Happy National Social Security Month!

Many Americans are worried about the state of Social Security and the possibility that benefits will be reduced or even disappear in the future. Even those already collecting Social Security benefits may be concerned that their monthly check could be impacted by the swelling population of beneficiaries and the inability of the taxes collected from the current workforce to keep up with the demand.

Every April, the Social Security Administration celebrates with a month of highlighting the agency’s mission to “promote economic security” and educating all of us on their programs and services. Social Security was originally created by President Roosevelt in 1935, as part of his New Deal plan, to develop a comprehensive social insurance program. There are three parts to the benefits in Social Security – retirement benefits, survivor and death benefits and disability benefits. This is a pay-as-you-go system, so the payroll taxes paid by the workers and employers today fund the benefits for the beneficiaries of the three SS programs.

Social Security is the single largest federal program and accounts for around 24% of all federal spending. According to the most recent report from the Social Security Administration, the benefits paid out by the Social Security retirement program will be more than what’s paid in, starting in 2020. When the program started in 1935, many workers paid into the program, but few lived long enough after retirement age to collect much in the way of benefits. The Social Security Trust Fund was created when the taxes collected surpassed benefits that were paid out. However, in 2010, the government starting dipping into these reserves to address the insufficient revenue. This trust fund is expected to be completely depleted by 2034 and benefits could be reduced to 75%-80% of current payments, unless something changes that will increase the money going into the trust fund or decrease the amounts being paid out.

We have all heard about Social Security benefits running out and have heard about the need for reform. We jokingly thank the Millenials for supporting something from which they may never recoup any income. But it really is a serious issue for the many Americans who have not saved enough on their own. As Investment News contributor, Mary Beth Franklin, notes, “By 2030, all baby boomers will be older than 65, meaning one in every five U.S. residents will be of retirement age”. This, of course, will put critical stress on the entire Social Security program.

So what can be done? Each year, the Social Security trustees use their annual reports to recommend that lawmakers address the projected trust fund shortfalls. We have heard about “means testing” for benefits, which already impacts Medicare Part B premiums. Means testing could take the form of more income taxes, a reduction in benefits, a surtax or some other method to correct the program shortfalls. Another possible solution talks about tying Social Security benefit checks to prices rather than wages, as price increases are slower than wage growth. This could correct shortfalls over time, but may present other undesirable effects. In a recent article, Ramesh Ponnuru, a Bloomberg View columnist, notes, “An implication of that change [using prices over wages] is that over time Social Security would replace a smaller and smaller portion of the income people made during their working lives.”

Congress is looking at a tactic to address the problem of insufficient retirement savings with a bi-partisan (remember that word?) bill, the Retirement Enhancement and Savings Act (RESA). This legislation would create a retirement savings program allowing access for workers who may not currently contribute to an employer-sponsored retirement plan. It would also offer a collective ‘multi-employer plan’ (MEP) that allows small businesses to share in the costs of plan administration and make it easier for them to offer retirement savings plans to their employees. The more that Americans can save on their own, the less of an impact SS benefit shortfalls will have.

We will continue to watch and wait for the legislators and administrators to solve this problem with Social Security. At DWM, we are all about helping you determine ways to save more, protect that savings and then invest it to have appropriate growth to achieve your goals. We work hard to help our “vintage” clients evaluate all of their options and strategies when applying for Social Security benefits. Benefits taken at the earliest age of 62 will reduce your lifetime benefits, while waiting to begin until the maximum age of 70 can increase your benefits by 8% a year after Full Retirement Age (FRA) is reached. We evaluate which is the most effective strategy for each client – whether waiting and maximizing your benefits or starting benefits at FRA and possibly avoiding any benefit changes that may occur. There is much to consider, but we are here to help navigate the sign-up, the strategy choices and all of the tax implications involved. Please let us know if we can help enhance YOUR retirement savings!

LOOKING THROUGH THE GENDER LENS

Woman_with_wealth.jpgLast week, we celebrated International Women’s Day. Adopted by the UN in 1975, we recognize this global day of advocacy to celebrate women’s work and to promote women’s rights. It has been a troubling year hearing women’s stories of facing sexual harassment in the workplace and elsewhere, but yet a momentous year of watching women gain a collective voice against this treatment. The #Me Too movement has catapulted women’s rights to one of the top national conversations and focused attention on the goal to removing gender bias in many aspects of our culture. You’ve come a long way, baby, indeed!!

This conversation has also put the spotlight on the gender gap for pay and hiring practices. According to an article in Businessweek, working women still earn between 57% – 80% of the salary of a working man, depending on whether they are white, black or Hispanic. Women’s pay is catching up, but is predicted not to achieve equal status until 2058. This affects all of us, as women have less opportunity to save, contribute to Social Security and participate in the economy. Saving adequate retirement savings is harder for women. Women are able to save less for several reasons, the gap in pay being one of them. There may be career interruptions for children, a need to pay for child care while in the workplace, higher healthcare costs and, of course, women live longer, which all puts a strain on women’s ability to save for retirement and have adequate means when older.

