Prospettiva Financial465 California StreetSuite 838San Francisco, CA 94104415-362-8636info@prospettivafinancial.comwww.prospettivafinancial.com

Fall 2017

Examining the Taxpaying Population: Where DoYou Fit In?

The Health-Wealth Connection

What are some tips for reviewing my Medicarecoverage during Medicare Open Enrollment?

How do economists measure inflation, and whydoes it matter to investors?

From Data Breaches to Ransomware: How to Avoid Becomingthe Victim of a Cybercrime

See disclaimer on final page

We hope you'll check out our latestresearch concerning the high cost ofhealthcare . Why is healthcare in theUnited States so expensive andwhat can you do to help ensureyou'll be able to afford it in thefuture? A multi -part series awaitsyou on our website:www.prospettivafinancial.com.

Each time youconnect to theInternet, you riskbecoming the victimof a cybercrime. It'sthe price we pay forliving in a digitalworld — whether it'sat home, at work, oron your smartphone.

According to theIdentity Theft Resource Institute, the number ofU.S. data breaches in 2016 increased by 40%.And as recently as May 2017, a widespread"ransomware" attack targeted personalcomputers across the globe. While softwarecompanies are continually developingstrategies to combat the latest cybercrimes,there are some steps you can take to helpprotect yourself online.

The stronger, the betterIt's a scary thought — most of us have a largeamount of financial and personal informationthat's readily accessible through the Internet, inmost cases protected by nothing more than ausername and password.

Create a strong password by using acombination of lower- and upper-case letters,numbers, and symbols or by using a randomphrase. Avoid using a password with yourpersonal information such as your name andaddress. In addition, have a separate andunique password for each account or websitethat you use.

If you have trouble keeping track of all yourpassword information or you want an extra levelof password protection, consider usingpassword management software. Passwordmanager programs generate strong, uniquepasswords that you control through a singlemaster password.

Follow the 3-2-1 ruleBacking up your online data is critical to avoidlosing valuable information due to a cyberattack. If you have digital assets that you don'twant to risk losing forever, you should back

them up regularly. This pertains to data storedon both personal computers and mobiledevices.

When backing up data, a good rule to follow isthe 3-2-1 rule. This rule helps reduce the riskthat any one event — such as a computer hackergaining access to your computer — willcompromise your primary data and backups. Inorder to follow the 3-2-1 rule:

• Have at least three copies of your data (thismeans a minimum of the original plus twobackups)

• Use at least two different formats (e.g., harddrive and cloud-based service)

• Ensure that at least one backup copy isstored in a separate location (e.g.,safe-deposit box)

Stay one step aheadFinally, the best way to avoid becoming thevictim of a cybercrime is to stay one step aheadof the cybercriminals. Here are some extraprecautions you can take before you go online:

Consider using two-step authentication.Two-step authentication, which involves using atext or email code along with your password,provides another layer of protection for yoursensitive data.

Keep an eye on your accounts. Notify yourfinancial institution immediately if you seesuspicious activity. Early notification not onlycan stop the cyber thief but may limit yourfinancial liability.

Think twice before clicking. Beware of emailscontaining links or asking for personalinformation. Never click on a link in an email ortext unless you know the sender and have aclear idea where the link will take you.

Be careful when you shop. When shoppingonline, look for the secure lock symbol in theaddress bar and the letters https: (as opposedto http: ) in the URL. Avoid using public Wi-Finetworks for shopping, as they lack secureconnections.

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Examining the Taxpaying Population: Where Do You Fit In?Every quarter, the Statistics of Income Divisionof the Internal Revenue Service (IRS) publishesfinancial statistics obtained from tax andinformation returns that have been filed with thefederal government. Recently published reportsreflect data gleaned from 2014 individualfederal income tax returns. These reports offera snapshot of how the U.S. population breaksdown as taxpayers.

