This week, I was listening to a Planet Money Podcast, and they said that America borrowed $80 million from its own people to finance the Revolutionary War. Obviously, that turned out to be a pretty good deal for everyone involved. This got me wondering how much we actually paid for America. It turns out, we got a really good deal.

We looked up all the major events that took place that involved land expansion in exchange for compensation and/or war in United States history. The Revolutionary war got it all started, and the total price of that one was $151 million in 1776 dollars. In today’s dollars, that is $2.7 billion, or roughly what we spend on our defense budget in the US today in about a day and a half! Our defense budget today is almost $650 billion dollars, just for reference.

The next major addition was the Louisiana Purchase in 1803. This massive land grab covered about 830,000 square miles in the center of our country. France sold us this land for $15 million dollars, which today would be worth somewhere around $250 million. This works out to about $300 per acre at today’s prices, which as it turns out, is pretty cheap. Undeveloped land in the US is estimated to be worth about $6500 per acre, or about 22 times what we paid to France.

The next one really hits home, because in 1819, Spain ceded Florida to the USA. In reality, they could no longer afford to support Florida, and wanted to get rid of it. In exchange, we gave back some land out west, and paid them $5,000,000. In today’s dollars, that is about $81 million dollars, or roughly the revenue generated by Disney in about 2 days in 2017. No, I’m not making this up.

In 1853, the Gadsden Purchase sent $18.25 million to Mexico in exchange for parts of southern Arizona and New Mexico. The real reason for this was that it contained land that was better suited to building a Southern east-west railway line, which was completed in 1883. In today’s dollars, that equates to $546 million, or about 2% of the GDP of the city of Tuscon, the largest city that falls within the boundaries of the purchase.

The last major land purchase was completed in 1867, when the US paid a whopping 2 cents an acre, or $7.2 million, for Alaska. In today’s dollars, that is $128 million. Alaska now pays out about 10 times that, or $1.3 billion, annually to its residents from its oil royalty fund.

All in all, it cost about $196.5 million dollars to buy the United States, or $3.7 billion in today’s dollars. Considering that the US economy generates about $33 million per minute in income, it would take just under 2 hours, or 112 minutes, to generate enough money to purchase the entire USA. I would say we made a very good investment, wouldn’t you?

Certain radio stations in our area have been running advertisements lately for something called “U.S. Freedom Checks.” According to the claims, people all over the country are able to collect these checks in varying amounts. These checks are apparently mandated by the U.S. Government. It sounds as easy as calling a certain phone number. Easy money, right? What could possibly go wrong?

Since it seemed so easy, I went looking for my individual “Freedom Check.” I didn’t seem to qualify for a “Freedom Check,” but I did learn a few things. So, I am sharing what I discovered.

I found that so-called “Freedom Checks” are indeed mandated by the U.S. Government, but they only apply to Publicly Traded Partnerships (PLPs). Most Americans know about partnerships, as many professionals form their businesses using that organizational method. Generally, partnerships are privately-held, and taxes “flow-through” to the partners, rather than being paid directly by the partnership entity.

Similar to MLPs (Master LImited Partnerships), but less prominent, are publicly-traded entities called “Publicly Traded Partnerships,” or PLPs. According to the U.S. Tax Code, PLPs are required to pay out to shareholders 90% of the entity’s income trust from “qualifying sources.” This simply refers to the profit they make from actual business transactions. When properly done, the PLP pays no income tax, as the taxation “flows through” to the shareholders. Ipso facto, they send government-mandated checks.

What is a “Freedom Check?” Who gets a “Freedom Check?” How large will the “Freedom Check” be? It seems that they are only issued to the shareholders in the proportion of their individual holdings. That’s right – it is a dividend under another name. The name “Freedom Check” is, as far as I can tell, a marketing gimmick. We would simply say that a dividend check will be sent to all shareholders in accordance with the Tax Code.

In the energy arena, many Master Limited Partnerships take on Limited Partners to generate money for operating expenses. Investors looking for an income stream sometimes buy shares in these MLPs. No MLP will ever send a dividend check (the so-called “Freedom Check”) to a non-shareholder

Are you feeling mislead yet? Me, too. Some things never change. Don’t spend your Freedom Check all in one place.

Van Wie Financial is fee-only. For a reason.

Do you own a Variable Annuity (VA)? Do you even know if you own a Variable Annuity? Over the years, we have met several people who did not know that one or more of their financial holdings was actually a VA.

