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!

Signatures are Becoming Extinct

Later this month, Visa, Mastercard, Amex, Target will no longer require signatures to complete credit card transactions. Walmart and other credit card companies and retailers will soon follow. It’s a new ball game now that cards are embedded with computer chips. Signatures are becoming extinct. Personal checks are on their way out. Could genuine handwritten notes be next?

Signatures have been part of our human identity and creativity for thousands of years, dating back to the Sumerians and Egyptians. The English Parliament elevated the status of signatures in 1677 by enacting the State of Frauds in 1677 Act which required all contracts to be signed. By 1776, when John Hancock signed the Declaration of Independence, the signature was in its full glory for binding a contract and exhibiting the signer’s creativity. Fast forward to 2000 when President Bill Clinton signed the E-Sign Act paving the way for eSignature technologies to use digital signatures to sign contracts.

Credit card companies, which cover the costs of credit card fraud, started adding microchips more than a decade ago to reduce fraud. Prior to chips, most retailers required signatures on all purchases and could be held liable (for a fraud) if they failed to notice that the signature on the receipt did not match the one of the back of customer’s card.

Then, with online shopping, card networks started the transition to eliminate signatures. Typically, purchases less than $25 or $50 did not require signatures. However, some card issuers continued to require signatures, so many merchants just kept getting signatures on all transactions. Now, with chip technology leading the way, the card networks are indicating that signatures are obsolete. This will speed up the checkout line, which will make everyone happy.

Some merchants may continue to ask for signatures. Some believe customers have the signature built into their muscle memory of the purchasing process. Further, they are concerned that eliminating signatures might impact workers’ tips. Lastly, some like to keep the signature as evidence that the customer received the services or goods when fighting fraud claims.

Even so, signatures are becoming extinct and will be likely be reserved for special situations, like a house purchase, a marriage license or birth certificate. Even celebrity autographs are now being replaced by “selfies.”

Which leads us to genuine handwritten notes. We know how important a handwritten “Thank you” or sympathy card is. Like homemade bread and hand-knitted socks, handwritten notes make a huge impact. Unfortunately, all of us are pressed for time. Not to worry, you can now fake a handwritten note using online services:

Handiemail. You type a letter, send it to Handiemail with the address of the recipient and $10. Within a couple of days, your letter, handwritten on specialty paper and hand-addressed in a premium envelope with a first-class stamp is delivered.
Inkly. With Inkly, you select a card design, type your message, snap it with your phone, upload to the app and Inkly sends it out for you.
Bond. Starting at $3, you can send an elegant handwritten note with a choice of five handwriting styles to be delivered to the recipient in a suitably classy envelope. Also, for $500 you can visit a Bond HQ where staff will help you improve your own handwriting.
Handwrytten. This is another app which offers a range of classy cards, which the company considers “hipster-friendly, limited-print letterpress designs.” Each letter created has “truly organic effect.”
Yes, keyboards seem to be replacing pens. A recent study showed that one of three respondents had not written anything by hand in the last six months. On average, they had not put pen to paper in the last 41 days. With information technology, handwritten copy is fast disappearing.

However, there is some pushback. Pens and keyboards apparently bring into play very different cognitive skills. “Handwriting is a complex task which requires directing the movement of the pen by thought,” according to Edouard Gentaz, professor development psychology at the University of Geneva. He continues, “Children take several years to master this precise motor exercise.” On the other hand, operating a keyboard is a simple task; easy for children to learn.

In 2000, work in the neurosciences indicated that mastering cursive writing was a key step in overall cognitive development. Studies have also shown that note-taking with a pen, rather than a laptop, gives students a better grasp of the subject.

IT continues to change our world. Yet, Professor Gentaz believes that handwriting will persist, “Touchscreens and styluses are taking us back to handwriting. Our love affair with keyboards may not last.” Time will tell.

DWM 1Q18 Market Commentary


In our last quarterly commentary, we cautioned not to get complacent, overconfident, or “too far out over your skis”. It’s ironic how just three months later, many investors’ emotions are just the opposite: unsure, cautious, and even scared. And rightly so, given the extreme up and downs for the first quarter of 2018. The stock market was in a classic “melt-up” state in January, only to quickly drop into correction territory in early February, then bounce and fall and bounce again from there. Yes, as I mentioned in my February 12th blog, volatility is back and here to stay (at least for the near future)!

