Thoughts on Transferring Wealth to the Next Generation

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

Lately, clients have been asking if we wouldn’t mind having a conversation with their kids about planning for future wealth transfer, as well as helping their children learn how to save and become financially independent. The decision as to whether to talk to your children and when is very personal, so there is no right answer. Every family has their differences, and views on money can be disparate, but having a conversation in advance can prevent future mistakes and confusion within the family. If you have open communication lines with your kids and don’t mind them knowing about the assets you have, bringing up this topic sooner rather than later can be advantageous.

First, decide how much information you want to reveal and what you would like to accomplish or instill in your children. Sometimes it may make sense to involve your financial advisor or estate attorney, who can be a sounding board and an intermediary when explaining types of accounts, estate documents, and other investment questions that may arise. Having a discussion about current beneficiaries, where accounts are located, and the purpose for each type of account is important. For example, if a child inherits an IRA or 401K account, there can be huge tax consequences if the child takes out all the funds at once.

Family Dynamics

If there are several children and grandchildren involved, usually most parents try to be fair. If you pass away and leave more money to one child than the other, since you helped one more while you were alive, communicating this decision in advance may prevent conflict. Also, discussing which assets would be best given to whom may make splitting assets smoother in the future. It may be more efficient in some cases to leave a house to a child that lives in the same location versus to a child who lives in another country. There may be certain tax advantages to leaving an IRA to one child versus another. If one child is struggling and paying for grandkids’ college and also thinking about buying a house, and you really want to pay for this, leaving only IRA assets to that child would cause them to have to take out funds and pay taxes prematurely, in comparison to another child that may be more financially stable and does not need the cash now.

Business Succession

If you are passing on generations of wealth from a family business, you may want to discuss how the money was made and explain the family legacy. If the family business is still active, communicating with your children about how you expect the business to continue may be important. One of our clients had a great idea. He wrote a book about his life for his grandkids and future generations. He added various pictures and life stories such as his first car and first girlfriend, and how he started in his profession.

Charitable Giving

If you are involved in charitable causes, this may be an opportune time to explain the importance of having philanthropy continue into the next generation. If you have a very strong inclination to give back to a specific cause because of a past experience, when your kids understand that decision they may be more inclined to remain involved in that cause once you are gone. One way of doing this could be to set up a charitable fund and have your kids as beneficiaries, but to discuss the purpose of the funds in advance.

Special Needs

If you are dealing with a child with special needs, it is important to have a conversation with other siblings or family members regarding your wishes when you are gone. If the plan was to have another sibling take care of the child with special needs, communicating and planning for this in advance can prevent future surprises. Assuming that a sibling wants to take responsibility as trustee or guardian for another sibling may end up in disaster. If you set up a trust with a sibling as trustee and they resign, you may end up with a corporate trustee making the decisions.

Continuing the Plan

Since your financial plan was put in place to make sure you are secure throughout your lifetime, if significant assets are projected to be left behind, continuity with your financial plan may be another topic for discussion. If your kids are all well off, planning for grandkids and future generations may now be your goal. Having a discussion with your advisor along with the family will help you make better decisions about how to plan for the future. Keep in mind that this should be revisited when there are changes in the tax laws or if there are changes in the family such as a marriage, divorce or new grandchild.

Feel free to reach out to Roxanne Alexander if you have any questions by email: RAlexander@Evensky.com or phone: 305.448.8882 extension #236.

www.Evensky.com

How to Navigate Between Private Foundations and Donor-Advised Funds

Kristin Fang

Danqin Fang, CFP®, CFA Financial Advisor

There are more tools now available to help you plan your charitable giving. The two most popular vehicles are private foundations and donor-advised funds (DAFs). While they are both designed to accomplish the same goal, namely of getting funds to charitable causes you care most about, they each come with a different set of pros and cons based on their different structures, tax rules, privacy, and flexibility levels.

Private Foundations

These are independent tax-exempt 501(c)(3) legal organizations, established by individuals, families, or corporations with public charitable missions. The board of directors or trustees and officers are responsible for such foundations’ three main duties: 1) Operational management, 2) Asset investment, and 3) Grant decisions. As its own legal entity, a private foundation provides its management board of great flexibility in grant making activities and total control over investments. However, this also comes with additional legal and recordkeeping responsibilities, with the need to comply with a set of more stringent tax rules. Before jumping into this powerful tool, it is prudent to weigh up all of the limitations and the level of commitment required.

Donor-Advised Funds (DAFs)

On the contrary, DAFs have gained increasing popularity in recent years by complementing what private foundations can do[i]. DAFs are charitable investment accounts established within a public charity that is affiliated with a community foundation, a financial institution, or other sponsoring organizations. Such funds were first addressed and defined in the Pension Protection Act of 2006[ii]. Donors who contribute assets to a DAF are eligible for immediate tax deductions. The contributions grow tax-free and are available for grants directed by donors at any time to any IRS-qualified public charities. While not offering the same grant-making flexibility as private foundations, DAFs provide an efficient solution for donors who want to outsource grant-making due diligence and the extensive administration of running a private foundation.

Comparisons and Planning Opportunities

  • Ease of setting up? DAFs win

DAFs are easy to set up as donors simply fill out account applications for the sponsoring organizations, without any cost associated, and then the accounts will be ready to use in just a few days. However, to set up a private foundation, the donor must first make a filing with the state to establish a trust or corporation and then apply to the IRS to ensure it is eligible, which can be a time-consuming and cost-burdensome process.

  • Independently managed? Private Foundations win

As a separate legal entity, a private foundation can appoint a board of directors and hire officers, including family members, to administrate the foundation, and the ultimate control over the foundation’s assets and the flexibility of its operations. However, A DAF is simply an account managed by a sponsoring organization, over which the donor has limited control regarding the account management, investments, and grant-making directions.

  • Preferred tax treatment? DAFs win

A wide variety of assets can be contributed to DAFs and the IRS allows a deduction of up to 60% of the donor’s Adjusted Gross Income (AGI) for cash gifts and up to 30% AGI for the fair market value of appreciated assets if held over one year, either for publicly or non-publicly traded assets. However, the deduction limit for private foundations is capped at 30% AGI for cash gifts and 20% AGI for appreciated assets. Even better, there is no excise tax on the annual income of DAF investments while generally a 1–2% federal excise tax is levied on a foundation’s annual investment income.[iii]

  • Investment control? Private Foundations win

Donors or the board of directors of private foundations can appoint investment advisors or can self-direct any investments they think prudent for their foundations. However, the investment options of DAFs are more limited for donors to choose from because they need to be approved and listed by the sponsoring organizations. Sometimes exceptions are made for higher account balance DAFs to include outside advisors.

  • Grant-making control? Private Foundations win

Private foundations donors have full control over the distributions of grants. There are no restrictions on the types of charities (either domestic or foreign) that can receive gifts, and even individuals can receive grants from private foundations, such as scholarships. However, DAF donors can only direct grants to eligible public charities approved by sponsoring organizations because these sponsors take on due diligence and legal compliance duties.

  • Distribution requirements? DAFs win

The “qualifying distributions” rule requires private foundations to grant 5% of the fair market value of its assets to other charities each year. However, there is no such requirement for DAFs and such donors can make grants anytime they like.

  • Privacy matters? DAFs win

The sponsoring organizations of DAFs can submit IRS form 990 with individual donor records kept private, so DAF donors can choose to grant anonymously should they wish. However, private foundation must complete a 990-PF tax form, which requires all contributions and grants to be part of the public record.

  • Recordkeeping and expenses? DAFs win

DAFs offer consolidated recordkeeping and tax reporting through the sponsoring organizations, and the fund administration and investment fees are charged to the accounts proportionate to their sizes. However, as an independent legal entity, a private foundation is responsible for all its own legal, accounting, tax reporting, investment management, and staffing operations expenses.