Adding to the difficulty in obtaining adequate saving levels, research has shown that women are, on average, less risk tolerant in their financial decisions than men. According to Associate Professor from the University of Missouri Rui Yao, women and men do not think of investment risk differently, but income uncertainty affects women differently from men. That uncertainty may result in women keeping funds in asset allocations with lower expected returns to “buffer the risk of negative income shocks”. This can be a concern for any investor with low levels of risk tolerance, as they might have greater difficulty reaching their financial goals and building adequate retirement wealth because they are less likely to invest in more growth-oriented asset classes with bigger returns, like equities. “Risk tolerance is one of the most important factors that contributes to wealth accumulation and retirement,” said Rui Yao. At DWM, we review the risk tolerance of all of our clients very carefully. We make sure that their investment strategy matches well with their capacity for risk, as well as their tolerance for it, while making sure that they can achieve their goals for financial independence.

Despite fighting issues of sexual harassment and glass ceilings in the workplace, women have made some remarkable gains in their financial status. In 40% of American families, the primary breadwinner is a woman and, for the first time in history, women control the majority of personal wealth in the U.S. In fact 48% of all millionaires are women. Also, women will benefit immensely in the future transfer of wealth – from husbands who are older and die sooner or parents who now bestow equal inheritances to sons and daughters. Breadwinner women may control more wealth, but there is still a shortfall in other areas.

There are many arguments for equalizing our gender dynamics at home and at work – there is no doubt that enabling women to achieve their full potential is certainly better for women and their families. There is also a universal financial argument to be made. By some estimates, according to Sallie Krawchek of Ellevate Network, if women were fully engaged in the economy, GDP would increase by 9%! Ms. Krawchek’s article also cites multiple studies that conclude “companies with diverse leadership teams” outperform other companies on metrics including higher returns on capital, lower risk and greater innovation. This translates into healthier corporate environments that are rewarded on the bottom line. That is good for men, women and families! All of the reasons for closing the gender gap are important, but the financial benefits for everyone are significant and certainly can’t be considered controversial. As someone once said, “It’s the economy, stupid”!

While there remain roadblocks to women achieving equality in their financial status with men, we do think having these national conversations and educating both women and men on the benefits of empowering women will begin to make progress. We agree that deficiencies in retirement savings and the economic engagement of women are highly related and we hope changes are coming. At DWM, we look at the total wealth management for all of our clients equally and with consideration for every one of their life situations. We know that anything that has a positive effect on the financial success of women is good for us all.

The Mighty Dollar

With tax cuts and tax returns on everyone’s minds, we think it is a good time to look closely at our favorite currency!  We might call it “dough”, “bread” or “cheddar”, we have “bean”-counters to keep track of it and we use simple, gastronomic valuations, like the Big Mac Index, to compare it to its peers.  Thinking about the US dollar and its’ value might just make you hungry!   The dollars’ worth is determined by the foreign exchange market, but investors and economists alike are always looking for ways to value the currencies and look for explanations or even monetary conspiracies, to explain currency fluctuations.

In 1986, The Economist came out with the Big Mac Index as a simple way to discuss exchange rates and purchasing-power parity (PPP), which compares the amount of currency needed to buy the same item in different countries, in this case a Big Mac. The Wall Street Journal came up with their own modernized version of this same idea with their Latte Index, which compares the price of a Starbucks tall latte in cities around the world.  For example, in New York City, the WSJ reporter could buy a tall latte at Starbucks for $3.45.  Other WSJ reporters would need to spend $5.76 in Zurich, $4.22 in Shanghai, $3.40 in Berlin (almost the same as the U.S.), $2.84 in London and $1.53 in Cairo.  These simple comparisons of the price of a good that is available in many countries can be an indicator of whether foreign currencies are over-valued or under-valued relative to the US dollar.

There are some criticisms of these simple tools.  Costs of these products can depend on local wages or rents, which are generally more expensive in richer countries and can add to the cost of the product.  The price for a Starbucks Latte can even fluctuate amongst American cities or specific locations, like airports, which may have higher rents.  And adjusting these indices for GDP will change the data and perhaps improve their accuracy.  Some also have pointed to the ingredients in these particular items as causing value differences.  McDonald’s, for example, must use strictly British beef in the U.K.  Starbucks can be a little more consistent, as coffee beans are not generally grown in most of the countries they operate in, so the imported price is pretty standard.

