How to Give Away Money

Posted On March 5, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning /

It shouldn’t be difficult to give money away, but there are many ways we can help improve outcomes for families who have more than enough assets to last a lifetime. While estate planning is important, let’s make your money go further and have a greater impact by creating a giving plan for while you are alive.

If you are philanthropically inclined, have a favorite charity, or just want your children or grandchildren to benefit from your blessings, we can help you plan how to best distribute your money, minimize taxes, and safeguard your future. Here are seven tips to get started.

1) Put yourself first. It should go without saying that you should not give away a significant amount of your wealth if there is any question as to whether you have sufficient funds to last a lifetime. With increasing longevity and rising costs of healthcare, it is not difficult to burn through a million or two over a 25-year retirement.

We begin with a retirement analysis that includes your philanthropic goals, and evaluates the likelihood your funds will cover your lifetime. The more guaranteed sources of income you have – Social Security, Pensions, Annuities, etc. – the more we can distribute other capital without worries of loss of income. The purchase of an Annuity can give you the confidence to disburse cash during your lifetime without fear of market risk, sequence of returns, or longevity.

We generally do not recommend that retirees aim to impoverish themselves to qualify for Medicaid. States have a 60-month look-back period that determines if you have given away money. In some cases, Medicaid planning may make sense, but we prefer to plan for abundance.

2) Understand the Gift Tax Annual Exclusion. Each year, you can give $14,000 (2017) to any person under the gift tax exclusion. This is well known, but most people don’t understand that you do not necessarily have to pay a tax if you exceed this amount; rather you are required to file a gift tax return, and your gift (over $14,000) reduces your lifetime gift and estate tax exemption, currently $5.49 million per individual.

Although most estates will not exceed these levels, we do know that there are many politicians in Washington who want to lower the estate exemption. So it’s difficult to predict what the exemption will be in 10 or 20 years. The easiest approach is to stay under the $14,000 annual exclusion. Remember that a couple may, combined, give $28,000 to an individual or $56,000 to another couple, such as a daughter and son-in-law.

Additionally, there are medical and educational exceptions to the gift tax. You can pay college tuition or medical bills for anyone, and those amounts are not subject to a gift tax. The best approach is to pay those bills directly to the providers, and not write a check to the recipient, to avoid any implication of a gift.

3) Give now, rather than leave everything in your will. By making donations and gifts today, you can:

receive a tax deduction for charitable giving. If you’re in the 28% tax bracket, giving $10,000 a year now could save you $2,800 on your taxes.
see your gifts make a difference for your family, causes, and institutions immediately. Your gifts may be more helpful to your children today rather than when they are 55 or 65.
discover how those monies will be spent, and learn who will be responsible with a large sum of money. Leaving a large inheritance through a will sometimes backfires, causing reckless spending. Starting a gifting program early may identify these issues and provide planning and education, or identify the need for trustees who can help ensure money is used prudently.
avoid the fights, misunderstandings, and vastly expensive lawsuits that so frequently occur with large estates. Don’t cause future problems for your spouse or children by leaving them a mess or a distribution that creates anger and divisions. This is so common and yet most parents think it will never happen to their family.

4) Give appreciated securities to charity rather than cash. You can donate shares of stock, mutual funds, or other assets to charity and avoid paying capital gains tax on the gains on those investments. Besides avoiding capital gains, you also get to deduct the full value as a charitable donation, as eligible. The charity will sell the donated securities immediately, but not owe any taxes to Uncle Sam. It’s a great way to be more efficient in your charitable giving. It saves you taxes, which ultimately means you will have more money to donate and do good.

5) Leave money to charity through your IRA rather than through your will. If you leave a $500,000 IRA to an individual, they will owe income taxes on any distribution, which could eat up $200,000 of the account, or more, if you have state income taxes. If you leave the same IRA to a charity, they will pay no taxes on the account, and would receive the full $500,000 immediately.

