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:

 

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Health Savings Accounts – Understanding the Benefits

Written by Ginny Wilson.

HSAHealth care is a very hot topic in 2017.  The new administration made it their leading agenda item, though we have yet to see a plan agreeable to both sides of the aisle.  As Republicans contemplate how to replace the Affordable Care Act (ACA) with a good alternative, Health Savings Accounts or HSAs are expected to figure prominently.  President Trump has made the expansion of access to HSAs an important measure for his health-care plan and conservative proposals are using expanded eligibility and increased contribution limits as key elements in their plans.   We think it is a good time, therefore, to understand how these plans might fit into an overall health care and investment strategy.

Health care costs are rising and the costs and inflation associated with health care are a tremendous consideration for retirement planning.  There are varying estimates of costs for retirement health care --some estimates show that a 65 year old couple will need an average of $260,000 for 20 years of healthcare spending.  At DWM, we actually look at health care as a separate spending goal in our financial plans because of the higher inflation and importance of adequately preparing for these costs. 

Here is where an HSA may come in.  HSAs offer an opportunity to take advantage of triple tax benefits to pay for some of this cost.  HSA contributions can be deducted or paid pre-tax, there is tax-free compounding while in the account and no tax is paid on qualified withdrawals for health care.  It’s a trifecta of tax advantage!  After age 65, you can make withdrawals for any reason and pay regular income tax just like you would for an IRA, but there are no required minimum distributions.  However, using the funds for non-qualified expenses before you are 65 results in a stiff 20% penalty plus the normal taxes.

 Let’s look at how HSAs currently operate.  You are eligible to contribute to a Health Savings Account if you are part of a high-deductible health plan (HDHP) and as long as you have not signed up for Medicare.  There is an annual contribution maximum and, for 2017, it is $3,400 for an individual and $6,750 for families.  A HDHP, in 2017, means your deductibles must be at least $1,300 for an individual and $2,600 for a family with maximum out-of-pocket expense requirements of $6,550 for an individual or $13,100 for a family policy.  The lower premiums charged for this kind of coverage have attracted consumers and employers alike.  Given the ACA’s requirements that certain preventive screenings, annual visits or prescription drugs be covered regardless of deductibles, these policies are now more attractive and palatable to average health care consumers.  These plans are also becoming more popular as employers look for ways to manage their employee benefit costs. 

You can make withdrawals from the Health Savings Account for many traditional healthcare expenses and the qualified expenses can also include things that you normally pay for with after-tax dollars, like vision or dental care and supplies.  It might be a good way to pay for braces for your child or eye exams that might not be otherwise covered.  This might be one way to use HSAs – as a tax-free payment for the costs of the deductibles on the HDHP, as well as some additional medical expenses.  The other beneficial use is as an extra savings vehicle to be used in retirement for those future retirement health costs, including some of the long-term care costs that Medicare doesn’t pay. Also, the pre-tax contributions that you are allowed to make to these accounts can be in addition to your contribution maximums for other qualified accounts.  You can also, like IRAs at age 50, make $1,000 “catch-up” contributions to your HSA at age 55.  

There are some downsides to these accounts.  High deductible plans might not be the right choice for everyone; each individual or family will have to evaluate their situation carefully.  Also, the HSAs are not offered by every financial institution and the investment choices and administrative costs should be investigated before committing to one.  It also takes disciplined saving to make the most of the tax advantages. 

We do think there could be a place for these accounts in certain circumstances and, as the political negotiations continue to unfold, it is good to understand their pros and cons. We recognize the importance that health care costs play in preparing for financial independence.   As your holistic financial advocate, we would be glad to help you evaluate how a health savings account might fit into your overall plan to help you reach your goals.  

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DWM 1Q17 Market Commentary

Written by Brett Detterbeck.

DWM 1Q17 Market Commentary

 

Fun 6Did you know that after 146 years, the Ringling Bros and Barnum & Bailey Circus is shutting down? No worries. It seems our friends in Washington are taking it over as it has been a circus-like atmosphere filled with noise for the last few months. Ironically, for the market, it’s been just the opposite, with 1Q17 going down on record as one of the “quietest” quarters in the last 30 years, as represented by the S&P500 posting an average daily move of just 0.32%. But even though the stock market was calm, that does not mean it didn’t produce. Because it did, with the three major asset classes - equities, fixed income, and alternatives - all up.

