Frisch Financial Blog

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Passive vs Active Investment Management

Over the past few decades, there has been an ongoing debate over which investment style works best…active vs. passive management. There are statistics that support both styles. For example, it is believed that passive management may produce better results in a stock market that has more transparency, such as the U.S. stock market vs. the Chinese stock market. Others believe that active managers may produce better results as markets peak and then decline. Costs are obviously a factor, however, there is not as much of a cost difference as there used to be years ago. All that being said, let’s define both investment styles to try to get a better understanding of each.

Passive Investing

Passive investing is an investment strategy that aims to maximize returns over the long run by minimizing transactional costs, tax liability, and management expenses. The belief is that the sum of all of these costs in an active portfolio creates a drag on performance. An example of a passive investment is an S&P 500 index fund which only holds the 500 stocks that comprise the S&P 500. Passive investors do not believe in “timing the market”…they believe in “time in” the market.

Active Investing

Active management is the use of an actual person or team who actively manage a fund's portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. For example, a fund manager may have extensive experience in a specific sector, potentially resulting in the fund beating benchmark returns. Actively managed funds also have the flexibility to make transactions to offset tax liability, possibly resulting in tax efficiency.

Which is the best strategy?

The answer to this question is quite simple - there is no best strategy. It depends on many different factors, tax strategies, statistics, and beliefs. Here at Frisch Financial, we can help determine which investment style makes the most sense for you. Our specialty is to help customize an investment strategy based on your specific goals and needs. Let’s figure it out together.

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Is Early Retirement Right for You?

Retiring early is a big decision that must be carefully considered. There are many advantages and disadvantages associated with early retirement. Our team at Frisch Financial offers retirement planning and investment planning to help you decide if early retirement is right for you.

There are many advantages associated with early retirement that you need to consider. Some of these advantages include the following:

  • Dissatisfaction with Your Job – If you currently are dissatisfied with your job, early retirement can give you the opportunity to pursue a more satisfying career or hobby. Retiring early can help you find a job that makes you excited to go to work on Monday morning.
  • Freedom to Explore – A major benefit of retiring early is the freedom. You will not be held to the rigid 9 am to 5 pm job and the 24/7 digital connection, giving you the freedom to explore the world, pursue your interests or get a new job that you love.
  • Health Benefits – Sedentary jobs can lead to an increased risk of illnesses such as diabetes or heart disease. Thus, retiring early could be beneficial to your health.
  • Caring for Family – Retiring early also gives you the opportunity to care for your ailing loved ones. Sometimes it can be more cost-effective to retire early so you can care for your family members instead of hiring full-time help which can be expensive.
  • Retirement is Fun – Early retirement gives you the chance to do anything that you want. You can go on vacation, spend time with family and friends, or enjoy the luxuries that you have missed during your working years.

There are also many disadvantages that can be associated with early retirement that should be considered. Some of these disadvantages include the following:

  • Not Enough Savings – Early retirement means that you will need to live on your savings for many more years than if you were to retire later. It is important that you factor in your current living expenses to determine how much money you will need to save.
  • Loss of Benefits – One main downside to retiring early is that you will lose your employee benefits. If you claim social security benefits before your full retirement age, you will receive a decreased amount of Social Security benefits each month. Additionally, you could possibly lose access to the health insurance plan offered by your employer. You may need to find a private health insurance company to cover your medical benefits.
  • Detrimental to Your Health – Contrary to popular belief, early retirement can also be detrimental to your health. Many retirees live a more sedentary lifestyle because they do not have somewhere to get up and go to each day. Additionally, your physical and mental health can decrease when you are not exposed to the daily work stress.
  • Changes to Relationships – Retiring early can change your relationship with your spouse and your friends. If you and your spouse do not retire together, it could potentially cause some tension in your relationship. Additionally, you could lose the socialization factor that occurs naturally at work, which could lead to a decrease in your mental and social health.
  • Difficult to Return to Work – If you decide that early retirement is not for you after you have already retired, it can be difficult to return to your previous job or another job. Generally, it can take over a year for job seekers over 55 years old to find another job. Also, if you do find a job, it most likely will not pay as well or provide benefits or perks as good as your old job.
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Tips for Preparing Your 2016 Taxes

As the tax deadline is approaching, what can you do now to help save taxes for 2016?