Instead, leave a taxable brokerage account to your children; they will receive a step-up in cost basis on those investments and therefore will likely have little or no capital gains on the sale of those assets. Your kids will be so much better off receiving taxable assets rather than the same number of dollars from your IRA.

Change your mind? If you write a charity into your will, and later want to change the amount or name a different charity, you will have to get a whole new will. But if you use your IRA for your charitable bequests, all you have to do is update the IRA beneficiary form, which is quick and free.

6) 529 plan for Grandchildren. Want to help your grandchildren be successful in life, pursue their career goals, and not be saddled with crippling student loans? Consider 529 college savings plans, which will get assets out of your taxable estate and enable tax-free withdrawals for qualified higher educational expenses.

If one beneficiary does not need the account, you can change the beneficiary to another person. You can retain control of this money, while creating a legacy for the future success of your grandchildren, great-grandchildren, or beyond.

Given a choice of having money in a taxable account or a tax-free account, you’d probably prefer the tax-free option, so I am baffled why more wealthy grandparents are not using 529 plans. The younger your grandchildren are, the longer time you will receive tax-free growth. Start early.

7) Insurance. Retirees can protect their ability to fund their giving goals by purchasing long-term care insurance. This can help ensure they do not deplete their assets or have to choose between adequate care and fulfilling their other financial goals.

If you intend to leave $1 million to your alma mater, church, or other organization, it may make sense to purchase a permanent life insurance policy specifically for that goal. Then you can preserve your other assets for your spouse or children while guaranteeing your gift to that institution. Or you could do the reverse – give money annually to charity and leave life insurance to your children or a trust. Individuals receive life insurance proceeds tax-free.

We’ve only just scratched the surface of what is possible to enable you to most efficiently disburse your money and assets. There are a lot of pitfalls that could be avoided with rigorous planning. Many of these strategies will benefit you over a long period of time, which means you’d be smarter to start these at age 58 rather than 78. Don’t procrastinate! Living the Good Life means that abundance finds joy in seeing the benefits our giving can have on the world.

Do Top Performing Funds Persist?

Posted On February 27, 2017 By Scott Stratton, CFP(R), CFA In Portfolio Management /

How do you pick the funds for your 401(k)? I know a lot of people will look at the most recent performance chart and put their money into the funds with the best recent returns. After all, you’d want to be in the top funds, not the worst funds, right? You’d want to invest with the managers who have the most skill, based on their results.

We’ve all heard that “past performance is no guarantee of future results”, and yet our behavior often suggests that we actually believe the opposite: if a fund has out-performed for 1, 3, or 5 years, we believe it is due to manager skill and the fund is indeed more likely to continue to out-perform than other funds.

But is that true? Do better performing funds continue to stay at the top? We know the answer to this question, thanks to the people at S&P Dow Jones Indices, who twice a year publish their Persistence Scorecard (link).

Looking at the entire universe of actively managed mutual funds, they rank fund performance by quartiles, with the 1st quartile being the top performing 25% of funds, and the 4th quartile being the bottom 25% of funds.

Let’s consider the “Five Year Transition Matrix”, which ranks funds over five years and then follows how they perform in the subsequent five year period. For the most recent Persistence Scorecard, published in December 2016, this looks at funds’ five-year performance in September 2011, and then how they ranked five years later in September 2016.

Here’s how the top quartile of all domestic funds fared in the subsequent 5-year period:
20.09% remained in the top quartile
18.93% fell to the second quartile
20.56% fell to the third quartile
27.80% fell to the bottom quartile
10.75% were merged or liquidated, and did not exist five years later

The sad thing is that if you picked a fund in the top quartile, there was only a 20% chance that your fund remained in the top quartile for the next five years. But there was a more than 38% chance that your top performing fund became a worst performing fund or was shut down completely in the next five years.

Another interesting statistic: the percentage of large cap funds that stayed in the top half for five years in a row was 4.47%. If you simply did a coin flip, you’d expect this number to be 6.25%. The number of funds that stayed in the top half is slightly worse than random.

