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.

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Breaking News- How the SECURE Act will Impact Retirement Plans

Written by Les Detterbeck.

SECURE Act into Law

 

Happy New Year!! We hope everyone had a great holiday. Everyone at DWM certainly did. In late December, Congress’s year-end spending package was signed into law and it included the SECURE Act which has made some significant changes to retirement plans. It’s a mixed bag. Major items impacted are 1) “stretching rules” for IRAs, including Roth IRAs, inherited by non-spouse beneficiaries 2) age limits for IRA contributions and 3) Required Beginning Date (“RBD”) for Required Minimum Distributions (“RMD”) for retirees.

In the past, owners of IRAs and Roth IRAs could leave them to much younger heirs, including grandchildren, who could “stretch” the IRA by taking out the minimum distribution, typically until they were 85 years. This was particularly valuable for Roth IRAs, where the income tax had already been paid and the account continued to grow tax-free for 50 years or more. For example, a grandchild who received a $100,000 Roth IRA from her deceased grandparent at age 30, who invested the money and earned 6% annually and withdrew only the required amount each year, could eventually receive $741,000 in distributions over 55 years, all tax-free. The same applied to IRAs, except there would be taxes to be paid on the distributions each year. This was a great wealth succession strategy.

Now, the “Big Stretch” is gone. The distribution period has been reduced generally to 10 years for non-spouse beneficiaries. Surviving spouses are still covered by the old rules. However, a non-spouse IRA or Roth IRA heir can postpone any distributions until the end of the 10 years to maximize tax-free or tax-deferred growth. A surviving spouse who inherits a Roth IRA can put the account in his or her name, not take any distributions in their lifetime and then leave the accounts to younger heirs who get a 10 year stretch.

The Big Stretch is gone but Roth conversions can still make lots of sense, in the right circumstances. Here’s a real life example of a program we are just putting into place with clients. A Roth conversion is where you voluntarily move all or a portion of an IRA to a Roth account and pay income tax on the amount transferred. The Roth account is tax-free thereafter. Over a 10 year period one of our client couples is converting $1 million of traditional “pre-tax” IRA money to Roth. We do an installment Roth conversion each year, with larger amounts in the beginning. At the end of the conversion, using a 6% annual investment growth, their Roth accounts total $2 million. It has cost about $250,000 of federal tax (they live in a state with no income tax) to do the conversion. At that point, our clients are 70 years old. They have no RMD requirements on their Roth accounts and, assuming the second to die of the couple passes away at 95 years of age, the $2 million would have grown to $8.5 million over those 25 years. After that, the beneficiaries can allow the money to grow for 10 more years under the new rules and then take tax-free distributions on the roughly $15 million of Roth money. The effective tax rate on the conversion and growth was less than 2% tax ($1 million of IRA money eventually became $15 million of Roth money). Conversions don’t work for everyone but for the right situation, it is a key part of the legacy and wealth succession strategy, even without the Big Stretch.

 Under the SECURE ACT, savers can continue to make contributions to a Traditional IRA past the age of 70 ½ (the age limit of 70 ½ has been repealed). Roth contributions were never subject to an age limit. They still have to meet the requirements of earned income to make contributions.

Lastly, starting dates, or RBDs, have been revised from 70 ½ to age 72 for RMDs. Obviously, people are living longer and many would prefer to start their RMDs later. Again, traditional IRAs have RMDs so that the IRS can finally start collecting tax on the money. The initial withdrawal rate is 3.6% and the withdrawal rate increases each year to 16% at age 100, for example. Roth IRAs have no RMDs for owners and their spouses. Now, if the owner reaches 70 ½ after 12/31/19, the first RMD year is the year in which the owner reaches 72. The RBD is April 1 of the year that follows the year in which the owner reaches 72 ½. Here’s an example, IRA owner was born in April, 1950. She will be 70 ½ in October, 2020 (after 12/31/19). So, she can take his first RMD either in 2022 or by April, 2023 (under the old rules she would have had a RBD of 2020 or April 2021.) However, if the first RMD is taken in April 2023, then the 2023 RMD for her will be taken that year as well. Doubling up may not be advantageous, as it may push you into a higher tax bracket.

