Robo-Advisers: Weighing the Worth of Automated Advice

Is a robo-adviser right for you? The answer to this question boils down to your unique needs, complexities and personal preferences.

What Is a Robo-Adviser? The Answer Lies Between the Lines

You can Google “robo-adviser” and find thousands of definitions. Put simply, they are a cost-effective solution that sits between managing your own investments and hiring a full-service wealth management firm to manage your entire financial picture. The hierarchy looks something like this:

  1. Do-It-Yourself (DIY) Investing
  2. Robo-Advisers
  3. Full-Service Wealth Manager

Need a little more clarification? LegalZoom can serve as a helpful analogy. Their online templates may cost more than drafting a legal document on your own, but they’ll save you time and likely produce a better deliverable. LegalZoom also costs less than retaining a full-service law firm, but their easy-to-edit templates may fall short if the complexity of your legal situation requires a specialized attorney. The hierarchy for legal services here would look like this:

  1. Do-It-Yourself (DIY) Legal Work
  2. LegalZoom
  3. Professional Attorney

The same can be said about robo-advisers. A full-service wealth manager can be worth every penny if you have complex needs, or you simply prefer to spend your valuable time doing something else. If not, most robo-advisers seem appropriately priced for the mid-range investment services they offer.

What Will a Robo-Adviser Do for You?

Services vary, but in general, a robo-adviser should:

  • Collect basic information, like your financial goals, risk tolerance and timeline.
  • Use its proprietary algorithm to recommend a model investment portfolio for you.
  • Offer an online platform for you to fund your account through a money transfer, an upfront deposit and/or recurring deposits.
  • Allocate your assets into the model portfolio you’ve selected.
  • Manage your model-based portfolio moving forward, including periodic rebalancing.

Some robo-advisers also offer online budgeting and financial planning, as well as access to a human adviser — usually for an additional cost. As robo-advisers continue to evolve, the lines may blur between their “robo-” and “adviser” roles, but it’s unlikely their personalized interactions — or pricing — will approach the levels you’d expect from a dedicated adviser.

With that being said, Alex Lynch, CFA, a Wealth Adviser at Jarvis Financial, believes that robo-advisers could eventually prove to be a good solution to improving financial literacy and education in America.

“Approximately 67% of Americans do not have a written financial plan. If robo-advisers can continue to evolve past providing generic investment allocation advice, they could really move the needle and help more households gain access to financial planning services at a palatable cost,” says Alex.

Newish Name, Oldish Idea

However we define them, robo-advisers have been on the rise lately. These days, there are close to 100 of them across 15 countries, and growing. Some are new firms like Wealthfront and Betterment, whose founders were leaders in popularizing the robo-adviser model. Others are familiar names that jumped on the existing bandwagon, such as the Schwab Intelligent Portfolios, Fidelity Go® and Vanguard Personal Adviser Services.

Robo-advisers aren’t as new as you might think, by the way. While the term didn’t take off until around 2012, it made at least one early appearance nearly 20 years ago, in a Financial Planning piece titled “Robo-Adviser: In a new world of intense 401(k) anxiety brought about by the Enron fiasco, the only hand investors may have to hold may be digital.”

Plus, I’d argue the robo-adviser concept has been around even longer — since the Vanguard Wellington fund was born back in 1928. This balanced U.S. mutual fund offered investors turnkey access to a one-stop, low-cost, diversified portfolio of stocks and bonds, governed by a prospectus prescribing its investment strategy and target risk levels.

That’s essentially what a robo-adviser offers too: turnkey access to low-cost, automated investing using a rules-based approach. In that context, there’s nothing dramatically new about the financial industry offering various levels of thriftier/cookie-cutter versus costlier/tailored investment solutions.

Variations on the Theme of Robo-Adviser

Which brings me to my next point: You don’t always have to transfer all your money to a robo-adviser to obtain a mid-price, mid-service solution for automated investment management services. Most major mutual fund companies offer low-cost, balanced mutual funds that automatically manage your money based on your desired goal and risk level. For example, a low-cost target date fund would meet this criteria.  

There are some caveats: A traditional balanced fund may not be built from the ground up using the latest technology, generously funded by venture capital. They may not always be as effectively diversified as their name suggests. And not all of them are low-cost.

That said, robo-advisers often come with their own challenges, too.

  • Administrative hurdles: We’ve seen evidence that it’s easier to join a robo-adviser platform than to leave it. Some of them insist on cutting a physical check instead of facilitating electronic transfers when you go. And at least one well-known robo-adviser, financial advisers have encountered problems transferring essential cost-basis information.
  • Future unknowns: The robo-adviser industry is also relatively new and competitive, with independent firms being launched, merged, acquired by bigger players, and taken public in the blink of an eye. In other words, the platform you begin with may not be the platform you remain on over time.
  • Opaque costs: Last but not least, some robo-advisers advertise implausibly low prices. They then may make up for seemingly “free” trades by using proprietary funds with higher underlying expense ratios, or by requiring large cash positions, so they can make their profit from behind-the-scenes lending strategies. Suffice it to say, when a price seems too good to be true, it probably is, and at least one well-known robo-adviser is being accused of violating its fiduciary duty due to some of these actions.

That’s not to say a robo-adviser may still not be a good deal, and a sensible “in-between” solution for you. But you’ll want to dig deeper to find out. And remember, robo-advisers aren’t the only mid-range game in town. No matter what you’re considering, shop around, and read the fine print. It might even be worth consulting with an independent financial planner to obtain a second opinion before you proceed.

Are You Ready to Robo?

So, when is a robo-adviser or similar solution right for you? Assuming you usually get what you pay for, robo-advisers make sense when you’d like to have your investments managed efficiently and cost-effectively. In fact, they may be more accurately called robo-managers. Their strong suit is doing the investment management when your top priority is to make and save money, and your financial-and tax-planning needs are relatively straightforward.

A good robo-adviser can also help do-it-yourself investors avoid falling into the most common financial behavioral traps that so often ensnare them. Plus, they can free more of your time to pursue your actual life’s interests, instead of fussing with your portfolio or worrying about the daily movements of the financial markets.

The Worth of a Financial Planner

For the simple, cost-effective purposes just described, robo-advisers are often priced appropriately. If, however, you want or need high-touch, human interaction and tailored advice, you’re likely to be left wanting more than a robo-adviser has to give. They can be too automated when years of accumulated wealth may benefit from far more nuanced management.

For example, a more sizable investment portfolio with larger positions and embedded taxable gains may need to be carefully handled as part of a diversified portfolio, rather than auto-traded by an algorithm. Plus, as you approach and enter retirement, you’re likely to have planning needs that go beyond simply saving and investing. These may include creating a tax-efficient income stream; coordinating insurance, estate planning and charitable goals; and more.

Over time, you may also increasingly value having a dedicated adviser to facilitate and hold you accountable to your financial goals. Even if you turn to a robo-adviser/planner pair, it won’t always measure up to real financial advice. How comprehensive or personalized can someone be if you’re one among 1,000+ clients assigned to them?

A big sign indicating that it might be time for more personalized advice is when you start asking yourself more complex questions about your money, like:

  • What should I do with my stock options?
  • Can I retire in 10 years, rent out my house, and travel the world?
  • How can I reduce my tax bill?

You know they’re important questions, you don’t have the answers, and you wouldn’t mind hiring someone to help you resolve them. Especially if your accumulated wealth has started keeping you up at night instead of helping you sleep more soundly, it’s probably time to de-automate your planning.

Founder and CEO, Define Financial

Taylor Schulte, CFP®, is founder and CEO of Define Financial, a fee-only wealth management firm in San Diego. In addition, Schulte hosts The Stay Wealthy Retirement Podcast, teaching people how to reduce taxes, invest smarter, and make work optional. He has been recognized as a top 40 Under 40 adviser by InvestmentNews and one of the top 100 most influential advisers by Investopedia.


Getting Approved for a Personal Loan After Bankruptcy

Your chances of qualifying for a personal loan after a bankruptcy depend in part on the type and date of your filing, your credit scores, and your income. If you are approved, you likely will pay a higher interest rate or fees.

A bankruptcy will remain on your credit reports for up to seven to 10 years, but with effort, your credit scores can become healthier during that time and beyond. While you should always consult with a qualified accountant or attorney regarding your finances post-bankruptcy, and never rely on a blog post like this one, here are a few tips to help you understand what to expect.

