite a few HSA providers, but the expense breakdown usually follows a similar formula. The HSA provider has a banking side and an investment side. There is a $2.50 per-month fee if the banking side doesn’t maintain a balance over $5,000. This fee amounts to 0.6% of the $5,000, which I believe the investments will outperform over time. This means, it makes sense to pay the fee rather than keep the cash on the bank account side. There is also the underlying investment fund fee, which can be minimized by using the link to a brokerage firm (if the HSA provider has one) to invest in a much wider variety of funds available than under their standard list of investment options. This allows the account to be linked to an Evensky & Katz portfolio to make the most of tax-sheltering assets that would otherwise create a high percentage of tax liability in the portfolio. There would also be a $3 per-month fee if your investment account drops below $5,000, along with any number of fees attributable to things such as closing the account closure, ordering a checkbook, ordering a debit card, and so on.

It’s crucial to know how you plan on using the HSA account and make sure you have the best supplier for your needs based on fees and investment options.

Special Considerations

If the spouse is the beneficiary of the HSA, it will be treated as the spouse’s HSA after your death. If the spouse isn’t the beneficiary, however, the account stops being an HSA, and the fair market value minus any qualified medical expenses for the person who passed that are paid by the beneficiary within one year after the date of death become taxable to the beneficiary in the year in which the account owner dies.

One HSA rollover is allowed per year within 60 days of receipt, but the rollover is not limited in terms of the amount of money rolled over.12 This means you can briefly tap into HSA funds in an emergency as long as you can pay it back within 60 days. Any amount not rolled back into an HSA account will be taxed, and penalties could be charged.

If employers offer HSA funding through a cafeteria plan payroll deduction, it is generally not subject to FICA taxes that go to Social Security and Medicare, which generally amount to about 7.65% of the amount contributed by payroll deduction. This means that absent a better use of your employer cafeteria deduction amount, it can be even more profitable than usual to fund your HSA plan with as much of the cafeteria plan funds as possible.

A qualified HSA funding distribution from an IRA to your HSA can be made once during your life. It reduces the amount you can contribute to the HSA that year by the amount converted. This means, in a year in which you can’t afford to fully fund your HSA from your income and savings, you can fund it with IRA money. If you have saved up sufficient health receipts and you had the HSA open during the proper period, you may be able to reimburse yourself for past expenses with the current value of the account. The money must pass directly from the IRA trustee to the HSA, and it isn’t included in income or deductible. This can be done from a Roth, but that generally wouldn’t make sense since you would be putting money you have already paid taxes on into an account you may have to pay taxes on (if not used for medical expenses). The qualified funding distribution can’t be more than any amount you are entitled to contribute to an HSA that year. You must also remain a qualified individual for 12 months after this transaction takes place, which means your insurance or qualifying insurance must remain in place for 12 months after the money is moved.

This one-time funding of your HSA from your IRA can be beneficial for years in which you can’t fund an HSA, especially if you would otherwise need to tap into your IRA for living expenses (which would cause you to pay taxes and possibly a penalty). Depending on the situation, you may be able to fund the HSA with your IRA funds and then reimburse yourself for past medical expenses from the money now in your HSA, doing away with both the early withdrawal penalty and taxes associated with the withdrawal.

Some HSA Rules

  • HSA distributions prior to age 65 for people who are not disabled for non-healthcare qualified expenses are charged ordinary income tax plus a 20% penalty.
  • An HSA can be funded by an individual, an employer, or a combination of the two. You don’t have to use the employer-provided HSA provider unless your employer requires you to maintain an account with them to receive employer contributions. Once the employer contributions are received, they can generally be transferred to your preferred HSA provider (you can have multiple HSA accounts). Any contributions are tax deductible (even if the tax return does not itemize deductions) but keep in mind that the IRS does not see employer contributions as income, which means they are not taxed to begin with and so cannot be deducted.
  • Funding an HSA requires a high-deductible health plan, and the person for whom the account is titled can’t be claimed as a dependent on someone else’s tax return for the year. In 2018, a high-deductible health plan has a minimum annual in-network deductible of at least $1,350 for an individual or $2,700 for a family and a maximum annual in-network deductible of $6,650 for an individual or $13,300 for a family.13
  • Contributions are limited to a combined funding limit of $3,450 per year for an individual or $6,900 per year for a family in 2018, but remember that the funding levels cover total funding among all HSA accounts, including any Archer MSA accounts. Anyone over the age of 55 can contribute an additional $1,000 per year, which means an individual over 55 can contribute $4,450 and a family with two eligible spouses over 55 years old can contribute $8,900 for 2018.14
  • You (or your family) are eligible for the entire year if you are eligible on the first day of the last month of your tax year (which is December 1st for most taxpayers) even if your spouse has a non-high deductible health plan, as long as the non-HDHP doesn’t cover you. However, there may be some limitations to how much you can contribute, and you may be required to keep the health plan or other qualifying health plan for 12 months to ensure that the HSA contributions are not included in the next year’s income with a penalty.
  • There are other rules to determine eligibility. If you have any questions regarding your eligibility, you should speak with your financial advisor or accountant. Contributions to an HSA can be made until the tax filing deadline for the year, which is usually April 15 of the following year.
  • You do not have to be eligible to save in an HSA account or have a high-deductible healthcare plan to use previously saved HSA money for health expenses tax free. Any money you save in the HSA does not go away at the end of the year. HSA funds roll over and accumulate from year to year (unlike funds in FSAs) and remain in your account if you leave your employer (unlike company-owned Health Reimbursement Accounts).
  • You cannot use HSA money for health expenses that will be reimbursed by your health insurance and still have the HSA distributions count as qualified tax-free distributions. You also can’t deduct medical expenses you have used HSA funds to pay for. You must keep all pertinent records for any HSA distributions, including receipts and proof that the expenses weren’t paid for by a medical plan, reimbursed from another source, or taken as an itemized deduction in any year.
  • Qualified medical expenses are generally expenses your insurance would cover if your deductible had been met that were incurred after you qualified for and established your HSA.
  • You generally can’t use the account to pledge for a loan or buy goods and collectibles without risking the amount used being deemed as distributed for non-qualified medical expenses for the year and fully taxed with potential penalties (although there are some exceptions).
  • Any distributions the HSA owner takes by mistake having reasonably believed they were for a qualifying medical expense can avoid tax consequences by returning the funds to the HSA before April 15th of the year after they discover the mistake.
  • For employers, the amount contributed to employees’ HSAs aren’t generally subject to employment taxes, although there are non-discrimination rules stating that all employees in the same class must receive HSA contributions (if any employees receive HSA contributions) to avoid an excise tax of 35% on contributions. This may mean employers strategically classify full-time and part-time workers, individual and family participants, and employees who are or are not enrolled in high-deductible health plans.

Flexible Spending Account

FSAs allow you to put away money before taxes to pay for medical expenses. You may be able to set aside money every year to use pre-tax dollars for your insurance copays, deductibles, some drugs, and certain other healthcare costs. However, remember that an FSA is a use-it-or-lose-it arrangement, which means you generally must use all or the vast majority of the funds within a certain time frame, generally by the end of the year.

Medical FSAs put all the employee’s annual contributions in at the start of the plan year. The employee can elect to defer a certain amount of money, spend the account down, or leave the employer for another employer without actually saving the amount of money from their paycheck withholdings that they’ve spent on tax-free medical expenses.


If the plan allows the rollover of a certain amount of money, it is almost always recommended to fund the FSA with at least the amount you can roll over from one year to the next to take advantage of the tax savings as long as you have the excess cash flow to afford to do so. Keep in mind that this money may go away if there is a separation from service with your employer, so it can be very important to spend down an FSA before quitting or being terminated from your employer.

If you decide to use an FSA, make sure you know how you’ll spend any extra money at the end of the year, including getting an additional pair of glasses, having dental work you might not otherwise have done, or buying medical equipment you need or know you will need. If you find you are getting close to the end of your plan year and you have money left in the plan you will not spend, it is worthwhile to go on websites that cater to FSAs to see what you may need that is available rather than losing the money when the plan year ends.

Remember that there may also be requirements to apply for refunds or reimbursements from the plan, so the dates of those filings should be noted and followed strictly.


Employers can make contributions to your FSA, but they are not required to. FSAs are limited to $2,650 per year per employee; if you’re married, your spouse can also put up to $2,650 in an FSA with their employer.15 FSA funds can be used to pay for not only your medical expenses but also medical expenses for your spouse and dependents. The funds cannot be used to pay for insurance premiums. The funds can be used for over-the-counter medicines with a doctor’s prescription (although insulin is allowed without a doctor’s prescription). They may also cover the cost of medical equipment.

Money put into your FSA by your employer that is not deducted from your wages is generally not counted against the FSA funding limit for the year. This means that if your employer contributes $1,000 to your FSA, you are generally still allowed to contribute the full $2,650 per year to your FSA. An exception to this would be if your employer’s FSA contribution comes from your employee benefits cafeteria plan, in which case your employer benefits would reduce the amount you can put into your FSA to a combined $2,650. In addition, if you have multiple employers offering FSAs, you may elect to defer an amount up to the limit under each employer’s plan; this differs from HSAs and IRAs, which only allow the combined funding up to a certain limit no matter how many accounts or employers you have.

Depending on the FSA, you may be allowed a grace period of up to two and a half extra months to use the money in the account or a carryover to the next year of up to $500. Only one of these options can be offered, and plans aren’t required to offer either one.

Carrying over a certain amount of money does not reduce the participant’s maximum FSA contribution for the next plan year. So, someone who carries over $500 from one plan year to the next can still contribute the maximum for the next plan year so they can get reimbursed for more than just the plan maximum for the next year.

Rules and Tax Implications

Generally, the money put into an FSA is not only exempt from your regular taxes but also not subject to payroll taxes for Medicare, Social Security, and Medicaid. This leads to an even higher tax savings than many other ways of saving money in a tax-benefited savings vehicle.

People who have high-deductible health plans with HSAs they are eligible to fund are generally not allowed to also have FSAs, except for a limited-expense FSA, which is also called a limited-purpose FSA account. This type of FSA can be used to reimburse dental and vision expenses as well as potentially eligible medical expenses incurred after the health plan deductible is met; however, it is important to understand the details of how this works for your particular plan before thinking about funding it with anything above the amount that can be rolled over or that you know you will need during the plan year. You may be able to extend your ability to keep your FSA money after you are laid off if you continue health coverage under the company’s COBRA health insurance or another arrangement.

In addition, there may be multiple types of FSAs offered through your employer, such as health and dependent care, but generally speaking, the money cannot be transferred from one type of account to another.

Dental Insurance

The cost of all types of health coverage has been on the rise, and dental insurance is no exception. In fact, dental care is not only more expensive, but employers are now putting more of the costs of dental insurance on their employees.  This means it’s important to shop around before defaulting to your employer’s plan since you may find that an organization you belong to provides a plan that better fits your needs (e.g., professional organizations, AARP, and many other organizations offer group dental plans).

When comparing dental plans, it is important to not only look at cost but also make sure your dentist is considered in-network; if not, consider whether you are willing to switch to another dentist in the dental plan’s network. Dentists outside the plan may provide you with little to none of the plan benefits.

You may see dental plans list coverage with three numbers illustrating the percentage of particular services the plan will cover (100-80-50 plan). These numbers can be understood as follows:

  • 100: The plan covers 100% of preventative dental work, including regular check-ups and cleanings.
  • 80: The plan covers 80% of the cost for common dental procedures the plan covers. Common procedures include cavity fillings, braces, root canals, whitening, etc.
  • 50: The plan covers 50% of the cost for major dental procedures the plan covers. Major procedures include tooth crowning, tooth implants, procedures requiring sedation, etc.

Typically, plans will require you to pay a small deductible. They will cover a certain percentage of costs after the deductible has been met, depending on the category in which the procedure falls, up to a yearly cap, after which point you will have to pay all remaining costs.

Vision Insurance

Vision insurance commonly pays for the following:

  • Preventive care, including annual eye exams and check-ups;
  • Costs associated with contact lenses, lens frames, lenses, and lens protection methods;
  • Disposable contacts (typically an added coverage that costs more); and
  • Eye surgery discounts (typically an added coverage that costs more).

It’s important to note that it’s not uncommon for vision insurance providers to deny coverage for medical issues related to your vision. Should something come up during a check-up, your doctor will likely refer you to a specialist, the costs for which wouldn’t be covered by your vision insurance. The good news is that although vision insurance may not cover the cost of such medical issues, your health insurance would cover the costs more often than not.

Some important questions to ask yourself and your employer regarding your vision insurance include the following:

  • Does your vision insurance cover the costs of eye tests or exams you want or need?
  • Does your vision insurance cover the costs of glasses you want or need?
  • Does your vision insurance cover the costs of lenses you want or need?
  • Are you required to go to a low-cost chain store, or can you go to your private practice doctor?

Life Insurance/Accidental Death and Dismemberment

Life insurance offered through your employer is often a very good deal. Because the underwriting is done for the employer as a whole, it’s generally low cost; it may even be free. Signing up is easy since you are generally not required to undergo a physical exam to qualify, and it’s usually pretty inexpensive. The problem is that a person can often buy a limited amount of insurance through their employer’s plan, which may not be enough to cover the amount of life insurance you need.

How much life insurance is necessary?

Life insurance is looked at as an income replacement insurance plan in case someone passes away. To find the minimum amount of coverage you should have, figure out how much it would cost for your family to live without your income and replace that amount minus any growth on the assets you think they’ll receive. This involves thinking about things like additional childcare and someone to help around the house. It can help to figure out how much it costs for you to live currently and how much each partner earns, although the lifestyle costs may increase or decrease depending on the family dynamic.

As a very rough starting point, if you are the sole breadwinner, it is generally recommended to make sure your assets minus your house add up to at least roughly 20 times your yearly expenses (you should speak with your financial planner and insurance provider for a specific recommendation). If your assets do not add up to 20 times your yearly expenses, then the current amount of shortfall is a very easy way to gauge the least amount of life insurance you should purchase from your employer or other life insurance program if possible.

Change of Employment Status

Another important point to make about employer life insurance is that you may lose life insurance if you quit your job or get fired from your job. You may be unable to get private insurance, and your next employer may not offer insurance. Some employer-sponsored life insurance plans are portable, so you can take them with you if you leave the job, but it’s important to know what type of life insurance your employer offers so you can buy insurance on the open market if your employer does not provide enough or the right type of life insurance.

Short and Long-Term Disability Insurance

According to the Social Security Administration16 one in four people in their 20s working today will become disabled before retirement age. One way to hedge against a disability is via disability insurance, which gives you a portion of your pay if you can no longer work for a specific period. The cost of disability insurance through your employer is often very inexpensive, making it worth considering. A disability can be due to pregnancy, short-term illness, or long-term illness.

Strategies and Tax Implications

It is important to know how to structure the payments for your disability insurance. If you pay for disability insurance with FSA funds or other pre-tax dollars, you will have to pay taxes on the benefits if or when you use the disability insurance. If you pay for the disability insurance with after-tax dollars, the benefit will be tax free. Given that the disability insurance only covers a percentage of your pay, it’s generally advisable to use after-tax dollars to fund the benefits. Personal circumstances, such as an inability to fund with after-tax dollars or to gather funds to cover any shortfall between the cost of living and the after-tax value of your disability benefits in case of a disability, may change the calculation for which option is most beneficial to you.

If your employer pays for your coverage pre-tax, your benefits will be taxable.

28. Taxation of Employer Provided Disability Insurance

Critical Illness Insurance

Critical illness insurance pays out a lump sum if the employee gets cancer or another serious illness. The insurance may be part of a cafeteria plan in which you choose how much money goes to which benefits, you may have to pay for the insurance out of withholding from your paycheck, or your employer may pay for the coverage. Remember that the benefits generally will not be taxed if the employee pays the full premium with after-tax money, whereas the lump sum payments will be taxed if the employer pays the cost with pre-tax money.

Coverage and Cost

The policy can be small or can cover as much as a million dollars per issue. So, it’s important to know how much coverage you need in coordination with any long-term care and disability insurance should you contract a major illness. Different policies cover different things, including:

  • Heart attack
  • Cancer
  • Heart transplants
  • Coronary bypass surgery
  • Parkinson’s disease
  • Alzheimer’s
  • Amyotrophic lateral sclerosis
  • Loss of sight
  • Loss of speech
  • Loss of vision
  • Heart valve replacement
  • Angioplasty
  • Kidney failure
  • Major organ transplant
  • Stroke
  • Paralysis

Keep in mind that each of these illnesses must meet the specific definition of the illness from the insurer; some cancers, strokes, etc. that you think will qualify don’t in fact qualify for a payout or only qualify for a partial payment. Likewise, some policies may require you to see a specialist in the particular field of your illness to qualify as having the disease properly diagnosed. So, it is important to know what your insurance actually covers.

It is often wise to consider disability, long-term care, and life insurance as the first places for insurance coverage money to be placed before looking at critical illness insurance. Keep in mind that self-insuring runs the risk that you contract a critical illness early on in life (in which case the insurance would have paid a significant return). If you do need coverage, this type of insurance can be very beneficial since the lump sum can be used to pay for things that aren’t covered by insurance, such as:

  • Some of your pay while not working
  • Travel costs to specialists
  • Specialists not covered by insurance
  • Experimental treatments not covered
  • Replacement of spouse’s income while they care for you
  • Health insurance premiums while you’re not working
  • Time off work
  • Out-of-network doctors & hospitals
  • Rent & Utilities
  • Mortgage & real estate taxes
  • Credit card bills
  • School tuition
  • Food

Insurers may provide up to a certain amount through your employer without going through a medical exam; however, amounts over that limit will require a physical. It’s important to make sure a failed health exam will not preclude you from getting the employer’s group coverage with no underwriting. To ensure that you’re protected in this scenario, you want to max out the available employer group coverage without underwriting while going through the underwriting just in case you fail the health exam and can’t get anything above the group coverage if that strategy is possible. Whether you go through your employer or an open-market plan from an insurance broker, you don’t want them to find cancer during underwriting, thus disqualifying you for any coverage, when you could have taken advantage of the group coverage prior to having the physical and finding out about the medical ailment. The group coverage will often require you to answer a few questions before providing the coverage you want.

