When Your Plan Ends…

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As our clients know, we use MoneyGuidePro (MGP) as our financial planning software tool and we generally review our clients’ particular plan with updates when we meet. This allows us the opportunity to discuss any changes in their lives, perhaps an upcoming life event, like retirement, or a new goal, like starting a 529 for a grandchild. We help to analyze all of the “known” factors and make some assumptions about the future, including when your time on earth may end. MGP euphemistically refers to this as the “plan end”, or in other words, the time when these variables, assets and concerns will no longer be yours!

Here is where good estate planning comes into play. At DWM, we think it is important to help you with the preparation for the end of your life, as well as your legacy after. We aren’t lawyers, but we work with some trusted estate attorneys and can use experienced insights and knowledge of your financial world to make sure that all of your wishes are properly addressed. We have helped many of our clients in this way, as well as many of their extended family members. We offer to carefully review your existing wills or trust in an effort to make sure your asset distributions and beneficiary designations are how you want them. We like to provide our own CliffsNotes version in a summarized Estate Flow for your convenience.   If things need updating, we can make some recommendations on how and also on who can help you with the legal paperwork and advice.

We also review all of your estate plan ancillary documents that discuss your end-of-life plan. These include the Health Care Power of Attorney (HCPOA), which designates an agent to represent you on health care decisions, the Durable Power of Attorney (DPOA), which designates a financial, legal and business representative on your behalf and the Living Will, which essentially outlines your care wishes in the event of incapacitation or when you can’t speak for yourself. Many of our clients come in not understanding how vitally important these documents can be for you and your family to have in place BEFORE there is a reason to need them! These documents are also state-specific and must be updated or kept current for where you spend time, either in a primary or secondary residence. Every situation is different – a terminal diagnosis may give you time to determine the answers for these questions and to generally get your affairs in order. However, a sudden, unexpected incident, especially for a younger person, can leave the people you love with decisions and demands that may be overwhelming.

An article in the WSJ recently talked about this issue of “Preparing for a good end of life”. Planning ahead and talking to your loved ones is important for everyone’s peace of mind. There are some fundamental pieces that should be considered to have a good plan ready. As the WSJ writer recommends, “Imagine what it would take to die in peace and work back from there.” This might include where you want to be and how you will manage the financial and physical obligation of your end-of-life. Would you want to be at home and perhaps have in-home care? Would you rather allow for in-patient hospice treatment so there is less demand on your family? The WSJ references a 2017 Kaiser Foundation study that suggests most people care much more about the burden on their families, both financially and emotionally, than about extending their own life.

The Living Will and HCPOA allow you to specify what kind of medical attention you want during a serious medical event or terminal situation. Will you want to be kept alive artificially while being treated so you can live as long as possible? These documents allow you to determine who will be your representative on these matters and what decisions for your care that you make ahead of time or ask that your representative decide for you. In some cases, the right choice might be someone more neutral than a close family member, as their judgement may be emotionally clouded. Either way, it allows you to make decisions now that will offer a guideline to follow for those who love you. Having these conversations ahead of time about who will make decisions and how you wish to be cared for will hopefully bring solace to your loved ones, as well as relieve any stress for you by knowing that this is in order.

It is also important to ensure that all of your legal affairs are in order. Make sure that all of your bequests to others and the timing for them to receive them are kept up to date. It is also important to make sure deeds and the beneficiary designations on other assets are current and titled the way you want them, whether in a trust to avoid probate or with named beneficiaries to make your wishes clear. Make sure to keep life insurance policy information in a safe place and the beneficiary designations current. Also, safely store a list of all important financial documents and social media passwords in at least one place to make it easier for your personal representative(s) to tie up your affairs. Prepare a business succession plan and keep all the documents current. Don’t put off assigning items of sentimental or financial value to those you want to receive them. Many people are now even planning their own memorial services and writing their own obituaries to lessen the obligation and make sure everything is how you would like it. We are happy to help you store some of these financial documents in our secure “vault” in our DWM cloud.

We may have all experienced or know about situations where no planning was in place or updates to wills, titles and/or beneficiary designations were missing or outdated. Your family and friends will be dealing with tremendous grief during this time, so making these preparations ahead of time will allow both you and them some comfort when it’s time. While it may be hard to have these conversations and make these decisions, it will certainly make it easier for everyone in the long run.

Please let us know if we can help you get these affairs in order. At DWM, we are always happy to help bring peace of mind to our clients and their families.

