• 2020 FRS Letter

    2020 FRS Legislation Developments

    Did you get your Free Copy of our FRS booklet?

    For the latest updates, listen to our weekly podcast.

    Do you need a strategy shift under the FRS Investment Plan?

     

    January 16, 2020

     

    Dear State of Florida Employee,

     

    Welcome to 2020!  How has it been 20 years since we rang in the new millennium!  On December 31, 1999, the DOW set a then record high of 11,497.  On December 31, 2019 the DOW closed at 28,538.  That’s a pretty good return over those 20 years considering the litany of events that occurred!

    1. Market Commentary.

    2019 certainly generated a great return with the DOW up 22% and the broader markets up even more for the best calendar year since 2013.  But remember, a lot of that performance was a recovery from the 15% decline in the last three months of 2018.  The markets are only up about 7% from September of 2018 even with the big return for 2019.

    The major drivers for 2019 were consumer confidence and lower interest rates.  As we head into 2020, those catalysts appear to have continued strength.  Consumer savings is double from just a decade ago and consumer debt relative to GDP is at its lowest level since 2003.  Interest rates are certainly not expected to rise anytime soon either.  Consequently, as we detailed in our weekly radio show/podcast from December 29, we expect 2020 to produce positive results for the markets on the upper end of the historical average of 8-10%.  Stay tuned for how that plays out.  For 2019, our annual tongue in cheek fearless forecast turned out to be 99.5% accurate!

    As with any year, 2020 will have its share of volatility – we’ve already seen that just a few days into the year with the headlines swinging from the positive (a China trade deal to be signed later this month) to the negative (heightened Middle East tension).  As always, volatility is a normal part of the markets and history and countless studies confirm that being consistent is the best option for achieving investment results over time.

    1. Our Weekly Podcast; Upcoming Meetings & FRS Booklet.

     

    Many of you know we host Central Florida’s longest running radio program but did you know it is now available as a podcast.  Dollars and Sense is broadcast live every Sunday morning from 9:00 AM to 10:00 AM on Newsradio 93.1 and AM 540.  The show is then converted to both audio and video podcasts.  To listen,  follow us on Facebook under Nelson Financial Planning and be sure to like us too!  To watch, subscribe to our Nelson Financial Planning channel on Youtube.  We are also on a variety of other platforms like Twitter, itunes, Google and many others.  Visit our website at www.NelsonFinancialPlanning.com to find your favorite podcast format.

     

    Our spring client meetings are rapidly approaching. These meetings represent an opportunity for you and your friends to hear from senior financial personnel about the markets and the economy.  We are particularly excited to welcome Dr. Sean Snaith to our January 29 event.  Dr. Sean Snaith is the Director of the Institute for Economic Forecasting at UCF and is a nationally recognized economist and highly sought after speaker.

     

    Wednesday, January 29, 2020 from 5:30 – 7:00 PM

    Dr. Sean Snaith of UCF featuring dinner and drinks

     

    Thursday, March 26, 2020 from 5:30 – 7:00 PM

    Mark Seaman with American Funds featuring dinner and drinks

     

    Our Booklet – The State of Your Retirement; The Essential Guide for all State of Florida Employees – continues to be the one source for state employees that describes all of unique choices you face at retirement.  The latest edition includes information about your eligibility for the Health Insurance Subsidy along with a chapter on the importance of 457 Deferred Compensation Plans. Please be sure to call (407-629-6477) or email (Joel@NelsonFinancialPlanning.com) us to request your free copy today.

     

    III. Is a Strategy Shift under the FRS Investment Plan necessary for you?

     

    If you are in the FRS Investment Plan, the table below shows the most recent performance of the funds we typically recommend.  This mix represents a more growth approach which reflects the accumulation phase of life – those years when you are working, saving and accumulating the resources to retire.  However, as you approach retirement, you should enter into more of a growth and income approach.  Receiving income while maintaining some growth to cover that income becomes paramount in retirement.  This shift means that your investment mix needs to adjust as well.  We encourage those that are within 3-5 years of retirement to review their investment allocation.  As always, we are happy to provide free consultations to state employees who would like to review their investment allocation.  Simply contact the office at 407-629-6477 to schedule a conversation and be sure to have your login information handy.

