Relief is on the Way!

These are truly unprecedented times for us as Americans! As businesses deal with the disruption, the U.S. Treasury has designed a few programs to help our citizens with relief. This article will be part one of a two-part series on the various methods and programs for individuals and businesses to seek relief. We will focus on individual relief provisions in this first article.

No doubt that you have heard many acronyms and strange titles assigned to laws passed by Congress but this one may be the most unique. CARES Act is the short name for the Caronavirus Aid, Relief and Economic Security Act. Whew! That is a mouthful. The primary purpose of this bill is to enhance our economy by infusing capital into the hands of citizens and businesses to continue to weather this difficulty. President Trump signed the bill into law on March 27, 2020.

Many of you will be receiving a stimulus check in the amount of $1,200 for each individual and $500 for each child under the age of 17. To receive these funds, you must have filed a tax return for 2018. If you haven’t filed a return for 2018, it is highly recommended that you do so promptly to qualify for this nontaxable benefit payment. For those who filed their 2019 returns before the pandemic worsened in the United States, your 2019 return will be utilized for purposes of qualifying for the stimulus benefit payment.

To qualify for the $1,200 payment, a phase-out, or disqualifying level of income is between $75,000 to $99,000 as an individual or $150,000 to $198,000 as a joint filer. If you did not file a return for 2018 because your income was lower than the filing requirement and you are a Social Security Benefits beneficiary, you will not need to file any returns and the information from SSA will be used to determine your benefit payment qualifications. Many questions exist about the qualifications of the recipients’ income in 2020, which is the year the stimulus payment is received. As an experienced CPA with a Masters in Tax, I expect those individuals that received the stimulus payment based on income reported in 2018, in other words have not filed their 2019 returns, and exceed the income limits for 2020, will not be required to repay the compulsory stimulus payments. We will continue to monitor IRS guidance on this issue.

Typically, a taxpayer would be required to report distributions from an employer retirement plan when received with the resulting tax and premature distribution penalty, if applicable, assessed on their income tax returns. However, for those individuals diagnosed with COVID-19, who receive a distribution from their 401(k)-plan account, the 10% penalty is waived on early withdrawals up to $100,000. The withdrawal will be taxable but the tax associated with the withdrawal will be spread over a three-year period. 

If you own an IRA and were subject to required minimum distributions, you may elect forgo your distribution for 2020 and not be subject to a penalty. This waiver applies even if you were not impacted by the pandemic. This is an excellent planning point and may save retirees unnecessary income taxes at a time our economy is in recovery.

Charities have been stricken particularly hard during this economic halt experienced in our country. To address the issue of revenue loss for these types of organizations, Congress included a provision in the bill that allows individuals to deduct “above-the-line” contribution of a total $300 or less made to qualified charities. To determine the qualified status of a charity, you may find the list of approved charities at the IRS website (irs.gov).

For those individuals who claim itemized deductions on their returns, the limitations for qualified charitable contributions has been increased to allow unlimited deductions in individuals. Another income tax planning point would be to consider charitable contributions more earnestly in 2020 than prior years. You may experience considerable tax savings!

It is critical that you be proactive in the process for applying for additional aid, if needed. This is the time to reach out to your neighbors and check on the welfare of the more senior members of our community. Many families may weather the financial storm but the emotional toll of self-isolation and social distancing may be far worse. Send a note to a friend, place a call to a neighbor for no other reason than sharing a discussion about something positive. This is what makes our nation so exceptional – caring for those who may be suffering worse than you.

Be safe and stay well. We will get through this challenge and become a better community in the process. 

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Perspective is the Key

These truly are challenging times for everyone! One of the most important actions you can take as you consider the current impact on your life is to remain calm. Sure. You have heard everyone tell you to be calm but it is one of the most important foundations of thinking clearly about situations in which you have not control to change.

On February 19, 2020, our economy began a slow down that quickly picked up speed causing a (18.21%) return year-to-date through March 26, 2020. To many of us this precipitous drop in the broad index was felt like an earthquake to our retirement accounts! This is where investors, particular those retiring in the next two years, must find a place of perspective. 