Two Main Types of Bankruptcy Filings

While bankruptcy can feel like an isolating experience, it’s not uncommon. Every year, hundreds of thousands of individuals file petitions, though it’s a figure dwarfed by the 1.6 million in late 2010, when a wave of filings spurred by the Great Recession crested.

There are two main types of bankruptcy available to individuals, Chapter 7 and Chapter 13. With both, typically a bankruptcy trustee reviews the bankruptcy petition, looks for any red flags, and tries to maximize the amount of money unsecured creditors will get.

About 70% of the petitions in 2020 were filed under Chapter 7, and 30% were filed under Chapter 13.

Chapter 7 Bankruptcy

This is often called liquidation bankruptcy because the trustee assigned to the case sells, or “liquidates,” nonexempt assets in order to repay creditors.

Many petitioners, though, can keep everything they own in what is known as a “no-asset case .” Most states let you keep clothing, furnishings, a car, money in qualified retirement accounts, and some equity in your home if you’re a homeowner. (Each state has a set of exemption laws, but federal exemptions exist as well, and you might be able to choose between them — definitely talk to a professional about this.)

After the bankruptcy process is complete, typically within three to six months, most unsecured debt is wiped away. The filer receives a discharge of debt that releases them from personal liability for certain dischargeable debts.

Chapter 13 Bankruptcy

This form, aka reorganization bankruptcy or a wage earner’s plan, allows petitioners whose debt falls under certain thresholds to keep all their assets if they agree to a repayment plan for three to five years. A trustee collects the money and pays unsecured creditors an amount equal to the value of nonexempt assets, according to Experian .

Once the terms of the plan are met, most of the remaining qualifying debt is erased.

If the debtor’s monthly income is less than the state median, the plan will be for three years unless the court approves a longer period. If the debtor’s monthly income is greater than the state median, the plan generally must be for five years, according to .

Certain debts can’t be discharged through a court order, even in bankruptcy. They include most student loans, most taxes, child support, alimony, and court fines. You also can’t discharge debts that come up after the date you filed for bankruptcy.

Will Bankruptcy Ruin My Credit?

A bankruptcy will be considered a “very negative event” on your FICO® Score, the folks at FICO say, but the severity depends on a person’s entire credit profile.

Someone with a super high credit score could expect a “huge” drop, but someone with negative items already on their credit reports might see only a modest drop, FICO says .

The good news is that the negative effect of the bankruptcy will lessen over time.

Lenders who check credit reports will learn about a bankruptcy filing for years afterward. Specifically:

•   For Chapter 7, up to 10 years after the filing

•   For Chapter 13, up to seven years

Still, filing for bankruptcy doesn’t mean you can’t ever get approved for a loan. Your credit scores can improve if you stay up to date on your repayment plan or your debts are discharged — among other steps that can be taken.

You may even be able to help your credit scores during bankruptcy by making the required payments on any outstanding debts, whether or not you have a repayment plan. Of course, everyone’s circumstances and goals are different so, again, always consult a professional with questions.

That said, realize that some lenders deny credit to any applicant with a bankruptcy on a credit report, according to VantageScore®, which, like FICO, calculates credit scores.

Should I Apply for a Loan After Bankruptcy?

Before applying for an unsecured personal loan, meaning a loan is not secured by collateral, it’s a good idea to get copies of your credit reports from the three major credit reporting agencies: Equifax, Experian, and TransUnion. Make sure that your reports represent your current financial situation and check for any errors.

If you filed for Chapter 7 bankruptcy and had your debts discharged, they should appear with a balance of $0. If you filed for Chapter 13, the credit report should accurately reflect payments that you’ve made as part of your repayment plan.

Next, you can consider getting prequalified for a personal loan and comparing offers from several lenders. They will likely ask you to supply contact and personal information as well as details about your employment and income.

If you see a loan offer that you like, you’ll complete an application and provide documentation about the information you provided. Most lenders will consider your credit history and debt-to-income ratio, among other personal financial factors.

A heads-up on “no credit check” loans: They usually have high fees or a high annual percentage rate (APR).

If You’re Approved for a Personal Loan

Before you sign on the dotted line, it’s smart to take the following steps:

Read the Fine Print

Since you have or had a bankruptcy on your record, the terms of your offer may be less than favorable, so consider whether you feel like you’re getting a reasonable deal.

People with “average” to bad credit scores might see APRs on personal loans ranging from nearly 18% to 32%. Make sure you are clear on your interest rate and fees, and compare offers from different lenders to make the choice that works for you.

Avoid Taking Out More Than You Need

You’re paying interest on the money you borrow, so it’s generally better to only borrow funds that you actually need. Further, it’s probably wise to only take out as much as you can afford to repay on time, because paying on time is an important key to rebuilding your credit.

If You’re Not Approved for a Personal Loan

If you are denied a personal loan, don’t despair. You may have options for moving forward:

Appealing to the Lender

You can try to explain the factors that led you to file for bankruptcy and how you have turned things around, whether that’s a record of on-time payments or improved savings. The lending institution may not change its mind, but there’s always a possibility the lender can adjust its decision case by case.

You likely have the best chance at an institution that you’ve worked with for years or one that is less bound to one-size-fits-all formulas — a local credit union, community bank, online lender, or peer-to-peer lender.

Looking Into Applying With a Co-signer

A co-signer who has a strong credit and income history may be able to help you qualify for a loan. But keep in mind that if you can’t pay, the co-signer may be responsible for paying back your loan.

Building Your Credit

It’s OK to take some time to try to improve your credit scores before reapplying for an unsecured personal loan. You still have a chance to work toward reducing your other debt.

The Takeaway

Getting approved for an unsecured personal loan after bankruptcy isn’t impossible, but it’s a good idea to compare offers, go in with eyes wide open about interest rates and fees, and gauge whether it’s the right time to borrow.

SoFi offers unsecured fixed-rate personal loans with no fees. Adding a co-borrower may help you qualify for a loan or a lower interest rate.

Find your rate in two minutes, with no commitment.

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External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.


The Penny Hoarder’s 2021 Survey on Child Care Costs

“Working families across the country pay a significant percentage of their annual earnings to cover the price of child care,” said Mario Cardona, Chief of Policy and Practice for Child Care Aware of America, a national child care advocacy organization.
About 35% say they’ve had to choose between paying for child care or paying a credit card bill on time.
“We’ve used this benchmark to say that no family should pay more than 7% of income towards child care, whether they receive child care subsidies or not,” he said.
Half the parents we surveyed reported spending at least 25% of their income on child care. That’s a significant increase from when The Penny Hoarder surveyed parents about the cost of child care in 2018. Back then, the median percentage of income parents said they spent on child care was 15%.
Nicole Dow is a senior writer at The Penny Hoarder. Chris Zuppa, The Penny Hoarder’s multimedia content creator, contributed to this report.

The Financial Toll of Child Care

This graphic breaks down how many parents feel overwhelmed by the cost of childcare.

This financial assistance, however, is temporary. About 1 in 5 parents receiving child tax credits reported that once the monthly payments end in December, they don’t believe they’ll be able to continue paying for care.
For working parents, child care is a necessity. Yet, it’s often challenging to secure and afford quality care.
Following these guidelines, a family earning ,000 a month should be paying no more than 0 a month for child care. Having to pay a child care provider makes it tough to meet other financial responsibilities. Almost 28% of parents say they’ve had to choose between paying for child care or paying their rent or mortgage on time.
Not paying a bill on time often results in late fees, but for some families, an extra fee is better than losing a coveted spot at a child care center and facing the challenge of finding other arrangements.
When you have a baby, you understand your life is going to change significantly.

The Sacrifices Parents Make

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63 percent of people consider childcare costs in whether or not they'll have another child. You’re responsible for another human being. You’ll lose tons of sleep. And, of course, you’ll have a bunch of new expenses.
Diapers. Formula. Clothing. Toys. But one of the biggest expenses that hit parents is child care.
The Penny Hoarder’s survey on child care costs survey found that financial support during the pandemic has helped parents pay for child care.
Four out of 10 parents say they’ve gone into debt due to the cost of child care. Over a quarter of parents have had to move to a different home to afford child care. Almost 38% of parents have had to take on a second job or side hustle.
Ready to stop worrying about money?
Leaving the workforce has ripple effects beyond a loss of income. Many stay-at-home parents find it difficult to return to work due to gaps in their employment history. They lose out on opportunities for career advancement. Not having access to an employer-sponsored 401(k) plan means stay-at-home parents miss out on the ability to grow their retirement savings.

