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Will Power

Only one-third of adults have a will in place, which may not be entirely surprising. No one wants to be reminded of their own mortality or spend too much time thinking about what might happen once they’re gone.1

But a will is an instrument of power. Creating one gives you control over the distribution of your assets. If you die without one, the state decides what becomes of your property without regard to your priorities.

A will is a legal document by which an individual or a couple (known as “testator”) identifies their wishes regarding the distribution of their assets after death. A will can typically be broken down into four main parts.

1. Executors – Most wills begin by naming an executor. Executors are responsible for carrying out the wishes outlined in a will. This involves assessing the value of the estate, gathering the assets, paying inheritance tax and other debts (if necessary), and distributing assets among beneficiaries. It’s recommended that you name at least two executors, in case your first choice is unable to fulfill the obligation.

2. Guardians – A will allows you to designate a guardian for your minor children. Whomever you appoint, you will want to make sure beforehand that the individual is able and willing to assume the responsibility. For many people, this is the most important part of a will since, if you die without naming a guardian, the court will decide who takes care of your children.

3. Gifts – This section enables you to identify people or organizations to whom you wish to give gifts of money or specific possessions, such as jewelry or a car. You can also specify conditional gifts, such as a sum of money to a young daughter, but only when she reaches a certain age.

4. Estate – Your estate encompasses everything you own, including real property, financial investments, cash, and personal possessions. Once you have identified specific gifts you would like to distribute, you can apportion the rest of your estate in equal shares among your heirs, or you can split it into percentages. For example, you may decide to give 45 percent each to two children and the remaining 10 percent to a sibling.

The law does not require that a will be drawn up by a professional, and some people choose to create their own wills at home. But where wills are concerned, there is little room for error. You will not be around when the will is read to correct technical errors or clear up confusion. When you draft a will, consider enlisting the help of a legal or financial professional, especially if you have a large estate or complex family situation.

Preparing for the eventual distribution of your assets may not sound enticing. But remember, a will puts the power in your hands. You have worked hard to create a legacy for your loved ones. You deserve to decide what becomes of it.

1. Caring.com, 2021

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

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INVESTING WITH YOUR HEART

Some individuals believe that return on investment shouldn’t be the only criterion for how they invest their money. For them, the social impact of investing is just as important – perhaps more important.

The history of socially responsible investing stretches as far back as the mid-18th century, but its more-modern form began taking shape in the 1960s, amidst the fight for civil rights and the emerging Vietnam War protests.

More than $17 trillion is managed under sustainable and responsible investing principles. This includes mutual funds, endowments, and even venture capital funds. It should be noted that amounts in mutual funds are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost. Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.1

What Is “Socially Responsible Investing?”

The definition of socially responsible investing has evolved. And it may be referred to by different names, such as “sustainable and responsible investing” or “values-based investing.”

Whatever term is used, this investment discipline is usually characterized by a set of principles that govern how investments are selected. One widely used framework includes environmental, social, and corporate governance criteria (ESG).

What’s ESG?

ESG criteria of good corporate governance, positive environmental impact, and responsible community involvement are a guide for making investment selections, akin to other investment-related criteria, such as price-to-earnings ratio or revenue growth.

The underlying belief is that good corporate practices may lead to better long-term corporate performance.

Investor experience with socially responsible investing will vary. As with any mutual fund or exchange-traded fund, socially responsible investments are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.

Individuals should also recognize that each investment approach may operate under a different set of principles, so you should be careful that your selection mirrors your personal values and beliefs.

1. USSIF.org, 2020 (most recent data available)

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

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A Taxing Story: Capital Gains and Losses

Chris Rock once remarked, “You don’t pay taxes – they take taxes.”1 That applies not only to income but also to capital gains.

Capital gains result when an individual sells an investment for an amount greater than their purchase price. Capital gains are categorized as short-term gains (a gain realized on an asset held one year or less) or as long-term gains (a gain realized on an asset held longer than one year).

Long-Term vs. Short-Term Gains

Short-term capital gains are taxed at ordinary income tax rates. Long-term capital gains are taxed according to different ranges (shown below).2

Long Term Capital Gains Tax Brackets (for 2021)

Tax Bracket/RateSingleMarried Filing JointlyHead of Household
0% $0 – $40,400$0 – $80,800$0 – $54,100
 15%$40,401 – $445,850$80,801 – $501,600$54,101 – $473,750
20%$445,851+$501,601+$473,751+

It should also be noted that taxpayers whose adjusted gross income is in excess of $200,000 (single filers or heads of household) or $250,000 (joint filers) may be subject to an additional 3.8% tax as a net investment income tax.2

Also, keep in mind that the long-term capital gains rate for collectibles and precious metals remains at a maximum 28%.3

Rules for Capital Losses

Capital losses may be used to offset capital gains. If the losses exceed the gains, up to $3,000 of those losses may be used to offset the taxes on other kinds of income. Should you have more than $3,000 in such capital losses, you may be able to carry the losses forward. You can continue to carry forward these losses until such time that future realized gains exhaust them. Under current law, the ability to carry these losses forward is lost only on death.4,5

Finally, for some assets, the calculation of a capital gain or loss may not be as simple and straightforward as it sounds. As with any matter dealing with taxes, individuals are encouraged to seek the counsel of a tax professional before making any tax-related decisions.

  1. BrainyQuote.com, 2021
  2. Kiplinger.com, June 15, 2021
  3. Investopedia.com, February 16, 2020
  4. Investopedia.com, February 1, 2021
  5. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

 

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Diversification, Patience, and Consistency

Regardless of how the markets may perform, consider making the following part of your investment philosophy:

Diversification. The saying “don’t put all your eggs in one basket” has some application to investing. Over time, certain asset classes may perform better than others. If your assets are mostly held in one kind of investment, you could find yourself under a bit of pressure if that asset class experiences some volatility.

