Financial Literacy: Money Matters!

As you all know, we provide proactive financial advice on matters such as investment management and value-added services such as tax planning, risk management and estate planning to name a few.  Something you probably didn’t know is that earlier this year, we launched a campaign to promote financial literacy for children and young adults!  It is called the Young Investors program.  Some of our clients have recently become the first recipients of this new program!

Financial literacy is a person’s ability to recognize and use the money and other resources he or she has to get what is needed and wanted.  Another way of saying this is that financial literacy is being able to set goals for using financial resources, make plans, and use the plans to meet financial demands and achieve goals.  To achieve financial literacy, a person needs to have experiences with money.  That is why it is important that children begin to learn about money and its use when they are young.

You might not know this, but financial literacy availability for young children is scarce, primarily because the school systems lack time and budget resources to incorporate financial education into the curriculums.  In fact, only 16 states require any instruction in economics between Kindergarten and 12th grade.  Even worse, only 7 states require students to take courses in personal finance.

There’s been a greater awareness of this educational need in the past 10 years and some financial-literacy advocacy groups have begun to take some steps to fill this educational void.  Some have responded by offering summer camps to young children whose parents want to teach their children the basics of money management.  Feedback from many of the attendees is that, believe it or not, they had fun!  Of course, we want to join in on the fun, and we are also excited to be a part of the solution.

We know that a financial foundation is best achieved when started early, reviewed, as well as reinforced often.  It’s important to teach young children even before they are in school about the concept of money, and that it’s not all about spending!  For example, something simple that a parent can start as early as age 3 can have lasting effects for the future.  Consider this:

Activity: Tell your toddler that you’ll give him a cookie now if he wants it, but you’ll give him two cookies if he waits an extra ten minutes. See what he chooses and try to encourage him to wait for the extra cookie.

Lesson Learned: Be patient and wait for a bigger payoff, rather than always going for instant gratification.

Although it might not look like much, it sets the stage for a less impulsive, more thoughtful response, and hopefully not just one involving money in the future!

Thinking about the scenario above, in an article I read the other day from the Wall Street Journal on personal finance summer camps, a 12 year old boy cited some camp attendance takeaways such as stopping and pausing before making purchases and long term planning!  I suppose it’s true that small things do matter!  And more interesting feedback from the camp directors is that many children ages 10-14 didn’t know what stock and bonds were.  Some thought the investments were a form of real estate.  Clearly, more attention needs to be given to this area.

We love the opportunities these summer camps offer and hope to provide some of our own financial education to our client families year round.  With our financial literacy agenda, our Young Investor program is structured with several tiers of age appropriate interactions and dialogue starters on financial matters for our clients to have with their children or grandchildren.  Age appropriate financial suggestions, tools, links to pertinent financial articles and fun activities to engage their minds are some of the content we will be sharing.  With the importance of starting as early as possible, we literally start at the very beginning, with newly born children/grandchildren, and capture all ages through the early 20s.  Specifically, we break out the tiers in roughly 5 year intervals, so age 0-5 years is the first group, 5-10 years is next, then 10-15 years, with 15-20ish years being the last group.  Our goal is that by age 25, the child or grandchild will be more than ready to begin a lifetime of investing!

Even after your children and grandchildren start their careers, it is our hope that they will join our Emerging Investor program, where they can establish their own brokerage accounts with Charles Schwab and have some of the same great DWM advantages and services as their parents and grandparents.  We are happy to help them by protecting and growing a diversified portfolio to preserve assets and provide moderate growth with minimal risk.

With our help, the young children of today will come to ask for financial assistance and have some of the best mentors in their lives, YOU!  And we all know that money is not an elective in life, so let’s keep the dialogue going with our young generation and keep providing them with good ‘sense’!  We hope you find this program to be a valuable experience.  As always, please let us know your thoughts or if you need financial assistance with a young investor in your life.

Tax Efficient Investing

Think of these opposites:  Good/Bad.  Rich/Poor.  Gain/Loss. Joy/Sadness.  Investment Returns/Income Taxes.  Yes, Uncle Sam is happy to take all the joy out of your investment returns and tax them.  That’s why tax efficient investing is so important.

