Nicholson Financial Services,Inc.David S. NicholsonFinancial Advisor89 Access RoadSte. CNorwood, MA 02062781-255-1101866-668-1101david@nicholsonfs.comwww.nicholsonfs.com

Fall 2018On the Road to Retirement, Beware of TheseFive Risks

Tax Benefits of Homeownership After TaxReform

What is the federal funds rate?

Can the federal funds rate affect theeconomy?

Nicholson Financial ServicesDid You Know...?Have You Made Any of These Financial Mistakes?

See disclaimer on final page

I hope everyone had a great summer!From a financial perspective, it wasrelatively uneventful. The equity marketswere not very volatile as stocks trendedhigher over the summer months. Withthe business environment being positiveand continuing to improve, there appearsto be good reason for that trend tocontinue. However, we all know themarket is overdue for a correction. The"when" and "why" are the questions thatno one has answers to. Last week, theFederal Reserve voted to raise interestrates again, the third time this year. Thismove was widely expected. Althoughhigher rates could eventually be astumbling block for stocks, rates havebeen so low for so long that there is longway to go before they become a seriousproblem. As we approach the end of theyear, the focus will likely remain oncorporate earnings and learning the realimpact of the tax reform. Although, thelatter will likely not be realized until theupcoming tax season.

As people move throughdifferent stages of life, there arenew financial opportunities — andpotential pitfalls — around everycorner. Have you made any ofthese mistakes?

Your 50s and 60s1. Raiding your home equity or retirementfunds. It goes without saying that doing so willprolong your debt and/or reduce your nest egg.

2. Not quantifying your expected retirementincome. As you near retirement, you shouldknow how much money you (and your spouse,if applicable) can expect from three sources:

• Your retirement accounts such as 401(k)plans, 403(b) plans, and IRAs

• Pension income from your employer, if any• Social Security (at age 62, at your full

retirement age, and at age 70)

3. Co-signing loans for adult children.Co-signing means you're 100% on the hook ifyour child can't pay, a less-than-ideal situationas you're getting ready to retire.

4. Living an unhealthy lifestyle. Take steps nowto improve your diet and fitness level. Not onlywill you feel better today, but you may reduceyour health-care costs in the future.

Your 40s1. Trying to keep up with the Joneses.Appearances can be deceptive. The nicelifestyle your friends, neighbors, or colleaguesenjoy might look nice on the outside, but behindthe scenes there may be a lot of debtsupporting that lifestyle. Don't spend moneyyou don't have trying to keep up with others.

2. Funding college over retirement. In your 40s,saving for your children's college costs at theexpense of your own retirement may be amistake. If you have limited funds, considersetting aside a portion for college whileearmarking the majority for retirement. Then sitdown with your teenager and have a frankdiscussion about college options that won'tbreak the bank — for either of you.

3. Not having a will or an advance medical

directive. No one likes to think about death orcatastrophic injury, but these documents canhelp your loved ones immensely if somethingunexpected should happen to you.

Your 30s1. Being house poor. Whether you're buyingyour first home or trading up, think twice aboutbuying a house you can't afford, even if thebank says you can. Build in some wiggle roomfor a possible dip in household income thatcould result from leaving the workforce to raisea family or a job change or layoff.

2. Not saving for retirement. Maybe your 20spassed you by in a bit of a blur and retirementwasn't even on your radar. But now that you'rein your 30s, it's essential to start saving forretirement. Start now, and you still have 30years or more to save. Wait much longer, and itcan be very hard to catch up.

3. Not protecting yourself with life and disabilityinsurance. Life is unpredictable. Consider whatwould happen if one day you were unable towork and earn a paycheck. Life and disabilityinsurance can help protect you and your family.Though the cost and availability of lifeinsurance will depend on several factorsincluding your health, generally the youngeryou are when you buy life insurance, the loweryour premiums will be.

Your 20s1. Living beyond your means. It's tempting tosplurge on gadgets, entertainment, and travel,but if you can't pay for most of your wants upfront, then you need to rein in your lifestyle,especially if you have student loans to repay.

2. Not paying yourself first. Save a portion ofevery paycheck first and then spend what's leftover, not the other way around. And why notstart saving for retirement, too? Earmark aportion of your annual pay now for retirementand your 67-year-old self will thank you.

