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Americans are experiencing unprecedented levels of personal financial satisfaction, the highest in the 24-year history of the AICPA’s Personal Financial Satisfaction Index (PFSi). After seven consecutive quarters on the rise and a second quarter in a row setting at an all-time record, the average Americans’ personal financial satisfaction has been steadily picking up steam. With financial satisfaction climbing to new highs, some can’t help but wonder when this rise will end.

First, some background. The PFSi is a quarterly economic indicator that measures the financial standing of the average American. It’s calculated as the difference between two sub-indexes: The Personal Financial Pleasure Index, which measures the growth of assets and opportunities, and the Personal Financial Pain Index, which calculates the loss of assets and opportunities. The Pleasure Index is made up of four factors, the largest contributor being the PFS 750 Market index. The Pain Index is also comprised of four factors, with the largest contributor being personal taxes. Most recently, the Pleasure Index (69.2) greatly outweighed the Pain Index (42.3) bringing the PFSi to a positive reading of 26.9, the highest reading since 1994.

 

AICPA Q4 PFSi

I recently sat down with Michael Landsberg, CPA/PFS, member of the AICPA’s Personal Financial Planning Executive Committee, to understand the potential for a market decline in the face of the index’s record performance.

        Jonathan Lynch: With personal financial satisfaction continuing its steady rise, what should Americans look out for?

        Michael Landsberg: While we’re not at the “euphoria” stage by any means, there are certainly concerns out there that the market is due for a significant pullback. That very         well may happen, but few investors remember that corrections (10 percent decreases in the market) are actually healthy occurrences during a bull market. I’m a big advocate of         diversification and “staying the course” so each individual’s approach should be dictated by the circumstances of his or her situation.

 

        JL: What opportunities may be presented and what investment decisions might Americans consider as their current financial satisfaction is at an         all- time high?

        ML: As equity prices have continued to run up over the past few years, for many it’s an opportune time to analyze his or her current asset mix. The common “60/40 portfolio” (60         percent stocks, 40 percent bonds) could have easily drifted to an 80 percent stock, 20 percent bond allocation at this point. While that may be suitable for some investors, it         probably won’t be appropriate for those nearing retirement or already drawing down their portfolio for living expenses.

        JL: Do you see anything from your clients that syncs up with the results?

        ML: For my clients, I’m finding that many are cautiously optimistic. I’d like to think that they’ve been conditioned over the years to realize how much returns can fluctuate.         What’s popular today could just as easily fall out of favor tomorrow.

        JL: How can a CPA financial planner help?

       ML: It’s always prudent to enlist the help of a CPA financial planner to navigate the labyrinth of new tax laws along with the elevated risk present in the market. The CPA financial        planner is able to take a disciplined approach in order to ensure each clients’ financial satisfaction remains high.

Throughout most of 2017, the surging market was the big story. Looking ahead, Americans are waiting to see the impact that tax reform will have on their financial situation. Personal taxes have been the leading overall contributor to financial pain for seven quarters in a row and while many people are likely to see their federal income taxes lowered by the Tax Cuts and Jobs Act, the full impact on each individual remains to be seen. Refining your plan accordingly is crucial.

“Planning is not a singular event. It’s dynamic; meaning it’s constantly evolving as a result of tax law, financial markets, and changes to your personal situation. Therefore, it’s important to work with a CPA financial planner on an ongoing basis to ensure you’re taking advantage of all opportunities to optimize your finances,” said Mark Astrinos, CPA/PFS, member of the PFS Credential Committee.

With new tax law now in effect, Americans will soon see the impact it has on their paychecks. However, for many, the true impact of the bill will come into clear relief only once they file their 2018 taxes next year.

“As we move forward into 2018, and taxpayers meet with their CPAs in advance of the April tax deadline, they should engage their CPAs and ask them to explain how the new tax laws impact them. While rates have been lowered, the limits to itemized deductions are just as, if not more significant, and could cause for some big, unexpected surprises later in the year,” said David Cherill, CPA, member of the PFP Executive Committee. “Taxpayers should ask for projections from their CPAs, so they can properly plan for the remainder of 2018, and avoid any large tax bills this time next year.”

Whatever your personal financial situation may be, CPA financial planners are able help you make informed decisions about the tax planning opportunities emerging from the new bill. In good times and bad, CPA financial planners help their clients reach their goals by integrating a strong foundation of technical tax knowledge into a holistic financial plan.

Originally published by AICPA.org