Four Investment Themes for 2017

Each November and December, I undertake a complete review of our Premier Wealth Management Portfolio Models and make tactical adjustments for the year ahead. We have five risk levels: Conservative (roughly 35% equities / 65% fixed income), Balanced (50/50), Moderate (60/40), Growth (70/30), and Aggressive (85/15).

Our investment process is tactical and contrarian. Each year we look for those market opportunities which have attractive and low valuations, and increase our weighting to those segments, while decreasing those categories which appear more expensive. We include Core positions, which offer broad diversification and are the essential and permanent foundation of our portfolios. And we purchase Satellite positions which we feel offer a compelling current opportunity in a more narrow or niche investment category. Typically, there are 12-15 positions in total, consisting of Exchange Traded Funds (ETFs) and Mutual Funds.

While we are not afraid to make changes to our models, we believe that when it comes to trading, less is more. We want to minimize taxable sales and especially to avoid short-term capital gains. That’s why we only change the models once a year, although we also believe that more frequent trading would be likely to be detrimental rather than return enhancing.

For 2017, our portfolio changes will be based on three considerations:
1) Relative valuations (reducing expensive stocks and adding to the inexpensive segments).
2) Replacing our holdings in a few categories, where another fund appears to offers a better risk/return profile.
3) Our world view of the markets in 2017, which is more focused on identifying risk than trying to predict the top performing investments. No matter what, diversification remains more valuable than our opinions about investment opportunities.

Here then are our four investment themes for 2017:

1) Low for Longer
Although interest rates may have bottomed in 2016, it does not appear that there will be a V-shaped recovery. We think interest rates, inflation, Domestic and Global GDP will all remain quite low for 2017.

2) Full Valuations
US Equities are no longer cheap. Years of central banks holding interest rates near zero (or actually negative in some countries this year) has forced investors into risk assets. This has driven up PE multiples. And while I would not call this a bubble, you can’t say that the US market is cheap today. That means that equity growth going forward is likely to be tepid.

Low bond yields pushed investors into dividend stocks, specifically to consumer staples and utilities, which are perhaps the most “bond-like”. These categories seem to be especially bloated and could underperform.

Turning to bonds, the yield on the 10-Year Treasury has increased from 1.6% to 2% in the past three months. Time will tell, but could this summer have been the peak of the 30-year bull market in bonds? I don’t know, but when yields are this low, prices on long-term bonds can move dramatically. We invest in bonds for income and stability and to balance out the equity risk in our portfolios. We’re not interested in using bonds to speculate on the direction of interest rates.

While there may not be an equity level of risk in bonds, it is safe to say that the price of bonds globally is higher in 2016 than it has ever been before. Bonds are much less attractive than five years ago, although we find some pockets that interest us and may at least give us a chance of exceeding inflation and earning a positive real return on our money.

3) Leadership Rotation
I believe we are going to see a very gradual shift in three areas:

A) From Growth to Value. Since 2009, growth stocks have dominated value stocks. This tends to be cyclical, but over the long-term, value has outperformed. We see a widening valuation gap between popular growth stocks, some of which are trading at PEs of 100 or higher, and out of favor value companies. Value is showing signs of life in 2016, and we think that there will be mean reversion at some point that favors value.

B) From Domestic to Emerging. Over the past 5 years, US stocks have reigned. Boosted by a strong dollar and a global flight to quality, US stocks have outperformed others and become more expensive than international stocks. Emerging markets have languished and are now trading at a big discount to developed markets. But emerging economies have higher growth rates and overall, have less debt and more favorable demographics than developed markets. While volatility will be higher, Emerging markets could greatly outperform if you are looking out 10 or 20 years from now.

C) From Bonds to Commodities. In 2016 we have already seen a rebound in oil, gold, and other commodity prices. After years of commodity prices falling, have we put in a bottom? We don’t have commodities in our models currently, but when inflation and interest rates start to pick up, I expect to see commodities gain and bonds suffer. That’s why the bull market in bonds may well end at the same time as the bear market in commodities. 2017 may be a good year to start diversifying for long-term investors.

4) High Risk, Low Return
With full valuations in equities and very low interest rates in bonds, expected returns for a Balanced or Moderate allocation are likely to be noticeably lower than historical returns. While volatility has been actually very mild for the past several years, investors should not be lulled into thinking that their portfolios will continue to grind higher without the possibility of a 10% or 20% correction.