3. Being financially illiterate. Learn as much asyou can about saving, budgeting, and investingnow and you could benefit from it for the rest ofyour life.

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On the Road to Retirement, Beware of These Five RisksOn your journey to retirement, you'll likely facemany risks that have the potential to throw youoff course. Following are five commonchallenges retirement investors face. Takesome time now to review and understand thembefore your journey takes an unplanned detour.

1. Traveling aimlesslySetting out on an adventure without a definitivedestination can be exciting, but probably notwhen it comes to saving for retirement. As youbegin your retirement strategy, one of the firststeps you'll need to take is identifying a goal.While some people prefer to establish one biglump-sum accumulation amount — for example,$1 million or more — others find that type ofnumber daunting. They might focus on howmuch their savings will need to generate eachmonth during retirement — say, the equivalent of$5,000 in today's dollars, for example. ("Intoday's dollars" refers to the fact that inflationwill likely increase your future income needs.These examples are for illustrative purposesonly. They are not meant as investmentadvice.)

Regardless of the approach you follow, settinga goal may help you better focus yourinvestment strategy. In order to set a realistictarget, you'll need to consider a number offactors — your desired lifestyle, pre-retirementincome, health, Social Security benefits, anytraditional pension benefits you or your spousemay be entitled to, and others. Examining yourpersonal situation both now and in the futurecan help you determine how much you mayneed to accumulate.

2. Investing too conservatively...Another key to determining how much you mayneed to save on a regular basis is targeting anappropriate rate of return, or how much yourcontribution dollars may earn on an ongoingbasis. Afraid of losing money, some retirementinvestors choose only the most conservativeinvestments, hoping to preserve theirhard-earned assets. However, investing tooconservatively can be risky, too. If yourinvestment dollars do not earn enough, youmay end up with a far different retirementlifestyle than you had originally planned.

3. ...Or too aggressivelyOn the other hand, retirement investors strivingfor the highest possible returns might selectinvestments that are too risky for their overallsituations. Although you might considerinvesting at least some of your retirementportfolio in more aggressive investments topotentially outpace inflation, the amount youinvest in such higher-risk vehicles should be

based on a number of factors. Appropriateinvestments for your retirement savings mix arethose that take into consideration your totalsavings goal, your time horizon (or how muchtime you have until retirement), and your abilityto withstand changes in your account's value.Would you be able to sleep at night if yourportfolio lost 10%, 15%, even 20% of its overallvalue over a short time period? These are thetypes of scenarios you must consider whenchoosing an investment mix.

4. Giving in to temptationOn the road to retirement, you will likely facemany financial challenges as well — theunplanned need for a new car, an unexpectedhome repair, an unforeseen medical expenseare just some examples.

During these trying times, your retirementsavings may loom as a potential source ofemergency funding. But think twice beforetapping your retirement savings assets,particularly if your money is in anemployer-sponsored retirement plan or an IRA.Consider that:

• Any dollars you remove from your portfoliowill no longer be working for your future

• You may have to pay regular income taxeson distribution amounts that representtax-deferred investment dollars and earnings

• If you're under age 59½, you may have to payan additional penalty tax of 10% to 25%(depending on the type of plan and otherfactors; some exceptions apply)

For these reasons, it's best to carefully considerall of your options before using moneyearmarked for retirement.

5. Prioritizing college saving overretirementMany well-meaning parents may feel thatsaving for their children's college educationshould be a higher priority than saving for theirown retirement. "We can continue working, ifneeded," or "our home will fund our retirement,"they may think. However, these can be veryrisky trains of thought. While no parent wantshis or her children to take on a heavy debtburden to pay for education, loans are acommon and realistic college-funding option —not so for retirement. If saving for both collegeand retirement seems impossible, considerspeaking with a financial professional who canhelp you explore the variety of tools andoptions.

No investment strategy canguarantee success. Allinvesting involves risk,including the possible lossof your contribution dollars.

There is no assurance thatworking with a financialprofessional will result ininvestment success.