Tick, Tock…is it Time for Your Required Minimum Distribution (RMD)?

“Time flies” was a recent quote that I had from a client.  Remember a long time ago…putting money aside in your retirement accounts, perhaps at work in a qualified traditional 401(k) or to an individual retirement account (IRA)?  It’s easy to ‘forget’ about it because, it was after all, meant to be used many years down the road.  It would be nice to keep your retirement funds indefinitely; unfortunately, that can’t happen, as the government wants to eventually collect the tax revenue from years of tax deferred contributions and growth.

In general, once you reach the age of 70 ½, per the IRS, many of those qualified accounts are subject to a Required Minimum Distribution (RMD) and you must begin withdrawing that minimum amount of money by April 1 of the year following the year that you turn 70 1/2.  Of course, there are a few exceptions with regards to qualified accounts, but as a rule, when you reach 70 ½, you must begin taking money from those accounts per IRS guidelines if you hold a traditional 401(k), profit sharing, 403(b) or other defined contribution plan, traditional IRA, Simple IRA, SEP IRA or Inherited IRA.  (Roth IRA withdrawals are deferred until the death of the owner and his or her spouse).   Inherited IRAs are more complicated and handled with a few options available to the beneficiary, either by taking lifetime distributions or over a 5 year period.  The importance here, is to be aware that a distribution is needed.  Another word of caution…In some cases, your defined contribution plan may or may not allow you to wait until the year you retire before taking the first distribution, so a review of the terms of the plan is necessary.  In contrast, if you are more than a 5% owner of the business sponsoring the plan, you are not exempt from delaying the first distribution; you must take the withdrawal beginning at age 70 1/2, regardless if you are still working.

The formula for determining the amount that must be taken is calculated using several factors.  Basically, your age and account value determine the amount you must withdraw.  As such, the December 31 prior year value of the account must be known and, second, the IRS Tables in Publication 590-B, which provides a life expectancy factor for either single life expectancy or joint life and last survivor expectancy, needs to be referenced.  The Uniform Lifetime expectancy table would be referenced for unmarried owners and the Joint Life and Last Survivor expectancy table would be used for owners who have spouses that are more than 10 years younger and are sole beneficiaries.  It comes down to a simple equation: The account value as of December 31 of the prior year is divided by your life expectancy.  For most individuals, the first RMD amount will be roughly 4% of the account value and will increase in percentage each year.

It all begins with the first distribution, which will be triggered in the year in which an individual owning a qualified account turns 70 ½.  For example, John Doe, who has an IRA, and has a birthdate of May 1, 1949, will turn 70 ½ this year in 2019 on November 1.  A distribution will need to be made then after November 1, because he will have needed to attain the age of 70 ½ first.  Therefore, the distribution can be taken after November 1 (for 2019), and up until April 1 of the following year in 2020.

Once the first distribution is withdrawn, subsequent annual RMDs need to be taken for life, and are due by December 31.  In this case, John Doe will need to next take his 2020 distribution, using the same formula that determined his first distribution.  This will become a regular obligation of John’s each year.

So, we’ve talked about who, what, why and when, now let’s talk about the where.  Once the distribution amount is calculated, an individual can then choose where he or she would like that money to go.  Depending on circumstances, if the money is not needed for living expenses, it is advised to keep the money invested within one of your other non-qualified accounts such as a trust, individual or joint account, i.e. you can elect to make an internal journal to one of your other investment accounts.  Alternatively, if you have another thought for the money, you can have it moved to a personal bank account or mailed to your home.  Keep in mind that these distributions are taxed as ordinary income, thus, depending on your income situation, you may wish to have federal or state taxes withheld from the distribution.  At DWM, we can help our clients determine if, and what amount, to be withheld.  One exception is the qualified charitable distribution or QCD, which is briefly discussed next.

Another idea that may be a possibility for some individuals is for the distribution amount to be considered a qualified charitable distribution (QCD).  Instead of the money going into one of your accounts, a direct transfer of funds would be payable to a qualified charity.  There are certain requirements to determine whether you can make a QCD.  For starters, the charity must be a 501 (c)(3) and eligible to receive tax-deductible contributions, and, in order for a QCD to count towards your current year’s RMD, the funds must come out of your IRA by the December 31 deadline.  The real beauty about this strategy is that the QCD amount is not taxed as ordinary income.  You would simplyprovide the QCD acknowledgement receipt(s) along with your 1099R(s) to your accountant for the correct reporting on your tax return.