Generally speaking, it is better to prioritize life insurance and disability coverage and then look to critical illness insurance since it is narrower in scope and it can be expensive. Of course, this changes for very cheap or free coverage or if your family has a medical history of critical illnesses. It is important to consider this in the hierarchy of insurance needs and decide where to spend your dollars to get the most benefit in terms of coverage and the way things will affect your life. I recommend speaking to a financial planner and insurance agent before making any decisions. The coverage may include only you or cover your spouse or domestic partner, your children, or family, so is important to know who can be covered and make sure you have thought about an objective for the appropriate coverage.

What the insurance covers can be very specific, so it’s important to know all the terms of the contract. Are pre-existing conditions covered? Which types of cancers and heart attacks are covered? Are some treatment payouts only partially covered, such as certain treatments for heart issues or cancers? Can you get a one-time payout or can you receive payments multiple times for the same illness or different illnesses over time? Do the policies require that you be hospitalized or receive chemotherapy or radiation to qualify? Is there an age-related benefit deduction (i.e., as you grow older, will the benefits decrease)? Is the policy portable (i.e., what happens if you switch jobs, retire, get laid off, or get fired)?

Payout Policy

Some policies provide multiple cash payments, such as for someone who has a heart attack followed by a kidney transplant, so the insurance will make multiple payouts from the same policy. On the other hand, some policies will only give a single payout for the first of the two issues. In addition, some policies will grant a second payout for a second occurrence of the same event, such as the second occurrence of a heart attack, although the second payout may be lower.

You may find that different illnesses provide different payouts as a percentage of the full value of the coverage (i.e., some cancers may pay out 100% while other cancers pay out 25%; skin cancer pays out a flat rate far lower that is not tied to the total coverage amount). There may also be a requirement that a certain amount of bodily damage be done in addition to the disease diagnosis to qualify for a payment.

The coverage may also provide an additional stipend for certain treatments, transportation, or lodging in association with the covered illness. Likewise, lifestyle choices, such as drug use, flying small planes, alcohol abuse, being part of a war or riot, or self-inflicted injuries, or how the illness was acquired may change your coverage. Some insurers require you to live for a certain period after a diagnosis, so someone who has a heart attack but dies the next week may not be covered for a payout under the policy.


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Employee Benefits: Stock 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


Stock Benefits


Employee Stock Purchase Plan

Optimal Use: Strategies and Analysis

Employee stock benefit plans are generally beneficial for one of two reasons or a combination of both reasons. The most common benefit of an employee stock purchase plan is that your employer allows you to buy stock at a discount, (usually somewhere in the range of 5–15%) to the fair market value. The other primary way employee stock purchase plans can add value is that some plans provide a look-back period, allowing you to use a historical closing price of the stock. This price may be either the price of the stock offering date or the purchase date, whichever is lower.

This means that, if your employer offers a 15% discount to the share price and a look-back period benefit and the price of your stock has gone up by 10% over the period, you will get a 15% discount to the price at the beginning of the period. Then you can sell it for an immediate return on your investment.

12. Employee STock Purchase Plan

It is usually best to maximize your employer stock purchase plan to the extent that your financial plan allows. The employer will generally allow you to use up to a certain percentage of income towards your stock purchase plan, but you will always need to keep the contributions below the IRS-dictated $25,000 per year for qualified employer stock purchase programs.7 If you buy and sell the stock on the same day with the discount, you receive the percentage discount as additional compensation with little risk, even without a look-back period, so there is at least a locked-in benefit of additional income. If there is a look-back period, the stock has gone down over the period, and you buy the stock at its current price with only a discount, which again provides you the benefit of buying a stock more cheaply, you still make money if you immediately turn around and sell the stock. If there is a look-back period and the stock has gone up, you stand to gain significantly with the combination of the look-back period and the discount along with selling the stock immediately and just thinking about the gains as additional income or additional salary rather than a long-term investment in the company. In other words, it’s a win–win situation as long as the shares are bought and sold on the same day regardless of whether there’s a look-back period.

Special Considerations

While there may be some tax benefits to holding on to the stock you have purchased for a certain period, it’s generally best to sell the shares as soon as possible to diversify your investments. The discount to the stock price you must pay versus what the stock is worth will always be taxed at ordinary income rates. Shares held for at least two years from the first day of the offering period and at least one year from the purchase date are generally taxed at the lower long-term capital gains rates. It’s important to remember that while the tax benefits may seem appealing, the stock can easily decline enough to justify the diversification of the holdings over that time. Holding the stock past the first day on which you can sell it is essentially the same as buying the stock on the open market for its present value. As investments in individual companies, stocks come with unsystematic risk (i.e., risk that can’t be diversified), and so much of an employee’s net worth is tied up in the company based on their personal earning power through their job, incentive stock options, restricted stock options, deferred compensation, and employee stock purchase plan. It is generally best to sell employee purchase-plan stock as soon as you can because there’s no benefit above and beyond what one would get from going out into the open market to buy the stock for the employee who keeps the stock. There is a significant downside to the employee if the company suffers significantly or goes out of business.

General IRS Rules and Eligibility

  • Employee stock purchase plans usually have an upfront enrollment period during which you need to decide what percentage of your paycheck you would like to have deducted and used to buy employer stock at a discount. Depending on the company, this is generally done with after-tax money, and the qualified plans are limited to $25,000 in stock purchases per year.
  • The employer will generally have you sign up for a certain period, e.g., 12 or 18 months, and give a certain number of purchase periods (i.e., two or three six-month periods) during which your money will be put into an account. At the end of the period, the money you’ve saved will be used to buy employee stock at the discount offered by your employer’s plan.

Restricted Stock Units

Restricted stock units (RSUs) are issued to an employee through a vesting plan and distribution schedule after achieving required performance milestones or remaining with their employer for a particular amount of time.8 RSUs are different than incentive stock options in that the employer gives you units that represent stock for free, but you can’t touch the RSUs until you’ve met your company’s vesting. The RSUs are taxed when they vest. Some companies give you the ability to take the proceeds from a RSU in kind (meaning you receive shares either before taxes so you receive more shares but pay taxes out of pocket from outside money or after taxes have been withheld by the employer) or in cash (meaning the employer gives you the net value of the shares the units represent after taxes have been withheld). In either case, you may have the option to receive the proceeds before or after taxes. The employer may withhold taxes by selling enough shares to cover your tax liability and sending the proceeds of the shares to the government.

You may see private companies, such as Facebook, offer RSUs. This allows employees of a privately held company to participate in the stock valuation of the company during its pre-IPO days without having to meet some of the requirements of public companies or companies with more than a certain number of owners. It also ensures that shareholder rights, such as voting, don’t end up in the hands of people that the founders of the company don’t want to have an outsized say in the happenings of the company before it goes public.

Optimal Use: Strategies and Analysis

It is generally best to sell RSUs as soon as they’ve vested; otherwise, it’s the same thing as buying the stock on that day. Any gains that occur between vesting and the time of sale will be taxed as if the shares were purchased on the open market on the day they vested. Any time shares are held for less than 12 months, gains will be taxed at ordinary income rates. If they are held for over 12 months, the gains will be taxed at long-term gain rates. To vest in an RSU and keep the shares, you need to hold on to the shares for 12 months to get the long-term capital gains rate (only on any gains after the date they vest) potentially leaving you overexposed to your employer’s stock because your livelihood and the RSU portion of your portfolio are both in a single company. Selling shares immediately upon vesting means you pay only the ordinary income taxes that would be due anyway, you don’t pay any other taxes than you would otherwise have to, and you can properly diversify the money so you’re not overexposed to a single company for your work income and your investments. It’s generally a good idea to think of RSUs that become vested as a bonus paid out in cash.

The strategy may be different when dealing with private company RSUs than with public company RSUs because you may want to have some exposure to company stock before it goes public that you couldn’t otherwise buy on the open markets. So, you may decide to keep the shares. In such a case, you may decide to instruct your employer not to sell any of the shares to cover your tax liability but instead come up with the tax money out of pocket. You will still need to pay the taxes on the RSUs immediately, so you need to have enough cash on hand to do so. In doing so, you take on a significant risk in terms of the number of shares owned, the amount of cash spent paying for the taxes on the shares, and your time spent working for the company.

General Considerations

Keep in mind that there’s a difference between a restricted stock plan, in which you own the shares and your employer repurchases any vested shares upon termination, and RSUs, in which you do not own any shares until the units vest and you are given stock or the value of the stock at the time of vesting. The settlement can occur in either cash or company stock at the time of vesting for RSUs. As an owner of an RSU, you are not a shareholder in the company, you generally do not have shareholder rights, and you may be given cash rather than stock.

RSUs are generally more valuable than options because there is likely to be some value to the shares at the end of the vesting period. The shares can be sold for something, whereas incentive stock options may be at a strike price lower than the current stock price; this means it doesn’t make sense to exercise the stock option at the end of vesting, leading to a complete lack of value. This means that, if you’re given the choice between incentive stock options and an equivalent amount of RSUs, it’s generally best to choose RSUs because there’s likely to be some residual value unless the company goes completely out of business. If choosing between the two, you want to see a large amount of incentive stock options in comparison to the RSUs to make the incentive stock options a justifiable bet not only because you need to buy the stock option (so you only get the difference between the price you can exercise the stock option at and the current price) but also due to the volatility of the nature of the option itself. Keep in mind that if you can fill out a beneficiary form, it’s always worthwhile to do so just in case something happens before you have handled your vested RSUs.

Special Considerations

Because the stocks can’t be touched until you vest, it’s important to know your vesting schedule and what shares are on the line if you plan on changing jobs. That way, you don’t quit a job right before a large vesting period. In addition, you can bring up how many shares you’re leaving on the table and what level of compensation that relates to when negotiating a new job to give you a better angle for negotiating the salary that is comparable to your previous employer’s compensation package. It may be possible to negotiate a one-time upfront restricted stock offer from a new employer with a vesting schedule similar to or possibly longer than your existing employer’s RSUs but with a similar value so you are no worse off for leaving your current employer and joining a new employer.

If you receive restricted stock rather than RSUs, you can make what’s known as an 83(b) election with the IRS. The election tells the IRS to lock down the fair market value at the time the stock is granted so you owe income tax on the grant date between the fair market value of the grant and the amount paid for the grant. The election starts the clock earlier for capital gains purposes, so when you eventually sell your stock, the second round of taxes is paid on any gains in the stock price after the election but before the vest. This introduces a new, potentially huge risk. You have paid taxes on the pre-vested shares, which were granted, that you can’t get back if you leave the company, pass away, or get fired before they vest. If the stock declines in value after the taxes are paid at ordinary income tax rates, you can deduct the losses, but that may mean you have paid taxes at a higher rate than you can deduct the losses at.

General IRS Rules and Eligibility

Vesting can generally be either time or performance driven; for example, you may find a yearly vest of 25% of your grant for four years, once the company hits a predefined goal, or once you as an individual hit a preset goal. This can also be tied to the IPO of the company, which means the company can specify a period after the IPO during which employees cannot sell shares so the market is not flooded with shares of the stock. Some companies allow you to defer the settlement of RSUs for income tax purposes so you can choose to vest the RSUs in years with low earnings to be in a lower tax bracket when your shares vest. A change in timing on the vesting of your stock requires two conditions to be met:

  • The initial deferral election is made prior to the year in which the compensation is earned; and
  • Payments are made according to a fixed schedule or tied to an event, such as end of employment, disability, or death.

Stock Options

Incentive stock options and non-qualified stock options are relatively complex instruments that led me to debate whether to include them in this book. I believe this topic requires professional modeling and opinions along with a comprehensive knowledge of all the workings of an individual’s finances. I fear that as simple as I have tried to make this book read and as overly simplified as I have made the topic, I run the highest risk of giving the reader enough information to be dangerous but not enough to make a truly educated decision in this section; however, I would be remiss in excluding it. At the same time, I am concerned that not enough information can be given about stock options in such a brief book when the topic of stock option analysis could comprise an entire book and still be inconclusive. Bill Gates said,

When you win [with options], you win the lottery. And when you don’t win, you still want it. The fact is that the variation in the value of an option is just too great. I can imagine an employee going home at night and considering two wildly different possibilities with his compensation program. Either he can buy six summer homes or no summer homes. Either he can send his kids to college 50 times, or no times. The variation is huge; much greater than most employees have an appetite for. And so as soon as they saw that options could go both ways, we proposed an economic equivalent. So, what we do now is give shares, not options.

With this in mind, I will try to provide the easiest, most simplistic routes in which to judge incentive stock options with the caveat that you should not make decisions concerning these instruments without consulting a professional. This is all to say that including any of this information gives the reader a sense that they have enough information to decide, when in fact I believe the only reason to include this information is so the book doesn’t feel incomplete. Stock options are very complex and volatile, but they have a lot of value if used correctly with discretion and the best luck. While the upside is substantial, the downside is likewise substantial, and both should be considered when making any decisions concerning stock options.


Before we begin discussing stock option strategies and analysis, a grounding in some fundamentals on the topic is in order.

A stock option is the right to buy a specific number of shares at a preset price (i.e., the exercise or strike price) during a certain period. There is generally more upside potential in stock options than in restricted stock because of the inherent investment leverage in options contracts.

The strike price is what it costs you to exercise an option (i.e., to buy a share). It is commonly called an exercise price since you’re exercising the option to buy the share at a specified price.

The value of your options (i.e., the options value) is the market price minus the strike/exercise price along with an adjustment for time value that decreases as you get closer to the end of the option time period.

The option is in-the-money when the value of the option is greater than zero (i.e., when the strike price is less than its per share value). The option is out-of-the-money when its intrinsic value is zero (i.e., the price you can buy each share for with your option is higher than its current cost on the open market).

The time value is the premium paid over the current exercise value of an option because of the possibility that the option will increase in value before its expiration date. The time value of an option naturally decays as you get closer to the expiration date, reaching zero on the expiration date, but the option will almost always be worth more than its current exercise value prior to the expiration date.

Optimal Use: Strategies and Analysis

While a host of insights and variables should be considered, this section includes some of the most common ones and provides a framework you can use to conduct a preliminary analysis and determine how to begin pursuing a stock option strategy.

It is always very important to know when your options will vest so you can exercise and/or sell the options because missing that date can be very costly. The expiration date on the stock options are critically important because the time value of the option decreases as you get closer to the expiration date and the value of the options more closely approaches the value of the stock. Keeping this in mind, any time you exercise employee stock options before their expiration, you lose the remaining time value.

Any change in the market price of your stock can have a very large impact on your option value. Any time you have leverage on investments, not only your gains but also your losses are potentially magnified. So, while options have more potential upside than RSUs, they also have more downside, and they may expire worthless since the price you can buy the shares at may be higher than the market price. In addition, if you exercise your options and the price decreases, the money you spent to purchase the shares and the taxes you had to pay are already money out of pocket that you may not ever get back.

It almost never makes sense to allow an in-the-money stock option to expire without exercising it. As mentioned above, a stock option is considered in-the-money when the stock is trading above the original strike price (i.e., you can buy the stock through your option cheaper than you can buy it on the open market). It makes much more sense to exercise the in-the-money stock option and immediately sell the stocks acquired (in turn realizing the short-term gains) than it does to allow that money to slip through your hands by letting the options expire.

Keep in mind that while it’s easy to think of incentive stock options as stock, they are not stock since there is inherent upside and downside leverage in your incentive stock options; and so an analysis of the stock options and their value is essential before making any decisions. The analysis should include the in-the-money value, the cash-out value, and a Black-Scholes value at the very minimum. There are many other ways of looking at stock options, but these are the bare-bones minimum when looking at any stock options and determining which options would be primary candidates for exercise and diversification.

  •  The in-the-money value calculation is the difference between the current fair market value per share (i.e., the current stock price) and your exercise price multiplied by the number of options you have. This only applies to the number of shares you have vested; it does not count the number of unvested shares you have options in. You can calculate the cash-out value by subtracting the amount of taxes you would have to pay on your vested grants from the value of your vested grants so you get an after-tax value equal to your cash-out value on the grants.
  • The Black-Scholes method of evaluating the value of an option should be a section unto itself in this book. It allows a deconstruction of the in-the-money value and the time value. You must know the expiration date (i.e., the time until the option expires), the strike price (i.e., the price you can buy the stock at), an estimate for the volatility of the stock, and the risk-free rate of return. Note that an option with a high volatility is an option where the stock fluctuates substantially; it will have a greater time value than an option for a stock that does not fluctuate substantially or that has low volatility because the volatility of the stock reflects both the potential upside and downside of the stock. The option value is enhanced by the theoretical ability to earn above the risk-free rate of return without investing anything (i.e., the higher the risk-free rate of return, the higher the time value of the option). Almost the entire value of the Black-Scholes model lies in finding the time value of the option. The time value is important in determining when to exercise options because as the time value decreases the value of holding the options also drops. In-the-money options with low time values are generally good candidates to diversify. The Black-Scholes value is equal to the in-the-money value plus the time value. The time value of vested options is important because it measures the company-specific risk or general market-specific risk associated with continuing to hold the options.
  • The cash-out value is the amount of money you would receive by selling your stock options at their current value. This allows you to see how much money is put at risk by not exercising your currently vested stock options.

