Macke Financial AdvisoryGroupTodd C. Macke, CFP®President & Founder12699 New Brittany BlvdFort Myers, FL 33907239-275-1122todd@mackefinancial.comwww.mackefinancial.com

July 2016Investors Are Human, Too

Be Prepared to Retire in a Volatile Market

Understanding the Net Investment IncomeTax

I have matured U.S. savings bonds. Are theystill earning interest and, if not, can I roll themover to another savings bond?

Macke Financial Advisory GroupWealth Management & Life PlanningInvestors Are Human, Too

See disclaimer on final page

We are excited to announce that inAugust we will be hosting tutorials onhow to navigate the client portal! Forthose of you interested in partaking,two web sessions will be held, thefirst, on Tuesday, August 16th, at11:00 a.m., and the second, onFriday August 19th, at 3:00 p.m. Toensure all participants are providedwith the necessary meeting link, weask that all RSVPs be received byAugust 10th for both classes.

We hope to continue offeringsessions such as these, and postingrecordings on the website. If you'reunable to attend in August thenplease contact Brie to set up ameeting or stay tuned for additionalsession information.

In 1981, the NobelPrize-winningeconomist RobertShiller published agroundbreakingstudy thatcontradicted aprevailing theory thatmarkets are alwaysefficient. If theywere, stock prices

would generally mirror the growth in earningsand dividends. Shiller's research showed thatstock prices fluctuate more often than changesin companies' intrinsic valuations (such asdividend yield) would suggest.1

Shiller concluded that asset prices sometimesmove erratically in the short term simplybecause investor behavior can be influenced byemotions such as greed and fear. Manyinvestors would agree that it's sometimesdifficult to stay calm and act rationally,especially when unexpected events upset thefinancial markets.

Researchers in the field of behavioral financehave studied how cognitive biases in humanthinking can affect investor behavior.Understanding the influence of human naturemight help you overcome these commonpsychological traps.

Herd mentalityIndividuals may be convinced by their peers tofollow trends, even if it's not in their own bestinterests. Shiller proposed that humanpsychology is the reason that "bubbles" form inasset markets. Investor enthusiasm ("irrationalexuberance") and a herd mentality can createexcessive demand for "hot" investments.Investors often chase returns and drive upprices until they become very expensiverelative to long-term values.

Past performance, however, does notguarantee future results, and bubbleseventually burst. Investors who follow the crowdcan harm long-term portfolio returns by fleeingthe stock market after it falls and/or waiting toolong (until prices have already risen) toreinvest.

Availability biasThis mental shortcut leads people to basejudgments on examples that immediately cometo mind, rather than examining alternatives. Itmay cause you to misperceive the likelihood orfrequency of events, in the same way thatwatching a movie about sharks can make itseem more dangerous to swim in the ocean.

Confirmation biasPeople also have a tendency to search out andremember information that confirms, rather thanchallenges, their current beliefs. If you have agood feeling about a certain investment, youmay be likely to ignore critical facts and focuson data that supports your opinion.

OverconfidenceIndividuals often overestimate their skills,knowledge, and ability to predict probableoutcomes. When it comes to investing,overconfidence may cause you to tradeexcessively and/or downplay potential risks.

Loss aversionResearch shows that investors tend to dislikelosses much more than they enjoy gains, so itcan actually be painful to deal with financiallosses.2 Consequently, you might avoid sellingan investment that would realize a loss eventhough the sale may be an appropriate courseof action. The intense fear of losing money mayeven be paralyzing.

It's important to slow down the process and tryto consider all relevant factors and possibleoutcomes when making financial decisions.Having a long-term perspective and stickingwith a thoughtfully crafted investing strategymay also help you avoid expensive,emotion-driven mistakes.

Note: All investments are subject to marketfluctuation, risk, and loss of principal. Whensold, investments may be worth more or lessthan their original cost.1 The Economist, "What's Wrong withFinance?" May 1, 20152 The Wall Street Journal, "Why an EconomistPlays Powerball," January 12, 2016

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Be Prepared to Retire in a Volatile MarketIn an ideal world, your retirement would betimed perfectly. You would be ready to leavethe workforce, your debt would be paid off, andyour nest egg would be large enough to providea comfortable retirement--with some left over toleave a legacy for your heirs.

