The Life Insurance Puzzle

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We read an article last month in Investment News that suggests that life insurance should not be used as a savings vehicle. As you might imagine, there was some uproar among the life insurance industry readers that heartily disagreed with the premise of the “Guestblog” by Blair Duquesnay.   Ms. Duquesnay believes that there are certainly appropriate purposes for life insurance, but saving for retirement is not one of them. She stated in a follow-up that “life insurance is an instrument of protection, not accumulation.” We wanted to look a little closer into this to understand both sides of the argument.

First, let’s start with some of the universally acceptable reasons for having a life insurance policy. As Ms. Duquesnay says, life insurance should be purchased, in general, “because there will be a financial impact” on a business or family if someone dies. Certainly, protecting our loved ones or business partners is prudent and responsible. If something happens to you, you might want to provide a benefit for regular or special spending needs, potential increased child care costs, a mortgage payoff or other debt relief. Similarly, a death benefit might help cover college costs or provide a lifetime of comfortable support to our dependents. Some policies can be used for estate planning, long-term care or asset protection. It is also true that, in general, the need for a life insurance death benefit may decline over time, as your life circumstances change.

Let’s talk about the different types of life insurance:

1.Term Life, or annually renewable life insurance, offers an affordable premium to buy a particular level of insurance for a specific period of time. Maybe you use it, maybe you won’t and maybe you keep it going, maybe you don’t, but, either way, at the end of the term, the policy expires and, generally, there is no longer a need to have it. There is no additional value to the policy beyond the safety net of the death benefit.

2.Whole Life is the most common form of permanent life insurance, which means the benefit coverages will be around for your lifetime, as long as you pay the premiums. There are two parts to it – an investment portion (cash value) and an insurance portion (face value or death benefit). Premiums are fixed and are considerably higher than term policies, with high mortality charges for keeping the guaranteed death benefit. These products are designed to stay in force for your lifetime and come with steep surrender charges if you terminate the policy early. There are also substantial up-front commissions and fees for investing part of your premiums in a tax-deferred account. You can access your cash value by taking a loan out with the insurance company against the account value in the policy and they will charge you interest. If you stop paying the premiums, you may be able to switch to a paid-up policy that will be worth the existing cash value, but in general, these products are expensive to keep in place.

3. Universal Life is designed to also be a permanent insurance policy, but is considered adjustable because the policy offers the flexibility of changing premium amounts and having a fixed or increasing death benefit. If you need to stop paying or reduce premiums, your accumulated cash value can be used to keep the policy from lapsing. Once the policy value goes to zero, the policy and death benefit lapse forever. There can be steep surrender charges if terminating or withdrawing from your account, which will reduce any accumulated cash value. Like Whole life policies, your premium pays a portion to a high-interest cash value account and a portion for a death benefit. The growth is dependent on the performance in the accounts, on investment earnings (or losses) and on the amount of your premium contributions. The flexibility can be beneficial, but the policy value can deteriorate and lapse and the fees and costs are much higher than a term policy.

4. Variable Life – these are policies built like Universal life contracts (there are also hybrid Variable Universal Life policies, just to make it more confusing), but the investments are kept in managed mutual fund sub accounts with investments selected from a menu. This gives the policy holder more investment choice (and risk) for the cash value account in the policy. However, like Universal life, the same risk applies – the accumulation is dependent on the amount paid with your premium and the performance of the investments in the cash value account. The flexibility might be attractive, but it also increases the risk to the policy. Again, once the policy value goes to zero, the policy and death benefit lapse forever.

There are more insurance products and deeper complexities to the above definitions, but this is a basic outline of some of the life insurance choices. As you can see, the “permanent” life insurance policies and their saving (or investment) option can be costly and will allow for less flexibility in the growth of your investment savings than using standard investment accounts not tied to insurance. We generally find that the expensive fees, commissions and surrender charges keep us from recommending these products as a saving vehicle. “Buy term and invest the rest” is the motto of most fee-only advisors. The insurance industry is always working to improve these products and find the sweet spot for combining protection with accumulation. We certainly agree that there may be appropriate circumstances for using the more complex insurance products. At DWM, we don’t sell any of these insurance products, but we are happy to review your current policies or insurance needs to help you find the sweet spot for you and your family!