Unfortunately, in today’s global economy, it seems less likely that a traditional diversification, for example, adding small cap and international stocks, will provide any sort of defense in the next bear market. We are expanding our investment universe to look for alternative strategies which can offer a true low correlation to equities. When the market is booming or even just recovering (like 2009), equities are often the top performers. But in a high risk, low return environment, we want some positions that offer the potential for positive returns with lower, different, or uncorrelated risks. If you want to explore these in greater detail, see our new Defensive Managers Select portfolio model.

These four investment themes are important considerations for how we position for 2017. You can get investments anywhere and they are becoming a low-cost commodity. However, what you cannot get anywhere is insight, personal service, and a custom-tailored individual financial plan. Investments are interesting, but we view them as a means to an end. Investments should accomplish your financial goals with the absolute least amount of risk necessary. The more interesting angle is how we can use investments to fulfill your plan just for you.

Orchestra Substitute Etiquette

I have been principal trombone of a regional orchestra for the past 15 years. During that time, I’ve seen a lot of substitutes who we wanted to hire again, and unfortunately, a number who we did not want to have back. Sometimes, that’s because of poor technique, but too often, we simply didn’t enjoy working with that individual. This may seem ridiculous to talk about conservatory graduates not being invited back to sub with a part-time group, but there are so many good players out there. Are you someone who we would want to have back?

If you’re trying to make a living as free-lancer, your income depends on people wanting to hire you next time they need a sub. Here are my top 7 tips for substitute etiquette, along with actual events which have occurred. Don’t be that player who makes us say “never again!”.

  1. Be responsible. A few years ago, we had a tuba sub who showed up 20 minutes late to the first rehearsal. At the second rehearsal, he left at the break, not realizing we were not yet done! At the first concert, he forgot his music at home, sending our poor librarian into a panic to locate and print parts. Is this someone you would want to have back? Does it even matter how he played? Be early, and make sure you have a pencil and any mutes or equipment you might need.
  2. Prepare your music in advance. Do not sight read on a gig, you will stick out! At one “movie score” program, the conductor emailed the orchestra in advance encouraging us to look at specific sections of a very difficult score by Dimitri Tiomkin. At the first rehearsal, he must have noticed that the other trombones had not picked up their folders. After the orchestra tuned, he immediately asked the trombone section to play a difficult sixteenth-note passage alone. It did not go well and we spent the first 10 minutes of that rehearsal having a trombone sectional, while the rest of the orchestra sat there and listened. Say what you will about the conductor’s behavior, it was a humiliating moment which may have been lessened or avoided if my colleagues had practiced their music. Sections play together for years. When you are a sub, you need to focus 100% of your attention on fitting into the section, not learning notes. Learn your music before the rehearsal, if you want to be called back to sub again. Myself, the bass trombone and tuba have played together for 15 years. If it is out of tune or not together, it is probably the sub on second.
  3. Don’t be a distraction. Be still when you play. Do not move or fiddle with anything before or during a colleague’s solo. You will probably see members of the orchestra playing with their phones during rests, and think it is okay to do this. I would keep your phone put away. You risk missing an entrance or not hearing what a conductor is saying. Similarly, you may hear others carrying on conversations during rehearsal. Again, as a sub, I would not. It’s not the time to talk about sports, politics, or equipment. You may unknowingly be distracting and irritating those around you who are trying to concentrate on the music. It may seem hypocritical to not also criticize the other musicians for this behavior, but they already have the gig and are respected colleagues. You are a sub and should be on your best behavior. Please do not turn around and look at players behind you.
  4. Be a great second player. In school, most studies are focused on audition excerpts or principal parts. Most calls for subs will be to play second. There is an art to being a great second player, and it is not the same as being a principal player. Blend. Do not play louder than the principal. Follow. Do not lead from the second or third chair. Listen to the principal for dynamics, style, phrasing, note lengths, and releases. Adjust to make the principal sound good. Be flexible, even if you heard it, learned it, or prefer it another way. Do not play too loudly. Do not let notes “hang over”. Be open to feedback and be willing to adjust. Why do I have to write this? Because I hear these problems all the time in groups. If I have to say something to a sub, they’re not listening to my playing.
  5. What not to play. Before the rehearsal or during breaks, please do not practice excerpts, concerti, or passages from other player’s parts. If you are there early, don’t be that player who is practicing on stage while the harp is tuning or the oboes are working on their reeds. If you are a brass player, bring a practice mute and the musicians in front of you will be much happier.
  6. Don’t complain. In many orchestras, there are the resident curmudgeons who are always unhappy. Even if they air their gripes, it is not appropriate for subs to complain about the music, the hall, the conductor, or other conditions. Those complaints may be valid, but sharing those thoughts creates a negative environment. If I say my dog is fat and stupid, that’s okay. If you say my dog is fat and stupid, it is an insult. Subs who complain come across as ungrateful and arrogant. Negativity can feed on itself and become a downward spiral. Have an attitude of appreciation. Or as my mom always said, “If you don’t have anything nice to say, don’t say anything at all!”
  7. Be positive. Several years ago, we played Bolero on our season opener. I spent all summer staying in shape, knowing that for our first week back, I had a heavy program that ended with one of the best known trombone solos. We had a sub on second, who literally did not say one word to me about the solo all week. It went well, and it would have been appropriate to say “nice job” or something resembling a compliment. I don’t need this for my vanity, it’s simply being a supportive colleague. By the third performance, it just felt awkward that he didn’t say anything. We want to be around people who are positive, who appreciate having the opportunity to make music together, and who support each other. Life’s too short to spend it working with people who are downers. If you want to be asked back as a sub, it doesn’t hurt to be a friendly colleague who people want to be around.