It may be pretty scary to know how quickly time flies, but with DWM by your side, we can take the scare out of the situation!

What will be Your Legacy?

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In the last few years, Elise and I have really gotten into our own family histories. Both sides of Elise’s family came from England, one in the 1830s and one at the turn of the century. My family tree is more diverse. I am 25% German, 25% Finnish, 25% Italian, and, I just recently found out, 25% Jewish. My German ancestors came to America in 1855 and the others came at the turn of the century.

As Elise and I looked back at not only the DNA of our forefathers and foremothers, but also the culture, traditions, stories and values passed on to us, we realize what wonderful legacies we have been given. In a way, we’re all standing on the shoulders of our ancestors.

In the past few years, there’s been a huge increase in people exploring their family history. Ancestry.com sold 1.5 million DNA kits a year ago on Black Friday. The DNA test uncovers your origins. And, Ancestry.com and others have huge online databases and have put together family trees that you can review and expand. This search has caused us to again look at our potential legacy and what it will be. Do you wonder what your legacy will be?

Legacy is defined as “something transmitted by or received from an ancestor or predecessor from the past.” In the simplest terms, it is everything you have worked for in your life. Certainly, that includes money and property, but it’s much more than that. It includes what you have achieved in your work life and your family life, as well as other social relationships and achievements that you ultimately leave behind.

Your estate, on the other hand, is the sum total of everything you own-all of your property (real, tangible and intangible). Your estate requires an “estate plan” to provide for your desired succession of assets, while minimizing taxes and administrative hassles.   If you desire to pass on more than just your assets and transfer your spiritual, intellectual, relational and social capital, you need a “legacy plan.”

The question is not “Will you leave a legacy,” but “What kind of legacy will you leave?” Why not be proactive and intentional in creating your legacy? Why not structure your life in a manner that helps you achieve your purpose and greatest success and safeguards those accomplishments for transfer to future generations? Why not develop and maintain your legacy plan?

If we think of our legacy as a gift, it places an emphasis on the thoughtful, meaningful, and intentional aspects of legacy, as the consequences of what we do will outlive us. What we leave behind is the summation of the choices and actions we make in this life and our spiritual and moral values.

What do you want to leave for your family, the community, your partner or the world? Your legacy can be huge; perhaps a world-changing cause. But it doesn’t need to be a grandiose concept. Instead of wanting to leave a legacy that inspires people to help starving children in the world, you, for example, may relate more with leaving a legacy with your family and friends of how you were kind, accepting and open to others, which might help inspire them to do the same.

A good place to start is to think about the ancestors, mentors and associates whose legacy you admire. What actions can you take to inspire others in the same way?

We encourage you to give some thought to your legacy plan. We’re all creating our legacy every day, whether we realize it or not. And, here at DWM, we’re focused on protecting and enhancing not only your net worth, but your legacy as well.

 

 

FIREd up about Early Retirement

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There is a recent trend among Millennials and younger Gen Xers that is generating a great deal of interest. The concept is defined by the acronym FIRE – financial independence/retire early. A WSJ article from November follows the rigid budget and sacrifices of Sylvia, who wants to retire in 2020 with $2 Million at age 40. The current rage to extreme early-retire by using frugality, intense saving and/or
investment strategies to achieve financial independence is becoming a popular notion. This purportedly comes from the 20 to 40 somethings who have a ‘burning’ desire to not be chained to a job, but rather want to freely choose how they spend their time. The FIRE followers want the freedom of financial independence to allow comfortable “retirement” at an earlier than usual age.

FIRE and the discussion around it has inspired many recent blogs, podcasts, articles, books and even a documentary coming out this year called “Playing with FIRE”. Playing with Fire follows a family as they “test their willingness to reject the standard narrative of adult life, which basically prescribes: go to college, take out tons of student loans, buy a new car, take on a mortgage, buy another car and lots more stuff you don’t need, then work for 40+ years to pay for it all. If you’re lucky, you might be able to retire at 65 and not have to eat cat food.” Now that is cynical!

On the surface, however, retiring early sounds like a reasonable goal… we are all striving for some level of financial independence, after all. At DWM and as financial advisors, we definitely believe that controlling spending and sticking to savings goals are the keys to reaching financial independence. Most of us would consider these good money habits to be a common sense approach to life – live below your means, save more, be less materialistic- but what does it take to actually achieve an extreme early retirement in your early 40s or even 30s and make sure you have enough money for the rest of your life? FIRE followers believe extreme saving and frugality is the path. As the Investment News article describes it “Followers of FIRE amass savings voraciously and live on bare-bones budgets. They aim to stockpile enough money to fund a retirement lasting roughly double that of the average American.” Apparently, the retirement savings number that they strive for is based on a future 3-4% percent withdrawal rate that might have to last 60 years!