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.

The End of Signing on the Dotted Line

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We all lead busy lives, so it’s important to save time and maximize efficiency whenever we can. The new eSignature feature from Charles Schwab allows you to review, electronically sign, and send back eligible forms to us, making a variety of processes quicker and easier than ever before.

At DWM, we always stay up to date with the latest technology and keep you informed, so we can ensure the best possible experience for our clients. As we learn more about today’s changing technology and the need to stay on top of cybersecurity, going digital allows sensitive client material to remain safely guarded, as well as providing an easier, less burdensome and more accurate onboarding process for everyone.

eSignature is accepted on many new account applications, maintenance forms, and managed account forms, such as:

  • Schwab One Personal accounts
  • Schwab One Trust Accounts
  • Company Retirement Accounts (CRA/Pension Trust)
  • Custodial/Minor IRA Applications
  • Account Closure Forms
  • Designated Beneficiary Plan Agreements
  • Investor Checking Accounts
  • IRA Distribution Forms
  • MoneyLink Applications
  • Transfer Your Account (Into or Out of Charles Schwab)

For a full list of eligible forms, click here. This time-saving eSignature feature is extremely efficient, and it’s easy to use, too! Simply follow the steps below and you’ll be well on your way to mastering electronic signatures.

1)When expecting a form for eSignature, keep an eye out for an email from Charles Schwab that states “Documents for Your Electronic Signature.”

2)Click “Review Documents” at the bottom of that email.

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3)Log into your Schwab account using your Schwab Alliance when prompted. If you don’t know your account information, let us know or contact Schwab Alliance at 1-800-515-2157.

4)Click “Agree/Continue” to agree to the eSignature terms and conditions.

5)Review the document and ensure that it is accurate before signing.

6)When you are ready, choose from two signing options: automatic signature or draw, in which you digitally “draw” your own signature.

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7)Click “Sign” in all places where signature or initial is needed.

8)Click “Finish” to complete the process. DWM will be notified promptly and you will then receive a confirmation email.

 

We could all use some time back in our day, so if you’d like to learn more about eSignature, reach out to us at any time or contact Schwab Alliance at 1-800-515-2157 for more information.

Bull Market Runs Come in All Lengths

 

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Let me help you with the details of the above chart- though it is difficult to read, it’s quite important.   This graph from First Trust reflects the historical performance of the S&P 500 index from 1926 through June 2018. The blue represents bull markets; the red bear markets. It’s obvious that there is a lot more blue on this chart than red. That’s why we encourage you to “stay invested” through the ups and downs of the markets in a risk appropriate, diversified portfolio.

There are 8 bear markets shown. These represent periods of time when markets went down 20% or more. The longest and largest, from 1929-1932, was caused by the Great Depression. This bear market lasted 2.8 years and represented a cumulative decline of 83.4% overall; 47% per year. Ouch. Other bear markets have been much tamer. The average bear market period for the eight periods shown above lasted 1.4 years with an average cumulative loss of 41%. The bear market in 2008-2009 caused by the financial crisis lasted 1.3 years, with a 51% cumulative decline, 41% per year.

There are 9 bull markets shown. The longest and largest occurred after World War II from 1948 to 1963. This bull market lasted 15.1 years and represented a cumulative total return of 936%, or 17% per year. The average bull market has lasted 9.1 years with a cumulative total return of 476%; 21% per year. Some bull markets have been as short as 2.5 years and there have been other longer bull markets of 12.8, 12.9 and 13.9 years.  Our current bull market started in Spring 2009 and has lasted 9.3 years, with a cumulative total return of 350%; 17.5% per year.

At DWM, we are asked the question: “How long can this bull market continue?” This question seems to be based on a concern that a bull market comes with a pre-ordained expiration date; when it runs out of whatever made it go. However, selling equities because a bull market run is longer than average has been a great way to miss out on lots of gains. Remember, bull market runs come in all lengths.