Once you compute the above values, it’s helpful to look at them in aggregate to see how leverage plays out in your stock options. This modeling does not give you a clear decision as to which stock options to exercise or provide a judgement with regard to exercising, but it at least lets you see the breakdown of where the value is coming from, how much is at risk due to time-value decay if the stock should remain flat, whether the market value of the options illustrates more or less volatility in the stock than you anticipate, and what the consequences of the stock going down might be so you can make a better informed decision.

13. Stock Price Graph

General Considerations

There are two general ways to exercise stock options: pay cash or net shares. With the pay-cash exercise, you pay for the entire value of the stock options to be exercised out of pocket. With the net shares approach, some of the shares you can buy are sold immediately to pay the taxes on the exercise for the remainder of the options. You own less shares after the exercise, but your tax has been paid based on the benefit of having the stock options.

Any time you elect to have all stock options purchased rather than a certain number exercised and sold and then the remainder purchased, you do have to pay out of pocket to buy the number of stocks you are allowed to buy at the specified rate.

It’s important not to delay exercising your stock options until the last-minute, waiting for your stock price to go up. If you miss the deadline, your options will expire worthless. These options are not stock; they are options to buy stock, and if you let the option lapse, you no longer have the benefit of buying the stock at your option at a cheaper cost than the list price. In addition, remember that if you retire, leave your company for a new job, or are laid off or fired, you may have no more than 90 days to exercise any stock options; therefore, it’s incredibly important to clarify what you can do with your stock options and what you need to do with your stock options before you leave a company or as soon as possible after you are let go.

As illustrated in the above chart, it’s also important to understand that incentive stock options have a leveraged nature. This means your incentive stock options are inherently more volatile or risky than the value of your employer stock, which can be a significant factor when you want to potentially decrease a single company-specific risk. The chart below shows that as the value of the stock increases, the value of the options dramatically increases; however, the value of the options is near zero below a certain point.

14. ISO Value CHart

Special Considerations

Incentive stock options are usually granted to employees, and they are not taxed at the grant date or the exercise date but only when the shares are sold. To qualify for favorable tax treatment, you must hold the shares two years from the grant date and one year from the exercise date.  That means, if you exercise after one year from the grant date, you need to hold the shares for an additional year to qualify for long-term capital gains rates; otherwise, you are taxed at ordinary income tax rates. This can lead to people “letting the tax tail wag the dog.”

15. Employee Stock Purchase Plan Special considerations

For some, this is a worthwhile gamble, but it would have devastating life consequences for others. It is important to know which position you are in and not take risks that would devastate your lifestyle for the hope of a little extra gain that may not have much of a meaningful effect on the rest of your life. Even though incentive stock options are generally not taxed when you exercise the option, the value of the discount your employer provides and the embedded gain may be subject to the Alternative Minimum Tax in any given year. So, it’s important to talk to your accountant to know the potential tax ramifications for exercising any incentive stock option.

General IRS Rules and Eligibility

If your company is acquired or if it merges, your vesting could be accelerated; this means, in some cases you might have the opportunity to immediately exercise your options, so it’s important for you to know your exercise options. It’s also important to check the terms of the merger or acquisition before acting so you know if the options you currently own in your company stock will be converted to options to acquire shares of the new company.

Unlike RSUs, stock options are not taxed until they are exercised, and if you exercise your option before the value of the options has increased and file an 83(b) election, you will not owe any taxes until the stocks are sold. If you exercise your options after the value increases but before they are liquid, then it is possible for you to owe an alternative minimum tax.  So, it’s crucial to consult a tax advisor before making that decision. Usually, you can’t sell or exercise your stock options before vesting unless your stock option plan allows early exercise. If you can exercise your options before vesting, you can make an 83(b) election. The 83(b) election starts the clock early for capital gains by notifying the IRS to lock down the fair market value at the time of exercise rather than vesting. You have 30 days from the early exercise date to file an 83(b) election.

Non-Qualified Stock Options

Non-qualified stock options require that taxes be paid upon exercise, whereas qualified incentive stock options are generally not taxed until the stock is sold. However, there may be an alternative minimum tax at the time of exercise, so it’s important to speak to your CPA to fully understand the tax implications. All options are taxed at the difference between the fair market value at sale and the fair market value of the purchase. Non-qualified stock options are taxed at ordinary income tax rates, which are substantially higher than the capital gains tax rates on which incentive stock options can be charged tax depending on the holding period of the stock purchased and sold.

Non-qualified stock options can be granted to employees and non-employees, and there are no restrictions on what the strike price can be; however, any strike price less than the current fair market value of the stock would be considered ordinary compensation and not capital gains. For example:

16. Non-Qualified Stock Options Example


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:

Click here for the previous chapter: Retirement

For more information on financial planning visit our website at

NewsLetter Vol. 11, No. 5 – September 2018

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Dear Reader:


Retirement isn’t the sort of thing you can just jump into. Rather, it requires thoughtful planning and a modest amount of basic knowledge. Unfortunately, Americans seem to be sorely lacking in this regard. GOBankingRates recently found that, shockingly, only 2 percent of respondents were able to pass a quiz on basic retirement knowledge.

Click here for full article.


From the Retirement Income Journal

If no action is taken, Social Security will be able to pay only 75 percent of its promised benefits after 2034. To solve that problem today, the government would have to raise payroll taxes (to about 15 percent from 12.4 percent), cut benefits across the board by 17 percent, or implement some combination of the two. It could also generate more revenue by raising the cap on the amount of earned income—currently the first $128,400—on which the payroll tax is levied.

Click here for full article.


CBS News

After more than a century behind bars, the beasts on boxes of animal crackers are roaming free.

Mondelez International, the parent company of Nabisco, has redesigned the packaging of its Barnum’s Animal Crackers after relenting to pressure from People for the Ethical Treatment of Animals

09-2018_Animal Crackers (1)

Click here for full article.


If you’re remotely in striking distance of qualifying for Medicare, my partner, Josh Mungavin, has a most excellent reference book. You’ll note the attractive price—$0—as Josh prepared this amazing effort as a public service and simply wants to make it available to as many people as possible.

09-2018_Medicare Book (2)

Click here to download it now.


Posse of top cops from 17 states dresses down SEC, demand same fiduciary standards for broker-dealers and RIAs and cite other ‘egregious’ deficiencies in proposed son of DOL rule

“… the state attorneys general’s remarks carry particular weight because of their regulatory powers and ability to sue the government if the rule falls short of its intended goals. Judging from their comments, they’re mad as hornets at the proposed measure.

The SEC’s proposed rule purports to impose a ‘best interest’ standard on broker-dealers while requiring additional disclosures; however, the proposed rule fails to require broker-dealers to act as fiduciaries for their clients, as is required of investment advisers—meaning retail investors are not assured unbiased advice from all their financial professionals,” the group asserted in a statement.

What’s more, “the proposed rule fails to ban even the most egregious of broker-dealer conflicts, like sales contests, which elevate the broker-dealer’s financial interest above that of the customer.”

Click here to read the full article.


Following up on the theme of retirement health care…

A Couple Retiring in 2018 Would Need an Estimated $280,000 to Cover Health Care Costs in Retirement,  Fidelity® Analysis Shows 

A 65-year-old couple retiring this year will need $280,0001 to cover health care and medical expenses throughout retirement, according to Fidelity Investments’ 16th annual retiree health care cost estimate. This represents a 2 percent increase from 2017 and a 75 percent increase from Fidelity’s first estimate in 2002 of $160,000.

For individuals retiring this year, using the same assumptions and life expectancies used to calculate the estimate for a 65-year-old couple, a male will need $133,000 to cover health care costs in retirement while females will need $147,000, primarily due to the fact that women are expected to live longer than men.

09-2018_Graph on Retirement (3)

Click here for the full article.


Luxury Apartment Sales Plummet in New Your City

Sales of such properties costing $5 million or more fell 31 percent in the first half of the year, pushing sellers to cut asking prices.

Click here for the full article.


At least for me … 10 Highest-Paid Professions in America

From Investment News

  Median base salary
Software Architect $105,329
Nurse Practitioner $106,962
Software Engineering Manager $107,479
Physician Assistant $108,761
Software Development Manager $108,879
Corporate Counsel $115,580
Enterprise Architect $115,944
Pharmacist $127,120
Pharmacy Manager $146,412
Physician $195,842

Click here for the full article.


Trends in Financial Advisor Compensation from

  2004 2018
Fee Only 31% 52%
Commission Only 21% 3%
Combination 10% 28%


For Online Daters, Women Peak at 18 While Men Peak at 50, Study Finds. Oy.

From the New York Times

Click here for full article.


  • “The wise man, even when he holds his tongue, says more than the fool when he speaks.” Yiddish proverb
  • “What you don’t see with your eyes, don’t invent with your mouth.” Yiddish proverb
  • “A hero is someone who can keep his mouth shut when he is right.” Yiddish proverb
  • “Don’t be so humble—you are not that great.” Golda Meir (1898-1978) to a visiting diplomat
  • “Intellectuals solve problems; geniuses prevent them.” Albert Einstein
  • “You can’t control the wind, but you can adjust your sails.” Yiddish proverb
  • “I’m not afraid of dying—I just don’t want to be there when it happens!” Woody Allen
  • “Not everything that counts can be counted, and not everything that can be counted counts.” Albert Einstein
  • “Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.” Albert Einstein


How long will $1 million last you in retirement? Report says it depends on the state


Mississippi: 25 years, 11 months, 30 days

Oklahoma:    24 years, 8 months, 24 days

Michigan:      24 years, 7 months, 14 days

Arkansas:     24 years, 7 months, 4 days

Alabama:      24 years, 7 months, 4 days

Hawaii:          11 years, 8 months, 20 days

California:     15 years, 5 months, 27 days

New York:    16 years, 3 months, 22 days

Alaska:          16 years, 8 months, 6 days

Maryland:     16 years, 8 months, 29 days

Click here for the full article.


From Financial Advisor magazine

Five Florida Brokers Sued By SEC In Alleged $1.2B Ponzi Scheme

Five unregistered Florida brokers are in hot water for funneling investors into a $1.2 billion Ponzi scheme. Woodbridge allegedly bilked 8,400 investors out of $1.2 billion in an elaborate Ponzi scheme in which high-pressure sales agents were used to prey on investors, who were told they would be repaid from high rates of interest on loans to third-party borrowers, the SEC said.

In reality, the borrowers were LLCs owned and controlled by Woodbridge’s leadership, according to the SEC, and investor funds were used to pay $64.5 million in commissions to sales agents … the five brokers were among the top revenue producers for Woodbridge, selling more than $243 million of its securities to more than 1,600 retail investors…

The SEC claims that the defendants told investors that the Woodbridge securities were “safe and secure” using various channels of communication. Klager pitched the investments via newspaper ads, while the Kornfelds allegedly solicited investments through seminars and a “conservative” retirement planning class taught via a Florida university and Costa recommended them on a radio program, the SEC said. Robbins allegedly used radio, television and internet marketing.

The moral is true: If it’s too good to be true, it’s not true.

Click here for full article.


From The Points Guy (@thepointsguy)

If you travel at all, I hope you have TSA PreCheck. If not, get it—it will save you tons of time and hassle at the security gate. What I didn’t realize is that if for some reason your known traveler number (KTN) doesn’t make it onto your reservation, your ticket may not reflect your qualification for PreCheck.

By streamlining security and cutting down on wait times, the program helps make travel a less stressful experience. However, it only does so when you actually use it, so we strongly encourage you to double-check your frequent flyer accounts and make sure your KTN is saved on your profile

Here’s how to do that for the major airlines in the US once you’ve logged into your account:


  • Visit Profile and tier status
  • Click on Traveler profiles
  • Click on Edit my information under International Travel Information
  • Enter your KTN, then click Save


  • Click on Your account
  • Click on Information and password
  • Enter your KTN, then click Save


  • Click on Go to My Delta
  • Click on View my profile
  • Find Basic Info, then click Open
  • Click Edit in the Secure Flight section
  • Enter your KTN, then click Save Changes


  • Click on the TrueBlue icon at the top right
  • Click on Profile
  • Click the pencil icon next to TSA PreCheck
  • Enter your KTN, then click Yes, Update


  • Click on My Account
  • Under My Preferences, click Edit
  • Enter your KTN, then click Save


  • Click on View account
  • Under Profile, click on Edit Traveler Information
  • Expand the KTN/Pass ID section, enter your KTN, then click Continue 



From my partner Brett

Are you getting a lot of spam email? Instead of clicking “unsubscribe” at the bottom of the email, which tells companies your email is legit and then you get even more spam email, use the Rules feature in Outlook.

  • Click on Rules, Create Rule
  • Go to Advanced Options
  • Click the checkbox that says “with “” in the subject or body” for Step 1
  • Below that, under Step 2, click on the blue link and type in the company name or some unique identifier (be careful not use to a word like JPMorgan or anything else that could inadvertently filter out good emails)
  • Click next and then click the checkbox “move a copy to a specified folder” for Step 1
  • Below that, under Step 2, click on the blue link and select Junk email
  • Click Finish


Two most excellent articles from one of my favorite practitioner authors, Larry Swedroe, from Advisor Perspective via Bob Veres’ most excellent newsletter.

The Danger in Private Real Estate Investments

“Should clients invest in private deals as an alternative to publicly-traded REITs? Swedroe examines the evidence, in the form of a private investment database compiled by Cambridge Associates. It contains historical performance of more than 2,000 fund managers, more than 7,300 funds, and the gross performance of more than 79,000 investments underlying venture capital, growth equity, buyout, subordinated capital, and private equity energy funds.

The database shows that for the 25-year period ending in 2017, private funds returned 7.6% a year, on average, while comparable REITs returned 10.9%. The private investments were also taking on much more risk, in the form of leverage above 50% of the value of the underlying properties. One research report summarized more than a dozen academic studies across various time periods, and all of them reached the same conclusion: REITs outperformed private deals.”

Click here for full article.

The Problem with Focusing on Expense Ratios

“The evidence is clear that investors are waking up to the fact that, while the past performance of actively managed mutual funds has no value as a predictor of future performanceexpense ratios dolower-cost funds persistently outperform higher-cost ones in the same asset class.

That has led many to choose passive strategies, such as indexing, when implementing investment plans because passive funds tend to have lower expense ratios. Within the broad category of passive investment strategies, index funds and ETFs tend to have the lowest expenses.

Most investors believe that all passively managed funds in the same asset class are virtual substitutes for one another (meaning they hold securities with the same risk/return characteristics). The result is that, when choosing the specific fund to use, their sole focus is on its expense ratio. That can be a mistake for a wide variety of reasons. The first is that expense ratios are not a mutual fund’s only expense.”

Click here for full article.


From my friend Dianna

At age 23, Tina Fey was working at a YMCA.
At age 23, Oprah was fired from her first reporting job.
At age 24, Stephen King was working as a janitor and living in a trailer.
At age 27, Vincent Van Gogh failed as a missionary and decided to go to art school.
At age 28, J.K. Rowling was a suicidal single parent living on welfare.
At age 30, Harrison Ford was a carpenter.
At age 30, Martha Stewart was a stockbroker.
At age 37, Ang Lee was a stay-at-home-dad working odd jobs.
Julia Child released her first cookbook at age 39, and got her own cooking show at age 51.
Vera Wang failed to make the Olympic figure skating team, didn’t get the editor-in-chief position at Vogue, and designed her first dress at age 40.
Stan Lee didn’t release his first big comic book until he was 40.
Alan Rickman gave up his graphic design career to pursue acting at age 42.
Samuel L. Jackson didn’t get his first movie role until he was 46.
Morgan Freeman landed his first major movie role at age 52.
Kathryn Bigelow only reached international success when she made “The Hurt Locker” at age 57.
Grandma Moses didn’t begin her painting career until age 76.
Louise Bourgeois didn’t become a famous artist until she was 78.
Whatever your dream is, it is not too late to achieve it. You aren’t a failure because you haven’t found fame and fortune by the age of 21. Hell, it’s okay if you don’t even know what your dream is yet. Even if you’re flipping burgers, waiting tables, or answering phones today, you never know where you’ll end up tomorrow.
Never tell yourself you’re too old to make it.
Never tell yourself you missed your chance.
Never tell yourself that you aren’t good enough.
You can do it. Whatever it is. 


From Morningstar’s optimistic review of active manager performance: Active vs. Passive Fund Management: Our Research on Performance

80% Fat-Free

“4 takeaways about active vs. passive fund management from our year-end 2017 report

  • S. stock pickers’ success rate increased sharply in 2017, as 43 percent of active managers categorized in one of the nine segments of the Morningstar Style BoxTMboth survived and outperformed their average passive peer. In 2016, just 26 percent of active managers achieved this feat.
  • The turnaround was most pronounced among small-cap managers. In 2016, the combined success rate of active managers in the small blend, small growth, and small value categories was 29 percent. In 2017, 48 percent of small-cap managers outstripped their average index-tracking counterparts.
  • Value managers saw some of the most meaningful increases in their short-term success rates. Active stock pickers in the large-, mid-, and small-cap value categories experienced year-over-year upticks in their trailing one-year success rates of 15.0, 20.2, and 34.2 percentage points, respectively. “

How I read these statistics:

20% Fat

57 percent of active managers underperformed their average passive peer.

52 percent of small-cap underperformed

For value managers, 85 percent of large-cap, 79.8 percent of mid-cap, and 65.8 percent of small-cap underperformed.

And that was the good news.

