Category Archives: Financial education

Strategies if you feel stressed or anxious about money

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We define our lives by the decisions we make every day. Whether it is an unexpected or unwanted election result or life transitions like death, divorce, or job loss, how we deal with these crises will define who we are (and who we become). It is tempting to wallow in self-pity, obsessing about worst case scenarios, engaging in bitterness and blame, or spending to forget, but these will only hurt and control your life. These behaviors will not provide lasting satisfying experiences or happiness within yourself. I encourage you to take the time, this year-end, to examine how you handle uncertain or stressful times and what actions you can take that will create positive experiences that will make you stronger, more resilient, and empowered.

Think about the good, the bad, and the ugly and decide what you want to keep or change in your financial life. Below are some thoughts on financial strategies to consider.

•  Build up an emergency reserve. We typically recommend that two-income families (with kids) maintain a reserve equal to six months of living expenses and nine months for one-income families. Couples without kids can keep their reserves at 4 months of living expenses and single earners need at least 6 months. During stressful times you may want to increase these amounts if you become concerned about the future. Let us know and we can help you define and create your reserve.

•  Pay down debt. These days unnecessary debt is very expensive, so consider paying down any unnecessary debts, such as credit cards, car loans or home equity lines of credit (anything with an interest higher than 4% should be paid – anything below should be aligned with your financial goals)

• Review your cash flow (or budget) each month to keep you financially connected.

•  For those who spend during stressful times … I encourage you to engage in “Stress saving” as opposed to “Doom spending”. The savings will add to your safety net and make you feel more stable and secure whereas an increasing credit card balance adds stress and uncertainty.  By focusing on strengthening your savings you’ll become more resilient in the face of uncertainty.

• Focus on gratitude and the things that make you smile. If you’re feeling unhappy with the world right now, focus on what you’re grateful for. The evidence is clear that being grateful and smiling each day can help improve sleep, lower stress and enhance relationships. Practicing gratitude can be a powerful antidote to the negativity we may feel around us, especially when the things worrying us are beyond our control. Find time to acknowledge each day the good things in your life.

If you’re feeling anxious and stressed, anchor yourself to what you can control and give yourself permission to release what lies beyond your sphere of influence. Remember, as Seneca The Younger wisely observed, “We suffer more in imagination than in reality.”

If we’re honest with ourselves, most of what we fear never comes to pass. Or if it does, it often brings unforeseen opportunities for growth or positive avenues for change. So, during this upcoming holiday season, if you’re feeling fearful or have a sense of doom and uncertainty, focus instead on strengthening your financial foundation, practicing gratitude, and managing what you can control. In time, you’ll feel more confident and better equipped to face whatever the new year brings our way.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Facts versus Beliefs – Elections and Market Behavior

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Perceptions, including beliefs and media noise about which political party will be better for investors, can create anxiety and regrettable investment changes.

Consumer Confidence by Political Affiliation

The purpose of your portfolio strategy is to provide growth from expected business profits while minimizing the downside, regardless of election outcome or latest media trend. Once we know the election outcome and the likely policy platform of the new House, Senate, and President, we may adjust the portfolio strategy.

In the short term, we will monitor for market opportunities stemming from market-based investor greed or fear.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

CTA – Beneficial Owner Information Filing Due Jan 1, 2025

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The purpose of the Corporate Transparency Act (CTA) is to create a national database of those who control entities in the US (including owners, principals, control persons of LLCs, C Corp, S Corp, LPs, and other closely held entities). The database will identify the human beings behind these entities. This law is part of an increasing effort to combat money-laundering, terrorism, tax evasion, and other financial crimes. The stated goal is to provide law enforcement with the ability to strip “US shell companies” of anonymity that can hide illicit financial activity and funding of terrorism. But this database will require information from every entity owner and yet few business owners know about this upcoming filing requirement.

There are over 33 million small businesses in the US and an increasing number of bad players caused Congress in 2021 to enact the CTA [Ref 1] as part of the National Defense Authorization Act [Ref 2]. The CTA created a new reporting requirement for “Beneficial Owners Information” (“BOI”) to the Treasury Department’s Financial Crimes Enforcement Network (or FinCEN).

