Home, Sweet Home

HomeForSale2Spring is in the air here in Charleston. Flowers are blooming and there are wonderful smells of Jasmine and Gardenia everywhere. And there are some other things popping out all over town: for sale signs! It is the season that many think about moving and Charleston has a very hot housing market. There is real estate fever galore.

There are many things to consider before jumping in to the real estate market. Having a little knowledge can really save you some time and money. One important thing I learned recently through my own buying and selling process is that you must be your own advocate! The other professionals involved: real estate agents, mortgage representatives, and closing attorneys are there to guide you, but they cannot always watch every detail of the transaction, particularly when buying and selling at the same time. Do not be afraid to ask questions to better understand every contract and settlement statement. This is your money and you are ultimately in charge. Furthermore, DWM is here to be another set of eyes for you. From advising on how much house is appropriate, to working on short-term bridge/margin loans, to assisting with the paperwork required by your lender, let us help make a complicated process easier.

When you decide to sell your home, the first thing to do is PURGE! This activity cannot be stressed enough… try and objectively evaluate everything in your home and realistically decide if it should stay or go. You will have to pack everything when you move anyway, so spend the time now sorting those things to keep and what can be donated, sold, or disposed of before you are rushed into just throwing everything into a box. Pretend that every belonging you have must justify a place in your new home. Decluttering and “staging” your home to showcase its greatest assets and appeal are worth the time! Box up all the family photos and personal knickknacks and set up each room up to make it appealing and spacious. Now is the time to make sure everything in your home looks as good as it can. And don’t forget the landscaping: curb appeal is a big selling point to a buyer. The general rule is that any modest money you put in to repair your home up front can be three times less than what a buyer will estimate it is to do it themselves. It may be worth it to repaint a tired looking room or replace worn out carpet. Before you take on larger projects like an updated roof or heating and cooling system, it is a good idea to have a professional evaluate this for you.

Next, you want to find a knowledgeable real estate agent or spend some time investigating how to sell your home yourself. Certainly, For Sale By Owner (FSBO) is an easier task in a hot market, but it is not for everyone. You will certainly save on the commission fee, but experienced real estate agents can advise you on properly marketing and selling your property. It is always a good idea to have an outsider look at your home with more scrutiny than you can. You want to ensure you get the highest and best structured offer in as short of a time as you can. While your home is on the market, think about fresh flowers, good lighting and keeping everything very tidy. You will become proficient at good places for hiding clutter at the last minute: think washers, dryers, and under beds!!!

Now, you may be ready to start looking for houses and vetting neighborhoods, whether local or across the country. Nowadays, with sites like Zillow and Trulia available, it is so much easier to shop online and find answers for many of your questions about schools, neighborhoods or local amenities. Make sure you ask pertinent questions about every house – remember the sellers are also trying to make their home look as good as possible to you, the buyer. Ask about taxes, insurance, utility bills, the age or condition of the roof and heating and cooling system. Find out if there is a neighborhood homeowner’s association – many have newsletters which can give you some good information. There can be high costs and stringent rules for an HOA – which can be great as long as you know what you are getting! It can be a good idea to look at the house at different times of day or talk to neighbors. For example, is there a lot of rush hour traffic or unwanted noise from a nearby school? Make sure you get a home inspection during the purchase process. In both South Carolina and Illinois, it is common to have contracts contingent on the inspection. You will want to check the comparable prices in the neighborhood, so you can make an educated offer when the time comes. You want to learn as much as you can about any new home before you sign a contract!

There is so much involved in buying and selling a home. As your primary home is often your largest asset, you want to protect its value and get the best return on your investment. Working carefully with a lender, real estate agent, closing attorney, and financial advisor, will make the processes of obtaining a mortgage, negotiating a selling and/or purchase price, and completing all the deed and title transfers less daunting. Asking questions and understanding as much as you can will make for the best experience. Moving is one of the top 5 life stresses, so hopefully you will find the right experts to guide you. But don’t forget that by educating yourself and managing some things up front, you can be your own best advocate and find your new home, sweet home.