  • Successor election? DAFs win

Donors can simply name other individuals or charities as successors in their DAF accounts, whereas private foundations require the board of directors to vote for successors.

There is no one-size-fits-all solution to carry out your philanthropic mission. To plan well, it’s important to start by asking the right questions to help understand your priorities. For example:

  • Do you have a specific or a broad range of causes you’d like to support?
  • Which charities would you like to support? Are there any foreign charities or individuals?
  • Who will decide on grant making? Is flexibility in investment control important to you?
  • Do you want to make anonymous grants?
  • Will the different tax treatments of each charitable vehicle have a significant impact on your specific situation?
  • Do you want to donate in cash or highly appreciated assets?

 

Complementing a private foundation with a DAF

Sometimes choosing only one between a private foundation or a DAF is not always the best option, instead, a strategy to include both may be necessary. Establishing a DAF to complement a private foundation can be very effective because you can make grants with flexibility and control investments using private foundations, while at the same time, you can use DAFs to solve situations where you want to make anonymous awards to certain controversial causes you’d like to support, and to take advantage of DAFs’ favorable tax treatment for donating highly appreciated assets, etc.

Conclusion

On your journey to become a more successful philanthropist, it is important to utilize the most efficient and effective strategies to achieve your charitable goals. There is no one “right” way, each specific situation should be planned accordingly with a customized solution.

[i] 2018 DAF Report,. National Philanthropic Trust

[ii] https://www.irs.gov/pub/irs-tege/donor_advised_explanation_073108.pdf

 

[iii] https://www.fidelitycharitable.org/guidance/philanthropy/what-is-a-donor-advised-fund.html

 

Feel free to reach out to Danqin Fang if you have any questions by email: DFang@Evensky.com or phone: 305.448.8882 extension #222.

www.Evensky.com

 

Congress moves to make changes to US retirement system

David Garcia

David L. Garcia, CPA, CFP®, ADPA® Principal, Wealth Manager

Having made substantial changes to the US tax code at the end of 2017, Congress took a step closer to changing the US retirement system a few weeks ago. The House of Representatives passed the Setting Every Community Up for Retirement Enhancement Act on May 23 by a large bipartisan margin of 417-3. The bill is expected to be taken up by the Senate later this year and would make some major changes to the US retirement system. What follows are some of the major provisions of the bill, which would be the most significant changes to the system since 2006.

  • Currently individuals are barred from contributing to their IRAs after age 70 1/2. The House bill would remove this limitation while also increasing the age when taxpayers are required to start taking taxable distributions from their IRAs from 70 ½ to 72.
  • The bill would make it easier for 401(k) plans to offer annuities by providing more liability protection to employers. This provision has been somewhat controversial, with some consumer advocates suggesting more protections for participants when negotiating annuity prices.
  • The bill would allow parents to withdraw up to $10,000 from 529 education-savings plans for repayment of student loans.
  • One of the biggest changes would affect people who inherit retirement accounts. The bill would require heirs to withdraw the money within a decade and pay any taxes due. The Senate version has a similar provision. Currently, beneficiaries can take much smaller taxable distributions over their own life spans.
  • The bill allows unrelated employers to create groups to offer a retirement plan. This is meant to encourage smaller firms to offer retirement plans.

Lawmakers say this could be only round one of legislation geared to increase retirement savings in the US, with more to come later in the year. Possible legislation may require companies of a certain size to offer retirement plans to their workers. The Senate is considering its own version of the House bill, called the Retirement Enhancement and Savings Act, or may just vote on the House version later this year. There is a real possibility a final bill could make its way to the president’s desk before year end.  EKFF will continue to monitor the progress of the legislation and its impact on our clients.

 

Feel free to contact David Garcia with any questions by phone 305.448.8882 ext. 224 or email: DGarcia@Evensky.com 

For more information on financial planning visit our website at www.Evensky.com

References:
Tergesen, Anne, and Richard Rubin. “House Passes Bill Making Big Changes to US Retirement System.” The Wall Street Journal, 23 May 2019, 6:32PM, www.wsj.com/articles/house-on-track-to-pass-bill-making-big-changes-to-u-s-retirement-system-11558625474.
O’Brien, Sarah. “The House Just Shook up Retirement Planning: Here’s What Could Happen to Your Savings.” NBC News, 24 May 2019, 1:18PM, www.nbcnews.com/business/retirement/here-s-what-new-retirement-bill-could-mean-you-n1010001.
“House Passes Bill That Would Bring Major Changes to US Retirement System.” CBS News, 24 May 2019, 12:12PM, www.cbsnews.com/news/secure-act-bipartisan-retirement-bill-clears-house/.

The December Rout

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

 

 

 

 

 

In case you haven’t been paying attention, it’s been a bit rocky lately in the market, so I thought this might be a good time for a little recent history.

05-2019-18

05-2019-19

https://www.ft.com/content/73d3dd26-0ce0-11e9-acdc-4d9976f1533b

 

BLOOMBERG, DECEMBER 26, 2018, 10:23 AM

INVESTORS SCRAMBLE TO PULL CASH OUT OF MUTUAL FUNDS

Investors withdrew $56.2 billion from mutual funds during the week that ended Dec. 19, according to data from the Investment Company Institute. The mutual fund market hasn’t experienced a one-week outflow so large since October 2008.

Rout_03

REMEMBER THESE HEADLINES DURING THE “DECEMBER ROUT?”

We’re always preaching patience and long-term investing but we’re also well aware that scary headlines such as the ones above make it difficult to remain in the market when “experts” are warning that the world is coming to an end. So, I decided to track the daily headlines post-“Rout” to see how helpful the daily news might be for investors. I believe you’ll find the almost daily flip-flopping enlightening and it will persuade you to ignore the financial pornography and remain a patient long-term investor. Be sure to note the flip-flop between the red and green boxes, particularly the heavy ones.

Obviously I didn’t know where the market was going when I started this, but I haven’t been surprised that the media coverage followed the classic pattern below.

The moral is, next time you think you should make your investments decisions based on financial pornography and “breaking news,” reread the history below since the beginning of the “December Rout” and think twice before you bail out.

Investment success is based on time IN the market, NOT market timing!

Rout_04.png

Rout_05

Rout_06

Rout_07

Rout_08

Rout_14

Rout_15

Rout_16

Rout_17

Rout_18.png

Rout_19

Rout_20.png

 

FINALLY, AFTER READING THIS I THOUGHT YOU MIGHT ENJOY A BIT OF CREDIBLE OPTIMISM FROM WARREN BUFFETT

Buffett: Stocks are ‘virtually certain’ to rise in years ahead

‘Miraculous’ U.S. economy remains the engine, says Berkshire chief. He’s not worried.

Warren Buffett assured Berkshire Hathaway investors that they’re likely to continue seeing “substantial” investment gains, aided by what he describes as the long-running U.S. economic miracle.

“Our expectation is that investment gains will continue to be substantial—though totally random as to timing—and that these will supply significant funds for business purchases,” Buffett said in his annual letter to Berkshire

Naysayers may make money by pushing “gloomy” forecasts, he said, but “heaven help them if they act on the nonsense they peddle.”

https://www.marketwatch.com/story/buffett-stocks-are-virtually-certain-to-rise-in-years-ahead-2017-02-25

If you made  it this far, I hope you found it useful and this history lesson provides some comfort as we struggle (once again) through volatile markets. Just remember, patience pays and we’re here for you if you’d like to chat further.