With the deadline for pre-existing companies to file approaching (January 1, 2025 and even sooner for new companies created during 2024) and court challenges not yet staying this deadline, small business owners (and other entity owners) need a deeper understanding of how to handle their own BOI reporting requirements.

Ultimately, most of our business/entity owner clients will file a relatively simple BOI report. Some companies/entities with more complex ownership and leadership structures might require the help of outside legal counsel since CPA/CFP are not legally permitted to interpret this law for clients.  It is advisable to take the time to read over the FinCEN FAQs [Ref 3] and Small business Guide [Ref 4] and determine if your firm has to file and if so whether you will need legal advice to complete this filing. We can help guide you but can’t interpret the law for you.

Who Needs To Report Their Beneficial Ownership Information (BOI)

At a high level, any company that was created by filing a document with a secretary of state or similar state-level office in the U.S. is a “reporting company” or entity that is required to file this BOI report. In practice, the requirement applies to business entities like Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), and corporations (C and S Corp) that are created by filing paperwork with the state(s) where they do business. It does not, however, appear to apply to unregistered entities like sole proprietorships and partnerships. In addition, there are 23 different types of companies that qualify for an exemption to the BOI. The FinCEN’s Small Entity Compliance Guide outlines the specific criteria that companies must meet to qualify for each type of exemption [Ref 4].

Please be aware that even if your company has been inactive or recently dissolved it may still need a BOI filed. Lastly, irrevocable trusts may also be required to file.

What Information will be Required?

The Beneficial Ownership Information (BOI) report itself is fairly simple and consists of 3 sections (plus an introduction page and a submission page): The first section requires business identification whereas the second and third sections request personal identification (this includes state ID, US passport or foreign passport). We encourage any beneficial owner to not file personal information directly in the BOI but instead create a FinCEN Identifier number. Creating this unique FinCEN ID number by the beneficial owner will require the upload of personal financial identifiers only once (under this FinCEN ID). Once created the FinCEN ID can be used in lieu of entering personal information directly in the BOI filing.

Please keep in mind that this filing is a separate process from tax filings and requires disclosure of personal information. This privacy invasiveness has led to legal challenges earlier this year, but none have yet stayed the BOI filing deadline. Given that the penalty is up to $500 per day for failing to file we encourage you to determine how and when you will file your entities BOI. We will all continue to monitor the legal challenges and the filing deadline since there may be announcements just prior to year-end.

FinCEN has put together a comprehensive FAQ on the specifics of the requirements [Ref 3], as well as a Small Entity Compliance Guide that we recommend reading [Ref 4]. These should help owners understand their obligations under the new rules. Please familiarize yourself on what will or will not be needed for your firm/entity.

Reference Links mentioned above:
[Ref 1] CTA details: https://www.fincen.gov/sites/default/files/shared/Corporate_Transparency_Act.pdf
[Ref 2] National Defense Authorization Act details: https://www.congress.gov/116/bills/hr6395/BILLS-116hr6395enr.pdf
[Ref 3] FAQ on BOI: https://www.fincen.gov/boi-faqs
[Ref 4] FinCEN Small business entity guide on BOI filing: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf
[Ref 5] BOI filing: https://boiefiling.fincen.gov/

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

A Brief Overview of World Equity Market Country Capitalization

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The AIKAPA equity portfolio is a global portfolio intended to provide diversification of US capitalization with uncorrelated assets over the rest of the world as well as within the US. We evaluate and reset the Global allocation based on both risk and known capitalization for countries throughout the world annually and review it quarterly.

I thought you might find educational an overview of country specific public equity capitalization that we use each year to set the AIKAPA equity strategy. Capitalization is the available wealth from the business marketplace in each country – we measure the ability to generate income/wealth for the investor. World financial market capitalization size is not the same as the world’s landmass, population, gross domestic product, or even exports.  We often divide World equity into Developed (at $72T or 88%) and Emerging ($10T or 12%) country public capitalization.

To gain perspective it is useful to understand that there are about 3,500 public companies in the US consisting of 61% of the World’s total market capital (this was about $50T at end of 2023) and yet ONE company (Apple) holds $3T of those assets which is about 4% of the World’s capital. This one large company holds more market capital than Canada or France and about the same as the entire UK!

