Timeline To Retirement

When making lifetime decisions it is critical that adequate time and consideration be given to the issue. Life has a way of paying us dividends based on the planning for events that we wish to occur. By reading this article, you will be more prepared to reach your desired results in life.

First, think about the desired outcome you seek. If you decide to retire, at some point in the future, it is integral to the level of success of this goal to plan accordingly. By initiating this process of systematic saving in your 20’s, the probability of success is higher than if you wait until you are age 60 to begin. 

We highly recommend that anyone planning to retire, in the next five years, give significant thought and planning to the design of this period of life. For example, will you travel, buy a second home, make substantial gifts to grandchildren or charity? These are worthy endeavors. However, to reach your goal you must plan for these expenditures.

Second, review your lifestyle needs. Oh, I didn’t define the difference between a need and a want. These two types of lifestyle goals are very different. Our brains are wired for gratification. I call this the “monkey” brain. We can’t seem to keep this “brain” focused on the important tasks in life because we are battling an insatiable hunger for fun and immediate responses. So many people have been trapped in poorly experienced retirements because of this phenomenon. 

To plan for long-term results that provide for your needs and wants, you must engage your “sage” brain which is the thought process that makes humans unique from animals. Your “sage” brain says, “When I start my first job, I will save 10% of my net earnings for my future.” The battle starts and “monkey” brain sees every toy that you have ever wished for and couldn’t afford. “Don’t worry about the future, live for today,” says “monkey” brain. You must be focused in the early years of life to create a future that is substantial.

Lastly, start today planning for your future. If you wish to live a life by design, it takes planning and soul searching. Retirement is a phase of life than can be tremendously enjoyable when planned accordingly. Seek out a CERTIFIED FINANCIAL PLANNER® to help you create your dream for the future. You will be glad you did!

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Millennial Perspective: Steps to Protect Your Financial Health

Way, way back at the beginning of the Common Era, Epictetus offered some advice that remains relevant today:

“It’s not what happens to you, but how you react to it that matters.”

In 2020, a lot changed – and Millennials are reacting. We’re adapting to pandemic conditions, hoping for economic improvement, positioning for financial market uncertainty, and coping with a lot of stress from the unknown. 

One way to address stress is to take positive action by conducting a year-end review of your financial plan. That may not sound like it will reduce your stress but taking control of something you can control may really help. You’ll be able to start the next year with confidence, knowing exactly what you need to do to protect your financial health today and tomorrow. 

These three steps can help you get started

1. Assess your work and income situation

Coronavirus has rapidly changed the business landscape. Some companies are at a standstill while others are busier than ever. Last year, Gartner Research reported:

“Dramatic changes in customer demand are putting organizations under huge stress: Sharp declines in demand present serious financial challenges to many businesses, while those facing demand surges and resource shortage risk disappointing and disengaging customers.”

Think about your industry and your company. Will coronavirus have a short- or longer-term impact? How could your income be affected? If it could be affected, are there steps you need take to reduce income risk? What are they?

2. Review your spending and expenses

There is never a bad time to review spending and expenses. This allows you to make sure your spending plan is working for you and is ready for the future. If your income will be significantly different in the near future, your spending plan may change. 

Typically, a spending plan keeps spending and saving aligned with income. If your income will be lower in the future, you may need to reduce the amount you spend and save. If your income increases, you may be able to increase the amount you spend and save. 

If you cannot find a way to align income and spending, talking to a CERTIFIED FINANCIAL PLANNER™ may be a helpful option. They should be able to review your spending and expenses from a professional standpoint to help you set the best course of action.

3. Evaluate your financial plans

It’s important to review your current financial plan to see whether and how progress toward your financial goals will be affected by changes in spending and saving. Sometimes, looking at current spending and saving decisions through the lens of your financial goals can help you decide how to modify your plans. 

For instance, when income falls, some people choose to save less, knowing it will push their financial goals further into the future. Others decide to spend less so they stay on track to reach their goals. Often, people decide on a combination of reduced spending and reduced saving. The choices you make will depend on your circumstances. 

2020, and 2021 so far, have been years for the record books, often in unwelcome ways. The way you react to what has happened may significantly affect your financial health and well-being over the short-term and your ability to reach your financial goals over the long-term. Do not be afraid to seek help from a CERTIFIED FINANCIAL PLANNER™ to better understand what your financial health looks like.

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Elections Have Consequences

No, I am not referring to the presidential election. I am concerned about your financial future! You have opportunities, during times of disruption in life, to make decisions that will forever impact your family’s security. I am referring to retirement plan, life insurance and Individual Retirement Account elections.