Sincerely,

_HRE SIGNATURE

Harold Evensky

Chairman

Evensky & Katz / Foldes Financial Wealth Management

www.Evensky.com

 

 

Important Disclosure
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Evensky & Katz / Foldes Financial Wealth Management (“EK-FF”), or any non-investment-related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from EK-FF. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. EK-FF is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of EK-FF’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are an EK-FF client, please remember to contact EK-FF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. EK-FF shall continue to rely on the accuracy of information that you have provided.

NewsLetter Vol. 12, No. 3 – May 2019

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

DEAR READER,

8 WAYS TO SPRING CLEAN YOUR FINANCES

An excellent piece by my friend Robert Powel in USA Today with a link to my partner Josh Mungavin’s free “Family Information Organizer”: https://www.amazon.com/Family-Information-Organizer-Emergency-Disaster-ebook/dp/B07HFG63CQ/

https://www.usatoday.com/story/money/columnist/2019/04/25/financial-planning-key-components-plan/3329845002/ 

 

HOW LONG?

How long might you be around? A life expectancy calculator developed by the Janet and Mark L. Goldenson Center for Actuarial Research at the University of Connecticut.

https://apps.goldensoncenter.uconn.edu/HLEC/

 

NOT SUCH GOOD NEWS

“How much money will you need to retire? If you’re like the majority of Americans, you don’t know the answer.

A Bankrate survey from June 2018 found that 61 percent of Americans don’t know how much they will need to have saved to fund their retirement. Meanwhile, a separate March 2019 survey found that 21 percent of working Americans aren’t saving at all. It’s no surprise then that half of working households are “at risk” of not being able to maintain their standard of living when they retire, according to the National Retirement Risk Index (NRRI) from Boston College’s Center for Retirement Research.”

If you’re in the “don’t know” camp, check with us—that’s what we do.

https://www.bankrate.com/retirement/how-to-save-for-retirement/

 

NO COMMENT

Except you might want to consider the Fiduciary Oath.

Wells Fargo, LPL, Raymond James, Stifel, Oppenheimer, RBC and 73 Other Firms Ordered to Pay Millions to Harmed Investors

The SEC has settled charges against 79 advisory firms that have been ordered to pay more than $125 million to mostly retail clients harmed in the sale of higher-priced mutual fund share classes when lower-priced share classes were available.”

http://financialadvisoriq.com/c/2223483/269053/

 

SUCCOTASH

Barron’s recently published its 2018 “Fund Family Ranking: The Best Active Shops.” I must admit the concept and value of the “Best Shops” leaves me clueless. A fund family may rank highly due to a few of the managers posting outstanding performance while the majority are mediocre or worse. Kind of reminds me of the man who drowned in the lake that only had an “average” depth of four feet or the one who was comfortable with his head in the freezer and his rear in the oven. Investors put their money in individual funds, not families. Succotash may be fine for vegetables, but not investments.

HOW TO CALCULATE THE COST OF COLLEGE: A GUIDE TO FINANCIAL AID TERMS

An excellent guide from NPR for anyone facing the daunting task of funding college expenses.

https://www.npr.org/2019/04/11/709528694/how-to-calculate-the-cost-of-college-a-guide-to-financial-aid-terms?utm_medium=RSS&utm_campaign=news

 

FREE MONEY (MAYBE)

A tip from AARP Magazine

05-2019-01

https://www.usa.gov/unclaimed-money

 

BEWARE!

Of unrealistic guarantees and affinity marketing.

Getty Images Plus

“SEC Charges Texas Radio Host For $19.6 Million Ponzi Scheme”

William Gallagher, the self-dubbed “Money Doctor” and author of “Jesus Christ, Money Master” is principal of a firm that claimed “to be a vehicle of God’s peace and comfort to as many people as possible, helping first with their financial peace of mind.” Gallagher guaranteed investors risk-free returns in the accounts ranging from 5 percent to 8 percent per year, according to the SEC’s complaint.

The Securities and Exchange Commission charged a Texas radio host on Tuesday for allegedly operating a $19.6 million Ponzi scheme that targeted elderly Christian investors.

https://www.wealthmanagement.com/people/sec-charges-texas-radio-host-196-million-ponzi-scheme

 

SPIVA UPDATE

The 2018 full year report is now in and it doesn’t look any better for active managers.

“For the ninth consecutive year, the majority (64.49%) of large-cap funds underperformed the S&P 500. The figures highlight that heightened market volatility does not necessarily result in better relative performance for active investing. Similarly, small-cap equity managers found it more challenging to navigate 2018’s market environment compared with 2017’s rangebound market movements; 68.45% of all small-cap funds lagged the S&P SmallCap 600 over the one-year horizon.”

05-2019-02

05-2019-03

05-2019-04

https://us.spindices.com/documents/spiva/spiva-us-year-end-2018.pdf

 

AND MARKET TIMING DOES NOT HELP—IN FACT, IT COSTS

DALBAR: U.S. Investors Lost Twice As Much As The S&P 500 In 2018

A combination of volatile market conditions and bad timing caused the average U.S. investor to lose twice as much as the S&P 500 in 2018, according to a new study from DALBAR.

The research firm’s latest Quantitative Analysis of Investor Behavior (QAIB) found that investors were actually blown away by market turmoil last year, losing 9.42 percent over the course of 2018, compared with a 4.38 percent retreat by the S&P.

https://www.fa-mag.com/news/u-s–investors-lost-twice-as-much-as-the-s-p-500-in-2018-43995.html

 

GOOD ON YA

As my Aussie friends would say

From Financial Advisor

Grandparents Spending $179 Billion Annually On Grandkids: AARP

While grandparents spend an average of $2,572 annually, many are spending a good deal more on things like tuition assistance and even multi-gen vacations, according to new research from AARP, which found the financial impact that grandparents have on their grandchildren’s lives is immense.

https://www.fa-mag.com/news/grandparents-spending–179-billion-annually-on-grandkids–aarp-44245.html

 

I’M CONFUSED

“Maryland Lawmakers Get Earful On Proposed Broker Fiduciary Rule” 

A recent story in Financial Advisor highlighted the debate over the fiduciary proposals now being debated in a number of states.

“Those both for and against Maryland legislation that would put brokers and insurance agents under a state fiduciary rule testified before state legislators on Wednesday…

Dually registered advisor and FSI member Bruce Robson, a partner with Comprehensive Financial Solutions (CFS) in Salisbury, Md., told Financial Advisor magazine that his smallest clients would likely be hurt by a state fiduciary rule that would force him to use only advisory accounts.

‘It would be harder to serve those clients because of cost,’ he said. ‘Our choices would be to stop working with smaller clients or to increase our fees to an unreasonable level, which would not just be a regulatory red flag, but put us out of compliance.’

Advisory accounts cost investors in the neighborhood of 0.75 percent to 1.0 percent of assets each year, while brokerage accounts can range from 3 percent to 5 percent in a one-time, upfront commission, which is amortized over the life of the account.”

https://www.fa-mag.com/news/industry-groups-fight-back-against-maryland-fiduciary-rule-43791.html?section=3

I am clearly biased but I’m also confused.

  • Why on earth would it be harder to serve small clients or cost them more? If the 3 to 5 percent is a reasonable upfront charge for the brokerage service and there is an issue with doing it as a commission, no problem: charge a 3 to 5 percent fee.
  • I don’t understand the concept of “amortized over the life of the account.” After a commission sale there is NO “life of the account.” After the sale the obligation of the broker to the investor is over. If the broker never speaks to the client again they keep the 3 to 5 percent. In an advisory relationship, the advisor only continues to receive a fee if the client continues to receive advice they consider valuable.

 

TIME IN THE MARKET, NOT TIMING THE MARKET

An interesting chart from DFA

05-2019-05

 

DON’T KNOW WHY

They spent so much money trying to get their kids into a prestigious school. They should have focused on sports training.