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What these indices don’t tell us about the currency market is why fluctuations occur.  For example, why has the U.S. dollar hit a recent three-year low?  According to an article in yesterday’s WSJ, one simple explanation for a weakened dollar is that “the economies in the rest of the world are finally growing again, so their currencies are strengthening. The U.S. economy isn’t improving as fast—because it was stronger to start with—so the dollar’s falling.”  The Chinese yuan has gained 3.8% so far in January after gaining 6.7% in 2017, which has the officials at the People’s Bank of China concerned about their exports.  President Trump and the U.S. have been critical of any Chinese central bank policies that would devalue the Chinese currency and cheapen goods coming into the U.S.  This trade friction complicates China’s management of their currency, particularly as they attempt to make the yuan a more market-driven currency.

Adding to the currency gap with China and the drop in US currency values overall were comments made last week by the U.S. Treasury Secretary signaling Administration support for a weaker U.S. dollar as being “good for trade.”   Such overt comments are traditionally avoided by the Treasury Department, but may spotlight the Administration goals to reduce the trade deficit and allow currencies to float freely.  President Trump reiterated his stance on trade imbalances in his State of the Union address, pledging to “fix bad trade deals” and that he expects trade deals to be “fair” and “reciprocal”.  Another factor that may weaken the dollar is the belief that 2018 will bring a tightening of monetary policy by the international banks.  Some banks, like the Bank of Canada and Bank of England, have already raised rates.

A weaker dollar makes U.S. goods cheaper to foreign markets, but there is a risk of undermining confidence in an array of U.S. assets, like the U.S. Treasury market.  As the WSJ article explained, as the new tax law expands the federal budget deficit, the government will look to sell the debt to foreign investors.  Those investors may demand higher rates to compensate for the risks of a weaker currency and those costs could fall onto the U.S. taxpayers.

So, we should think about our American dollar today and perhaps look at our paychecks or tax returns to see what has changed.  At DWM, we are always careful to think about each and every one of your dollars – the ones you invest, the ones you save, the ones you spend and the ones you pay in tax.  Using the simple Big Mac or Starbucks Latte indices might help us remember all the factors that go into the value of a dollar around the world.  For me, I certainly prefer to imagine buying a tall latte in Zurich over a Big Mac!

 

 

Understanding Risk and Reward

Electronic Discovery Risk Assessment3-1024x664Mark Twain once said “There are three kinds of lies:  lies, damned lies and statistics”.  We are inundated nowadays with statistics.  Statistics are a scientific method for collecting and analyzing data in order to make some conclusion from them.  Very valuable indeed, though not a crystal ball by any means. 

When you study investment management, you must conquer the statistical formulas and concepts that attempt to measure portfolio risk in relation to the many variables that can affect one’s investment returns.  In the context of investing, higher returns are the reward for taking on this investment risk – there is a trade-off – the investments that usually provide the highest returns can also expose your portfolio to the largest potential losses.  On the other hand, more conservative investments will likely protect your principal, but also not grow it as much. 

Managing this risk is a fundamental responsibility for an investment advisor, like DWM.  You cannot eliminate investment risk. But two basic investment strategies can help manage both systemic risk (risk affecting the economy as a whole) and non-systemic risk (risks that affect a small part of the economy, or even a single company).

  • Asset Allocation. By including different asset classes in your portfolio (for example equities, fixed income, alternatives and cash), you increase the probability that some of your investments will provide satisfactory returns even if others are flat or losing value. Put another way, you’re reducing the risk of major losses that can result from over-emphasizing a single asset class, however resilient you might expect that class to be.
  • Diversification. When you diversify, you divide the money you’ve allocated to a particular asset class, such as equities, among asset styles of investments that belong to that asset class. Diversification, with its emphasis on variety, allows you to spread you assets around. In short, you don’t put all your investment eggs in one basket.

However, evaluating the best investment strategy for you personally is more subjective and can’t as easily be answered with statistics!  Investment advisors universally will try to quantify your willingness to lose money in your quest to achieve your goals. No one wants to lose money, but some investors may be willing and able to allow more risk in their portfolio, while others want to make sure they protect it as well as they can.  In other words, risk is the cost we accept for the chance to increase our returns.

At DWM, when our clients first come in, we ask them to complete a “risk tolerance questionnaire”.  This helps us understand some of the client’s feelings about investing, what their experiences have been in the past and what their expectations are for the future.  We also spend a considerable amount of time getting to know our clients and understanding what their goals are and what their current and future financial picture might look like.  With this information in mind, we can then establish an asset allocation for each client’s portfolio.  We customize the allocation to reflect what we know about them, looking at both their emotional tolerance for risk, as well as their financial capacity to take on that risk.  We also evaluate this risk tolerance level frequently to account for any changes to our clients’ feelings, aspirations or necessities.  While we use the risk tolerance questionnaire to start the conversation, it is our understanding of our client that allows us to fine tune the recommended allocation strategy.