December 2023 World Equity Partial List by Decreasing % Capital by Country
* USA (3,481 companies) – 61% of World Capital ($50T)
* Japan (2,557 companies) – 6% of World Capital ($4.7T)
* UK (590 companies) – 4% of World Capital ($2.9T)
* China (2,295 companies) – 3% of World Capital ($2.4T)
* Canada (525 companies) – 3% of World Capital ($2.2T)
* France (229 companies) – 3% of World Capital ($2.1T)
* India (1,535 companies) – 2% of World Capital ($1.8T)
* Switzerland (172 companies) – 2% of World Capital ($1.7T)
* Germany (248 companies) – 2% of World Capital ($1.5T)
* Australia (486 companies) – 2% of World Capital ($1.5T)
* Taiwan (1,458 companies) – 2% of World Capital ($1.6T)
(The data above is an excerpt from the 2023-Dimensional funds annual report and only includes a small number of countries for illustration purposes).

But Can We Select Which Countries Provide the Best Returns? Most people assume that the US is the best market performing country every year since it has the largest capital. The facts show that the US doesn’t always even make the top ten best performing developed countries. That said, the last 6 years have been unusual, from 2018-2023 the US has performed in the top 10 countries, in five out of six years (83%)! A major accomplishment. BUT it is a different story in the prior ten years. If we look earlier, from 2004-2013 (see chart below), we find that for 6 of those years the US was altogether missing from the top 10 performing countries. It only made the top 10 best performing countries 40% of the time.

If you look over the chart of the best performing developed countries below, you’ll also see that we can’t predict which country will do best in any year but by exposing the portfolio to other countries based on a combination of country capitalization and level of country risk we can improve the overall AIKAPA portfolio long-term performance. The largest impact is from increasing the probability of including exposure to countries that experience better performance when the USA under performs (uncorrelated countries). Looking for uncorrelated assets is an important way that a diversified portfolio generates higher long-term performance over other strategies.

Developed Market Countries Ordered by Equity Returns Each Year (2004-2013)

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Financial Guidance for the Younger Generation

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Modeling positive financial behaviors for the younger generation especially in affluent communities can pose unique challenges. Here are some key topics I’d like you to consider:

1.    Understanding the concept of “enough”: In affluent communities, where material possessions are abundant, it’s essential to teach the young (and not so young!) that wealth is not solely defined by possessions.  I like to keep my focus on President Roosevelt’s quote “Comparison is the thief of joy” and encourage a focus on spending that has lasting satisfaction rather than buying the next ‘in thing’. Usually, this includes understanding the role that money plays in their lives and how they wish to integrate financial security, spending, saving, and investing.

2.    Value of Budgeting and Understanding their Spending: Teaching younger generations to follow and understand their income and expenses is crucial for financial independence and achieving life goals like homeownership and retirement. Helping them understand their spending patterns provides opportunities for money conversations and creates comfort around money conversations. The goal is to encourage them (however slowly) to plan their spending and create sustainable financial habits that will last them a lifetime.

3.   Understanding the value of employment: Encouraging loved ones to recognize the value of a job or career is part of growing up. We all know that employment provides value beyond earning money since it can add unique opportunities. It will also provide them with a steady source of income, so they have money to eat out, do fun things with friends, and hopefully also begin saving.

Financial literacy for the younger generation is challenging since so much of their world is imbued by marketing. The challenge is how to model or engage with them not to crave what others seem to have but rather to understand what brings them long term satisfaction.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

H.S.A. Contributions – Did You Know?

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Health Savings Accounts (H.S.A.) in retirement can be useful tax-free pools of money that can be used for health care expenses without increasing taxable income and potentially increasing Medicare premiums (through IRMAA). Contributions to H.S.A. accounts are only permitted if you participate in a specific type of health care insurance (High deductible) and only prior to Medicare enrollment.

Since H.S.A. contributions are NOT permitted with Medicare it often leads to misunderstandings on how to contribute maximally to an H.S.A. during the year in which you have both a high deductible H.S.A. insurance plan and eventually change to a Medicare plan. H.S.A. contributions must be pro-rated for the months prior to Medicare engagement (unless you are in an employer funded H.S.A.).