05-2019-06

 

HIGH-CLASS GARBAGE COLLECTOR

Our partner Katie is participating in a city program that invites community leaders to actively participate in various city services in order to gain an appreciation for the work of city workers. One of her first experiences was becoming a garbage collector. Her observation: It’s a lot harder than it looks! Coming soon, riding with the police for an evening. Mighty proud of her.

05-2019-07

 

AND THE PRICE IS RIGHT!

05-2019-08

05-2019-09  05-2019-10

05-2019-11  05-2019-12

 

NONSENSE

As much as I respect Fidelity, I can’t help but respond to this comment.

Baby boomers, heavily invested in stocks, are putting retirement savings at risk: study

“If there was a market downturn, they could lose a significant chunk of what they’ve worked so hard to save,” said Meghan Murphy, the vice president of thought leadership at Fidelity.

Roughly half of baby boomers have their 401(k) plans invested in riskier allocations than Fidelity suggests for their age group, Murphy said. (Fidelity recommends having around 54 percent in stocks and the rest in bonds, money market funds or certificates of deposit.)

https://www.msn.com/en-us/money/savingandinvesting/baby-boomers-heavily-invested-in-stocks-are-putting-retirement-savings-at-risk-study/ar-BBV0chD

First, assuming the portfolio is appropriately balanced and rebalanced and the investment is truly long term, they are unlikely to “lose a significant chunk of what they’ve worked so hard to save.”

Second, there is no reason to believe their 401K is their only form of saving.

Third, to advise an allocation based on age is wrong and often dangerous. Consider two families living next door to each other, both the same ages and health. One only has limited savings and their 401K, the other has significant savings, a high probability of a significant inheritance and/or the other spouse has a good pension and/or they spend significantly less than their neighbor, etc., etc. Obviously, age is a not very important factor.

Finally, it seems contradicted by what I believe is much more credible Fidelity advice

Long-term investors: Stick to your plan

If you are saving for retirement or another goal that is years away, the time to consider how much of a loss you can handle isn’t during a correction. Rather, you should consider the appropriate risk level for your portfolio when you are looking at your long-term goals, and thinking clearly about your financial situation and emotional reaction to risk.

If you haven’t created a plan, you should. If you have one, it may be worth checking in to see if your investments are still in line with that plan and if your plan continues to reflect your investment horizon, financial situation, and risk tolerance. If all that is so, you will likely be in a better position to manage the ups and downs of the market. If your mix of investments is off track, consider rebalancing back to a more neutral positioning

Key takeaways

  • Given the inevitability of market pullbacks, it’s important to have an investment plan you can stick with through market ups and downs.

https://www.fidelity.com/viewpoints/investing-ideas/ready-for-stock-market-correction

 

NOT SO GOOD NEWS

Future of Retirement: Many Americans Will Run Out of Money; The Street.com

“The future of retirement is, in a word, bleak. Currently, only 58% of households between the ages of 35 and 64 are predicted to not run short of money in retirement, according to Jack VanDerhei, Research Director of the Employee Benefit Research Institute, and one of 16 experts who spoke at TheStreet’s Retirement, Taxes, and Income Strategies symposium held recently in New York. Or put another way: Roughly four in every 10 households between the ages of 35 and 64 (call it 27 million households) are predicted to run short of money in retirement, according to EBRI’s research.”

https://finance.yahoo.com/m/f0be4a7a-cad8-3e4a-a4ff-0ee98e933bb5/future-of-retirement%3A-many.html

 

MORE KATIE

Receiving her second consecutive Golden Apron Award from the mayor for raising the most funds at Beans and Cornbread, the fundraiser for Hospice of Lubbock.

05-2019-13

 

PHILOSOPHERS OF THE TWENTIETH CENTURY

From my friend Alex

  • When a man opens a car door for his wife, it’s either a new car or a new wife. ~ Prince Philip
  • Having more money doesn’t make you happier. I have $50 million, but I’m just as happy as when I had $48 million. ~ Arnold Schwarzenegger
  • If life were fair, Elvis would still be alive today and all the impersonators would be dead. ~ Johnny Carson
  • The first piece of luggage on the carousel never belongs to anyone. ~ George Roberts
  • As I hurtled through space, one thought kept crossing my mind—every part of this rocket was supplied by the lowest bidder. ~ John Glenn
  • America is the only country where a significant proportion of the population believes that professional wrestling is real, but the moon landing was faked. ~ David Letterman
  • I’m not a paranoid, deranged millionaire. Actually, I’m a billionaire. ~ Howard Hughes
  • After a game of chess, the king and the pawn go into the same box. ~ Old Italian proverb

 

 

MENSA WINNERS

From David

The Washington Post’s Mensa Invitational once again invited readers to take any word from the dictionary, alter it by adding, subtracting, or changing one letter, and supply a new definition.

Here are a few of the winners…..

  • Intaxication: Euphoria at getting a tax refund, which lasts until you realize it was your money to start with.
  • Cashtration (n.): The act of buying a house, which renders the subject financially impotent for an indefinite period of time.
  • Reintarnation: Coming back to life as a hillbilly.
  • Giraffiti: Vandalism spray-painted very, very high.
  • Sarchasm: The gulf between the author of sarcastic wit and the person who doesn’t get it.
  • Inoculatte: To take coffee intravenously when you are running late.
  • Karmageddon: It’s like, when everybody is sending off all these really bad vibes, right? And then, like, the Earth explodes and it’s like, a serious bummer.
  • Decafalon (n): The grueling event of getting through the day consuming only things that are good for you.
  • Dopeler Effect: The tendency of stupid ideas to seem smarter when they come at you rapidly.
  • Arachnoleptic Fit (n.): The frantic dance performed just after you’ve accidentally walked through a spider web.

 

I THINK I SEE THE PROBLEM

As much as I loved growing up in New Orleans, it’s a bit depressing to see my home state ranked as the “Dumbest State for Financial Literacy: 2019.

05-2019-14

https://www.thinkadvisor.com/2019/04/09/10-dumbest-states-for-financial-literacy-2019/

 

BEST TIME TO BUY FLIGHTS

From Lifehacker

05-2019-15

When to Buy Winter Flights

If you can avoid Christmas week and ski destinations, most winter destinations offer good value for the money.

  • The average best time to buy is 94 days from travel (just over three months). The prime booking window is 74 to 116 days (about 2.5 months to nearly four months).

When to Buy Spring Flights

Plan ahead for spring flights. There are no major travel holidays in the spring, but both families and college students enjoy spring break for much of March and April. Take advantage of lower midweek prices to help keep costs down.

  • The average best time to buy is 84 days from travel, or nearly three months. The prime booking window is 47 to 119 days (about 1.5 months to just under four months)

When to Buy Summer Flights

Americans travel a ton in the summer, and the peak summer dates of June 15 – August 15 are when the bulk of travel happens. You can find the best deals the closer you get to the end of the season (late August and September will give you the best odds to score low airfares).

  • The average best time to buy is 99 days out from travel. The prime booking window is 21 to 150 days. Flying the second half of August on into September is the sweet spot for these deals.

When to Buy Fall Flights

Overall, fall offers great value for budget travelers. Fall is shoulder season for a lot of destinations, and people simply do not travel as much. Of course, the one exception to this rule is Thanksgiving week. Traveling during Thanksgiving? Better buy on the early side.

  • The average best time to buy is 69 days from travel. The prime booking window is 20 to 109 days (about three weeks to 3.5 months)

https://lifehacker.com/the-best-time-to-buy-flights-in-2019-based-on-917-mill-1833514909

 

CHOOSING A FINANCIAL PROFESSIONAL

Some good advice from the Texas State Securities Board:

05-2019-16

05-2019-17

https://www.ssb.texas.gov/sites/default/files/2019_CORE4_Choosing_A_Financial_Professional.pdf

 

FINALLY

Keep your eye out for my “special report” on the December Rout, coming soon.