Those are the key issues in the SECURE ACT. If you have any questions, please let us know. We love working with retirement plans, traditional IRAs and particularly Roth IRAs. Even with the new changes in the SECURE Act, there are still some great planning opportunities available.

 

 

https://dwmgmt.com/

 

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SC Business Review Interviews Les Detterbeck: "Is 'Free' Stock Trading Really Free?"

Written by Les Detterbeck.

Today's Guest Microphone

Press Release: On December 3rd, SC Public Radio Host interviewed Les Detterbeck. This message, that there is no ‘Free Lunch,’ is extremely important.

Click here to listen to the audio, and/or please read the transcript below.

 

Mike Switzer: Since 1975, when the U.S. Securities and Exchange Commission, SEC, deregulated stock broker commissions, rates have been falling. Recently several major discount firms have announced completely free stock trading, but our next guest says that you should beware of any offer of a free ‘lunch’. Les Detterbeck is a Chartered Financial Analyst in Charleston, South Carolina, and a member of the South Carolina chapter of the CFA society, we have him on the phone! Les, welcome back to the program.

 

Les Detterbeck: Thank you Mike it’s a pleasure to be here! 

 

Mike Switzer: So let’s just dive right in. Do you have plenty of clients now who are taking advantage of this free lunch?

 

Les Detterbeck: Many of our clients use Schwab, in fact we use Schwab as our main custodian. The equity trades are now at zero, but Schwab and others have been offering Mutual Fund trades at zero for some time. To make the major announcement about stocks and exchange funds going to zero was a pretty major one in the industry, and we have been using that yes. 

 

Mike Switzer: Are you expecting this to spread industry wide?

 

Les Detterbeck: Yes, we expect that it will. That’s what has been happening over the last decades as the cost of commissions went down from $50 to $20 dollars, then $10 dollars to $4.95, so it’s not a surprise that this area of income for the brokers for much of their business that the commissions are going to be down to zero.

 

Mike Switzer: Does this mean then that they are making money in other ways once they have you as a client, or are there hidden fees somewhere that you are paying and don’t realize?

 

Les Detterbeck: No, I don’t know that there are hidden fees but there are three basic sources of income from the brokerage firms. In the beginning 30, 40, even 50 years ago, the trade commissions were the majority of their income; now it’s a very small amount. The other area has been operating expense ratios that is on Mutual Funds that they trade. There are expenses included in there and there is a portion of that fee that brokers can obtain. The last major item would be in the area of uninvested cash, the cash that’s within brokerage accounts that is not invested in specific securities. 

 

Mike Switzer: And so they are basically able to make enough then to drop trading costs for the consumer to zero?

 

Les Detterbeck: Yes, that’s exactly right. None of us can begrudge them the opportunity to make a profit. They’re doing a good job, we expect they need to make income, they’re just getting it from other sources these days. 

 

Mike Switzer: So, is this going to stay in the discount broker arena, or spread to the full service brokerage firms?

 

Les Detterbeck: It’s spreading although it’s going slowly that way, Mike. Obviously the big name full service brokerages have people and have brands that people love causing them to stay with them. So, we have seen some of that but it may still be a while before that changes. 

 

Mike Switzer: Now are the firms that are offering this putting any conditions in place, like you have to have this level of account investment $100,000? 1 Million?

 

Les Detterbeck: We are not aware that they have that. In fact the general idea, one of the main areas as I’ve mentioned, is the uninvested cash and Schwab, that we know so well, one of their business strategies to collect more deposits, for example. A portion of those deposits will likely be in cash and they can use and invest that cash to make money there, so I think it will be something they will look at obtaining deposits in whatever size those might be. 

 

Mike Switzer: And so Les, it sounds like that managing the cash portion of one’s portfolio might be becoming more important?

 

Les Detterbeck: Most definitely! Certain people may have cash; 5, 6, 7, or 10% of their portfolios, and that money is not working for them. So if the balance of their portfolio is earning 10% a year for example, but 10% of the portfolio is sitting in cash, their return is 9% under those circumstances. The result should be that investors should look at maintaining a small amount of cash, 1-2%, stay invested, stay with an appropriate asset allocation, and make sure your money is working for you.