A Wall Street Journal article challenged how clients feel about their own risk tolerance and suggested that being afraid of market volatility tends to keep investors in a misleading vacuum.  The article suggests that investors must also consider the risk of not meeting their goals and, that by taking this into account, the investor’s risk tolerance might be quite different.

The WSJ writer surveyed investors from 23 countries asking this question:

“Suppose that you are given an opportunity to replace your current portfolio with a new portfolio.  The new portfolio has a 50-50 chance to increase your standard of living by 50% during your lifetime.  However, the new portfolio also has a 50-50 chance to reduce your standard of living by X% during your lifetime.  What is the maximum % reduction in standard of living you are willing to accept?” Americans, on average, says the article, are willing to accept a 12.65% reduction in their standard of living for a 50-50 chance at a 50% increase.   How might you answer that question?

So, bottom line, it is the responsibility of your advisor, like DWM, to encourage you to choose a portfolio allocation based on reasonable expectations and goals.  However, understanding your own risk tolerance and seeing the big picture of your investment strategy is also your responsibility.  Our recommendations are intended to be held for the long-term and adhered to consistently through market up and downs.  We know that disciplined and diversified investing is the strategy that works best for every allocation!

We want all of our clients to have portfolios that give them the best chance to achieve their financial aspirations without risking large losses that might harm those chances.  Through risk tolerance tools and in-depth conversations, we get to know our clients very well, so we can help them make the right choice.  After all, our clients are not just numbers to us!

Total Eclipse of the Sun

We all spend a lot of time thinking about our Sun.  In the summer, we want to know if clouds or rain will obscure the Sun’s heat and brilliance and perhaps impact our plan for outdoor activities.  We must think about the Sun’s intensity by protecting our skin and our eyes from the powerful UV rays with sunscreen, protective clothing and eyewear.  Sunrise and sunset mark the ebb and flow in our days with beautiful atmospheric displays.  The Sun, as we all know, keeps us alive on this planet!

On August 21st, our moon will pass between the earth and the Sun, throwing shade across a wide path of the United States that includes Charleston, SC.  Temperatures will drop, the sky will darken and animals will be confused about what to do. The Great American Eclipse of 2017 will begin in the Charleston area with the first phase at 1:17 pm, will hit the peak or “totality “ period at 2:46 pm and will finally end around 4:10 pm.  This is the first total solar eclipse to occur in the US since 1979 and is the biggest astronomical event that America has seen in years.

There are five stages to a solar eclipse and there are some interesting features to look for during each phase, for those of you getting ready to participate.  Here are the 5 phases:

1. Partial eclipse begins (1st contact): The Moon starts becoming visible over the Sun’s disk. The Sun looks as if a bite has been taken from it.

2. Total eclipse begins (2nd contact): The entire disk of the Sun is covered by the Moon. Observers in the path of the Moon’s umbra, or shadow, may be able to see Baily’s beads and the diamond ring effect, just before totality.  Baily’s beads are the outer edges of the Sun’s corona peeking out from behind the moon and the diamond ring effect occurs when one last spot of the Sun shines like a diamond on a ring before being obscured.

3. Totality and maximum eclipse: The Moon completely covers the disk of the Sun. Only the Sun’s corona, or outer ring, is visible. This is the most dramatic stage of a total solar eclipse. At this time, the sky goes dark, temperatures can fall, and birds and animals often go quiet. The midpoint of time of totality is known as the maximum point of the eclipse. Observers in the path of the Moon’s umbra may be able to see Baily’s beads and the diamond ring effect, just after totality ends.

4. Total eclipse ends (3rd contact): The Moon starts moving away, and the Sun reappears.

5. Partial eclipse ends (4th contact): The Moon stops overlapping the Sun’s disk. The eclipse ends at this stage in this location.

Historically, solar eclipses have been significant events and have been recorded dating back to 5,000 BC.  There are writings of mathematical predictions of eclipses from ancient Greece, Babylon and China.  Rulers and leaders often used the predictions of astronomical events to gain power or to offer reassurance to a fearful population.  George Washington was grateful for a heads up about a coming solar eclipse prior to a battle in 1777 so he could alleviate any superstitions that his troops may have.  And scientists have used the opportunity of an eclipse to study the Sun, measure distances and features in the universe and learn about the Earth’s atmosphere.  The discovery of hydrogen can be credited to a solar eclipse and a solar eclipse in 1919 provided observational data for Einstein’s theory of general relativity.  This year, NASA has set up many sites within the path of the eclipse to monitor, measure and capture data to further their knowledge.  There is much to be learned from studying these phenomena.