The Persistence Scorecard is a pretty big blow to the notion of picking a fund based on its past performance. And it’s significant evidence that we should not be making investment choices based on Morningstar ratings or advertisements touting funds which were top performers.

Should you do the opposite? I wish it was as simple as buying the bottom-performing funds, but they don’t fare any better. Funds in the bottom quartile had a similarly random distribution into the other three quartiles, but had a much higher chance of being merged or liquidated.

There are a couple of possible explanations for funds’ lack of persistence:

Styles can go out of favor; a “value” manager may out-perform in one period and not the following period. Hence a seemingly perpetual rotation of leaders.
Successful managers may attract large amounts of capital, making them less agile and less likely to out-perform.
There may be more randomness and luck to managers’ returns, rather than skill, than they would like to have us believe.

Unfortunately, the S&P data shows that for whatever reason, there is little evidence for persistence. Investors need a more sophisticated investment approach than picking the funds which had the best performance. The Persistence Scorecard highlights why performance chasing doesn’t work for investors: yesterday’s winners are often tomorrow’s losers.

What to do then? We focus on creating a target asset allocation, using a core of low-cost, tax efficient index ETFs and a satellite component of assets with attractive fundamentals. What we don’t do is change funds every year because another fund performed better than ours. That kind of activity has the potential for being highly damaging to your long-term returns.

I hope you will take the time to read the Persistence Scorecard. It will give you actual data to understand better why we say past performance is no guarantee of future results.

Is Your Pension Insured?

Posted On February 19, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning /

Pensions offer what may be the ideal source of retirement income. If you are fortunate enough to be vested into a Pension Plan, consider yourself lucky. You should ask, though, What would happen to your pension if the plan were to terminate or fail?

If you are a participant in a private sector pension, check if your plan is covered by the Pension Benefit Guaranty Corporation here. The PBGC is a federal agency that was chartered to protect pension plan participants; it’s funded through required employer contributions and receives no tax dollars.

Even if your pension is insured, there are limits on the amount of coverage available through the PBGC. If a plan terminates and you are vested, but not yet retired and receiving benefits, you would be covered only for your currently vested benefits and would not receive any further credit for future work.

This is important: you need to understand whether your Pension Estimate is based on past contributions, or an estimate based on the assumption you are going to work to age 65 or other future date. The PBGC will only cover vested benefits and a plan termination will halt the accrual of future benefits.

If you are retired and already receiving benefits, the PBGC has limits on the monthly benefit they cover. If a plan terminates and is taken over by the PBGC, you could see your monthly benefit drop by a significant amount.

The limit of benefits available through the PBGC depends on four things:

Whether your plan was a single-employer plan or a mutliemployer plan.
Your age at retirement.
The number of years you were a participant in the plan.
Whether your benefit is a single-life annuity or a joint and survivor benefit.

For single-employer plans, the limit of the PBGC coverage is capped based on your age and the year the plan was terminated. For example, if you are 65 years old and your plan were to terminate in 2017, your PBGC benefit would be capped to $5,369.32 a month for a single-life benefit or $4,832.39 for a Joint and 50% Survivor Annuity. Link: PBGC Monthly Maximum Tables.

The PBGC benefits for single-employer plans are generally quite strong. However, if your pension benefit is above the monthly guaranty amount, and the plan were to fail, your benefit would be reduced to the PBGC maximum.

This can happen! Years ago, I met an airline pilot who retired at the mandatory age of 60 and started his six-figure pension thinking he was set for life. After 9/11, his former employer went bankrupt and his pension was slashed to around $3,000 a month. They hadn’t saved very well because they were planning on the generous pension. The reduction to his monthly pension check was devastating.

If your pension offers a lump-sum payout upon retirement, we can determine the limit of your PBGC coverage and investigate the funded status of your pension plan. If your plan is in critical status, or your company has a credit rating below investment grade, you will seriously want to consider the lump sum, if your payment exceeds the limits of PBGC coverage.