FIRE followers advocate aggressive savings goals of 50-75% of earnings and following strict budgets to achieve this. They focus on cutting back or even cutting out all non-essential spending like going out to eat, vacations or bigger houses and newer cars. Or like Sylvia from theWSJ article reportedly does, search for the brown bananas and borrow Netflix passwords. This might be where we should talk about quality of life!

On top of that, the unknowns in this strategy could wreak havoc on the best-laid plans. Some in the FIRE movement live austere lives now and plan to continue the austerity into the future to maximize
their savings. All well and good as long as nothing unexpected happens. How about the often unforeseen or underestimated expenses that come from having kids or running into health problems? We can try to predict the impact on our portfolios from inflation, the economy, the markets, investments, but we really can’t say absolutely what will happen in the future. We know that healthcare costs are increasing and becoming a large spending item in normal retirement, especially before Medicare begins. We know that we can’t predict what will happen to Social Security. We certainly can’t predict our life spans – whether short or long – nor are we ever as ready as we would like for emergencies and crises like natural catastrophes, death of a loved one or chronic illness. We just don’t have a crystal ball!

There is also an underlying degree of cynicism in this mindset that our working life is focused solely on the goal of amassing “more stuff”. What about the satisfaction and connection that comes from building a career and a level of accomplishment and expertise in a field? Many of us have had several varying career paths and, had we jumped off after the first one, what would we have missed? What inventions or discoveries or achievements would humanity miss out on if the productivity and challenges that are gained from a lifelong career were cut short?

Successful financial independence does come from hard work, discipline and a measure of frugality and sacrifice – we can all agree on this. At DWM, our goal is to help guide you toward achieving your goal of financial independence, whether you keep “working” or spend your time in other ways – as you wish. We try to minimize some of the risks by planning for as many of the “What Ifs” as we can and hope that, by charting a course, we can help you breathe easier as you plan for the future. We want you to be “fired up” for your whole life and find satisfaction and quality of life during your saving and accumulating days, as well as your spending and legacy days. We think this is possible by following a balanced, moderate and careful financial plan. We can certainly get fired up about that!

U.S. Housing Market: Not Hot Everywhere

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Zillow just reported that the U.S. Housing Market is up 49% overall since 2012. That’s roughly 6% per year in that time period-though, to be fair, 2012 was when the housing market hit bottom after the 2008-2009 financial crisis. The U.S. Housing Market is huge- $33 trillion (“T”). It’s larger than the value of all U.S. stocks and is about equal to the Gross Domestic Products (GDPs) of the U.S. ($19T), China ($12T) and Canada ($2T). Commercial real estate, including retail, hotels, office buildings, apartment buildings and industrial is about $6T.

The U.S. housing market has had some big winners and some big losers in the last 7 years. Almost 1/3 of the gain of $11T since 2012 has occurred in California. Four of the country’s 10 most valuable markets are in California; LA (5% increase in value in 2018), San Francisco (9.6% increase), San Jose (10% increase) and San Diego (3% increase). New York Metro itself has $3T of housing. The Washington, D.C. metro housing is worth $900 billion. DC itself has more housing value than 40 states, including Colorado, Arizona, Ohio and Oregon.

Unfortunately, housing in some areas hasn’t done so well. Illinois has many state-specific issues which makes it one of the worst housing markets areas. In fact, among the nation’s top 100 metro areas, Chicago is expected to be the weakest housing market of them all in 2019. With mortgage interest rates possibly causing a likely national homes sales slowdown of 2% in the U.S. in 2019, Chicago metro, including Naperville and Elgin, is expected to have an 8% decline in home sales this year. Taxes are a big problem in Illinois. Illinois homeowners are subject to the highest overall tax burden in the country, including the second highest property taxes in the U.S. Since 1996, Illinois property taxes have grown 43% faster than home values and 76% faster than home values in Cook County (Chicago). Worse yet, less than 50% of the tax increases have gone to pay for services. Most of the increase has gone for teacher and other governmental pensions and debt service on bonds.

In 2017, Illinois raised income taxes- the largest permanent state hike in history. Add in a sluggish state economy and outbound migration and the Illinois housing market is hurting. Even so, the Illinois Association of Realtors expects the median value of houses in IL to rise in 2019 by 4%, to roughly $196,000 for the state and $241,000 for Chicago.