While a bull market may be technically defined as a period of time after a 20% drop (bear market) has reached its end, it’s probably healthier to view a bull market from an economic perspective. Barry Ritholtz in a Friday Bloomberg article defined a bull market as follows: “An extended period of time, typically lasting 10-20 years, driven by broad economic shifts that create an environment conducive to increasing corporate revenue and earnings. Its most dominant feature is the increasing willingness of investors to pay more and more for a dollar of earnings.” This is exactly what we have seen in periods after WWII, the 1980 and 1990s biotech boom and now the maturation of internet, software and mobile companies.

Bear markets are typically brought about by recessions; often when the markets have gotten overheated (such as the dot.com bubble bust in 2000). Bear markets can also be brought on by a financial crisis, as we had in 2008-2009. Recoveries from financial crises are quite different from recoveries from depressions.   A post crisis recovery is marked by slow and erratic economic growth, weak wage gains and disappointing retail sales. Furthermore, investors, after being burned, remain skittish for years. The 2008-2009 crisis scarred consumers and left them more determined to sock away funds.

Case in point, the Wall Street Journal reported Monday morning that the personal savings rate is up to 7.2% from the 3.3% estimated previously. The new number exceeds the 6.4% average savings rate since 1990 and is almost three time the savings rate in 2005. The “wealth effect” that we saw in the mid 2000s that increased spending and dropped savings rates, is not happening now. This news, along with the reduction in corporate taxes, historically low unemployment and continued increased corporate earnings bodes well for a continuation of the current Bull Market despite ongoing negative factors.

Yes, we don’t know how long this bull market will run. And, we’re not going to try to time it. We do know, at some point, this bull market run will come to its natural end. Before it does, we may see more pullbacks (declines of 5% or more) or corrections (declines of 10% or more).   Remember this graph- lots more blue than red- and stay invested.

Biases: Fluid & Fuzzy vs Rational

In a perfect world, we would all make optimal decisions that would provide us with the greatest value and satisfaction.  In economics, the rational choice theory states that when you are presented with options, you would choose that which maximizes your personal satisfaction.  This theory assumes that you make your decision by weighing the costs and benefits, without emotion and external factors.  If it were only that simple.

Enter behavioral economics.  It draws on psychology and economics to try to explain why people sometimes make irrational decisions, i.e. not following predictions of economic models based on a consistently rational, self-interested, and “utility” maximizing approach?  Psychology explains this deviation of behavior from what is expected rationally to be caused by “biases.”  Common examples of biases include:

  • Anchoring- relying too heavily on one piece of information
  • Confirmation-focusing on information that confirms one’s preconceptions
  • Endowment-demanding much more for something owned than what you would be willing to pay to acquire it
  • FOMO- Fear of missing out- paying too much to get into the “game”
  • Loss aversion- valuing the pain of losing twice as much as the satisfaction of making a gain
  • Normalcy- refusing to plan for a potential disaster that has never happened before
  • Recency- predicting the future results by expected recent results to continue

Koen Smets’s recent article in the Behavioral Scientist “There is More to Behavioral Economics than Biases and Fallacies” defines behavioral economics as the field that confronts us with our deeply potentially irrational selves.  “We are bamboozled by biases, fooled by fallacies, entrapped by errors, hoodwinked by heuristics, deluded by illusions.”  Ouch.

This brings to mind Ebenezer Scrooge’s question of the Ghost of Christmas Future:  “Are these signs of things that will happen or may happen?”  Perfect question, Ebenezer.  Actually, there is a widespread misconception that biases explain or even produce behavior.  Biases merely describe behavior that may or may not be followed.  They are simply labels for an observed behavior that contradicts traditional economics’ simplified “rational” expectations.

The conversation about biases is generally negative:  they interfere with our decision making or undermine our health, wealth and happiness.  For example, consider loss aversion.  Ten of thousands of years ago, humans were more concerned about losing a week’s food supply than gaining an extra week’s.  Today, an individual might never invest their cash because of a fear of losing money and have the purchasing power of their funds decreased by inflation.  This loss aversion is part of our evolutionary DNA, but that doesn’t mean that we have to exhibit that behavior.

Biases are tendencies that are not uniformly shared or employed.  Mr. Smet describes human behavior as “fluid and fuzzy.” These days, speed and simplification are keys and behavior based on biases is increasing.  Knowing that people are taking shortcuts, marketing has really stepped up its game.