As a sub, you may not realize that it can be very stressful on a section to have a different person playing. We play together for years and develop an unspoken way of blending, tuning, and approaching different styles of music. When a sub comes in, that all goes out the window. It can be very unsettling. Like it or not, people don’t enjoy having subs. You are an unknown, a risk, someone who could make their section look bad in front of their colleagues and conductor. There is not a lot of upside to having a sub play for a week. Think about how you can use these seven tips to put them at ease and lower their anxiety.

As a free-lancer, I have had a chance to sub with a fair number of orchestras over the years. I am very grateful to those who invite me to play again. But sometimes I think I played well, and still never get a call back. I think about subs in my orchestra who have not gotten called back, and the reasons why. I am sure I have probably broken every one of these seven tips at one time or another. Mea culpa. Hopefully, I can continue to grow as a person and improve as a musician!

Remember that you never get a second chance to make a first impression. Imagine yourself as a member of the orchestra and ask whether you would want to have yourself back. Be prepared, be professional, be polite, and be positive.

7 Financial Tips for Professional Musicians

Just like a career in music, achieving prosperity is the product of years of planning, deliberate work, and making sound choices. Being a professional musician is different from other traditional careers and can pose a unique set of financial challenges. Here are seven ways professional musicians can improve their financial future:

  1. Think like an entrepreneur. You are dedicated to your art; be sure to not neglect your business, because you are indeed a business. What would a business owner do? Develop multiple sources of revenue (different gigs, styles, teaching, administration, etc.) to diversify your income stream and have the flexibility to change when opportunities arise or go away. Entrepreneurs don’t do everything themselves or try to know everything. They enlist professionals – financial planners, CPAs, attorneys – to make sure they are doing things right.
  2. Set Goals. The myth is that all musicians were born with a talent. The reality is that we’ve spent thousands of hours over many decades practicing, learning from masters (and colleagues), and competing to reach the highest levels of performance. If musicians spent even a small fraction of that energy on setting financial goals, taking steps to save, and educating themselves about money, they would be incredibly successful. Professional musicians are as driven and dedicated as Olympic athletes or chess champions. If we can apply that same process and focus to financial planning, the sky’s the limit. It doesn’t matter if you change your goals later on, the important thing is to get started today and not wait another year to start saving and planning for your future.
  3. Emergency Fund. The common rule of thumb is to keep 3-6 months of living expenses available in cash for emergencies. For musicians, I’d extend this to 6-12 months if you can. Your income can be highly variable, and if you can’t work, your income goes to zero. Read my top tips on How to Save More as a Musician.
  4. Be proactive to reduce taxes. The more money you keep, the more you have earned. Be organized with your receipts and records and aim to learn and improve your tax situation each year. Don’t wait until April to think about your deductions. If you have a dedicated practice room, be sure to use the home office deduction. Read The Musicians Guide to Mileage and Deducting Concert Clothes. If you have both salary (W-2) and self-employment (1099) income, try to deduct general expenses against your self-employment income on Schedule C. Take every opportunity to reduce your taxes. This takes some time, effort, and organization, but is well worth the effort.
  5. Think in terms of Assets and Liabilities. Grow your assets (investments, retirement accounts, cash, real estate) and have a plan to eliminate your liabilities (credit cards, student loans, mortgages, etc.). Aim to be debt free before retirement and get that stress out of your life. The earlier you start a retirement plan, the more you will have at retirement age. Read The Musician’s Guide to Choosing a Retirement Plan.
  6. Don’t skip insurance. I know a lot of musicians who are uninsured or under-insured. Don’t forgo health insurance at any age. Make sure you have coverage for home and auto that will actually protect you. If you can get a disability policy, make sure it covers “own occupation” (being a musician) and not “any occupation”. If other members of your family are dependent on your income, you need a life insurance policy. I recommend term insurance for 95% of the people I meet. Learn about Umbrella Policies.
  7. Be a good colleague. Working musicians know that their livelihood depends not just on their skills, but on their relationships with other musicians. Being easy to work with is essential to getting called back, being recommended for other gigs, being granted tenure, and maybe even winning a job or audition. A positive attitude is a tremendous asset in a field which is competitive, high pressure, and full of challenges. Be someone that you’d want to be around. Optimists are going to be more successful as musicians, as well as with their finances.