     

    1. 2020 Legislative Update.

     

    In a sharp contrast from prior years, there appears to be a number of proposed bills in the upcoming Florida Legislative session that in fact benefit state employees.  For many years, your benefits have been getting cut in response to the  economic decline of 2008.  Specifically after 2008 there were substantial cuts in the employer contribution rates to FRS which had a profound impact on your retirement.  However, over the years, as the markets and economy have improved so to has the state of the Florida Retirement System.  As of November 1, 2019, the state’s FRS Pension Plan now has nearly $165 billion invested in a mix that is 70% in equities and 30% in cash and bonds – a very typical asset allocation that we follow as well for retirees.  This is a dramatic improvement over the $110 billion that was in the plan just 10 years ago.

     

    With those improved finances, there is finally proposed legislation that increases the contribution rates by employers to your retirement – albeit still not to the levels that existed prior to 2008!  SB 992 proposes raising the employer contribution rates from 6.3% to 10.3% for regular class employees and from 14% to 18% for special risk employees over a three year period between 2021 and 2024.  This would certainly contribute to a better retirement picture for all state employees.  Unfortunately, under this bill, state employees are also being forced to increase their required contributions from 3% to 5% for regular class employees in 2021 and from 3% to 5% for special risk employees between 2021 and 2024.

     

    1. Retirement Under the Florida Retirement System.

     

    There are many factors that go into properly planning your retirement.  The various types of FRS retirement accounts such as IRAs, FRS Investment Plan Accounts and Deferred Compensation Accounts are unique and have different tax consequences depending on your age.  These are very important and very complicated issues that require proper planning in order to have the most flexibility in retirement.

     

    If you are thinking of retiring or have recently done so, please contact us at 407-629-6477 to schedule an appointment to discuss planning your retirement in the most tax and cost efficient manner.  THESE RETIREMENT PLANNING SESSIONS ARE ABSOLUTELY FREE NO OBLIGATION CONVERSATIONS THAT ANALYZE ALL YOUR RETIREMENT OPTIONS.

     

    We look forward to seeing you at our events on January 29 and March 26. In addition, please be sure to visit the latest exhibition at Cornell Fine Arts Museum at Rollins College.  “African Apparel: Threaded Transformations across the 20th Century” runs from January 18 to May 17 and we are proud to be a presenting sponsor.  As always, please contact us with any questions on any financial matter.

     

    Sincerely,

     

     

     

    Joel Garris

    FRS Investment Plan Current Growth Recommendations

    As of December 31, 2019 2019 2018 2017 3 YR
    Return
    5 YR
    Return
    10 YR
    Return
    FRS U.S. Large Cap Stock Fund 28.87% -7.00% 25.49% 14.57% 11.03% 13.82%
    FRS Global Stock Fund 30.48% -5.57% 29.26% 16.78% 11.44% 10.96%
    FRS Foreign Stock Fund 27.40% -14.91% 31.17% 10.20% 6.15% 6.41%
    FRS U.S. Stock Market Index Fund 31.09% -5.20% 21.24% 14.64% 11.33% 13.49%
    FRS Small/Mid Cap Stock Fund 29.14% -8.19% 16.31% 11.31% 10.33% 14.51%
    Average 29.40% -8.17% 24.69% 13.50% 10.06% 11.84%

    Note: 10 year returns as of November 30, 2019

     

    Performance data quoted represents past performance, which is no guarantee of future results.  Please note that the information provided in this letter has NOT been approved or endorsed by the State of Florida or the Florida Retirement System.  All examples shown reflect actual performance; however, individual results may vary and values do fluctuate.