Unfortunately, this is not a perfect world, andevents can take you by surprise. In a surveyconducted by the Employee Benefit ResearchInstitute, only 44% of current retirees said theyretired when they had planned; 46% retiredearlier, many for reasons beyond their control.1But even if you retire on schedule and haveother pieces of the retirement puzzle in place,you cannot predict the stock market. What ifyou retire during a market downturn?

Sequencing riskThe risk of experiencing poor investmentperformance at the wrong time is calledsequencing risk or sequence of returns risk. Allinvestments are subject to market fluctuation,risk, and loss of principal--and you can expectthe market to rise and fall throughout yourretirement. However, market losses on the frontend of your retirement could have an outsizedeffect on the income you might receive fromyour portfolio.

If the market drops sharply before your plannedretirement date, you may have to decidebetween retiring with a smaller portfolio orworking longer to rebuild your assets. If a bigdrop comes early in retirement, you may haveto sell investments during the downswing,depleting assets more quickly than if you hadwaited and reducing your portfolio's potential tobenefit when the market turns upward.

Dividing your portfolioOne strategy that may help addresssequencing risk is to allocate your portfolio intothree different buckets that reflect the needs,risk level, and growth potential of threeretirement phases.

Short-term (first 2 to 3 years): Assets such ascash and cash alternatives that you could drawon regardless of market conditions.

Mid-term (3 to 10 years in the future): Mostlyfixed-income securities that may havemoderate growth potential with low or moderatevolatility. You might also have some equities inthis bucket.

Long-term (more than 10 years in thefuture): Primarily growth-oriented investmentssuch as stocks that might be more volatile buthave higher growth potential over the long term.

Throughout your retirement, you canperiodically move assets from the long-term

bucket to the other two buckets so you continueto have short-term and mid-term fundsavailable. This enables you to take a morestrategic approach in choosing appropriatetimes to buy or sell assets. Although you willalways need assets in the short-term bucket,you can monitor performance in your mid-termand long-term buckets and shift assets basedon changing circumstances and longer-termmarket cycles.

If this strategy appeals to you, considerrestructuring your portfolio before you retire soyou can choose appropriate times to adjustyour investments.

Determining withdrawalsThe three-part allocation strategy may helpmitigate the effects of a down market byspreading risk over a longer period of time, butit does not help determine how much towithdraw from your savings each year. Theamount you withdraw will directly affect howlong your savings might last under any marketconditions, but it is especially critical in volatilemarkets.

One common rule of thumb is the so-called 4%rule. According to this strategy, you initiallywithdraw 4% of your portfolio, increasing theamount annually to account for inflation. Someexperts consider this approach to be tooaggressive--you might withdraw less dependingon your personal situation and marketperformance, or more if you receive largemarket gains.

Another strategy, sometimes called theendowment method, automatically adjusts formarket performance. Like the 4% rule, theendowment method begins with an initialwithdrawal of a fixed percentage, typically 3%to 5%. In subsequent years, the same fixedpercentage is applied to the remaining assets,so the actual withdrawal amount may go up ordown depending on previous withdrawals andmarket performance.

A modified endowment method applies a ceilingand/or a floor to the change in your withdrawalamount. You still base your withdrawals on afixed percentage of the remaining assets, butyou limit any increase or decrease from theprior year's withdrawal amount. This could helpprevent you from withdrawing too much after agood market year, while maintaining a relativelysteady income after a down market year.

Note: Asset allocation is a method used to helpmanage investment risk; it does not guaranteea profit or protect against investment loss.1 Employee Benefit Research Institute, "2016Retirement Confidence Survey"

Market losses on the frontend of your retirement couldhave an outsized effect onthe income you mightreceive from your portfolio.