The PBGC coverage for multiemployer pension plans is unfortunately much, much lower than for single-employer plans. If you are a participant in a multiemployer plan, your maximum coverage under the PBGC is based on the number of years of service. This is regardless of how your plan may calculate benefits.

PBGC formula for multiemployer plans:
100% of the first $11 of monthly benefits,
Plus 75% of the next $33 of monthly benefits,
Times the number of years of service.

The maximum monthly benefit under the PBGC then is $35.75 times the number of credited years of service. For example, if you were a participant for 30 years, your maximum benefit would be $1072.50 a month, or $12,870 a year. And in order to get $35.75 from the PBGC, you’d have to be receiving at least $44 from the pension. In other words, to get the PBGC benefit of $12,870 a year, your pension benefit amount would need to be at least $15,840.

The amounts for Multiemployer plans are not indexed for inflation and do not receive Cost of Living Adjustments. Link: Multiemployer Benefit Guarantees.

The PBGC only covers private sector pension plans. Participants in a federal, state, or municipal government plan do not have any separate insurance or guaranty. And there are significant problems with funding in municipal pension plans. Here in Dallas, there is a billion dollar short-fall in the Police and Fire pension plan. Recent problems have prompted a stampede for the exits, as members retire early so they can take a lump sum payment. All of which is further driving the plan over the edge.

There are lots of municipal pension plans that are ticking time-bombs. It’s not clear to me that the public has the willingness to accept increased taxes so we can cover generous employee retirement plans. It seems inevitable that there will be some plans which will be forced to reduce the benefits they have promised.

All of which means that investors need to have multiple legs on their retirement plan: pension, Social Security, investment accounts including IRAs, and other sources of income. If you try to have a plan that rests entirely on one leg, you are potentially asking for trouble.

Can You Be Too Conservative?

Posted On February 13, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

As you approach retirement, you are probably thinking quite a bit about making your investment portfolio more conservative. We generally recommend that investors start dialing back their risk five years before retirement.

However, it is possible to be too conservative. Retirement is not an single date, but a long period of sustained withdrawals. We typically think in terms of a 30-year time horizon, which is not unrealistic for a 60 to 65-year old couple, given increasing longevity today.

The old rule of thumb was to subtract your age from 100 to determine your allocation to stocks. For example, a 65-year old would have 35% in stocks and 65% in bonds. Unfortunately, this old rule of thumb doesn’t work for today’s longer life expectancies.

Researchers analyzing the “4% rule” used for retirement income planning, typically find that optimal allocation for surviving a 30-year distribution period has been roughly 50 to 60 percent stocks. For most new retirees, we generally suggest dialing back only to 50/50 or 60/40 in recognition that the portfolio still needs to grow.

We still need growth in a retirement portfolio to help you preserve purchasing power as inflation erodes the value of your money. At 3% inflation, your cost of living will double every 24 years. So if you are retiring today and thinking that you just need $40,000 a year, you should be expecting that need to increase to $80,000 or more, to maintain your standard of living.

Another reason retirees should not be overly conservative: interest rates are very low today. Bonds had a much better return over the past 30 years than they will over the next 30 years. That’s not even a prediction, it’s just a fact. When we use projected returns rather than historical returns in our Monte Carlo simulations, it suggests that bond-heavy allocations are not as likely to succeed as they were for previous retirees. See: What Do Low Interest Rates Mean For Your Retirement?

The other side of today’s low interest rates is that some investors are reaching for yield and investing in much lower-quality junk bonds. While retirees often focus heavily on income producing investments, financial planners and academic researchers prefer a “total return” approach, looking at both income and capital gains.

We don’t want to take high risks with the bond portion of our portfolios, because we want bonds to provide stability in the years when the stock market is down. High Yield bonds have a high correlation to equities and can have significant drops at exactly the same time as equities.