The big pictureFor tax year 2014, U.S. taxpayers filed roughly139.6 million individual income tax returns.1Total adjusted gross income reported on thesetax returns was $9.71 trillion, resulting in a totalincome tax of $1.37 trillion. That works out toan overall average tax rate of 14.16% for allreturns filed — the highest total average rate inthe 10-year period represented by the statisticalreport.

If your 2014 AGI was $38,173 or more, youwere in the top 50% of all federal income taxfilers based on AGI. This group accounted for88.7% of all AGI reported and paid 97.3% oftotal federal income tax for the year.

A look at the topHow much AGI did it take to make the top 10%of all individual filers? Probably not as much asyou might think. If your AGI was $133,445 orgreater, you would have been one of the almost14 million filers making up the top 10%. Thisgroup reported about $4.58 trillion in AGI (morethan 47% of all AGI reported) and accountedfor about 70.9% of total individual income taxfor the year.

To make the top 5%, you would have needed$188,996 or more in AGI. You would have beenamong approximately 7 million filers whoreported almost $3.5 trillion in total AGI andaccounted for about 60% of total income taxespaid.

It's also worth noting that the top 3% of all 2014individual income tax returns based on AGIaccounted for 52.9% of total income tax paid forthe year.

The very, very topFor the 2014 tax year, 1.4 million returns hadan AGI of $465,626 or more. These taxpayersmake up the top 1% of filers, reporting almost$2 trillion in total AGI and responsible for justunder a 40% share of the total tax haul.

The 1,396 income tax returns that showed$56,981,718 or more in AGI make up the top0.001% (that's the top one-thousandth of 1%) of2014 filers. These filers together reported over$207 billion in AGI and paid over 3.6% of taxes.

Not all high-income returns showed taxOf the 6.2 million income tax returns filed for2014 with an AGI of $200,000 or more, 10,905showed no U.S. income tax liability (the numberdrops to 3,927 if you eliminate returns filed byindividuals who were responsible for incometaxes to foreign governments and had no U.S.income tax because of a credit for such taxespaid).

Why did these high-income returns show noU.S. tax liability? The IRS report noted thatthese returns show no tax for a variety ofreasons, including tax credits and deductions,most notably miscellaneous deductions anddeductions for charitable contributions, medicaland dental expenses, and investment interestexpenses. A significant secondary factor wasthe deduction for taxes paid.

Average tax ratesDividing total tax paid by total AGI yields thefollowing average federal income tax rates forthe 2014 tax year:

Top Filers(byPercentile)

AGIThreshold

Average TaxRate

0.001% $56,981,718 24.01%

0.01% $11,407,987 25.92%

0.1% $2,136,762 27.67%

1% $465,626 27.16%

5% $188,996 23.61%

10% $133,445 21.25%

20% $90,606 18.64%

30% $66,868 17.19%

40% $50,083 16.24%

50% $38,173 15.52%

1 Excludes returns filed by dependents; based onfinal estimates for tax year 2014 reported in Spring2017 Statistics of Income Bulletin

Sources for data: IRSStatistics of IncomeBulletins, Spring 2017 andSummer 2017, Washington,D.C., irs.gov/statistics

What is adjusted grossincome (AGI)?

Adjusted gross income, or AGI,is basically total income lessadjustments for certain items,such as deductiblecontributions made to an IRA,alimony paid, and qualifiedstudent loan interest paid.

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The Health-Wealth ConnectionIt's a vicious cycle: Money is one of the greatestcauses of stress, prolonged stress can lead toserious health issues, and health issues oftenresult in yet more financial struggles.¹ The clearconnection between health and wealth is whyit's so important to develop and maintainlifelong plans to manage both.