“Although 2017 marked a clear near-term improvement in active managers’ success rates, many of their long-term track records leave much to be desired. In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons.

Click here for the full article.


Top Magician—Israel’s Got Talent

Click here to watch.


18 Kirkland Products You Should Buy at Costco

Tips from Kiplinger

Click here to see the slideshow.


Before I start this “story,” I want to emphasize that I am NOT recommending any of the investments discussed below and E&K has not and does not currently invest in any of them.

It’s a very popular theme today to critique mutual funds for being expensive closet indexers (and I agree) and to suggest that a far better solution is to search for managers who have a high “active share,” i.e., a high percentage of a portfolio that differs from the index (I’m a skeptic). What I teach my class is to be agnostic and do your own research. I recently came across a story about the Baron Fifth Avenue Growth Fund that seemed to make the case for such a manager.

The Art of High-Conviction Investing

Financial Advisor

For over seven years, the Baron Fifth Avenue Growth Fund was a fairly typical large-company growth vehicle with a diversified portfolio of over 100 stocks, lots of benchmark index companies, and so-so performance.

That changed pretty quickly when Alex Umansky, who had been a large-cap growth manager at Morgan Stanley for many years, assumed control in November 2011. Within a relatively short time he had whittled the fund down to fewer than 40 carefully chosen stocks and gave the best ideas ample room to run…

“The fund’s old portfolio was structured to guard against volatility,” says the 46-year-old Umansky. “I guard against over-diversification. If you have a portfolio of 100 names, you’re really just providing exposure to an asset class. We’re in the business of finding mispriced securities and adding alpha.”

Click here for full article.

MarketWatch also had a quite glowing story

Opinion: Baron Funds money manager goes all in to beat the stock market

09-2018_Market Watch Text (4)

Click here to read full article.

So I decided to look beyond the “story.”

Simply looking at a comparison of the fund performance to an appropriate investable index (iShares Russell 1000 Growth) since December 2011, when Mr. Umansky took over, didn’t seem to support the argument.

09-2018_Graph (5)

Next, I looked at what I consider to be the real test—risk-adjusted return. The basic measure for that is the Sharpe ratio, a number that according to Investopedia “ … is the average return earned in excess of the risk-free rate per unit of volatility or total risk.” What I found was that although Baron’s return did indeed beat the index by a percent or two, on a risk-adjusted basis, it lagged. Bottom line, Baron’s looks like a fine alternative if you’re looking for a mega large cap actively managed domestic stock fund, but iShares Russell 1000 Growth, at least today, looks a bit better. The moral: research and don’t just read—read between the lines.
09-2018_Volatility Measures (6)


SEC Chairman Calls for End of Sales Contests

“As the SEC goes over the public comments it received on its proposed Regulation Best Interest and holds roundtables to hear from investors, the commission’s chairman says some of the feedback has ‘resonated’ with him, according to a statement published on the regulator’s website. Namely, Jay Clayton is adamantly opposed to ‘high-pressure, product-based sales contests’ and wants them eliminated entirely, he says in the statement.

‘In these circumstances, I do not believe it is possible for an investment professional to say with credibility that the investment professional is not putting his or her own interests ahead of the interests of the customer,’ he says, referring to the sales contests.”

Click here for full article.


From the ICI Annual Mutual Fund Shareholder Tracking Survey as reported by ThinkAdvisor

09-2018_Tracking Survey(7)

Although 81 percent and 84 percent respectively reported a fund’s investment objective and risk profile were important considerations, only 36 percent said it was very important.

My ranking for Very Important would be:

  • Investment Objective and Risk Profile
  • Performance Compared to an Index
  • Fees and Expenses (already included in the “performance”)
  • Mutual Fund Rating Services wouldn’t even make the list

Click here for full article.


From my friend Dianne on Facebook

An English professor wrote these words on the blackboard and asked his students to punctuate it correctly:

“A woman without her man is nothing”

All of the males wrote:

“A woman, without her man, is nothing.”

All the females in the class wrote:

“A woman: without her, man is nothing.”

Punctuation Is Powerful!


SEC Chairman Jay Clayton’s statement on Cryptocurrencies and Initial Coin Offerings

“The world’s social media platforms and financial markets are abuzz about cryptocurrencies and ‘initial coin offerings’ (ICOs). There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, ‘this time is different.’

The cryptocurrency and ICO markets have grown rapidly. These markets are local, national and international and include an ever-broadening range of products and participants. They also present investors and other market participants with many questions, some new and some old (but in a new form), including, to list just a few:

  • Is the product legal?  Is it subject to regulation, including rules designed to protect investors?  Does the product comply with those rules?
  • Is the offering legal?  Are those offering the product licensed to do so?
  • Are the trading markets fair?  Can prices on those markets be manipulated?  Can I sell when I want to?
  • Are there substantial risks of theft or loss, including from hacking?

The answers to these and other important questions often require an in-depth analysis, and the answers will differ depending on many factors.  This statement provides my general views on the cryptocurrency and ICO markets and is directed principally to two groups:

  • ‘Main Street’ investors, and
  • Market professionals—including, for example, broker-dealers, investment advisers, exchanges, lawyers and accountants—whose actions impact Main Street investors.

Considerations for Main Street Investors

A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.

Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies. If any person today tells you otherwise, be especially wary.”

Click here for full article.


After the Bitcoin Boom: Hard Lessons for Cryptocurrency Investors

Tony Yoo, a financial analyst in Los Angeles, invested more than $100,000 of his savings last fall. At their lowest point, his holdings dropped almost 70 percent in value. Pete Roberts of Nottingham, England, was one of the many risk-takers who threw their savings into cryptocurrencies when prices were going through the roof last winter. Now, eight months later, the $23,000 he invested in several digital tokens is worth about $4,000, and he is clearheaded about what happened.

“I got too caught up in the fear of missing out and trying to make a quick buck,” he said last week. “The losses have pretty much left me financially ruined.”

Mr. Roberts, 28, has a lot of company. After the latest round of big price drops, many cryptocurrencies have given back all of the enormous gains they experienced last winter. The value of all outstanding digital tokens has fallen by about $600 billion, or 75 percent, since the peak in January, according to data from the website

Click here for full article.


From my friend Peter. You can’t make this stuff up.

09-2018_Headlines (8)


As one might expect, the desolate and remote East Antarctic Plateau is home to Earth’s coldest temperatures. What is surprising, however, is that these bitter temps are even colder than previously thought—reaching nearly -148 degrees Fahrenheit (-100 degrees Celsius).


From my friend Judy. Always a good source of interesting tidbits.

  • My goal for 2018 was to lose 10 pounds. Only 15 to go!
  • I ate salad for dinner. Mostly croutons and tomatoes. Really just one big round crouton covered with tomato sauce. And cheese. FINE, it was a pizza. I ate a pizza.
  • I just did a week’s worth of cardio after walking into a spider web.
  • I don’t mean to brag, but I finished my 14-day diet food in 3 hours and 20 minutes.
  • A recent study has found women who carry a little extra weight live longer than men who mention it.
  • Kids today don’t know how easy they have it. When I was young, I had to walk nine feet through shag carpet to change the TV channel.
  • Just remember, once you’re over the hill you begin to pick up speed.



Harold Evensky to receive FPA’s highest award


Harold Evensky to receive Frankel Fiduciary Prize


From my friend Alex.

09-2018_Memes (9-A)

09-2018_Memes (9-B)



One evening, a grandson was talking to his grandmother about current events. The
grandson asked his grandmother what she thought about the shootings at schools,
the computer age, and just things in general.

The grandmother replied, “Well, let me think a minute.”

  • I was born before:
    • Television
    • Penicillin
    • Polio shots
    • Frozen foods
    • Xerox
    • Contact lenses
    • Frisbees
    • The Pill
  • There were no:
    • Credit cards
    • Laser beams
    • Ballpoint pens
  • Man had not yet invented:
    • Pantyhose
    • Air conditioners
    • Dishwashers
    • Clothes dryers (clothes were hung out to dry in the fresh air)
    • Man hadn’t yet walked on the moon
  • In my day:
    • “Grass” was mowed
    • “Coke” was a cold drink
    • “Pot” was something your mother cooked in
    • “Rock music” was your grandmother’s lullaby
    • “Aids” were helpers in the principal’s office
    • “Chip” meant a piece of wood
    • “Hardware” was found in a hardware store
    • “Software” wasn’t even a word.
  • Until I was 25, I called every man older than me “sir.”
  • And after I turned 25, I still called policemen and every man with a title “sir.”
  • We were before gay rights, computer dating, dual careers, day care centers, and group therapy.
  • Our lives were governed by good judgment and common sense.
  • We were taught to know the difference between right and wrong and to stand up andtake responsibility for our actions.
  • Serving your country was a privilege; living in this country was a bigger privilege.
  • We thought fast-food was what people ate during Lent.
  • Having a meaningful relationship meant getting along with your cousins.
  • Draft dodgers were those who closed front doors as the evening breeze started.
  • Time-sharing meant time the family spent together in the evenings and weekends, notpurchasing condominiums.
  • We never heard of FM radios, tape decks, CDs, electric typewriters, yogurt, or guys wearing earrings.
  • We listened to big bands, Jack Benny, and the president’s speeches on our radios.
  • If you saw anything with “Made in Japan” on it, it was junk.
  • The term “making out” referred to how you did on your school exam.
  • Pizza Hut, McDonald’s, and instant coffee were unheard of.
  • We had 5-and-10-cent stores where you could actually buy things for 5 and 10 cents.
  • Ice cream cones, phone calls, rides on a streetcar, and a Pepsi were all a nickel. And if you didn’t want to splurge, you could spend your nickel on enough stamps tomail one letter and two postcards.
  • You could buy a new Ford Coupe for $600, but who could afford one?Too bad, because gas was 11 cents a gallon.
  • We volunteered to protect our precious country.
  • No wonder people call us “old and confused” and say there is a generation gap.

How old do you think I am? 

Are you ready?

This woman would only have to be  66  years old. All this is true for those of us born any time before late 1952. Gives you something to think about.

Depressing, as I’m lots older.


Why Conflicting Retirement Advice is Crushing American Households

From Forbes

It is a well-documented fact that American workers are financially underprepared for retirement. For example, in a recent Government Accountability Office Report that examined the retirement savings of households in the 55 to 64 age group, researchers found that 55% of households had little to no retirement savings. Additionally, the remainder in that range that had saved for retirement saved a median of approximately $104,000. Even with Social Security, it seems the average American worker will have limited financial resources to generate income during retirement.

When you look at the savings data, this shortfall is not a surprise, as the U.S. consistently under-saves its peers. Data sourced from the Organization for Economic Co-operation and Development (OECD) spanning over a decade of savings rates ending in 2008 shows that the U.S. has historically come up short. Canada, France, Germany, Italy, Japan and the U.K. all reported generally better national savings rates during that time period. Although the retirement preparedness of the average American worker is distressingly bad and the savings trends and figures are of great concern, the focus of this article will be on the cost of conflicting advice on retirement preparedness.

The effects and financial impact of conflicting advice on American families is of consequence. In a 2015 report by the Council of Economic Advisers, the authors estimate that “the aggregate annual cost of conflicted advice is about $17 billion each year.” This conflicting advice comes from individuals and institutions that are “compensated through fees and commissions that depend on their clients’ actions. Such fee structures generate acute conflicts of interest.”

Unfortunately for the American family seeking “professional” financial advice, the choices are few. Just a small percentage of financial professionals are able to offer financial advice without facing the conflicts outlined by the Council of Economic Advisers. In a recent article (paywall) penned by Dr. Kent Smetters, he suggests that out of the roughly 285,000 financial advisers in the U.S., few are “fee-only advisers who follow a true fiduciary standard that prohibits commissions on products recommended to clients and legally requires the advisers to always put their clients’ interests first.”

It is challenging at best to determine which advisers, brokers, agents and mutual fund companies are able to act in your best interests as most say they will.

The effects and financial impact of conflicting advice on American families is of consequence. In a 2015 report by the Council of Economic Advisers, the authors estimate that “the aggregate annual cost of conflicted advice is about $17 billion each year.” This conflicting advice comes from individuals and institutions that are “compensated through fees and commissions that depend on their clients’ actions. Such fee structures generate acute conflicts of interest.”

Click here for full article.


From Yahoo Finance

For almost two years, Wells Fargo has been under near-constant fire. It all began, of course, with the revelation that employees in bank branches, who faced immense pressure to sell, had opened fake accounts for customers. Then, the bank agreed to pay a $1 billion fine to settle allegations of abuses in its auto lending and mortgage businesses.

In the spring, the bank also disclosed that its board was conducting a review of “certain activities” within the bank’s wealth management unit, which filings describe as including fee calculations of fiduciary accounts.

In mid-July, Yahoo Finance reported on increasing sales pressure in the wealth management sector of Wells’ Private Bank. Late last month, the Wall Street Journal also reported that four Wells Fargo advisors had sent a letter to the Justice Department and the Securities and Exchange Commission, detailing “long-standing problems” in the wealth management business.

In addition, the Journal reported that the broad class of Wells Fargo advisors were encouraged to funnel wealthier clients into the Private Bank’s wealth management area because the fees were higher. A former senior executive in this area and multiple former Wells Fargo brokers expressed that to Yahoo Finance as well.

Click here for full article.


From Financial Advisor

“Merrill Lynch’s equity research arm has agreed to pay approximately $8.9 million to settle Securities and Exchange Commission charges that it failed to disclose a conflict of interest to more than 1,500 of Merrill’s retail advisory accounts who were sold approximately $575 million in products as a result.

Investors continued to be sold the products managed by a U.S. subsidiary of a foreign multinational bank despite concerning management changes because of the fees the banks paid to be on Merrill’s advisory platforms and its broader financial relationship with the wirehouse, the SEC found.

‘By failing to disclose its own business interests in deciding whether certain products should remain available to investment advisory clients, Merrill Lynch deprived its clients of unbiased financial advice,’ said Marc P. Berger, director of the SEC’s New York Regional Office. ‘Retail clients must feel confident that their advisors are eliminating or disclosing such conflicts and fulfilling their fiduciary duties.’

Merrill’s decision to continuing offering the U.S. subsidiary’s products violated both its due diligence and disclosure policies and violated its own ADV requirements.

According to the order, Merrill put new investments into these products on hold due to pending management changes at the third party. As part of the decision, Merrill’s governance committee planned to vote on a recommendation to terminate the products and offer alternatives to investors.

The third-party manager sought to prevent termination by contacting senior Merrill executives, according to the order, including making an appeal to consider the companies’ broader business relationship.

Following those communications, and in a break from ordinary practices, the governance committee did not vote and chose instead to defer action on termination, the SEC found.”

Click here for full article.

If you’re in doubt regarding the legal relationship you have with an advisor, have them sign the simple mom-and-pop “fiduciary oath” (it doesn’t even have the word “fiduciary” in it). If you’d like a copy, call (305-448-8882) or send an email ( and we’ll send you one.

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. 4 – August 2018

Employee Benefits: Retirement

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




401(k), 403(b), & 457 Plans

A workplace retirement plan is one of the most common profitable employee benefits employers offer. They normally come in the form of 401(k), 403(b), 457, pension, or cash balance plans. Often, an employer will match employee contributions up to a certain dollar amount or income percentage.

Optimal Use: Strategies and Analysis

a. Mega Backdoor Roth 401(k) contributions

By using the right strategies, you may be able to contribute more than you thought possible and, in turn, save more money on taxes over time. In general, employees can only contribute up to $18,500 per year to a retirement plan with an additional catch-up of up to $6,000 per year if the employee is 50 years old or older (“employee contribution limit”).1 Many employees don’t realize that the maximum contribution to one of these accounts is $55,000 per year plus the catch-up (“maximum contribution limit”)—and that they may be able to contribute up to that amount despite the employee contribution limit and employer matching amounts adding up to less than the full maximum contribution limit.

The strategy is as follows:

1. Backdoor Roth 401(k) Strategy

The math works like this:

2. Backdoor Roth 401(k) Math

Normally, this would mean you could not fund your 401(k) up to the maximum contribution limit of $55,000, leaving a full $24,000 on the table ($55,000 – $31,000 = $24,000). If you have a nondeductible 401(k) and work for a company with retirement plan documents that allow it, however, you can make a $24,000 contribution to the nondeductible part of the 401(k) and then convert the contribution to the Roth portion of your 401(k). This effectively allows you to maximize the yearly contribution to your retirement account.

A very highly compensated employee can still take advantage of this strategy because employers can only base 401(k) matching off $275,000 of an employee’s compensation per year no matter how highly compensated the individual is.2 A 401(k) can provide a versatile savings account by allowing penalty-free (but not tax-free) distributions of certain amounts for a down payment on a home purchase or medical expenses. Keep in mind that any additional profit-sharing plan contributions by the employer must be considered when calculating the overall yearly contribution. It is very important to check the plan documents and speak with your HR department or plan administrator to make sure you are getting the most from your retirement plan.

b. Company Stock in a 401(k): Net Unrealized Appreciation

Net Unrealized Appreciation (NUA) is the name of a little-known tax break that can help save you money on taxes from employer stock held in a 401(k) plan if you qualify. NUA rules allow you to take employer stock out of your 401(k) upon certain triggering events, only pay ordinary income taxes on the cost basis of the stock (the price you originally paid for the stock) for the withdrawal, and then have the gains taxed at capital gains tax rates. This can be particularly valuable if:

  • You have highly appreciated employer stock (stock with very low-cost basis);
  • You have an immediate need to withdraw money from your 401(k);
  • You are retiring after age 70.5 and you have to take your first required minimum distribution (RMD); or
  • You have a short RMD period, including stretch RMDs.