We manage to a specific, target asset allocation and rebalance annually to stay at that level of risk. That gets our focus away from stock picking and looking at the primary source of risk: your overall asset allocation of stocks, bonds, and other investments. While no one can predict the future, a disciplined approach can help avoid mistakes that will compound your losses when market volatility does occur.

Diversification and Regret

Posted On February 6, 2017 By Scott Stratton, CFP(R), CFA In Behavioral Finance, Portfolio Management / 1 Comment

Diversification is one of the key principles of portfolio management. It can reduce idiosyncratic risks of individual stocks or sectors and can give a smoother performance trajectory, or as financial analysts prefer to say, a “superior risk-adjusted return” over time. Everyone sees the wisdom of not putting all your eggs in one basket, but the reality is that diversification can sometimes be frustrating, too.

Being diversified means holding many different types of investments: stocks and bonds, domestic and international stocks, large cap and small cap, traditional and alternative assets. Not all of those assets are going to perform well at the same time. This leads to a behavioral phenomenon called Tracking Error Regret, which some investors may be feeling today.

When their portfolio lags a popular benchmark, such as the Dow Jones Industrials or the S&P 500, Investors often regret being diversified and think that they should get out of their poorly performing funds and concentrate in those funds which have done better. (Learn about the benchmarks we use here.)

It’s understandable to want to boost performance, but we have to remember that past performance is no guarantee of future results. Many people receive a snapshot from their 401(k) listing their available funds with columns showing annualized performance. Consider these two funds:

	3-year	5-year	10-year	Expense Ratio
S&P 500 ETF (SPY)	11.10%	13.55%	6.88%	0.10%
Emerging Markets ETF (VWO)	2.83%	-0.07%	2.24%	0.15%

Source: Morningstar, as of 2/06/2017

Looking at the performance, there is a clear hands-down winner, right? And if you have owned the Emerging Markets fund, wouldn’t you want to switch to the “better” fund?

These types of charts are so dangerous to investors because they reinforce Performance Chasing and for diversified investors, cause Tracking Error Regret. Instead of looking backwards at what worked over the past 10 years, let’s look at the Fundamentals, at how much these stocks cost today. The same two funds:

	Price/Earnings	Price/Book	Dividend Yield	Cash Flow Growth
S&P 500 ETF (SPY)	18.66	2.65	2.21%	0.33%
Emerging Markets ETF (VWO)	12.34	1.51	3.37%	5.09%

Source: Morningstar, as of 2/06/2017

Now this chart tells a very different story. Emerging Market Stocks (EM) cost about one-third less than US stocks, based on earnings or book value. EM has a 50% higher dividend yield and these companies are growing their cash flow by 5% a year, versus only 0.33% a year for US companies.

I look at the fundamentals when determining portfolio weightings, not past performance. If you only looked at the performance chart, you’d miss seeing that EM stocks are cheap today and US stocks are more expensive. That is no guarantee that EM will beat the S&P 500 over the next 12 months, but it is a pretty good reason to stay diversified and not think that today’s winners are bound to continue their streak forever.

Performance chasing often means buying something which has become expensive, frequently near the top. That’s why I almost never recommend sector funds or single country funds (think Biotech or Korea); the investment decision is too often based on recent performance and those types of funds tend to make us less diversified rather than more diversified.

Staying diversified means that you will own some positions which are not performing as well as others in your portfolio. When the S&P 500 is having a great year, a diversified portfolio often lags that benchmark. But, when the S&P 500 is down 37% like it was in 2008, you may be glad that you own some bonds and other assets.

We use broadly diversified ETFs and mutual funds, with a willingness to rebalance and buy those positions when they are down. We have a value bent to our weightings and are willing to own assets like Emerging Markets, even if they haven’t been among the top performers in recent years. Staying diversified and focusing on the long-term plan means that you have to ignore Tracking Error Regret and Performance Chasing. Just remember that you can’t drive a car forward by looking in the rear-view mirror.