If you want to discuss what steps to take with your finances, you don’t have to go it alone. Give me a call and let’s talk about what you want to achieve.

AFM Pension Plan Slide Continues

Participants in the AFM Employers’ Pension Fund (AFM-EPF) received the annual funding notice and notice of critical status this week. Unfortunately, this year’s report is not good, and this notice does little to explain why.

Each year, pension administrators are required to evaluate their plan’s “funded percentage” as a measure of the plan’s financial capacity. The funded percentage is the actuarial value of the plan’s assets divided by the actuarial value of its liabilities. A funded percentage of 100% or higher would indicate a fully funded plan. Our plan has been in critical status since 2010, as have many plans, following the crash of 2008-2009 which greatly impacted asset values.

Two years ago, the AFM-EPF, reported a funded percentage of 85.7%. This declined to 81.6% last year, and then to 76% this year, which means that the plan presently has only 76 cents for every dollar of future benefits promised. The funded percentage is based on “actuarial” values, which means that these numbers are actually adjusted to smooth out stock market fluctuations and to discount future benefits back to today’s dollars. Also alarming is a large decline is the actual, “fair market value” of assets.

The fair market value of plan assets sat at $1,823,000,326 as of 3/31/2014, and stayed fairly level over the following year, to $1,818,080,945 as of 3/31/2015. Over the past year, however, assets declined by $114 million to $1,703,971,000, a drop of over 6%. During the most recent plan year (April 1, 2015 to March 31, 2016), the S&P 500 Index delivered a total return of 1.78%, so this wasn’t due to a terrible stock market environment.

It is also worth noting that the fair market value of assets is substantially lower than the actuarial values. As of April 1, 2015 (the most recent value made public), the actuarial value of assets was listed as $2,066,699,976, or $248 million more than the fair market value. That is a quarter billion dollars in smoothing! Over time, as we get further away from 2009, this gap should narrow. The actuarial values should eventually decline towards the fair market values – meaning that the funded percentage is unlikely to improve significantly even if the market performs strongly next year.

Over this same time period, the actuarial value of liabilities has been steadily increasing, from $2.39 billion in 2013 to $2.46 billion in 2014 and $2.53 billion in 2015. Increasing liabilities and decreasing assets are why the funded percentage has worsened.

One of the most significant changes to the plan has been dramatic reduction in the Benefit Multiplier. Put bluntly: the current participants are going to receive less than one-quarter of the benefits promised to previous beneficiaries and are going to bear the pain of the rehabilitation plan, while older participants will still receive their full benefits. Over time, the lower Benefit Multiplier should help improve the funded percentage.

The Benefit Multiplier is used to calculate a monthly payment for each $100 that has been contributed to the plan in your name. The multipliers below are all for retirement at age 65, and contributions earned in the following dates:

  • Before 1/01/2004: $4.65
  • Between 1/01/2004 and 4/01/2007: $3.50
  • Between 4/01/2007 and 4/01/2009: $3.25
  • Between 4/01/2009 and 1/01/2010: $2.00
  • After 1/01/2010: $1.00

Over this time period, the monthly benefit fell from $4.65 per $100 contribution to $1.00. I have to admit, I am baffled how the old payout was ever going to work. Someone who had $100 in contributions in 2003 and retired in 2004 at age 65 would get $4.65 a month, or $55.80 a year for the rest of their life? From $100?