As we have seen throughout history, the science of astronomy can be used to predict and measure certain events and occurrences with regularity.  Wouldn’t it be nice if there could be more certainty in predicting the ups and downs of the stock market?  One study found that stocks around the world rise on sunnier days!  However, no one can predict the future.  We need to focus on what we can control, including an appropriate asset allocation, diversification and keeping costs low.  That is why actively managed funds underperform the benchmarks and why even the geniuses like Warren Buffet recommend using passive index funds.  At DWM, we think you should stick with your investing plan and not look for the latest fads or trends or even astronomical events to impact your strategy.

We hope that NASA and other scientists learn some spectacular new things from this years’ eclipse.  Here in Charleston, we will be avid, yet passive spectators to the historical occurrence and will use our ISO certified eclipse glasses to watch the once-in-a-lifetime event unfold.   Happy eclipse watching!

Now’s the time to plan your 529!

Summmerrrtttime!  Every day in the summer at our office here in Charleston, we are regaled with the carriage tour drivers’ versions of this famous song from Porgy & Bess.  We end up having that song stuck in our head a lot of the time!  Already the ads for back to school sales are appearing and it reminds us that, while the “livin’ is easy” right now, the hustle of getting kids ready to head back to school isn’t far away.  We hate to interrupt your summer fun, but it is a good idea to get ready for college tuition payments no matter what age those students are!

We wanted to highlight the particular advantages of using 529 plans for funding your education purposes, as it is the most cost-effective way to manage the expenses of higher education.  Enacted in 1996, Section 529 of the Internal Revenue Service Code allows an account owner to establish a plan to pay for a beneficiary’s qualified higher education expenses using two types of plans – a pre-paid tuition program or the more popular, state-administered college savings plan.  The beneficiary can be a family member or friend or an owner can set up a 529 account for their own benefit.  Anyone can then donate to the account, regardless of the owner or beneficiary.  Funds can be deposited and used almost immediately (need to wait 10 days) or can be invested and grown until needed.  Surprisingly, according to a Wall Street Journal article recently, only 14% of Americans plan to use 529s to pay for college.

Although there is no allowable federal tax deduction for 529 contributions, the income and gain in the account are not taxable, as long as they are used for qualified education expenses.  These qualified expenses include tuition, room & board, books and, in a 2015 legislative change, payments for many technological expenses like a computer, printer or internet access, even if not specifically required by the educational institution.  The costs for off-campus housing can also qualify, as long as the amount used matches the average cost of resident-living at your university.  Many states, like SC and IL, also allow a tax deduction for 529 contributions to in-state plans.  Another recent legislative change allows for an increase from one to two annual investment selection changes per year, unless there is a rollover and then a change can be made at that time.  This gives the 529 owner a little more benefit, flexibility and control over their accounts.

When funding 529 accounts, we recommend that our clients not fund more than 50% of the total cost of estimated expenses for the education of their student before the student selects and starts college.  One nice feature about 529 plans is that they are transferrable to a sibling or other close family member, if a student doesn’t use or exhaust their entire 529 account.    However, you don’t want to overfund an account and then have some leftover.  Only the gains in the account are taxed, but there is a 10% penalty on the account if the funds are withdrawn and not used for qualified education expenses.  Another reason for not overfunding is that there are many scholarships available – you may have an accomplished science whiz or an amazing athlete that earns scholarship money.  Once final amounts of tuition requirements are determined, 529 account owners can make necessary additional contributions to take advantage of tax benefits.

There are many scholarship opportunities available for those who take the time to look and apply.  Checking with the high school guidance counselor, local civic groups or community organizations about scholarships or awards opportunities can give your high school student some hands on involvement in paying for their own education!  All high school seniors should also fill out the annual FAFSA (Free Application for Federal Student Aid).  There are many opportunities for earning money for college and nothing should be ruled out.

We know that using 529 accounts is the least expensive way to pay for college.  Research shows that the most expensive way to pay is by taking out student loans or paying out of pocket as the student needs it.  At DWM, we want to help you strategize how to save for and pay for any education expenses that you may have before you, no matter when those costs are expected.  We can help you evaluate the various state plans and the investment options in the 529s and calculate an appropriate annual or lump sum amount of savings.  We will be glad to help make your summertime livin’ easy and carefree!  Okay, now back to summer fun…already in progress!

Health Savings Accounts – Understanding the Benefits

Health care is a very hot topic in 2017.  The new administration made it their leading agenda item, though we have yet to see a plan agreeable to both sides of the aisle.  As Republicans contemplate how to replace the Affordable Care Act (ACA) with a good alternative, Health Savings Accounts or HSAs are expected to figure prominently.  President Trump has made the expansion of access to HSAs an important measure for his health-care plan and conservative proposals are using expanded eligibility and increased contribution limits as key elements in their plans.   We think it is a good time, therefore, to understand how these plans might fit into an overall health care and investment strategy.