Don’t Miss Out on a Roth IRA

Posted On January 25, 2017 By Scott Stratton, CFP(R), CFA In Retirement Planning /

I am a big fan of the Roth IRA and think it is an underutilized tool for investors. There are many people who are eligible for a Roth and are not participating. If you have a chance to put money into an account where it grows tax-free, why would you not want to contribute?

If you have a 401(k) at work, your first goal should be to maximize contributions to that account. For 2017, you can invest $18,000 into a 401(k), or $24,000 if you are age 50 or older. Your 401(k) contribution is tax deductible.

But whether or not you max out your 401(k) contributions, many families are missing the opportunity to also contribute to a Roth IRA. YES, you can be eligible for a Roth even if you participate in a retirement plan at work. More people should be trying to do both. Even if you do invest $18,000 a year into a 401(k), who says that will be enough to retire?

For the 2016 tax year, you can contribute $5,500 to a Roth IRA if your modified adjusted gross income (MAGI) is below $117,000 (single) or $184,000 (married). If you are over age 50, you can contribute $6,500. Contributions must be made by April 15, 2017 to count as a 2016 contribution.

Many investors are contributing to their 401(k) plan and say they don’t have additional income to contribute to an IRA. But if you have a taxable investment account, you could use money from that account to fund your Roth. If you aren’t planning to touch that money, don’t leave it in a taxable account, put it into an account that grows tax-free!

Here are a couple of important points to know about the Roth IRA:

With a Roth IRA, if you need to access your money before age 59 1/2, you can withdraw your principal (your original investment amount) without taxes or penalty. It is only if you withdraw earnings, would you be subject to a penalty and taxes before age 59 1/2, and even then only on the earnings portion.
If you’re married, as long as your income is below the $184,000 threshold, both or either spouse can contribute to the Roth IRA. It doesn’t matter if one spouse doesn’t work outside the home, you’re both eligible.
If you make too much to contribute to a Roth IRA, AND you do not have any Traditional IRAs, you may be a candidate to make a “Back-door Roth Contribution”. Read how here.
For investors who are over age 70 1/2, you are allowed to contribute to a Roth IRA but not a Traditional IRA. Again, put your money into the tax-free account if you are eligible!

The biggest problem with the Roth IRA is that the contribution limit is so low. When you miss a year of contributions, you can’t get that opportunity back later. So don’t miss out. If you are eligible for a Roth for 2016 and haven’t funded it, don’t delay. Call me today.

Gifts, Rights, and Duties

Posted On January 23, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning /

What does Good Life Wealth Management stand for? Financial Planning is both an Art and Science, and while we dutifully toil on numbers, it is all in service to loftier goals and ambitions. Investment strategy is the one of the outcomes of our Financial Planning process, but it is certainly not the most important part.

We want to begin with an understanding and appreciation of three things in your life: Gifts, Rights, and Duties. When these are clear in your mind, your relationship with money has purpose.

Gifts certainly include inherited wealth, but we should all recognize how fortunate we truly are to be alive in 2017. I live in a vibrant city in the fastest growing state in the most prosperous country in the world. I was blessed to be born in a good zip code and attend great schools with the support and love of a wonderful family.

I attended two private universities, institutions which did not just spring from the ground, but were gifts to the future from people who were incredibly generous, insightful, and industrious. And some 175 years later, many thousands have benefited from those university founders.

Today, we have the gift of modern medicine, technology, cars, and the internet. And our wealth is invariably derived from all these gifts. It may still take a lot of our own blood, sweat, and tears, but no one in America is 100 percent self-made.

Rights include our constitutional protections of life, liberty, and private property. The ability to achieve financial freedom is an impossible dream – still – in many parts of the world. And while it is easy for me as a white male to take these rights for granted, for many other Americans, those rights did not exist in the not so distant past.