You have three types of investment accounts: taxable, tax deferred or tax exempt.  For taxable accounts, you must pay taxes in the year income is received.  Retirement accounts, IRAs and annuities are examples of tax deferred accounts, in which you pay tax on the income when you take it out. Tax-exempt accounts, like Roth IRAs and Roth 401ks, are not taxed even at withdrawal.

Strategy #1:  Know Your Bracket.  The tax brackets have changed for 2018.  The top federal marginal rate of 37% will hit taxpayers of $500,000 and higher for single filers and $600,000 for married couples filing jointly.  There can be a huge difference between taxes on current ordinary income and taxes on long-term capital gains. Capital gains are the appreciation on your holdings over time and often represent a very significant portion of your total investment return.  Securities held for over a year generally qualify for long-term capital gain taxes, which are taxed at 0% to 20%, with most investors paying 15%. The difference between ordinary and capital gains taxes on your investment income can be substantial.

Strategy #2:  Asset Allocation includes Asset “Location.”  Tax efficient investments should be in taxable accounts, tax inefficient investments should be in tax deferred or tax-exempt accounts.  For example, bonds are tax inefficient.  Interest earned on bonds in taxable accounts is income in the year received and is taxed at ordinary income tax rates.  However, bond interest earned in a tax deferred account is also taxed as ordinary income, but only at withdrawal, when presumably you might be at lower income and tax levels.  Hence, bonds should generally be located in tax deferred accounts, such as IRAs and 401ks.

Stocks are more tax efficient. First, the qualified dividends received on stocks are taxed at the capital gains tax rate, which is likely less than your ordinary income tax rate. And, second, the largest part of your investment return on equities is often your capital gain, which is also generally at 15% tax and is only paid when you sell a security.  Hence, stocks and equity funds are tax efficient and generally should be located in taxable accounts.  Conversely, holding equities in retirement accounts is not generally a good idea because even though the tax is deferred, the ultimate withdrawals will be taxed at ordinary rates, not capital gains.

Alternative investments, which are designed to be non-correlated with bonds and stocks, may generate more ordinary income than tax-efficient income.  Hence, they should generally be located in tax deferred accounts.  Tax-exempt accounts, such as Roth accounts, can hold tax efficient and tax inefficient holdings. Hence, tax-exempt accounts are already tax efficient and can hold all three asset classes; equity, fixed income and alternatives, in appropriate asset allocations without any income tax cost.

Strategy #3:  Grow your Roth Assets.  Because Roth assets are tax-exempt and, therefore, 100% tax efficient, they are the most valuable investment asset you can own; both in your lifetime and your heirs.  Roths only have investment returns, no taxes.  Furthermore, Roth accounts, unlike traditional IRA accounts, do not require minimum distributions when you and/or your spouse reach 70 ½.  Upon your passing, the beneficiaries of your Roth assets can “stretch them” by allowing them to continue to grow them tax-free. However, the heirs will be required to take minimum distributions.

Roths can be funded in a number of ways.  If you have earnings, you can make Roth contributions of $5,500 per year ($6,500 if you are 50 or over) if your income is below a certain threshold.  In addition, if you are working for a company with a 401k plan, that plan may allow Roth 401k contributions. In this case, there are no earnings limitations and you can contribute $18,500 ($24,500 if you are 50 or over.)  You can also convert IRAs to Roths.  This is done by paying income tax on the difference between the amount converted and the cost basis of the IRA. There is no limit of the amount you can convert.  The concept is “pay tax once, have the Roth grow tax-free forever.” Oftentimes this conversion takes place after retirement but before age 70 ½ and is done in an annual installment amount to keep the tax implications within a given tax bracket.   We encourage you and/or your CPA to look at this possibility.

Strategy #4:  Do an Income Tax Projection.  Tax projections are really important, particularly in 2018, with all the new changes brought on by tax reform.  The projection provides information as to your income, deductions, tax bracket, estimated taxes (to minimize surprises and penalties) and, hopefully, also possibilities for tax savings.  We prepare “unofficial” tax projections for our clients for these very reasons.  Investment management must consider income taxes.