The Lowcountry in SC is faring much better. Charleston Metro is now home to 700,000 people. Ongoing job growth means continued housing demand. The median home value in Charleston is now about $320,000 and Charleston home values went up 8% in 2018. The forecast for 2019 is 3% growth. Buyers outnumber sellers. A typical home in Charleston receives only one offer. However, homes sell for only 3% less of the listing price on average with 73 days on the market.

Charleston has many reasons for its housing growth:

  • A booming job market with an unemployment rate under 3% and one of the least unionized states in the nation
  • Wages are low
  • South Carolina’s overall tax burden is among the lowest, particularly for retirees.
  • Huge Tourism industry including being the most sought after wedding destination in the country
  • Home Appreciation is strong- 31% over the last 10 years

Overall, the U.S. Housing market is strong for now. Many winners, but some losers. Mortgage rates, after jumping to 5% and more on 30 year mortgages just a few months ago, are now down in the low 4% range. If they stay there, 2019 could be a pretty good year again for the U.S. Housing Market. But, with many areas coming off a strong run overall the last several years, a cool-down on housing prices wouldn’t be surprising. We’ll continue to watch how the events unfold and keep our clients and readers informed as conditions warrant.

It’s beginning to “cost” a lot like Christmas!

 

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It’s beginning to “cost” a lot like Christmas! It’s a fun play on the popular holiday song, “It’s beginning to look a lot like Christmas”, originally written by Meredith Wilson in 1951. Though times have certainly changed since the 1950s, the spirit of gifting and giving during the holidays has always remained the same. According to the National Retail Federation, the average American spends an average of $1,000 during the holiday season!

It’s not uncommon, as we approach the holiday season, that you might find yourself feeling grateful, compassionate and more charitable than any other time of the year. Now is the time people eagerly give to their loved ones and generously give back to those in need. Here’s a look into new and exciting ways people are giving and gifting in 2018:

529 College Savings Plans

As the total student loan debt in the U.S. approaches the $1.5 trillion mark, 529 college saving plans have grown in popularity. Unlike ordinary gift checks, a 529 savings plan can an act as an investment in a child’s future that has the ability to grow, tax-free, for the use of qualified educational expenses (K-12 tuition included under the new tax law). While college savings may not be the most riveting gift for a young child to receive at the time, the potential to alleviate the future burden of student loans, all or in part, will be one gift they won’t soon forget.

Custodial Investment Accounts

There are two main forms of custodial investment accounts, UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts. They are virtually identical aside from the ability of UTMA accounts to hold real estate. Custodial accounts can be a great way to teach children about investments while limiting their access to investment funds. Depending on your state, access to custodial accounts is limited to minors until the child has obtained ages 18-21.

In 2018, individual gifts are limited to the annual $15,000 gift-tax-exemption limit ($30,000 for married couples). Family and friends can contribute directly to custodial accounts of another person. If these accounts are properly titled as retirement accounts, such as a Custodial Roth Account, contributions must be made indirectly, limited to $5,500 for 2018, and the donee must have earned an income equal to or greater than the contribution made.

Charitable Gifts

Did you know you can complete charitable gifts in the name of a friend or family member and still capture the tax deduction? Assuming you itemize, funds given to charity can come from any taxable account (or qualified, see below) of your choosing and may list a donor of your choosing. For example, one can give to St. Judes Children’s Hospital using their own personal funds, receive a tax deduction for doing so, and list the donor as someone other than themselves, like a grandson or other relative. So long as you can prove the funds used came from you, i.e. your name is listed on the account used, you should receive a deduction for these forms of charitable contributions.

There are several ways to give back to charity, one of the more tax efficient ways is by way of Qualified Charitable Distributions (QCDs). This is an alternative to Required Minimum Distributions (RMDs) that you are required to take from your IRA upon obtaining age 70 1/2. A QCD allows you to give a portion or all of the amount that you otherwise would be required to take from your IRA to charity. The benefit of doing so is to exclude these funds from your taxable income. This process can be especially beneficial if, under the new tax reform, you will be using the new increased standard deduction, $12,000 for individuals and $24,000 for married filing jointly, as opposed to itemizing.

There are many forms of giving. Integrating both charitable giving and family giving can be an intricate part of your overall plan, and it doesn’t always have to “cost you an arm and a leg.” Ensuring your gestures are both sustainable and tax-efficient are good questions to ask. At DWM we are always looking for new ways to give back to our clients and friends by assisting in these areas. Please, never hesitate to reach out to us in regards to new ways to give back to your family, friends and charitable organizations.