“Heuristics” are really becoming huge. They are the various techniques we use to solve problems, learn or discover by using shortcuts.  Persuasion heuristics save us time and effort in making many of the hundreds of decisions we are confronted with each day.  Robert Cialdini, author of “Persuasion and Marketing” and political consultant, offers six key principles to persuading (or perhaps hoodwinking) a consumer using heuristics:

  • Authority-the voice or face of authority drives results. (Celebrity endorsements work)
  • Commitment and Consistency-consistent follow through establishes trust (Repetition works)
  • Scarcity-create hype based on time limits and expirations. (I see this every time I go to book a hotel room)
  • Liking-people are persuaded by others liking something. (Tripadvisor)
  • Social Proof- Show evidence of results. (People like to hear positive statistics-whether or not they are true)
  • Reciprocity-Offer discounts, free trials, sample products (people tend to “return a favor”)

We know biases exist. Some of them are in our DNA; some we learn over time.  At the same time, people and companies are aware of these potential biases as they are marketing their products, services, or suggestions.  Certainly, for many small decisions we need to make every day, there is no problem with taking a shortcut and even employing a bias.

However, when it comes to really important decisions, such as your wealth and happiness, it’s time to step up your game and move from fluid and fuzzy to rational.  These very important decisions generally take more time and require more due diligence.   You need to make sure you thoroughly and objectively understand and investigate choices and understand the likely risks and rewards of each.  To keep yourself “bias-free” at these times, you may benefit from having the expertise, skill and objectivity of a wealth manager like DWM who works with these important matters every day.  There’s a time for fluid and fuzzy and a time for rationality.  We’re here to help you when it’s time for rationality. Give us a call.

 

 

 

 

 

Happy Independence Day!

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Everyone at DWM hopes you and yours will have an excellent celebration with family and friends on July 4th! Hopefully, there will be family reunions, great food, baseball games, picnics, parades, fireworks and more. Have a wonderful time!

We also hope you take a few minutes to think about why we celebrate July 4th. As many of you recall, Thomas Jefferson was the principal author of the Declaration of Independence, though John Adams, Benjamin Franklin and other members of Congress made 86 changes to the document before it was approved on July 4, 1776.   The Declaration consists of three main parts. First, it declares the rights of citizens. Second, it lists the grievances against England’s King George III. And, third, it makes a formal claim of independence.

The most famous words of the Declaration of Independence are:

“We hold these words to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of happiness.”

These powerful words still apply today. We hope that you, your family and all Americans are enjoying your life, liberty and pursuit of happiness on Independence Day and throughout the entire year!

Emptying the Nest

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It is an exciting time of year when smiling faces in caps and gowns are seen everywhere! Recently having the pleasure to witness my son’s graduation, the President of the University of South Carolina made sure that the graduates took the time to thank their parents for helping them get to this important occasion. Absolutely! So, congratulations, parents! Turning 21 or graduating from college are exciting milestones and your kids have now reached what we all consider to be the beginning of “adulthood” as they get ready to enter the “real” world. Kids grow up in all different ways and in all different stages – is your young adult ready for launch?

At DWM, we like to offer proactive financial advice for all members of our clients’ families. As your young adult is readying to depart the nest, however that looks, we think this is a good opportunity to provide some education, as they take the reins of their own financial future. Many college-aged kids have had a student checking account and understand how to use their debit card pretty well by now! They probably have some experience with having a job and budgeting for things they want to buy in the short term. However, some of the more complex financial topics can be intimidating for young adults, While they may have a solid background in finance, it is always good to review concepts like compound interest, building good credit, taxes, buying insurance and understanding 401(k)s, for once they land that first “real” job! We might suggest that a good place to start is by getting a copy of The Wall Street Journal. Guide to Starting Your Financial Life by Karen Blumenthal (https://www.amazon.com/Street-Journal-Guide-Starting-Financial/dp/030740708X ). This book covers issues about renting or buying your first home, basic investing, taxes, purchasing health insurance, buying a car, establishing good credit and saving for retirement, among other topics. Might make a perfect college graduation or 21st birthday gift!