Before looking ahead, let’s see how the major asset classes fared in 1Q18:

Equities: The S&P500 had its first quarterly loss since 2015, falling 0.76%. On the other side of the globe, developed countries also suffered, evidenced with the MSCI AC World Index registering a -0.88% return. Emerging markets were a stand-out, up 1.28%*. In a turn of events, smaller caps significantly outperformed larger caps. Much of this has to do with the trade war fears, i.e. many feel that smaller domestic companies will be less affected than some of the bigger domestic companies that rely on imports. Growth continued to outperform value. However, that gap narrowed in the last couple of weeks with some of the biggest cap-weighted tech names getting drubbed, including Facebook because of their user-data controversy and Trump’s monopolistic tweets at Amazon.

Fixed Income: Yields went up, powered by increasing expectations for growth and inflation in the wake of the recent $1.5 trillion tax cut. The yield on the 10-year Treasury note rose from 2.4% to 2.7%. When bond rates go up, prices go down. So not surprising the total return for the most popular bond proxy, the Barclays US Aggregate Bond Index, showed a 1.46% drop. Fortunately, for those with international exposure, you fared better. The Barclays Global Aggregate Bond Index rose 1.37%, helped by a weakening U.S. dollar (-2.59%**) pushing up local currency denominated bonds.

Alternatives: The Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, was down 1.72%. Losers in the alternative arena include: trend-following strategies, like managed futures (-5.08%***), that don’t do well in whipsaw environments like 1Q18, and, MLPs, which were under duress primarily due to a tax decision which we think was overdone. Winners include gold****, which was up +1.76% for its safe haven status, and insurance-linked funds† (+1.60%), which have hardly any correlation to the financial markets.

In conclusion, most balanced investors are seeing quarterly losses, albeit small, for the first time in a while. So where do we go from here?

Inflation concerns were the main culprit to the February sell-off, but there are other concerns weighing upon the market now: fears of a trade war brought on by tariffs, escalated scrutiny of technology giants, new Fed leadership, increasing interest rates, stock valuation levels, and a bull market long in the tooth in its 10th year.

Opposite these worries is an incredibly hot economy right now, supported by the tax cut which should boost corporate earnings to big heights. In fact, FactSet has projected earnings for S&P500 companies to increase 17% in 1Q18 from 1Q17!

And, whereas there has been much dialogue regarding how the S&P500 has been trading at lofty valuations, the recent move of stock prices downward has really been quite healthy! It has put valuations back in-line with historical averages. In fact, the forward 12-month PE (Price-to-Equity Ratio) of the S&P500 at the time of this writing is almost identical to its 25-yr average of 16.1. International stocks, as represented by the MSCI ACW ex-US is even more appealing, trading at a 13.3 forward PE.

We don’t think inflation will get out of hand. Even with unemployment around all-time lows, wage growth is barely moving up. So we doubt that we’ll see inflation tick over 2¼%. That said, we do think the Fed will continue to raise rates. Frankly, they need to take advantage of a good economy to bring rates up closer to “normal” so that they have some fire-power in the event of future slow economic times. But that doesn’t mean they’ll be overly aggressive. The new Fed Head, Jerome Powell, like his predecessor, most likely will be easy on the brakes, keeping focus on how the Fed actions play off within the market.

Put it all-together and it seems like we’re in a tug-of-war of sorts between the positives and the negatives. At DWM, we feel like the positives will outweigh the negatives and are cautiously optimistic for full year 2018 returns in the black, but nothing can be guaranteed. The only couple things one can really count on are:

1.Continued volatility. After an abnormally stable 2017 that saw little whipsaw, 2018’s volatility is more reminiscent to the historical average of the last few decades. Back to “normal”.

2.DWM keeping its clients informed and embracing events as they unfold, keeping portfolios positioned and financial plans updated to weather what’s next.
Here’s looking to what 2Q18 brings us!

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

*represented by the MSCI Emerging Markets Index

**represented by the WSJ Dollar Index

***represented by the Credit Suisse Managed Futures Strategy Fund

****represented by the iShares Gold Trust

†represented by the Pioneer ILS Interval Fund

Our Children Are Our Future

This Holy Week in the Christian world is an excellent time to put last Saturday’s “March for Our Lives” in perspective. While millions of Americans found the marches for gun control inspiring, many others were skeptical wondering “What do these kids know?” Older people have been groaning about the young in politics for centuries. Yet, in the late 19th century, during a very dark political time for the U.S., the young people helped save democracy. Can they do it again?