THE DECEMBER ROUT

In case you haven’t been paying attention, it’s been a bit rocky lately in the market, so I thought this might be a good time for a little recent history.

05-2019-1805-2019-19.png

https://www.ft.com/content/73d3dd26-0ce0-11e9-acdc-4d9976f1533b

 

Hope you enjoyed this issue, and I look forward to “seeing you” again.

_HRE SIGNATURE

Harold Evensky

Chairman

Evensky & Katz / Foldes Financial Wealth Management

 

For Previous Issues:

Vol. 12, No. 2 – March 2019

Vol. 12, No. 1 – January 2019

www.Evensky.com

Important Disclosure
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Evensky & Katz / Foldes Financial Wealth Management (“EK-FF”), or any non-investment-related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from EK-FF. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. EK-FF is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of EK-FF’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are an EK-FF client, please remember to contact EK-FF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. EK-FF shall continue to rely on the accuracy of information that you have provided.

 

 

 

Protecting Elderly Family Members – What Can You Do?

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA®
Senior Financial Advisor

Fact: We are all getting older. Unfortunately, there are many ways that the elderly can be targeted and taken advantage of financially. We are seeing increases in fake phone calls and emails and IRS fraud as scammers and the technology used becomes more and more sophisticated. There are some steps you can take to help ensure that you and your family are protected from fraud or inadvertently making a transaction that you cannot reverse. I have heard several stories about caregivers, even family members, who did not have good intentions, managing to take funds from the elderly.

If you feel your elderly parent, spouse, or friend is having cognitive difficulties but is not considered medically incapacitated, some of the steps below may also be helpful. It can be hard for someone to relinquish control over their finances, especially when they have been accustomed to handling their affairs for decades, so for some people this may be a sensitive subject.

There are several options that can be easily put into place if you think you or your loved one may be at risk.

  1. Trusted contact forms: Most custodians such as Vanguard, Schwab, Fidelity, TD, etc., offer trusted contact forms, where you can list a trusted friend or family member who can be contacted if there is any suspicion of financial exploitation. This person has the right to confirm your contact information, health status, and the identity of any legal guardian, trustee, or power of attorney. The trusted contact will not be able to view your account information or execute transactions. You would probably want to make sure this person knows that they are listed as a trusted contact.
  2. Set up view-only access: You can set up view-only access for accounts so that a family member can log in and monitor activity. You can also set up a family member or friend to receive email alerts and notifications regarding the account. Paperwork would need to be signed by the account owner to allow viewing access. Keep in mind that these notifications (similar to receiving duplicate statements, which may not catch fraud immediately) may not be timely enough in case of an incident such as a wire transfer.

This action, along with the trusted contact form, are two steps that provide a basic layer of protection. Technologically-savvy family members could also be authorized to download the custodian’s app on their phone and set up notifications. For example, some credit card apps send alerts every time the card is used, and they pop up on your phone.

Having viewing access is also a good way to monitor your loved ones’ spending habits – usually, an unexpected or unexplained change can indicate a potential problem.

  1. Advisor notifications: If you work with a financial advisor, the advisor is usually set up to receive notices on any delinked accounts, accounts being transferred out, contact info changes, deposits, and withdrawals on a daily basis, but again, these notices may not be timely enough if a wire is initiated and money has already left the account. Your advisor may also be able to contact the custodian or a family member if there is suspicious activity in the account.
  2. Add a power of attorney: Adding a power of attorney will allow another person to conduct transactions on the account, view the account, sign paperwork, etc., depending on the extent of their power-of-attorney privileges. This document will not prevent an elderly family member from making transactions or requests – it will just add another person to the account who also has this ability. This step will not prevent the account owner from calling up and wiring funds or moving the account. You should discuss this with your estate planning attorney before adding this document to make sure it matches your intentions.

The most restrictive steps you can take, which can prevent the account owner from doing anything inadvertently, are as follows:

  1. Resign as trustee: The ability to resign as trustee on a trust will depend on the language of the trust. If you resign, the successor trustee(s) will take over. You may need to prove you are incapacitated by providing doctor’s letters stating your health condition before this can be done.
  2. Conservatorship or guardianship account: This step requires an original court-certified conservatorship/guardianship order, which will then be reviewed by the custodian of the funds. The custodian will then decide what type of additional paperwork is needed for the specific type of account, such as a new account application that may have to be filled out to add the guardian. This route will prevent the account owner from being able to do anything on the account. You would probably not choose to go to this extreme unless the account owner is incapacitated and can no longer manage their financial affairs.

The worst-case scenario may be if large wire is accidentally or unintentionally sent, since this can be impossible to get back once it leaves the account. Usually there is paperwork to fill out and sign, as well as security questions to answer, but if the account owner is able to provide all this information there is not much that can be done to stop the transaction.

If you have concerns about someone in your family, you may want to discuss these steps and possibly reach out to their attorney or financial planner to discuss the best options based on the situation.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@Evensky.com 

For more information on financial planning visit our website at www.Evensky.com

Turning age 70.5 with an IRA account – what you need to know

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA®
Senior Financial Advisor

When you turn 70.5, you have to start taking distributions from your retirement plans. There are several decisions you will need to make once this process starts, but making sure you do start taking distributions is the most important, since the IRS imposes a 50% penalty on funds that are not withdrawn as mandated.

How is a required distribution calculated?

The calculation is fairly straightforward, if you fall under the regular rules. You would take the value of your IRA accounts as of December 31 of the prior year and then divide it by the IRS divisor based on your age. This IRS Uniform Lifetime Table can be found here:

https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/overview

There are several rules depending on whether you are married or single, and whether your spouse is 10 years younger than you are. If your spouse is 10 years younger, your distribution amount will be less, and you would use the IRS Joint Life Expectancy Table to find the correct divisor. The custodian of your IRA will usually calculate your required distribution and will track how much you take out on a monthly basis. They will then give you this information on your monthly statement. However, if you have a unique situation (inherited IRA or younger spouse), you may need to calculate and track this on your own.

Do you need the cash?

If you need cash, you would simply withdraw the required amount from your IRA and move it into a taxable account less any tax withholding. Usually the custodian of the funds will send the tax withholding directly to the IRS on your behalf. This works somewhat like withholding on a W2, so when you go to file your taxes this amount has already been paid to the IRS on your behalf. At the end of the year, you will get a 1099R showing how much you took out and the taxes that were withheld on this amount. Sometimes your accountant may suggest a higher withholding than your actual tax rate, since the withholding may cover taxes on any other income you might be receiving. If you don’t need the funds, you can transfer securities into a taxable account. This will still be considered a taxable distribution, so you will either need to have funds available to pay the taxes or you may need to sell some securities to generate funds to pay the taxes. You should speak to your accountant to determine how much you should withhold based on your tax situation.

Should I wait until the following year to take my distribution?

You have until April 15th of the year after you turn 70.5 to take your first distribution. Keep in mind that, in this case, you will have to take a second distribution that year. If you are still working in the year you turn 70.5, but plan to retire the following year and project that you will have lower income, you can choose to wait and take two distributions the following year.

Do I have to take a portion from each account?

If you happen to have several IRA accounts, you can aggregate the value of the accounts to make the calculation, but then take the distribution from only one of the accounts. You do not need to take a portion from each account, unless you prefer to do it that way for accounting purposes. Keep in mind, if you have a 401K account, you will need to calculate that amount separately and then take that portion from the 401K. If you have other accounts, such as retirement annuities or 403b’s, you will likely have to take those distributions separately, as they cannot be aggregated with your regular IRAs. If you have a 401k and you are still working and contributing, providing you are not more than a 5% owner of the company, you can choose to defer distributions until you retire. If you own more than a 5% share of the company, you will be required to take a distribution.