For example, many of our clients are participants in the Oklahoma Teachers Retirement System (OTRS). When counseling these outstanding educators and administrators about their future, we provide guidance on the appropriate decisions that must be addressed. One of those decisions is to receive a larger current monthly benefit payment or to consider your spouse’s needs should you predecease him or her. It is difficult to make decisions when all of the facts are not known. Our role is to model different scenarios that will help them consider the probabilities of certain acts occurring in the lives of the couple.

Once an election has been filed with the OTRS, you are barred from changing the election for spousal survivor benefits. What a tragedy if your family were subjected to a considerable decrease in financial security at a time when you need it most. This is an important decision that should not be made without consultation of an experienced retirement planning specialist.

Another election is the use of your lifetime assets for immediate cash flow needs. This year has been different for all of us. Congress and the president have given individuals, under the age of 59½, the option of taking funds from their IRA without incurring a premature distribution penalty of 10% of the amount received. Although this relief granted IRA owners is generous, your lifetime retirement assets should be the last resort for purposes of funding an immediate need. For example, you may incur federal and state income taxes on the distribution amount which may be taxed, at a minimum, for a total of 20%. There are many other options where interest rates are lower than this percentage.

One of the most damaging elections one can commit is failing to review beneficiary designations. Let me explain with a story. One of our clients had divorced his long-term spouse and remarried. When experiencing a life change such as marriage, divorce, birth of a child, change of a career, etc., it is important to be aware of the collateral impact of other factors in life. In this instance, our client was asked, on several occasions, to provide us copies of all of his beneficiary designations for his retirement plan, life insurance, bank accounts and other joint tenancy property so that we may confirm their current status.

Citing his understanding of estate law and, now much bravado over his finances, he failed to bring us the beneficiary statements for review. Unfortunately, he suffered a terminal heart attack after a year of marriage to his second wife. While administering his estate, his son, the successor trustee of the decedent’s trust, discovered a shocking document! His father had not changed the beneficiary designation on a substantial life insurance policy. The sadness and desperation in the voice of this man was evident. I recommended he consult with the trust’s attorney but informed him, under federal and Oklahoma law, the beneficiary designation will stand counter to any verbal wishes or intentions of his father.

There is a happy ending to the story. Well, happy for the decedent’s first wife. The assets he attempted to shield from her during the divorce awarded her upon his death. Our newest client was a lady that we had known for many years that just inherited $2,000,000 tax free! Just like a fable in a children’s novel, there are always happy endings. The question is, will you be the one that is happy? See a CERTIFIED FINANCIAL PLANNER™ professional to help you create a happy ending to your future security story.

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The Importance of Year-End Tax Planning

This is an optimal time to review your potential income tax liability for 2020. Most individual filers under U.S. jurisdiction are calendar-year, cash-basis taxpayers. This means that many of the options to lower your tax liability for 2020 are eliminated simply by the passage of the year. Just like Cinderella in the historic Disney movie of the same name, your world immediately changes for tax filing purposes at the stroke of midnight on December 31 each year.

A few simple strategies you should consider before the end of the year are presented in this article. First, review your withholding on your year-to-date pay stub to determine if adequate amounts have been withheld. This is a simple fix if you need additional withholding before the end of the year. Provide your employer or Human Resource Department a new Form W-4 to reflect your additional or less withholdings. Also, consider that you may experience a refund for federal taxes and owe a balance for state taxes. To mitigate this issue, provide your employer with a Form W-4 specific to each tax agency. This would be accomplished by conspicuously marking one of the Forms W-4 with “Oklahoma Only” or the name of your appropriate state at the bottom of the form below your signature. 

Another area of planning that is simple, yet considerably effective, is your deferral to your retirement plan, Health Savings Account or IRC Section 125 “Cafeteria Plan” to lower your current federal and Oklahoma taxable incomes for withholding purposes. Remember, most plans provide a matching component for your employer-retirement account that aids in the growth of your retirement assets without consideration of market activity. 

If you are utilizing a cafeteria plan for pre-tax qualified medical expenses, consider making an appointment with your medical providers to determine if you could schedule any procedures before the end of the year to mitigate the need for paying more deductible after the start of a new year. Many families have met, or are close to meeting, their insurance deductible by this time of year. Don’t allow this opportunity to pass if you are needing a medical procedure. Be proactive and seek out your medical providers’ attention to complete the procedure prior to December 31. The keys to success is to complete the procedure and the billing date of the procedure is properly noted in 2020.