Lets painfully look back to the market turbulence of the last major correction and reflect on the perspective gained from that period compared to today. In 2008, the S&P 500 fell (37.00%) within a period of ten weeks. Comparing the two periods of negative returns in the index gives us a moment of relief. 

When advising our clients to take certain actions to protect their retirement assets, we believe simple steps can be implemented that will yield significant results. The first step is your mindset about investing. Many investors believed the long bull run markets could provide significant returns on their investments but got caught with too much exposure in their portfolios. You should act on those activities you can control – diversification, quality of the investments, timing for retirement election and establishing a level of risk that allows you to sleep at night. 

One of the most important steps of our proprietary process for guiding clients through retirement is to assess their true feelings about risk. The second step is to determine what their ultimate objectives for their investments will be. With these two factors we can develop a portfolio of long-term perspective that considers market contractions and expansions without compromising the investor’s time of retirement.

I have visited with individuals who were surprised by the recent market contraction and will now postpone their retirement plans. This is not the way they wanted to start their next phase of life. Take steps today to seek out the opinion of a specialist in retirement planning to give you confidence that your plan can weather any financial storm you may face. Perspective is the key to success! Are you sleeping well? 

Here is the secret formula to sleeping well tonight: This too will pass. If you are age 50 and above, this is not your first experience with market contractions. Through some miracle, you have survived many market contractions dating back to the 70’s and 80’s. The difference among these markets is that you most likely have more invested at this stage of life than you did in your teens and twenties. More at risk, the more you are concerned about risk. Tomorrow is a new day. Live your life abundantly for today.

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Fear Is Not An Investing Strategy!

In recent days, the airwaves have been inundated with all things COVID-19! At the time of writing this article, the infectious disease had not been reported as a pandemic but may be on its way. It is often the mistake of many individual investors to attempt to know the movements of the stock market. When a disruptive force gives the markets an opportunity to correct, investors not only help the market correct but substantially contribute to the degree of correction. One method of assistance is the overwhelming and uncanny ability humans possess for allowing fear to grip their lives so dramatically that bad decisions are turned into horrific decisions.

At the turn of the new year, the coronavirus began its assault on the people of China. We can debate whether the communication and unified efforts of the Ministry of Health of the People’s Republic of China and the World Health Organization (WHO) may have stifled the transmission of the disease. The fact is that this strain of coronavirus has spread rather quickly from one hemisphere to the next arriving in our nation on the west coast.

What does this information have to do with investing, you ask? Fundamentally, the same companies that achieved record profits in 2019 are the same ones that investor are now selling because of potential supply line delays or collapse. China provides a significant amount of goods to the Unites States. However, the companies that purchase their primary inventories from China for further manufacturing their products in the U.S. continue to hold substantial cash positions on their balance sheets, enjoy full employment of their workforce and, as mentioned earlier, know how to make a profit.

So, what is all of the concern about COVID-19? First, the ability to cope with unknown environmental infirmity by individual investors is almost nonexistent. Two emotions drive most of the market purchases and sells – fear and greed. One of the most often quoted statements of wisdom about these emotions was coined by one of the greatest investors of our lifetime, Warren Buffett. He said, “It is wise to be fearful when others are greedy and greedy when others are fearful.” The markets’ precipitous drop, as reported by the S&P500 and DJIA, for the period of February 19 through 28 can only be explained with fear. Stocks that were successful and reported good growth in 2019 were now being liquidated so quickly the indices reported an 11% drop meeting the definition of a correction.

Understanding that people are concerned about their overall investment portfolios, I recommend they revisit their purposes for accumulating the investments. If you have a change in your long-term need, your physical well-being has improved or declined dramatically, your family has received an unexpected windfall of assets – these are valid reasons to rebalance your portfolio to reduce risk or increase opportunity. To attempt to time the market by simply selling out after the decline of the market only converts your unrealized loss to a realized one. In country terms of my father’s remarking, “that is about as wise as shutting the barn door after the horse has left the barn.”

The better approach to protecting your family’s long-term investment savings is to make decisions out of unbiased research and analysis. Study the fundamentals of the markets and set a level of expected risk that will trigger the time of rebalancing instead of allowing fear to drive your decisions and possibly cost your family the security you desired in the first place. 