Young people have always been involved in American politics, primarily as unpaid labor doing work behind the scenes; making posters, handing out campaign information, running errands and other unglamorous jobs. The young were never allowed to champion themselves or their opinions, being told by established politicians to simply follow the party’s platform.

At the end of the 19th century, according to John Grinspan, Smithsonian historian and author, young people cried out to be heard on their issues. A new generation of young people denounced current leaders and partisanship. They demanded reforms. In 1898, one New Yorker summarized their movement as “the younger generation hates both parties equally.”

At the start of the 20th century, the youth movement put an end to extreme polarization; forcing both parties to pursue its issues and concerns. Independent young voters became a decisive third force, with enough clout to swing close elections. Politicians supported them and their agenda, creating the Progressive Era, which included cleaning up cities and passing laws protecting workers. Though unable to personally vote, women played a key role. Women worked to refocus American life toward social issues, built schools and fought child labor.

Mr. Grinspan argues that the key to understanding youth politics is that young people can’t “focus simply on benefits for the young.” Youth is temporary and gains are passed on. The high school seniors who marched Saturday across the country will hopefully make their schools safer well after they have graduated. Mr. Grinspan concludes that the young should set the nation’s political agenda as they will be here much longer than the rest of us.

Today’s young have much work to do. The solutions the marchers want certainly depend on winning elections. Ultimately, it’s not about standing up to be heard, but about accomplishing political change. These kids didn’t spontaneously emerge from Florida a month ago. They and millions like them were born after 9/11. They have grown up with the worry of guns in their classrooms and the threat of terrorism for their entire lifetime. Many have perceived that our grown-up generations have been stripping our nation’s resources, allowed or assisted in the destruction of the middle class, added trillions of dollars of debt to our nation’s finances and have allowed politics to sink into tribalism. They’ve been watching us and our mistakes and they’ve decided it’s not for them. We all have much to learn from these children and their perspective and they deserve our support.

In honor of Holy Week, it seems a very appropriate time to read Matthew 19:13-14 (from the new living translation): “Then the little children were brought to Jesus for Him to place His hands on them and pray for them; and the disciples rebuked those who brought them. But Jesus said, ‘Let the children come to me. Don’t stop them! For the Kingdom of Heaven belongs to those who are like these children.’”

DWM wishes you and your family a wonderful Easter weekend!!

Data Breach Deja Vu

facebook-data-dislikeSocial media behemoth Facebook landed itself in hot water this week when it was revealed that the company allowed a third-party firm to gain access to user data. This latest scandal comes amid a slew of serious data concerns and shows just how careful we need to be with our information in this digital age. In the world of mobile devices, social media, and the cloud, it can be disconcerting to think that your personal information might just be floating around out there.

The data firm, Cambridge Analytica (CA), accessed information from tens of millions of Facebook users without their permission and “improperly” stored this data for years, despite CA’s claim that the sensitive data had been destroyed. Furthermore, CA, who is known for supplying marketing data for political campaigns, is believed to have harvested this information for political campaigns after 2013.

According to the Wall Street Journal, Facebook bears a huge amount of blame for allowing CA to get its data to begin with. However, reports calling CA’s data harvesting a “leak,” a “hack,” or a serious violation of Facebook policy are all, unfortunately, incorrect. All of the information collected by the company was information that Facebook had freely allowed app developers to access.

Now, an investigation is being launched to find out exactly who knew about this large-scale improper data usage and when they knew about it. According to Facebook, this serious slipup should not be considered a data breach, because the data firm abused user data that was openly shared with third parties. However, I think we can all agree that sharing user data with third-party firms opened up the floodgates for illegal data breaches and abuse of personal information – as seen by Equifax in June of 2017. While Facebook’s stock takes a nosedive and the company tries desperately to get out in front of this PR nightmare, the rest of us are left reflecting on how our sensitive data is being handled and what measures are being taken to protect it.

As a common rule of thumb, it should be noted that you should never keep sensitive information on any social media platform. This includes but not limited to phone numbers, addresses and even email addresses. While your email address, and sometimes phone numbers, are needed for the account setup in many social media platforms, this information should never be made viewable by friends or followers on any social media platform

With DWM, you don’t have to spend any sleepless nights wondering about how your personal and financial information is being handled. Our firm and our preferred custodian, Charles Schwab, would never jeopardize our clients’ information by handing out data to third parties. You can feel confident knowing that your information will never be released to any outside parties for any reason (except with your explicit permission).

You may want to consider deactivating your Facebook account, but you can rest assured that your financial information with DWM is safe and secure.