Personal strategies such as increasing your tax deductible charitable donations may help you reduce your current year tax liabilities. Review your current level of itemized deductions and see if you can “bunch” your deductions every other year to allow you to itemize when you can exceed the standard deduction. By itemizing your deductions you may save additional state income taxes, depending upon your particular state’s law.

If you are wishing to reduce your estate by making inter vivos gifts to heirs, consider completing the gifts prior to yearend. You can gift each heir or donee $15,000 without the requirement of filing an annual gift tax return (Form 709). This is good news for both the donor and the donee. The donor will reduce their gross estate by the amount of the gift, provided the person lives for three years beyond the date of the gift, and the recipient owes no tax on the receipt of the gift. This is a win/win!

What happens if someone gifts you $1,000,000? Do you owe taxes on the gift? No! Isn’t the U.S. Tax Code a beautiful thing? As a recipient of a gift, of any size, where the intent of the donor was to transfer property or cash to you, without the requirement for reciprocal value or services, you will not owe income tax on the gift. I know what you’re thinking. You may have found a reason to eat Thanksgiving Dinner with your estranged, but rich, Uncle Charlie to discuss this important strategy for lowering his estate. Enjoy the giblet gravy!

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Three T’s of Successful Retirement Planning

Making a major life decision is not to be approached in a haphazard manner. Many people underestimate the impact of retirement on their lives and have “buyer’s remorse” once the process is complete. How can you experience a more positive and proactive outcome to retiring? Simply follow the “3 T’s” outlined below and you will gain tremendous confidence and control over your new phase of life.

Establish a Team

The first “T” is to establish a team. Many aspects of life allow you only one opportunity to get things right and this is one of them. Financial, estate, cash flow and tax considerations must be addressed in the process of planning to retire. Often clients come to our office for a meeting about their retirement and certain elections chosen by the individual are irrevocable. Elections in the format in which you will receive your retirement benefits, Medicare and Social Security Benefits and other critical lifestyle choices may have lifelong ramifications. You should consider assembling a team consisting of, at a minimum, a CPA, a Certified Financial Planner™ practitioner, an estate planning attorney and your spouse or significant other. Why do you wish to include your spouse/significant other? Do you know how your relationship may be changed by each of you spending the majority of your day together? It is critical that you listen and coordinate your plans for retirement with your team.

Timing

The second “T” is timing. When is the best time to retire? How can you maximize retirement income by electing benefits offered by your employer, SSA Benefits and other support income during your retirement years? The key to properly timing your approach to launch into this next phase of life is to understand the qualitative issues and work to resolve them to your benefit with similar gusto as you do your quantitative needs. Emphasis is generally given the monetary issues of retirement only to realize your plan failed to consider the importance of emotional issues about the changing lifestyle you may find yourself. Work with your wealth advisor to determine if you have addressed all facets of retirement and the timing is in your best interest.

Transition

The third and final “T” is for transition. Successful individuals that transition smoothly to and enjoy retirement are those that understand their time is more valuable than their wealth. Purpose is required of each of us to live a fulfilling life. Why would you wish to devote most of your early life to work and career only to be miserable after your leave employment? That, to me, is not success. However, the person who understands that she has talents, time and treasure to devote to others may find a more rewarding experience in the retirement phase. Consider your plans to travel, join civic groups, devote your time to education in other fields of interest, etc. You must understand that with today’s medical advancements, you may spend as many years in retirement as you did in your career. With that in your mind, wouldn’t you feel more confident knowing that you addressed the Three T’s of Retirement Planning?

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Planning for the Future

“There is nothing certain in life but death and taxes.” This is my paraphrase of Benjamin Franklin’s famous quote to Jean-Baptiste Leroy in 1789. Imagine the tax rates imposed by the King of England in the days of the colonies and those assessed by our nation, The United States of America, to fund its services today. Our government budget continues to swell with the costs of programs administered by the U.S. Government to serve our citizens and their needs caused by an international pandemic.

A review of the President’s Budget for Fiscal Year 2021 is typically analyzed by those of us in the financial planning profession to determine where priorities will lie for the administration and Congress. Our government is bigger than any corporation I can think of in sheer number of employees or economic impact on the world. Now, this article is not judging the government’s function or disfunction. The purpose of this article is to provide you an understanding of the enormity of our government and comparison of the type of budgeting to that of a typical family.

One of the primary areas addressed by this budget is the outlook or vision of the administration. Like our government, we individuals should have a written plan for the future. Unlike our government, we are not allowed to print money to fund our own operations. (Well, we can’t print money legally.) You and I must work within the means we generate through our efforts or investments to provide for our housing, food, healthcare and other necessities of life. What has happened to many Americans is a microcosm of what is happening in our government services – borrowing to continue operations in the manner we wish versus that we can afford.

