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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:

 

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SC Business Review Interviews Les Detterbeck on Risk Profile and Asset Allocation

Written by Les Detterbeck.

on_the_air.jpg

Press Release: On January 25th, SC Public Radio host Mike Switzer interviewed Les Detterbeck.   On that date, the Dow Jones Industrial Average (“DJIA”) was at 26,269; near its all-time high. Three weeks later, on February 20th when the interview was aired, the DJIA had dropped 5% to 24,884. Yet, the message was the same: Investors need to regularly review their risk profile and asset allocation.

Click here to listen to the audio http://southcarolinapublicradio.org/post/are-your-investments-getting-little-too-risky or please read the transcript below.

Mike Switzer: Hello and welcome to the SC Business Review. This is Mike Switzer. A regular review of your financial plan and investment portfolio is always a good idea. This is not just to make sure you are still on track to meet your goals, but to also make sure your risks haven’t increased past your initially desired risk threshold. And our next guest says that is an especially a good idea when financial markets have been setting record highs. Les Detterbeck is a Chartered Financial Analyst (“CFA Charterholder”) and a member of the South Carolina chapter of the CFA Society and he joins us from his office in Charleston, SC. Welcome, Les. Thanks for joining us today.

Les Detterbeck: Thank you, Mike. Great to be here.

MS: Les, first of all, please tell us how establishing a risk profile works for an investor.

LD: Certainly, Mike. There are three components of your risk profile. First, your risk capacity, or ability to withstand risk. Second, your risk tolerance, or willingness to accepts large swings in investment returns. This is how you are “hard-wired.” And, third, your risk perception, which is your short-term subjective judgment about the characteristics and severity of risk.

MS: I’m assuming people receive a questionnaire or an online form to determine all of this.

LD: That’s exactly right, Mike. There are different formats that are used for this and the result is to classify your risk profile into one of five categories of risk: Defensive (very low risk), Conservative (low), Balanced (moderate), Growth (high) and Aggressive (very high).

As a general rule, older investors would be thought to take on a lower level of risk than younger investors. However, that’s not always true. Investors in their 80s and 90s, who know that they have ample funds for their lifetimes and who can emotionally handle high risk, may have an aggressive risk profile; particularly when they plan to leave most of their money to their beneficiaries.

MS: And of course, a young person can be very defensive?

LD: By all means, Mike. And, people’s circumstances and risk profiles can change with life events, such as marriage, birth of a child, loss of a job, retirement, changes in health and others. So, it’s important to review your risk profile regularly.

MS: Les, walk us through the importance of reviewing the risk within your portfolio after some market cycles.

LD: What we suggest is you start by quantifying the risk you need to accomplish your goals. What market return is required to provide the likely outcome of success (also known as not running out of money)? Do the goals require a high rate of return just to have a chance of success, or is the demand on the portfolio low?

MS: The actual risk level of your risk profile can change over market cycles, right?

LD: Yes, it can. And, the emotional piece can be a big issue as cycles go up and down. Investors can become elated as markets climb and therefore increase their equity allocation for fear of missing out on the rally. And, then as the markets decline, they ultimately reduce their equity allocation just as stocks hit bottom. Instead, we suggest that you establish an appropriate risk profile and asset allocation to meet your goals and stay with it through the long-term.

MS: Once you’ve stuck with your asset allocation, then you need to rebalance it, correct?

LD: Yes, rebalancing is huge.

MS: How often should you rebalance?

LD: At least once a year, Mike, though 2-4 times per year is much better with all the changes in our world. You do this by comparing the asset allocation in your portfolio to your target asset allocation. You split your holdings into the three asset classes; equities, fixed income (including cash) and alternatives and calculate percentages for each.   A balanced portfolio might have a target of roughly 50% equities, 25% fixed income and 25% alternatives. In a bull market, your equities will outperform the other asset classes and when you compare your actual asset allocation to your target, the equity percentage will very likely exceed your target. This means your assets are more risky than your plan and you need to rebalance by trimming back your equities and getting your allocation back into your desired risk profile and asset allocation.

MS: Les, thank you so much for your insight and your time today.

LD: Nice talking with you, Mike.

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College Funding Solutions

Funding                 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
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Happy Valentine’s Day- Here’s Something Better than Chocolates!