The rules for an NUA distribution are very strict, and you should work with your CPA to make sure you follow all the rules precisely. The rules are as follows:

  • You have to distribute the entire balance of your 401(k) and any other qualified plans you have with the employer in a single tax year (some can be withdrawn directly to a taxable account and some can be rolled into an IRA, but there can be no money left in your 401(k) account at the end of the tax year).
  • You must take the distribution of company stock from your 401(k) in actual shares—you cannot sell the shares in the 401(k) and then distribute cash.
  • You must have experienced one of the following triggering events:
  • Separation from service from the company whose plan holds the stock (this may include certain cash buyouts of the company you work for);
  • Reached age 59.5;
  • Become disabled; or
  • Death

Potential Downsides

All tax strategies can be useful, but it is generally not recommendable to let the “tax tail wag the dog.” Trying to pursue this NUA strategy too aggressively can lead to you owning too much company stock and not having your portfolio appropriately diversified. You only have a few different triggering events, which means you only have a few opportunities to distribute the stock, possibly leading to overzealous distributions in the year in which they can be made. This can lead to paying taxes at a higher-than-normal tax bracket and not leaving as much money as you would normally leave in your retirement account, ultimately leading to higher taxes in the long run because all the investments held outside your retirement account are taxed every year. Your heirs do not receive a “step up in basis” on NUA shares upon your passing. You may be charged a penalty for an early retirement account withdrawal if you retire earlier than 59.5 years old, (although in some cases you can take penalty-free distributions as early as age 55). You cannot strategically convert these assets into Roth IRA assets over the years at a potentially low tax rate if they are taken as NUA; however, any amounts rolled into an IRA and not taken as an NUA distribution can still be converted to a Roth IRA. You will have to pay any applicable state taxes on the NUA withdrawal, which may apply equally to ordinary income and capital gains.

Keep in Mind

  • You will have to pay gains (for any price changes in the stock subsequent to the distribution) on any shares distributed from the retirement account and not sold immediately as either short- or long-term gains.
  • It is generally wise to keep the NUA stock in an account separate from other company stock to simplify your recordkeeping.
  • In addition, note that the NUA is not subject to the 3.8% Medicare surtax on net investment income.

Strategic Use

  • You are allowed to “cherry pick” which shares of stock to distribute in kind to the brokerage account and roll the remainder into an IRA.
  • Your heirs are allowed to take an NUA distribution when you pass away if the shares are still held in the company plan.
  • If you separate from service before the age of 59.5, have a very highly appreciated employer stock position, and you need to make a distribution from your retirement account, you would have to pay the normal 10% early withdrawal penalty. However, the penalty will be calculated off of your cost basis. This means if you purchased shares for $1,000 that are now worth $50,000, you can withdraw the $50,000 in employer stock and only pay the ordinary taxes and 10% penalty on the $1,000 cost basis. Then you would only have to pay taxes on the remaining $49,000 at your current capital gains tax rate.
  • You may be able to take an NUA distribution and then strategically sell the shares off in small amounts over the years to keep your income limited to a level that allows for 0% capital gains rates.
  • You can use the NUA distribution to satisfy your first required minimum distribution if you are over the age of 70.5 when you retire so you only have to pay ordinary income taxes on a potentially low-cost basis amount rather than the full amount of your first distribution when you would have had to distribute money from your retirement account anyway. This can significantly reduce the taxes due on your first required minimum distribution.

c. Optimizing Taxes: Backdoor Roth IRA Contributions

This unique strategy becomes available if your 401(k) plan allows you to roll over an IRA account into the 401(k) plan. Normally, single people making over $120,000 a year and married people filing taxes jointly making over $189,000 a year are limited in their ability to contribute to a Roth IRA (the income numbers are based on your Modified Adjusted Gross Income). By using the backdoor Roth IRA strategy, a highly compensated individual can contribute to a non-deductible IRA and convert it to a Roth IRA. The problem is that any Roth conversions must be done pro-rata across all IRA accounts. This means that, if you have a deductible IRA in addition to a non-deductible IRA being funded, any conversion of IRA money would be taken from both pre- and post-tax IRA accounts pro-rata. This creates a tax on the distributions from the deductible IRA where otherwise there would be none.

3. Backdoor Roth IRA Contributions

To avoid this additional taxation, you could potentially transfer the deductible IRA money into your 401(k) and then convert the new non-deductible IRA contributions to a Roth IRA without creating a taxable distribution.

d. 15-Year 403(b) Catch-Up Deferrals

There may be a special provision in a 403(b) plan that allows an additional catch-up separate from the over-50 catch-up. The additional catch-up, which amounts to $3,000 per year, is available to employees who have provided the same employer with 15 years of service. The amount of the allowable 15-year catch-up deferral is calculated as the lesser of:

  • $3,000; or
  • $15,000 reduced by all prior 15-year catch-up deferrals; or
  • $5,000 x years of service, reduced by all prior elective deferrals (including all past 15-year catch-up deferrals) to your 401(k)s, 403(b)s, SARSEPs, or SIMPLE IRAs sustained by your employer.

For employees who are eligible for the 15-year catch-up deferral and the over-50 catch-up, the 15-year catch-up deferral should generally be used first; the over-50 catch-up falls second in priority.

4. 15-Year 403(B) Catch-up Deferrals

e. 457 Special Catch-Up Deferrals

Another catch-up tool available to 457 plan participants is the 457 special catch-up deferral. This allows plan participants who are three years away from attaining normal retirement age in their 457 plan to defer:

  • Twice the yearly limit on deferrals ($37,000 in 2018, which is two times the yearly maximum contribution of $18,500 in 2018) for the three years leading up to normal retirement age; or
  • The yearly limit on deferrals plus any amount allowed in prior years that you chose not to or could not contribute. Plans will keep an ongoing list of amounts you were allowed to defer in prior years, the amount you actually deferred, and any shortfall from those years. If you choose this option, they add up all your shortfall and allow you to contribute an amount equal to the shortfall over the next three years.4

For governmental 457 plans, this additional contribution cannot be paired with the over-50 catch-up, which makes it important to use the one that will provide you with the greatest benefit or largest contribution.

5. 457 Special Catch Up Deferrals

Special Considerations

It is important to know whether your employer matches contributions on a per-year or per-paycheck basis. Obviously, it is in the best interest of the employee to put in the full $18,500 at the beginning of the year to maximize the amount of time the money is invested. However, if the employer matches on a per-paycheck basis, the employee may find themselves getting a 5% match on their first paycheck and no further employer contributions for the year. As a result, the employee’s checks have no 401(k) contributions to match for the remainder of the year. This can lead to tens or hundreds of thousands of dollars in lost matching through the years if not caught by the employee.

Mingling Contributions Among 401(k)s, 403(b)s, and 457 Plans

If you have a 401(k) and a 403(b), the maximum amount you can contribute to both accounts combined is $18,500 (2018).5 If you have a combination of a 401(k) and/or a 403(b) paired with a 457 plan, the maximum you can contribute combined is $37,000: $18,500 to the 401(k) and/or 403(b) and $18,500 to the 457. Plus, you can make any catch-up contributions allowed. The money you save into each account should be in order of employer matching with the employer plan that matches you at the highest rate first, until the match is completely maximized; then the money should flow to the account with the second-best matching and so on until you have contributed your overall maximum contribution to all plans.

6. Mingling Contributions 401(k), 403(B) & 457

Over-50 Catch-Up Contributions

For those who will reach age 50 before the year’s end, the limit on the amount you may contribute to a 403(b), 401(k), or 457 account increases by $6,000. This boosts the individual contribution limit from $18,500 to $24,500.

7. Over-50 Catch-Up Contributions

General Breakdown of 401(k)s, 403(b)s, and 457 Plans

When it comes to comparing 401(k)s, 403(b)s, and 457 plans, there are many similarities and few differences. The similarities include:

  • $18,500 contribution limit (2018);
  • $6,000 over-50 catch-up contribution;
  • Risk of investing falls on employee;
  • Withdrawals taxed as ordinary income; and
  • Amounts deferred on a pre-tax basis.

The major differences include:

  • 403(b)s and 457s have additional catch-up deferrals, as discussed above;
  • 401(k)s are open to most employers, 403(b)s are open to tax-exempt and non-profit organizations, and 457s are open to state/local governments and some non-profit organizations; and
  • 457 plans may not be subject to early withdrawal penalties like 403(b)s and 401(k)s.

Pensions: Buying Years of Service

Your pension may give you the option to buy additional years of service credit, which can increase your yearly pension benefit.

Optimal Use: Strategies and Analysis

Purchasing additional years of service should be looked at as an investment decision. You should estimate the rate of return on the “investment” of buying years of service. Doing so would allow you to compare it to a portfolio you’re currently invested in or one you plan on being invested in during retirement. You should also look at what you can buy as a single premium immediate annuity compared to what you would spend out of pocket to buy the years of service. You can then compare the additional increase in your pension to the annuity payment (keeping in mind whether your pension has any cost-of-living adjustments) to know whether you’re being offered something that competes with what is available on the open market.

To calculate an estimated return on this investment, you will need to figure out the rate of return over a given period. In other words, you’ll need to determine the amount of time you expect to collect on the pension plus any cost-of-living adjustments the pension may have. A cost-of-living adjustment would only make buying years of service more profitable.

8. Buying Additional Years of Service for Pensions

Some employers may allow you to avoid early retirement penalties by purchasing service credits. Doing this allows you to become eligible for normal retirement at an earlier date. This might make sense if you: (1) face the potential of having to go on unpaid medical leave that will be factored into your last three years of income, (thus lowering your yearly benefit); (2) have enough money to retire and no longer wish to work; or (3) are presented with another money-making opportunity that requires leaving your employer to pursue. Purchasing additional service credit is generally done to increase your retirement benefit, but doing so can also increase the benefit to your beneficiaries if you pass away during active service. This can be particularly valuable if you have a younger spouse or a critical illness. It can be thought of as a life insurance policy that pays out over time to support your family, even if you no longer qualify for a new life insurance policy due to your terminal illness.

General Considerations

Pension calculations generally rely on the following variables: years of service, retirement age, and highest salary over a specified number of years or average salary over a specified number of years. Purchasing additional service credit adds the number of years purchased to the number of years you worked for the employer for purposes of computing your monthly benefit.

9. Example of a Pension Benefit Calculation

Special Considerations

One thing you need to consider is that you will be buying additional income in retirement. This may affect your taxes and Medicare premiums. You must also consider the stability of the pension plan you’re buying into and the possibility that the pension will change during your retirement along with the years in which you’ll be collecting the pension.

You will want to consider whether you are already vested in the pension. Buying into a pension before vesting and being laid off before you vest can have serious repercussions depending on how the pension years of service purchase works with your employer. There is the possibility of buying years of service before vesting, being laid off or leaving, and not getting any benefit from the money you spent to buy years of service in a pension you will never receive benefits from. Pensions will usually not allow beneficiaries to buy additional years of service credit once the original pension owner passes away. It’s imperative that you don’t put all your eggs into one basket. Relying solely on the pension money can be risky because the pension could be renegotiated and the city, state, federal agency, or employer could go into bankruptcy.

An important factor to consider is whether you can purchase the service credit with pre-tax or after-tax money. If all the money from the pension benefit is to be taxed, then it would be ideal to pay for the years of service credit with something that is pre-tax, like a 403(b) or other retirement plan. As a result, the money is only taxed once rather than twice, and you can reduce your required minimum distributions from the retirement plan for future years in hopes of staying in lower tax and Medicare brackets.

General IRS Rules and Eligibility

  • Pensions typically don’t allow you to buy years of service to bring yourself up to a vesting level (although some do).
  • Some pensions only allow you to buy service at retirement or after a certain number of years of employment.
  • Certain pensions allow credit to be purchased at a discount or acquired for free for periods spent in military service, on maternity leave, under a worker’s compensation claim due to disability, or for out-of-state service from a similar state, federal, or private school employer.

It’s worth talking to any past and current employers to figure out the best way to combine your years of service or use previous job years of service to get a discount when buying years in your pension.

You may also find value in using your paid time off (PTO) strategically during your last working years (the years your pension calculation is based on). You may be limited in the number of hours of PTO factored into your pension calculation in your last years of employment. As a result, you may be able to get more value from your pension by strategically selling your PTO days back to your employer if that is considered when your pension is calculated. You may also be able to use your PTO during times you would normally be off work, e.g., holidays or summer for teachers, in your last years of your employment to boost the average salary on which your pension is based.

DROP Accounts

Some employers’ pension plans have the option for a Deferred Retirement Option Program (DROP), which allows you to formally retire (as far as your pension is concerned) while you continue to work. Your monthly pension retirement benefits are put into a trust fund instead of being paid to you while you participate in the DROP program. The trust fund will be invested, potentially earning tax-deferred interest for you during the time you participate in the DROP program.

Optimal Use: Strategies and Analysis

It’s important to begin paying attention to any DROP program options far in advance of retirement since plans can have a five-year period for which you can participate. You will have to file the appropriate applications on time to take advantage of the longest period that you can be a participant if it makes sense for you and your financial plan.

Your DROP benefits may be calculated using a participation rate (accrual rate) on your current income or on your pension benefits. For example, let’s say someone earns credits in the DROP program based off a accrual rate on their years of service and their current income ($50,000 per year), the accrual rate is 2.5%, the period in the program is five years, and the person elects to participate for the full five-year period after having worked 25 years. You determine the DROP benefit by multiplying the $50,000 per-year income by the 2.5% accrual rate, which gives you a payout rate of $1,250 per years of service. In this case, we would multiply the $1,250 x 20 for the years of service to get an annual credit in the DROP pension payout of $25,000 per year x the five years of participation for a total drop credit of $125,000.

The math works like this:

10. Example of a Drop Pension

Free calculators are available online that will compute your break-even period if you invest the DROP money; going into that level of depth on this calculation, and some things that should be factored in, are beyond the scope of this book. Suffice it to say that, for most people who invest the funds at a reasonable rate of return, the time to break even when not having participated in DROP is a very long time. It may also make sense to compare the yearly benefit of an immediate fixed-annuity payment bought with the lump-sum DROP money to the yearly difference in a pension payment (keeping in mind that I’m not currently a fan of annuities), but doing so gives you a good comparison point for how much your DROP money would purchase in terms of an annual benefit.

You may also choose to participate in the DROP plan if you have already maximized your lifetime benefits payable by your pension plan. This allows you to continue adding to your retirement even though you have hit the edge of what your pension will pay you. The rate at which you accrue benefits in the DROP program may also be higher than what the defined benefit part of your pension plan offers. It’s worthwhile to look at the payout available to you if you were to take the DROP assets at the end of the period and put them in an immediate annuity purchased cheaply at a fixed rate. By doing so, you can see what the amount of money would buy you in a yearly retirement benefit guaranteed by the open market compared to what your employer offers for the same period of service credits. That is not to say you should buy an annuity with the money, but it is an easy, straightforward way to compare what your pension offers with what is available elsewhere with the same amount of money.

Further, it may make sense for you to use your DROP funds to purchase a term or other life insurance policy and couple that with a pension that has a payout over a single lifetime. This dual strategy may give you more money overall than if you just got a joint pension with a payout for both spouses—and given the insurance component, it also provides money on the back end for the surviving spouse. The value of this strategy varies widely from couple to couple, so it’s important to do a proper evaluation and comparison. That being said, when evaluating the life insurance, you should assume that the spouse for whom the single life pension payments are being made passes away in the first year, so the surviving spouse has sufficient buffer should the worst happen. Again, I am not a huge fan of life insurance due to the way it is commonly sold, but it makes sense to at least check the math on the cost and potential value of a fixed-term life insurance policy with an insurance agent before deciding whether to participate in the DROP program using the above strategy and what type of pension payout to take.

Your pension may have a cost-of-living increase to the pension plan for the years in which you are participating in DROP, or they may stop the cost-of-living adjustment increases for your pension benefits while you are participating in the program. It is important for you to account for this in any calculations involving whether it makes sense for you to participate in the DROP program.

The DROP program will generally allow you to name a designated beneficiary and contingent beneficiary. This means that if you pass away while participating in the DROP program, your beneficiary or contingent beneficiary will receive the DROP assets. This can be particularly valuable if you have elected for any options other than joint and 100% survivor pension benefits so the surviving spouse is left with a lump sum of money. It can also benefit the contingent beneficiary to the extent that if something were to happen to both you and your spouse, usually no one would be eligible to receive pension benefits. However, in this case your contingent beneficiary could still receive the DROP benefits that accrued during your participation in the DROP program rather than receiving nothing from your pension.

DROP programs can allow either a guaranteed rate of return or allow you to invest the funds like you would with an IRA account. It’s important to know what your investment options are and if they are guaranteed before opting for the DROP program. Make sure your participation in the DROP program is in line with your risk tolerance and return goals. If you retire with enough money to not take your pension payments immediately and before you reach age 70.5, you can use the assets you hold outside the DROP program and the pension to fund your current lifestyle. It may be wise to use the years before you turn 70.5 to convert, in piecemeal, the DROP program money into an IRA and then convert slowly, as dictated by pre-modeling your taxes, certain amounts of money every year from your IRA to your Roth IRA.