     

  • Top 10 Tax Changes for 2020

    The Tax Cut and Jobs Act (the “Tax Act”) enacted at the end of 2017 produced extensive changes to tax rates and deductions for both businesses and individuals. In addition, the recently enacted Setting Every Community Up for Retirement Enhancement Act (the “SECURE” Act) produced sweeping retirement changes. These two acts have widespread implications on your 2019 tax return. If you have any questions about the effect of these tax changes on your personal situation, please contact us at 407-629-6477.

     

    1. Mandatory Health Insurance Tax Removed. Effective January 1, 2019, the Individual Shared Responsibility Payment Mandate, which previously assessed a penalty on individuals without health insurance, was removed. If applicable, the penalty was calculated on an individual’s federal tax return and paid with their taxes. The penalty was the larger of $695 per adult ($2,085 per family) or 2.5% of annual income. When filing your 2019 tax return in 2020, there will be no penalty. Although removed on the federal tax return, some states, such as California, Massachusetts, New Jersey, Vermont, and Washington DC, still have their own individual health insurance mandate penalty.
    2. Elimination of the Stretch IRA. Effective January 1, 2020, the SECURE Act eliminated the Stretch IRA, which previously allowed most non-spousal beneficiaries to stretch the required minimum distributions (RMD) from an inherited retirement account over their own life expectancy. The SECURE Act requires non-spousal beneficiaries to withdraw all assets from an inherited account within 10 years of the deceased’s death. Beneficiaries no longer have minimum distribution amounts required each year but can instead withdraw the balance at their discretion until it must be liquidated in the 10th year. This change will not only accelerate distributions, but also accelerate the associated income taxes. This was a truly unfavorable change in the tax law and effectively eliminated one the most powerful and flexible estate planning tools that was previously enacted.
    3. Required Minimum Distribution (RMD) Age Raised and Age Restriction for IRA Contributions Eliminated. The SECURE Act increased the RMD age for IRAs from 70 ½ to 72. The SECURE Act did not change the age for Qualified Charitable Distributions (QCD), which remains at 70 ½. Any QCD made between age 70 ½ and 72 are considered non-taxable on your tax return and may reduce your future RMD since the IRA balance decreases from the distributions. Additionally, the SECURE Act removed the age restriction of 70 ½ for IRA contributions for taxpayers that are still working. This also applies to spousal IRAs. Thus, if at least one spouse is working after age 70 ½, both spouses can continue to make IRA contributions and receive a potential tax deduction.
    4. Higher Contribution Limits for 401(k)s, 403(b)s, 457s, Simple IRAs, IRAs & HSAs. The contribution limits to retirement accounts increases for 2020. For 401(k)s, 403(b)s and 457s the limit increases from $19,000 to $19,500. For those over age 50, the catch-up contribution limit increased to $6,500 allowing for a maximum possible contribution of $26,000 for 2020.  The limit for SIMPLE IRAs increases from $13,000 to $13,500 with the over age 50 catch up contribution staying at $3,000.  The annual limit on Traditional IRAs and Roth IRAs remains the same at $6,000 for 2020.  The age 50 catch-up contribution remains at $1,000 for these accounts.  The Health Savings Account limits also increases from $3,500 in 2019 to $3,550 in 2020 for individual plans while family plan contribution limits increase from $7,000 to $7,100.  In addition, HSA account holders age 55 and older may contribute an extra $1,000 annually.  These increases reflect inflation adjustments on the contribution limits and allow tax payers to save more.