The big pictureConsider the following statistics:

1. More than 20% of Americans say they haveeither considered skipping or skipped going tothe doctor due to financial worries. (AmericanPsychological Association, 2015)

2. More than half of retirees who retired earlierthan planned did so because of their ownhealth issues or to care for a family member.(Employee Benefit Research Institute, 2017)

3. Chronic diseases such as heart disease,type 2 diabetes, obesity, and arthritis areamong the most common, costly, andpreventable of all health problems. (Centers forDisease Control and Prevention, 2017)

4. Chronic conditions make you more likely toneed long-term care, which can cost anywherefrom $21 per hour for a home health aide tomore than $6,000 a month for a nursing home.(Department of Health and Human Services,2017)

5. A 65-year-old married couple on Medicarewith median prescription drug costs would needabout $265,000 to have a 90% chance ofcovering their medical expenses in retirement.(Employee Benefit Research Institute, 2017)

Develop a plan for long-term health ...The recommendations for living a healthylifestyle are fairly straightforward: eat right,exercise regularly, don't smoke or engage inother risky behaviors, limit soda and alcoholconsumption, get enough sleep (at least sevenhours for most adults), and manage stress. Andbefore embarking on any new health-relatedendeavor, talk to your doctor, especially if youhaven't received a physical exam within thepast year. Your doctor will benchmark importantinformation such as your current weight andrisk factors for developing chronic disease.Come to the appointment prepared to shareyour family's medical history, be honest aboutyour daily habits, and set goals with yourdoctor.

Other specific tips from the Department ofHealth and Human Services include:

Nutrition: Current nutritional guidelines call foreating a variety of vegetables and whole fruits;whole grains; low-fat dairy; a wide variety ofprotein sources including lean meats, fish,eggs, legumes, and nuts; and healthy oils.Some medical professionals are hailing thelong-term benefits of the so-called"Mediterranean diet." Details for a basic healthydiet and the Mediterranean diet can be found athealth.gov/dietaryguidelines.

Exercise: Any physical activity is better thannone. Inactive adults can achieve some healthbenefits from as little as 60 minutes ofmoderate-intensity aerobic activity per week.However, the ideal target is at least 150minutes of moderate-intensity or 75 minutes ofhigh-intensity workouts per week. For moreinformation, visit health.gov/paguidelines.

... and long-term wealthThe recommendations for living a financiallyhealthy life aren't quite as straightforwardbecause they depend so much on yourindividual circumstances. But there are a fewbasic principles to ponder:

Emergency savings: The amount you needcan vary depending on whether you're single ormarried, self-employed or work for anorganization (and if that organization is a riskystartup or an established entity). Typicalrecommendations range from three months' toa year's worth of expenses.

Retirement savings: Personal financecommentator Jean Chatzky advocates strivingto save 15% of your income toward retirement,including any employer contributions. If thisseems like a lofty goal, bear in mind that aswith exercise, any activity is better than none —setting aside even a few dollars per pay periodcan lead to good financial habits. Considerstarting small and then increasing yourcontributions as your financial circumstancesimprove.

Insurance: Make sure you have adequateamounts of health and disability incomeinsurance, and life insurance if others dependon your income. You might also considerlong-term care coverage.²

Health savings accounts: Thesetax-advantaged accounts are designed to helpthose with high-deductible health plans setaside money specifically for medical expenses.If you have access to an HSA at work, considerthe potential benefits of using it to help save forhealth expenses.

"Always keep two things instock: crunchy vegetables andan emergency savingsaccount."

Michael F. Roizen, MD, andJean Chatzky, personal financecommentator

Authors of Ageproof: LivingLonger Without Running Out ofMoney or Breaking a Hip

¹ American PsychologicalAssociation, February 4,2015; The Telomere Effect:A Revolutionary Approachto Living Younger, Healthier,Longer, by Blackburn andEpel; and Ageproof: LivingLonger Without Running Outof Money or Breaking a Hip,by Chatzky and Roizen

² The cost and availability oflife insurance depend onfactors such as age, health,and the type and amount ofinsurance purchased. Acomplete statement ofcoverage, includingexclusions, exceptions, andlimitations, is found only inthe policy. It should benoted that long-term carecarriers have the discretionto raise their rates andremove their products fromthe marketplace.

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Prospettiva Financial465 California StreetSuite 838San Francisco, CA 94104415-362-8636info@prospettivafinancial.comwww.prospettivafinancial.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017

We offer financial planning andinvestment advisory servicesthrough Rhodes & Fletcher, LLC, aregistered investment advisor.