Charitable contributions and the new tax laws

The new tax laws have increased the standard deduction and put caps on what you can itemize. If you have charitable contributions, you can make these through your IRA by sending a check to the charity directly from your IRA account. These donations go towards satisfying your required minimum distribution, but are tax free. For example, if your RMD is $50,000 and you donate $50,000 to a charity from your IRA, you owe no taxes and you have satisfied your required distribution. You can also request checks on your IRA in order to make smaller donations along the way that otherwise may not be deductible. Keep in mind that the charity has to be registered as a qualified charity.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@Evensky.com 

For more information on financial planning visit our website at www.Evensky.com

Harold Evensky’s NewsLetter Vol. 12, No. 2 – March 2019

Harold Evensky CFP® , AIF®
Chairman

Dear Reader:

SPIVA UPDATE

S&P 500 SPIVA Institutional Scorecard

“This report adds institutional accounts to the mutual funds analyzed in the U.S. SPIVA scorecards. Underperformance among institutional accounts was not meaningfully different from those reported for retail funds.

“For active equity institutional managers, the one-year performance figures ending December 2017 were positive. Managers in 10 out of 17 categories outperformed their benchmarks, gross-of-fees. [Editor’s note: There are only two problems with this positive spin: gross-of-fees and short term.]

“However, the majority of equity managers in 15 out of 17 categories underperformed their respective benchmarks over the 10-year horizon, gross-of-fees.”

LINK

 

COOL TIDBITS

The following bits of wisdom are from a talk by my friend Jane Bryant Quinn, one of the very best personal finance writers ever.

  • Clairvoyance Society of London will not meet this week due to unforeseen circumstances.
  • I am an optimist. I’m not someone who smells flowers and looks around for a coffin.
  • Her mom is 102, and five years ago married a young man of 85.
  • Broker: “I’ve looked over your assets and I’m happy to say there is enough there for both of us.”
  • The SEC is enabling fake fiduciaries: “Informed consent” supported by the SEC staff.
  • Lilly Tomlin: No matter how cynical you become, it’s hard to keep up.
  • A man was going to die and asked God if he could bring some of his things with him. God said yes but only one suitcase. He scoured his investments—stocks, bonds, real estate. He decided on gold. When he got to the pearly gates, St. Peter asked, “What’s that?” He opened his suitcase and all the gold bars spilled out. St. Peter exclaimed, “What, you brought pavement?!”

 

FROM MY FRIEND PETER

Don’t blame me for these—blame Peter.

  • England has no kidney bank, but it does have a Liverpool.
  • I tried to catch some fog, but I mist.
  • I changed my iPod’s name to Titanic. It’s syncing now.
  • I stayed up all night to see where the sun went, and then it dawned on me.
  • I’m reading a book about antigravity. I just can’t put it down.
  • I did a theatrical performance about puns. It was a play on words.
  • Why were the Indians here first? They had reservations.
  • I didn’t like my beard at first. Then it grew on me.
  • Broken pencils are pointless.
  • What do you call a dinosaur with an extensive vocabulary? A thesaurus.
  • I dropped out of communism class because of lousy Marx.
  • I got a job at a bakery because I kneaded dough.
  • Velcro: what a rip-off!
  • Don’t worry about old age; it doesn’t last.

 

THE WORST PERFORMING ETFs IN THE PAST MONTH

As reported by Wealth Management magazine

Past month? You’ve got to be kidding. That’s noise, not news. This is a story I would classify as financial pornography.

LINK

 

2018: A YEAR TO FORGET FOR ACTIVE INVESTORS

Excerpts from a Morningstar research report, as seen in Financial Advisor

“Proponents of active management may want to forget what happened in 2018. In fact, if they’re large-cap investors, they may want to forget the entire past decade.

“Only 38 percent of active U.S. stock funds survived and outperformed their average peer passive fund last year, which was down from 46 percent in 2017, Morningstar said in its year-end ‘Active/Passive Barometer’ report….

“While that was the year-to-year picture, the long-term view of active vs. passive fund performance wasn’t any better, according to the Chicago-based research firm. Only 24 percent of all active funds beat their passive fund rivals over the 10-year period ending December 31….

“The data is based on the performance of 4,600 U.S. funds that account for about $12.8 trillion in assets, or about 69 percent of the U.S. fund market, Morningstar said.”

LINK

 

DAN EGAN

I don’t know Dan, but I did enjoy his tweet: “How come we have Smart Beta and not Lucky Alpha?”

 

DID YOU KNOW?

These come courtesy of my special friend Patti.

  • Humans are born with two fears: falling and loud noises. Every other fear is learned.
  • You once held the world record when you were born, for being “the youngest person on the planet.” Think I’ll add it to my resume.
  • An octopus actually has six arms and two legs, not eight legs.
  • There are exactly 46,783,665,034,756,288,456,012,645 moves possible in a game of chess.
  • Elephants can smell water from three miles away.
  • If humans killed each other at the same rate we kill animals, we’d be extinct in 17 days.
  • Without your pinkie finger, your hand would lose 50% of its strength.
  • Giraffes spend about 70% of their day eating. They must be on a cruise.
  • Cows have best friends and get stressed when they are separated.
  • Beer reduces the risk of developing kidney stones by 40%.
  • Dogs are capable of understanding up to 250 words and gestures. The average dog is as intelligent as a two-year-old child. And they pay about as much attention.
  • Tea is the most consumed drink in the world after water. I’m working on wine to give tea a run for its money.
  • Once a tractor company owner was insulted by the owner of Ferrari. Enzo Ferrari’s words were “You may be able to drive a tractor, but you will never be able to handle the Ferrari properly.” Today that tractor company is known as “Lamborghini.”

 

AND IF YOU’RE NOT YET CONVINCED THAT YOU SHOULD AVOID “GURUS”

Barron’s runs an annual forecasting challenge. Last year it had over 4,000 entrants. Here are a few of the results.

What will the DOW industrials return in 2018, including dividends?

Correct answer: Negative

Correctly answered by 11.57%

Which global market will do best in 2018?

Correct answer: U.S. S&P

Correctly answered by 25.03%

Which of these developments is most likely to occur in 2018?

Correct answer: Equity bear market, S&P 500 finishes in the red

Correctly answered by 8.11%

How many times will the Federal Reserve lift short-term rates in 2018?

Correct answer: four or more

Correctly answered by 5.98%

 

WILL ROGERS QUOTES

Suggested by my friend Alex:

  • “Common sense ain’t common.”
  • “Live in such a way that you would not be ashamed to sell your parrot to the town gossip.”
  • “The road to success is dotted with many tempting parking spaces.”
  • “When you find yourself in a hole, quit digging.”
  • “The short memories of American voters is what keeps our politicians in office.”
  • “A fool and his money are soon elected.”
  • “I don’t make jokes. I just watch the government and report the facts.”
  • “The trouble with practical jokes is that very often they get elected.”
  • “Be thankful we’re not getting all of the government we’re paying for.”
  • “Last year we said, ‘Things can’t go on like this,’ and they didn’t—they got worse.”
  • “The only difference between death and taxes is death doesn’t get worse every time Congress meets.”
  • “There are men running governments who shouldn’t be allowed to play with matches.”
  • “The taxpayers are sending congressmen on expensive trips abroad. It might be worth it except they keep coming back.”

I’ll let you decide whom these shoes fit. I can only believe Rogers would be having a ball if he were alive today.

 

AND IF THE MARKETS DON’T SCARE YOU, WHAT DOES?