    5. Qualified Business Income Deduction (199A) for Rental Properties. The Qualified Business Income Deduction (QBID) allowed owners of sole proprietorships or pass through entities to take a 20% deduction on qualified business income. With one year under their belt, the IRS has increased their scrutiny towards taxpayers taking this deduction, especially for rental real estate. The IRS released a renal real estate safe harbor, which requires taxpayers to keep separate records for the rental real estate business and perform at least 250 hours of rental services per year, to be able to utilize the deduction on their 2019 tax return. The taxpayer must keep contemporaneous records that detail the hours, dates, and description of services performed. Typical rental services include: advertising to rent, collecting rent, performing daily operations including lawn services, maintenance, and repairs, and managing the property. These activities can be performed by you, your employees, outside services, or independent contractors. In order to take the QBID on a rental real estate business, you must sign an election under penalties of perjury certifying that you meet the requirements for the rental real estate safe harbor.
    6. Alimony Payments and Divorce Agreement Modifications. Divorce or separation agreements executed after December 31, 2018 exclude alimony payments from the tax return entirely. To facilitate proper reporting under the new regulations, taxpayers are now required to indicate date of divorce on their 2019 tax return when reporting alimony. If a divorce or separation agreement executed prior to December 31, 2018 is modified, it may trigger use of the new tax treatment depending on the changes made. If you previously received a deduction for alimony payments and had a material modification to your divorce agreement in 2019, you may not be entitled to the deduction moving forward.
    7. Higher Medical Expense Deduction Threshold Averted. The medical expense deduction threshold was supposed to increase from 7.5% to 10%. Fortunately, the SECURE Act extended the lower threshold of 7.5% for 2019. Taxpayers can still deduct unreimbursed medical expenses but only if the expenses exceed 7.5% of adjusted gross income on their 2019 tax return and only if they itemize their deductions.
    8. 529 Education Savings Plan. One of the Tax Cuts and Jobs Acts changes now allows distributions from 529 Plans to be used to pay up to $10,000 of tuition each year at an elementary or secondary (K-12) public, private or religious school. Additionally, the SECURE Act allows for 529 Plan distributions to pay for student loan payments and the cost of apprenticeship programs up to $10,000 per plan. 529 Plans previously only offered tax-advantaged savings for qualified higher-education expenses. Contributions up to $15,000 are eligible for the gift-tax annual exclusion ($30,000 combined gifts for couples).
    9. Capital Gains & Dividend Tax Rates. The Net Investment Income Tax of 3.8% on dividends and capital gains remains. This additional tax applies to investment (unearned) income for single filers with income above $200,000 and married filers with income above $250,000. Investment income includes dividends, interest, rents, royalties and capital gains. The capital gains and qualified dividend rates remain at 0%, 15%, or 20% dependent on income and marital status.
    10. Form Changes. On the 2018 tax return, the IRS removed over 50 lines from the face of Form 1040 in efforts to simplify the tax return for individuals. Consequently, most of the 50 lines were then picked up on six new schedules. On the 2019 tax return, the IRS has reduced the number of schedules from six to three. Some of these items have been moved back to the face of Form 1040, while other items have been grouped together and/or renamed. Additionally, the IRS released a draft version of Form 1040-SR, which will be available for taxpayers age 65 and older. Essentially, it is a simplified income tax form with larger font and predominately displayed charts. Form 1040-SR was created to help seniors who file their tax returns on paper instead of electronically.