As of September, 2019, the average family in America owed credit card debt in the amount of $6,849 (according to a December 2, 2019 article by Erin El Issa published in Nerdwallet). The cause of most credit card debt is a lack of budgeting and controlled spending. Too often we seek immediate gratification instead of saving for a particular object. By disciplining yourself to only seek debt for the necessities in life such as a home or automobile, you may avoid a tremendous amount of hardship for your family’s cash flow burden. 

The U.S. Government currently owes a debt balance, and it changes by the second, of more than $24,000,000,000,000. How do we pay for a debt this large? First, we must think about revenues. Currently, the U.S. Marginal Income Tax Rates for individuals consists of rates ranging from 10% to 37%. Our system of taxation is known as a progressive tax system – the more you earn in taxable income the higher your marginal tax rate. Sounds simple, right?

Based on a recent report, in 2018 the U.S. Government relied on individual income taxes as the primary source of tax revenue. Our citizens contributed 40.72% of the total revenue needed to support services! Let’s take a quiz. If the costs of government functions and services are rising, what is the most obvious form of taxation that will eventually need to rise to pay for the services in a balanced budget? You guessed correctly if you said “personal income taxes”.

The goal of each family should be to plan for their future, care for the members of the family and serve their fellow man. Our country is the greatest on the planet. We could help sustain our greatness for all mankind by exercising a few simple disciplines in our spending and plan for the future. Another of my favorite quotes attributed to Benjamin Franklin will guide us to a better future – “A penny saved is a penny earned.”


Monday is a holiday when we recognize those who served our country – our servicemen and servicewomen of the armed forces. Those celebrated this Memorial Day made the ultimate sacrifice for our freedoms and liberties we now enjoy in the United States of America. To these celebrated heroes I simply, reverently and respectfully, say, “Thank you”. 

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Strategies for Using Your Stimulus Check

Have we secretly transported to another universe? We can’t sit in a restaurant and eat dinner. We can’t attend a movie theatre. We can’t even visit our friends. All of these changes in life because of one thing – a virus. Have we experienced a paradigm shift in our lifestyle in the United States? I say NO WAY!

The United States Treasury has begun the process of issuing stimulus payments to qualified American citizens. Checks and direct deposit payments started crediting the checking and savings accounts of my fellow countrymen earlier this week. Most of us will receive a benefit of $1,200, some will receive a lesser amount and others will receive nothing. What do you do with this sudden inflow of money?

One of the most basic strategies of using your stimulus benefit is to establish a plan that addresses your most critical needs. For example, if you are in need of shelter, food or medicine, you should utilize the funds for these purposes. What if your mortgage is a federally-backed loan (such as FHA loans)? You may be granted payment relief for 6 – 12 months! If you are renting, perhaps your landlord will allow you to defer a month or two so that you can focus on the more important matter of your health. Any medicines you may require to maintain your health would be the focus for using your stimulus check.

If your basic living needs are met, you should consider saving the stimulus funds to enhance your emergency funds. It is vital that you maintain a minimum of 60 – 90 days of living expenses in a readily available account for emergencies. Guess what? The current pandemic we are living through is one of the emergencies for which this fund would be utilized! By maintaining access to funds that will allow you to live your life as you desire, at least for a period of time despite the ever-changing world around you, is both comforting and empowering. To know that your lifestyle can continue through times of struggle gives you the mental confidence to meet other challenges that may arise in life.

Let’s assume that you accumulated ample savings in your emergency fund. You may wish to review your debts and pay down, or even better pay off, certain high interest debts such as credit cards. I am not a big fan of credit cards due to the ease of abuse of such unsecured credit that allows individuals to live beyond their means. The phrase my father often tells me come to mind pertaining to credit cards – “give a man enough rope and he will hang himself”. During times of economic distress, many credit card companies will lower your interest rate for a period of time, if you contact them, and have been making your payments consistently and on time. Once the card is paid in full, place it in a zip-lock bag, then place the bag in a plastic container of water. Next, place the container in your freezer. This will require some effort on your part to free the card from the ice causing you to expend energy and time thinking about the use of the card.

Should you have none of the above needs, consider yourself a lucky person! The use of your stimulus benefit could be a very positive act such as contributing to an Individual Retirement Account (IRA) for a tax deduction. By saving for your future with an IRA, you will be preparing for the future in a bold way. Your needs are met today, for the next 90 days and for your future!