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.

HOW TO AVOID A 2018 INCOME TAX SHOCK

Did your paycheck get a nice bump in the last few weeks? Employers are just starting to use the newly issued IRS withholding tables for 2018. All things being equal, employees may see a 5%-15% reduction in their federal tax withholding, resulting in a boost in their take home pay. Who doesn’t love that? However, the question is, when you file your 2018 tax return a year from now, will you owe a substantial amount? Has your withholding been reduced too much? How do you avoid a tax shock?

The various changes of tax reform passed in December plus lower withholding may lead to unexpected results. Itemized deductions were generally reduced; in some cases, in major ways. Standard deductions were doubled. Income tax rates were lowered. Exemptions were eliminated. Lots of moving pieces to consider.

Let’s take a look at an example, as presented by the WSJ last Saturday. Sarah is a New York resident. For 2017, she had $200,000 of wages and other income and $33,000 of itemized deductions, including $28,000 for state and local income taxes. Her federal tax, including AMT, was $41,400. Her withholding was set at $41,500, so that she would receive a tax refund of about $100.

For 2018, Sarah has the same income and deductions, and she doesn’t adjust her withholding certificate, even though her itemized deductions are reduced by $18,000 to $15,000. Using the 2018 withholding tables and her withholding certificate (W-4) from 2017, her employer reduces her withholding and increases her take-home pay by $5,300, about $100 per week.

Here’s the problem: Because her deductions were greatly reduced and she lost her personal exemption, her income taxes will only be reduced by $500 in 2018. She’ll owe $4,700 (plus a penalty for underpayment) come April 2019.

All taxpayers, even those that don’t get paychecks, need to get ahead of curve and project their income taxes for 2018 and review how tax reform is going to impact them. You need to do it early. Sarah can change her withholding now (by increasing withholding $100 per week-back to what it was) to avoid a big tax shock in April 2019. In addition, as you and your tax professional review the elements of your 2018 projection, you may identify some changes that made now could reduce your ultimate 2018 income taxes.

The IRS has put together a withholding calculator, https://www.irs.gov/individuals/irs-withholding-calculator that seems to work fairly well with simple returns. It’s a “black box” with little detail of the calculations.

At DWM, we consider our role in tax planning a very important element of the value we provide to our Total Wealth Management clients. We don’t prepare returns. However, since our inception, we’ve been doing projections focused on eliminating surprises and often finding potential tax savings ideas to review with our clients and their CPAs. This year we are using BNA Income Tax Planner software to make sure that all the new tax provisions are being considered and calculated properly as we are doing the projections. We’ve done about dozen so far.

We’ve already seen some major eliminations of itemized deductions on projections we’ve done. One couple lost over $100,000 of itemized deductions, primarily due to the new $10,000 cap on state and local income taxes and elimination of miscellaneous deductions. Similar to the example above, without a change in their W-4s and, therefore, a change in their withholding, they would have owed over $30,000 in federal taxes in April 2019.

Tax reform didn’t have much impact on IL income taxes, as taxes are passed primarily on adjusted gross income. However, the full year tax rate of 4.95% in IL is roughly 16% more than the effective 2017 rate. In SC, where the state tax is based on taxable income, the tax will generally be going up for those taxpayers with large itemized deductions in the past. SC tax in 2018 will likely rise at the rate of 7% of the amount of lowered deductions and exemptions as compared to 2017, all other items being equal.

We encourage you to prepare or get assistance to prepare a 2018 income tax projection now and check it in the fall as well. Even if you haven’t received a larger paycheck recently, it’s really important to go through this process to avoid tax shocks and, maybe, even find some opportunities to reduce your taxes for 2018.

College Funding Solutions

Last night, our Palatine team at DWM performed a presentation for the parents of students attending Quest Academy, a private K-12 school right here in Palatine, IL. The focus of the night was putting a spotlight on two important topics, tax reform and college savings. We’ve covered the effects of tax reform quite a bit in blogs from the past few weeks, so we wanted to focus in on the savings portion of the presentation for our blog this week.

College costs are rising, with no end in sight. Tuition prices for public and private universities increase yearly by approximately 4-8% consistently, which put them right up there with housing and gas prices as the leaders of inflation (though college costs experience much less volatility then either of the others). Per Figure 1, we can see the effect of this inflation, with tuition at an in-state public university costing parents over $100,000 over the four years of collegiate study. With inflation rates as they are, these numbers are only going to get larger.