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Tax Benefits of Homeownership After Tax ReformBuying a home can be a major expenditure.Fortunately, federal tax benefits are stillavailable, even after recent tax reformlegislation, to help make homeownership moreaffordable. There may also be tax benefitsunder state law.

Mortgage interest deductionOne of the most important tax benefits ofowning a home is that you may be able todeduct the mortgage interest you pay. If youitemize deductions on your federal income taxreturn, you can deduct the interest on a loansecured by your home and used to buy, build,or substantially improve your home. For loansincurred before December 16, 2017, up to $1million of such "home acquisition debt"($500,000 if married filing separately) qualifiesfor the interest deduction. For loans incurredafter December 15, 2017, the limit is $750,000($375,000 if married filing separately).

This interest deduction is also still available forhome equity loans or lines of credit used to buy,build, or substantially improve your home. [Priorto 2018, a separate deduction was available forinterest on home equity loans or lines of creditof up to $100,000 ($50,000 if married filingseparately) used for any other purpose.]

Deduction for real estate property taxesIf you itemize deductions on your federalincome tax return, you can generally deductreal estate taxes you pay on property that youown. However, for 2018 to 2025, you candeduct a total of only $10,000 ($5,000 ifmarried filing separately) of your state and localtaxes each year (including income taxes andreal estate taxes). For alternative minimum taxpurposes, however, no deduction is allowed forstate and local taxes, including property taxes.

Points and closing costsWhen you take out a loan to buy a home, orwhen you refinance an existing loan on yourhome, you'll probably be charged closing costs.These may include points, as well as attorney'sfees, recording fees, title search fees, appraisalfees, and loan or document preparation andprocessing fees. Points are typically charged toreduce the interest rate for the loan.

When you buy your main home, you may beable to deduct points in full in the year you paythem if you itemize deductions and meet certainrequirements. You may even be able to deductpoints that the seller pays for you.

Refinanced loans are treated differently.Generally, points that you pay on a refinancedloan are not deductible in full in the year youpay them. Instead, they're deducted ratably

over the life of the loan. In other words, you candeduct a certain portion of the points each year.If the loan is used to make improvements toyour principal residence, however, you may beable to deduct the points in full in the year paid.

Otherwise, closing costs are nondeductible. Butthey can increase the tax basis of your home,which in turn can lower your taxable gain whenyou sell the property.

Home improvementsHome improvements (unless medicallyrequired) are nondeductible. Improvements,though, can increase the tax basis of yourhome, which in turn can lower your taxable gainwhen you sell the property.

Capital gain exclusionIf you sell your principal residence at a loss,you can't deduct the loss on your tax return. Ifyou sell your principal residence at a gain, youmay be able to exclude some or all of the gainfrom federal income tax.

Capital gain (or loss) on the sale of yourprincipal residence equals the sale price of yourhome minus your adjusted basis in theproperty. Your adjusted basis is typically thecost of the property (i.e., what you paid for itinitially) plus amounts paid for capitalimprovements.

If you meet all requirements, you can excludefrom federal income tax up to $250,000($500,000 if you're married and file a jointreturn) of any capital gain that results from thesale of your principal residence. Anything overthose limits may be subject to tax (at favorablelong-term capital gains tax rates). In general,this exclusion can be used only once every twoyears. To qualify for the exclusion, you musthave owned and used the home as yourprincipal residence for a total of two out of thefive years before the sale.

What if you fail to meet the two-out-of-five-yearrule or you used the capital gain exclusionwithin the past two years with respect to adifferent principal residence? You may still beable to exclude part of your gain if your homesale was due to a change in place ofemployment, health reasons, or certain otherunforeseen circumstances. In such a case,exclusion of the gain may be prorated.

Other considerationsIt's important to note that special rules apply ina number of circumstances, including situationsin which you maintain a home office for taxpurposes or otherwise use your home forbusiness or rental purposes.

Recent tax reform legislationmay have reduced the taxbenefits of homeownershipfor some by (1) substantiallyincreasing the standarddeduction, (2) lowering theamount of mortgage debt onwhich interest is deductible,and (3) limiting the amountof state and local taxes thatcan be deducted. On theother hand, the tax benefitsof homeownership may haveincreased for some becausethe overall limit on itemizeddeductions based onadjusted gross income hasbeen suspended. Yougenerally can choosebetween claiming thestandard deduction oritemizing certain deductions(including the deductionsfor mortgage interest andstate and local taxes). Thesechanges are generallyeffective for 2018 to 2025.