Quick Bytes: Tech Tips for Real Life

binary-code-475664_12801. Where not to use your debit card: Although your debit card may look just like a credit card, there are some key differences and places you really shouldn’t use it:

  • Online or over the phone. If your card information is hijacked, your bank account could be wiped out and you might have a cash flow problem until your claim is processed and the funds are reimbursed. If the same thing happens with a credit card, the worst case scenario is you can’t use that card until it’s sorted out.
  • Use a credit card for big ticket items, recurring payments, or anything else you might potentially have a dispute over. Besides rewards program benefits, credit cards offer dispute rights that debit cards typically do not.
  • Don’t use your debit card for future travel or hotel reservations because they will keep your information in their system until your trip and it will be at risk of a data breach for an extended period of time.
  • Lastly, don’t use your debit card anywhere ‘risky’. Restaurants, businesses you haven’t dealt with before, and self-checkout or ATM equipment that looks like it’s been tampered with can put you at risk of having your information stolen and account drained.

2. What ever happened to my Social Security statements? Remember when you used to receive a report from Social Security with your yearly earnings history and estimated benefit in the mail each year? It’s been a while since the Social Security Administration stopped mailing those, but you can still request one by completing a form. Better yet, go to socialsecurity.gov/mystatement to set up an account. (Be prepared- they ask some very specific questions to help prevent identify theft.) With an online account you can keep track of your earnings, get estimated future benefits, update your address, start or modify your direct deposit information if you’re receiving benefits, etc. We urge everyone to verify your earnings annually and monitor your estimated benefit so you don’t have any surprises when you’re ready to retire.

3. Scams- not just for email anymore: Most people who have used email for years are pretty savvy when it comes to avoiding common scams. (I.e. when you receive an email riddled with grammatical errors, from an unknown person in another country, claiming someone left you $10MM or that you won a lottery you didn’t enter, you don’t open it). However, scam artists are always adapting. Many have started using more believable angles like ‘delivery failure notification’ emails that look like a well-known carrier is notifying you they weren’t able to deliver a package. If you click on the tracking number or attachment, you will inadvertently download malicious software. They also target certain groups who are likely to be interested in a certain ‘opportunity’, such as the work from home scam recently targeted at university students. Other recent scams include:

  • Fake (but familiar sounding) charities soliciting donations after a natural disaster,
  • Notices of unpaid parking tickets or other government fees or taxes (where the user may be directed to an official looking website and enter personal information in addition to paying the ‘fine’), and
  • Family/friend in distress emails where it looks as if your friend or family member is stranded in another country and needs money to obtain new documents and get home.

Always verify before you do anything. Have established charities you give to- don’t accept solicitations. (You can verify their worthiness through websites such as CharityWatch). Received a notification of an unpaid parking ticket or IRS back taxes you didn’t know you owed? Look up the phone number of the city or agency that allegedly sent it and call them to inquire. (Don’t rely on contact information listed on the notice). Didn’t know your friend was in Spain? Call them. The Federal Trade Commission, FBI, and Snopes are good places to check if you’re suspicious of something.

In the last few years, as social media has rapidly grown in popularity, scammers have followed. Scams can be found everywhere: LinkedIn, Snapchat, Pinterest, Instagram, Google+; you name it! Because most users aren’t as experienced with these platforms as they are with email, they may be more likely to fall for a scam. Countless people on Twitter and Facebook forward chain letters they would have deleted immediately had they shown up through email. (Apple is not giving away the newest iPhone to the first 500 people to repost/retweet the message. Sorry). Other common, more malicious scams, include being directed to fake homepages that look like the real thing. For example, shortened URLs are common on Twitter. But since you can’t see the actual address, you don’t know what site it’s really taking you to until it’s too late. If you enter your login information you just inadvertently gave it to a scammer. You’ve been phished. Now they can use your account to post friend/family in distress messages (see above) and take their money and information, and so on. Other than verifying before acting, make sure your spyware, malware, and antivirus are always up to date. Scams are nothing new but they are always changing to take advantage of the latest news, trends, apps, and seasons (ie tax season or holiday giving). They use psychology to appeal to our charitable, greedy, religious, social, or law-abiding nature.