  • Dear Friends,

    Welcome to 2020! How has it been 20 years since we rang in the new millennium! On December 31, 1999, the DOW set a then record high of 11,497. On December 31, 2019 the DOW closed at 28,538. That’s a pretty good return over those 20 years considering the litany of events that occurred!

    2019 certainly generated a great return with the DOW up 22% and the broader markets up even more for the best calendar year since 2013. But remember, a lot of that performance was a recovery from the 15% decline in the last three months of 2018. The markets are only up about 7% from September of 2018 even with the big return for 2019.

    The major drivers for 2019 were consumer confidence and lower interest rates. As we head into 2020, those catalysts appear to have continued strength. Consumer savings is double from just a decade ago and consumer debt relative to GDP is at its lowest level since 2003. Interest rates are certainly not expected to rise anytime soon either. Consequently, as we detailed in our weekly radio show/podcast from December 29, we expect 2020 to produce positive results for the markets on the upper end of the historical average of 8-10%. Stay tuned for how that plays out. For 2019, our annual tongue in cheek fearless forecast turned out to be 99.5% accurate!

    As with any year, 2020 will have its share of volatility – we’ve already seen that just a few days into the year with the headlines swinging from the positive (a China trade deal to be signed later this month) to the negative (heightened Middle East tension). Please be sure to listen to our live show Sunday morning from 9-10 am on Newsradio WFLA Orlando or subscribe to any of our podcast or Youtube channels to stay informed along the way. Those social media channels can be found directly by going to the upper right hand corner of our website and just clicking on the icon that looks most familiar to you to become a subscriber.

    The start of a new year also means that tax time will be upon us soon. While the tax changes are not as sweeping as last year, there are certainly many to be aware of so be sure to review our next blog post of the Top 10 Tax Changes of 2020. In particular, two of the major changes involved removing the age cap of 70 on being able to contribute to an IRA if you or your spouse are still working and increasing the required minimum distribution age to 72.

     

  • Merry Christmas, Happy Hanukkah and Other Year End Musings

    Dear Friends,

    Happy Holidays!  We hope you all have the opportunity to spend time with family and friends this season and enjoy the craziness of life!

    This year the market has given us all much to cheer about but lest our memories fade too quickly remember where we were one year ago at this time.  The markets were in a bit of a tailspin and from early November until Christmas Eve of last year proceeded to decline by nearly 20% (19.6% to be exact). Our view for 2019 was that the markets would recover from that rapid decline (the Federal Reserve certainly helped out by cutting interest rates early in January and then again, a couple of more times this year) and so the year has unfolded somewhat as expected.  Better economic and employment data coupled with increased consumer spending have provided additional fuel for the markets upward trajectory as well.

    If you follow our radio program/podcast (which you can do by following this link), https://www.youtube.com/channel/UCMkUy7pgh5x0jzAYwdUx9og  you know at the start of every year we do our tongue in cheek exercise of a Fearless Forecast for what the markets will do for the coming calendar year.  This tradition started over three decades ago by my father-in-law Jack Nelson and it continues today.  We are on a bit of a lucky streak on our forecasting these days as this year will mark the fourth time in the past eight years where our forecast has been nearly spot on – plus/minus within 400 points of where the DOW finished the year at.  This year may turn out to be our most accurate yet – our prediction was a DOW at 28,400 by year end and yesterday the DOW closed at 28,239.  Needless to say – stay tuned as there are still a few more days left in 2019!  We will look to recap the numbers on our program that will air on December 29.  As for the other four years of those past eight – well, suffice it to say that we were less than accurate in our forecasting.  This underscores the reason why we don’t time the market!!!

    Looking ahead to next year, well, you’ll have to wait for our December 29 radio program/podcast for the official Fearless Forecast but basically, we believe the current positive economic trends will carry into 2020.  Beware though the uncertainty of election years can produce some heightened volatility (that plus China trade, North Korea, Brexit – there’s always a host of headline events that provide distraction).

    What we do know about 2020 is that we have a very exciting line up of client meetings ahead. In a bit of a change, for the first time in a number of years, we are bringing in an independent nationally known speaker for our first client meeting on January 29.  Dr. Sean Snaith, Director of the Institute for Economic Forecasting at UCF, will be our featured speaker for a dinner session.  Sean is a nationally recognized economist in the field of business and economic forecasting and has won multiple awards for the accuracy of his forecasts, his research and his teaching.  He is a highly sought after speaker and is frequently interviewed in international, national and regional media.  We are confident he will have much to say about 2020 and beyond!

    After that, our next client meeting will be another dinner session on March 26 and feature a national speaker from the American Funds.  Looking further ahead we are excited about returning to Quantum Leap Winery for our annual client appreciation event.  Remember it is the identical event on both nights so look for a formal invitation and response card in your mail in late March in order to secure your first choice of date.

    Lastly, thank you!  Our business continues to grow thanks to your continued confidence, loyalty and referrals.  We appreciate you all so much!

    Enjoy the holiday season!

    Fondly,

     

    Joel