I studied Pension Accounting in the CFA Program, and I understand how these decisions were made. The assumptions are crucial decisions. They assume a rate of return, a number of new and retiring participants, wage and contribution growth, and even the life expectancy of the average beneficiary. Unfortunately, many of these assumptions have proved overly optimistic, not just for the AFM-EPF, but for many pension plans. The rate of return has been lower in stocks since 2000, and is going to be much lower in bonds, going forward. Participants are living longer than the mortality tables (created decades ago) predicted. Growth in contributions and inflation make what seems like high pension payments possible in the future. Unfortunately, employers in music – specifically orchestras and the recording industry – are not areas of high contribution growth either in the number of musicians employed or in covered wages.

The EPF created the Rehabilitation Plan in 2010, which the Actuaries originally thought would enable the plan to emerge from critical status by 2047. Today, they no longer believe that the rehabilitation plan will work, only that it should forestall insolvency for at least 20 years. Past 20 years, they say that it is difficult to predict. This is a troubling development, and it’s not information which was shared in the plan mailing. If you want to find this information, you have to go online and download the June 27, 2016 update to the Rehabilitation Plan. On page 9:

“Currently, Milliman does not project that the Plan will emerge from critical status. Accordingly, the objective of the Rehabilitation Plan is to take reasonable measures to forestall possible insolvency.”

What does all this mean to you?

  1. The plan remains in critical status, and may worsen. The plan actuaries now believe that the rehabilitation plan will not enable to the plan to emerge from critical status. The funded status would be even worse if they used the fair market value of assets rather than the actuarial value.
  2. The plan has already slashed benefits going forward, but may need to lower payouts further if they want to guarantee solvency.
  3. Each year that the funded ratio declines, we are closer to the eventual possibility that the plan will be taken over by the Federal Government, via the Pension Benefit Guarantee Corporation, or PBGC. Note that the PBGC provides a reduced benefit and has a maximum guarantee of $35.75 times the number of years of service. (For example, if you participated for 30 years, your maximum monthly benefit would be $1072.50, even if the AFM-EPF had planned to pay you $2,000 a month.)
  4. Even in the best case scenario, musicians who joined the plan since 2010 will receive a small fraction of the benefits paid to those who had earnings before 2004. Newer participants had better have other sources of retirement income.
  5. The conversation we are having now on the AFM-EPF, all Americans should be having about Social Security. It is also in jeopardy and will not work as originally designed. Benefits promised cannot be delivered. We must make changes, including lowering benefits, lifting the retirement age, and increasing personal savings.

I trust our AFM Leadership to take the steps to fix the EPF. As a multi-employer plan with contribution rates determined by hundreds of CBAs and union agreements throughout the country, increasing contributions further is not a feasible option. Getting the plan to be fully funded may require tough decisions about cutting benefits. If you are concerned about your retirement, whether it is next year or 35 years away, give me a call and we will create a plan for your needs and goals.

Emergency Assistance for Musicians

Today I am writing something which I hope none of you will ever need: financial assistance for musicians who experience an emergency. The most common need is for medical bills, which can easily run into the tens or even hundreds of thousands today for an accident, injury, or serious disease. The phrase “unexpected illness” is redundant – no one ever expects that they will be the one who experiences a life-threatening illness or injury. When these cause a financial crisis, there are three charitable organizations whose mission is specifically to help musicians in their time of need.

Even if this doesn’t apply to you, please read this, and keep these organizations in mind for your friends and colleagues. Every year, I hear about someone I know who plays in local groups, or who I went to school with, who is experiencing a financial emergency. Please let them know about these resources.

Musicians Foundation  http://www.musiciansfoundation.org/

Since 1914, the Musicians Foundation has provided emergency financial assistance for medical bills and living expenses for musicians who are unable to work due to emergency circumstances. To be eligible, you must have been a professional musician for at least 5 years and reside in the United States. To apply, they have a 4-page application and require tax documents, a letter, professional biography, and medical documentation.

Grammy.org MusiCares Emergency Financial Assistance  https://www.grammy.org/musicares/client-services/emergency-financial-assistance

Grammy’s Emergency Financial Assistance Program provides financial support for musicians in times of financial, medical, and personal crises. This includes hospital and medical bills, addiction recovery treatment, psychotherapy, Alzheimer’s care, as well as living expenses such as rent and utilities. To qualify, you need to document employment as a musician for at least five years and on six commercially released recordings or videos.

Sweet Relief Musicians Fund  http://sweetrelief.org/

Sweet Relief helps career musicians in the US and Canada with financial emergencies due to illness, disability, or age-related problems. Grants are provided to musicians who have regular public performances or performed or wrote music for at least three widely distributed recordings.