Variable Annuities are insurance products (contracts), and are chock full of costs, some of which happen at the time of purchase, while others are ongoing. Surrender Charges apply a few days after the purchase, following a “free-look” period, during which the contract may be cancelled. The Surrender Charge is used to pay the salesperson’s commission for selling the VA. Surrender charges reduce the cash value of your contract until the commission is fully amortized, which is generally over a period of several years.

Internal costs include, among many others, Mortality Expense, which represents premiums on life insurance within the VA. Why do you need insurance on your own money? Easy – because, like all annuities not otherwise protected, the contract’s value upon your death is zero (remaining money is retained by the insurance company), unless of course, you insure the balance. That insurance comes at an ever-growing expense, because Mortality Expenses increase with your age.

It doesn’t have to be that way. Help is available through Van Wie Financial. As fee-only advisors, how is it we can help you with a Variable Annuity? The answer lies in an innovative product from Jefferson National Life (JeffNat). The JeffNat commission-free Variable Annuity is designed to serve the exact market in which we operate.

JeffNat has redefined the nature of the VA by accepting the fact that your money is your money, and does not need to be insured. There is no Mortality Expense in the contract, and JeffNat charges only $20.00/month Administrative Fee. The cost difference generally saves the VA owner thousands of dollars over the years of ownership.

However, the low internal cost is only a portion of the benefit. Most VAs are limited to investing in company-owned mutual funds, which tend to be expensive to own and less successful than non-insurance company funds. Conversely, the JeffNat VA invests your money in the same mutual funds and Exchange-Traded Funds (ETFs) that we use as financial advisors in the non-insurance investment market. Perhaps best of all, the fee-only advisor on the account is able to advise and invest as if the funds were not in a VA.

But we are not done yet. Transitioning to the JeffNat VA is extremely painless, thanks to an IRS-approved process called a 1035 Tax-Free Exchange. With no cost to the VA owner, and with Van Wie Financial guiding the paperwork process, there is little to do other than enjoy the benefits. Perhaps the best benefit is the lifetime savings, which begins the day the JeffNat VA receives your funds from the old VA. Using the JeffNat website, we can show you the savings relative to your current VA.

Just when it might sound like it can’t get better, there is more. You, as the owner, have 100% control over the funds in the annuity, subject to IRS requirements for Required Minimum Withdrawals for IRA-owned annuities. If you own a Variable Annuity, give us a call. We will be pleased to present a comparison that may be able to save you money and hopefully improve your investment returns. You have nothing to lose.

Van Wie Financial is fee-only. For a reason.

“The best test for this is simply to check if you paid your balance in full for the first two months. If you did, you might be able to handle it,” says Adam Van Wie, a certified financial planner in Jacksonville Beach, Florida. “If you carried a balance during that time, cut up the credit card and stick with cash or debit.”

5 Rules for Your First Credit Card

Living in Florida is a common dream for many people, especially ones in northern states, with cold, snowy winters. While not the only consideration when contemplating retirement places, climate is a powerful motivator. Growing up in Wisconsin, we always claimed that there were two seasons; Winter and Road Construction. But it took more than climate to drive us to make the move long before retirement age.

April 15th (Tax Day) was always an unpleasant event in Wisconsin. State (and in some places, Local) income tax forms had to be filed along with the Federal 1040. With the filing comes the even-more-unpleasant experience of actual paying State and Local Taxes, which are abbreviated “SALT.”

SALT payments were 100% deductible for Federal Tax purposes, taking some of the sting away. Without the SALT deduction, many high-tax states would probably have less overall population, and certainly fewer financially-successful residents than under previous tax law. With the recent passage of the Tax Cut and Jobs Act, we are about to test that theory.

Throughout the ugliness of finalizing the new tax law, proposals ranged from total elimination of the SALT deduction, to keeping the SALT deduction “as is.” A compromise seemed all but certain, and we got just that, in the form of an overall limitation on the SALT deduction to $10,000 annually. Coupled with the greatly-expanded Standard Deduction, many people will be totally unaffected by this limitation. However, the highest earning Americans in the high-tax states will be paying more – some of them a lot more.

Escaping high taxes by moving to the land of Sunshine and Oceans seems like a slam-dunk decision, but other states are vying for your retirement plans with creative tax provisions of their own. Since not everyone can tolerate our hot and humid summers, many retirees will be comparing other taxation climates.

Some states exempt retirement income, including Social Security, from state taxation, eliminating Florida’s competitive advantage. Some states also give seniors a property-tax deduction (Florida does this). Military retirees receive tax-free pension income in some states. Tax policies are as varied as the number of states. There are also some foreign countries getting into the competition with low-tax domestic incentives.