If you feel that you can’t make the decisions necessary to stay the course of your original investment approach, seek out a Certified Financial Planner™ professional and ask for a complimentary consultation and stress-test of your portfolio. You may sleep better at night.

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Liquidity is Everything!

One of the most frightening stories I have heard about a retiree is the one where her daughter came to our office and her face was ghostly pale. No, this isn’t a fictional character. Sadly, this story is too often told and true. Our client’s mother had been talked into an investment that “guarantees her a return with a bonus paid up front”. This particular investment sounds good but the problem was the mother’s age was 89 years young! Suitability is the key word for this type of investment. 

Investments that require prolonged surrender periods, the time at which you can recover your original investment without a penalty, should be skeptically analyzed for appropriateness for the investor. In the present instance, our client’s mother was 89 years of age and the investment had a surrender period of 12 years. Her mother would be 101 years of age before she could recover her $300,000 original investment. I will admit that U.S. citizens are living longer that that experienced in the 1860’s but the likelihood of living to 101 and not needing her funds for medical care is improbable. 

Not only did her mother invest the $300,000, she had very little liquid funds available should in-home aides be required or nursing home care admittance become a necessity. By investing in illiquid, long-term investments, the client’s mother would not experience the type of lifestyle she was accustomed. Diversification is an excellent tool to minimize exposure to this type of danger. These products are not illegal or unusual. The biggest hurdle for many people is that the products are sold by individuals with a benefit for themselves. Commissions on some of these products can be 10% or higher. 

A better alternative is to utilize investments that ladder or vary in maturity. For example, if you need fixed income interest payments, perhaps you would want to purchase individual, highly-rated bonds with varying maturity dates. Some jumbo certificates of deposit may be utilized for laddering purposes so that your interest rates vary depending on the term of the deposit.

If something sounds too good to be true, it usually is. There is no substitute for sound, independent, financial advice delivered by a fiduciary advisor. Select someone that does not have a vested interest in the sale of the product but rather the success of the client’s investment in meeting their goals. As a Certified Financial Planner™ professional, it is our policy and process to place the client’s interests ahead of our own. There is another old question I ask some of my financial professional colleagues that brings this thought to light: “Would you invest your mother’s money in the same way as you are recommending your 89 year old client?”. 

Don’t take chances with your financial security. Apply generally acceptable and proven strategies for meeting your family’s needs. Let’s end this column with a quote from Warren Buffet, “Risk comes from not knowing what you are doing.” See you on the golf course!

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Should I Change My Investment Approach In Retirement?

While accumulating assets for retirement, many people utilize an employer retirement plan that allows consistent contributions while investing in a growth model. Their approach is to maximize the matching contribution from their employer and, perhaps, assume more risk than they would otherwise assume because of continued contributions. Let’s review the process of investing during retirement and the differences one will encounter throughout the distribution phase of the portfolio.

The most prevalent concern of any retiree is running out of money. To confront this fear, most retirees make the most critical mistakes with their investments. First, to seek safety in the portfolio, the retiree will change from a balanced portfolio of equities and bonds to a bond-dominant portfolio. Thinking the cash balance approach secures their cash during the contraction of the markets, the larger peril to the portfolio is the lack of participation in the expansion phase of the market cycle. In layman’s terms, the rate of return on most bonds will not be sufficient to maintain the retiree’s purchasing power during retirement. Rising costs of living expenses such as medical care, housing, food and other basic needs will preclude the portfolio from providing excess cash flow to the retiree unless the total portfolio is significant.

To resolve the concern of running out of money, we work with our clients to develop a sound investment approach that addresses inflationary pressure, periodic cash distribution requirements and market risk. One of the most effective tools to combat risk is to diversify. At the time of retirement, many of our clients will participate in an economics lesson. Albeit a short lesson, we simply ask, “how would you feel to be out of money and healthy?” This question is one that causes their face to wrinkle and the eyebrows to furrow. Typically, the answer given us is “I would not feel comfortable at all!” 

Obviously, we knew their answer but the exercise is one that makes them confront what risk truly is in their lives. So many people believe risk to be simply the loss of principal in their account. However, the greatest risk is outliving your means of support to where your longevity is not rewarded with peace and tranquility but rather anxiety. Our independent research has proven that most retirees sleep better at night knowing they will not be subjected to the need for family or state support. Independence is the reward for investing properly.