Your “Hidden Brain” Impacts Your Politics

Hopefully, all of us will vote in the midterms on 11/6 or before. Roughly half the country will vote for Republicans (conservatives) and half will vote for Democrats (liberals.). Did you know that your choices are not only impacted by your upbringing and experiences, but also very specifically by your genes? We’re hard-wired from birth for much of our political views.

Shankar Vedantam is one of my favorite authors and commentators. He is NPR’s social science correspondent and before that a journalist at The Washington Post. His 2010 book “The Hidden Brain: How our Unconscious Minds Elect Presidents, Control Markets, Wage Wars and Save our Lives” describes how our unconscious biases influence us. I highly recommend it.

Mr. Vedantam relates the story that on a regular basis, right before an election, someone will share an article with him about how science proves that the brains of a liberal are stunted or that Republicans are less intelligent than Democrats. While those claims likely have no merit, Mr. Vedantam contends that there are “genuine psychological differences between liberals and conservatives.”

On a recent Hidden Brain telecast, Mr. Vedantam hosted political scientist Dr. John Hibbing to the show. Dr. Hibbing is co-author of “Predisposed: Liberals, Conservatives and The Biology of Political Differences.” Dr. Hibbing pointed out that differences between partisans are not limited to politics. There are generally differences in food choices, living spaces, and temperaments. Conservatives generally like meat and potatoes; liberals are more likely to prefer ethnic food. Conservatives tend to have organized rooms with things like sports memorabilia, while liberals tend to have lots more books and may not be as tidy. As far as temperament, conservatives tend to favor order and tradition and liberals tend to be more comfortable with ambiguity and change.

Then, there’s a huge difference between conservatives and liberals when it comes to threats and danger. According to Dr. Hibbing, conservatives tend to see the world with its terrorists, home invaders, drug cartels, and immigrants as a very dangerous and threatening place.   Liberals tend to believe they live in a relatively safe society.   Conservatives therefore want and need the government to help them “protect themselves and their family, limit immigration, and put lots of money into defense and law and order.” Liberals, on the other hand, are reinvigorated by immigrants coming to our country, don’t see the need to spend so much money on defense and support gun control. Conservatives and liberals read about events of the world and they simply don’t respond to them in the same way.

Mr. Vedantam chimed in: “There is a very powerful illusion that we have that the rest of the world sees the world the way we see the world. And, if they come to a different conclusion, it must be because they’re being deliberately obtuse or somehow deliberately biased, as opposed to the idea that people are actually seeing the world the same way, but reacting to it differently.” Psychologists call it a case of “false consensus” that we assume others will see the world the way we do.

People are wired differently. Roughly 30-40% of our political views come from genetics based on research by Dr. Hibbing. 60-70% comes from our environment. Mr. Vedantam has described how researchers separate the effects of biology from those of the environment. They look at fraternal and identical twins. Both sets of twins have identical initial environments, but the fraternal twins have similar but not identical genes. Data from thousands and thousands of twin pairs supports the conclusion that political views are quite “inheritable.”

Finally, brain activation patterns of liberals and conservatives are different. Dr. Hibbing has conducted tens of thousands of experiments in which he showed various pictures to individuals whose brain was being scanned. Liberals’ brains would highly activate at times much differently than when conservatives’ brains were highly active. The brain scan results alone proved “incredibly accurate in determining whether an individual was a conservative or liberal.”

Frankly, I find it very helpful to learn that political views are at least, in part, biological. Years ago, left-handers (like both my mother and father) were thought to be lazy and had their hands hit with a wooden ruler to make them write “correctly,” using their right hand. People saw left-handers as a flaw, something that needed to be driven out. Now, of course, we understand that being left-handed is very biological. Similarly with politics. Dr. Hibbing concludes: “If we recognize that others, virtually half the country, are oriented to the world in a different fashion, maybe we would be a bit more tolerant to them. This is the only way we’re going to get anywhere if we at least understand where they are coming from even if we might deeply disagree with their conclusions.”

As we approach the midterms with the vitriol rising, let’s all remember our hidden brains and those of others, particularly family and friends and show tolerance and respect to all. We may see the same world differently: our unique genes, unconscious biases and life experiences may produce different conclusions and different political preferences. Yet, we’re all Americans and we and our country will all do better if we work together.

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!