Keep in mind that diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if an investment sees a decline in price.

Asset allocation strategies also are used in portfolio management. When financial professionals ask you questions about your goals, time horizon, and tolerance for risk, they are getting a better idea about what asset classes may be appropriate for your situation. But like diversification, asset allocation is an approach to help manage investment risk. It does not eliminate the risk of loss if an investment sees a decline in price.

Patience. Impatient investors can get too focused on the day-to-day doings of the financial markets. They can be looking for short-term opportunities rather than longer-term potential. A patient investor understands that markets fluctuate, and has built a portfolio based on their time horizon, risk tolerance, and goals. A short-term focus may add stress and anxiety to your life, and could lead to frustration with the investing process.

Consistency. Most people invest a little at a time, within their budget, and with regularity. They invest $50 or $100 or more per month in their retirement account or similar investments. They are investing on “autopilot” to help themselves attempt to build wealth over time.

Consistent investing does not protect against a loss in a declining market or guarantee a profit in a rising market. Consistent investing, sometimes referred to as dollar-cost averaging, is the process of investing a fixed amount of money in an investment vehicle at regular intervals, usually monthly, for an extended period of time regardless of price.

Investors should evaluate their financial ability to continue making purchases through periods of declining and rising prices. The return and principal value of stock prices will fluctuate as market conditions change. Shares, when sold, may be worth more or less than their original cost.

If you don’t have an investment strategy, consider talking to a qualified financial professional today.

Click here to send us an email to learn more.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

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Five Most Overlooked Tax Deductions

Who among us wants to pay the IRS more taxes than we have to?

While few may raise their hands, Americans regularly overpay because they fail to take tax deductions for which they are eligible. Let’s take a quick look at the five most overlooked opportunities to manage your tax bill.

Reinvested Dividends: When your mutual fund pays you a dividend or capital gains distribution, that income is a taxable event (unless the fund is held in a tax-deferred account, like an IRA). If you’re like most fund owners, you reinvest these payments in additional shares of the fund. The tax trap lurks when you sell your mutual fund. If you fail to add the reinvested amounts back into the investment’s cost basis, it can result in double taxation of those dividends.1

Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

Out-of-Pocket Charity: It’s not just cash donations that are deductible. If you donate goods or use your personal car for charitable work, these are potential tax deductions. Just be sure to get a receipt for any amount over $250.1

State Taxes: Did you owe state taxes when you filed your previous year’s tax returns? If you did, don’t forget to include this payment as a tax deduction on your current year’s tax return. The Tax Cuts and Jobs Act of 2017 placed a $10,000 cap on the state and local tax deduction.2

Medicare Premiums: If you are self-employed (and not covered by an employer plan or your spouse’s plan), you may be eligible to deduct premiums paid for Medicare Parts B and D, Medigap insurance and Medicare Advantage Plan. This deduction is available regardless of whether you itemize deductions or not.

Income in Respect of a Decedent: If you’ve inherited an IRA or pension, you may be able to deduct any estate tax paid by the IRA owner from the taxes due on the withdrawals you take from the inherited account.3

  1. IRS.gov, 2021
  2. IRS.gov, 2021
  3. Under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. You may continue to contribute to a Traditional IRA past age 70½ under the SECURE Act as long as you meet the earned-income requirement.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

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9 Facts About Retirement

Retirement can have many meanings. For some, it will be a time to travel and spend time with family members. For others, it will be a time to start a new business or begin a charitable endeavor. Regardless of what approach you intend to take, here are nine things about retirement that might surprise you.

  1. Many consider the standard retirement age to be 65. One of the key influencers in arriving at that age was Germany, which initially set its retirement age at 70 then lowered it to age 65.1
  2. Every day between now and the end of the next decade, another 10,000 baby boomers are expected to turn 65. That’s roughly one person every 8 seconds.2
  3. The 65-and-older population is the fastest growing age group in the United States, and has grown by 34.2% over the past decade.3
  4. Ernest Ackerman was the first person to receive a Social Security benefit. In March 1937, the Cleveland streetcar motorman received a one-time, lump-sum payment of 17¢. Ackerman worked one day under Social Security. He earned $5 for the day and paid a nickel in payroll taxes. His lump-sum payout was equal to 3.5% of his wages.4
  5. Eighty percent of retirees say they are confident about having enough money to live comfortably throughout their retirement years.5
  6. The monthly median cost of an assisted living facility is over $4,000, and 7 out of 10 people will require extended care in their lifetime.2
  7. Sixty-two percent of retirees are dependent upon Social Security as a major source of their income. The average monthly Social Security benefit at the beginning of 2021 was $1,543.5,6
  8. Centenarians – in 2020 there were 92,000 of them. By 2060, this number is expected to increase to 589,000.7
  9. Seniors age 65 and over spend over 4 hours a day, on average, watching TV.8

These stats and trends point to one conclusion: The 65-and-older age group is expected to become larger and more influential in the future. Have you made arrangements for health care? Are you comfortable with your investment decisions? If you are unsure about your decisions, maybe it’s time to develop a solid strategy for the future.

