Our Blog

DWM is committed to learning for its team, clients and friends. In this changing world, it’s extremely important to stay current in all areas impacting your financial future.

We encourage all of team members to “drill down” on current topics important to you and contribute to our weekly blogs.  Questions from our clients and their families are often featured in our blogs.  

Financial literacy for clients and their families is very important to us.  We generally hold an annual wealth management seminar for all of our clients.  We encourage regular, at least semi-annual, meetings in person with our clients to review family updates, progress on financial goals, asset allocation and performance of investments.  We’re happy to assist younger members of the family as part of our total wealth management program.

Here’s our latest blog:



Your Money and Your Estate Taxes-Impacted Greatly by Your Withdrawal Rate

Written by Lester Detterbeck.


Historically, retirement worries have centered around two major questions: 1) Will I run out of money and 2) Will my heirs owe estate taxes? Withdrawal rates in retirement certainly have a huge impact on your money and, in the future, perhaps your estate taxes as well.

Let’s first look at a hypothetical couple, age 65, just starting retirement with $3,000,000 of liquid investments and assume:

  • They spend $12,500 per month on basic retirement spending, health care, travel and gifts.
  • Their social security, net of Medicare premiums and taxes is $2,500 per month.
  • So, they need $10,000 monthly ($120,000 annually) from their portfolio.
  • Their annual investment return is 6%.
  • The tax rate on investment income is 20%
  • Inflation is 3%.
  • Their “real return” is 3% (6% gross less 3% inflation).
  • They live 30 years.

Their withdrawal rate is 4% ($120,000 divided by $3,000,000 in year one). And, since this withdrawal rate exceeds their real return of 3%, over time their portfolio starts to decline. In their 95th year, they spend their last dollar.

It’s not surprising that if this couple’s withdrawal rate was greater than 4%, e.g., they take out $150,000 per year (5%), they would likely run out of money (in 23 years). If their withdrawal rate is less, e.g. they take out $90,000 per year (3%), their portfolio stays almost perfectly level over this 30 year at $3 million.

So, now let’s turn to couple #2 with twice as much money and a similar withdrawal amount initially of $120,000 per year. Their $6,000,000 portfolio starts with an annual withdrawal rate of 2%. In 30 years, their portfolio would be $13 million. This hypothetical couple doesn’t need to worry about running out of money, but they do need to worry about estate taxes.

The lifetime estate tax exemption is currently $11.4 million ($22.8 million per couple). The estate tax exemption has changed dramatically over the years. As recently as 1997, the exemption was only $600,000 per person.  In 2007, it had risen to $2,000,000. In 2011 it jumped to $5,000,000 (plus annual inflation) where it stayed until the Tax Cuts and Jobs Act (TCJA) brought it to its current level.

If the so-called Blue Wave continues from the 2018 midterms into the 2020 general election, a Democratic majority in Washington could significantly change estate planning. Senator Bernie Sanders has suggested a reduction of the estate exemption to $3.5 million. Others have suggested a reduction to $2 million per person. Even assuming an inflation increase in the exemption, our second couple upon death could owe millions in estate taxes. Though taxpayers may be well under the exemption limits today, if their withdrawal rate is lower than their real return, their portfolio will increase and there might be a taxable estate in future years. Exemption amounts and tax rates are always subject to change.

One of the key tax strategies that will likely be employed to eliminate the estate tax for couples similar to couple #2 and others will be to use an irrevocable trust to freeze estate values. An irrevocable trust is a trust that cannot be changed or amended by its maker after it is signed. Irrevocable trusts are used to make gifts (often to children) “with strings attached.” Once the trust is funded, it is no longer part of the maker’s estate and appreciates for the benefit of the beneficiaries.

This effectively “freezes” the value of the gifted assets, since only the value when gifted may be added back to the maker’s estate, not the future value. Furthermore, while we are not attorneys, it is our understanding that certain gifts made while the lifetime exemption was $11.4 million may not be required to be added back at all.