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Nicholson FinancialServices, Inc.David S. NicholsonFinancial Advisor89 Access RoadSte. CNorwood, MA 02062781-255-1101866-668-1101david@nicholsonfs.comwww.nicholsonfs.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018

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Can the federal funds rate affect the economy?The Federal Open MarketCommittee (FOMC) is thepolicymaking branch of theFederal Reserve. One of itsprimary responsibilities is

setting the federal funds target rate. The FOMCmeets eight times per year, after which itannounces any changes to the target rate. TheFederal Reserve (the Fed), through the FOMC,uses the federal funds rate as a means toinfluence economic growth.

If interest rates are low, the presumption is thatconsumers can borrow more and,consequently, spend more. For instance, lowerinterest rates on car loans, home mortgages,and credit cards make them more accessible toconsumers. Lower interest rates often weakenthe value of the dollar compared to othercurrencies. A weaker dollar means someforeign goods are costlier, so consumers willtend to buy American-made goods. Anincreased demand for goods and services oftenincreases employment and wages. All of whichshould stimulate the economy. This isessentially the course the FOMC took followingthe 2008 financial crisis in an attempt to spurthe economy.

However, if money is too plentiful, demand forgoods may exceed supply, which can lead toincreasing prices. As prices increase (inflation),demand for goods decreases, slowing overalleconomic growth. When the economy recedes,the need for labor decreases, unemploymentgrows, and wage growth slows. To counteractrising inflation, the Fed raises the target rate.When interest rates on loans and mortgagesmove higher, money becomes more costly toborrow. Since loans are harder to get and moreexpensive, consumers and businesses are lesslikely to borrow, which slows economic growthand reels in inflation.

The Fed monitors many economic reports thattrack inflationary trends and economic growth.The Fed's preferred measure of inflation is thePrice Index for Personal ConsumptionExpenditures produced by the Department ofCommerce. To forecast economic growth, theFed looks at changes in gross domestic productand the unemployment rate, along with severalother economic indicators, such as durablegoods orders, housing sales, and businessfixed investment.

Source: Federal Reserve, 2018

What is the federal funds rate?The federal funds rate is theinterest rate at which bankslend funds to each other fromtheir deposits at the FederalReserve (the Fed), usually

overnight, in order to meet federally mandatedreserve requirements. Basically, if a bank isunable to meet its reserve requirements at theend of the day, it borrows money from a bankwith extra reserves. The federal funds rate iswhat banks charge each other for overnightloans. This rate is referred to as the federalfunds effective rate and is negotiated betweenborrowing and lending banks.

The Federal Open Market Committee sets atarget for the federal funds rate. The Fed doesnot directly control consumer savings or creditrates directly; it can't require that banks use thefederal funds rate for loans. Instead, the Fedlowers the federal funds rate by buyinggovernment-backed securities (usually U.S.Treasuries) from banks, which adds to thebanks' reserves. Having excess reserves,banks will lower their lending rates for overnightloans in order to make some interest on theexcess reserves. To raise rates, the Fed sellssecurities to banks, decreasing the banks'

reserves. If enough banks need to borrow tomeet overnight reserve requirements, bankswith extra reserves will raise their lending rates.

The federal funds rate serves as a benchmarkfor many short-term rates, such as savingsaccounts, money market accounts, andshort-term bonds. Banks also base the primerate on the federal funds rate. Banks often usethe prime rate as the basis for interest rates ondeposits, bank loans, credit cards, andmortgages.

The FDIC insures CDs and bank savingsaccounts, which generally provide a fixed rateof return, up to $250,000 per depositor, perinsured institution. The principal value of bondsmay fluctuate with market conditions. Bondsredeemed prior to maturity may be worth moreor less than their original cost. Investmentsseeking to achieve higher yields also involve ahigher degree of risk. U.S. Treasury securitiesare backed by the full faith and credit of theU.S. government as to the timely payment ofprincipal and interest.

Source: Federal Reserve, 2018

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