Help Needed

Child Care Aware of America uses an affordability benchmark from the U.S. Department of Health and Human Services, which states that families who are receiving child care subsidies should not pay more than 7% of their income toward co-payments.
For many parents, it costs more to send their kids to day care than to put a roof over their heads.
Other parents figure that it makes more sense to leave the workforce than to spend so much of their income paying for child care. Nearly 1 out of 5 parents say they’ve had to quit a job due to the costs of child care. Seventy percent of parents said stimulus check money helped with the cost of child care during the pandemic. Over 83% of those receiving monthly child tax credit payments said that money has helped with child care expenses this year.
Methodology: The Penny Hoarder used Pollfish to conduct a national survey about the cost of child care with 2,000 people completing the survey Sept. 8-10, 2021. Survey responses are weighted so that each response is representative of the U.S. population. <!–


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[Targeted] Discover: Earn 6% Cash Back On Grocery Store Purchases ($1,250 Spend)

Update: Some people have the same offer but for gas instead of grocery.

The Offer

No direct link to offer, sent out via e-mail. Unknown subject line

  • Discover is offering some cardholders 6% cash back on grocery store purchases, on up to $1,250 in purchases

The Fine Print

  • Valid until 12/31/21
  • Excludes purchases made at Walmart and Target

Our Verdict

Great deal if you can spend big on grocery stores. $1,250 limit is relatively generous as far as these offers go as well.

Hat tip to reader X W


6 Things You Can Do Right Now to Ensure Your Money Will Last in Retirement

If you’re within six months or so of retirement, there are certain things you need to do now to help prepare yourself for the transition into retirement.

Throughout this retirement preparation process, there will be times when you feel as though you are making a series of rapid-fire micro decisions as you work through Social Security benefits, Medicare options, pension elections and retirement account distributions.

The decisions to be made are many, and understanding the long-term ramifications of those decisions is paramount, considering that your retirement years could be as many as those spent working.

The numerous options you will face can become a labyrinth of choices leading many people to attend YouTube university in search for answers, while leaning on friends and co-workers to fill in the missing pieces. The truth is, people underestimate the complexities that exist with preparing for retirement and find themselves over their head.

Unfortunately, without understanding the long-term effects of one decision over another, a retiree may be well into their retirement before problems begin to surface.  For instance,

  • Inflation will erode your income over time.
  • Longevity may require your money to last longer than you thought.
  • Market volatility can deplete your resources.
  • Heath care expenses can potentially absorb most of what you have.

By the time these risks are exposed, retirees find themselves stuck. That is why retirement planning shouldn’t be viewed as a rapid-fire micro decision-making process but rather a time to design a master plan focused on what you can control and protecting yourself from what you can’t.

Think of it like building a home … you wouldn’t begin construction without first having blueprints drawn up. Your retirement plan is the blueprint for your retirement, while Social Security benefits, Medicare options, pension elections and retirement account distributions are your building materials.

6 Things You Can Do for a Sustainable Retirement

Going back to the home construction metaphor, to ensure you have your bases covered and are retirement ready, first consider the cost of the project. It is better to estimate the cost of your retirement now to uncover potential problems before actually retiring. Start by carefully evaluating your current thinking about your situation.

1. Develop an income plan detailing exactly how much income you will need each year to fund your retirement lifestyle

Now, before skipping over this you should consider that your lifestyle will change — along with your tax situation — which means that the amount you need now to live on will not be the same when you retire. You may need to budget even more for your early years of retirement, when you’ll be enjoying the good life. So, it is not a good idea to make general assumptions about your future income needs based on how things are while you’re working.

Carefully consider what will change and what will stay the same once you retire, adding into the mix such things as travel, health care costs and other variable expenses. You can learn more about this topic in my article, “What is Cash Flow?”

2. Identify your income sources and determine exactly how much income will be generated from each source to satisfy your annual income needs  

No generalizations here …  you should seek to know exactly how much you can expect from each resource you have.

This is where most people begin to struggle, because there is often a disconnect between their mindset around their assets and the need they have from them. There are generally two camps with this:

  • Those who focus on protecting their principal by holding cash.
  • And others who hold on to their investment portfolios in hopes for long-term growth.

Both camps are focused on growing or preserving their money, making it difficult for them to adjust for their need to receive consistent income from the assets.

You can learn more about how to generate income from your assets by listening to my Common Sense Financial Podcast episode titled “The #1 Thing That The Most Successful Investors Are Doing With Their Money That The Average Investor Isn’t Even Thinking About.”

3. Map your assets out and separate them by their purpose

What I find is that most people have money sitting in bank accounts, large amounts of equity in their home and money combined together in their investment portfolios.

And while this may seem an ideal arrangement, it is important to point out that cash in the bank is not earning anything, equity in a home is not earning anything and money in the stock market has varying levels of risk … none of which translates to having consistent income in retirement.

In most instances, the assets you have are either going to be spent or used for income now or in the future.

So, a good place to begin would be identifying which assets fall into these categories.

4. Have an income replacement plan in place for your spouse to cover the loss of Social Security or pension income if you were to predecease them

Developing an income strategy for retirement most often means you are relying on a husband and wife’s benefits, but those benefits are only received while both are living (in most cases).

Many people are misled into believing that as you get older your need for life insurance diminishes, and while this may be true for some, for others the need for it may actually rise.

It is a good idea to know the specifics for how benefits will adjust when a death occurs and have a plan in place to replace lost income if it is needed.

5. Have (updated) legal documents in place designating financial power of attorney, medical directives, wills and trusts                       

Most people kick this can down the road with the idea they will have time to get this done later. (Later meaning when they need it.)

Here is the deal: If you wait until you need these documents it will be too late to get them.

6. Have a contingency plan in place to cover health care costs if you were to find yourself needing long-term nursing care

This is an area that so many people ignore, crossing their fingers and hoping nothing happens to them that would require this level of care. However, considering the cost of nursing care, it is not something to ignore. You need to know how this cost will be covered if you find yourself needing care.

The cheapest way to cover this risk is through insurance, but some may choose to spend down a portion of their assets to cover the costs.  Either way, it is a good idea to have this mapped out and know how you plan to cover the cost if incurred.

Wherever you are in your thinking, there is an opportunity to improve your probability for a successful retirement. To get started, figure out where you are, know where you’re going and then identify what obstacles stand in your way.

You can download my  Successful Retirement Checklist™ for free and begin using it to score yourself in these areas by clicking here. 

Securities offered through Kalos Capital, Inc., Member FINRA/SIPC/MSRB and investment advisory services offered through Kalos Management, Inc., an SEC registered Investment Advisor, both located at11525 Park Wood Circle, Alpharetta, GA 30005. Kalos Capital, Inc. and Kalos Management, Inc. do not provide tax or legal advice. Skrobonja Financial Group, LLC and Skrobonja Insurance Services, LLC are not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.

Founder & President, Skrobonja Financial Group LLC

Brian Skrobonja is an author, blogger, podcaster and speaker. He is the founder of St. Louis Mo.-based wealth management firm Skrobonja Financial Group LLC. His goal is to help his audience discover the root of their beliefs about money and challenge them to think differently. Brian is the author of three books, and his Common Sense podcast was named one of the Top 10 by Forbes. In 2017, 2019 and 2020 Brian was awarded Best Wealth Manager and the Future 50 in 2018 from St. Louis Small Business.


Biotech Stocks – What They Are and Why You Should Invest in Them

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Additional Resources

Over the past few decades, innovation in health care has been incredible. If you had said 20 or 30 years ago that HIV and hepatitis C soon wouldn’t be death sentences, no one would have believed you. The same goes for various types of cancers, epilepsy, and several other ailments. 

The driver in the development of new therapeutic options is the same driver behind evolutions in entertainment, shopping, and more: technology. Technological innovation is changing the way we live our lives, and nowhere is that fact more clear than in the field of medicine. 

In fact, technology has played such a major role in the innovation of new therapies that an entirely new market — known as the biotech market — has emerged. 

The emergence of the biotech industry led to extended lifespans and better quality of life for countless patients over the past few decades. It has also led to tremendous growth in revenue, profits, and investor interest in the stocks that represent the companies making novel medicines and treatments. Investment opportunities are being created in the space consistently, making the biotech sector one of significant interest for stock market participants. 

What Are Biotech Stocks?