  1. Social Security Administration, 2021
  2. Genworth.com, 2021
  3. The United States Census Bureau, 2020
  4. Social Security Administration, 2021
  5. Employee Benefit Research Institute, 2021
  6. AARP.org, December 23, 2020
  7. Statista.com, January 10, 2021
  8. U.S. Bureau of Labor Statistics, 2020

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

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How Women Can Prepare For Retirement

When our parents retired, living to 75 amounted to a nice long life, and Social Security was often supplemented by a pension. The Social Security Administration (SSA) estimates that today’s average 65-year-old woman will live to age 86½. Given these projections, it appears that a retirement of 20 years or longer might be in your future.1,2

Are you prepared for a 20-year retirement?

How about a 30-year or even 40-year retirement? Don’t laugh; it could happen. The SSA projects that about 33% of today’s 65-year-olds will live past 90, with nearly 14% living to be older than 95.2

Start with good questions.

How can you draw retirement income from what you’ve saved? How might you create other income streams to complement Social Security? And what are some ways you can protect your retirement savings and other financial assets?

Enlist a financial professional.

The right person can give you some good ideas, especially one who understands the challenges women face in saving for retirement. These may include income inequality or time out of the workforce due to childcare or eldercare. It could also mean helping you maintain financial equilibrium in the wake of divorce or death of a spouse.

Invest strategically.

If you are in your fifties, you have less time to make back any big investment losses than you once did. So, protecting what you have may be a priority. At the same time, the possibility of a retirement lasting up to 30 or 40 years will require a good understanding of your risk tolerance and overall goals.

Consider extended care coverage.

Women have longer average life expectancies than men and may require significant periods of eldercare. Medicare is no substitute for extended care insurance; it only covers a few weeks of nursing home care, and that may only apply under special circumstances. Extended care coverage can provide financial relief if the need arises.1,3

Claim Social Security benefits carefully.

If your career and health permit, delaying Social Security can be a wise move. If you wait until full retirement age to claim your benefits, you could receive larger Social Security payments as a result. For every year you wait to claim Social Security, your monthly payments get about 8% larger.4

Retire with a strategy.

As you face retirement, a financial professional who understands your unique goals can help you design an approach that can serve you well for years to come. Reach out for more information at Lynnt@herretirement.com .

  1. CDC.gov, January 2020
  2. SSA.gov, February 25, 2020
  3. Medicare.gov, February 25, 2020
  4. Investopedia, November 24, 2019

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

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A House Divided

The latest research suggests that divorce rates in the U.S. have been falling in recent decades. Still, many people face the difficult crossroads that comes when their marriage ends.1

Getting a divorce is a painful, emotional process. Don’t be in such a hurry to reach a settlement that you make poor decisions that can have life-long consequences. If divorce is a possibility, here are a few financial ideas that may help you prepare.

The most important task you can do is getting your finances organized. Identify all your assets and make copies of important financial papers, such as deeds, tax returns, and investment records. When it comes to dividing up your assets, consider mediation as a low-cost alternative to litigation. Most states have equitable-distribution laws that require shared assets to be divided 50/50 anyway. When a divorce becomes contentious, attorney’s fees can accumulate.

From a financial perspective, divorce means taking all the income previously used to run one household and stretching it out over two residences, two utility bills, two grocery lists, etc. There are other hidden costs as well, such as counseling for you or your children. Divorces also may require incurring one-time fees, such as a security deposit on a rental property, moving costs, or increased child-care.

Finally, dividing assets may sound simple but it can be quite complex. The forced sale of a home or investment portfolio may have tax consequences. Potential tax liability also can make two seemingly equal assets have varying net values. Additionally, when pulling apart a portfolio, it makes sense to consider how each asset will suit the prospective recipient in terms of risk tolerance and liquidity.

Remember, the information in this article is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

During a divorce, many factors are competing for attention. By understanding a few key concepts, you may be able to avoid making costly financial mistakes.

Chart Source: Familyinequality.com, 2019

  1. The Wall Street Journal, 2019

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2022 FMG Suite.

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Stock Market Concerns

In this week’s podcast I’m talking about the growing concern over volatility in the current stock market and a question that’s on the top of everyone’s mind: Is this the beginning of the end? That is the end of the bull market we’ve enjoyed for the last 12 years. Or is this simply a short term fluctuation. Well, no one knows for sure. And how the market performs is not something we as investors can control. But, one should understand what market volatility is along with another term sequence of return risk. For those new to investing, a bull market is loosely defined as a persistently sloping upward line. During a bull market, market confidence is high and investors are eager to buy stocks with the hopes that their stocks will grow in value. During a bear market, it’s quite the opposite, invest want to sell their stocks because of fear and anxiety that the market will crash.

As an investor, there’s also some tried and true things you should do and not do during a roller coaster ride in the markets. And if you’re an individual nearing retirement or just in retirement, this type of market can be disconcerting. There’s definitely some strategies and behaviors you need to consider.

In the words of Warren Buffet…

“The stock market is a device to transfer money from the impatient to the patient.”

Let’s start with a quick review of volatility and sequence of return risk…

When we witness market volatility it’s very unsettling, even for the most astute investors. Many things affect the swings of the market and some of these affects are short term blips while others can lead to longer term bear markets.

The question right now is, should we all be worried and what, if anything should we do about it? There’s a saying on Wall Street that “stocks climb a wall of worry.” Which means that investors are always worried.

Even with the effects of volatility and sequence of return risk, which I’ll talk about after volatility, the stock market has always come back and outperformed other investment options over time. The truth is that there is always something to worry about, but stock and bond markets remain resilient if you have patience and are willing to stay the course. This is the good news.

The bad news is that many investors react the wrong way to volatility and make bad, knee jerk reactions. It’s part of behavioral finance and one of the main benefits of having a financial advisor. He or she can help you stay the course in times of turbulence, which by the way is the best advice…strap in and stay the course. The market has averaged (with all its volatility), 9% rate of return since 1970, which means if you invested a dollar in 1970, you’d have close to $70 today.