Couples contributing to a family H.S.A. who are over age 55, are entitled to contribute an additional $1K each as part of their catch-up annual contribution. Unfortunately, H.S.A. accounts can only accept one catch-up contribution, so couples are often uncertain how to fund their H.S.A.’s fully. The couple must contribute $1K catch-up each to two different H.S.A. accounts and only contribute the family core amount to one of the two H.S.A. accounts. Let us know if you have questions.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Social Security Benefits Primer

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Social Security benefits were never intended to be the sole financial support during retirement but for 21% of retirees Social Security benefit is the only source of income. For most American workers, Social Security benefits are the only guaranteed retirement income that is also inflation adjusted each year.

All workers in America are entitled to pay into Social Security and based on their pay history, to receive a lifetime income each month starting from ages 62 to 70.

Ideally prior to retirement, you’ll also maximize other income sources that include taxable savings, IRAs, ROTH, Qualified plans (401K, 403b, 457b), annuities, deferred compensation, and employer pension plans.

Since your future Social Security benefit is calculated from your Social Security work history, you must ensure (and correct if necessary) that this history has been recorded correctly at www.socialsecurity.gov/myaccount OR the new www.ssa.gov/myaccount.

Social Security benefit calculation uses your top 35 highest earning years and projects your estimated benefit at your FULL RETIREMENT AGE (FRA).

Your FRA is based on your birth year and, as you can see on this table, it has been increasing. In fact, since 1983 when the FRA was 65, it has been increased gradually so that by 2025 (for those born in 1960 or later) the FRA will be 67. To understand Social Security, you must first determine your FRA.

When can you collect Social Security? At FRA, you can file and receive your full benefit (100%) based on the amount of Social Security tax paid to your Social Security number. The earliest you can collect Social Security benefits on your record is at age 62 (when your FRA amount is reduced ½% for each month or 6% less each year until FRA) and the latest at age 70. If you delay past your FRA, you earn Delayed Retirement Credits (DRC) and for each month it will grow two-third of a percent or 8% per year until age 70.

Example of how benefits are calculated: If you were born in 1960 and your FRA amount is $1K/month then collecting at age 62 will result in a lifetime amount of $700/month but delaying until age 70 would result in $1,240/month (plus annual COLA adjustment).

When creating your financial plan, we will consider different Social Security timing strategies based on your financial and longevity expectations. When deciding on your best timing we always request that you consider your health, your family’s longevity, and known increases in population longevity.

Compared to what you earned, what can you expect to receive?
As an example, an average earner ($58K) could receive $1,907 or $23K per year in benefits for life, starting at FRA. On the other hand, those who paid Social Security at maximum earnings for 35 years would receive $3,822/month or $45K per year if 2022 was their FRA.

What if you take early benefits while still working? It seldom makes sense to work and take Social Security benefits early because your benefits are reduced by $1 for each $2 earned above an annually set earning level (in 2024 you can only earn up to $22,320 per year ($1,860/month) before your benefits are reduced). Once you reach FRA your Social Security benefits are NOT reduced (regardless of earnings).

We encourage each of you to work with us to review your Social Security history and then use your financial plan to make the best Social Security timing decision for you.

Applying for Social Security should be started three to four months prior to your chosen Social Security benefit start date. You would apply online at www.socialsecurity.gov or call (800-772-1213) or go to the local Social Security office.
One last and very important cyber security reminder: Protect your Social Security log in information (or credentials) – make certain that you are using a secure device when you log into your account.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

The Crypto Saga Continues

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Though Bitcoin gets the Crypto headlines, I continue to remind you that it is Blockchain that is the promising digital technology that has a place in investment allocation in a long-term retirement portfolio.