DWM 3Q18 MARKET COMMENTARY

Get yourself fit! A diversified portfolio is like a well-balanced diet. You need all major asset classes/food groups for proper nutrition. Think of the major asset classes (equities, fixed income, alts) as your protein, carbs, and fats. If you were to load up in one particular area (e.g. carb loading), you might feel better in the short-term, but it could seriously affect your health in the long-term. And it’s the same way with investing: if you “overindulged” in any one particular area for too long; you are bound to get ill at some point. Which is a good segway for this quarter’s market commentary. Yes, US stocks – those in the large cap growth area in particular – ended the third quarter near records, but now is not the time to be one-dimensional.

But, before we dive into a proper nutritional program, let’s see how the major asset classes fared in 3q18:

Equities: Let’s start with the spicy lasagna…the S&P500, the hot index right now, which climbed 7.7% in the quarter and up 10.6% for the calendar year. However, most don’t realize that just three companies (Apple, Amazon, & Microsoft) make up one-quarter of those year-to-date (“YTD”) gains. Besides these outliers, returns in general for equities are more muted as represented by the MSCI AC World Index registering a 3.9% 3q18 & 3.65% YTD return. Emerging Markets* continue to be the cold broccoli, down 1.1% for the quarter and now -7.7% for the year. In other words, even though the headlines – which like to focus on domestic big-cap stocks, like the ones in the S&P500 and Dow – are flashing big numbers; in reality, the disparity amongst equity benchmark returns is huge this year with some areas up sizably and some areas down sizably.

Fixed Income: The Barclays US Aggregate Bond Index, was basically unchanged for the quarter and down 1.6% YTD. The Barclays Global Aggregate Bond Index fell 0.9% and now down 2.4% YTD. Pretty unappetizing. The shorter duration, i.e. the weighted average of the times until the fixed cash flows within your bond portfolio are received, the better your return. It’s a challenging environment when interest rates go up, but the Fed continues to do so in a gradual and transparent manner. Last week, the Fed raised its benchmark federal-funds rate to a range between 2% and 2.25%. We could see another four rate hikes, one for each Fed quarterly meeting, before they stop/pause for a while.

Alternatives: The Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, increased +0.7% for the quarter and now off only 1.2% for the year. Alts come in many different shapes and forms so we’ll highlight just a few here. Gold** continued to drop, down 4.9% for qtr and now off 8.6% for year. Oil*** continues to rise, up 4.7% 3q18 & 27.5% YTD. MLPs**** jumped 6.4% on the quarter and now +5.0% for 2018. Whereas alts have not been “zesty” as of late, think of them like your morning yogurt: a great source of probiotics, a friendly bacteria that can improve your health when other harmful bacteria emerge.

So after a decent 3q18 for most investors, where do we go from here and what should be part of one’s nutritional program?

Let’s first talk about the economy. It’s been on a buttery roll as of late. The Tax Cut & Jobs Act of 2017 has created a current environment for US companies that has rarely been more scrumptious, as evidenced by earnings per share growth of 27% year-over-year (“YOY”). Unemployment clicked in at last measure at 3.9% and most likely will continue to drop in the near future. With the economy this strong, many may find it surprising to see the lack in wage growth and inflation. Wages are only up 2.8% and core inflation is up only up 2.0% YOY. Wages are staying under control as the Baby Boomers and their higher salaries exit the work field, replaced by lower-salaried Millennials and Gen Z. Part of the lack of inflation growth is because of the internet/technology that gives so much information to the Buyer at the tip of their fingers, keeping a lid on prices. Trade talk/tariffs, have been a big headliner as of late creating a lot of volatility; but that story only seems to be improving with the revised NAFTA taking shape with Mexico and Canada. Some type of agreement with China could be on the near horizon too.

This is all delectable news, but the tax stimulus effect will peak in mid-2019 and companies will have to perform almost perfectly to remain at their current record profit margin levels. With earnings a major component of valuation, any knock to them could affect stock prices. Further, the S&P500 is now trading at a forward PE ratio of 16.8x, which is north of its 16.1x 25-year average. This is not the case in other areas of the world – Europe, Japan, Emerging Markets – where valuations are actually lower than averages. If you haven’t done so already, time to put those on your menu.

It’s not only a good diet you want for your portfolio; you also want to make sure of proper fitness/maintenance, i.e. rebalancing back to established long-term asset allocation mix targets. Time to bank some of those equity gains and reinvest those into the undervalued areas if you haven’t already done so recently. Regular portfolio rebalancing helps reduce downside investment risk and instills discipline so that investors avoid “buying high” and “selling low”, a savory way to keeping you and your portfolio healthy.