Market volatility is a side effect of investing. To enjoy higher returns, you need to assume more risk. However, that risk comes with having the stomach to weather some potential large swings, and often losses, during a given time period. In fact, people are stressing about a 4, 5 and even 10% market drop during this week, but market declines of 10% or more during the year are actually quite common. In the last six years alone, we have seen four years with intra-year losses of more than 15%. And despite the ups and downs, the Russell 3000 (which is another market like the S&P 500) rewarded disciplined investors with an average annual return of over 9% since 1980. The goal isn’t to time the market. In fact, it’s impossible to time the market. Your goal should be to invest in the market, ride out the ups and downs and reap its rewards.

One financial investment company I researched stated this, “If we look at individual investors and their track record, the average equity (stock) investor trailed the S&P 500 over a 30 year period by more than 4% per year as of December 31 of 2020. Missing a 4% compounding return over decades can be devastating to your wealth. Why does it happen? The average investor thinks that they will sell before the downturn and then buy when things are better. However, reasons to worry and volatility always persist so they end up selling and getting back in at the wrong times.

Missing only a few days of returns can dramatically affect your investment outcomes. For example, from 2000 to the end of 2020, a $10,000 untouched investment would have grown to almost $43,000. Missing only the 10 best days out of almost 5,000 trading days would have cut your potential growth by more than half, and your investment would only be worth about $23,000.

Market timing sounds like a reasonable strategy, but it never works consistently to your advantage over time. Professional and individual investors alike only hurt their long-term performance when they try.”

Let’s me explain volatility a bit more…

When in retirement and withdrawing income from your portfolio, it’s imperative to reduce portfolio volatility. Recent studies have proven that when withdrawing income from a portfolio, the portfolio with lower volatility will experience a longer lifespan than one with higher volatility. A recent study completed by Sure Dividend titled Why You Must Care About Volatility in Retirement concluded that “simply put, the greater the volatility of your portfolio, the greater chance you have of outliving your money all other things being equal. By its nature, higher volatility means greater swings in the value of your portfolio.”[1]

Standard deviation is a statistical measurement that can be applied to assess a portfolio’s volatility or risk level. It is used to determine how much the returns of a portfolio will deviate from the mean or average rate of return from year to year. The higher the standard deviation number, the higher the volatility or risk in a portfolio.

The higher the standard deviation or risk, the shorter a portfolio will survive when taking withdrawals. The math proves that the portfolio with the lower standard deviation or risk will last longer when taking withdrawals for income in retirement, all other factors being equal, as shown in the following chart.

  

Sure Dividend Study Results

 

Simply put, the greater the volatility of your portfolio, the greater chance you have of outliving your money all other things being equal.”

–Sure Dividend Research Study

The Sure Dividend study assumed the following:

  • Retirement portfolio value: $1,000,000
  • Withdrawal amount: $3,333 per month or $40,000 annually (4% withdrawal rate)
  • Inflation factor: 3% increase per year
  • Rate of return: 9%
  • Retirement duration goal: 30 years (age 65–95)

The results of the study concluded that the higher the standard deviation or volatility in a portfolio, the greater chance of portfolio failure or financial ruin. As standard deviation or volatility was lowered, portfolio failure rate was decreased and a higher degree of success (or portfolio survival) was realized.

Now I’ll give you a little background on sequence of return risk…which is a risk every retiree must be aware of and plan around.

Sequence of return risk is a major risk that must be mitigated by retirees when beginning to take withdrawals from their retirement portfolio. Sequence of return risk is defined by Investopedia as, “The risk of receiving lower or negative returns early in a period when withdrawals are made from an individual’s underlying investments.” Dramatic portfolio losses early in retirement will reduce the lifespan of the portfolio. Understanding this requires a different way of thinking than when money is invested while accumulating for retirement (without any withdrawals). In the accumulation phase, the sequence of return makes no difference; at the end you wind up in the same place with the same dollar value.

While sequence of return risk cannot be controlled any more than market volatility, its effect can be mitigated. Having a safe money bucket of funds to draw income from in the event of a dramatic downturn in the stock market can be an effective strategy to protect the portfolio from negative sequence of return risk. Research studies have concluded that having this buffer to draw from when market losses occur can have a positive effect on the long-term survivability of the overall portfolio.

A major psychological benefit of the income buffer strategy is that it will enable a retiree to withstand the temptation to exit the stock market with their retirement funds during a period of market losses, which might put the retiree in a market timing guessing game. Such an approach often leads to selling at the market low and buying at the market high and dramatically underperforming a long-term buy-and-hold strategy. Numerous studies have shown that the average investor has dramatically underperformed the market returns due to irrational selling and buying decisions.

As an example, during the 2007–2009 stock market downturn, having a safe money buffer or reserve account to withdraw income from (until the stock portion of the portfolio rebounded) would have been a positive step to protect against negative sequence of return risk. As a reference, in an article dated February 2015 by Wealthfront’s Andy Rachleff and Duncan Gilchrist, PhD, the 2007–2009 market loss was 56.39% and took the market 1,485 days or 4.06 years to recover. Since 1911, the average recovery time after a stock market downturn has been 684 days or 1.87 years![2] Based on this fact, it’s prudent to have a buffer in place three to five years before retirement begins, and it should cover approximately four to five years of retirement income. A proper buffer can consist of life insurance cash values, a reverse mortgage reserve account, cash or CDs, a guaranteed annuity, or any other account that will have a limited negative effect when there is a stock market downturn.