Health care costs are rising and the costs and inflation associated with health care are a tremendous consideration for retirement planning.  There are varying estimates of costs for retirement health care –some estimates show that a 65 year old couple will need an average of $260,000 for 20 years of healthcare spending.  At DWM, we actually look at health care as a separate spending goal in our financial plans because of the higher inflation and importance of adequately preparing for these costs. 

Here is where an HSA may come in.  HSAs offer an opportunity to take advantage of triple tax benefits to pay for some of this cost.  HSA contributions can be deducted or paid pre-tax, there is tax-free compounding while in the account and no tax is paid on qualified withdrawals for health care.  It’s a trifecta of tax advantage!  After age 65, you can make withdrawals for any reason and pay regular income tax just like you would for an IRA, but there are no required minimum distributions.  However, using the funds for non-qualified expenses before you are 65 results in a stiff 20% penalty plus the normal taxes.

 Let’s look at how HSAs currently operate.  You are eligible to contribute to a Health Savings Account if you are part of a high-deductible health plan (HDHP) and as long as you have not signed up for Medicare.  There is an annual contribution maximum and, for 2017, it is $3,400 for an individual and $6,750 for families.  A HDHP, in 2017, means your deductibles must be at least $1,300 for an individual and $2,600 for a family with maximum out-of-pocket expense requirements of $6,550 for an individual or $13,100 for a family policy.  The lower premiums charged for this kind of coverage have attracted consumers and employers alike.  Given the ACA’s requirements that certain preventive screenings, annual visits or prescription drugs be covered regardless of deductibles, these policies are now more attractive and palatable to average health care consumers.  These plans are also becoming more popular as employers look for ways to manage their employee benefit costs. 

You can make withdrawals from the Health Savings Account for many traditional healthcare expenses and the qualified expenses can also include things that you normally pay for with after-tax dollars, like vision or dental care and supplies.  It might be a good way to pay for braces for your child or eye exams that might not be otherwise covered.  This might be one way to use HSAs – as a tax-free payment for the costs of the deductibles on the HDHP, as well as some additional medical expenses.  The other beneficial use is as an extra savings vehicle to be used in retirement for those future retirement health costs, including some of the long-term care costs that Medicare doesn’t pay. Also, the pre-tax contributions that you are allowed to make to these accounts can be in addition to your contribution maximums for other qualified accounts.  You can also, like IRAs at age 50, make $1,000 “catch-up” contributions to your HSA at age 55.  

There are some downsides to these accounts.  High deductible plans might not be the right choice for everyone; each individual or family will have to evaluate their situation carefully.  Also, the HSAs are not offered by every financial institution and the investment choices and administrative costs should be investigated before committing to one.  It also takes disciplined saving to make the most of the tax advantages. 

We do think there could be a place for these accounts in certain circumstances and, as the political negotiations continue to unfold, it is good to understand their pros and cons. We recognize the importance that health care costs play in preparing for financial independence.   As your holistic financial advocate, we would be glad to help you evaluate how a health savings account might fit into your overall plan to help you reach your goals.  

The Oracle’s Wager

When Warren Buffett, Chairman and CEO of Berkshire Hathaway Inc., discusses investing, most everyone in the financial industry pays attention.  No one can disagree with his success or business acumen and few seem to be better at picking stocks.  However, when Mr. Buffett criticized hedge funds back in 2007 for their heavy fees, one hedge fund manager decided to challenge him to an investment duel.  With a hefty bet of $500,000 on the line for charity, the wager was made to determine which strategy could perform better over a 10-year time frame – passive index funds or actively managed hedge fund strategies.  Articles in the WSJ and Fortune last week are spotlighting the performance battle, which will conclude at the end of 2017.  Mr. Buffett picked a low-cost S&P 500 index fund run by Vanguard and the former hedge fund manager, Ted Seides from Protégé Partners on Wall Street, chose five unnamed hedge funds.  While Mr. Seides agreed that over time the expenses from active management would eat into the returns to investors, he believed that an “unusually well-managed hedge fund portfolio” could be superior over time.

According to Fortune, who reports annually on the bet, the results, at this point, are not even close!  The index fund has recorded an annual increase of 7.1% for a total of 85.4% since the start of the bet.  The hedge fund has registered gains of an annual 2.2% or total average gains of 22%.  The discrepancies have been aided since 2007 by an extended bull market and poor hedge fund performance overall.  As Mr. Buffett states in his letter to his stockholders from February 25th, 2017, the performance average of the 5 hedge funds “were really dismal.”  Apparently, short of a complete market-meltdown, Girls Inc. of Omaha, Nebraska will get a nice contribution from Protégé Partners, thanks to Mr. Buffett.