Duty is a recognition of our moral obligations. We have a duty to protect and provide for our spouse, children, and family. We have a duty to our self to plan for retirement and a secure future. We have a duty, I think, to leave the world a better place, and to help the next generation, just as our predecessors built schools and industries and fought for the rights which we enjoy today.

My vision of financial planning does not begin with choosing the “right” mutual fund or ETF. It is rather a holistic strategy to create a roadmap to your goals, as determined by your Gifts, Rights, and Duties.

– If we are to value our money, we must begin with the humility to recognize that most of our success is a gift. We won the life lottery and that 90% of who we are was luck and 10% was through our efforts. (Even intelligence, good health, and a strong work ethic are gifts, not something we earned!)

– We should not take our rights for granted. While there are fundamental rights, financial planning is to make sure you navigate your other smaller rights, such as to tax deductions, a 401(k), a Roth IRA, or Estate Plan. We want to make sure our clients take advantage of the benefits which are available to them.

– Duty to others means that we can take care of ourselves first and foremost. But it also means that we have prepared for the unexpected. That’s why I am perplexed by young families who want my help with investments, but want to skip over estate planning, college funding, or life insurance. That’s not fulfilling your duty as a parent and spouse.

There are two types of happiness: pleasure and fulfillment. Pleasure is easy: it is going to the beach and doing nothing, enjoying a glass of wine, or celebrating with friends. It is basically hedonistic. While we all need to rest and recharge from time to time, many retirees become bored after three months of golfing every day. Pleasure is not the highest form of satisfaction.

Fulfillment is having a purpose and making a difference. In Maslov’s hierarchy of needs, the highest need is achieving self-actualization, or realizing your full potential. The Good Life, is not about seeking pleasure, but finding fulfillment and purpose. While our financial planning software can crunch the numbers, our conversations are really about How do we use our gifts? What are our rights? How can we best fulfill our duty to others and make a difference? If that is the starting point for our relationship with money, we can have a more meaningful perspective on our goals, values, and impact on the world.

Reducing the Costs of Healthcare

Posted On January 16, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning /

We may soon see the repeal or defunding of the Affordable Care Act (ACA or “Obamacare”). No matter your political perspective, there is no doubt that rising costs of health care are a significant financial problem for many American families. These costs threaten our ability to save and accumulate, as well as to secure our retirement. In our financial plans, we calculate a higher rate of inflation for health care costs than other living expenses, but cost increases for those using individual plans on the ACA exchange have grown much faster than the overall 5-6% rate nationwide.

As a society, we are going to need to curb these costs while making sure all Americans have access to care. What concerns me today is that the new administration is pushing forward with the repeal while replacement plans remain vague and uncertain. We know what they are against, but what is the best solution?

Here’s a Financial Planner’s perspective on how America might reduce the cost of healthcare. My hope is that we can have a more educated and thoughtful conversation about this complex subject.

1) Covering Pre-existing Conditions
Requiring insurance companies to accept new participants and cover their “pre-existing conditions” is a fair and compassionate move from a consumer protection standpoint. But it’s a major change to the insurance model.

It means that insurers have to worry about self-selection bias, where people who are sick will sign up, but people who are healthy decide to forgo coverage. The more insurance premiums go up, the more self-selection occurs. That’s why the ACA included a provision to penalize people who do not have coverage, to create a financial incentive for everyone to participate.

The penalty is 2.5% of your income, with a floor of $695 and a ceiling of $2,085 per adult for 2016 and 2017. The ACA forces a painful decision between paying a penalty versus spending thousands more on coverage that has a high deductible and may offer little benefit unless you have a catastrophic illness or injury.

Unfortunately, requiring insurance companies to accept pre-existing conditions is like requiring auto insurers to cover your car after you’ve already had an accident. To afford covering pre-existing conditions, we need all Americans to participate in health insurance and not let healthy folks opt out. That’s why covering pre-existing conditions combined with rising costs is causing self-selection: people who are healthy are choosing to forgo coverage or cannot afford it.