Seek out the advice of an independent financial advisor that specializes in retirement planning. You deserve a specialist for this phase of life just like your cardiovascular surgeon if you have health issues with your heart. If you have questions regarding your financial future, why not gain assurance that you are making the right decisions for your family? A visit with a Certified Financial Planner™ practitioner may give you the confidence you need to live your life in a manner you desire instead of simply existing. 

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Post-Retirement Considerations

Nursing home costs in the United States can easily top $70,000 per year! Assisted living centers may cost as much as $4,000 per month for a one-bedroom private-pay facility. We discuss these lifestyle changes as part of our planning process for retirees. It is not always a popular subject to broach with newly-retiring people because they think of it as a negative. However, as specialists in retirement planning, we believe in educating our clients about all facets of the future that they might control.

Let’s think about the options and find a few methods of mitigating these possible future costs. For one, by maintaining an active lifestyle and sensible diet, one may escape these options or, at least, delay them. Many of our clients have seen the impact on their families’ and friends’ budgets from admissions to a nursing home. These facilities are of great assistance when transitioning our loved ones that experience a period of life in which continual support is warranted. 

Another option to utilizing these types of facilities is to accumulate sufficient funds that will allow you to remain in your own home with assistance provided by nurses’ aides and other medical providers. This option appeals to most of our clients that may simply have mobility issues and cannot provide for all aspects of their daily lives. We evaluate each client’s capabilities to accomplish their activities of daily living (ADL) and assist them in analyzing the impact of potential nursing care in their future financial planning budgets.

The six routine activities of daily living are: eating, bathing, getting dressed, toileting, transferring and continence. Each of us participate in these activities daily. To lose your capability to perform one of these activities may not be the deciding factor to start searching for an alternative to remaining in your home. However, when you lose the ability to conduct three or more of these activities, it is critical that the family consider nursing providers in the home of the individual or seek a nursing home.

To determine the appropriate level of support for a loved one, it is critical that the level of care replaces the daily activities that are not being performed by the individual. It may mean that you simply require an aide in your home for twelve hours per day. As the person’s abilities become more impaired, additional support and possible relocation may be needed.

One of the greatest ramifications of assigning a loved one to a nursing home is the emotional effect on the person. Too often this process is decided without input from the impaired person and the children simply need some relief from the care being required of them. Those of us deciding the fate of any person must consider the infirmed person’s wishes and desires. These decisions are some of the most difficult to make. By keeping the person informed of each step and soliciting their acceptance with the process, you may experience a better transition.

These types of decisions can have a significant impact on your retirement plans. Seek out a Certified Financial Planner™ practitioner who understands all aspects of retirement. It is too important of a decision to simply guess.

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How to Confidently Prepare for Retirement

If you are like most individuals, considering the scope of the changes from an active career to retirement brings anxiety and a sense of loss. As specialists in retirement planning, we guide our clients in the process to, and through, retirement to provide confidence in the outcomes for their lives. One method in which we bring confidence to the process is by addressing an individual’s four biggest financial concerns about retirement: 1) paying for healthcare; 2) saving enough money for retirement; 3) liquidating indebtedness; and 4) creating and maintaining consistent, predictable income streams in retirement.

Healthcare costs are one of the most expensive areas of living for retirees. As we age, our healthcare costs may rise. One of our clients is suffering ill health in retirement and her medical expenses average more than $6,000 per month! Proper planning for healthcare expenses is critical before you retire. Not only do you suffer physically but the potential for significant cash need for healthcare may jeopardize the quality of life and the longevity of your assets to sustain you. Analysis of the probabilities for genetic health issues as well as capabilities for current physical activity of the individual will need to be addressed.

Saving for retirement is an area of life that is often delayed until it is almost too late to help the individual substantially. Too often individuals treat their employer retirement plan as a savings account and funds “emergencies” in life with plan loans. I believe this is tremendously detrimental for the long-term viability of their retirement assets. Emergencies can be mitigated by establishing a responsible budget each year and transfer extraordinary expenses to insurance coverages. For example, if you have a home, which is often one of the largest assets of a family, you should maintain adequate replacement value insurance on the property. Failing to do so could result in the family experiencing an exorbitant damage requiring more funds that are maintained in the family reserve account.

