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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:
As parents, we want what is best for our kids and want to prepare them to be independent and successful adults. Two of my three children are in college now and, from my experience both as a parent and working at DWM, I have learned there are some gaps in the financial education and understanding of money in our young people, including my kids. Money isn’t everything and certainly should be kept in perspective related to other pursuits in life. That would be my first tip for the young adults in my life. However, money is a means to an end and it is important for them to understand their own unique balance sheet and learn strategies to successfully manage all the variables that will affect their financial future.
- 1. Protect and Grow your Most Valuable Asset – YOU!
One of the most important things for college-age or young working adults to realize is that by far their most valuable asset is themselves! For a young adult, the ability to generate income for the next 40 or so years is their most phenomenal asset. Understanding the value of this asset can encourage them to look for ways to magnify that potential earning power and minimize the risks to it. Will additional education improve that income potential? It is also smart for young people to realize that the future is uncertain. We need to teach them to prepare for any risks, like economic downturns, that may reduce asset growth or increase their liabilities. This can help them recognize that using resources to maintain adequate disability or life insurance can be as important as insuring your car or home. Creating good habits in saving, tax-planning and budgeting are important to protect against unanticipated variables.
- 2. Diversify your Assets
When evaluating net worth, most people tend to think of some of the obvious current assets that you might include – a house or a car, for example. Looking more deeply, though, will show some differences in those assets. This is another area where younger people may need some education. A car’s value, for example, should be considered against the taxes, maintenance, gas and depreciation that essentially makes it worth much less over time. Same with a boat. Real estate is usually considered a good asset to offer diversification, if it is appreciating at or above inflation. An interesting article from the Wall Street Journal notes that as wealth increases, the percentage of net worth represented by a principal residence declines. Young adults should understand that diversification is an important strategy and having a good mix of assets will make you financially stronger, especially over the long-term.
- 3. Spend Wisely
In general, a personal balance sheet should include the value of everything you have and everything you owe, even if some of those are intangible. When you put the potential value of a career’s worth of income in real dollars in one column against the future costs of loans or other debts, it makes the impact more visible. This strategy can help spotlight the real costs for student loans, houses, cars, trips, credit cards or luxury purchases. An Investment News article recently quoted a study that found more than half of college bound students had failed to estimate their student loan costs adequately and regretted the decision to take out those loans, once their repayment programs had begun. Certainly, when evaluating the merits of an educational program or even a business investment, it would be smart to consider potential income benefits against the costs for that investment. Weighing the purchase of a new flat screen TV or expensive pair of shoes against the value of income needed to finance that goal might make anyone think twice!
- 4. Save and Invest Early
Finally, it is significant for young people to know that they can really maximize the potential on their balance sheet by saving and investing as early and as fully as possible. Learning the value of compounding in real terms can be a wonderful eye-opener and understanding the effect of inflation on a dollar over time can be equally enlightening. Not all saving is created equal. A penny saved is worth more than a penny earned, when you factor in taxes and compound interest! It is important to maximize retirement investments and practice the “pay yourself first” philosophy of saving and investing to create a good financial plan.
Also, young workers should be encouraged to immediately sign up for employer retirement plans, like 401(k)’s, and to maximize their contributions to take advantage of any match programs offered by their employer. If their job doesn’t offer one, opening an IRA or Roth IRA might be a good solution. Starting a Roth at a young age allows the investor to take advantage of making after-tax contributions while in a lower tax bracket and creating an account that can grow and offer tax free funds for use later in life. As an example, a 25 year old who makes the maximum allowable annual contribution of $5,500 annually to an investment vehicle that averages a 5% return could have around $700,000 by the time they are ready to retire.
The biggest lesson that our kids and other young adults should be taught is that the most important key for success in wealth management, as in most things, is discipline. We love to educate our clients and their families. Please let us know if we can help teach your kids good financial habits.
Holiday season is here. Lots to do, including year-end tax planning. Yes, you need to carve out some time to reduce your 2016 tax bill. Planning this year could be extremely important. A tax reform is likely in early 2017 that would reduce income tax rates, increase standard deductions and could reduce the impact of big tax deductions. The basic strategy is to defer income and accelerate deductions.
Here are some key areas for you to review with your CPA:
Reduce income. The standard advice of pushing as much income as possible into future years is all the more powerful if tax rates drop. Small business owners might want to wait until the end of December to bill clients so that related payments are received in January. They might also buy equipment and place it in service before December 31. The Section 179 Deduction permits up to $500,000 of business equipment to be written off 100% in year of purchase. The closing of a sale of real estate might be put off until January 2, 2017. If you are in retirement and living off IRAs, consider deferring taking any more distributions until early 2017.
Retirement Tax Breaks. If you are contributing to a traditional 401(k) or other retirement plan, considering maximizing it ($18,000 for those under 50 and $24,000 for those 50 and over) with larger deductions on your December paychecks. Consider maximizing IRAs ($5,500 and $6,500 respectively) even if your contributions are not deductible, as you may want to convert those to Roth IRAs in the future.
Capital Gains and Losses. Capital gains taxes are likely to be less in future years for higher income American taxpayers under tax reform proposals. The House GOP plan would revert to an older system that taxes a portion (50%) of investment income at regular rates and excludes the rest. You and your financial advisor should review your portfolio for all realized and unrealized capital gains and harvest appropriate losses before year-end if you haven’t already done that.
Medical Expenses. Taxpayers can deduct medical expenses if they amount to 10% of their income or 7.5% for taxpayers 65 and older. If you’re scheduling an expensive procedure, you might want to get it done and paid in 2016. Some tax reform proposals eliminate medical expense deductions. And, even if medical expense deductions remain available, they may not be worth as much in tax savings if your income tax rate goes down.
State and local taxes. This deduction may be coming to an end. Already, four million Americans lose this deduction due to the Alternative Minimum Tax (“AMT”). Both the Trump Plan and the Ryan Plan intend to eliminate the AMT. If so, this deduction could be wiped out. Hence, if possible, consider paying your property taxes and/or state income taxes in 2016.
Mortgage Interest. All tax reform proposals have continued to support a mortgage interest deduction. However, it might make sense to make your January 2017 mortgage payment in December. The standard deduction is expected to be doubled to $25,000 to $30,000. If so, fewer taxpayers will itemize.
Charitable Contributions. The raising of the standard deduction will likely mean fewer taxpayers will get a tax benefit from their charitable contributions. And, even if they do itemize, their income tax bracket may be reduced going forward. Therefore, consider contributing both your 2016 amounts and your 2017 charitable contributions by 12/31/16. Here are three good ways to do this:
- You can contribute to “Donor-advised” funds this year and get the deduction in 2016 and then make “grants” to charities with these funds as desired in the future.
- You can contribute appreciated property such as stocks, mutual funds and exchange traded funds to a charity. The taxpayer doesn’t pay the capital gain on the appreciation and gets a full charitable contribution deduction. And, yes, appreciated property can fund your donor-advised fund.
- You can make a “Qualified Charitable Distribution” (“QCD”) from your IRA. A QCD allows an IRA owner who is at least age 70 ½ to contribute up to $100,000 to a charity without having to claim the distribution in taxable income. This is particularly valuable to philanthropic taxpayers who can fulfill their Required Minimum Distributions (“RMDs”) by sending payments directly to the charities of their choice.
Our clients know that at DWM we recommend starting tax planning in April or May, following it up in the fall and finalizing it in December. We don’t prepare tax returns. We do provide suggestions for reducing taxes. Helping you minimize your tax bill is part of the value you get with DWM Total Wealth Management. Please let us know if you have any questions. Don’t delay!