Though in 2017 Crypto looked promising, in 2022 we saw the complete collapse of Terra (4th largest cryptocurrency and its related Luna coin) that was believed to be the most stable crypto (it was linked to US dollar) and in 2023 we saw the high-profile collapse of cryptocurrency exchange FTX (Sam Bankman-Fried was convicted of fraud and is awaiting sentencing in 2024). Bitcoin was at $64.4K in November of 2021 and the same single coin was worth $16,500 by November 2022 and was back at $34K by November of 2023. That is certainly too much volatility for a retirement portfolio and yet speculators, media, and pundits promote that it be included. The most stable Cryptocurrency platform and coin are currently Ethereum and its Ether coin, but it is still very volatile.

The progress and growth of Blockchain as a financial digital technology (rather than as a currency) has increased and it looks like it may be an important part of productive AI (Artificial Intelligence) technology development. In addition, Blockchain technology has already seen much revenue growth. Consider that the revenue was around $35M in 2019 and in 2023 increased to $1.75B.

As time passes, we are seeing more acceptance and conversation on how to best allocate digital assets in a portfolio. The most recent was the SEC acceptance of Cryptocurrency-based exchange-traded funds (ETFs) which are primarily for currency allocations. Unfortunately, we are also seeing danger signs. Use of cyber/virtual currency to fund terrorism and destabilize governments may be its undoing since a significantly large and obvious connection between Blockchain and terrorism will cause a global crackdown. My hope is that a crisis will instead generate protective processes/tools which may allow Cryptocurrencies to compete directly with fiat currency.

For now, Cryptocurrency is an investment to be consider like you might consider investing in art, collectible cars, rare coins, and stamps. It can gain and lose a lot of value and not be liquid to use in a crisis particularly during your retirement.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

2024 – Financial Opportunities and Challenges

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In 2024 we are expecting recoveries in some real estate categories, a settling of interest rates, and dramatic growth in the AI (Artificial Intelligence) space. It is the latter that could help businesses improve efficiencies and deal with headwinds from labor costs/shortages though it is still at its infancy. In addition, we are seeing growth in capital invested to deal with the expected scarcity in rare earth metals. If we have limited supplies then price volatility will greatly impact data, electronics, alternative energy, and agriculture investment sectors (new sources for these metals are from mining of asteroids and other stellar bodies).

The less predictable potential for volatility, in the USA, will come from our ability to deal with the destabilizing forces all around us from climate change and the election. I suspect that the US consumer will continue to spend through volatility and reward companies that meet the consumer demands (as they did in 2023).

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

AI and Data Analytics – new SEC rules in 2024

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At end of July, the SEC approved a plan that they say will root out conflicts of interest that can arise when financial firms use Artificial Intelligence (AI) to serve clients. They are also improving rules requiring companies to disclose serious cybersecurity incidents within four business days of any significant breach.

I would be more impressed if these were required for all technology firms that handle customer data analytics (not only financial firms).

The SEC asserts that the new regulations will ensure that ‘predictive data analytics is used to optimize services that better serve clients’ and not for the benefit of the financial firm. Banks and brokerage firms are typically using AI for fraud detection and market surveillance, but recently the shift has been made to have AI and analytics as part of trading recommendation, asset management, and lending. This is a huge development with serious implications for consumers. The goal of the new regulation is to ensure that biases are not ingrained in the technology algorithm, particularly since many vendors and consumers accept technology output, as fact, without human verification.

In this vein, The Federal Trade Commission (FTC) has opened an investigation into Microsoft Corp – OpenAI Inc (the creator of ChatGPT) to examine what risks the chatbot poses for consumers . . . these programs are written by humans and can extend biases and discrimination.

The ideal ‘responsible innovation’ in technology is appealing but so is responsible capitalism or governance and we are currently not doing well in any of these areas.

AI has the potential to draw on reams of data to target individual investors and nudge them to alter their behavior on trading, investing, borrowing, or even opening financial accounts for them. Many of the new tools can be transformative in our time, and I would love to use them. Even so, we should be leery about the concentration of this technology and powerful data in the hands of only a few firms which can pose a huge risk for future stability in financial markets.

It is important that we not provide our private data to technology or analytics software that is not yet fully tested and regulated from unregulated companies. We need to continue to demand that regulations be developed to ensure the safety of our data and particularly add controls for how for-profit firms can use our data. I am particularly concerned when I see errors in financial software output that are accepted as correct because they are software generated.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com