Is the 4% Withdrawal “Rule” Reliable?

DiceRules of thumb can be great, except when they don’t work. Take the 4% withdrawal rate rule, for example.

This rule, developed twenty years ago, is used to forecast how much people can spend annually in retirement without running out of money. Let’s say a couple has $1,000,000 and has just retired. The rule says if they spend $40,000 (4%) from the portfolio and increase this annual withdrawal by the inflation rate, their $1 million nest egg should last for the rest of their lives.

Historically, an average annual return on a balanced allocation strategy portfolio was roughly 7% from 1970 until 2014, while annual inflation was 4%. Hence, a real return of 3%. The conditions during those four decades are different from today. The decades of the ’80s and ’90s produced average equity returns close to 20% per year. The bond bull market produced returns of almost 9% per year for the last three decades. During this time, the “rule” could have worked fairly well for some people. Today, however, there are a number of problems with this rule.

First, inflation forecasted returns and longevity have changed greatly. Inflation has been negative over the last twelve months and has averaged less than 1% per year over the last three years. Forecasted returns, of course, vary widely and no one can predict the future. A conservative estimate might be a 2% real return (3% nominal less 1% inflation, or 5% nominal less 3% inflation). Longevity is increasing. Hence, for many people, their calculations should be based on an eventual age of 100.

In an article from this past Sunday’s NYT, Professor Wade Pfau at the American College of Financial Services put it this way: “Because interest rates are so low now, while stock markets are also very highly valued, we are in unchartered waters in terms of the conditions at the start of retirement and knowing whether the 4 percent rule can work in those cases.”

Second, the 4% rule never took into account non-linear spending patterns of retirees, other goals, other retirement resources, asset allocation, taxes and stress testing the plan.

There’s a much better way to do this, though it takes more thought and time and a disciplined process. For those who value their financial future, it’s worth the effort. Here are some of the elements that you need consider:

Start with your goals. At what age do you want to achieve financial independence (freedom to retire)? What will be your likely spending patterns during retirement? What will your housing be? What will be your likely health care costs? Are there any other needs, wants or wishes you have for the future?

Retirement resources. The calculation needs to include not only the investment portfolio, but also other income sources, such as social security, pension, rental income or part-time work. The calculation also needs to review all assets, not simply the investment portfolio, and determine the amount, if any, of proceeds from the sale of those assets that could be used in the future to fund goals.

Asset allocation. Varying allocations will likely produce varying results of returns and volatility. The plan should be calculated using the appropriate allocation strategy. Returns should be calculated in two ways- historical and forecasted.

Taxes. Income taxes can have a huge impact on a plan. Allocation of investments into appropriate (taxable, qualified, Roth) accounts can make a real difference. Tax-efficiency throughout the plan is imperative.

Stress Testing. The calculations need to be done using a “stochastic” process such as Monte Carlo simulation rather than a linear one. A Monte Carlo simulation is a tool for estimating probability distributions of potential results by allowing for random variations over time. The world does not operate in a straight line and linear projections can be greatly upset (and therefore of little value) when outliers come into play. In addition, stress testing involves looking at the potential impact of negative factors in the future, including living longer, social security cuts, lower than expected investment returns, and/or large health care costs.

In short, the old 4% withdrawal rule is not a good way to predict whether or not you will fulfill the goals you have for you and your family. However, there is a process that can provide reasonable assurance and one you should expect from your wealth manager, like DWM, as part of their package of services for you. It can be a little complicated but should be customized for your particular situation. It will take some time and effort. It requires discipline and monitoring. However, if you value your financial future, it’s well worth the effort.