Non-economic factors will continue to play a role in location selection. Family location, traffic patterns, and availability of recreational and cultural amenities will contribute to decision-making.

Let the competition begin!

Van Wie Financial is fee-only. For a reason.

There is a proposal running around the halls of Congress to allow the use of annuities within ERISA-covered Retirement Accounts, including 401(k), 403(b), and traditional Profit Sharing accounts, which today cannot hold traditional annuities. Before forming an opinion, we evaluated some of the Pros and Cons of implementing this change. Remember our long-held question; “Why would you?”

First, we have always had the right to use annuities in our IRAs, simply by making a separate IRA (you can have as many as you want), and having the IRA buy an annuity. The contract is then titled to the IRA, and is subject to the usual rules for IRAs, including Required Minimum Distributions, or RMDs. So why is this different?

The current proposal, if passed, would allow an annuity to be commingled with all the stocks, bonds and cash in a regular (Traditional or Roth) IRA. This has been problematic for fee-only advisors, as annuities have always been commission-based products. Now there are some new annuity products that are not commissionable. That eliminates one barrier to using the annuity within an existing IRA.

But, should this be passed? Let’s examine some arguments, both Pro and Con:

  • Pro – This would allow an annuity to be purchased inside an ERISA- covered retirement plan, thus not requiring a rollover first
  • Con – Not performing a rollover to an IRA continues to limit choices and keep costs relatively high in the relatively expensive ERISA Plan
  • Pro – Annuities are the only financial product that can guarantee an income for the owner for life
  • Con – Most people already have a retirement annuity (called Social Security), and some have lifetime pensions
  • Pro – Social Security will seldom provide sufficient lifetime income for most people’s needs, whereas an annuity will furnish lifetime income
  • Con – Anyone with an IRA can already buy an annuity (inside or outside an IRA), so this could be considered redundant
  • Pro – Annuities transfer the risk of running out of money to a large annuity company
  • Con – Annuities are often sold as “investments,” which they are not; they are transfer-of-risk products, designed to emulate the returns on CDs

Based on these factors, there is no clear answer to the basic question. There is one annuity, however, that is already authorized to use inside an existing retirement account. This annuity (called a “QLAC”) is designed for people who have reached the age where Required Minimum Distributions (RMDs) are required by law, but the account owner has no need for more taxable income.

Next week we will examine the use of the Qualified Longevity Annuity Contract, or QLAC.

Van Wie Financial is fee-only. For a reason.

Acrophobia, according to the reliable website Dictionary.com, means “a pathological fear of heights.” While we are not necessarily qualified to call what is being felt among many investors today “pathological,” we are certainly qualified to understand the fear we see and hear from clients, friends and radio callers. It is the fear that the market is so high that it is dangerous to stay invested, lest a crash is right around the corner. While that possibility exists every day, we are reasonably confident that a “crash” is not imminent.

Just as words mean things, market actions reflect conditions in the economy, the country, and the world. For the last year, our economy, our country, and a large portion of the world are prospering. Prospering, in fact, in a way we have not seen for many years, and almost certainly not since before the terrorist attacks of 9/11/2001.

We understand the underlying reasons for widespread current prosperity, so we have not joined the acrophobic masses. The simple truth is that our economic good times are the result of good economic policies. It is not an accident, either, as the same policies that drove us into prior periods of economic growth and prosperity have been recreated by the current Administration.

Historically, tax cuts have always resulted in economic prosperity. It matters not what political party is responsible for passing the cuts; it just works. Presidents John F. Kennedy, Ronald Reagan, and George W. Bush all shepherded tax cuts through Congress, and each time the result was increased economic prosperity, with improved government revenues. So it is today with the recent President Donald J. Trump tax cut package. Since the implementation of the new law on January 1, 2018, the market has gone on a tear. It was already headed up, and is waiting for more good news. Whenever good news is received, the market responds as anticipated.

“How long will it last?” “Is it too high?” “Will there be a pullback, or even a crash?” No one knows, but we can assess these possibilities. Right now, a pull-back of any kind could be deemed a probability, as it has been a long time since we have had one. However, we believe that it will be preceded by more advances. The new economic policy has not even been fully implemented yet. New withholding tables were just published by the IRS, and will have to be used by employers by February 15, 2018. The resulting larger paychecks will help to further stimulate our economy, which is 70% driven by consumer spending.

We can’t form any other logical conclusion than that continued prosperity awaits, both economically, and for the markets. Sure, we continue to have problems as a nation, but so long as our momentum is strong, more good results should follow.