This conversion over time means the required minimum distributions from any DROP money will be lower in the future. You may be able to keep your lifetime taxes lower by taking small amounts out of your IRA and moving them to a Roth at a low tax bracket. Decreasing the required minimum distributions by converting money from IRA money to Roth IRA money over the course of time may also help keep your Medicare premiums at a lower rate during your retirement, which allows additional cost savings. In addition, if you retire early enough and you have converted some of your IRA money to a Roth, you can take it out tax and penalty free if you need any money from that Roth IRA (as long as the money is not attributable to growth but the money you put in the Roth IRA that has been in the Roth IRA for five years or longer). This means that you need to keep track of how much you convert from the IRA to the Roth IRA before growth. In other words, if you convert $10,000 from the IRA to the Roth IRA and it grows to $15,000 over the course five years, it is invested so you can take out $10,000 tax and penalty free; however, you will have to pay penalties on the additional $5,000 in gains that are made in the Roth (if you are not over age 59.5). This allows extra emergency cash flow in case you need it later in life but before you turn 59.5.

General Considerations

Generally, the DROP program is valid for a specified number of years; after that point, you will have to terminate your employment. The DROP assets will generally be paid out to you as an IRA rollover. Certain job benefits may also accrue based on your previous purchase of service credits in the pension. If this money is paid for with after-tax contributions, you may find different rules for receiving the money back. You may be able to roll the ordinarily earned DROP money over into an IRA, and you may have to take an immediate distribution to a taxable account for any DROP credit earned by purchasing service credits from your pension provider. These accumulations may or may not be a tax-free lump sum payout. The proportion of DROP assets you get that are attributable to any purchase of service credit with after-tax money may be treated differently upon rollout. You may find that you get paid out to a taxable account and the rest rolls over to an IRA.

Special Considerations

Typically, once you start the DROP program you are no longer eligible to purchase pension service credit.6 It’s important to purchase any credits you intend on purchasing before entering the DROP program or to know whether your employer allows the purchase of service credits after having entered the DROP program.

Make sure you file the appropriate forms if there are any changes to your employment or employer and make sure you know how DROP works before making any changes since any lapse in employment with a participating employer can cause your DROP participation to be terminated. Some benefits intended for actual retirement may not be available to you while you are in the DROP program because you are currently working, including health insurance subsidies and other programs intended to help retired employees.

It is important to know your options for reemployment after participating in DROP and formally retiring from service since some employers require you to be retired for a certain period, such as six months after your DROP termination date and your retirement date, to receive all your benefits. In some cases, if you go back to work too early, the employer will void your retirement application and benefits, including all the funds accumulated during your DROP participation, which you will ultimately have to pay back. This has very serious consequences, so if you intend on going back to work after retirement, it’s important to speak with your HR department and make sure you fully understand how the DROP and pension programs work in coordination with going back to work in the future.

If you do not terminate your employment at the end of the DROP program, you may find that your retirement benefits during that point of time, including DROP money that has been put aside and growing for you, are cancelled and you are put back into the regular pension program, which may or may not be beneficial. Understanding what happens if you work past the DROP election date is important because if the DROP program has not had a positive outcome for you, it may be worthwhile to run the math and consider working past the DROP program date intentionally to accrue the pension benefits if your pension works in that manner.

You can generally receive DROP account money in a direct rollover to an eligible retirement plan (e.g., an IRA and a lump-sum payment) or some combination of a direct payment to you and a rollover to an IRA. Keep in mind that if you decide to take a lump-sum payment, you will generally be taxed on the full amount given to you at an ordinary income tax rate. This can be punitive because you may have five years of pension payments taxable all in the same year that you have been working.

11. More Drop Pension Examples

It is important to note that any withdrawals from the DROP program prior to age 59.5 may be subject to a 10% penalty, similar to the 10% penalty assigned to an IRA early withdrawal. There may be a way around this if the DROP program has an associated investment plan qualified as an employer-sponsored plan. Keeping the money in the investment plan may make you eligible to take distributions prior to age 59.5 from the investment plan without facing a 10% IRA early withdrawal penalty if the payments are paid to you after you separate from service with your employer during or after the year you reach age 55. You may also be able to structure payments over the course of your lifetime from the DROP program and avoid the 10% penalty. Correctly structuring your retirement and the age at which you will need these assets is very important, so you should speak with your tax advisor and financial planner before doing anything.

Some special-risk members who are qualified public safety employees may receive distributions from the plan without the 10% excise tax if they separate from service after age 50 (people in this category are generally police, firefighters, or emergency medical service workers for a state or municipality). This means, it can be important to think carefully about your age and how long it will be before you need the DROP money before deciding whether to keep the money inside an investment plan offered by the pension provider or roll the money over into an IRA where you could be subject to additional excise taxes on any withdrawals before the age of 59.5. If you have already rolled the money over into an IRA, it may be wise to speak to your HR department about whether you can roll the money back into the investment plan and take withdrawals if you end up needing withdrawals prior to age 59.5, although this may not always be possible.

 General IRS Rules and Eligibility

  • You may have to wait until you are eligible to retire under the current pension plan to participate in the DROP program. Depending on the plan, you may have to choose to enroll within a certain period based on your first eligibility date, or you may be allowed to choose when you would like to enroll after your retirement date.
  • Once you enroll in the DROP, you may not be able to add years of service to your pension.
  • You are likely limited in terms of the amount of time you can participate in the DROP program, but if you select a shorter DROP period than the maximum allowed, you may be able to request an extension up to the maximum allowed by your employer.
  • Electing to participate in the DROP program is usually irrevocable. In other words, you typically cannot decide you don’t want to participate in the DROP program any longer once you have started participating. In addition, you will no longer receive service credit for years of work and the pension calculation for years worked while participating in the DROP program in most cases.
  • You may need to name a separate beneficiary for the DROP account money from your pension since that person may not automatically be the same as the pension beneficiary. Looking at who the beneficiary is and ensuring that it is who you want it to be is important.


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:

For more information on financial planning visit our website at

NewsLetter Vol. 11, No. 4 – August 2018

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Dear Reader:


From USA Today:

200,000 trillion calculations per second: U.S. launches the world’s most powerful supercomputer. Oak Ridge National Laboratory and IBM have successfully built and launched the Summit supercomputer, the world’s most powerful and smartest supercomputer.

The powerful computer is the next step toward a national goal of developing the world’s first fully capable exascale machine by 2021. An exascale computer is one that is capable of making one billion billion calculations per second. The Summit supercomputer has a peak performance of 200,000 trillion calculations per second — or 200 petaflops, making it eight times faster than the Titan Cray X supercomputer that came before it. [My emphasis.]

Oak Ridge National Laboratory director Thomas Zacharia said Summit has already proved itself capable of making exascale calculations in some scientific areas. During its installation, scientists used it to make more than 1.8 quintillion calculations in a single second in bioenergy and human health research. “This is the first time anyone has broken the exascale barrier,” Zacharia said. “Today’s Summit also gives us confidence we can deliver on a fully capable exascale computing resource by the year 2021.”


As I wrote in my last NewsLetter, cybercrime is alive and well. Indeed, according to the AICPA, “143 million U.S. consumers were victims of cybercrime in 2017, with losses hitting $19.4 billion. Still, only three in five adults responding to the AICPA survey (61%) said they had ever looked at their credit report. Monitoring your credit is an important step in protecting your finances.” You can request one free report per year from each of the three major credit reporting agencies. The AICPA also recommends checking credit reports associated with your children’s names, even very young children.

From the Federal Trade Commission website:

The three nationwide credit reporting companies have set up a central website, a toll-free telephone number, and a mailing address through which you can order your free annual report.

To order, visit, call 1-877-322-8228. Or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Do not contact the three nationwide credit reporting companies individually. They are providing free annual credit reports only through, 1-877-322-8228 or mailing to Annual Credit Report Request Service.

You may order your reports from each of the three nationwide credit reporting companies at the same time, or you can order your report from each of the companies one at a time. The law allows you to order one free copy of your report from each of the nationwide credit reporting companies every 12 months.

We take cybersecurity VERY seriously, and you should too!


The New York Times reported on a paper by Ohio State finance professor Rene Stulz that found:

  • In the mid-1990s, there were more than 8,000 publicly traded companies.
  • By 2016 there were only 3,627.
  • Based on the growth of the U.S. population, those numbers represent a reduction from 23 companies/million to 11 in 2016.
  • In 1974, 61.5% of publicly traded companies had assets of less than $100 million (in 2015 dollars). By 2015 that portion was 22.6%

1.The Shrinking Market










The New York Times reports on new research that sheds light on the scope of a problem affecting a rapidly growing share of older Americans: “The rate of people 65 and older filing for bankruptcy is three times what it was in 1991, and the same group accounts for a far greater share of all filers.”



Good advice for everyone, not just Boy Scouts. My friend Mena suggests checking out “I really like for all their information on storm preparation. They cover everything from hurricanes to wildfires to active shooters and pets. June is Pet Month. Gather some information about it!”


These five lessons from West Point can make you a better investor—and a better person:

2.Excellent Advice









Even professionals engage in nonsensical habits. From

Active vs. Passive: Halftime Results

Investors who shifted to index-based ETFs and mutual funds have generally been rewarded in the first half of 2018, as most actively managed funds failed to keep up with the cheaper alternatives despite the belief we’re in a “stock picker’s market.”

Comparing performance over a six-month period? Worthless!


In his recent newsletter for professionals (which is always excellent), Michael Kitces invited Ben Coombs, a longtime friend and one of our profession’s founders to contribute a guest column. Ben’s musings included a few thoughts both clients and professionals need to take to heart when planning.

  • No matter how precise your answer or calculation may be, it will be wrong tomorrow; a moment will change everything.
  • You can’t send a rocket to the moon without making midcourse corrections.

In my terms that means ignore the decimal places, and “don’t buy and forget—buy and manage.”


From the New York Times:

Facebook’s stock Plunge Shatters Faith in Tech Companies’ Invincibility

It had become an article of investor faith on Wall Street and in Silicon Valley: Quarter after quarter, year after year, the world’s biggest technology companies would keep raking in new users and ever-higher revenue. And with that, their share prices would continue to march upward, sloughing off any stumbles.

This week, that myth was shattered. And investors responded Thursday by hammering the stock of Facebook, one of the world’s most valuable companies. Shares of the social media giant fell 19 percent, wiping out roughly $120 billion of shareholder wealth, among the largest one-day destruction of market value that a company has ever suffered.

Reminds me of the crazy time of the tech boom that peaked in early 2000, when many pundits were arguing that the only place to invest was in U.S. technology and anyone who didn’t was stupid.


If six months is worthless, how about one year? Be wary of chasing whatever’s hot. S&P Dow Jones Indices publishes a SPIVA U.S. Scorecard that’s chock-full of interesting and useful data.

For example, it notes that the U.S. equity market ended 2017 on a strong note with the S&P 500 growing 21.83%. Unfortunately, 63.08% of large-cap managers underperformed their index.

How about those that did beat their benchmark for the year? The following highlights the risk of assuming that a style that beats its benchmark index for one year is likely to continue doing so in the future.

Percentage of U.S. Equity Funds That Outperformed Their Benchmarks

1-YEAR           3-YEARS        5-YEARS        10-YEARS

Mid-Cap Growth Funds              82                     9                      19                        2

Small-Cap Growth Funds           85                   13                      13                       4

Real Estate Funds                        63                   40                      26                     15



From the Wall Street Journal:

 A Generation of Americans Is Entering Old Age the Least Prepared in Decades

Low incomes, paltry savings, high debt burdens, failed insurance—the U.S. is upending decades of progress in securing life’s final chapter

Americans are reaching retirement age in worse financial shape than the prior generation, for the first time since Harry Truman was president.

This cohort should be on the cusp of their golden years. Instead, their median incomes including Social Security and retirement-fund receipts haven’t risen in years, after having increased steadily from the 1950s. 


From the Financial Times:

Hamptons property sales slow as caution spreads to the wealthy

3. Tragic







Home sales have slowed down this year in the Hamptons, the Long Island beach communities that serve as a summer playground for the wealthy of New York, bringing the median price below the $1m mark.


Below is my summation of “Investing Lessons from a Top Poker Player,” an article by Larry Swedroe, one of our profession’s most thoughtful practitioners in our profession’s number-one newsletter (Bob Veres’s Advisor Perspective).

A poker player is betting against one opponent, with a good hand and one card remaining to be drawn.  He estimates his odds of winning the hand to be 86%, so he makes a big bet. Ultimately, that last card proves to be the winning one for his opponent, and he loses big. He “learns his lesson” and changes his strategy.

But wait—if he had followed this strategy 100 times, he’d come out ahead 86% of the time. He knew that in 14% of the cards to be drawn, the hand would be lost. Changing his strategy will probably end up losing him money in the long run.

The lesson? You cannot judge a strategy by the results of one or two outcomes—either way. The Amazon executive who owns Amazon stock in a highly concentrated portfolio has enjoyed a great outcome, and draws the lesson that this is a great investment strategy. But executives who tried that strategy at Polaroid, Eastman Kodak, Digital Equipment, Burroughs, and Xerox would have begged to differ. Roughly 80% of the time, a concentrated portfolio is a poor idea.

The same caution applies to value investing. From 2007 to 2017, the value premium—the average annual difference in returns between value stocks and growth stocks—was -2.3%. So we have “learned” that value investing is inferior to growth, right? But over 10-year periods since 1927, value stocks have outperformed growth stocks 86% of the time, just like a poker hand eventually would. Value investing isn’t suddenly a bad idea; we just managed to hit that other 14% that comes along from time to time.

Swedroe says that there are going to be periods when the best strategy loses, and the smartest among us will be the first to notice and switch course. Research has shown that people with the most intelligence and numerical literacy are the ones who tend to make this type of mistake.


“Less than two-thirds of workers are confident that they will retire at age 65, and nearly a third of those surveyed plan to continue working in retirement, according to a Transamerica Center for Retirement survey.

Sixty-two percent of baby boomers, the group closest to retirement, believe they can comfortably retire…. ‘Millennials are the most confident, as they have the most time to save,’ says Catherine Collinson, CEO and president of Transamerica Institute and its center for retirement studies. Despite this sense of assurance, only 67% of millennial workers are confident that they will be able to fully retire with a comfortable lifestyle.”

Framing is everything. I read this as “more than two-thirds of retires and 67% of millennials are confident they will be able to retire with a comfortable lifestyle.” I hope they’re right, but I wouldn’t bet on it.


We’ve been using our “Cash Flow Reserve Strategy” since the early 1980s. Versions are now common throughout the financial services world, so it’s really nice to be recognized as the creators. Check out the mention below from Christine Benz, director of personal finance at Morningstar, in her article “A Midyear Bucket Portfolio Checkup.”

“Before we delve into the Bucket portfolios’ performance, let’s first review what the Bucket approach is designed to do. As pioneered by financial planner Harold Evensky, the Bucket strategy for retirement portfolios centers around an extraordinarily simple premise: By holding enough cash to meet living expenses during periodic weakness in stock or bond holdings—or both—a retiree won’t need to sell fallen holdings. That leaves more of the portfolio in place to recover when the market eventually does.”


Notes from David E.:

From March 2005 comes this summary (by John Hallock) of a study, “Forecasting the availability and diversity of global conventional oil supply.” The study was published in the journal Energy.

There is a lot of talk about oil and gasoline these days—and of fear premiums and even the ability of supply to match the pace at which demand is rising.… [The] US Energy Information Administration (EIA) projected that worldwide crude oil production wouldn’t peak until between 2020 and 2030…. Others believe that when conventional oil does actually become harder to find that the market will ensure a transition to alternative fuels—liquified petroleum gas (LPG), tar sands, deep-water oil, etc.…

A growing cadre of researchers, oil industry professionals and even economists are not so sanguine. They believe that the potential to find more oil and produce oil at ever increasing rates is more limited and doubt that either the oil or alternatives will be found in time to avert near-term supply disruptions.

 Now to July 2018, from Bloomberg:

U.S. Is Set to Become World’s Top Oil Producer, Government Says

The U.S. government sees oil production further climbing next year even amid transportation logjams in the country’s most prolific shale play.

The Energy Information Administration sees U.S. crude output averaging 11.8 million barrels a day in 2019, up from its 11.76 million barrel a day estimate in the June outlook.

‘In 2019, EIA forecasts that the United States will average nearly 12 million barrels of crude oil production per day,’ said Linda Capuano, Administrator of the EIA. If the forecast holds, that would make the U.S. the world’s leading producer of crude.


Here’s an excellent graphic from Nic reminding everyone (particularly investors) to be wary of overconfidence. Remember, all the kids in Lake Woebegone aren’t really above average.

Coined in 1999 by Cornell psychologists David Dunning and Justin Kruger, Wikipedia tells us that “in the field of psychology, the DunningKruger effect is a cognitive bias in which people of low ability have illusory superiority and mistakenly assess their cognitive ability as greater than it is.”

4. The Dunning-Kruger Effect


As usual, I’ll preface this with the caveat that I’m quite biased on the subject of advisor responsibility. The following are excerpts from an op-ed piece by Elizabeth Warren in Financial Advisor regarding the SEC’s proposal to address the broker conflict-of-interest problem.

Your lawyer can’t take money from your opponent to give you bad legal advice. If you’re on Medicare, your doctor can’t take kickbacks from drug manufacturers for prescribing their drugs. But, under current law, your broker-dealer can receive monetary rewards and other perks for recommending certain investment products, even if those products aren’t in your best interest.

The commission should make four main changes:

First, the final rule should make absolutely clear that all financial professionals must act in their clients’ best interest by applying a fiduciary standard to the brokerage industry….

Second, the SEC should explicitly ban the most obvious forms of conflicted advice, like sales contests and quotas that encourage brokers and agents to make bad recommendations….

Third, the SEC shouldn’t rely on disclosure alone to protect customers. A number of studies have shown that disclosure fails to reduce the harm caused by conflicted advice, and brokers have every incentive to make the disclosures as ineffective as possible. A lawyer can’t represent his client’s opponent just because that conflict was disclosed, and the same should be true of a broker.