Biotech stocks represent companies in the biotech sector. These are companies that are focused on the development of new medicines, vaccines, or medical devices through the use of innovative technologies and advanced medical science. 

These companies are working to bring an end to some of the world’s most devastating health conditions, including cancer, heart disease, and several rare diseases that most people can’t even pronounce. 

These medical science efforts have been so successful that experts such as the Legacy Research Group suggest that we are entering an age of a biotechnology renaissance.

Biotech stocks include familiar pharmaceutical names like Johnson & Johnson, Gilead Sciences, and Merck, along with a host of yet-unknown companies with products in early-stage development. 

Pro Tip: Are you looking for the next great investment but don’t have time to do the research yourself? The Motley Fool Stock Advisor, one of the most successful stock picking services, will send you two stock recommendations each month. Netflix, a past recommendation, is up more than 21,000%. Learn more about Motley Fool Stock Advisor.

Biotech Stock Pros and Cons

Investments in biotechnology companies can lead to massive gains and make you feel good. However, when things go wrong, they can go very wrong. As with any investment, these investments come with their fair share of pros and cons. 

Biotech Stock Pros

There are several benefits to making the right investments in the sector. Some of the most important of these benefits include:

1. Potential for Massive Profits

Investing in the biotechnology industry can prove to be overwhelmingly lucrative. Most clinical-stage stocks in this sector trade at prices under $5 per share. However, the successful launch of a new treatment option can send the stock soaring in many multiples. If there’s ever a sector that creates millionaires, biotechnology is it. 

2. The Feel-Good Effect

These days, investors make investments for more than profit. In fact, there’s a trend of socially responsible investing sweeping the globe. With socially responsible investing, you look for and invest in companies that are making positive change in the world. 

Some socially responsible investors look toward solar stocks for environmental change or financial-literacy stocks designed to remove the wealth divide. Others invest in the biotech sector, helping to fund the development of life-saving and life-changing treatment options. That’s something to feel good about. 

3. Better Understanding of Medicine

When investing in any stock in any sector, it’s important to do your research. When doing this due diligence in the biotech industry, you’ll learn quite a bit about the human body, medicine, and the various ailments medicines are being designed to treat and cure. 

There’s value in knowing why your ticker ticks and how to keep it ticking for the long run. Investing in biotech stocks could lead to lifestyle decisions that don’t only improve your financial health, but your medical health as well. 

Pro tip: Before you add any biotech stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Trade Ideas can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.

Biotech Stock Cons

There are plenty of benefits to investing in biotech, but every darling has a blemish. There are some drawbacks to investing in this space as well. 

1. Clinical Failure

Any company can fail. In the biotechnology industry, failure can come much easier. A failed clinical trial means the loss of millions of dollars and years in research, generally leading to dramatic losses. 

2. Commercial Failures

Taking a new medical product to market takes quite a bit of work and capital. Even if that product seems as though it will be met with high consumer demand, failure can happen. These failures prove to be extremely costly when they occur, both for the biotech company and its investors. 

3. One-Hit Wonders

Once products are created and commercialized, biotech companies only have a limited amount of market exclusivity. After a period of several years, competitors will launch generics. If the company doesn’t have other products to fall back on, generic treatments could lead to dramatic declines in share values.

4. Poor Financial Foundations

There are an elite few companies in this sector that have created a blockbuster product, brought it to market, made billions, and continued to innovate, growing out a multibillion-dollar, stable company in medicine. The vast majority of biotech companies are in clinical stages and produce no revenue. With poor financial foundations, these companies are at the mercy of the investing community and lenders to stay afloat. 

Biotech Stock Stages

There are multiple stages of a biotechnology business. The stage of a company’s product development tells you a lot about the potential risk and reward associated with an investment in that particular company. 

1. Research-and-Discovery-Stage Biotech Stocks

Research-and-discovery-stage stocks are the most risky plays you can make in the sector. In fact, they are so risky that most of them trade on the over-the-counter (OTC) market because they do not meet key requirements set by major exchanges like the NASDAQ or New York Stock Exchange. 

These companies have a plan, but no product. They are currently researching to discover the basic foundations of what will become an experimental vaccine, therapy, or device. 

There are several major risks to consider when thinking about an investment in a research-and-discovery-stage company. Among the most important are:

  • Research That Doesn’t Produce Results. The best scientists in the world may look for ways to deliver an effective treatment. That doesn’t mean they’re going to find them. Ultimately, these companies are rooted in research, which doesn’t always yield a viable product. 
  • Capital Requirements. Research in the field of medicine is a highly capital-intensive process. Not only do companies have to pay high salaries, but they also have to pay high costs associated with equipment, regulatory matters, and more. Without a product, research-and-discovery companies don’t generate any revenue. So, this capital must come from debt, grants, or the investing community, neither of which is good for current investors. 
  • Fraudsters. While most research-and-discovery biotech companies are looking for ways to improve quality and length of life in patient populations, there are also plenty of companies out there designed for nothing more than creating a payday for the founders. These companies say they want to perform research, but need to raise capital to do so. That capital goes to paying executive salaries and perks, and the research never happens. This is a common scam in the biotech sector, and investors should be highly diligent in looking for it in these early-stage companies. 

2. Preclinical-Stage Biotech Stocks

Preclinical-stage biotech companies are a bit further along than research-and-discovery-stage companies. These companies have done the research that has led to the development of an experimental product. 

However, preclinical-stage companies are still quite young in terms of development. In the preclinical stage, companies are looking to prove their concept. For example, if a preclinical-stage company is developing a drug for lung cancer, it may treat mice that have lung cancer with the new drug, looking for signs of the treatment’s efficacy and safety. 

Although mice are quite different from humans, our bodies work in many of the same ways. Therefore, a treatment that works in mice has a better likelihood of working in humans than one that doesn’t. 

In order to move into human studies, these companies have to show regulatory authorities that there is a strong likelihood that a treatment will work and be safe to use in humans. The preclinical stage is centered around doing just that. 

At this point, there are still several risks to consider. The most important of these risks include:

  • Preclinical Failure. If a new treatment is given to a mouse, and the mouse dies as a result of the treatment, it will be difficult to bring that treatment to human studies. As such, if a company at this stage announces a preclinical failure, it could send the stock tumbling. 
  • Capital Requirements. As biotech companies move through the process of developing new therapies, costs only grow. Like research-and-discovery-stage companies, preclinical-stage biotech companies don’t have products on the market and are unable to generate revenue. As a result, they will need to look for funding elsewhere. While some of this funding may come from grants, the vast majority of preclinical companies are funded through transactions — such as public offerings of common stock — that ultimately dilute the long-term value of shares currently held by investors. 
  • Regulatory Hurdles. For a company to go from preclinical to the clinical stages, it will have to receive investigational new drug approval from regulatory authorities. This approval gives the company the ability to test a new drug in humans. All the preclinical data may look positive to the average investor, but the U.S. Food and Drug Administration (FDA) may use a different measuring stick. If the company’s investigational new drug application is declined, its stock will fall. 

3. Early-Clinical-Stage Biotech Stocks

Early-clinical-stage biotech companies have a tangible product that is being developed. Moreover, this product has been given the green light by regulatory authorities for experimental testing in humans. 

There are three main phases of clinical studies in this experimental process. Companies in the midst of the first two phases are considered early-clinical-stage companies. 

Phase One Clinical Studies 

Phase One clinical studies are the earliest studies in which human subjects are used. These studies generally consist of small patient populations. In most cases, all volunteers involved in the Phase One clinical studies are healthy adults. The idea of Phase One studies is to slowly escalate the dose of a treatment to find the maximum tolerable dose in the human body.

While Phase One studies will show signs of the treatment’s effectiveness, the main focus of these studies is safety and tolerability. These trials usually aim to answer the following questions:

  • Are there side effects? 
  • Are the side effects tolerable? 
  • Is the new therapy or other medical product safe to use?
  • What dose is needed? 
  • Is there a glimmer of efficacy?

Phase Two Clinical Trials

Phase Two clinical trials are generally proof-of-concept trials. Knowing the maximum tolerable dose for healthy adults, early-clinical-stage companies will open a new trial, enrolling actual patients who are dealing with the ailment the new treatment or device aims to improve or eradicate. During these studies, companies aim to answer the following questions:

  • Is the medical product safe to use in a sick-patient population?
  • Does the experimental medical product produce positive results by reducing the symptoms or eradicating the illness in a small patient population?