A quick example. For simplicity, let’s assume couple #2 split their $6 million into two buckets, $3 million each. The first bucket is theirs to use for lifetime expense withdrawals. The second is in an irrevocable trust, gifted to their children. The first bucket is likely to be depleted in their lifetime (as we saw with couple #1). The second bucket grows to $13 million, as it has no withdrawals, other than taxes. Upon death, their estate would potentially only include the $3 million in gifts to the irrevocable trust 30 years earlier. Hence, no estate tax even with a future lifetime exemption of only $2 million.

Conclusions: Your withdrawal rate is a key metric. It requires a budget, financial plan and forecast. It will help you determine if you have enough money for your live(s) and if estate tax strategies may be needed in the future and how they might be designed. Please give us a call if you would like to discuss this very important topic in more detail.               


Ask DWM: Should We Invest in Real Estate?

Written by Lester Detterbeck.



Great question.

Let’s start with some basic concepts.  Real estate is an illiquid investment. You can’t buy or sell it in a day or two like liquid investments. It is somewhat uncorrelated to the stock market returns- which is good.  While it is smart to consider adding real estate as a portion of your overall investment portfolio, you don’t want to have too much in illiquid investments. We suggest a rule of thumb is that real estate, excluding your house, should be at the very most 40% of your overall investment portfolio.  So, if your investment portfolio (both liquid and illiquid) is $1 million, real estate should at most be $400k.

Location. Location. Location. Appreciation in value over time is key. This will impact the ultimate sales price when you sell your investment property and the rental income amounts while you hold it. Historically, US real estate has increased, on average, about 3% per year, similar to inflation. However, location can produce tremendous differences. Charleston real estate has done very well in the last ten years, though some areas of the Lowcountry haven’t done so well. Chicago’s market overall has been flat for the last ten years, yet there are areas that have done very well and areas in the suburbs that have lost significant value.  Investing in a piece of real estate is not like buying shares in an S&P 500 index, where your investment will rise as the market will rise. Rather it is a singular investment in one piece of property, subject to both the general market risks and the specific risks of the property.

Would you be prepared to self-manage the investment property? Do you have the skills, time and patience to handle phone calls or texts, perhaps in the middle of night, from an upset tenant?   If you decide to have someone else do the property management, it won’t be cheap- likely 10% of your rental income.

Let’s look at the key metric- your likely return on investment. We start by calculating the “net operating income” (“NOI”), which is the cash flow of the property, assuming there is no financing, and compare this to the purchase price.  For example, let’s say you think you can buy a property for $500,000 that will rent for $3,000 per month. You need to include an amount for estimated vacancies/rental commissions- let’s use 8%. So, the hypothetical annual net rent would be $33,120. Now, let’s look at expenses- taxes might be ½% to 1% or more of the property value. There may be homeowner association fees and/or repair costs. And, there will be insurance-perhaps an amount equal to the real estate taxes. Just for simplicity, let’s say all of those expenses combined are 1 ½% of the value of the property. Based on a $500,000 property, expenses might be $7,500, assuming you do the property management yourself. Therefore, in this example, NOI would be $25,620 ($33,120-$7,500) or 5% of the investment.

The hypothetical total return on the investment is NOI + expected appreciation. Let’s say this property would be sold in 6 years for $650,000. Assuming you sell it using a broker, there would be a 6% commission. So, net proceeds of $610,000. This would represent a 3.5% annual appreciation on the property. Therefore, your total expected return in this example would be 8.5% (5% net operating income + 3.5% appreciation).

We haven’t talked yet about financing and taxes. If you get a loan at less than your NOI (5% in our example), your total return will increase slightly as you are benefitting from leveraging. If the rate is higher than NOI, the total return would be a little less. Depreciation is a non-cash expense that can reduce the taxable income on the property during your ownership. Any depreciation taken has to be “recaptured” (given back) when you sell the property. Depending on your personal circumstances, you may be able to take losses on rental property and you may be eligible for a 20% Qualified Business Income Deduction. Financing and taxes are generally not the key determining factors in deciding to buy the property, but may have some impact on the total return.

We generally suggest a minimum threshold for expected total return on real estate investments to be 9% or more. If a balanced liquid investment portfolio is expected, over a long-term, to have a total return of 5-7% net of fees, a real estate investment should be at least 3% more. Real estate investments are illiquid, riskier (due to lack of diversification) and, if you self-manage, will require time, skill and patience.