Finally, the SEC should include a strong enforcement mechanism by allowing investors to sue advisers who scam them. When someone is cheated by their doctor or lawyer, they can go to court. There’s no reason that families shouldn’t have the same option when their life savings are at stake.

Sounds like common sense to me. I couldn’t agree more.


But sometimes Jim Cramer gives good advice. Check out “Jim Cramer’s Investing Rule 7: No One Made a Dime by Panicking.”

Click Here.


I barely understand Bitcoin, but if the following is true, it’s sobering.

Ripple CEO Brad Garlinghouse took to the stage at the Stifel Financial 2018 Cross Sector Insight Conference to talk cryptos. “I’ll tell you another story that is underreported, but worth paying attention to. Bitcoin is really controlled by China. There are four miners in China that control over 50% of Bitcoin…

How do we know that China won’t intervene? How many countries want to use a Chinese-controlled currency?”


Ken Fisher is often outrageous in his pronouncements, and we’re rarely on the same page, but in his recent rant about the current SEC proposed actions, I believe he’s absolutely on target. Below are a few excerpts from an article on Financial Advisor IQ.

 Ken Fisher Slams SEC Attempt to Tighten Broker Regulation

The founder of RIA giant Fisher Investments has slammed the industry watchdog for its attempts to write a best interest standard for broker-dealers, saying if the SEC wants to better regulate brokers, it should enforce the rules it already has….

“I urge the Commission to begin strictly enforcing the ‘solely incidental’ language in the Advisers Act, like a parent starting to strictly enforce bedtime after a long summer vacation, which for the brokerage industry has lasted for more than two decades,” Fisher says.


Danny is infinitely humbler than me. I obviously couldn’t resist including this tidbit from s2analytics, “Five Lessons from Daniel Kahneman.”

Be Humble
Kahneman’s research has shown that since we use overconfident, highly emotional logic in making investment decisions, the best approach is often the simplest. Ironically, Kahneman defers to his certified financial planner for portfolio advice, Harold Evensky of Evensky, Brown & Katz in Coral Gables, Florida.

At the beginning of a lecture in Chicago on May 2, after introducing himself as a psychologist and insisting he wasn’t an economist, Kahneman glanced down at Evensky sitting in the first row and quipped nervously, “I’m intimidated by my financial adviser, he knows how little I know.”

A little humility goes a long way in successful investing. You don’t need a Nobel Prize under your belt to discover that.


Seen in the bulletin: “BID BY AARP TO SAVE ‘FIDUCIARY RULE’ REJECTED—Reg would have forced financial advisors to put clients first.”


My friend Bob Veres highlighted in his most excellent newsletter some thoughts from Allan Roth, an experienced practitioner. A number of them really resonated with me.

  • I’m charging you to tell you I don’t know the future.
  • Is your goal to die the richest person in the graveyard? This is another version of: If you’ve won the game, quit playing. Stop taking significant market risk when you no longer have to.
  • You have a ton of cash, and that is your riskiest asset. Inflation and taxes inevitably erode the value of cash, bit by bit, over decades.
  • If it feels wrong, go for it. People typically want to put their money in whatever asset class has performed well, or take from the asset class that has performed worst. This is backwards.
  • Get real! This means focus on real, after-inflation returns, and after factoring out all the AUM fees, mutual fund expense ratios, etc.


From comes this list of the world’s biggest wealth management firms in 2017:

UBS                                            $2.4      Trillion

Morgan Stanley                      $2.2       Trillion

Bank of America                     $2.2      Trillion

Wells Fargo                              $1.9      Trillion

Royal Bank of Canada           $908      Billion

Credit Suisse                            $792      Billion

Citi                                             $530      Billion

J.P. Morgan                              $526      Billion

Goldman Sachs                      $458      Billion

BNP Paribas                           $437      Billion

E&K didn’t make the list. Maybe next year.


From Kiplinger:

“To help you weigh the pros and cons of each state when it comes to retirement, we ranked all 50 states based on financial factors critical to retirees, including living expenses, tax burdens, health care costs, household incomes, poverty rates and the economic wellness of the state itself. Of course, plenty of other factors figure into this major life decision, from proximity to family to climate preferences. But we’ll leave assessing those personal considerations to you.”


Share of                                  Cost of Living              Average Income

Population 65+                        to U.S. Average          for 65+ households

#1  South Dakota               15.2%                                      -4%                              $43,712

#2  Hawaii                          16.1%                                      +87%                           $71,997

#3  Georgia                         12.3%                                      -7%                              $50,607

#4  North Dakota               14.2%                                      +1%                             $46,763

#5  Tennessee                    15.0%                                      -12%                            $47,891

#6  Alabama                       15.3%                                      -13%                            $44,934

#7  Virginia                         13.8%                                      +7%                             $59,869

#8  Florida                           19.1%                                      +1%                             $51,187

#9  New Hampshire          15.9%                                      +18%                           $53,202

#10  Utah                             10.0%                                      +4%                             $53,211

U.S.                                       14.5%                                                                           $53,799


I’m not going to complain about 100 degree weather in Lubbock

5. OK


From “An increasing number of women are becoming billionaires. In fact, women are joining the three-comma-club at a faster rate than men, according to Wealth-X’s annual billionaire survey.”


Some ideas from my friend Leon:

6. Spruce up your garage door


In preparing for a seminar I’ll be giving, I came across an interesting article. I believe the “lesson” is as valid today as when the study was done in 2002.

“In researching how wealthy families created their wealth and then how some were able to sustain it while others lost the wealth, we came across the following.

“To create wealth required concentrated risk taking, often magnified through leverage. To sustain it, the better strategy was to diversify and take a diverse portfolio of risks. This was highlighted through a study of the Forbes 400 (a list of the wealthiest individuals in the U.S.) over a 23-year period. Of the 400 on the list at the beginning of the 23-year period, only 50 remained on the list. The principal factor in dropping off the list was that they did not change their approach to risk taking and their concentrated wealth did not keep up with increases in the market. The interesting insight from this study was that any of those original 400 who would have sold their concentrated assets at the beginning of the period, paid taxes, and simply invested in the S&P 500 Index would still be on the list today.”

Source: “Creating a Goal-Based Wealth Allocation Process,” by Ashvin B. Chhabra, Ravindra Koneru, and Lex Zaharoff, Journal of Wealth Management, winter 2008.


This chart is from J.P. Morgan’s most recent Guide to the Markets, a quarterly publication and one of the most valuable publications in the financial services world.

7. More Smart, Not Brilliant.png

Source: J.P. Morgan, Guide to the Markets, 3Q 2018, as of June 30, 2018


8. It's a Global World.png


9. Why Diversification Works Over Time

Source: J.P. Morgan, Guide to the Markets, 3Q 2018, as of June 30, 2018


From the Wall Street Journal:

‘This Is Unbelievable’: A Hedge Fund Star Dims, and Investors Flee

For years, David Einhorn’s investors didn’t seem to mind his unusual ways—the aloofness toward clients, midday naps, unpopular stock picks, late nights on the town. Until the billionaire hedge-fund manager fell into a slump.

After more than a decade of winning on Wall Street, Mr. Einhorn’s Greenlight Capital Inc. has shrunk to about $5.5 billion in assets under management, his investors estimate, from a reported $12 billion in 2014, and his investments are struggling.


In the hedge fund coffin, this one from the New York Times:

Hedge Funds Should Be Thriving Right Now. They Aren’t.

Highly paid hedge fund managers have complained for years that it’s unfair to compare their performance with the broad stock market during prolonged bullish periods. Hedge funds are designed to mitigate risk, the argument goes, and so investors in them might sacrifice some gains as markets rise while waiting for hedge funds to prove themselves in more challenging times.

Those times would seem to have arrived.

So far this year, stock markets have delivered weak returns, bond markets have turned in negative performances, and everything is much more volatile—just the environment that many hedge funds say they’ve been waiting for….

The results for the first six months are now in—and they shatter the myth of hedge funds thriving in turbulent markets.

Hedge funds, on average, underperformed the Standard & Poor’s 500-stock index yet again. An index of hedge fund performance, calculated by the research firm HFR, gained just 0.81 percent in the first half of 2018. That is less than half of the S. & P. 500’s 1.67 percent gain.


10. And Some interesting (and impressive) data on emerging markets

J.P. Morgan, Guide to the Markets, 3Q 2018


Notice a pattern?

11. Buy High Sell Low

Source: 2018 Investment Company Fact Book: A Review of Trends and Activities in the Investment Company Industry. Washington, DC: Investment Company Institute. Available at


Some tidbits from my friend Leon. Just reading this wore me out. I had to take a nap.

  • Your heart pumps approximately 2,000 gallons of blood through its chambers every single day. It beats more than 100,000 times a day.
  • You take around 17,000 breaths a day on average, and don’t have to think about a single one.
  • Your brain doesn’t stop working. It’s estimated that about 50,000 thoughts pass through it each day on average, although some scientists put the figure closer to 60,000. That is a whopping 35 to 48 thoughts every minute.
  • You blink about 28,800 times every day, with each one lasting just a tenth of a second. You can weigh up any visual scene in just a hundredth of a second.
  • Red blood cells literally shoot around the body, taking less than 60 seconds to complete a full circuit. That means 1,440 trips around your body every day.
  • You shed more than 1 million skin cells every day.
  • Your hair (if you still have any) grows about half a millimeter per day, and the average adult with a full scalp has around 100,000 hairs on their head.
  • The average person will eat over 50 tons of food in his or her lifetime. No wonder I keep gaining weight!
  • And most amazing of all, your body cells are regenerating themselves every single day without any prompting. This means you have an entirely new set of taste buds every 10 days, new nails every six to 10 months, new bones every 10 years, and a new heart every 20 years.



Kiplinger’s “Cheaper by the Decade” shows us prices today versus 33 years ago (adjusted for inflation):

                                                1985               2018

Cell Phone                           $  1,495           $    670

Television                             $  1,200           $    160

Computer                             $  2,495           $ 1,099

Nike Air Jordans                 $     152           $    110

Honda Accord LX               $25,343           $24,465


PGIM Investments, the investment manufacturing and distribution arm of PGIM, the global asset management business of Prudential Financial, has found in its 2018 Retirement Preparedness Survey that a majority of millennials (62%) planned to retire only when they had enough money, but 31% were not saving for retirement at all, as they didn’t see “the point of planning for retirement because anything can happen between now and then.”

As my dad would say, I think they’re cruzin’ for a bruzin’.


Courtesy of David:

12. We've Come a Long Way, part 2


13. Now That's Volatility


Wikipedia tells us, “The overconfidence effect is a well-established bias in which a person’s subjective confidence in his or her judgements is reliably greater than the objective accuracy of those judgements, especially when confidence is relatively high.” And from Financial Advisor IQ:

Americans Confident About Their Own Financial Literacy – for No Reason

Americans seem to put a lot of faith in their financial literacy, despite the fact that only around one out of 20 scored in the top bracket on a financial quiz, according to a recent report from the research firm Raddon.

Forty-four percent of Americans believe they’re “extremely” or “very” financially literate, according to a survey of 1,200 U.S. adults 18 and over conducted in the fall of 2017 by Raddon, which is part of Fiserv. But not even half were able to pass a financial quiz, and just 6% were able to get a score of 90 or above on the company’s quiz, Raddon found.

WORKER PRAISE             

14. Worker Praise

Courtesy of

Retirement plan participants are clearly happy campers. If you’re eligible and not yet participating, do it now! If you’re in business and do not offer a plan, now’s the time to consider doing so. As we’re advisors to many plans we’re obviously biased in favor of saving through retirement plans.


If you’re like me, you never can remember who is in which generation. Here’s a good recap and some interesting statistics from the Graphic Sociology blog on the Society Pages site:

15. Cheat Sheet 1

15. Cheat Sheet 2


Hope may spring eternal but market timing is a tried-and-true strategy for long-term underperformance. Here’s an example from Jason Zweig’s always excellent Wall Street Journal column “The Intelligent Investor.”

Average returns if an investor had…*


Bought and Held the Investment           Traded the Investment


Emerging Market Bonds                  6.1%                                                                   4.0%

European Stock                                 2.6%                                                                   -7.8%


*Annualized over the 10 years ended March 31, 2018—Morningstar


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



Harold Evensky


Evensky & Katz / Foldes Financial Wealth Management


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

NewsLetter Vol. 11, No. 4 – June 2018

Six Things You Need to Know to Make You a Better Investor

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Click the following links to view Harold R. Evenskys, CFP®, AIF® Six Things You Need to Know to Make You a Better Investor presentation that was held at the Coral Gables Art Cinema on Tuesday, June 12th, 2018.

To view the entire seminar: Click Here

To view in segments click the following:

Part 1: Squaring the Curve

Part 2: Returns (No Control)

Part 3: Volatility Risk & Luck

Part 4: Real People

Part 5: Market Timing

Part 6: Knowing Where the Buck Stops


Feel free to contact Harold Evensky with any questions by phone 1.800.448.5435 or email:

For more information on financial planning visit our website at

The Value of a Financial Planner


John R. Salter, CFP®, AIFA®, PhD Wealth Manager, Principal

Financial planning is the process of determining how you can meet your financial goals by managing your financial resources. Probably you have already thought about your own financial planning. Maybe you have thought about working, or already work, with a professional financial planner. Whatever your situation, we wanted to discuss the value of working with a financial planner.

Financial planners provide advice on how to achieve financial goals. The quality of the advice should be measured by whether you attain those goals. The value of financial planning lies in the development of a plan specific to your goals, but just as important is the guidance you get along the way.

Below are just a few ways financial planners provide value to clients.

Creating a Financial Plan

One well-documented fact about our lives is we are likely to spend more time planning a vacation than planning for our retirement. And why not? The vacation seems much more fun! However, the vacation is a one-time event, whereas issues related to your financial life have a lasting impact on your future (and your ability to take vacations, for that matter!) A financial plan maps out the steps you need to take in the areas of spending, saving, investing, managing risks, and handling bequests in order to attain your financial goals.

A financial planner provides the analysis and can outline the steps needed to meet your current and future financial goals.

Being a Sounding Board

Should you pay off your mortgage? Should you buy or lease your car? What about buying a rental property? Were you pitched an annuity at a free dinner? A financial planner can help you answer all these questions and more, either through an analysis and/or by providing the details you need to make an informed decision yourself. You can probably think back to times you have contemplated a decision, seemingly to no avail, when an objective opinion could have saved you time.

A financial planner is there to help.

Optimal Investing

Investing should be boring. We should focus not only on achieving returns, but also evaluate the risk we are willing to accept to reach those returns. This “risk” refers to how much your portfolio might drop in a short-term bear market, but also the risk that you might not be able to meet your future financial goals. Our investments should be diversified; we should not have all our eggs in one basket. The best portfolio should arise out of the overlap between your risk tolerance, your financial capacity to take risk, and the risk and return needed to meet your future goals.

A financial planner helps determine your optimal portfolio.

Staying Disciplined

Long term, we are likely to be our own worst enemy in terms of keeping our financial plan on track, both in terms of performing the financial planning tasks we need to undertake and sticking with the investment plan. One notable example is estate planning, which seems to be the last item on everyone’s to-do list. Sometimes we need simple “nudges” to make sure these tasks are completed. Financial planners also help stay on track with our investments. When the market’s down, you want to adjust and make it more conservative, and then get back in when it is up. This is the easiest way to lose money long term. Ongoing management includes rebalancing or bringing the investment mix back to target. In general, this is selling the winners and buying more of what hasn’t done as well recently, and of course assumes long-term investment values will rise. Does short-term market volatility get you worried? Why not have your financial planner help you stay disciplined through the ups and downs of the market cycle, which are inevitable, simply by reaching out to you during rough markets?

A financial planner helps you stay disciplined through the financial planning process.

Managing Behavior

We are human, and therefore we are hard-wired to make terrible financial decisions. We want to be in the market when things are going well, and out when things look bad. We should do the opposite. We focus too much on the short term; we want to make decisions based on short-term noise rather than long-term analysis. We want to be in the winners and out of the losers, whereas being spread across winners and losers (being diversified) is the best long-term strategy. We want our investments to be exciting and sexy, but they should be dull and boring. We want to chase the investments that did well in the too-recent past, but they are likely those that will falter in the short-term future. We make decisions based on simple rules of thumb because we cannot perform complex math in our head. Our behavior, based on the emotions tied to our money, prevents us from reaching our future financial goals.

A financial planner helps manage your behavior and separate emotion from your money.

Tax and Cost Efficiency

In a world of lower return expectations, and given that we cannot control the markets, the ability to control and take into consideration tax and cost efficiency becomes even more important. Many financial planners have access to the universe of financial products. This means they also have access to the range of costs of products and may be able to implement a plan more cost effectively compared to a retail solution. If a financial planner can access a mutual fund for 0.5% less, that is 0.5% more staying in your portfolio. Tax savings produce similar benefits. A financial planner can not only make long-term tax-efficient recommendations but can also strategically position your individual investments in certain accounts to minimize current taxable income. A solution which decreases the tax you pay also results in more money accumulated or available.

Keep on Track

A financial plan is important to meeting goals, and maintaining and monitoring the plan are the check-ups required for progress. Annual meetings with your financial planner provide the opportunity to review your goals and see progress toward meeting them. Of course, we all know life can change at any moment, so updating and monitoring financial plans takes account of the ebbs and flows of life.

So, what is the quantifiable value of a financial planner? Many studies have addressed this question. These examples include many of the topics above, such as the financial planning process, portfolio construction and investment selection, rebalancing, and tax efficiency. The answer? Studies have concluded the value of a financial planner and the financial planning process can add an upwards of 3% in returns per year.