What’s interesting is that it was not a continuation of the “Trump trade” that has powered the recent advance. After the November election, shares of financials and smaller US stocks jumped based on hopes that looser regulations and tax cuts would benefit banks and more domestically oriented companies. However, so far the Trump administration has not lived up to the campaign hype. The failure of the Republicans' health-care bill has led investors to question if this administration can push anything through, including any significant shift in U.S. trade policy. That has led to a sector rotation within the equity asset class. Things that were strong post-election like financials and small caps are being sold for US multinationals, particularly those in the trade-sensitive technology sector, and emerging markets. This shows in the following results:

Equities: The MSCI AC World Equity Index had a great start to 2017, up 6.9%. Domestic large cap stocks as represented by the S&P500 came in at a solid 6.1% as large caps dominated small caps*, up only 2.5%. The big winner was emerging markets**, up 11.5%.

Fixed Income: The Fed lifted rates during the first quarter based upon promising US economic forecasts. The personal consumption expenditures price index, which is the Fed’s preferred inflation gauge, ticked in at over 2% for the first time in over five years. It wasn’t too long ago that people were worried about deflation, so this achievement is very good news. The Barclays US Aggregate Bond Index gained 0.8% in the first quarter. The Barclays Global Aggregate Bond Index enjoyed slightly better returns, +1.8%, thanks to stronger results overseas. Again, emerging markets was the place to be, up 4.2% as represented by the PowerShares Global Emerging Mkts Sovereign Debt ETF.

Alternatives:  The Credit Suisse Liquid Alternative Beta Index was just above break-even, +0.1%.  The handful of liquid alternatives (which could be an alternative asset or strategy) that DWM follows fared better. Alternative assets like gold*** surged 8.4% and MLPs**** advanced 2.6%. An alternative strategy like the RiverNorth DoubleLine Strategic Income Fund, which takes positions in the inefficient closed-end space, registered a 1.4% return. The only real losing alternative category we follow were managed futures funds (an example of alternative strategy), like the AQR Managed Futures Fund which lost 1.0%. These funds struggled from the rotation change mentioned above. It should be noted that these type of funds exhibit extremely low correlation to other assets and can provide huge protection in down times.  

Put it together and it was a very handsome start to 2017 for most balanced investors.

Looking forward, we are encouraged as we believe economic growth will continue to advance not only in the US but also globally. Consumer and business owner sentiment is very strong. American factory activity has expanded significantly in recent months.  

Concerns include:

  • Elevated US equity valuations: Current valuations of 29x cyclically-adjusted price-to-earnings (CAPE) are much higher than the long-term average of 18x. This doesn’t necessarily mean a huge pullback is in front of us, but it could be pointing to a much more muted return profile. Frankly, we would view a small pullback as a healthy development.
  • Pace of Fed rate hikes: We think the Fed has done a decent job handling and communicating rate changes. They need to continue this practice and avoid further acceleration to avoid making investors nervous.
  • The return of volatility: After the record “calmness” mentioned above, volatility most certainly will rise. Hopefully, it advances in a manageable fashion.
  • Heightened Political risk: 2016 was full of political surprises and more are possible in 2017 given the rise in populism and the heavy global calendar. See below.

Picture1

I’ve written a lot of these quarterly market commentaries and I cannot remember one so consumed with political policy. There’s a lot of uncertainly right now. But what is certain is that we live in some interesting times. Every day brings a new headline, and a lot of them are political. So far, the market has worked through it handsomely. Let’s hope our strong economic outlook continues to offset any ugliness coming out of the Barnum & Bailey Circus…err, I mean, Washington. 

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

*represented by the Russell 2000 Index

**represented by the MSCI Emerging Markets Index

***represented by iShares Gold Trust

***represented by the ALPS Alerian MLP ETF

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Your Choice- $1 Million or $5,000 per Month for Life?