In conclusion, we are in interesting times. The economy is peppery-hot, but incapable of keeping this pace. A slowdown is inevitable. The question is two-fold: how big will that slow-down be, and are you prepared for it? Now is the time to revisit your risk tolerance and compare that to how much risk is in your current portfolio. That spicy lasagna, aka the S&P500, has been a delicious meal as of late, but don’t let too much of it ruin your diet. Make sure your portfolio is diversified in a well-balanced manner. Stay healthy and in good shape by working with a wealth manager like DWM who can keep your portfolio as fit as a triathlete.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

*represented by the MSCI Emerging Markets Index

**represented by the iShares Gold Trust

***represented by the Morningstar Brent Crude Commodity ER USD

****represented by the UBS AG London BRH ETracs Alerian MLP ETF

THE FINANCIAL CRISIS: 10 YEARS LATER

On September 15, 2008, Lehman Brothers imploded; filing a $691 billion bankruptcy that sent stock markets into a deep dive of 40% or more. The global financial crisis ultimately would destroy trillions of dollars in wealth- $70,000 for every single American. The deep financial trough produced the Great Recession.

Now, 10 years later, how are we doing and what lessons have we learned?

How are we doing?

Official economic statistics would say that the American economy is fully recovered. We are in a 9+ year bull market with a cumulative total return of 350%. The total combined output of the American economy, known as our gross domestic product (“G.D.P.”) has risen 20% since the Lehman crisis. The unemployment rate is lower than it was before the financial crisis. These key measurements, now a century old tradition, however, don’t tell the whole story. The official numbers are accurate, but not that meaningful.

For many Americans, the financial crisis of 2008-2009 isn’t over. It left millions of people-who were already just “getting by”- even more anxious and angry about their future. The issue is inequality. A small, affluent segment of the population receives the bulk of the economy’s harvest. It was true 10 years ago and is even more so today. So, while major statistics look good, they really don’t measure our country’s “human well-being.”

The stock market is now 60% higher than when the crisis began in 2007. While the top 10% of Americans own 84% of the stocks, the other 90% are much more dependent on their homes for their overall net worth. The net worth of the median (not the “average”) household is still 20% lower than it was in 2007, despite the record highs for the stock markets.

The unemployment rate, currently at 3.9%, does not take into account two major items. First, the number of idle working-age adults has swelled. Many of them would like to work, but they can’t find a decent job and have given up looking. Currently, 15% of men aged 25-54 are not working and not even looking; therefore, they are not considered “unemployed.” Second, many Americans are working at or near the federal minimum hourly wage- which has been $7.25 per hour since July 2009. Neither group is benefitting from low, low unemployment rates.

There is a movement to change these metrics to something more meaningful.   A team of economists, Messrs. Zucman, Saez and Piketty, have begun publishing a version of G.D.P. that separates out the share of national income flowing to rich, middle class and poor. At the same time, the Labor Department could modify the monthly jobs report to give more attention to other unemployment numbers. The Federal Reserve could publish quarterly estimates of household wealth by economic class. Such reports could change the way the country communicates about the economy. Economist and Nobel Laureate Simon Kuznets, who oversaw the first G.D.P. calculation in 1873, cautioned people not to confuse G.D.P. with “economic welfare.”

What lessons have we learned?

Mohammed A. El-Erian, the chief economic adviser at Allianz, the corporate parent of PIMCO, recently summarized, in the “Investment News,” some key lessons learned from the crisis.

Accomplishments:

  • A safer banking system due to strengthened capital buffers, more responsible approaches to balance sheets and better liquidity management
  • A more robust payment and settlement system to minimize the risk of “sudden stops” in counterpart payments
  • Smarter international cooperation including improved harmonization, stronger regulation and supervision and better monitoring

Still outstanding issues:

  • Long-term growth still relying on quick fixes rather than structural and secular components
  • Misaligned internal incentives encouraging some institutions who are still taking pockets of improper risk-taking
  • The big banks got bigger and the small got more complex through the gradual hollowing out of the medium-sized financial firms
  • Reduced policy flexibility in the event of a crisis because interest rates in most of the advanced world, outside of the U.S., are still near zero and world-wide debt is significantly higher than 10 years ago.

Yes, we’ve made some good progress in the last 10 years since the financial crisis. But, there’s still plenty of room for improvement.