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Understanding the Net Investment Income TaxIt's been around since 2013, but many are stillstruggling to come to grips with the netinvestment income tax. The 3.8% tax, which issometimes referred to as the Medicare surtaxon net investment income, affectedapproximately 3.1 million federal income taxreturns for 2013 (the only year for which data isavailable) to the tune of almost $11.7 billion.1Here's what you need to know.

What is it?The net investment income tax is a 3.8% "extra"tax that applies to certain investment income inaddition to any other income tax due. Whetheryou're subject to the tax depends on twogeneral factors: the amount of your modifiedadjusted gross income for the year, and howmuch net investment income you have.

Note: Nonresident aliens are not subject to thenet investment income tax.

What income thresholds apply?Modified adjusted gross income (MAGI) isbasically adjusted gross income--the amountthat shows up on line 37 of your IRS Form1040--with certain amounts excluded fromincome added back in.

The net investment income tax applies only ifyour modified adjusted gross income exceedsthe following thresholds:

Filing Status MAGI

Married filing jointly orqualifying widow(er)

$250,000

Married filing separately $125,000

Single or head of household $200,000

What is net investment income?Investment income generally includes interest,dividends, capital gains, rental and royaltyincome, income from nonqualified annuities,and income from passive business activitiesand businesses engaged in the trade offinancial instruments or commodities.Investment income does not include wages,unemployment compensation, Social Securitybenefits, tax-exempt interest, self-employmentincome, or distributions from most qualifiedretirement plans and IRAs.

Note: Even though items like wages andretirement plan distributions aren't included innet investment income, they are obviously afactor in calculating MAGI. So higher levels ofnon-investment income can still make adifference in whether the net investmentincome tax applies.

Gain from the sale of a personal residencewould generally be included in determininginvestment income. However, investmentincome does not include any amount of gainthat is excluded from gross income for regularincome tax purposes. Qualifying individuals aregenerally able to exclude the first $250,000--or$500,000 for married couples filing jointly--ofgain on the sale of a principal residence; any ofthe gain that's excluded for regular income taxpurposes would not be included in determininginvestment income.

To calculate net investment income, you reduceyour gross investment income by anydeductible expenses that can be allocated tothe income. So, for example, associatedinvestment interest expense, investment andbrokerage fees, expenses associated withrental and royalty income, and state and localincome taxes can all be factored in.

How is the tax calculated?You know your modified adjusted grossincome. You know your net investment income.To calculate the net investment income tax, firstsubtract the threshold figure (shown above) foryour filing status from your MAGI. Thencompare the result with your net investmentincome. Multiply the lower of the two figures by3.8%.

For example, assume you and your spouse filea joint federal income tax return and have$270,000 in MAGI and $50,000 in netinvestment income. Your MAGI is $20,000 overthe $250,000 threshold for married couplesfiling jointly. You would owe $760 (3.8%multiplied by $20,000), because the tax isbased on the lesser of net investment incomeor MAGI exceeding the threshold.

How is it reported?If you're subject to the net investment incometax, you must complete IRS Form 8960, NetInvestment Income Tax--Individuals, Estates,and Trusts, and attach it to your federal incometax return (you must file IRS Form 1040). Theinstructions for IRS Form 8960 provide anoverview of the rules that apply and can be agood source of additional information. If youthink you may be affected by the net investmentincome tax, though, it's a good idea to considerdiscussing your individual situation with a taxprofessional.1 IRS Statistics of Income Bulletin, Spring 2015

The 3.8% net investmentincome tax, sometimesreferred to as the Medicaresurtax on net investmentincome, originated inrevenue provisions includedin the Affordable Care Act of2010. Unlike payroll taxrevenues, funds collectedfrom this surtax aredeposited into the generalfund of the U.S. Treasury;they are not applied to theMedicare Trust Fund.

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Macke FinancialAdvisory GroupTodd C. Macke, CFP®President & Founder12699 New Brittany BlvdFort Myers, FL 33907239-275-1122todd@mackefinancial.comwww.mackefinancial.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

IMPORTANT DISCLOSURES

Broadridge Investor CommunicationSolutions, Inc. does not provideinvestment, tax, or legal advice. Theinformation presented here is notspecific to any individual's personalcircumstances.