Written by Les Detterbeck.

dollarsMost of our readers will likely have to make that type of decision someday.  From our perspective, it’s a pretty easy answer.  As Cuba Gooding, Jr. famously told Tom Cruise in “Jerry Maguire”:  “Show me the money!!”

Yet, an article in the WSJ on Monday tried to make the decision sound really tough, with losers on both sides.  It would have you believe that many will suffer from either an “illusion of poverty” or an “illusion of wealth” and are likely going to experience a disappointing retirement.  Really?

Researcher Daniel Goodwin at Microsoft Research asked people how adequate they would feel if they have $1 million at the time they retired.  He used a seven-point system with one being “totally inadequate” and seven being “totally adequate.”  Then, he asked them to rate instead an income each month in retirement of $5,000.

In theory, the choices are similar based on pricing of annuities. If a 65 year old paid $1 million for a “single premium immediate annuity” they could receive payments of $5,000 each month for their life.  Actuarially, a 65 year-old is expected to live 18-20 years.  So, 19 years of monthly payments of $5,000 would be $1,140,000 and represent a 1.4% annual return on the investment.

Yet, believe it or not, many people, feel that $5,000 per month is more adequate than the $1 million lump sum.  Mr. Goldstein says that this group suffers from the “illusion of poverty.”  Apparently, these folks are “inclined to think about wealth in terms of monthly income” and don’t want the “burden” of a lump sum which could run out someday.  Hence, they dial down their expenses, eliminate any wants or wishes and make do on their $5,000 per month.

Mr. Goldstein then suggests that I and most people may suffer from the “illusion of wealth.”  He thinks that those selecting the lump sum, through a false sense of security, may spend too much and run out of money. In fact, the larger the lump sum, the more likely the “extra millions will lose their meaning.”  Really?  Do we all suffer from illusions, as Mr. Goldstein suggests?  Are we all on the road to an unsuccessful retirement regardless of our choices?  It certainly doesn’t have to be that way.

Perhaps I should contact Mr. Goldstein and invite him (and his wife) to go through the DWM Boot Camp.  First, we’d sit down and help them with their goal setting. We’d help them identify their needs, wants and wishes.  We’d look at their assets, health care costs, income taxes, expected inflation and investment returns, and insurance and estate matters.  Ultimately, we’d help them design a financial plan.

If Mr. Goldstein was under an “illusion of poverty,” we’d show him that his $5,000 per month program is a poor choice.  To begin with, his $5,000 per month would lose its purchasing power each month due to inflation.  With 3% inflation, after 15 years of retirement, his $5,000 would only buy $3,200 worth of goods in today’s dollars.  Second, if he did a “personal annuity” by simply taking the lump sum, investing it, earning 6%, e.g., and withdrawing the $5,000 per month, his family would still have the $1 million in principal when he passed away.  No need for an illusion of poverty here.

On the other hand, if Mr. Goldstein was under an “illusion of wealth”, the plan would help him identify his needs, wants and wishes and would have helped evaluate whether those potential expenses were affordable based upon his assets, expected investment returns and the other metrics.  We would have created numerous scenarios to ultimately result in a plan that was successful.  The plan would be stress tested for items that could negatively impact that plan and monitored and modified over time.  In short, the plan would not suffer from an illusion of poverty nor of wealth.

We’re glad contributors Shlomo Benartzi and Hal Hershfield ran the article Monday focusing on Mr. Goldstein’s findings. Retirement/financial independence planning is extremely important.   However, we don’t agree that it has to be a dire situation with poor choices, lots of suffering and disappointments.   It’s simple: take the lump sum and put together your realistic plan with a fee-only adviser like DWM and then have us help you monitor it for the changes that will undoubtedly occur in the future. You’ve worked hard for your money, the time will come to enjoy it. As Ginny’s blog http://www.dwmgmt.com/blogs/82-2017-02-07-23-30-00.html pointed out a few weeks ago, retirement/financial independence should be a time for “jubilation” not illusions or disappointments.  Proper planning with the right team can make that happen.

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