Early-clinical-stage stocks come with similar risks to preclinical-stage stocks:

  • Clinical Failure. Although preclinical data must be solid to get to this point, there is no guarantee that results in mice and petri dishes will equate to results in humans. Although there’s a stronger chance of positive outcomes in clinical stages than there is in preclinical stages, there is still a chance of failure. Clinical failures mean the loss of millions of dollars and years of research and can lead to a substantial loss of value in the stock that represents the company in charge of the trial. 
  • Capital Requirements. Even at this stage, the companies don’t have products on the market and face the same capital challenges seen by research-and-discovery and preclinical companies. The difference here is that with a tangible product in development with FDA approval for experimental use in humans, the risk to lenders and institutional investors is lower, often leading to better fundraising opportunities. Nonetheless, these transactions can still cost investors in the long run. 

4. Late-Clinical-Stage Biotech Stocks

Late-clinical-stage biotech companies are at the final step before submitting the applications that allow them to bring new medical products to market. 

These companies are in the midst of Phase Three clinical development. In Phase Three clinical studies, late-clinical-stage companies enroll large populations of patients that have confirmed cases of the illness they are attempting to treat. In the enrollment process, the company will attempt to hit every corner of the patient population, ensuring a wide diversity in age, race, and (often) severity of the condition.

Late-stage biotech companies already have a good understanding of the safety and tolerability profile of their treatment and believe it to be effective. Now, it’s time to prove that it is safe, tolerable, and effective across the vast patient population that would use it once approved and marketed. 

If there is a current standard of care for the ailment being addressed — that is, the standard treatment you would expect with what’s currently available — late-stage companies will generally treat a percentage of the patient population with the experimental drug and another percentage with the standard of care. The goal of these head-to-head clinical studies is to prove that the experimental drug performs better than the current standard of care. 

As with all other stages of biotech stocks, late-stage stocks come with their own risks:

  • Clinical Failure. As you begin to invest in biotech, you’ll see that clinical failure, even in late stages, happens all too often. By this stage, companies have spent incredible amounts of money on research, preclinical testing, and early trials. The process has likely taken several years, if not a decade or more. A failure at this stage is extremely painful, and that’s seen in the stock’s price when it happens. 
  • Capital Requirements. Phase Three clinical trials are expensive. Also, to move out of the clinical stage and into commercial stages, there is a large cost involved in regulatory approvals. If capital hasn’t already been worked out at this point, companies may be forced to move forward with transactions that aren’t in the best interest of investors in order to raise the capital needed to go through the final stages of development and work toward commercialization. 

5. Commercial-Stage Biotech Stock

In the world of biotech, commercial stages are the big leagues. At this point, companies have been through the clinical development process and have either brought or are bringing a product to market. 

This is the point at which companies will need to market properly to bring their treatment to the masses. If all works out, revenue will start to pour in and shareholders will enjoy the fruits of their investments. However, even commercial-stage biotech stocks come with risk:

  • Commercial Failure. Even if a new drug seems like it provides far more benefits than other options, it can fail in the market. A great example of this is MannKind’s Afrezza. The inhaled mealtime insulin treatment frees diabetics from the needle. However, when it hit the market, sales were slow. While the product is still sold, it was nowhere near as successful as many expected it to be. As a result, MannKind stock has fallen from a value of more than $50 per share following the drug’s approval to under $5 per share today. 
  • Early Commercial Capital Requirements. At the point of commercialization, biotech companies have the ability to generate revenue through product sales. However, the marketing and distribution of these products can be extremely expensive. If there is not a commercialization partner involved, the producer of the new medical product will have to pay the costs. Early in the process, this can lead to capital issues that ultimately end in loss of value for investors. 
  • Exclusivity. Patents and exclusivity for a new medicine are only temporary. After the exclusivity period — often five to 12 years — generic options may hit the market at a much lower price than the brand-name drug. This can deeply cut into profits of companies with products that have been on the market for a while. 

How Much Should You Invest in Biotech Stocks?

No single asset or single class of assets should make up 100% of your investing portfolio. Diversification is an important tool to protect you from extreme losses. 

There is no one-size-fits-all allocation strategy. However, there are some factors to consider when determining your asset allocation. 

Never Forget Bonds

Although stocks are the darling of the investing community, you shouldn’t discount the value of bonds. Sure, bonds will generally grow at a slower rate than stocks, but they offer a level of protection that should not be ignored. 

If you don’t already have a bond allocation strategy and are not sure how much of your portfolio should be in bonds, simply use your age. For example, if you’re 32 years old, 32% of your investing dollars should be invested in bonds. This rule of thumb and its many variations provide a solid level of volatility protection that increases as you age. 

The 5% Rule 

Considering that most biotech companies are in clinical, preclinical, or discovery stages, investments in the industry can be highly speculative and therefore carry a high risk. If these are the types of biotech stocks you’re interested in, consider the less-than-five rule: less than 5% of your portfolio should be used in these high-risk investments. That way, if the high-risk investment fails, no more than 5% of your money is subject to the losses you will face. 

If you have other high-risk investments, consider how much of your 5% high-risk cap you want to allocate to biotech plays and what percentage you will allocate to other more speculative investments. 

Lower-Risk Biotech Stock Allocation

Of course, if you’re more interested in established stocks in the sector, such as Gilead Sciences, Pfizer, Bristol-Myers Squibb, AbbVie, and several others with massive market caps, the risks are far lower. The less-than-five rule wouldn’t play into your decision to invest in these more established companies. However, these stocks have already made their dramatic runs and don’t offer the same potential for profit that the higher-risk, late-clinical-stage or early-commercial-stage biotech stocks do. 

Nonetheless, they do make attractive investments for some investors. Big pharmaceutical companies, also known as big-pharma companies, are known for producing slow but steady gains over time while offering decent dividends. 

However, even under these terms, your exposure to a single stock should never be more than 5% of your investment dollars. Again, this is to protect you should a decision to buy one of these stocks result in a turn for the worst. 

Take the time to look into revenue growth, profit growth, continued innovation, dividends, and exclusivity periods for any company you’re considering to get a good idea of the quality of the investment you’re making. From there, decide if it’s worth risking 5% of your investment dollars. Continue to assess in this way until you’ve gone through all of the quality blue-chip biotech stocks you’re interested in. 

Consider Investing in Biotech Funds

Investing in stocks that represent biotech and biopharmaceutical companies can be rewarding. Not only will your investments potentially generate profits, they’ll help improve the lives of patients with debilitating conditions like Alzheimer’s disease, AIDS, and various cancers under the oncology umbrella. 

However, individual stocks aren’t the only way to get involved. 

If you want to invest in the industry but don’t have the time, know-how, or desire to do the research it takes to pick and maintain a portfolio of the best stocks in the space, you may want to consider exchange-traded funds (ETFs). 

ETFs pool money from a large group of investors that’s used to invest in a diversified portfolio of stocks based on the fund’s prospectus, and there are plenty of biotech ETFs out there to choose from. 

If you decide to go this route, make sure to look at the fund’s historic performance, expense ratio, and prospectus before you dive in. This will help to ensure that the funds you invest in have a high probability of producing competitive returns while keeping expenses to a minimum. 

Final Word

The biotech industry can be a great place to invest. It can also generate extreme losses if things go wrong. Considering this, there are a few rules to follow when investing in biotech stocks:

  • Never Overallocate. No matter how good an investment in biotech seems, unless you’re an investing pro, never spend more than 5% of your investing dollars on a single stock. Also, never spend more than 5% of your investing dollars across all high-risk investments. 
  • Never Stop Researching. An educated investment decision has far better potential to be a winner than a dumb-money investment. Research the biotech stocks you plan to invest in very deeply before making your initial investment. Once you’ve made your investment, keep a close eye on what the company is doing to ensure that your money is well-invested through the long term. 
  • Always Remember the Risks. The biotech industry can lead to huge profits, but stocks can also lose the vast majority of their value if things go wrong. Always consider the risks before making any investment. 

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What Is Escrow? How It Keeps Home Buyers and Sellers Safe

What is escrow? In real estate, an escrow account is a secure holding area where important items (e.g., the earnest money check and contracts) are kept safe by an escrow company until the deal is closed and the house officially changes hands. Escrow is also a contractual arrangement in which a third party—usually the escrow officer—maintains money and documents until the deal is done and escrow is closed.