Investors should always be cautious, but each of us has an obligation to ourselves and our futures to make the best decisions we can. Very often, good decision-making results from seeking the assistance of professionals. As fee-only Certified Financial Planners, we can assist you in overcoming your fear and making sound investment decisions. In the words of then-candidate Donald J. Trump, “What the H___ do you have to lose?” Love, hate, or remain indifferent to the man himself and his sometimes-irritating style, from a policy standpoint he is a refreshing and comforting policy leader.

Van Wie Financial is fee-only. For a reason.

Two things in life are certain, as the saying goes, “Death and Taxes.” Perhaps a third certainty is Government Regulation, and especially so in our financial advising business. The Securities and Exchange Commission (SEC) regulates investment markets and those practitioners involved in the markets. Naturally, the gigantic mutual fund industry has rules galore, and they must be followed by all fund families.

While this is primarily a discussion of taxes and misunderstandings, regulation is the underlying cause of the confusion many people have about mutual fund performance. Many investors have questioned why their long-held and successful mutual funds seemingly under-performed the markets late in 2017. There is a reason people feel this way. Here’s why, and it is solidly based on the SEC rules for all mutual funds:

  • The value of a share in a mutual fund is called the “Net Asset Value,” or NAV
  • The NAV is the sum of all fund assets, including the value of the stocks and/or bonds owned by the fund, plus the cash available after paying fund expenses, divided by the number of fund shares outstanding
  • During any one operational year, the fund receives income in the form of interest, dividends, and/or capital gains/losses from sales of fund assets
  • By SEC Rules, the income and capital gains accumulated during each year are required to be distributed to the shareholders prior to year-end (done on the “Distribution Date”)

Investors usually track the value of a stock by its price on any day, or for that matter, any minute of any day. It is a natural thing to do, although it can result in uneasiness in times of volatility. Following a mutual fund’s progress by monitoring the price of a share is fine most all the time. But during the season of annual (or more frequently for some funds) distributions, there is a potential for misunderstanding.

In a great market year, such as 2017, these distributions can be quite large, and the apparent change in fund value can be startling. This is why the number of questions over the last month has escalated, and it comes as no surprise. Here’s why, in the simplest terms I can present:

  • On the Distribution Date, all earnings and capital gains for the period are calculated and distributed by the fund to its shareholders pro-rata by shares owned
  • The value of the distribution per share is subtracted that day from the closing price
  • The distribution dollars can be sent to shareholders, or they can be reinvested in new shares – the choice is up to the owner
  • Whichever method is used, the distribution value is subtracted from the share price at the moment the distribution is made

Resulting from the distribution are a lower priced share and a cash payment to the shareholder. But the process is not immediate. It may take a day or two to post to the accounts. When it takes place on a Friday, it may take longer, due to the intervening weekend. That’s when some fund shareowners tend to panic.

The second way investors get upset is when they don’t notice the distribution, but days later they look at a price chart, and one day there is a sharp fall in share price. It makes for an ugly chart, and no one could blame them for their distress. But the reason is the same, and all mutual fund owners should understand the process. We are here to help.

In every case, after a day or two, when the accounting is completed and accounts are updated, the true account value is visible in the shareholders’ accounts. They can then breathe a sigh of relief.

The evolution of the mutual fund industry, the financial planning industry, and the knowledge of individual investors has been geometric. It has resulted in rewards for the average person, far beyond what our parents would have been able to imagine. All we need in order to participate is knowledge, education, goals, and propensity to save. Put the emphasis on knowledge, and you can’t go wrong in the long run.

Van Wie Financial is fee-only. For a reason.

Most owners of retirement accounts, including IRAs, 401(k)s and 403(b)s, understand that one day the IRS is going to demand that they begin to withdraw money from those accounts. The Required Minimum Distribution, or RMD, is the minimum (well-named, isn’t it?) amount that must be withdrawn during any calendar year. There is no maximum allowable withdrawal, up to the balance of the account. The process begins in the year the IRA owner turns age 70-1/2, and continues until the death of the owner, or the depletion of the account, whichever comes first. The calculation is performed the same way every year, but uses a different factor each year for the equation. All amounts withdrawn are taxable as ordinary income in the year of the withdrawal.

While there is an available 1-year RMD deferral for the year in which the owner attains age 70-1/2, today’s discussion is regarding the strategy for the withdrawals, and there is no sense bogging it down with obscure possibilities.