Written by Les Detterbeck.

tax advantages and chocolate

We love chocolate. We also love saving taxes for our clients. Hard to believe- we’re already 45 days into 2018, dealing with a very different tax structure. We’ve been working on 2018 tax planning for our clients and wanted to share some early observations with you. Our twin goals: eliminate surprises and identify tax strategies/advantages to save money.

First, a review of the major changes in personal income taxes for 2018:

  • Standard deductions are increased (to $24,000 for couples and $12,000 for singles).
  • Exemptions are eliminated.
  • State and local tax deductions are capped at $10,000 total.
  • Interest on home equity loans is no longer deductible and mortgage interest is also reduced.
  • Miscellaneous deductions are no longer allowed.
  • Tax rates have been lowered.
  • Alternative minimum tax will likely affect fewer taxpayers.
  • Self-employed taxpayers may get a 20% reduction for small businesses, partnerships and S Corps “pass-through income.”
  • Section 529 Plan distributions have been expanded to include K-12, though capped at $10,000 per year.
  • Corporate tax rate decreased from 35% to 21%.

Second, a quick recap of what we have seen on the 2018 income tax projections we’ve completed so far for a dozen or so of our clients:

  • Except for certain anomalies, such as large families, most taxpayers will be paying less tax than 2017. Larger income generally means greater tax savings. And, business owners with pass-through income will get the biggest tax benefits.
  • New, lower withholding tables have been released.
  • More taxpayers will be using the standard deduction.

Third, a summary of some key new/enhanced tax planning strategies/advantages that may help:

1. Expanded use of 529s. We think 529s are a great educational funding planning tool. As long as the distributions are for qualified expenses, there is no income tax on the appreciation of contributed funds. Furthermore, contributions are tax deductible, within certain limits, for both IL and SC taxpayers and both states offer quality investment options. Contributions can be made in installments or lump-sum.

2. Bunching of deductions. With itemized deductions being reduced, more taxpayers will use the standard deduction. A decision to use the standard deduction or itemize can be made each year. If your itemized deductions typically are less than the standard deduction, you could consider bunching deductions, particularly charitable contributions in one year, so that you could alternate between itemized and standard deduction from one year to the next. The use of Donor Advised Funds can help accomplish this.

3. Using the Qualified Charitable Deduction (“QCD”) for all or most of your Required Minimum Distribution (“RMD”) from your IRA. Once you reach 70 ½, required minimum distributions need to be made annually from your IRA accounts. Instead of simply taking the distribution and paying income tax on it, you can instead direct money to a charity and not pay tax on that part. Hence, a married couple could get the $24,000 standard deduction, plus reduce their taxable income by making QCDs. The maximum annual amount of QCDs is $100,000. If the total QCDs are less than the RMD, then you will pay tax on the difference.

4. Paying investment management fees in part from retirement accounts. Most CPAs have been deducting investment management fees as allowable miscellaneous expenses for years. Some only deducted amounts paid by taxable accounts. Some deducted the full amount, whether paid by taxable accounts or retirement accounts. Now, in 2018, investment management fees will not be deductible at all. We believe it is best to have fees for retirement plan funds paid by retirement funds and fees for taxable accounts paid for by taxable accounts. Pre-tax money in retirement accounts will be taxed someday, typically when RMDs start. Taxable accounts represent money that has already been taxed. And, paying for taxable account investment management from a retirement account would be considered a taxable distribution for which a 1099-R would be issued. Best to split it up.

5. If you are a business owner, meet with your CPA early and often. In order to give small business owners a similar tax break to the new corporate tax rate of 21%, the 2018 tax reform provided a deduction of up to 20% for pass-through entities on “qualified business income.” There are three important tests however. Certain specified businesses are excluded. Limitations may be imposed due to wages and capital amounts. And, lastly, if individual income exceeds certain limits, no deduction is allowed. CPAs are still waiting for clarification on a number of very important items associated with the 20% deduction. Regardless, keep pestering your CPA until she or he helps you put together a plan to take advantage of this huge potential tax savings if it applies to you.

Happy Valentine’s Day. We hope you enjoyed some tax savings ideas. We also hope your loved ones bring you chocolates as well. Love those Daily Doubles!!

 

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