All three organizations accept and rely on donations to provide this financial support to musicians in need. So, if you are able, please consider making a donation on behalf of other musicians.

If you know a musician experiencing a health care and financial crisis, the last thing they may be thinking about is filling out forms, writing letters, and submitting financial paperwork. I will help any eligible musician complete these applications at no cost whatsoever. It’s a few hours of my time, but hopefully this can help them and their family in their moment of need.

The exorbitant cost of health insurance has been a frequent conversation this year. This month, I spoke with a healthy, young musician who is spending $450 a month for insurance, and a family of three with a premium over $1,200. As awful as that is, going without insurance is reckless. It is rolling the dice and hoping that you never get ill or have an accident. Please do not go without health insurance – you are risking everything. For moderate and low income families, make sure to investigate tax credits for insurance purchased through the Exchange, under the Affordable Care Act.

Link: IRS Facts about the Premium Tax Credit

How to Save More as a Musician

For many musicians, saving is a challenge. You may have multiple employers and gigs, but no guaranteed salary to create a consistent budget around. You may not know what work you will have in 6 to 12 months, let alone how much you will make or can save. Things can be much more unpredictable than for someone in a traditional job.

As a musician, you might not have a 401(k) with a company match or other benefits. Instead, you need to think like an entrepreneur and become responsible for creating your own savings plans.

Saving and investing is the path to financial independence. Even if you don’t want to retire, you should still aim for financial independence, so you can work because you want to and not because you have to. Saving isn’t just for retirement planning, it’s developing a plan for financial security to free you from worry today.

How can we make saving easier? What steps make you more likely to succeed?

1) Put your saving on autopilot through automatic monthly contributions. Whether it is establishing an emergency fund, contributing to an IRA, or creating a 529 college savings plan, making it automatic is the way to go.

2) Emergency Fund Triggers. Hopefully you already have an emergency fund with at least 3-6 months of living expenses. I know that musicians often need to tap into funds during the summer when their income drops with fewer gigs and students. Coordinate your saving with an emergency fund target: if your target is $12,000, anytime your account exceeds $12,500, sweep $500 from your emergency fund into an investment account. When you have busy months, you will have funds to invest more frequently.

Having trouble getting your emergency fund started? If you contribute to a Roth IRA, you can always access your contributions (but not any earnings), without tax or penalty. Hopefully, you will not have any emergencies and can leave the Roth account intact.

3) Set goals. If you don’t have a finish line – a target amount for your nest egg – it’s hard to feel any sense of urgency to saving. When I was 30, I knew where I wanted to be at 50, which also meant I could determine where I needed to be at 35, 40, and 45. Those specific goals have helped me stay on track through the years. Without long-term goals, short-term actions often lack direction and a clear purpose.

4) Think big, not small. How many times have you read that you can fund your IRA by giving up your daily coffee fix. Forget that! If you get the big decisions right, the small stuff takes care of itself. Instead, be very smart, calculating, and objective on two essential things: housing and cars. These are the biggest expenses for almost everyone, and we have tremendous discretion in choosing how much we spend on these two categories.

If you want to jump start your saving, take a close look at all your recurring monthly costs: insurance, utilities, cell phone, cable TV, and memberships. Comparison shop, look for savings, and drop items you don’t use or won’t miss.

5) Focus on maximum saving. There is an oft-repeated rule of thumb that you should save 10% of your income. I am guilty of saying this one, too, especially as a “realistic” goal for new savers. However, there is nothing magical about the number 10%, and there is no guarantee that if you start saving 10% today that you will have enough money to accomplish all your financial goals. Try to contribute the maximum to any employer retirement plans, which for a 403(b) or 401(k) means $18,000 or $24,000 if over age 50. And if you are also eligible for an IRA, fund a Traditional, Roth, or Backdoor Roth IRA. If you have self-employment or 1099 income, you may also be eligible for a SEP-IRA.

If it helps you to increase your saving, then let’s calculate each need separately and contribute to:

  • Employer retirement accounts
  • IRAs
  • Health Savings Accounts
  • 529 College Savings Plans
  • Term life insurance policy
  • Taxable brokerage account
  • Savings for a first or second home down payment
  • Savings for your next car, so you can pay cash when you need to replace your current vehicle

In other words, you have lots of reasons, needs, and ways to save!

Link: If your Adjusted Gross Income is below $30,750 (single) or $61,500 (married), you may be eligible for The Saver’s Tax Credit when you contribute to an IRA or other retirement account.