How escrow works

The escrow agent is a third party—perhaps someone from the real estate closing company, an attorney, or a title company agent (customs vary by state), says Andy Prasky, a real estate professional with Re/Max Advantage Plus in Twin Cities.

The third party is there to make sure everything during the transaction proceeds smoothly, including the transfers of money and documents, and to hold assets safely in an escrow account until disbursement.

Escrow protects all of the relevant parties in a real estate transaction, including the seller, the home buyer, and the lender, by ensuring that no escrow funds from your lender and other property change hands until all of the conditions in the agreement have been met. Along the way, proper documentation is filed with the escrow agent or the escrow company as each step toward closing is completed.

Contingencies that might be part of the process could include home inspection, repairs, mortgage approval, and other tasks that need to be accomplished by the buyer or seller. And every time one of those steps is completed, the buyer or seller signs off with a contingency release form; then the transaction moves to the next step (and one step closer to closing).

Once all conditions are met and the transaction is finalized, the closing costs are paid and the money due to the sellers is disbursed from your lender. Meanwhile an escrow officer clears (or records) the title, which means the buyer officially owns the home.

How much does escrow cost?

That varies—as well as whether the buyer or the seller (or both) pays—with the fee for this real estate service typically totaling about 1% to 2% of the cost of the home.

The earnest money deposit

Earnest money—also known as an escrow deposit—is a dollar amount buyers put into an escrow account after a seller accepts their offer. The escrow company holds the money in an escrow account for the duration of the transaction.

Another way to think of it is as a “good-faith” deposit into an escrow account, which will compensate the seller if the buyer breaches the contract and fails to close.

Can you borrow earnest money from your lender?

Most home buyers come up with cash for escrow and deposit it into the escrow account from their own funds. The payment amount is small compared with the cost of the home and the loan, and the home buyers may not even have a mortgage lender yet when they make an offer on a home.

However, earnest money can be borrowed from your lender, but there are certain rules involved. First-time buyers are most likely to need to go to their mortgage lender to make this escrow account deposit. Your lender will ultimately count the deposit toward closing costs and the down payment on the house.

How escrow protects you during the real estate buying process

Escrow may seem like a pain, but here’s how it can work in your favor. Let’s say, for example, the buyer had a home inspection contingency and discovered that the roof needed repairs. The seller agrees to fix the roof. However, during the buyer’s final walk-through, she finds that the roof hasn’t been repaired as expected. In this case, the seller won’t see a dime of the buyer’s money until the roof is fixed. Talk about a nice safeguard!

Sellers benefit from escrow, too: Let’s say the buyers get cold feet at the last minute and bail on the transaction. This may be disappointing to the seller, but at the very least, buyers have typically ponied up a sizable chunk of change for their earnest money deposit. This money, often totaling 1% to 2% of the purchase price of a home, has been held in escrow. When buyers back out with no legitimate reason, they forfeit that money to the seller—a decent consolation for the sale’s failure and the expense of making mortgage payments and other expenses while the home was off the market.

Escrow, in other words, is the equivalent of bumpers on cars, keeping everyone safe as they move forward in a real estate transaction. Odds are, no one’s trying to swindle anyone. But isn’t it nice to know that if something does go wrong, escrow is there to cushion the blow?

What is an escrow account on a mortgage account?

When a homeowner makes monthly payments to the mortgage servicer, part of each payment goes toward the mortgage and part of it goes into an escrow account for payment of property taxes and insurance premiums such as homeowners insurance or mortgage insurance. When those bills are due, the escrow service uses the funds in the escrow account to make payment to your insurance company and to the county for property taxes.

If more money accumulates in your escrow account from monthly payments than is necessary to pay property taxes and insurance, the mortgage company sends you a refund check, and may lower your monthly mortgage payment. On the other hand, if insurance premiums and property tax expenses go up, your mortgage holder may send you a bill for the difference, or raise your monthly loan payments.


10 Least Tax-Friendly States for Retirees

Whether you plan to retire at the beach, near the mountains, or to some other dream destination, make sure you check out the local tax situation before packing your bags and hiring a moving van. If you don’t, you might be unpleasantly surprised by a hefty state and local tax bill in your new hometown.

State and local taxes can vary greatly from one place to another. The difference can easily exceed $10,000 or more per year for some people, which is enough to break the bank for a lot of retirees. So, to avoid this kind of bombshell, make sure you do some research before settling on a new location. You can start with Kiplinger’s State-by-State Guide to Taxes on Retirees. This tool maps out the tax landscape for each state and the District of Columbia, and allows you to do a side-by-side comparison for up to five states at a time.

We also identified the 10 states that impose the highest taxes on retirees, which are listed below (we saved the worst state for last). Our results are based on the estimated state and local tax burden in each state for two hypothetical retired couples with a mixture of income from wages, Social Security, 401(k) plans, traditional and Roth IRAs, private pensions, interest, dividends, and capital gains. One couple had $50,000 in total income and a $250,000 home, while the other had $100,000 of income and a $350,000 home. Take a look to see if your state—or the state you’ve been dreaming about for retirement—made our “least tax-friendly” list for retirees (we hope it didn’t).

See the final slide for a complete description of our ranking methodology and sources of information.

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10. Texas

picture of Texas flag in coinspicture of Texas flag in coins
  • State Income Tax Range: None
  • Average Combined State and Local Sales Tax Rate: 8.19%
  • Median Property Tax Rate: $1,692 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

You might be surprised to see the Lone Star State on the list of least tax-friendly states for retirees. Afterall, isn’t Texas one of the handful of states with no income tax? Well, yes, it’s true that there are no income taxes in Texas…which means no taxes on Social Security benefits, pensions, 401(k)s, IRAs, or any other type of retirement income. But a lot of states don’t tax these types of retirement income anyway (or at least partially exempt them), so states without any income tax don’t necessarily have an advantage over other states when it comes to taxes on seniors.

Texas’ main problem is with its property taxes. The state’s median property tax rate is tied for the seventh-highest in the country (the tie is with New York). For our hypothetical retired couples, that means an estimated annual property tax bill of $4,230 for the couple with the $250,000 home and $5,922 for the couple with the $350,000 home. Seniors may be able to get a $10,000 property tax exemption, have their tax bill “frozen,” or delay payment of taxes.

Sales taxes are on the high end in Texas, too. The state imposes a 6.25% tax, but local governments can tack on up to 2% more. When combined, the average state and local sales tax rate in Texas is 8.19%, which is the 14th-highest combined rate in the country.

For more information, see the Texas State Tax Guide for Retirees.

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9. New York

picture of New York flag in coinspicture of New York flag in coins
  • State Income Tax Range: 4% (on taxable income up to $8,500 for single filers; up to $17,150 for joint filers) to 10.9% (on taxable income over $25 million)
  • Average Combined State and Local Sales Tax Rate: 8.52%
  • Median Property Tax Rate: $1,692 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: Estate tax

Unfortunately, the Empire State’s heavy tax burden for middle-class families carries over into retirement—especially when it comes to property taxes. Based on New York’s statewide median tax rate, our first hypothetical retired couple would pay about $4,230 each year in property taxes on their $250,000 home in New York. For our second couple, the annual estimated tax bill is $5,922 for their $350,000 home. Those figures are tied (with Texas) for the seventh-highest amounts in the country for those home values. There are some property tax breaks for seniors, though. Local governments and public-school districts can reduce the assessed value of their home by 50%. Under another program, part of a senior’s home value can be exempt from school property taxes.

New York has high sales taxes, too. There’s a 4% state tax, and localities can add as much as 4.875% in additional taxes on purchases in the state. At 8.52%, New York’s average combined (state and local) sales tax rate is the 10th-highest in the nation.

When it comes to income taxes, New York’s tax bite is less severe for ordinary retirees when compared to other states. Social Security benefits, federal and New York government pensions, and military retirement pay are exempt. However, anything over $20,000 from a private retirement plan (including pensions, IRAs and 401(k) plans) or an out-of-state government plan is taxed. Also, for ultra-wealthy retirees, New York income tax rates were always steep, but they’re even higher now — starting in 2021, the highest rate jumps from 8.82% to 10.9%.

New York also has an estate tax—with an unusual “cliff tax” kicker. Generally, the tax is only imposed on that portion of an estate over the $5.93 million (for 2021) exemption. However, if the value of the estate is more than 105% of the exemption amount, the exemption won’t be available and the entire estate will be subject to New York estate tax. Ouch!