The information in our newsletter isintended to provide generalguidance for the record keepingneeds of individuals. Rhodes &Fletcher, LLC as provider or authorof this information is not engagedin rendering specific legal, oraccounting advice. Readers areencouraged to consult their CPA,tax advisor, and/or attorneyregarding their specific situation.

Any market indices discussedherein are unmanaged. Investorscannot directly invest inunmanaged indices.

California Insurance Licensenumbers: 0680655/0C68251New York Insurance Licensenumber: LA-778146

How do economists measure inflation, and why does itmatter to investors?The Federal Open MarketCommittee (FOMC) adjustsinterest rates to help keepinflation near a 2% target. The

FOMC's preferred measure of inflation is thePrice Index for Personal ConsumptionExpenditures (PCE), primarily because itcovers a broad range of prices and picks upshifts in consumer behavior. The Fed alsofocuses on core inflation measures, which stripout volatile food and energy categories that areless likely to respond to monetary policy.

The typical American might be more familiarwith the Consumer Price Index (CPI), whichwas the Fed's favorite inflation gauge until2012. The Consumer Price Index for All UrbanConsumers (CPI-U) is used to determinecost-of-living adjustments for federal incometaxes and Social Security.

The CPI only measures the prices thatconsumers actually pay for a fixed basket ofgoods, whereas the PCE tracks the prices ofeverything that is consumed, regardless of whopays. For example, the CPI includes a patient'sout-of-pocket costs for a doctor's visit, while thePCE considers the total charge billed to

insurance companies, the government, and thepatient.

The PCE methodology uses current and pastexpenditures to adjust category weights,capturing consumers' tendency to substituteless expensive goods for more expensiveitems. The weighting of CPI categories is onlyadjusted every two years, so the index does notrespond quickly to changes in consumerspending habits, but it provides a goodcomparison of prices over time.

According to the CPI, inflation rose 2.1% in2016 — right in line with the 20-year average of2.13%.1 This level of inflation may not be a bigstrain on the family budget, but even moderateinflation can have a negative impact on thepurchasing power of fixed-income investments.For example, a hypothetical investment earning5% annually would have a "real return" of only3% during a period of 2% annual inflation.

Of course, if inflation picks up speed, it couldbecome a more pressing concern forconsumers and investors.1 U.S. Bureau of Labor Statistics, 2017 (data throughDecember 2016)

What are some tips for reviewing my Medicare coverageduring Medicare Open Enrollment?During the Medicare OpenEnrollment Period that runsfrom October 15 throughDecember 7, you can make

changes to your Medicare coverage that will beeffective on January 1, 2018. If you're satisfiedwith your current coverage, you don't need tomake changes, but it's a good idea to reviewyour options.

During Open Enrollment, you can:

• Change from Original Medicare to a MedicareAdvantage plan, or vice versa

• Switch from one Medicare Advantage plan toanother Medicare Advantage plan

• Join a Medicare prescription drug plan, switchfrom one Medicare prescription drug plan toanother, or drop prescription drug coverage

The official government handbook, Medicare &You, which is available electronically or throughthe mail, contains detailed information aboutMedicare that should help you determinewhether your current coverage is appropriate.Review any other information you receive fromyour current plan, which may include an Annual

Notice of Change letter that lists changes toyour plan for the upcoming year.

As you review your coverage, here are a fewpoints to consider:

• What were your health-care costs during thepast year, and what did you spend the moston?

• What services do you need and whichhealth-care providers and pharmacies do youvisit?

• How does the cost of your current coveragecompare to other options? Considerpremiums, deductibles, and otherout-of-pocket costs such as copayments orcoinsurance; are any of these costschanging?

If you have questions about Medicare, you cancall 1-800-MEDICARE or visit the Medicarewebsite at medicare.gov. You can use the site'sMedicare Plan Finder to see what plans areavailable in your area and check each plan'soverall quality rating.

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