In addition, this is a good time to help them make sure all of their accounts are properly set up, titled appropriately and that they have a savings program in place. Reaching the age of majority, which is age 21 for both Illinois and South Carolina, is a good time to change any custodial accounts like a UTMA and UGMA to individual accounts. It may also be helpful to talk about debt, perhaps review student loans and consider opening a credit card account to establish some credit history. Using debt wisely, having a good emergency fund and responsible budgeting are all really valuable conversations and will help your young adult navigate their new financial map.

Encouraging saving and investing is a fundamental lesson and the “pay yourself first” concept is an important one. Remind them that they are paying their future self and that, just like the rewards for eating right, exercising and wearing sunscreen, saving and investing will benefit the health of their future self (as well as their current self!).

One idea that might help is having an automatic savings app like the one found in The College Investor article https://thecollegeinvestor.com/17610/top-automatic-savings-apps/. Also from The College Investor, you can find numerous financial and investing podcasts available that your young adult may take interest in. Here’s the link to get started: https://thecollegeinvestor.com/6778/top-investing-podcasts/. Or maybe they would want a subscription that focuses on the economy, like The Economist or Wall Street Journal.

If working and the business offers it, they should always make sure to contribute to their 401(k) to get the most advantage of any company match. And, if they don’t already have one, starting a Roth account is another great investment savings vehicle, especially while their starting incomes and lower tax brackets will allow them the opportunity to make annual contributions. Up to $5,500 of their earned income can be directly contributed to a Roth account and the compounded gains will never be taxed. Your young adult can set up automatic transfers to investment accounts or savings vehicles so they get used to not seeing those funds in their everyday account, just like 401(k) contributions. It is a great way to plant the seeds for a successful future!

Once the young adult has gotten some traction and they have good financial habits in motion, encourage them to contact us and check out the Emerging Investors program at DWM http://www.dwmgmt.com/investors/. You can learn even more about the EI program by clicking on this link and accessing one of our recent blogs written by Jake Rickord http://dwmgmt.com/archives-blog/index.php/2017/11/. Our Emerging Investors program offers a specialized financial planning model with DWM investment strategies that uses the automated Schwab IIP platform. Our goal is to help them graduate to full DWM Total Wealth Management clients down the road. The best way to reach the level of a TWM client is not just by higher earning, but by stronger and earlier investing. We love to educate and help others plan for their financial future. We are always available if you or your young adult have any questions and would certainly welcome feedback.   Please let us know how we can be of assistance!

 

Rates keep going up! Should I Still Buy That McMansion I’ve Been Dreaming of??

BMIFeature-Rising-Rates-Minimal.pngThe ultra-inexpensive era of mortgage rates is coming to an end, and quickly. Mortgage rates have reached unprecedented 7-year highs. The average 30-year mortgage this week will cost consumers 4.7%, up nearly a full 1% from 2016.

While a 1% increase may not seem like the end of the world, it is important to realize the effect this may have over the course of a mortgage. Consider a consumer who purchased a home with a $200,000 mortgage in 2016. Assuming a 3.7% interest rate, this would amount to a principal and interest monthly payment of $921. In today’s environment, the same consumer may have a monthly payment of $1,037. Over the life of a conventional 30-year mortgage, today’s consumers may pay $41,760 more than those who locked in a rate in 2016.

Reviewing rates in today’s environment may leave some consumers discouraged. However, in comparison to many historical rates, today’s rates are actually relatively low. Take 1981, for example, when the average 30-year mortgage rate was 16.64%. Using a 16.64% interest rate, a $200,000 mortgage in 1981 would cost the consumer $2,793 per month, or, over the course of 30 years, $632,160 more than a consumer today.

For those looking to purchase a new home, the question remains: Is now a good time to buy? The answer is not so simple. There are a few factors to consider before determining if it’s the right time to buy for you.

First of all, as the economy improves overall, mortgage rates are likely to continue to increase. The culprit behind increased mortgage rates is actually surging wage growth. According to the Census and Bureau of Labor Statistics, average household income is at an all-time high, while mortgage rates have been laying low—until now. As wage growth continues to increase the money supply to consumers, consumer spending power increases. Unfortunately, increased consumer spending also increases demand for goods and will ultimately raise the price of goods–inflation.