To the extent that this materialconcerns tax matters, it is notintended or written to be used, andcannot be used, by a taxpayer for thepurpose of avoiding penalties thatmay be imposed by law. Eachtaxpayer should seek independentadvice from a tax professional basedon his or her individualcircumstances.

These materials are provided forgeneral information and educationalpurposes based upon publiclyavailable information from sourcesbelieved to be reliable—we cannotassure the accuracy or completenessof these materials. The information inthese materials may change at anytime and without notice.

How many types of government savings bonds arethere, and what's the difference between them?While the U.S. governmenthas issued 13 types of savingsbonds, there are currently onlytwo series available for

purchase through the U.S. TreasuryDepartment: Series EE bonds and Series Ibonds. U.S. savings bonds are nonmarketablesecurities, which means you can't resell themunless you're authorized as an issuing orredeeming agent by the U.S. TreasuryDepartment. Savings bonds are guaranteed bythe federal government as to the timelypayment of principal and interest.

You can buy Series EE bonds and I bonds inany amount from $25 up to $10,000, which isthe maximum amount you can purchase foreach bond type per calendar year. In otherwords, you may buy a total of $10,000 annuallyin both EE and I bonds, for an annual total of$20,000 for the two types combined.

Series EE bonds earn a fixed rate of interest aslong as you hold them, up to 30 years. You'llknow the interest rate the bond will earn whenyou buy it. The U.S. Treasury announces therate each May 1 (for new EE bonds issuedbetween May 1 and October 31) and November

1 (for new EE bonds issued between November1 and April 30).

Series I bonds are similar to EE bonds, but Ibonds offer some protection against inflation bypaying interest based on a combination of afixed rate and a rate tied to the semi-annualinflation rate. The fixed rate component doesn'tchange, whereas the rate tied to inflation isrecalculated and can change every six months.The total interest (fixed and inflation adjusted)compounds semi-annually.

In any case, the interest on EE or I savingsbonds isn't paid to you until you cash in thebonds. You can cash in EE bonds or I bondsany time after one year, but if you cash themout before five years, you lose the last threemonths of interest.

The interest earned on both EE and I bonds isgenerally exempt from state income tax butsubject to federal income tax. Interest incomemay be excluded from federal income tax whenbonds are used to finance higher-educationexpenses, although restrictions may apply.

I have matured U.S. savings bonds. Are they stillearning interest and, if not, can I roll them over toanother savings bond?Once U.S savings bonds havereached maturity, they stopearning interest. Prior to 2004,

you could convert your Series E or EE savingsbonds for Series HH bonds. This would haveallowed you to continue earning tax-deferredinterest. However, after August 31, 2004, thegovernment discontinued the exchange of anyform of savings bonds for HH bonds, so thatoption is no longer available.

Since matured savings bonds no longer earninterest, there is no financial benefit to holdingon to them. If you have paper bonds, you cancash them in at most financial institutions, suchas banks or credit unions. However, it's a goodidea to call a specific institution before goingthere to be sure it will redeem your bonds. Asan alternative, you can mail them to theTreasury Retail Securities Site, PO Box 214,Minneapolis, MN 55480, where they will beredeemed. If you have electronic bonds, log onto treasurydirect.gov and follow the directionsthere. The proceeds from your redeemedbonds can be deposited directly into yourchecking or savings account for a relatively

quick turnover.

Another important reason to redeem yourmatured savings bonds may be becausesavings bond interest earnings, which can bedeferred, are subject to federal income taxwhen the bond matures or is otherwiseredeemed, whichever occurs first. So if youhaven't previously reported savings bondinterest earnings, you must do so when thebond matures, even if you don't redeem thebonds.

Using the money for higher education maykeep you from paying federal income tax onyour savings bond interest. The savings bondeducation tax exclusion permits qualifiedtaxpayers to exclude from their gross income allor part of the interest paid upon the redemptionof eligible Series EE and I bonds issued after1989 when the bond owner pays qualifiedhigher-education expenses at an eligibleinstitution. However, there are very specificrequirements that must be met in order toqualify, so consult with your tax professional.

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