According to Popular Science…

Heights                               28.2%

Sharks                                 25.4%

Reptiles                              23.6%

Public Speaking            20.0%

Deep lakes & oceans 18.2%

Clowns                                6.7%

LINK

 

READY FOR A QUIZ?

Also from Popular Science:

Sorry, you’ll have to wait for the end for the answers…

 

FOLLOW THE MONEY

From Skip and InvestmentNews

Fiduciary-based—IAA, FPA…………………………$     468,264

NOT Fiduciary-based…………………………………$19,915,902

SIFMA—brokerage firms

ICI       —Mutual funds

NAIFA —Insurance

FSI      —Commission-based advisors

SIFMA, the trade association representing major brokerage firms, spent more money lobbying lawmakers last year than Goldman Sachs, Fidelity InvestmentsVanguard Group, and other top financial services firms.

 

INTERESTING BUT DEPRESSING

Notes from the Journal of Financial Planning:

In “Retirement Income Literacy: A Key to Sustainable Retirement Planning,” Hopkins and Pearce conclude “…those who better understand key retirement income issues are more likely to have a well-developed retirement income in place.”

“Unfortunately, based on a 2017 survey of 1,244 respondents between the ages of 60 and 75 with at least $100,000 of investable assets:

Mean Score for Retirement Income Knowledge Areas: 47%”

“When asked: how knowledgeable would you say you are about retirement income planning, 88% responded they were moderately to extremely knowledgeable. However, of this same group, only 28.6% passed the literacy quiz with a score of 60 percent or higher.

When asked about Concerns, “Running Out of Money” was of the least concern and health care costs and potential cuts to Social Security were the highest.”

From the Center of Financial Services Innovation U.S. Financial Health Pulse Study:

  • “Only 28 percent of Americans are ‘financially healthy.’ Over half (55 percent) were categorized as ‘financially vulnerable.’”

And some less depressing news:

  • ETFs: 2018 was the 25th anniversary of exchange-traded funds. (I had no idea they were that old.)
  • Roth IRA: 2018 was the 20th anniversary
  • Bitcoin: 2018 was the 10th anniversary
  • Dow Jones Industrial Average (DJIA) removed General Electric, a member of the index since 1907, replacing it with Walgreens.
  • In 2018 Amazon and Apple reached a value of $1 trillion, and Fidelity reached $2 trillion in retirement assets.

 

INTERESTING STATS

Also from the Journal of Financial Planning:

$35,676: Average cost of tuition and fees for the 2018–2019 school year at a private college

$21,629: Average cost of tuition and fees for the 2018–2019 school year at a state school for out-of-state students

$9,716: Average cost for state residents at public colleges for the 2018–2019 school year

40: Percentage of parents with 10th graders who have a financial plan in place to reach college savings goal

56: Percentage of parents with 10th graders who have not discussed how much their kids will be expected to contribute to the cost of college

$16,400: Average amount borrowed per year by parents to pay for their children’s college education in 2014, up from $5,200 in 1990

$37,180: Estimated parental debt from federal college loans for the 2017–2018 school year

 

NEWS HEADLINES FROM NPR

That’s tough!

I guess it would have been OK if he had been legally spying.

 

MORE NEW, OLD PRODUCT PITCHES FROM PETER

 

WANT TO RETIRE IN COMFORT? HERE’S WHAT IT COSTS BY STATE PER YEAR:

#50 – Arkansas     $36,378

#37 – Texas          $39,814

#30 – Louisiana    $41,107

#24 – Florida         $42,586

#4   – California    $49,640

#3   – New York    $50,321

#2   – Hawaii         $54,590

#1   – Alaska         $56,879

LINK

 

TECHNOLOGY, ONCE UPON A TIME

LINK

 

I KNOW YOU’VE ALL BEEN WAITING

So here’s the link to our updated paper, “The Efficacy of Publicly-Available Retirement Planning Tools”: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2732927.

 

A THOUGHT TO REMEMBER DURING ROCKY MARKETS

A boat that doesn’t rock doesn’t move

 

INSURANCE INDUSTRY BATTLES BACK AGAINST FIDUCIARY STANDARD

“The three leading insurance and agent associations are working in tandem to support a state ‘standard of care’ proposal for agents that rejects fiduciary responsibility for agents and advisors. At stake, they say: middle-class investors.”

Of course, why on earth would middle-class investors deserve to be provided a fiduciary relationship?

LINK

 

BARRON’S RANKED ADVISOR DIRECTORY

Barron’s publishes this ranking four times a year that it says is based on “…a deeply researched, quantitate approach.” Assuming I counted correctly, I found that the following large commission-based brokerage firms represented about 58% of the total.

Morgan Stanley –     23%

Merrill Lynch –           21%

UBS –                                  6%

Wells Fargo –                  4%

J.P. Morgan –                   4%

Fee-only fiduciary firms were just a small fraction of the listings. Go figure.

Of course, with the ranking Barron’s notes: “The list of highlighted advisors below is a special advertising section.” That might have something to do with it.

MORE FROM BARRON’S

Maybe their crystal ball isn’t so great, but I’ll give them credit for honesty. In an article reviewing the publication’s 2018 stock picks titled “A Mixed Year for Barron’s Stock Picks,” they wrote: “Shares of the 71 companies we wrote about bullishly fell 10.5% on average, versus 9.5% for their benchmarks. Add back dividends and we were down 9.4% versus a drop of 8.5% for the benchmarks. The S&P lost 7.4% over the same period.”

GOOD TO KNOW

ANOTHER GOOD WEEK

Deena and I were honored with the Dr. A. William “Bill” Gustafson Distinguished Leadership Award, “…recognizing distinguished leadership that is consistent with the ideals of the Texas Tech Department of Personal Financial Planning and promotes the financial planning profession with commitments to developing leaders of the highest caliber and character.”

The award was presented by our department chair, Vickie, and our partners Katie and John (John won the Distinguished Alumni Award last year).

 

 

SHOW YOUR SWAGGER

We are happy to introduce a new website, Advisor on My Side (https://www.advisoronmyside.org/), where investors can get reliable information from ethical financial advisors who truly have their clients’ interests at heart. Here’s an excerpt:

It’s a fact. Objective and competent financial advice can be life-changing. Yet with confusing information from the industry and regulators, it can be tough to figure out who’s who. To know which advisors are on your side. Advisors who are actual fiduciaries.

All advisors talk the talk. Only some can walk the walk.

Advisor On My Side brings together the best tips from investors, fiduciary advisors, and experts.

The mission: to help investors learn what they need to know to protect themselves.

Be sure to look at the short video to understand what we mean by “swagger.”

 

THE ANSWERS

 

FINAL FOOD FOR THOUGHT

Also from my friend Alex.

Hope you enjoyed this issue, and I look forward to “seeing you” again.

Harold Evensky

Chairman

Evensky & Katz / Foldes Financial Wealth Management

 

For Previous Issues:

Vol. 12, No. 1 – January 2019

Vol. 11, No. 7 – December 2018

www.Evensky.com

What is perfect tax planning when it comes to tax returns?

Michael Hoeflinger, CFP®
Wealth Manager

It’s that time of year again when millions of Americans file their tax returns before the deadline, hoping for a tax refund of some sort. But is that really the best strategy from a financial planning standpoint? The best tax planning is to have a tax balance of zero when it’s time to file, which means you would neither owe anything nor receive a refund. This would indicate that you paid exactly the amount of tax liability owed for that particular year.

This tax season will be different for filers under the Tax Cuts and Jobs Act that went into effect in 2018. Some of the major changes from the new law include a higher standard deduction ($12,000 for single filers and $24,000 for married persons filing jointly), the elimination of personal exemptions, new limits placed on itemized deductions and a new $10,000 cap on state and local deductions. The law also changed the higher standard deduction for the elderly, the blind and those with a disability. Furthermore, the IRS and Treasury department released new withholding tables, which means that the guidelines your employer follows in order to deduct the appropriate amount of income tax from your paycheck have changed.