Tuition

Figure 1: College Tuition Costs

So, as we presented last night, how can parents of children expect to be able to pay these high price tags?

Luckily, there are several different options available to parents and children alike that can help offset the huge costs of college. These different solutions vary from federal financial aid, merit-based scholarships, savings, and loans.

Let’s start with federal financial aid. The path to being awarded federal financial aid starts at the same spot for each family, the Free Application for Federal Student Aid, commonly referred to as the FAFSA form. This document helps many domestic colleges determine how much, if any, federal aid your child should be allotted. To determine this, the FAFSA form interprets your financial situation based on their calculated Expected Family Contribution (EFC), or essentially how much money the parents of a student will be able to contribute to their child’s college tuition. To determine the EFC amount, many factors including the family’s taxed and untaxed income, assets, and benefits (such as unemployment or social security) are evaluated. Retirement assets are not considered in this calculation. For example, any money held in an IRA or 401k plan will not be counted towards the EFC, since those funds cannot be used for college tuition. However, money held in a checking or brokerage account will factor into the EFC when calculating federal financial aid. One important caveat to this is that any funds held in the student’s name will be weighted more heavily towards the EFC calculation than those assets held in the parent’s name. For a quick reference, please see Figure 2 below, which gives an approximate federal aid allotment based upon your EFC and the number of children you have.

EFC

Figure 2: https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/troyonink/2017/01/08/2017-guide-to-college-financial-aid-the-fafsa-and-css-profile

Another college funding solution is the use of merit-based scholarships, which are awarded by the schools themselves, based on a student’s academic, athletic, music, or other merits. If a student shows exceptional talents, colleges are likely to offer these students grants in order to entice them to coming to their college. These scholarships tend to be offered for at least four years of college depending on their eligibility, and can often be a hefty sum of the tuition costs (some being the full amount)! Besides the colleges themselves offering these scholarships, there are various online sources that have private funding that is given out to students who apply to them. We have done some research on these websites, and have included some of the most popular ones at the bottom of this blog. Please feel free to check them out with your student!

One of the major college funding methods that students and their parents utilize is through savings. Besides holding assets in a bank or brokerage account to pay for their child, parents have some other ways of saving money specifically for college funding that can be great resources also for tax purposes! One of the best of these vehicles is a 529 plan. In Illinois, we like the Illinois Bright Start and Bright Directions 529 platforms, and in South Carolina, our team likes the Future Scholar 529 platform. What these programs offer is a method for holding college funds and investing them, allowing for compounding tax-free growth! By contributing to these accounts, taxpayers can annually take advantage of a $10,000 state tax deduction ($20,000 for married couples) for Illinois, and can utilize the $15,000 dollar gift tax exclusion on the transfer as well, helping to lower the taxes for the parents, and save a lot of money for their child quickly. In comparison, South Carolina offers an unlimited state deduction for all contributions to a 529 plan. In conjunction with this, in all states parents are able to take advantage of a “Five-Year Forward” funding method, which allows for up to $150,000 to be contributed to a 529 plan in one year, and as long as no extra contributions are made in the following four years, the entire amount qualifies for five years of the gift-tax exclusion, a fantastic strategy for savings and estate planning, for parents and grand-parents alike! As part of the recent tax reform, the government has expanded the use of these plans to allow parents to use these funds to pay for K-12 private schooling, though this could prohibit the use of the state tax deduction, which is still a grey area. Stay alert for more updates on this particular change.

Lastly, there are loans. Most students and parents have come to a modern consensus that student loans are extremely hard to pay off, and as of 2018, student loan debt does indeed sit at approximately $1.5 trillion, so whenever loans are taken, it is extremely important that parents take into account how these will be paid off. There are many different options when it comes to taking these loans as well, including federal versus private loans (government vs. banks), and deferral timings (“subsidized” start payments once graduated, “unsubsidized” start payments immediately). Some important aspects of loans to look at when researching them is to ensure that they have no application fee, a soft hit on credit pulls, and no fees for paying off loans early, so you get out with the least interest accrued as possible.

All in all, paying for college is a daunting task for any parent and student. However, by planning early and utilizing the many different methods of funding, both can find peace of mind and focus on the challenges presented in reaching a higher education, and less on how they are going to pay for it.

If you have any questions on any of the above information, please do not hesitate to reach out!