As the WSJ points out, though, Mr. Buffett made his fortune by savvy investing in individual companies and undervalued stocks with his own brand of active management.  Not exactly a shining example for passive investing!  Mr. Buffett, also known as the Oracle of Omaha, releases an annual shareholders’ letter that is always highly anticipated.  One of his themes this year is passive investing versus active investing and his belief that “passive will beat active over time”.  Mr. Buffett has been critical in the past of investment managers for charging high management fees even when their funds underperform.  He encourages investors to use low-cost index funds and states in his letter from last week – “The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”  At DWM, we completely agree with Mr. Buffett on the benefits of passive vs. active investing for traditional asset classes like equities and fixed income.

However, here is where we see things differently.  Mr. Buffett is a billionaire and certainly has a monumental tolerance for risk.  Mr. Buffett has a history of making his fortune investing in exactly the companies included in this Vanguard index fund – the 500 top U.S. large-cap entities.  In contrast to the performance for the last 9+ years, had the bet occurred in the decade prior, Mr. Buffett would be the one on the losing end of the battle.  Since even the Oracle himself cannot predict how the market will perform going forward, at DWM, we believe in the low-cost benefit of passive index funds, but we also strongly believe in asset class and asset style diversification that will protect our clients who do not have the risk tolerance profile of Mr. Buffett.  We use index funds from several classes of equities, not just the S&P 500.  We use a diversified mix of domestic and international small and large cap funds.  We also use other asset classes to “hedge” our exposure to equities by using fixed income funds and alternatives.  We want to protect the assets of our clients, participating when the markets are up like in 2016, but protecting against downturns like in 2008.   A client portfolio with a balanced allocation might be a couple of percentage points below Mr. Buffett’s choice of index fund in various short term time periods, but our use of diversification instead of this concentrated investment style should lead to smoother returns, less downside, and ultimately better long-term results.

Mr. Buffett is an example of business leadership and financial prowess.  In his case, we think his advice to put your investments in low-cost and passive index funds is solid.  He is, however, an example of “do what I say, not what I do” in his investing style and we believe that trying to emulate the investing career of Warren Buffett should come with a warning label – don’t try this at home!  However, we applaud his advice on passive investments, but want to add that, unless you are a billionaire and can weather that amount of risk, diversification is critical to your success.  A strong mix of passive investments and diversification will do better over time.  You can bet on it!

Feliz Jubilación!

We loved recently learning the word for retirement in Spanish …Jubilación!  It has a much more festive ring to it than “retirement” or even “financial independence”, as we say in the U.S.  In France, they use the word for retreat or “retraite” to define this time of life.  We don’t think many of us want to retreat, exactly, or hide away from anything!  And in England or Italy, they use a derivative of pension to describe a ‘retiree’ – ‘pensioner’ or ‘pensionato’, while in Spanish, you are a ‘jubilado’!  While they all mean the same general thing, we think this transition in life should be celebratory and warmly anticipated without any anxiety or trepidation.  As wealth managers at DWM, our goal is to make this transition so easy that you are indeed… jubilant!

So how can this transition truly be smooth and worry-free?  We do think that there are some things that you can do for yourself and then some things where your financial advocate, like DWM, can be very helpful.  Let’s start with some of the administrative items that come up at “a certain age”.  In fact, at DWM, we keep track of the important dates and significant milestones in our clients’ lives so we can remind them of the things that they will soon want to do.  For example, at age 50, you can start increasing your IRA or 401(k) contributions each year.  At 55, we like to discuss the pros and cons of long term care for you and your family and around age 60 or 62, we like to discuss Social Security strategies and help you with plans to start thinking about Medicare sign-ups.  We are always available to help analyze the proper benefits, help you schedule sign-ups or meet with professionals to assist you.  We also help with tax strategies and account transitions as you leave your job and need to understand your employer retirement benefits packages.  And when you hit 70 and it is almost time to start taking your required minimum distributions from your IRA’s, we are also here to guide you and manage this.  There are a few things that need to be done, but we like to educate our clients on the process and then help to guide them through it.

It is also important to make sure that your resources are protected and wisely invested to maximize your success in achieving your goals.  Assessing your resources and making a realistic plan will allow you to make the best choices for your future.  As wealth managers, we are always mindful of taxes, asset allocations, estate planning and risk management, as we look for ways to make the most of what you have.  We want to help you realize your goals with a comprehensive financial plan and a roadmap to success.  Money certainly isn’t everything, but having your finances in order and the details understood can make this transition much more worry-free and enjoyable.  Looking at all of your goals and assets with honest and realistic expectations will allow your plan to reach its highest potential.