Ultimately, your return on investments is your gross return less the income taxes.  Therefore, we encourage you to make your investment portfolio operate as tax efficiently as possible and accentuate the positive; good, rich, gain, joy and investment returns.  Rather than the negative; bad, poor, loss, sad and income taxes.  You should make yourself happy, not Uncle Sam.

Labor Day- A Holiday and a Time to Reflect on the American Dream

Hamdi_Ulukaya.jpgWe hope everyone had a wonderful Labor Day weekend. We certainly did. Labor Day always marks the “unofficial” end of summer. Time for school and work to begin in earnest. It’s also an excellent time to remember the contributions and achievements of American workers and to reflect on their chances of achieving the American Dream, which is “the ideal that every U.S. citizen should have an equal opportunity to achieve success and prosperity through hard work, determination and initiative.”

Last week, I read a very engaging interview in the NYT about Chobani yogurt’s founder, Mr. Hamdi Ulukaya (pictured above) and his quest of the American dream for himself and others.

Hamdi Ulukaya grew up in eastern Turkey with sheep, goats and cows. He and his family spent the spring, summer and fall in the mountains; herding animals and producing yogurt and cheese. They came back to their village in winter time. Hamdi went to a boarding school, but didn’t like it. He left school, got in trouble and then thought he should leave Turkey. A stranger suggested, “Why don’t you go to the United States?” Hamdi wasn’t sure, but decided to take the plunge in 1994, at age 22, and came to America with $3,000 in his pocket.

After several years of university study and odd jobs, in 2002 Mr. Ulukaya was encouraged by his father to start making feta cheese. Years of hard work and struggle ensued with little success. One day, Mr. Ulukaya saw an ad for a fully equipped yogurt plant for sale. Kraft was closing the operation in the dairy region of NY, near where Mr. Ulukaya lived. His attorney checked into it and reported back, “They’re looking for an idiot to unload this on. They probably have environmental issues. And, if they thought yogurt was a good business, they would not be getting out of it.” This was 2005 and at that time Greek yogurt represented about ½ of 1% of the yogurt market.

But, Mr. Ulukaya was convinced he could make it work. He pursued the deal and, on August 17, 2005, he had the “key” to the factory. Today, Greek yogurt is over 50% of the yogurt market. Chobani, which means “shepherd”, went from no sales in 2005 to over $1 billion per year by 2012. It continues to grow as the #1-best-selling Greek yogurt in America. BTW, it’s my favorite.

Chobani started with a few people and now employs thousands. They are known for offering generous wages and benefits and recently gave away equity to its employees. Mr. Ulukaya tells why: “Look, my background is a working-class background. One of my dreams was to make this company a place where everybody’s a partner, and the employees deserved a portion of what they have helped to build. If you make $7 or even $9 per hour, you can’t have a house. You can’t have good food for the kids. Forget vacations.” He continues: “Especially for rural communities, we (the employers) have to start worrying about our own employees, their families and their children’s well-being, and the school, and the firehouse and the baseball field. You have to get involved.”

Chobani needed people for its growth. Coincidentally, at this time people from different parts of the world were being settled in the Utica, NY area near the Chobani plant. Mr. Ulukaya, an immigrant himself, decided to start hiring them: “These are hardworking people-they’ve gone through a lot.” Today roughly 20% (500 to 600 people) of the Chobani workforce are immigrants from 19 different countries. In April 2016, Mr. Ulukaya gave his employees 10% of the shares of Chobani.

Labor Day is a perfect time for a holiday and perfect time to reflect on the American dream. Chobani’s Hamdi Ulukaya is a shining example that the American dream is alive and well. Mr. Ulukaya, now 45 years old, is worth $1.7 billion and is an owner, investor and philanthropist. And, as importantly, Chobani is helping keep the flame of the American Dream alive for its employees; by providing generous wages and benefits, including equity.   All 2,500 Chobani employees, some of them newcomers to the United States from other parts of the world and some whose families have been here for generations, could all celebrate in a very special way on Labor Day. The American dream is alive and well, particularly with entrepreneurs like Hamdi Ulukaya leading the way.