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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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Simplify Your Life, Consolidate Your IRAs

Diversification is a common term heard by most investors. However, its true meaning is sometimes lost. Recently, we were meeting with a new client of ours that is retired. When the woman brought her giant, purple, three-ring binder to the first meeting, we were somewhat puzzled. Near the end of our first meeting, she opened up the binder to reveal that she owned six, yes six, different IRAs with a total of three advisors!

She must have noticed the look of shock on my face and responded with a phrase we hear, although erroneously, that this is a form of diversifying her portfolio. We examined her statements for the different custodians and asked if we could provide her a “second opinion” as to the state of her investments according to her goals. She quickly responded affirmatively and we set the next meeting.

After much review of the statements, we noticed a trend among the various advisors. Each advisor had taken a similar strategy to helping the client meet her lifetime income goals! Further analysis explained what we previously thought about her approach to diversification – the client had not truly diversified her portfolio but had concentrated her portfolio, inadvertently, by never informing the advisors of her use of multiple advisors. In other words, she was highly concentrated in certain assets classes within her total holdings that exposed her to significant risk. We use the term “overlap” to describe the result of using several advisors that essentially invest in the same assets classes.

During the second meeting we verified her goals, risk tolerance and cash flow needs to confirm our understanding. We provided her a consolidated report of all six IRA statements and she was alarmed at the problem she created with so many accounts. After explaining our recommendation of diversification in many different forms – asset classes, geographically, market sectors, etc. – she was ready to simplify her life. 

By combining all of her IRAs into one account, she reduced the amount of paperwork necessary to be maintained for tax purposes and monitoring of her investment positions. Additional diversification was achieved by including asset classes not previously in the portfolio that would reduce her exposure to risk while maintaining her need for immediate cash flow each month. Her smile was all we needed to see to know that we had provided her the highest level of response and service as well as a resolution to a worry she had been carrying for some time. She also through away the giant, purple binder!

If you have multiple accounts with multiple advisors, you should consider a simpler approach to achieve your desired result with a consolidated account of truly diversified investments. We have a saying in our company, “To make things complex is simple. To make things simple is complex.” In other words, let us help you make life simple that you can enjoy retirement on your own terms. Stress? We don’t think it’s necessary when you work with a retirement planning specialist. 

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Strategies for Filing for Medicare Benefits

One of the most complex benefits provided by the federal government is Medicare. Numerous elections that affect your lifetime benefits cause people much anxiety. You will learn when and why to file for certain benefits under the Medicare laws in this article.

While working, employers generally provide health insurance benefits for its employees. The coverages are broad and provide a level of safety for the participants. However, when a worker turns age 65, some strategies must be considered about filing for Medicare in a timely and appropriate manner.

Medicare Part A is the program that provides hospitalization coverage for in-patient care, hospice care, skilled nursing facility care and home health care. The cost for this coverage is free to individuals who have worked forty (40) quarters during their career and contributed to the system through payroll deductions. When examining your paystub, the payment for this program is deducted from your gross pay at 1.45% per pay period. All qualified individuals should file for Medicare Part A coverage upon turning age 65 regardless of employment.

If an individual continues to work beyond age 65, Medicare Part A serves as a supplemental to the person’s employer-provided group coverage if the plan covers equal to or more than 20 employees. However, if the employer plan covers fewer than 20 employees, additional research will need to be performed with your employer-plan provider. The insurance company may or may not cover your healthcare needs as the primary insurer. 

Medicare Part B is the program that provides medical insurance for out-patient care. This type of coverage will provide payment for services from your doctors, durable medical equipment costs, preventive services and home health care. The premiums for Medicare Part B are borne, partially, by every participant. For 2019, the monthly premium for Medicare Part B is $135.50. However, some participants may be required to pay an additional amount referred to as the “Part B income-related adjustment amount” if his or her modified adjusted gross income is greater than $85,000 for a single person or $170,000 for a joint filer. Modified adjusted gross income is defined as adjusted gross income plus tax-exempt interest.

One area of the Medicare Programs that many people don’t understand, or utilize appropriately, is Medicare Part D, the prescription drug coverage. Anyone that is needing prescription drugs on a regular basis for their care should consider the benefits of enrolling in Medicare Part D. There are several punitive measures for failing to enroll at your first opportunity. Many different carriers provide plans for this program and a professional should be consulted to determine which plan is most appropriate for your needs.

Medicare is a wonderful program for those qualified individuals. You don’t have to worry or wonder if you are utilizing the program to its fullest extent. Consult a CPA or Certified Financial PlannersTM practitioner to assist you in enrolling for this important coverage. For additional information about retirement benefits and strategies, please go to our Compass Capital Management Resource Center.

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