Portfolio losses just prior to retirement or early in retirement can have a dramatic effect on portfolio survival rates and having a safe money buffer in place can have a substantial effect on reducing potential negative sequence of return risk.

Let me wrap this section of the podcast up by saying that the goal of investing is not to achieve the highest rate of return possible. It’s to achieve an appropriate level of return with the right amount of risk that will allow you to stay invested through both the good times and the bad. The level of risk that is right for you and your plan is very individual decision.

This is one reason why people approaching or in retirement invest differently. Most retirees, I would say want more stability and less risk, while still having some exposure to stocks for long-term growth.

If volatility is unsettling for your situation, keep in mind that you can make adjustments to how much risk you take. It’s not an all-or-nothing decision. It’s possible to find a portfolio strategy that protects you from too much risk and still take advantage of returns from growth. Yes, you can have your cake and eat it too. And this is where I’ll put in a plug for the Hybrid Income Portfolio…it’s definitely worth checking out if you’re concerned with the current markets and are approaching retirement or are just in retirement. Our friends over at Your Retirement Advisor created the Hybrid Income Portfolio. While I can only educate you on research backed investment information, they can explain and advise you on your specific situation and concerns. Just email me at: lynnt@herretirement.com and I can connect you.

Benjamin Graham, British economist, professor and investor has stated this suggestion, “The best way to measure your investing success is not by whether you’re beating the market, but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” Sage advice indeed.

To wrap this up for this episode let me leave you with a few thoughts….

During times of turmoil, the hardest thing to do is to stay the course, but this approach is critical to achieving long-term investment outcomes. There are some opportunities in times of market fluctuations. Market volatility can create opportunities through portfolio rebalancing, tax-loss harvesting, and even buying when stock valuations are low. Talk to your investment or retirement advisor about these opportunities.

Next, focus on what you can control. You can’t control interest rates, inflation, the markets, changes in tax policy, or the economy. But…you can control how you prepare for these risks and how you react when they happen. And guest what? They will happen. The best defense is a good offense that incudes a comprehensive financial plan that includes your investment strategy, retirement income strategy and a plan to make it all last as long as you do. As Sylvia Kwan, Ellevest’s Chief Investment Officer, explains: “Over the past 93 years, the stock market has gone up by an average of nearly 10 percent a year. But it didn’t go straight up!”

You’ll also want to make sure you’re diversified. Be patient and focus on the long term. As my mother always says, “This too shall pass.” According to Marketwatch: “There has literally never been a 20-year period in the past century or so that has resulted in a negative return for stocks.”

Next, try a Jedi mind trick…shift your thinking…it’s no where near a crash or significant downturn. It’s a sale. Perhaps there’s some buying opportunities. Finally, turn off and tune out the noise and prognosticators. Don’t spend all day looking at your portfolio. It’s a waste of precious time.

Finally, life always give us “stuff” to keep us up at night. Don’t let the stock market be one of them. There are ways to protect your money from downside risk and help you sleep better at night. Reach out if you want more information on this sleep insurance or any investment help, I can connect you to people that are registered and qualified to help. lynnt@herretirement.com.

Here’s to resiliency, staying the course and getting her done. Remember: worry doesn’t look good on anyone.

 

Sources:

*Average Investor as determined by Dalbar. Source: “Quantitative Analysis of Investor Behavior (QAIB), 2021,” DALBAR, Inc. www.dalbar.com.

 

Source: Russell 3000 Index returns from 1980 through January of 2022.

 

[1] “Why You Must Care About Volatility in Retirement,” Sure Dividend, October 14, 2014, https://seekingalpha.com/article/2560525-why-you-must-care-about-volatility-in-retirement?page=2).

[2] “Celine Sun and Andy Rachleff, “Stock Market Corrections: Not as Scary as You Think.” Industry Insights, accessed January 11, 2017, https://blog.wealthfront.com/stock-market-corrections-not-as-scary-as-you-think/.

 

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Strategies to Optimize Your Retirement Plan

Hello and welcome to the Her Retirement podcast. I am your host Lynn Toomey, and here in my podcast each week, I talk about how to live a better, more intentional, and financially secure life now and in retirement. Whether you’re single, suddenly single or partnered up woman, your only sure investment is an investment in yourself and finding financial wellness, also known as financial security. Isn’t just a dream. It’s a decision. And when you decide to make a commitment to yourself and change your financial destiny, our fresh modern platform will help you know, more and have more now and in retirement. Welcome to her retirement. Welcome to my no more, have more financial wellness platform and welcome to my podcast. Are you ready to get her done? Let’s do this

In this week’s episode of the, Her Retirement podcast I am speaking to Brian Saranovitz of Your Retirement Advisor. He also happens to be my significant other, and this was done during a zoom chat that we had with people that attended our Retirement Power Hours masterclass. And after attending the class both live and on demand, we offered a December, 2021 live Q and a session. Brian kicked off that session with a discussion of what he calls Multi-Discipline Retirement Strategies or MDRS. And these are little known retirement optimized strategies that many people can deploy in their plan to really improve their retirement outcome. I think it’s really, really important topic. And we’ll give you some ideas and strategies that you may not have heard before. So definitely throw on some headphones, go for a walk, ride your bike. Sit back, take a listen and learn about MDRS and if some of these strategies can help your retirement

Hey there officially, if you haven’t met me before, I’m Lynn Toomey, I’m your host and co-creator of both Her Retirement for those people who are coming to us from that program and the Retirement Power Hours masterclass. And joining me is Brian Saranovitz, and he’s the co-creator of Retirement Power Hours and the president of Your Retirement Advisor. So just really quick, Brian, in addition to teaching, Brian is a retirement advisor to many pre and post retirees. Your Retirement Advisor is what we call a one stop retirement advisor practice. And he really focuses on people, you know, 50 to 70. I think your sweet spot is people like five years from retirements is where I’d probably, I’d probably say 55 to 70 or so. Yeah, I mean, we have worked with, people in their mid-seventies and so depending on how long they’re planning to live, but in many respects people planning to live to 95. So even if you’re 75, you still have 20, 25 years to go, you might as well make them an efficient 25 years. And you got some 30-year-olds who are focused on, those retirement plans.