Below are links to a few of these studies.

No matter how you might value a financial planner, the true value comes from the benefits listed above and from following and keeping on track with the financial planning process. Value goes beyond simple products or investment choices and returns. A financial planner is your partner in meeting your future financial goals.

Feel free to contact John Salter with any questions by phone 1.806.747.7995 or email:

For more information on financial planning visit our website at

NewsLetter Vol. 11, No. 3 – June 2018

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Dear Reader:



“Medicare to go broke three years earlier than expected, trustees say.

Medicare’s hospital trust fund is expected to run out of money in 2026, three years earlier than previously projected, the program’s trustees said in a new report published this afternoon.

“The more pessimistic outlook is largely due to reduce revenues from payroll and Social Security taxes, and higher payments than expected to hospitals and private Medicare plans last year.

“The solvency report is the first since the repeal of Obamacare’s Independent Payment Advisory Board earlier this year as part of a massive spending agreement in Congress. The panel outside experts was designed to tame excessive Medicare spending growth, but costs never grew fast enough to trigger the controversial board, and no members were ever appointed. Social Security faces depletion in 2034, the program’s trustees also said today. That’s identical to last year’s projection.”



From my friend and long-term care guru, Bill Dyess.

I don’t know if it’s good news that someone needed LTC this long, but it was certainly good news that their insurance covered them. Here are the largest claims as of 12/31/2017 (and they’re still being paid!)

Male Female
Paid to date $1,592,000 $2,600,000
Years claim has been paid 9 years, 10 months 13 years, 9 months
Initial premium/year $4,474/year $2,600/year
Years paid until claim began 6 years, 6 months 13 years, 9 months



For market timers….

Think about the few times when there was lots of certainty—2000 or 2009. How did that work out?



From my last NewsLetter …


John Durand wrote Timing: When to Buy and Sell in Today’s Markets, a classic in active investment management. He also wrote How to Secure Continuous Security Profits in Modern Markets, in which he opined: “As this is written, one of the greatest bull markets in history is in progress. People have been saying for several years that prices and brokers’ loans are too high; yet they go on increasing.… People who deplore the high at which gilt-edged common stocks are now selling apparently fail to grasp the fundamental distinction between investments yielding a fixed income and investments in the equities of growing companies. Nothing short of an industrial depression … can prevent common stock equities in well-managed and favorable circumstanced companies from increasing in value, and hence in market price.” When was his book published?

No winners, but here are ones that came mighty close:

Alan Rosoff ……………… 1928

Richard Lorenz………….  1930

Jewell Davis ………….…  1925

The publication date was September 1929.

The Great Depression started October 29,1929.


  • Only about 37% of couples share financial decision-making equality. For shame!
  • The average parent thinks allowances should begin at age 10.
  • Approximately 29% of women in dual-income marriages make more money than their spouses; that’s up from 16% in 1981.
  • The “average” family in the top 10% of wealth in the United States receives an inheritance of about $367,000, while families at the median level of wealth report an average of about $16,000.
  • The average payout from the tooth fairy in 2017 was $4.13; in the West, it was $6.
  • About 53% of grandparents contribute to their grandkids’ education, and 23% contribute to health and dental bills.



When markets take a dip, it’s not the end of the world (and if it is, who cares about markets?).

06-2018_Market Downturn

Even better, from our perspective, is that corrections are great buying opportunities.



While the Federal Reserve’s “Report on the Economic Well-Being of U.S. Households in 2017” stated that “overall economic well-being has improved over the past five years,” that optimistic headline masks a lot of sad news.

“Economic Well-Being. A large majority of individuals report that financially they are doing okay or living comfortably, and overall economic well-being has improved over the past five years.

“Even so, notable differences remain across various subpopulations, including those of race, ethnicity, and educational attainment.”


“Dealing with Unexpected Expenses. While self-reported financial preparedness has improved substantially over the past five years, a sizeable share of adults nonetheless say that they would struggle with a modest unexpected expense.

“• Four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money. This is an improvement from half of adults in 2013 being ill-prepared for such an expense.

“• Over one-fifth of adults are not able to pay all of their current month’s bills in full.

“• Over one-fourth of adults skipped necessary medical care in 2017 due to being unable to afford the cost.”



Good thing I went to college a zillion years ago. Here are the statistics for Cornell’s Class of 2022:

Applicants     –           51,000+ (a record high)

Admit rate      –           10.3%    (an all-time low)

Admitted        –           5,288



Cyberattacks are a reality of life today, and we take the risk very seriously.

2.9% of advisors have faced successful attacks on their firm (not us).

44% of firms with more than one employee require mandatory cybersecurity training (we do).

81% of advisors believe addressing cybersecurity is high or very high on their priority list (we believe it’s very high).



New York Times

“Hoping to thwart a sophisticated malware system linked to Russia that has infected hundreds of thousands of internet routers, the F.B.I. has made an urgent request to anybody with one of the devices: Turn it off, and then turn it back on.

“The malware is capable of blocking web traffic, collecting information that passes through home and office routers, and disabling the devices entirely, the bureau announced on Friday.”



As I wrote in my last NewsLetter:

Here’s what Crypto pioneer Mike Novogratz said on Monday on CNBC’s “Fast Money” (12/11/17).

“This is going to be the biggest bubble of our lifetimes.” Which, of course, does not stop him from investing hundreds of millions in the space. While conceding that cryptos are the biggest bubble ever … “Bitcoin could be at $40,000 at the end of 2018. It easily could.” Then, of course, it may not.

Turns out, so far, it’s “not.”

06-2018_Bitcoin USD Price



Also from AARP, an excellent article (as always) by Jean Chatzky: “Planning for the Worst.” Why disability insurance may be a must-have for you and this article is must-have reading for my younger readers.



“Dismal Outlook for Millennials” was the headline in a planadviser article. Why?

67% 66% 47%
Feel they will outlive their savings Have no retirement savings Think they will be unable to retire when they would like to

And, to my amazement,

Only 34% Only 21%
Participate in a retirement plan Are worried about their retirement security



“Income inequality in the United States has increased significantly since the 1970s, after several decades of stability….”


The New York Times ran an interesting, albeit depressing, story highlighting this issue:

“Want to Make Money Like a CEO? Work 275 years.

“This year, publicly traded corporations in the United States had to begin revealing their pay ratios—comparisons between the pay of their chief executive and the median compensation of other employees at the company. The results were predictably striking.”

Examples included:

CEO Median Employee Years to Earn
Walmart $22.2 million $19,177 More than 1,000
Live Nation $70.6 million $24,406 2,893
Time Warner $49 million $75,217 651



From the Wall Street Journal:

“Wells Fargo’s 401(k) Practices Probed by Labor Department
“Department is examining if bank pushed participants in low-cost 401(k) plans into more expensive IRAs

“The Labor Department is examining whether Wells Fargo & Co. has been pushing participants in low-cost corporate 401(k) plans to roll their holdings into more expensive individual retirement accounts at the bank, according to a person familiar with the inquiry.

“Labor Department investigators also are interested in whether Wells Fargo’s retirement-plan services unit pressed account holders to buy in-house funds, generating more revenue to the bank, the person said.”

It’s important to note that at this stage, it’s just a “probe,” but it’s no secret that these actions are common throughout the financial services world. If you’re responsible for a 401(k) plan, be sure your advisor is a 3(38), not a 3(21), fiduciary.

From the National Institute of Pension Administrators: “A 3(21) investment fiduciary is a paid professional who provides investment recommendations to the plan sponsor/trustee. The plan sponsor/trustee retains ultimate decision-making authority for the investments and may accept or reject the recommendations. Both share the fiduciary responsibility. By properly appointing a monitoring an authorized 3(38) investment manager, a plan sponsor/trustee is relieved of all fiduciary responsibility for the investment decisions made by the investment professional.”



“The Securities and Exchange Commission’s enforcement strategy to protect retail investors resulted in the return of a record $1.07 billion to harmed investors in 2017, SEC officials said Tuesday.”

Financial Advisor.



“JPMorgan Chase & Co. is telling its brokers and private bankers to prepare for changes to its retirement account policies and products in preparation for the likely repeal of the Department of Labor’s fiduciary rule next week.

“The message, sent in emails from bank executives to advisors at J.P. Morgan Securities, Chase Wealth Management and Chase Private Bank on Wednesday, signals that Wall Street firms are poised to move quickly to reverse restrictions that they imposed to comply with the conflict-of-interest rule that took partial effect last June.”



As I continue to beat the fiduciary drum continually, what can I say? It’s REALLY important. So, below is an excerpt from an interview with Phyllis Borzi in my friend Christopher Carosa’s FiduciaryNews.

FN: Now to the present. It looks like the Conflict-of-Interest Rule has not survived its court challenge and that the current administration seeks to, in essence, rewrite it. Still, the impact of the Rule remains. The term “fiduciary” – in part thanks to your efforts, in part thanks to John Oliver – has been elevated in the minds of the investing public. What aspects of the Conflict-of-Interest Rule are now “baked into the cake” of the retirement industry and would be hard to reverse, formal regulation or not?

Borzi: It’s probably too early to tell. But one of the lasting legacies of the DOL conflict-of-interest rules is in the greater public understanding of the need to seek an advisor who is willing to agree in writing to be a fiduciary. Unfortunately, most consumers are not yet at the point where they can tell for sure whether someone who assures them they are acting in their best interest (and thus using that term as a marketing slogan) is genuinely accepting legal liability as a fiduciary. That’s why consumers must get that acknowledgement of fiduciary status in writing and not simply accept the representations of individuals purporting to be acting in their interest.”

That’s why getting the Committee for the Fiduciary Standard’s oath ( signed by your advisor is so important.

You can read the full transcript of the FiduciaryNews interview here:



The hot story in the planning world is Robo-Advisors: i.e., planning based on computer algorithms. I just heard a quote from an MIT AgeLab presentation that captures my thoughts:

“My life is not an algorithm; my life is a story.”



Of course, when discussing fiduciary concepts, it’s important to consider principles, so I thought I’d share the story of “A Man of Principles” from my friend Phil.

“In 1952, Armon M. Sweat, Jr., a member of the Texas House of
Representatives, was asked about his position on whiskey. What follows
is his exact answer (taken from the Political Archives of Texas):

“‘If you mean whiskey, the devil’s brew, the poison scourge, the bloody
monster that defiles innocence, dethrones reason, destroys the home,
creates misery and poverty, yea, literally takes the bread from the
mouths of little children; if you mean that evil drink that topples
Christian men and women from the pinnacles of righteous and gracious
living into the bottomless pit of degradation, shame, despair,
helplessness, and hopelessness, then, my friend, I am opposed to it
with every fiber of my being.’

“‘However, if by whiskey you mean the lubricant of conversation, the
philosophic juice, the elixir of life, the liquid that is consumed
when good fellows get together, that puts a song in their hearts and
the warm glow of contentment in their eyes; if you mean Christmas
cheer, the stimulating sip that puts a little spring in the step of an
elderly gentleman on a frosty morning; if you mean that drink that
enables man to magnify his joy, and to forget life’s great tragedies
and heartbreaks and sorrow; if you mean that drink the sale of which
pours into Texas treasuries untold millions of dollars each year, that
provides tender care for our little crippled children, our blind, our
deaf, our dumb, our pitifully aged and infirm, to build the finest
highways, hospitals, universities, and community colleges in this
nation, then my friend, I am absolutely, unequivocally in favor of it.’

“‘This is my position, and as always, I refuse to compromise on matters
of principle.’”



If you’ve not yet planned your retirement, the two major contributors to increasing the probability of financial success are delaying retirement and social security. If you have questions, check with us. That’s our forte.

06-2018_How Americans Claim.png




“10 Universities with the most billionaire alumni”—a useless but interesting tidbit. Here’s the list:

SCHOOL                               # of Billionaire Alumni

University of Michigan                         26

University of Chicago                           29

University of Southern California       29

Yale                                                         31

Cornell                                                    35

MIT                                                           38

Columbia                                                53

University of Pennsylvania                 64

Stanford                                                  74

Harvard                                                188




“The overconfidence effect is a well-established biased in which a person’s subjective confidence in his or her judgments is reliably greater than the objective accuracy of those judgments, especially when confidence is relatively high.” ~Wikipedia

Overconfidence (e.g., Lake Woebegone, where all the children are above average) is a classic behavioral heuristic and one that often leads to poor investment decisions.

“There’s a Big U.S. Gender Gap in Retirement Investing Confidence Wealth Management

“Sixty percent of college-educated, not-yet-retired men say they’re comfortable managing their investments, compared to 35 percent of women.”

It’s that recognition of reality that makes women generally better investors then men.



Given my current age, I kind of liked this:

One evening the old farmer decided to go down to the pond, as he hadn’t been there for a while.
He grabbed a twenty-liter bucket to bring back some fruit while he was there.

As he neared the pond, he heard voices shouting and laughing with glee. As he came closer, he saw it was a bunch of young women skinny-dipping in his pond. He made the women aware of his presence and they all went to the deep end. One of the women shouted to him, ‘We’re not coming out until you leave!’

The old man frowned, ‘I didn’t come down here to watch you ladies swim naked or make you get out of the pond naked.’

Holding the bucket up he said, ‘I’m here to feed the crocodile….’

Some old men can still think fast.


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



Harold Evensky


Evensky & Katz / Foldes Financial Wealth Management


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

NewsLetter Vol. 11, No. 2 – April 2018



Buyer Beware: What Do You Get From Your Advisor?

Brett Horowitz

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

Although I have never been to Thailand, I have read that you cannot go more than a few feet in a typical town market without someone yelling “same same.” It is the vendor’s way of telling you that what they offer is the same as everyone else, thus encouraging you to end yourcomparison shopping and buy from them.

Recently I spoke with a gentleman considering whether to become a client of our wealth management firm, and he asked matter-of-factly how we are different than all the other hundreds of investment firms in the area. It seems that most of the public thinks of all financial firms as “same same,” yet they differ widely. Here are a few of the things that may distinguish one financial advisory firm from the next.

You Don’t Know What You Don’t Know

I cannot tell you the number of prospective clients who sit down to meet with us and have no idea how to answer the following three major questions.

  1. What return do you need in order to meet your personal goals?

If your portfolio is making 20% per year but it is loaded with risky assets that are keeping you up at night and you only need to earn 5% per year to live your current lifestyle, what is the point of taking the extra risk? Is your plan to make as much money as possible or to have the ideal lifestyle with the least amount of risk? If your goals change, shouldn’t the asset allocation (and desired return) be altered as well?

  1. Is your portfolio performing suitably to help you meet your goals?

If you are not receiving performance reports every so often, how do you know if the current advisor is doing a good job in helping you meet your goals? What does this performance tell you about the likelihood that you will meet your goals? Do you have a plan in place for tracking your goals?

  1. How does your current advisor get paid, and what is the total cost of your relationship?

If you cannot determine how much your advisor is being paid, isn’t it vital that you ask, to make sure the fees are reasonable? The US Department of Labor 401(k) fee website ( compared two investors who started at age 35 with a 401(k) balance of $25,000 and never contributed again. Both investors earned 7% per year before fees, but one paid a 0.5% annual fee and one paid a 1.5% annual fee for the investments. The ending value after 35 years would have been $227,000 for the investor who paid a 0.5% annual fee versus $163,000 for the investor who paid a 1.50% annual fee. The 1 percentage point difference in fees reduced the account balance at retirement by 28%! An advisor cannot control the market, but they do have some control over taxes and expenses.

Out of Sight, Out of Mind

We recognize that you have a lot going on and you do not always get around to completing your tasks. Perhaps you bought a life insurance policy years ago and have never revisited that decision to determine whether it still makes sense. Perhaps you never made a change to your estate documents or IRA beneficiaries after a marriage or divorce. Or perhaps you have not revisited your 401(k) allocation since the first time you made the initial selection.

Is this something that your advisor addresses? Does your advisor even know or want to know about your social security benefits, life insurance, or estate documents? Or have you simply been reduced, in your advisor’s eyes, to “a number?”

There are also certain age milestones that should prompt you to confer with your financial expert to ensure that decisions are made responsibly, such as:

  1. A few months before age 62, we suggest you sit down and go through a social security analysis to determine the optimal age for beginning to collect benefits.
  2. A few months before age 65, we recommend you research and apply for Medicare (as delaying will likely lead to penalties, based on the current Medicare rules).
  3. At age 70½ (or earlier for inherited IRAs) and each year thereafter, you need to decide the best approach in taking Required Minimum Distributions from your IRA.

Tax Brackets

Knowing your tax bracket and working with your accountant can help you achieve the highest after-tax return on your bonds.

Tax Sheltering

Placing certain assets to take advantage of IRAs, where you do not pay taxes on income and gains, can help boost your overall return.

Capital Gain Distributions and Tax Losses

If you are not watching out for mutual fund capital gain distributions at the end of the year, you are likely to get hit with a large tax bill. In addition, one of the ways to lower your tax bill is to take advantage of losses in your account once they take place.


It is important to keep your asset allocation consistent with your goals by rebalancing between stocks and bonds. This may also lead to higher risk-adjusted portfolio returns over time.

The Devil Is in the Details

At the end of the day, it will benefit you to find a firm that puts a lot of time, effort, and thought into these details. The plan that is put in place on Day 1 should not be “buy and hold” (often described as “set it and forget it”), but rather “buy and manage,” with changes based on research, long-term projections, and unique circumstances. I can assure you that all financial firms are not “same same.” It is incumbent upon you as the buyer to ask the right questions before choosing the firm that’s best for you.


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

For more information on financial planning visit our website at