With the expectation of rising inflation comes a steady increase in the yield of the 10-year Treasury note. The yield on the 10-year Treasury note, which usually affects the 30-year mortgage rate, has risen to its highest close since 2011, ending up at just over 3.1%.

In addition, the Federal Reserve has indicated that it will be raising short-term rates at least three to four times this year alone, and potentially several more times in the coming years.

Current home owners should also not expect to refinance anytime soon. As rates rise, the group of homeowners who would benefit from or be eligible for mortgage refinancing has decreased drastically by 46% this year, according to Black Knight Inc.—the smallest group since 2008.

But with mortgage rates trending upward and no sign of lowering again in sight, many people are choosing to strike while they still have the chance.

Overall, your decision depends on if you want to wait it out and hope that mortgages rates will decrease again, or if you want to buy now while the rates are still relatively low, even with the 1% jump. One effective tip to help counteract for the increase in mortgage rates is to lower your price range accordingly and look for a house priced lower than what you would have pursued had mortgage rates remained at their lowest point.

Of course, there are many other factors besides mortgage rates which may affect a consumer’s decision to purchase a home. For example, economic factors such as rising rents, home appreciation, and predictable monthly housing payments.

Bottom line: Rising rates are expected to continue for some time, so it is important to weigh all factors at play and make the decision that’s right for you today and in the future.

First Grexit, Then Brexit, Now Itexit?

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The future of the EU is in question again- for the 3rd time in 4 years. In June 2015, the Greek financial crisis brought us Grexit. Two years later, the Brexit vote passed. And, now we may have Itexit. The political turmoil in Italy could result in Italy renouncing the euro and reviving the lira. Italy was a founding member of the EU and its exit could cause severe economic disruptions worldwide.

The two parties that won the March 4th Italian elections, the Five Star Movement and the League, have been hostile toward EU rules and the interference by Brussels in Italy’s affairs. They joined forces to form a government and proposed euroskeptic Paolo Savona as their choice for economics minister. Mr. Savona co-authored a blueprint for Italy to leave the EU. Current Italian President Sergio Mattarella rejected Mr. Savona and effectively collapsed the attempt to form a government. Mr. Mattarella’s Democratic Party has supported staying in the EU and was a big loser in the spring elections. Now, it looks like new elections later this summer are likely, which could amount to a referendum on Italy remaining in the EU.  

In 2015, Greek voters overwhelmingly rejected EU bailout terms requiring austerity. Greece defaulted on some of its debt and ultimately agreed to a third bailout, worth $100 billion, which imposed further cuts on spending. Grexit proved to be a powerful force for the Eurozone to work together and develop closer ties and more consistent and tougher fiscal rules. Greece is on schedule to be free from the burden of bailouts in August.

The UK is scheduled to withdraw from the EU on March 29, 2019, with a 21 month transition period out to December 31, 2020. Despite delays in negotiations, the UK government and UK opposition party say Brexit will happen. Since Brexit, the British pound first slumped, then regained its losses against the U.S. dollar, but has remained down 15% to the euro. Bank of England Governor Mark Carney indicated that Brexit has reduced UK GDP by $60 billion already. There is an ongoing debate as to what the relationship between the UK and the EU will be post-Brexit. If there is no agreement on trade, the UK would operate with the EU under World Trade Organization rules, which could mean customs checks and tariffs on goods as well as longer border checks. It could also mean Britain losing its position as a global financial center and its citizens living in other parts of the EU will lose their residency rights and health insurance. The next negotiation summit will be this June.

Before the euro, Italy had the power to raise or lower interest rates on their currency to impact its value. A cheap lira made Italian exports less expensive around the world, strengthening their economy at home. But, with the euro, Italy has no control over interest rates or prices. The populists, who did well in the recent elections, complained that their spending power has declined with the euro and EU membership has undermined Italian sovereignty. However, now Luigi di Maio, leader of the Five Star Movement, has said his party never supported leaving the euro.

Many experts agree that if Italy left the euro, it would be poorer, likely default on its debts and the lira would become greatly devalued. A default could lead to retribution from other countries and potential asset freezes and economic isolation. If this occurred, the trustworthiness of the euro as a currency would be questioned and the impact could destroy confidence in the EU itself.