  2017 2018-2025
Standard Deductions    
Single $6,350 $12,000
Married filing jointly $12,700 $24,000
Elderly or blind

(single and not a surviving spouse)

Add’l $1,550 Add’l $1,600
Elderly

(both over age 65 and married filing jointly

Add’l $2,500 Add’l $2,600
Exemption    
Personal exemption $4,050 per family member Eliminated

What can you do if you are surprised after filing your 2018 tax return? First, take a look at your tax withholding from your employer and think about what you can do to adjust it. This could be as simple as reviewing your W-4 form with your employer alongside the withholding tables to help best determine your income tax load. For example, if you claim too many allowances on your W-4, your employer will withhold less tax from your paycheck, but you may owe the following year. If you claim zero allowances, you may overpay and get a refund come tax time, but you will take home less pay per month as a result of the taxes. If you need less of your income to be taxed, make sure you are contributing more to your employer’s retirement plan as well as any other tax-sheltered accounts (assuming you are not already at the maximum allowed). If you are a 1099 employee, you may need to evaluate how much you are paying in taxes each quarter to make sure you get the liability just right.

Tax planning is a critical component of your overall financial planning, and making the necessary adjustments along the way will help you over both the short and long term.

Feel free to contact Michael Hoeflinger with any questions by phone 305.448.8882 ext. 241 or email: MHoeflinger@Evensky.com

REFERENCE: www.irs.gov

For more information on financial planning visit our website at www.Evensky.com

My Own “Jiminy Cricket”

Brett Horowitz

Brett Horowitz, CFP®, AIF® Principal, Wealth Manager

Whether you are working with a doctor, lawyer, or financial professional, you need to be aware of who is watching over you. It’s not enough to simply assume that they are on your side. When someone gives us recommendations, we want them to be like the Jiminy Cricket character in Pinocchio—a trustworthy person who is looking out for us and helping us make good decisions. Let’s look at an example to help frame this discussion.

You go to the doctor’s office complaining of muscle pain, and the doctor offers you a choice of medications. He hands you Medicine A and you walk out the door, feeling comfortable that he gave you the right medication that will make you feel better in no time. Why are you so at ease with the doctor’s recommendations? The short answer is that you trust the doctor. You believe that they will follow the Hippocratic Oath, which says in summary “above all, do no harm.” You have come to expect that they are providing you with advice that is in your, the patient’s, best interest. What if I told you that the financial profession doesn’t work that way? Surprised? Confused? If you’re like most Americans, you’re not alone.

According to a recent study by the RAND Corporation, commissioned by the SEC, most Americans have trouble distinguishing between advisors and brokers. As the study’s authors note, “Our analysis confirmed findings from previous studies and from our interviews with stakeholders: Investors had difficulty distinguishing among industry professionals and perceiving the web of relationships among service providers.” When a financial professional can have dozens of different titles, ranging from investment advisor to wealth manager to financial planner, it’s not hard to see why consumers are confused. One of the major differences comes down to a popular buzzword in the industry that every investor should understand: the term FIDUCIARY.

What is a fiduciary?

Quite frankly, one of the first questions you should ask your investment professional is this: Are you a fiduciary and do you acknowledge this in writing? (If you’re already working with someone and are unsure of their status, it’s a good idea to call them up and ask them.) A financial advisor held to a fiduciary standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated, elimination of any significant conflicts of interest to the extent possible, and full disclosure of any remaining significant conflicts of interest. In other words, the financial advisor must place their client’s interests first.

Our website specifically states, “As a fee-only financial advisor, our revenues derive solely from fees paid directly to us by our clients. We have no potential conflicts associated with commissions or proprietary products.”

Our firm charges fees based on the amount of money that we are managing for our clients (i.e., assets under management). If you are a client of our firm and are interested in paying off a mortgage to free yourself of the debt, we acknowledge the potential conflict of interest that exists in you withdrawing money from the portfolio and the resulting drop in our fees, but we will help you make the right decision. In fact, over the last few years, we have helped many clients pay off their mortgage. It’s with this peace of mind that they can sleep comfortably knowing that we are on their side.

Let’s say that you just found yourself the recipient of an inheritance or a large bonus check and are thinking about possibly investing it in your portfolio. Without this fiduciary relationship, the answer would be simple: invest everything, because the more you invest, the more fees the firm will reap. But that’s not how we answer the question. We would want to know whether you expect to make any significant withdrawals from the portfolio during the next five years. We do not believe any investor should invest money in the market if they expect to need it back within the next five years. If you’re likely to need funds annually to supplement other outside income, we would make sure that you have enough cash set aside in case the markets go down so that you don’t have to sell anything in the next year and you know exactly where your grocery money will come from. Once again, the decision is not how to maximize our short-term profits; instead we are looking to make smart decisions that will benefit our clients.

On the other hand, brokers and other commission-based advisors are held to a “suitability” standard, which states that they must recommend a product that is suitable for the client, but that may not necessarily be the best recommendation for that person. For example, you’ve probably seen situations where a representative from XYZ Company recommends buying the XYZ Bond Fund, the XYZ Large Cap Growth Fund, and the XYZ International Fund. Is it really likely that XYZ Company could have the best mutual fund in every category?

Fees, fees everywhere

Some firms charge an annual rate, some charge based on assets under management, and some build the fees into the stock and bond transactions. None of these are inherently unfair as long as you know exactly how the advisor is getting paid, whether the fees are reasonable, and what their duty is to you (i.e., business standard or fiduciary). There may also be additional fees—such as mutual fund expenses, transaction fees, account opening or closing fees, and such—so it’s important to know how much those fees are and who receives those fees. At our firm, we use no-load mutual funds and exchange-traded funds. As there are no commissions involved, these investments have relatively low expense ratios, and fees are paid directly to the fund companies. There are small transaction fees as well, and these fees are paid directly to the custodian. We are paid only by our clients, who receive a bill each quarter with the calculation and amount of those fees. Performance is calculated net of fees where possible so that it’s in our best interest and the client’s best interest to limit all fees as much as possible.

You should always be aware of conflicts of interest as they pertain to fees. Will buying the mutual fund, annuity, or life insurance contract primarily benefit you or the person selling the product? The type of legalese you might look for is something to the effect of “Your account is a brokerage account and not an advisory account. Our interest may not be the same as yours … We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.” (Italics are my emphasis.)

For example, a representative at the XYZ firm may recommend a high-yielding bond to their client. What the client doesn’t know is that the firm is trying desperately to sell the bond to everyone it can so that it doesn’t have to keep the bond on its books due to expected losses (I have taken this example from the book Liar’s Poker by Michael Lewis, a nonfiction book describing his experience as a bond salesman in the 1980s). Who is the best prospect to sell the bond to? Their client, of course. They can do this because as long as the client asked for income in their portfolio, this investment would be suitable.

None of this by itself implies that there is anything wrong with compensation by way of commission. The bottom line is that you, as the client, need to understand how the advisor is getting paid, whether they are being held to a fiduciary or suitability standard, and whether these details are in writing. If in doubt, simply ask your advisor if they will sign a statement similar to the following:

  • In our relationship I will always place your interest first.
  • I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
  • I will not mislead and will provide you with conspicuous, full, and fair disclosures of all important facts.
  • I will avoid conflicts of interest.
  • I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

It’s time that we break down the confusion surrounding investment professionals so that the public understands who their Jiminy Cricket is.

Feel free to contact Brett Horowitz with any questions by phone 305.448.8882 ext. 216 or email: BHorowitz@Evensky.com

For more information on financial planning visit our website at www.Evensky.com