 

Mike Switzer:  Well Les, as always, thank you so much for your time. 

 

Les Detterbeck: Thank you so much, Mike.

https://dwmgmt.com/

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The “Nastiest, Hardest Problem” in Retirement

Written by Les Detterbeck.

running out of money empty wallet

 

Running out of money in retirement is, according to Nobel Prize winning economist William Sharpe, the “nastiest, hardest problem” in retirement. Professor Sharpe has spent his career thinking about risk. His work on the Capital Asset Pricing Model and systemic risk produced in 1966 the Sharpe ratio, which measures risk-adjusted returns. Now, he’s tackling a much broader subject, extremely important to everyone, about possibly outliving your money in retirement. Similar to the Monte Carlo analysis that DWM uses to provide a probability of success for your financial plan, Dr. Sharpe created a computer program with 100,000 retirement-income scenarios to calculate the probability of not running out of money. He’s published a free 730 page e-book “Retirement Income Scenario Matrices.”

In short, there are three key variables that impact your retirement income; your spending, your investment returns and your eventual age (when your plan “ends.”)

The first variable, spending, is the one you can most control. Your spending before retirement will generally determine how much money you accumulate while working. What you don’t spend becomes savings/investments and these annual additions and their appreciation increase your investment portfolio overtime. Your spending in retirement will determine how much you need to withdraw from your investment pot. As your earnings during the working years increase, you need to save a larger percentage of your income in order to accumulate an investment pot at retirement time that will support the lifestyle you’ve created. Withdrawals from your investment portfolio during retirement typically should not exceed 4% of the total investment pot. It’s an easy calculation. For example, if you determine you will need to withdraw $100,000 from the portfolio in your first year of retirement, you’ll need a portfolio of $2.5 million.

Now let’s look at investment returns. No one can predict the future. Historically, we know there is a relationship between inflation, asset allocation and returns. Hypothetically, let’s assume that a diversified fixed income portfolio over the long term would produce a return of 1% above inflation. The return above inflation is called the “real return.” Equities, because of their higher risk, have earned an “equity risk premium” of roughly 3 to 7% above the inflation rate over the long term. Again, hypothetically, let’s assume that in the long-run equities earn 5% above inflation. Alternatives have a shorter historical track record but are designed to produce returns comparable to fixed income returns over time. Therefore, a portfolio with 50% fixed income holdings and 50% equity holdings might hypothetically produce a 3% real return over time. If long-term inflation is expected to be 2.5%, the nominal return could be expected to be 5.5%. A larger allocation to equities will likely produce a larger real return and a smaller (more defensive) allocation of equities would likely produce a smaller real return.

Lastly, longevity. Certainly, we can look at actuarial tables, such as those used by insurance companies and social security, to calculate life expectancy. These charts show that a male age 60 might be expected to live another 22 years; a female age 60, another 25 years. However, we suggest you not use these actuarial tables. Harvard Professor David Sinclair‘s “Lifespan- Why we Age- and Why We Don’t Have To” shows that the increases in technology and medicine are going to give those individuals who want to live a longer and healthier life the opportunity to do so. It is very possible that many of our clients and friends will live a healthy 100 plus years and younger generations, such as millennials and Gen Z, may live to 110 or longer. Accordingly, we suggest using an eventual age of at least 100 when doing your financial planning.

Dr. Sharpe’s final section in the book is about advice. He indicates that many people will need help. He outlines the “ideal financial advisor” and compares a “good financial advisor” to a “fine family doctor” who has “deep scientific knowledge, can assess client needs, habits and willpower and is able to provide scientific diagnoses and can communicate results to the client in simple terms so that the best treatments can be applied.” We like the analogy, we use it all the time.

Yes, running out of money in retirement would be a nasty, hard problem. It’s doesn’t have to be that way. You need a solid financial plan based on realistic values for investment returns and longevity. You also need to focus on spending and savings.   And, you might need some help from a “good financial advisor” that operates like a “fine family doctor,” a firm like DWM.

 

https://dwmgmt.com/

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