The timing question for taking the RMD came from a radio listener, and it proved very interesting. Setting the stage, the question was, essentially, “In a market such as this, is it better to take the entire RMD early in the year, late in the year, or spread out along the way?” The questioner did not need the income, and intended to invest the net proceeds in the market, using a taxable brokerage account. What withdrawal system, under those circumstances, would most likely provide the best outcome?

First, the calculation of the RMD amount is done on the balance in the account as of December 31 of the preceding year. The amount so calculated cannot change during this year, so fluctuations in account value during this year are a non-consideration. This also means that taxation is a non-consideration, as the taxable amount is constant, as is the owner’s tax rate. The next consideration was the need for the money, which is also non-existent in this case. Income sooner, later, or monthly did not matter.

A third consideration would perhaps be the general direction of the market. But is it? We are in a rising market, so if nothing changes substantially, the balance in the IRA will be larger in December than in January. This means that the (probable) increase in value this year will be tax-deferred, as it remained in the IRA for the whole year. If the general direction of the market is down, funds remaining in the account will have time to recover, also tax-deferred.

At first, the general market seemed to favor the later withdrawal. Upon further consideration, the current market didn’t seem to matter. Looking at every angle, our conclusion remained the same. The best strategy for RMDs is to take the money out as late in the year as possible. Conversely, contributions should be made as early in the year as possible. Either side of the argument favors keeping funds in the tax-deferred account for as long as possible.

For people who aren’t in the enviable position of not needing the income, this strategy should work fine. Many people, however, do need monthly income provided by RMDs. There is no problem taking the RMD in installments during the year. Optimizing is not always an available option. But for the fortunate folks, the strategy of “early-in, late-out” should provide good long-term results.

Van Wie Financial is fee-only. For a reason.

Aren’t you glad now that we didn’t pay attention to the media in 2016, as they whined for weeks about the Armageddon a Trump presidency would wreak on the economy and the market should he be elected? Strangely, they never seemed to offer an explanation for their gloomy outlook. Were they afraid because Trump promised lower taxes and de-regulation?

Many of us remember clearly the results of prior application of free market principles. Whether Democrat (JFK) or Republican (“W” and Reagan), when taxes were cut, the economy was unshackled, and free-market principles were allowed to work, jobs were created, profits rose, incomes rose, and the markets followed suit. After all, business conditions drive markets, whether up or down.

Since it works every time its tried, the only question left was how Trump (a former Democrat, like Reagan) would govern. Most of us were concerned that he would be less conservative, economically speaking, than he portrayed himself. But, as the policies of the new Administration became increasingly clear, the business community realized that things were getting friendlier. Since businesses are primarily run by rational, educated people, they reacted accordingly, creating jobs, ramping up production lines, and committing resources to what they perceived as better times ahead.

How did that work out for us? Here are a few interesting facts:

  • Right now, there are more people working than ever before; over 160 million, in fact, which resulted from the creation of about 1.9 million jobs in 2017
  • The US GDP has never been higher, having reached about 19.5 Trillion on an annualized basis
  • The DJIA closed at record highs 71 times in 2017, crossed over six 1,000-point milestones, and arrived near 25,000, having set new records on average 1 day of every 4

All this begs the question, “Do any of the naysayers ever have to justify their inept suppositions?” Hardly. There are many lessons we should take away from the last 14 months. Here are some of my highlights, with some analysis:

  • Do not confuse political leanings with analysis, as we are all prone to “confirmation bias”, meaning we find it easy to believe things that fit in with our political inclinations
  • Markets, for the most part, are driven by profits, not by political parties or presidents
  • Generally, the market is looking between 6 months and 1 year ahead, and estimating the upcoming business environment
  • Although the business and personal tax cuts were already factored into the market, the outcome is very positive for business in 2018 and beyond

One feature that can’t be overlooked this year was the lack of volatility in the market. Coupled with many investors’ market acrophobia, it will be difficult for uneasy investors to hold on when volatility returns. Base your activity on the economy, rather than daily volatility.

The new Tax Law has been signed and delivered, but it is not sealed yet. There are several loose ends, ambiguities, and errors in the quickly-produced law that will be ironed out over coming weeks. Still, the best bet is that most Americans will be better off, tax-wise, than they were under the old Tax Code. This is a positive indicator for the economy, and by inference for the markets.

As fee-only financial advisors, we have a fiduciary duty to learn as much as possible, as soon as possible, about the tax law changes, enabling us to better serve our clients’ tax planning needs. Future Blogs will address changes in tax planning strategy.

Van Wie Financial is fee-only. For a reason.