Under the right circumstances, investment real estate can be a nice addition for a portion of your investment portfolio. At DWM, we are very familiar with real estate. We understand the pluses and minuses for a portion of your investment assets. In 50 years of marriage, Elise and I have purchased and sold over 40 properties, some of which were our home and some were investment properties. Real estate investment has helped increase our income and net worth.

If you think you might like to invest in real estate, or, if you already own real estate and wonder if you should be adding more or subtracting some or all of it, give us a call. Once you’ve assembled all the facts (cost, income, expense, appreciation), we’re happy to help you review the NOI and total return and discuss how investment real estate fits into your overall investment strategy. We don’t do property valuations and we certainly can’t guarantee your future results, yet we’re happy to provide competent, independent and valuable input as you determine whether or not you should invest in real estate.







Leverage for the Next Generations: How to Build Credit Effectively

Written by Jake Rickord.

laptop and card smile

According to a study done by Sallie Mae recently, the younger generations, from teens to young adults, are much more likely to make payments by debit card, cash, or mobile transfer (Venmo, Paypal), than by credit card. In fact, only around 50% of them have credit cards at all. This statistic is leaving some analysts, like those at Fortune magazine (Bloomberg) wondering if credit cards will soon go the way of the video store or Toys R Us. But what are some possible reasons for this shift away from debt lending instruments in young adults, and what lessons can they learn to ensure that picking one up doesn’t lead them to further financial struggles?

            One of the big reasons that can easily be identified as an answer to the first question is the looming student loan debt floating over most of those adults’ heads. The average student leaving college in 2017 had roughly $28,650 in student loan debt. On top of this, about 11% of outstanding student loans were 90 days or more delinquent or in default. With the risks of this debt compiling and carrying out, students and young people entering the workforce are less concerned about credit scores and more concerned on making sure they can pay their monthly loan amount, on top of any other recurring expenses. However, the one piece of good news coming out of paying these student loans is that by doing so, one can build up significant credit that will help take the place of missing out on credit card payments. While this avenue won’t leave much room to start borrowing to buy discretionary items, making these payments on time and for the right amount will allow young folk to build a strong credit foundation for the future.

            In addition to student loans, many other issues impede those looking to get a credit card early. In 2009, the Credit Card Accountability Responsibility and Disclosure Act set forth a precedent that banks needed to have more stringent policies with which they lend money, including not offering credit cards to anyone under the age of 21 without a co-signer or proof of income. Even if these are available, with little to no credit history available, some will be turned down for credit card offers. However, most companies offer some sort of secured debt instruments at the least which ask for a deposit upfront as a collateral credit limit. These will allow those with low or new credit scores to earn it while keeping the banks/credit card companies from being at risk. One additional method for those who choose not to use these types of cards is simply to be added as an authorized user on a parent’s credit card. While at a slower pace, this can help out a young person get started even if they don’t use it at all.

            Additionally, once their credit is established and starts going in the right direction, they must remain diligent to avoid having what they worked for diminished. There are many different factors that go into a person’s score, however following some key principles will be more than enough to continue pushing this score up:

  1. Use 30% max of the allowed total credit line. This 30% rule is used to ensure that one’s spending habits are in-line with how much they can borrow.
  2. Pay all bills on time. Either through setting up auto-pay or keeping a calendar with important payment deadlines written down, this is one of the most important factors.
  3. Continue using the debt instrument. Even if it’s only being used to pay for small monthly charges or gas bills, continuing to use the card will build up credit.
  4. Pay as much as is feasible. The balance set on the card is not nearly as important as the fact that it’s being used. In order to keep interest down (some go as high as 17%!), one should pay off as much of the balance as they can each month. This is especially important since roughly 25% of millennials have carried a credit card debt for over a year!

All in all, younger generations of people have sincere trepidation when it comes to using credit cards or any other item causing them to incur more debt than they’ve already been exposed to through student loans. They’re still fearful, having grown up through the Great Recession, and face several hurdles even if they decide to pursue getting a credit card. However, once they have them, and through loans, they can still build up a reasonable credit score and attain their financial dreams by remaining diligent and following advice like those points listed above. Please let us know if you have any questions on the above information for you, your family, or your friends.

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