Robo-advisors: The Latest “Inexpensive” Product

RoboadvisorWhen Brett was little, he worked, saved his money, and bought a three wheel ATV. He needed a helmet to keep his head safe while he was riding merrily through the neighborhood. We investigated and settled on a Bell Helmet since it was the best. Their slogan said it all: “If you have a $10 head… buy a $10 helmet.” In my opinion, the same applies to your financial future. If your financial future isn’t worth much to you, use a robo-advisor. It’s like the $10 helmet: it’s cheap, better than nothing, yet provides little value.

Robo-advisors are making the news. They are a low-cost, computerized asset-allocation software application. Folks like Betterment, Wealthfront, Vanguard, and now Schwab have been getting into the game. Users are asked to provide a number of inputs such as:

  • How much are you investing?
  • What is your risk tolerance?
  • What is your goal?
  • How long do you have to invest?

Then proprietary algorithms process the inputs and provide a “tailored” investment plan. The provider implements that plan using their recommended funds.

Here’s what people who use robo-advisors are generally not getting:

  • Appropriate diversification. Use of all three asset classes: equities, fixed income, and liquid alternatives is generally not available with the robo-advisors. Studies have shown that adding non-correlated assets, aka alternatives, to a portfolio can improve return and reduce volatility.
  • Wide fund selection. Robo-advisors not only get their asset management fee from customers, they typically also receive all or part of the operating expenses of the funds for the funds they recommend. Lack of independence in fund selection is a key point here since the robo-advisor’s overall income is impacted by the funds they recommend. Hence, while the asset allocation percentages may be appropriate, the specific investment choices may not be, which can lead to underperformance.
  • Monitoring. Investment management is a process. “Set it and forget it” doesn’t work, particularly in the current investment environment.Regular monitoring and periodic rebalancing is required in order to continue to adapt and improve portfolios.
  • Commitment to protecting your money. Let’s face it, the robo-advisors were developed and exist to collect assets and make money for their company. If there is a big market swing, like we had in 2008, don’t expect the robo-advisor to cushion the downfall. A firm like DWM is focused on your money, not ours.We’re here to help protect first and then grow your assets. Our clients are familiar with what we did in 2008 to contain their losses by reducing equity exposure and the use of alternatives.
  • Guidance. Some robo-advisors do include some assistance with financial decisions in their service. Most of the advice will be generated automatically by the firm’s computers and delivered online. Compare that with a firm like DWM. Brett and I have over 60 years’ experience helping clients. In addition, as you know, we’re CFP® practitioners, CFA charterholders, and I am also a CPA. You want a sounding board that is experienced, competent, thoughtful, and sensitive to your particular personal situation, not a robot simply doing calculations and spitting out answers.
  • Fiduciary care. Robo-advisors don’t sign an oath, as Brett and I have, to always put the client’s interest first. We are also Accredited Investment Fiduciary (AIF®) certificants. Robo-advisors are the latest “fad” for collecting assets and have no legal responsibility to put their client’s interests first. Their principal goal is to make as much money for their company as they can.
  • Proactive advice. Don’t expect that from your robo-advisor. DWM clients know that we believe “Wealth Management is a Process, not a Product.”We have processes in place to review and monitor on a regular basis and review with our clients such important topics as financial independence, education funding, income taxes, estate planning, insurance and other matters. We have saved families hundreds, thousands, and millions of dollars by providing proactive suggestions for them in many different ways. In addition, we have collaborated with their other advisers to implement changes to help secure and protect them.

Ultimately, it’s all about what price you put on your financial future. If you want a seemingly inexpensive product (a computerized calculation of an asset allocation) and you believe that will provide you and your family future financial success, then a robo-advisor may be for you. If, on the other hand, your family’s financial future is of key importance to you and you wish to have financial “peace of mind” with an independent, competent, experienced, proactive financial advocate that employs processes in both investment and financial planning areas devoted to helping you and your family and is committed to protecting and growing your net worth and legacy, then I suggest you do your due diligence and opt for the best, not the cheapest.