Yeah, I do. I do have younger clients as well. yep, we do. We don’t discriminate by age, but, uh, <laugh> the vast majority I would say are between like 55 and 70. Yep. Services are offered across the United States. Although there’s some physical offices here and Massachusetts, for those that are close enough, we could actually meet you face to face at some point. But, you know, Zoom is just as good for that. We call Brian the resident retirement geek. He’s an investment advisor representative and an RIA with over 35 years’ experience. And he also has a tax planning company, and he’s a former professional football player. I think in one of the emails we alluded to not asking him any questions about the NFL playoff prospects or this week’s Patriots game, but you can stick around and do that at the end if you’d like to ask those questions.

So, I wanna start off with a couple things. 70% of people give up many retirements income benefits because they don’t know all the facts. So, it’s great. You’re here to get some questions answered and don’t give up those income benefits because you don’t learn the facts. If nothing else you’ve attended our classes or if you haven’t or you going to down the road, either on demand or live, you make sure you learn as much as you can about all of this stuff so that nobody pulls the wool over your eyes. And you go into retirement with a full understanding of what it is you’re doing and why you’re doing it. 81% of people don’t know how much income they need to retire. And that’s an issue, you need to know that. And 85% don’t have a written retirement plan.

So, Your Retirement Advisor and Retirement Power Hours, and Her Retirement were created to help change this for people. So my question is, do you have the right plan? It’s December, right? New year’s resolution, it might be, I’m going to get a written plan. It’s a great resolution. But the question also is, is your plan efficient. Brian’s gonna talk about efficiency and his offer to all participants tonight is he wants to do a Retirement Efficiency Assessment, because you know, why not over the holidays, right? He may have a little extra time, although he always thinks that December’s gonna slow down and, and never seems to slow down at all.

<laugh> I really don’t have extra time. <laugh>, you know, I am very, very, very, very busy and, which is good. I love it because I’m helping a lot of people and, keeping things moving forward. But, no, that’s good. But, yep, the Retirement Efficiency Assessment is a very, very important piece. You know, one of the things I was thinking, as you said, most people don’t, or many people don’t have a plan, I guess you don’t need a retirement plan. If all you have is social security income and a little pension, but if you’ve got you 250, 400, 500,000, a million, $2 million, I mean, and, and we see all those types of people. If you’ve got some money that you’ve put away over the years, you’ve got some social security income, some pension income, so on and so forth, you know, and a nest egg that you built up in your 401k, you really need to have of some sort of plan, at least look at some sort of plan.

So, I think that’s very important. Like I said, if you don’t have, you know, you got, you know, $200,000 in an IRA or a 401k, and you’ve got, your social security income, you maybe don’t need a plan. But you know, I had one gentleman the other day, he said, gee, if I didn’t have all this stuff, I wouldn’t need to plan with you. And I said, absolutely. So, I think, you know, once again, there was, as we’ll talk about in a minute, there’s a lot of things that you can do to better your retirement outcome. That’s the bottom line. And once again, thank you everybody for being here. You know, I really enjoy teaching and, and going through these things. But as it says, as it says here, the right retirement plan is more than a 401k investment strategy.

And this is so true. I think, you know, a lot of people, will have you believe. And, you know, I work with Fidelity. I work with Vanguard. I work with T. Rowe Price. I work with all the investment companies, but if you go directly to them, they’re gonna tell you that, you know, all you need is a 401k stock and bond portfolio, and we’ll run a couple projections, tell you how much you can generate for income. Here’s your social security. And that’s just a projection. There’s no planning to that. And they’ll say, you know, you got your 401k, your social security, maybe a little pension, just call it a day. And this is what you can do. There is much more than just a 401k or an investment strategy. As it says here, the right strategy incorporates a portfolio that will reduce risk and volatility in increased growth.

You also need a proper investment strategy. You know, you also need a proper investment strategy that will, you know, take you through to the end. You also need to incorporate tax efficiency, tax efficient, distributions tax, efficient income, which is another component that is going to make you more successful, get a better retirement outcome when taking money from your portfolio and incorporating that tax efficiently. You also need to protect, and this is something that’s very important is we can create the best we can create the best income plan, the best income strategy ever known demand. And if you have a long-term care event or some unforeseen situation and you haven’t done the proper risk management strategies looked at your long-term care insurance, so on and so forth, that can decimate the best of plans. And also, you should have a properly drafted whether it’s just wills or revocable trusts or irrevocable trust, maybe to protect from long term care situations.

So, there’s a number of facets that are gonna make sure that you need to incorporate to be as efficient as possible and get the best outcome. But then also, so make sure that you know, when you have this plan put together that you’re also protecting the plan, you’re also protecting the plan through estate planning and risk management. Okay, this does this all the time. There we go. I know why it does that.