I know a lot of millionaires who were great savers and invested in generic, plain mutual funds. But I have yet to meet anyone who has turned $5,000 into a million through their brilliant investing. Investing decisions matter, but you are likely to reach your goals faster if you can figure out how to save 50% more rather than spending your time trying to increase your returns by 50%, because it is not possible over any meaningful measure of time.

Saving is the foundation of financial planning. It’s the first step which leads to many other good things. Unfortunately, it is also the most difficult step for most of us! But if you spent years practicing an instrument and studying in a conservatory, you already have the discipline, organization, and drive to be successful. It’s just a matter of applying that same process and curiosity to your finances!

Is Your Car Eligible for a $7,500 Tax Credit?

As a free-lance musician, I can think of many times when I have spent three hours or more in the car, round-trip, for a two and a half hour rehearsal. In most cases, our pay for a gig is fixed, so the only way to take home more money is to reduce our expenses.

If you are in the market for a fuel-efficient vehicle, you may want to know about a tax credit available for the purchase an electric or plug-in hybrid vehicle. Worth up to $7,500, the credit is not a tax deduction from your income, but a dollar for dollar reduction in your federal income tax liability. In other words, if your tax bill was $19,000 and you have a $7,500 credit, you will pay only $11,500 and get the rest back.

This credit has been available since 2010, but in the last two years a significant number of new car models have become eligible for the tax credit. If you drive a lot of miles, these cars may be worth a look.

The credit includes 100% electric vehicles like the Tesla Model S or the Nissan Leaf, and it applies to the newer plug-in hybrid models, including the BMW i3, Chevrolet Volt, Ford C-Max Energi, Hyundai Sonata Plug-In Hybrid, and others. The credit does not apply to all hybrid vehicles, only those with plug-in technology. While the plug-in cars may be more expensive than regular hybrids, they are often less expensive once you factor in the tax credit.

The amount of the credit varies depending on the battery in the car, and may be less than $7,500. The credit is phased out for each manufacturer after they hit 200,000 eligible vehicles sold, with the credit falling to 50% and then to 25%. So, for those 400,000 people who put down a deposit on the Tesla Model 3, most will not be getting the full $7,500 tax credit. Only purchases of new vehicles – not used – are eligible for the credit.

The program is under Internal Revenue Code 30D; you can find full information on the IRS website here. An easier-to-read primer on the program is available at www.fueleconomy.gov.

Some states also offer tax credits or vouchers for the purchase of a plug-in hybrid or electric vehicle. Unfortunately, Texas is not one of those states! You can search for your state’s programs on the US Department of Energy website, the Alternative Fuels Data Center.

Do you have a plug-in hybrid or electric vehicle? Send me a note and tell me how you like it.

Are Orchestra Musicians Independent Contractors?

Landmark court case says musicians are employees.

This spring, the U.S. Court of Appeals ruled that the musicians of the Lancaster Symphony were not independent contractors as the orchestra’s management asserted, but employees with the right to unionize. The musicians’ legal struggle took over eight years, but they eventually prevailed.

It is odd that you can work for one orchestra, have three rehearsals and a performance of Beethoven Five, and be considered an employee, and yet you could do the exact same thing for another orchestra and be considered an independent contractor. It doesn’t matter if an orchestra is full-time or per service, the work is the same.

Unfortunately, the IRS does not give a precise definition of what makes someone an independent contractor, but rather a list of characteristics to apply to each particular case. An employer, here orchestra management, will always prefer to have independent contractors for reasons I’ll explain below. The main argument that orchestras have for independent contractor status is that musicians provide their own instruments. But, the IRS says the key determinant is this:

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

Link: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined

I cannot imagine any conductor in the world who does not believe that their job is to control “what will be done and how it will be done.” Musicians are told what to do, when, what to wear, and how to act. You are not an independent contractor. If an employer really had any doubt as to a musicians’ status, they could file Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will review the facts in the case and make a determination. Since employers are not required to submit this form, most simply make a determination on their own.

There are a couple of important differences between being an independent contractor versus an employee.

  • Independent contractors receive a 1099, employees receive a W-2 at the end of the year. If you receive a 1099, you report your income and expenses on Schedule C; W-2 employees deduct unreimbursed expenses as an itemized deduction on Schedule A.
  • Independent contractors pay Self-Employment Tax, which basically means that they pay both halves of the Social Security and Medicare payroll taxes. If you are an employee, your employer pays one-half of the tax (7.65%), and you pay the other half. Even a per service orchestra likely has several hundred thousand dollars in payroll each year, so 7.65% is a significant expense.
  • Employees have a right to unionize.
  • Musicians who are employees might have a right to unemployment and worker’s comp benefits, depending on their state. Employers pay unemployment taxes if they have employees, but not for independent contractors.