Eliminating or reducing indebtedness prior to retirement will provide an individual a higher annual discretionary cash flow. We have assisted many of our clients in a plan to reduce or eliminate debt prior to transitioning to retirement. It is inconceivable to plan for all potential perils and hazards in life but you will experience a more confident retirement by maintaining little or no debt while retired. Again, budgeting is the key to success for debt management.

Without consistent, predictable cash flow streams, your retirement will feel more like a burden than a reward. The secret to adequate cash flow streams in retirement is to start saving early in life and structure a retirement lifestyle that is within your means. Where we have witnessed this challenge is when someone retires without a thorough plan of execution and overspends during the first few years of retirement. The family is now in distress and substantial, critical work must be performed to remedy the situation. 

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Retiring On Your Own Terms

“I want to live by the beach,” said his wife. “I want to live in the mountains,” said the husband. Differences of retirement plans typically exist within the same family. One person may wish to retire in a different environment than the other. Many of our clients come to their complimentary initial consultation without a complete understanding of their spouse’s desires for retirement. Simply because someone is married to another person for many years does not translate to an understanding of that person’s long-term goals and dreams. Communication is critical in all relationships, in a couple pondering retirement plans it is vital.

To help our clients resolve differences of opinion, and desires about retirement, we developed an approach that addresses the three “E’s”: Environmental, Economic and Emotional. To fittingly address the needs of each of the partners, these three “E’s” provide a comprehensive background for each to gain a deeper understanding of the other. This article will provide you considerations for each of the three components of retirement planning.

Environmental considerations are critical due to the impact your surroundings play in the overall happiness and health of a person. For example, scientists have proven that environment affects a person’s overall satisfaction in life attributed to their surroundings. Some people are happier in sunny, warm climates while others enjoy the cold, harsh tundra. By understanding your partner’s thoughts on environment, each of you will gain knowledge about the type of surroundings desired by the other. We work with a client who enjoys mild weather and sandy beaches. To compromise, we divided the year into quarters and accommodated her wish for salty water in the winter and his mountainous terrain for game hunting in the fall of each year. They remain content at their primary residence for six months of the year during seasons that are not extreme. Compromise is the key and extending understanding with a mindset of flexibility helps with the creation of a joyful retirement.

Economic factors contribute to the retirement quality of all of us. Considering that you have accumulated more than a sufficient amount of assets to live anywhere you wish, economic factors play less of a role in the retirement decision process. However, lets assume you have saved but may have some cash flow difficulty in the future. It is necessary to consider all means of support and the term in which that support will be available. As presented in our last article, the location of your retirement home will be a considerable outcome based on your economic means.

After considering environmental and economic factors, the most influential of these three factors, emotional, must be broached. To illustrate the power of emotions in decision making, we will share this short story. Tom and Linda decided to retire. Tom had his mind made up that he would retire in the mountains with a cabin and enjoy the land around him for his ideal retirement. Linda, often submitting to Tom’s decisions, was in misery in the mountains. Her asthma, allergies and other minor health conditions only worsened in the humid, hot summers in the mountains. She tolerated the first couple of years in the mountains and simply decided to make her wishes known to Tom. After a deep discussion of all the desires for her retirement, it was decided that they would share their time in retirement between the mountains and her beachfront condo she had been dreaming about for many years.

Compromise and consideration of the environmental, economic and emotional factors of retirement will yield the most effective choice for couples. The transition time to retirement is difficult for many people. Seek out someone who understands the needs and desires of retirees as well as possesses the expertise to help design and execute a plan that is pleasing to both partners. Life is short. Focus on these three factors and live life on your own terms!

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Relocation Considerations for Retirement

One of the most difficult decisions in retirement planning is to relocate. If you reside in a state that has a high income tax rate, sales tax rate and/or ad valorem tax, it may be something to consider. During the retirement phase of life, your savings must last beyond your lifetime. To ignore the cost of living could be the difference between truly enjoying a lifetime of income and experiencing worry at a time in life that you shouldn’t.