Even though we are now in 2017, as you are preparing to file your 2016 taxes, there are a few strategies you can still utilize.

Contribute to a Retirement Account:

If you or your spouse worked in 2016, you may be able to contribute to an IRA or a Roth IRA by April 18, 2017. You can contribute up to the greater of your 2016 earnings for yourself and your spouse or $5,500 if you are under age 50 and $6,500 if you are age 50 or over as of 12/31/2016. Whether this contribution is deductible depends upon your income and if you or your spouse is eligible for a retirement plan through your employers. If you cannot make a Roth IRA contribution or a deductible IRA contribution, you may be eligible for a non-deductible IRA contribution.

If you are self-employed, you may be able to contribute to a SEP (Simplified Employment Pension Plan). You have until the due date of your tax return, including extensions, to open and fund a SEP for the prior tax year. For example, if you are a calendar year filer, and extend, you have until October 16, 2017.

Education Credits and Deductions:

If you contributed to a 529 plan in 2016, you may be able to take a deduction on your state tax return. 34 states currently offer a tax credit or deduction for 529 contributions. For example, NYS allows a deduction for up to $10,000 per married couple and $5,000 for single filers who make contributions to a NY approved 529 plan.

If you, your spouse or a dependent was enrolled in college in 2016, you may qualify for certain college credits or deductions. There are currently 2 education credits that may be available: the American Opportunity Credit and the Lifetime Learning Credit. Some additional federal deductions are the Tuition and Fees Deduction, Student Loan Interest Deduction and the Business Deduction for Work-Related Education.

Charitable Contributions:

If you itemize your deductions and you made charitable contributions in 2016, be sure to include those amounts on your tax return. Be sure to add up the amounts of both cash and non-cash contributions (i.e., clothing, household items, food, etc) which are in “good used condition or better”. For non-cash gifts over $500, you must file Form 8283, which asks for information regarding each non-cash gift. For most gifts over $5,000, an appraisal is required.

Cost Basis on Capital Gains:

Over the last several years, the IRS has added improved reporting on mutual fund and investment gains and losses. When sold, the cost basis for securities purchased in the last few years is now included in the Form 1099 from the Custodian. For securities that you’ve owned for many years, the cost basis information may not be on Form 1099. Be sure you include your reinvested dividends when you report that transaction on your tax return. For example, ABC Mutual Fund that was purchase in 2003 for $10,000 may have reinvested dividends of $4,000 over the years, thereby increasing the cost basis to $14,000, NOT $10,000.

Remember to Include All of your Payments:

Tax payments include withholding, estimated payments, extension payment, prior tax year’s overpayment if it was applied to the next tax year, excess social security tax withholding and certain refundable credits (i.e., earned income credit and child tax credit). There may also be some non-refundable credits (i.e., residential energy credits and the retirement savings contribution credit).

Educator Expenses:

If you are an eligible educator, the Educator Expense Deduction allows for up to $250 of out-of-pocket, unreimbursed expenses to be deducted on your tax return. This is an “above-the-line” deduction which has the benefit of reducing your AGI (Adjusted Gross Income). This can be beneficial as “AGI” is used for the calculation of other deductions and credits.

Tax laws are consistently changing. In addition to our year-round tax planning, we work with a number of highly qualified accountants who can assist you, if you wish. Utilizing a good tax accountant can help you save both money and time. If you have not already started gathering your tax documents, we recommend you do so as soon as possible, as for most the tax deadline is April 18, 2017.

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