For more information, see the New York State Tax Guide for Retirees.

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8. Iowa

picture of Iowa flag in coinspicture of Iowa flag in coins
  • State Income Tax Range: 0.33% (on taxable income up to $1,676) to 8.53% (on taxable income over $75,420) [For 2022, 0.33% on taxable income up to $1,743 and 8.53% on taxable income over $78,435.]
  • Average Combined State and Local Sales Tax Rate: 6.94%
  • Median Property Tax Rate: $1,529 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: Inheritance tax

The Hawkeye State’s spot on our list of the least tax-friendly states for retirees is primarily based on high property taxes. The statewide median property tax rate in Iowa is the 11th-highest in the U.S. Our imaginary couple with a $250,000 home in the state would fork out about $3,823 per year in real property taxes. The couple with a $350,000 home can expect to pay about $5,352 annually. A property tax credit of up to $1,000 is available to lower-income seniors. (Beginning in 2022, special rules will allow residents who are at least 70 years old with an annual household income of not more than 250% of the federal poverty level to offset increases in property taxes.)

On the income tax front, Social Security benefits are tax-free. There’s also a $6,000 exclusion ($12,000 for joint filers) for most types of federally-taxed retirement income. However, when compared to some ot the tax breaks for retirement income available in other states, the Iowa exclusion doesn’t look all that generous. As a result, income taxes for retirees in the state can be a little on the high end, especially for wealthier residents. (Beginning in 2023, the lowest Iowa personal income tax rate will be 4.4%, while the highest rate will be 6.5%.)

Sales taxes in Iowa are middle-of-the-road. The state rate is 6%, and localities can add as much as 1%. The average combined state and local rate is 6.94%. That puts Iowa in the middle of the pack when it comes to overall sales tax rates.

The Iowa inheritance tax is another thing retirees need to worry about –  at least for the time being. Beginning in 2021, Iowa is phasing out it’s inheritance tax over a five-year period by reducing the rate of tax by 20% each year (the base rates range from 5% to 15%). Therefore, for 2021, Iowa’s inheritance tax ranges from 4% to 12%, depending on the amount of the inheritance and the relationship of the recipient to the decedent. The tax will be completely repealed on January 1, 2025.

For more information, see the Iowa State Tax Guide for Retirees.

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7. Wisconsin

picture of Wisconsin flag in coinspicture of Wisconsin flag in coins
  • State Income Tax Range: 3.54% (on taxable income up to $12,120 for single filers; up to $16,160 for joint filers) to 7.65% (on taxable income over $266,930 for single filers; over $355,910 for joint filers)
  • Average Combined State and Local Sales Tax Rate: 5.43%
  • Median Property Tax Rate: $1,684 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

The Badger State suffers from weak income tax breaks for retirement income and high property taxes. While Social Security benefits aren’t subject to Wisconsin’s income taxes, income from pensions and annuities, along with distributions from IRAs and 401(k) plans, are generally taxable. Seniors can subtract up to $5,000 of retirement income (including distributions from IRAs) from Wisconsin taxable income if their federal adjusted gross income is less than $15,000 ($30,000 for a married couple filing jointly). But that exclusion is comparatively small and is only available to retirees with a relatively low income.

Property taxes are the eighth-highest in the U.S. For our hypothetical couple with a $250,000 home in Wisconsin, estimated property taxes would be about $4,210 per year. The make-believe couple with a $350,000 home would have to cough up about $5,894 each year for taxes. Plus, there are limited property tax breaks for retirees. For instance, unlike younger taxpayers, residents age 62 or older don’t need earned income to claim an income tax credit for property taxes paid. Property tax deferral loans are also available for seniors with incomes under $20,000.

There are some bright spots for retirees, though. For example, sales taxes are actually low in Wisconsin. It has the ninth-lowest combined average state and local tax rate in the nation. There are no estate or inheritance taxes, either.

For more information, see the Wisconsin State Tax Guide for Retirees.

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6. Vermont

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  • State Income Tax Range: 3.35% (on taxable income up to $40,350 for single filers; up to $67,450 for joint filers) to 8.75% (on taxable income over $204,000 for single filers; over $248,350 for joint filers)
  • Average Combined State and Local Sales Tax Rate: 6.24%
  • Median Property Tax Rate: $1,861 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: Estate tax

The Green Mountain State offers cold comfort on the tax front to retirees. It has a steep top income tax rate, and most retirement income is taxed. Vermont also taxes all or part of Social Security benefits for single residents with federal adjusted gross income over $45,000 (over $60,000 for married couples filing a joint return).

Vermonters also pay a lot in property taxes. If our first made-up couple owned a $250,000 home in Vermont, they’d pay about $4,653 in property taxes each year. Our second couple, with a $350,000 home, would pay around $6,514 annually. These property tax amounts are the fifth-highest in the U.S. for those home values. Homeowners age 65 and older may qualify for a tax credit worth up to $8,000 if their household income does not exceed a certain level.

Vermont also taxes estates that exceed $5 million in value (for 2021). The tax is imposed at a flat 16% rate.

Sales taxes aren’t too bad in Vermont, though. Local jurisdictions can add 1% to the state’s 6% sales tax, which results in an average combined state and local sales tax rate of 6.24%. That’s below the national average.

For more information, see the Vermont State Tax Guide for Retirees.

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5. Nebraska

picture of Nebraska flag in coinspicture of Nebraska flag in coins
  • State Income Tax Range: 2.46% (on taxable income up to $3,290 for single filers; up to $6,570 for joint filers) to 6.84% (on taxable income over $31,750 for single filers; over $63,500 for joint filers)
  • Average Combined State and Local Sales Tax Rate: 6.94%
  • Median Property Tax Rate: $1,614 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: Inheritance tax

Nebraska is one of the least tax-friendly state in the nation for retirees primarily because of steep income and property taxes. With regard to the state’s income tax system, the Cornhusker State taxes some Social Security benefits and most other retirement income, including IRA withdrawals, 401(k) funds, and public and private pensions. Plus, the top income tax rate kicks in pretty quickly: It applies to taxable income above $31,750 for single filers and $63,500 for married couples filing jointly. (Note that the state is reducing taxes on Social Security benefits starting in 2021 and eliminating taxes on military retirement pay beginning in 2022.)

Nebraska’s inheritance tax ranges from 1% to 18%. The tax on heirs who are immediate relatives is only 1% and does not apply to property that is worth less than $40,000. For remote relatives, the tax rate is 13% and the exemption amount is $15,000. For all other heirs, the tax is imposed at an 18% rate on property worth $10,000 or more.

The median property tax rate in Nebraska is pretty high. For a $250,000 home, the statewide average tax in the state is $4,035 per year. It’s $5,649 for a $350,000 residence. Those totals are the ninth-highest property tax amounts in country for homes at those price points. People over age 65 with income less than a certain amount may qualify for a homestead exemption that exempts all or a portion of their property’s value from taxation.

The state sales tax rate is 5.5%, but local jurisdictions can add an additional 2.5% to the state rate. The average combined state and local sales tax rate is 6.94%, which is in the middle of the pack when compared to other states.

For more information, see the Nebraska State Tax Guide for Retirees.

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4. Kansas

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  • State Income Tax Range: 3.1% (on taxable income from $2,501 to $15,000 for single filers; from $5,001 to $30,000 for joint filers) to 5.7% (on taxable income over $30,000 for single filers; over $60,000 for joint filers)
  • Average Combined State and Local Sales Tax Rate: 8.7%
  • Median Property Tax Rate: $1,369 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: None

While there’s no place like home, I wouldn’t be surprised to hear that Dorothy (and ToTo, too) fled Kansas when she retired to avoid the state’s high taxes. Looking at the state’s income tax system, distributions from private retirement plans (including IRAs and 401(k) plans) and out-of-state public pensions are fully taxed. Kansas also taxes Social Security benefits received by residents with a federal adjusted gross income of $75,000 or more. Military, federal government and in-state public pensions are exempt from state income taxes, though.

Shopping in Kansas can be expensive, too. The Sunflower State’s average combined state and local sales tax rate is the ninth-highest in the U.S. at 8.7%. Groceries, clothing, and even prescription drugs are subject to state and local sales taxes in Kansas, too.

Property taxes are above the national average as well. The statewide average property tax bill for our first hypothetical retired couple with a $250,000 home in Kansas comes to about $3,423. The bill for our second imaginary couple, with a $350,000 home, is estimated to be $4,792. Those amounts are the 15th-highest in the U.S. Homeowners who satisfy certain age and income requirements may qualify for a property tax refund, though.