A recent study of individual taxation by state yielded some not-so-surprising news. California, Hawaii, New York, Connecticut and Illinois are the highest taxing authorities on individuals. These states are currently seeing an exodus of its citizens to lower cost of living states. To eliminate 15% of your tax liability by simply relocating to Texas or Florida, states without individual income tax assessments, may provide the additional savings needed for your savings to last to lifetime.

Another area of consideration is property tax. If a state does not assess an income tax on individuals, it will, in most cases, utilize an ad valorem, or property tax, to generate revenue needed to fund the state’s functions. For example, some people consider moving to Texas due to its absence of individual income tax assessments. However, in most of the counties contiguous to the Dallas metroplex, the rate of assessment for property taxes creates more of a tax burden than one would pay by remaining in Oklahoma.

Personal property tax is another consideration when relocating in your retirement years. States have begun to assess sales tax on automobile purchases versus the excise tax previously charged for such transactions. It may take some of the joy out of your new purchase when you realize the bill from the state could be as much as $5,000! 

Lastly, two of the necessities of life are utilities and food. When considering relocating, the cost of meals and household utilities should be considered. In extreme temperature climates such as experienced in Alaska, the cost of food and utilities, compared to Oklahoma, are very expensive. Due to the lack of fruit, vegetable and dairy production facilities and farms, these important staples of life must be flown into the location. The costs of delivery cause extremely high retail costs for consumers. 

Although Hawaii may be the land of paradise many of us enjoy on vacation, the cost of living on the islands is very high compared to other states. Recently, we enjoyed a stay on Oahu and the cost of a gallon of milk was $7.99! If you are raising kids in your family, it may be cheaper to buy a cow. 

It is important to consider many aspects when thinking of relocating during retirement. Cash flow is the ultimate factor coupled with your ecological requirements. One of the lowest costs of living states is Tennessee but you may wish to see the beautiful ocean shore each day. Trade-offs are a part of our lives. Rate the most important factors for you before undertaking a move to another state.

If you have questions as to how you can create a lifetime income plan, contact a Certified Financial PlannerTM practitioner to assist in the analysis so that you can make the best decision for your family’s needs. 

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Big Changes Affecting Your Retirement

A couple of bills containing significant changes to retirement planning were signed into law by President Trump on December 20, 2019. We will provide just a few of the sweeping changes that affect most of us planning or currently in retirement. The Setting Every Community Up for Retirement Enhancement Act of 2019 (commonly referred to as, “The SECURE Act of 2019) is effective for tax years beginning January 1, 2020.

If you are reaching the age of 70-1/2 and anticipated taking a distribution from your IRA, or suffer a penalty, the Act extends the date of required minimum distributions to age 72. When the present age of 70-1/2 was applied to IRA distributions, U.S. citizens were living fewer years, on average, than they are now. By increasing the age of required minimum distributions to age 72, the federal government has deferred revenue for another one and a half years which allows continued growth of the retirement funds. Many of our clients do not need or desire the distributions required under previous law. However, the penalty for failing to withdraw the IRA funds was more costly than the effective tax rate applied to the distribution. In other words, it was far cheaper to simply take the distribution and pay the tax bill.

The Act has closed a very effective generational planning strategy used by many people. No longer can your IRA be utilized for multi-generational planning (i.e., your grandchildren could have benefited from a “stretch” IRA strategy in the past). Under the provisions of the Act, the non-spouse beneficiary, or any beneficiary more than 10 years younger than the IRA owner, must take the full IRA value by the end of the tenth year after the death of the IRA owner. Of course, taxation will occur at a much sooner date than previously recognized due to the distribution occurring within ten years of death of the IRA owner. 

Congress and President Trump have expressly acknowledged that children require families to spend money for housing, clothing, food, etc. Another relief item for individuals adopting or birthing children is the use of $10,000 of your employer-provided retirement plan assets without penalty. Although the participant will be required to pay income tax on the distribution, the 10% penalty for early withdrawal will not subject the family to additional burden.

IRAs can be confusing for individuals. To assist you with helpful information, please go to Compass Capital’s Resource Center and watch one of our instructional videos. If you have any questions regarding your particular retirement plan facts, seek out a Certified Financial Planner practitioner and CPA that specializes in families just like yours.

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