The other question to ask yourself is what is your passion?  How would you like to spend your time, now that it is yours to spend?  Will you continue working?  Will you travel? Will you move to a new home?  Some people find that they can now spend their time doing exactly what they have always wanted to be doing, but just aren’t sure what that may be!  There are many things to investigate and you can now take some time to explore your options – whether it is continuing to work, volunteer, travel or take up a hobby that might have always interested you.  The goal here is to look at it as a wonderful opportunity where you embrace the change and get excited to find a happy “new normal”.  It may take some time and some patience to make this adjustment smoothly.  Staying healthy, active and engaged with others are all great tips to helping with the emotional transition.  You may have to adjust to your new identity and staying busy and connected with others can definitely support you through this process.

This should be a wonderful time in your life and we are here to help in any way we can as you move forward into “retirement”.  Just remember, you have earned the ability to celebrate – this is your lifetime achievement award!   As your financial advisor, we look forward to helping you look at this time with joyous and resounding JUBILATION!

Teach Your Children Well

As parents, we want what is best for our kids and want to prepare them to be independent and successful adults.  Two of my three children are in college now and, from my experience both as a parent and working at DWM, I have learned there are some gaps in the financial education and understanding of money in our young people, including my kids.  Money isn’t everything and certainly should be kept in perspective related to other pursuits in life.  That would be my first tip for the young adults in my life.  However, money is a means to an end and it is important for them to understand their own unique balance sheet and learn strategies to successfully manage all the variables that will affect their financial future.

1. Protect and Grow your Most Valuable Asset – YOU!

One of the most important things for college-age or young working adults to realize is that by far their most valuable asset is themselves!  For a young adult, the ability to generate income for the next 40 or so years is their most phenomenal asset.  Understanding the value of this asset can encourage them to look for ways to magnify that potential earning power and minimize the risks to it. Will additional education improve that income potential?  It is also smart for young people to realize that the future is uncertain.   We need to teach them to prepare for any risks, like economic downturns, that may reduce asset growth or increase their liabilities.  This can help them recognize that using resources to maintain adequate disability or life insurance can be as important as insuring your car or home.  Creating good habits in saving, tax-planning and budgeting are important to protect against unanticipated variables.

2. Diversify your Assets

When evaluating net worth, most people tend to think of some of the obvious current assets that you might include – a house or a car, for example.  Looking more deeply, though, will show some differences in those assets.  This is another area where younger people may need some education.  A car’s value, for example, should be considered against the taxes, maintenance, gas and depreciation that essentially makes it worth much less over time.  Same with a boat.  Real estate is usually considered a good asset to offer diversification, if it is appreciating at or above inflation.   An interesting article from the Wall Street Journal notes that as wealth increases, the percentage of net worth represented by a principal residence declines.  Young adults should understand that diversification is an important strategy and having a good mix of assets will make you financially stronger, especially over the long-term.

3. Spend Wisely

In general, a personal balance sheet should include the value of everything you have and everything you owe, even if some of those are intangible.  When you put the potential value of a career’s worth of income in real dollars in one column against the future costs of loans or other debts, it makes the impact more visible.   This strategy can help spotlight the real costs for student loans, houses, cars, trips, credit cards or luxury purchases.  An Investment News article recently quoted a study that found more than half of college bound students had failed to estimate their student loan costs adequately and regretted the decision to take out those loans, once their repayment programs had begun.  Certainly, when evaluating the merits of an educational program or even a business investment, it would be smart to consider potential income benefits against the costs for that investment.  Weighing the purchase of a new flat screen TV or expensive pair of shoes against the value of income needed to finance that goal might make anyone think twice!

4. Save and Invest Early

Finally, it is significant for young people to know that they can really maximize the potential on their balance sheet by saving and investing as early and as fully as possible.  Learning the value of compounding in real terms can be a wonderful eye-opener and understanding the effect of inflation on a dollar over time can be equally enlightening.  Not all saving is created equal.  A penny saved is worth more than a penny earned, when you factor in taxes and compound interest!  It is important to maximize retirement investments and practice the “pay yourself first” philosophy of saving and investing to create a good financial plan.

Also, young workers should be encouraged to immediately sign up for employer retirement plans, like 401(k)’s, and to maximize their contributions to take advantage of any match programs offered by their employer.  If their job doesn’t offer one, opening an IRA or Roth IRA might be a good solution.  Starting a Roth at a young age allows the investor to take advantage of making after-tax contributions while in a lower tax bracket and creating an account that can grow and offer tax free funds for use later in life.  As an example, a 25 year old who makes the maximum allowable annual contribution of $5,500 annually to an investment vehicle that averages a 5% return could have around $700,000 by the time they are ready to retire.

The biggest lesson that our kids and other young adults should be taught is that the most important key for success in wealth management, as in most things, is discipline.  We love to educate our clients and their families.  Please let us know if we can help teach your kids good financial habits.