All right. So this is a very, very important quote. And I hope you take this to heart, cuz I think this is very, very, very important. One of my favorite retirement planning quotes, and this is from a gentleman, Wade Pfau, Ph.D., he is one of the foremost retirement researchers in the industry. I don’t know if anybody else has ever heard of Wade Pfau, Ph.D., but Wade, like I said is one of the foremost retirement researchers. He also is a, he writes the curriculum. He writes much of the curriculum for the CFP certified financial planning classes, at the American College, that’s where CFPs get designated as a certified financial planner. So he trains CFP certified financial planners. And ultimately this is his quote. Most advisors concentrate solely on managing investments. They don’t incorporate all the intricate retirement strategies. As I said, they don’t incorporate all the intricate retirement strategies that must be utilized to dramatically increase the probability of a retiree success. And that’s one of the reasons why we said earlier, I said earlier, you know, it’s much more than just an investment strategy. I don’t care. Anybody tells you there are many as Wade Pfau says, there are many intricate strategies that can be utilized to increase and better your outcome.

All right, I’ve boiled it down to, there are many strategies out there. But I’ve boiled it down to the five that are most important to try to. Now all of these strategies are not going to be incorporated in everybody’s plan, but you should at least look at each one. That’s what the Retirement Efficiency Assessment that I put together that I run for each individual. That’s what it does is it incorporates and shows us how each of these, what I call Multi-Disciplined Retirement Strategies, MDRS strategies. Each one of these will have a certain effect on your retirement outcome.

So, the first one is what I call Retirement Portfolio Optimization, RPO. This is by reducing the volatility in your portfolio. And there are strategies beyond just stocks and beyond just bonds, stocks and bonds reduce the volatility in your portfolio and is imperative to creating a sustainable retirement income for life. Okay. Very, very important to understand RPO optimizing, optimizing your portfolio, minimizing risk of loss and increasing growth for the risk that you are assuming that’s what retirement portfolio optimization is all about. And it can add years of life to your portfolio when taking income.

Number two, tax efficient income distribution, tax efficiency, take money from your portfolio. Tax efficiently in retirement will reduce taxes and ultimately increase the probability of portfolio survival. Once again, this will increase the amount of spendable income in your pocket that you can put away and make sure that you can actually increase your net spendable income by being more tax efficient and enjoy better retirement or take the same amount of income and leave more on to your loved ones, kids, grandkids, family. So whether you want it to take more income in your pocket and enjoy a better lifestyle and retirement, or leave more money onto your kids and take the same amount of money as you were gonna take before. That’s what tax efficiency is all about.

Social security timing, timing your social security, properly, understanding how social security works. As it says here, proper social security filing and maximizing this very important income source can dramatically increase the probability of a retiree success as well. So once again, social security filing. When should you take your social security? When should your wife take her social security or vice versa? My husband or wife. So ultimately that’s a very, very important question based upon longevity and based upon a number of other factors as to when you should take your social security benefit to get the most. It’s not just that you want to get the most, like most people tell you to take it at age 70 or you’re better off. Some people say you’re better off taking it at age 62. It depends. You must run it in your retirement projection, do some planning around social security timing to make sure you do the right thing. When you take your social security benefit and maximize this very important benefit.

Alpha Efficient Portfolio Management. I don’t have an acronym for this one. Lynn <laugh> I guess we could call this A E P M, that’s good. <laugh> I’m trying to make it AEPM, Alpha Efficient Portfolio Management, simply what this means is it means adding positive money management effect, adding positive management, what’s called Alpha Affect to a retirement portfolio. So for instance, if you have one control fund that basically is investing in large cap growth stocks, another manager that’s investing in large cap growth stocks. So you have a Fidelity fund and a zero price fund. One manager for the same risk gives you a 10% percent rate of return. The next 10 years, one gives you an eight and a half. Well, I’ll take that 10% all day over the eight and a half with that same level of risk. So that’s what Alpha Effect is getting you, above average returns above the index averages. And that’s very important in retirement because if you have 50%, 60%, 40% of your money in whether it’s mutual funds, ETFs, individual money managers, whatever it is, if we’re getting 1% or 2% more from those portfolio managers, because you know how to find them, ultimately that gives you more income again, that’s what this is all about with all of these strategies is creating more in your pocket, spendable income.

And then last, but definitely not least is the prudent use of home equity. Many people have five, especially today with the, with the values of homes. Many people have $500,000 homes, $600,000 homes, a million-dollar homes, and ultimately, they are not taking advantage of some opportunities, opportunities to add that value net equity as either a tax-free income source or are just as a reserve for opportunities or a reserve for emergencies. What am I trying to say? Thank you, Lynn. I was at a shortage for words there, or for opportunities or for emergencies, emergencies. Thank you. And so that’s what you can actually utilize your home equity in retirement. There are many, many ways to do this and leading academic research indicates that the use of home equity in retirement can increase the probability of portfolio survival and increase the legacy to your loved ones.

So, these are what I think are five major strategies that we will look at incorporating in your Retirement Efficiency Assessment report to see do all of these, give you value, can just one of these give you value or whatever.

So ultimately these are things that you should include in your overall retirement efficiency, whether you do it through the Retirement Efficiency Assessment, or you do it on your own very, very important to maximize these. All right.

So now once again, according to several research studies from Morningstar, Vanguard Investments, Morningstar and Envestnet, three major studies were done and it shows that all three studies showed that 3% or more or additional equivalent yield can be added to your safe withdrawal rate. So, let’s just say, for instance, your portfolio makeup, if you have just, ETFs exchange, traded funds or indexed in your portfolio, and that’s all you do, and your safe withdrawal rate is 3%. What this studies, what these studies say is by incorporating some of those strategies we talked about, you could increase your equivalent yield by another 3%. So if you’re earning 6%, you can increase that as much as 9% equivalent yield. So we’ll talk about that. Vanguard, this is Vanguard study, Vanguard did the Vanguard Advisor’s Alpha study. And basically it said by incorporating proper retirement strategies can add as much as 3% equivalent yield. As I just said to your retirement portfolio, Morningstar, Vanguard and Envestnet, as I said, also did some very extensive, studies in research papers and they have differing areas that you can identify to increase your overall, what they call retirement of alpha <inaudible> gamma.