The good news is that Kansas does not impose estate or inheritance taxes.

For more information, see the Kansas State Tax Guide for Retirees.

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3. Connecticut

picture of Connecticut flag in coinspicture of Connecticut flag in coins
  • State Income Tax Range: 3% (on taxable income up to $10,000 for single filers; up to $20,000 for joint filers) to 6.99% (on taxable income over $500,000 for single filers; over $1 million for joint filers)
  • Average Combined State and Local Sales Tax Rate: 6.35%
  • Median Property Tax Rate: $2,139 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: Estate tax

The Constitution State is a tax nightmare for many retirees…but at least things are improving on the income tax front. For residents with federal adjusted gross income over $75,000 ($100,000 for joint filers), 25% of Social Security benefits taxed at the federal level are taxed by Connecticut. (Social Security payments are exempt for taxpayers below those income levels.) Plus, for 2020, only 28% of income from a pension or annuity is exempt for taxpayers with less than $75,000 of federal AGI (less than $100,000 for joint filers). But the exemption percentage will increase by 14% each year until it reaches 100% for the 2025 tax year. Military pensions are also excluded from state taxes.

Connecticut has the third-highest property taxes in the U.S., so the $10,000 cap on the federal tax deduction for state and local taxes stings a bit more here. For our two make-believe retired couples, the statewide estimated property tax for a $250,000 home in Connecticut is $5,348 per year, and the estimated annual tax for a $350,000 home in the state is $7,487. The state des offers property tax credits to homeowners who are at least 65 years old and meet income restrictions. Income ceilings are $45,100 for married couples (with a maximum benefit of $1,250) and $37,000 for singles (with a maximum benefit of $1,000).

Connecticut imposes an estate tax on estates valued at $7.1 million or more (for 2021) at progressive rates ranging from 10.8% to 12%. Connecticut is also the only state with a gift tax, which applies to real and tangible personal property in Connecticut and intangible personal property anywhere for permanent residents. Only the amount given since 2005 and over $7.1 million is taxed. Gift tax rates start at 10.8% and go up to 12%.

There are no local sales taxes in Connecticut, so you’ll pay only the statewide sales tax rate of 6.35% on your purchases (slightly below average). Clothing, footwear and accessories priced at more than $1,000; jewelry worth more than $5,000; and most motor vehicles costing $50,000 or more are taxed at 7.75%.

For more information, see the Connecticut State Tax Guide for Retirees.

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2. Illinois

picture of Illinois flag in coinspicture of Illinois flag in coins
  • State Income Tax Range:4.95% (flat rate)
  • Average Combined State and Local Sales Tax Rate: 8.83%
  • Median Property Tax Rate: $2,165 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: Estate tax

There’s a bit of good tax news for retirees in Illinois: Social Security benefits and income from most retirement plans are exempt. Plus, the state’s 4.95% flat income tax rate is relatively low.

Now for the bad news: Property taxes hit retirees hard in Illinois. The statewide median property tax rate in Illinois is the second-highest in the nation—a staggering $5,413 per year on a $250,000 home and a whopping $7,578 on a $350,000 home. Fortunately, there is some relief for qualifying seniors in the form of a homestead exemption of up to $5,000 ($8,000 in Cook County), the ability to “freeze” a home’s assessed value, and a tax deferral program.

Sales tax rates are high in Illinois, too. The state has the seventh-highest average combined state and local sales tax rate at 8.83%. In some locations, the rate can be as high as 11%! And groceries (1% state rate; additional local taxes may apply) and clothing are taxable.

Illinois also has an estate tax that applies to estates worth $4 million or more. That can be bad news for your heirs.

For more information, see the Illinois State Tax Guide for Retirees.

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1. New Jersey

picture of New Jersey flag in coinspicture of New Jersey flag in coins
  • State Income Tax Range: 1.4% (on taxable income up to $20,000) to 10.75% (on taxable income over $1 million)
  • Average Combined State and Local Sales Tax Rate: 6.6%
  • Median Property Tax Rate: $2,417 per $100,000 of assessed home value
  • Estate Tax or Inheritance Tax: Inheritance tax

Sorry, New Jersey, but you’re the least tax-friendly state in the country for retirees. And, once again, it’s the property taxes that are crushing retirees. The Garden State has the highest median property tax rate in the country. If our first make-believe couple bought a $250,000 home in the state, they would pay an eye-popping $6,043 in property taxes each year based on our estimates. Our second couple would pay a sky-high $8,460 on their $350,000 New Jersey home. The state does offer some property tax relief for seniors, though. Homeowners age 65 or older may qualify for a property tax credit of up to $1,000. There’s also a program (the “senior freeze”) that reimburses eligible seniors for property tax increases. And a $250 property tax deduction is available for senior citizens with an annual household income of $10,000 or less.

Income taxes are comparatively low for retirees in New Jersey, thanks in large part to a generous exemption for retirement income. For example, married seniors filing a joint return can exclude up to $100,000 of income from a pension, annuity, IRA, or other retirement plan if their New Jersey income is $100,000 or less. Single taxpayers and married taxpayers filing a separate return can exclude up to $75,000 and $50,000, respectively. We should also point out that Social Security benefits are not taxed in New Jersey, either.

Sales taxes are reasonable in New Jersey, too. The state sales tax rate is 6.625%, but because some areas charge only half the state rate on certain sales, New Jersey’s average state and local combined sales tax rate is only 6.6%, which is a little below average.

Although New Jersey recently eliminated its estate tax, the state still imposes an inheritance tax. The tax rates range from 11% to 16% on inherited property with a value of $500 or more. The amount of tax due is based on who specifically receives the property and how much the property is worth.

For more information, see the New Jersey State Tax Guide for Retirees.

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About Our Methodology

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Our tax maps and related tax content include data from a wide range of sources. To generate our rankings, we created a metric to compare the tax burden in all 50 states and the District of Columbia.

Data Sources:

Income tax – Our income tax information comes from each state’s tax agency. Income tax forms and instructions were also used. See more about how we calculated the income tax for our hypothetical retired couples below under “Ranking method.”

Property tax – The median property tax rate is based on the median property taxes paid and the median home value in each state for 2019 (the most recent year available). The data comes from the U.S. Census Bureau.

Sales tax – State sales tax rates are from each state’s tax agency. We also cite the Tax Foundation’s figure for average combined sales tax, which is a population-weighted average of state and local sales taxes. In states that let local governments add sales taxes, this gives an estimate of what most people in a given state actually pay, as those rates can vary widely.

Ranking Method:

The “tax-friendliness” of a state depends on the sum of income, sales and property tax paid by our two hypothetical retired couples.

To determine income taxes due, we prepared returns for both couples. The first couple had $15,000 of earned income (wages), $20,500 of Social Security benefits, $4,500 of 401(k) plan distributions, $4,000 of traditional IRA withdrawals, $3,000 of Roth IRA withdrawals, $200 of taxable interest, $1,000 of dividend income, and $1,800 of long-term capital gains for a total income of $50,000 for the year. They also had $10,000 of medical expenses, paid $2,500 in real estate taxes, paid $1,200 in mortgage interest, and donated $1,900 (cash and property) to charity.

The second couple had $37,500 of Social Security benefits, $26,100 of 401(k) plan distributions, $18,200 of private pension money, $4,000 of traditional IRA withdrawals, $2,000 of Roth IRA withdrawals, $2,000 of tax-exempt municipal bond interest (from the state of residence), $2,000 of taxable interest, $4,000 of dividend income, and $4,200 of long-term capital gains for a total income of $100,000 for the year. They also had $10,000 of medical expenses, paid $3,200 in real estate taxes, paid $1,500 in mortgage interest, and donated $4,300 (cash and property) to charity.

Since some states have local income taxes, we domiciled both our couples in each state’s capital, from Juneau to Cheyenne. We calculated their 2019 income tax returns using software from

How much they paid in sales taxes was calculated using the IRS’ Sales Tax Calculator, which is localized to zip code. To determine those, we used Zillow to determine zip codes with housing inventory close to our sample assessed value.

How much each hypothetical family paid (and deducted on their income tax return, if allowed) in property taxes was calculated by assuming a residence with a $250,000 assessed value for the first couple and a $350,000 assessed value for the second couple. We then applied each state’s median property tax rate to that appropriate amount.