As a musician, you are better off being an employee, a fact which caused the Lancaster Symphony management to spend eight years trying to overturn the decision of the National Labor Relations Board that determined that the musicians were in fact employees.

I play in a per service orchestra where musicians are considered independent contractors. I wanted to find out what this ruling meant to musicians who are independent contractors, so I contacted Harvey Mars, Esq., who is the counsel for AFM Local 802 in New York, and an expert in employment law for professional musicians. Mr. Mars recently wrote about the Lancaster ruling here.

FFM: Is the Lancaster Symphony ruling grounds to compel other per service orchestras to classify musicians as employees rather than independent contractors?

Mars: Yes, the ruling does establish a precedent and will be considered persuasive authority.

FFM: Do you foresee orchestras making this change voluntarily, or would the players or union need to pursue this on a case by case basis?

Mars: I believe this ruling may change some, but not all employer practices.

FFM: What are the benefits for musicians to be employees rather than independent contractors? (Ability to unionize, unemployment benefits, employment taxes?)

Mars: In addition to what you have, take advantage of statutes that only benefit  employees, such as civil rights statutes.  In New York we have City Laws that only apply to employees covering paid leave time.

The reality is that most orchestra musicians have always been closer to the definition of employee than independent contractor, but no one had ever challenged that status in court. Now we have a legal precedent to be considered employees, thanks to the Lancaster Symphony ruling. Similar per service orchestras should take note!

Musicians: Get Your Student Loans Forgiven In 10 Years

Many musicians work for a non-profit organization, such as an orchestra, opera company, chamber music group, or university. If you work full-time for a non-profit, you are eligible for the Public Service Loan Forgiveness (PSLF) Program. This program will forgive 100% of your eligible loans after you make 120 monthly payments.

Public service jobs include those with a federal, state, or local government agency or public school or library. Luckily for musicians, a full-time job with any 501(c)(3) non-profit organization is also considered a public service job, regardless of what the organization does. You must meet your employer’s definition of “full-time” or work at least 30 hours per week. If you work part-time positions, you can still use the program if you have multiple qualifying jobs that total at least 30 hours per week. If you are off summers, you still qualify, as long as you work 8 months per year and your employer still considers you employed over the summer.

Only loans received through the William D. Ford Federal Direct Loan Program eligible for the PSLF. However, if you have Perkins or FFEL loans, you may consolidate them into a Direct Consolidation Loan and then they will become eligible for the PSLF. Payments made prior to becoming a Direct Loan will not qualify. For other types of consolidation, be very careful – moving a Direct Loan into a bank loan could cause you to lose the opportunity to use the PSLF. Private loans are not eligible for the PSLF.

To qualify for the PSLF, you should use one of the federal income-drive repayment plans, including the Federal Income-Based Repayment (IBR) Plan, the Pay as You Earn Repayment Plan, or the Income-Contingent Repayment (ICR) Plan. The standard repayment plan also qualifies, but since that is a 10-year program, it would leave a zero balance after 120 payments. However, if you switch from the standard plan to one of the income-driven plans, you can still count your previous payments towards the PSLF.

I know a lot of musicians who make sacrifices to pay off their student loans in 10 years or less. If you work for a non-profit, I’d encourage you to use one of the income-driven plans instead, so you can become eligible for the PSLF. With the lower monthly payments, use the difference for other financial goals. Pay off your credit cards, build up your emergency fund, or contribute to an IRA. If the government is offering to forgive 100% of your remaining loan balance after 120 payments, you should send the smallest payment amount they will accept.

Payments made after October 1, 2007 may qualify for the PSLF. So if you’ve been making payments for 4 years, you may have only another 6 years to go! For further details on the program as well as instructions on how to verify and record your eligibility, please visit the Federal Student Aid Website. You will need to have each employer complete the Employment Certification Form to document proof of your eligibility. Although you are not required to submit the form until after 120 payments, it is recommended that you do so annually or whenever you change jobs, to make sure that your progress is being tracked.

Another great feature: the loan forgiveness you receive from the PSLF is non-taxable! Managing student loans has become one of the biggest hurdles today for people in their 20’s and 30’s. As a CFP(R) practitioner, I’m here to help you with all your financial goals and concerns, so if you thought I only do investments, I’d like to introduce you to the benefits of having your own financial plan.