Let’s hope Italy stays in the EU. The UK is starting to realize that the populism that brought Brexit can be quite expensive and painful. The Greeks certainly didn’t like austerity, but the tough rules of the EU put their country in a better spot. Itexit would harm Italians, the EU and the world. Let’s hope if there is a referendum, the Italians will vote for the greater good and stay in the EU.

The End of an Era

barbara-bush 2Barbara Bush was one of our country’s most cherished Grande Dames of politics and we were all saddened recently when she passed. With her signature white hair and pearls and her no-nonsense attitude, we were a little in awe, as well as inspired, by her example of family loyalty, faith, public service and good manners. She broke boundaries as the First Lady and championed education issues in her life, while remaining a loving wife and strong matriarch for her family. Regardless of what you think of her family’s politics, Barbara Bush was a woman to be admired.

Part of her legacy will now be the grace and dignity with which she managed her end of life. Surrounded by family at her home, she left this earth with the peace and comfort that we all might aspire to. Achieving that smooth and tranquil transition requires some planning, however. There are certain things that can and should be arranged and recorded ahead of time so that one’s loved ones are not unduly burdened and so that your own comfort and care are well-managed.

Caroline Feeney, in an article on wealthmanagement.com, recently outlined some of the lessons learned by watching Barbara Bush. We think these are valuable to review.

1.Understand Probate – Anyone who has been through probate will tell you to avoid it! Probate can be expensive, time-consuming and becomes part of the public record. Protecting your assets with proper titling and using a revocable or living trust can keep assets from going through the probate system. All revocable trusts remain private and anyone can set one up for their beneficiaries.

2.Plan for Contingencies – Think of all the scenarios that might come up. Select trustees and successor trustees with care and with a back-up plan. Consider the age, health and circumstances of beneficiaries, like substance addiction or divorce protection, when determining the age or terms of your designations.

3.Personal Property Memorandum – These are the softer, more sentimental items that you own. Houses and cars are protected by a trust or designated titling and a personal property memo provides a plan for the smaller tangible items. Someone will have to address these personal belongings when you are gone and, since you know them best, you should outline your plans for taking care of them. You only need to refer to the memo in a will or trust for it to be legally recorded. The list can be changed and updated, as you see fit, without involving a lawyer each time!

4.Palliative Care – Less than 30% of people have a Health Care Power of Attorney (HCPOA) that spells out the kind of care you want to receive and the people that you want making the decisions on your behalf if you cannot. The HCPOA allows an agent to make health care decisions, if you are incapacitated, for things like life support, tube feeding or organ donation. Consider those that might not be overcome with grief as agents who are tasked to comply with your wishes.

5.Prepare an inventory of all accounts – This includes a list of all bank and investment accounts with passwords, as well as all digital assets, including social media accounts. You can use a password vault or keep a handwritten list in a safe and then give access to one of your designated trustees.

6.Have Tax Planning Up to Date – The estate tax limits have increased in 2018 ($11.2M individual/$22.4M married couple), so most of us will not need to worry about estate taxes, unless the legislation changes again! It is still a good idea to have all of your information gathered, organized and up to date to make it easier for your executors, trustees and beneficiaries.

7.Designated Beneficiary Planning – We always help our clients make sure that all assets are titled properly, including real estate, investment accounts, qualified plans, bank accounts and life insurance policies.

8.Review Plan Regularly – Once you have a good plan in place, you should review it every year or two or as there are any life changes. At DWM, we keep copies of your documents with our own summary “estate flow” to help manage this.

9.Use Professionals! – This includes a recommended estate attorney to prepare your plan, as well as a professional wealth manager, like DWM, to review it.

10.Everyone Can Have an Estate Plan – You don’t need to be a famous, well-connected political icon, like Barbara Bush, to be thoroughly prepared.

Estate planning can be a daunting and sometimes complicated task. Many of our clients have trepidation about the process when starting, but every one of them feel a great deal of relief and accomplishment when they have done all the work and have a good estate plan in place. Helping our clients navigate all of the requirements and considerations of estate planning is a very important and satisfying part of what we do at DWM. We are not lawyers, but we know our clients well and can help them understand the many objectives and appropriate pieces of a good customized estate plan. Please let us know if you would like to review your estate plan with us!