Scholarship resources to check out:

bigfuture.org
cappex.com
fastweb.com

COMPLACENCY CHECK: MARKETS FINALLY GO DOWN & THE RETURN OF LONG OVERDUE VOLATILITY

 

The last week hasn’t been kind to investors. The S&P500 and Dow officially entered “correction” territory, which signifies a decline of at least 10% from a recent high, after all-time record highs only a couple weeks ago.   What’s going on???

 

The culprit: things were too good!  Recent stronger than expected reports on wages and jobs means growth may be “overheating” and that can lead to inflation and rising interest rates. Rising rates equal higher bond yields, which can make bonds more attractive than stocks, and – VOILA! – now traders don’t want to own stocks, many of which have become quite expensive on a valuation perspective from the nine-year Bull run. Then, in this worst-case scenario, stocks go down and that causes consumer confidence to wane which means Joe Investor won’t want to be another 4G TV. Consumer spending slows, corporate earnings suffer, and recession takes place.

 

Vicious circle, huh? It doesn’t have to be exactly like that. Furthermore, cycles can take a long time to play out – years, not days. In this fast-paced, information at your fingertips society we’re in, we forget that.

Last Friday’s jobs report showed the largest annual increase in wages since 2009. In hindsight, this wasn’t surprising given that 18 states pushed up minimum wages to start 2018. Furthermore, many major corporations, raking it in from the recent tax cuts, have provided one-time Tax Reform-related bonuses to workers. So these government reports, that some traders obsess over, may have been amplified for January and most likely will come down to earth in the ensuing months.

 

It was just a couple of years ago when many were concerned about DEFLATION and hoped of the day when the Fed could raise rates back to “normalcy”. This schizophrenic market is now focused on the fear of INFLATION. The threat of inflation and higher bond yields – evidenced by the Ten-Year Bond reaching four-year highs yesterday at 2.85% – has some worried. But frankly, a 3% or even 4% Ten-Year Bond environment shouldn’t be so concerning. For the last several decades, the 10-Year was higher than that and could be nice “fresh powder” for a Fed when recessionary times come.

 

The “buy the dip” mentality that has been so common place the last few years has not shown up this time around, or at least not until today. Some contend that “buy the dip” investors didn’t have enough time as the quants and hedge funds with big volatility-related bets work through the crash in that subsector.

After a very calm 2017 where we didn’t see any stock markets daily moves of over 2%, we’ve already had a few this year. Volatility is back to “normal” – not 2017 normal, but normal when we are comparing to the last 100 years or so. It was only February of 2016 when we had our last correction, which really isn’t that long ago. But complacency is unfortunately an easy characteristic to exhibit after such a long period of subdued volatility. Hopefully it didn’t lead to overconfidence.

So we’re in a correction…what do we do now?

 

There have been over a dozen market pullbacks of 5% or more since March 2009. This is another one! According to Goldman Sachs Chief Global Equity Strategist Peter Oppenheimer within a January 29 report, “The average bull market ‘correction’ is 13% over four months and takes four months to recover.” Which tells you that generally when the market comes back, it does so relatively quickly, as we’ve already seen today.

 

So, it’s a fool’s game to try to time the market and jump in and out of it. No one has a crystal ball. Furthermore, we know that over time that staying invested is your friend. Studies show that just missing a few days of strong returns (which we could very well get next week or later this month), can drastically impact overall performance.

So avoid any emotional mistakes by staying invested and staying disciplined. Don’t be making any short-term knee-jerk reactions; instead think long-term and focus on the things that can be controlled:

 

§  Create an investment plan to fit your needs and risk tolerance

§  Identify an appropriate asset allocation target mix

§  Structure a well-balanced, diversified portfolio

§  Reduce expenses through low turnover and via passive investments where available

§  Minimize taxes by using asset location, tax loss harvesting, etc.

§  Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points

§  Stay Invested

 

In closing, a pullback / correction like this one is needed to allow the market to recalibrate. It can be a very healthy event because it may signify that the underlying assets’ valuations are getting back in line with fundamentals. So don’t get anxious over this return of long overdue market volatility. We should all get used to this “new normal” and not let our emotions cause us to take irrational actions that could lower our long-term chances of financial success.

 

Don’t hesitate to contact us to further discuss your portfolios and your overall wealth management.

 

[1] Cheng, Evelyn. “The stock market is officially in a correction… here’s what usually happens next.” CNBC, 8 February 2018, https://www.cnbc.com/2018/02/08/the-stock-market-is-officially-in-a-correction–heres-what-usually-happens-next.html. Accessed 12 February 2018.

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!