And I think, Brian, you talked about the five, but there’s, there’s more right. Five are the key ones. Those are kind of your, but you know, there’s things like behavioral coaching, right? Studies show investor behavior, investor returns have failed in comparison to what managed money by advisors has done historically, you know, a 2% difference. So, it’s those five plus a few more things that an advisor value can offer as well.

There’s just a lot of other, as I said earlier, the five, I would say what I just went over the five, the majors, the five MDRs strategies, you know, use of home equity and alpha and, and all the rest. Those are five. What I think are major strategies, right? That incorporating can really give a tremendous advantage and a much better outcome if they’re incorporated properly, if they’re incorporated properly into a retirement plan. These are within the Morningstar study, the Vanguard study Envestnet Capital study, shows that there are other strategies that can be employed as well. Mm-hmm <affirmative> so ultimately, yes, that’s absolutely true.

So, Morningstar, now Morningstar research estimates, and this is David Blanchett and Dr. Wade Pfau, who I talked about, work together on the Morningstar report and Morningstar research estimates that a retiree can generate 22.6% more income by employing what they call Gamma Efficient Retirement strategies. Let me put that into perspective. What does it mean to get 22.6% more income? It simply means if you are taking an income of $60,000 and that’s what you’re getting from a traditional stock and bond portfolio <affirmative>, ultimately by employing, additional strategies, like we talked about, what Morningstar said is you can actually add 22.6% more income, or $73,560 inflation adjusted each and every year. So $13,560, more based upon a $60,000 income. Of course, if you’re getting a hundred thousand dollars income, now you’re at $122,600. So ultimately it just means once again, by incorporating strategies, proper strategies in retirement, you can get a heck of a lot more income. That’s the bottom line and retirement efficiency.

And once again, what I always say is yes. I sometimes have individuals come in when we look at their Retirement Efficiency Assessment and they’re gonna make it to age 95 with a traditional 60, 40 stock bond portfolio. And a lot of times, you know, they’ll have, you know, $600,000 initially, and at age 95, and even the worst case scenario, they’ll have a hundred thousand dollars. So they’ll make it with the type of income that they need. But there are many instances that we can increase that income instead of taking $30,000, $40,000 from the portfolio, we could take $50-$60,000 from that portfolio and get the same outcome at age 95.

That’s what the retirement efficiency means. It means squeezing out as much as you can out of your retirement so that you can enjoy a better lifestyle, a better retirement, or leave more money onto your loved ones. Once again, that’s what it’s all about. That’s what efficiency is, getting the most from what you’ve got. I don’t care if that’s $300,000 or 3 million, it’s getting the most from what you’ve got. All right. Retirement Income Readiness is being able to make this statement. And I think this is a great statement. And Lynn, the first time I’ve ever, ever seen this slide before? No, <laugh>, that’s why I was kinda like, oh, what is this? But as I read it, this is, this is exactly, this is perfect. Neither a stock market correction, or a bear market nor a rising interest rates will have a noticeable impact either of the amount of income produced by my portfolio or my ability to keep that income growing. That’s perfect. That’s exactly what setting yourself off properly does. It doesn’t matter whether we have, whether we encounter, the next 10 years are lost decade where the market loses 1% for 10 years, or if interest rates rise by two or 3% over the next five or 10 years, and we lose value in our bonds.

What we wanna do is we want to insulate our retirement from those inevitable events they’re gonna happen. It’s not like when it’s just when they’re gonna happen, not if they’re gonna happen. And that’s what you want to do is you want to insulate your retirement, mitigate these risks so that when you go through it doesn’t matter if the market goes up the next 10 years, like it has the last 10 years, we’re all happy. But if the market goes down, we still want to be happy. So very, very important.

And this is one of my favorite quotes. This is one of my favorite quotes, because this is one of my favorite guys. One of the greatest world’s greatest investors ever, Warren Buffet, he says, and he’s a very statistical probability type guy, kind of like Bill Belichick of the New England Patriots. Very statistical. Don’t go there. Probability football talk, right? You are neither. You are neither. And this is Warren Buffet. Not Bill. You are neither right, nor wrong. You are neither right, nor wrong because the crowd disagrees with you, you are right because your data and your reasoning, your math is right. That makes so much sense to me. Because once again you can hear all this conjecture out there and I’ll call it something else. But I won’t say it, but there’s so much conjecture. You know, there’s, there’s the investment. People say, annuity stink, never touch them. Don’t do that. And then and then the annuity guy will say, never put your money in the stock market. You can lose it all in one day. And that’s all just conjecture. That’s all ridiculousness. What you have to do is you run your numbers, your data, and your reasoning, and your math leads you in the right direction. And that’s exactly what you need to do.

I hope you enjoyed that discussion with Brian Saranovitz again, of Your Retirement Advisor and his discussion about Multi-Discipline Retirement Strategies. And as he mentioned, there is a very valuable retirement assessment that we do want to extend to all of the people that happen to listen to this podcast and would like to take Brian up on his offer of that Retirement Efficiency Assessment. If you are interested in that, certainly email me at Lynnt@herretirement.com. And as I always say, email me with any questions, concerns, any directions you need in terms of getting your retirement right. And as I like to say, you need to go out and get her done. Knowing more is having more. And I hope you learned more today about Retirement Optimized Strategies. Thanks again. And we’ll talk to you next week.

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