Similarly, allowing young adults to stay on their parent’s coverage through age 26 under the ACA sounded like a great idea to keep those children insured. Unfortunately, it removed healthy young people from the pool, which made costs more expensive for everyone else who needed coverage through the exchange.

In this regards, the ACA coverage of pre-existing conditions has increased costs more than anticipated. Maybe the best solution would be a single-payer, government health plan, like in many European countries. Our tendency is to reject these plans out of hand, but maybe we should look more carefully at their costs, benefits, and features. We cannot afford to think we have nothing to learn from the rest of developed world.

2) Cost of insurance versus healthcare
Insurance companies have a mandate legally requiring a large, fixed percentage of their premiums go directly to medical costs and not to overhead. Insurance premiums have not been rising because of greedy insurance companies making profits. In fact, the opposite, companies are leaving the ACA exchange after losing tens or hundreds of millions of dollars. Insurance costs are going up because the costs of healthcare are skyrocketing.

What we need to be doing is looking at ways to reduce healthcare costs; insurance just passes through those costs to consumers. The US spends 50% to 100% more than other developed countries per person. We spent 17.8% of GDP on healthcare in 2015, the highest in the world. Universal healthcare programs in Europe, Canada, and elsewhere costs much less, no more than 10-11% of GDP.

Why do we spend so much on healthcare in the US?

US patients may pay 3-4 times as much for medicines than in Mexico or Canada. This is frequently for drugs that were invented or manufactured in the US. We need to examine why the free market isn’t pushing those costs down.
The threat of lawsuits, and magnitude of awards, hurts Americans two ways. Directly, the cost of malpractice insurance is ultimately passed on to consumers. Indirectly, doctors may order additional tests, procedures, or medications that may be unnecessary or more costly than other alternatives, because of the threat of malpractice, rather than medical need.
To some extent, private insurance subsidizes hospitals who receive low reimbursements from Medicare and from uninsured patients who do not pay. Your insurance company is likely paying a hospital much more than they would receive from Medicare. Many public hospitals, like Parkland in Dallas, serve the 15% of Americans who are uninsured. And when the uninsured have a $50,000 hospital bill, that amount will seldom be collected.
Patients often do not have any incentive to reduce costs or share in expenses. Once your deductible and out-of-pocket is met, for example, the patient’s cost of a $15,000 procedure is the same as a $50,000 procedure. Which procedure is a doctor or hospital more likely to recommend if you have good insurance?
We spend a significant amount of our Medicare and Medicaid budget on caring for people in their last 3-6 months. Dying is a natural process, but modern medicine often assumes we should prolong life for as long as possible regardless of the quality of that life. I am glad that we do not tie end-of-life decisions to cost, but perhaps it would be both sensible and compassionate to focus on comfort rather heroic procedures for an elderly patient with significant health issues. Being hooked up to machines and tubes may keep you alive, but it is not the same as living.
Many health issues such as heart disease, blood pressure, and diabetes are exacerbated by the obesity problem in the US. An education on smarter food choices and more exercise should start at an early age. Prevention is less expensive.

We cannot expect the cost of health insurance to decrease unless we address the cost of healthcare. We need to encourage everyone to have health insurance coverage, because the very nature of insurance is spreading out risks so that the pooled money covers claims for those who need it. We are keeping our fingers crossed that whatever plan Washington develops, more people can be insured and that we look long-term to keep healthcare costs better under control.

9 Things to Know About GLWM

Posted On January 7, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning /

There are a lot of ways to get financial advice today and you want to know that you’ve made the right choice. How do you decide? We invite your questions and scrutiny and would love to get to know you. That’s the beginning of a trusted advisory relationship.

While you can and should read our disclosure documents and “Form ADV Part 2”, to really get to know Good Life Wealth Management, you need more personal insights. Here are 9 things that will help you better understand who we are and how we help clients like you.

1) The Key Benefit to You
When my clients see their goals defined in milestones and specific actions, they feel confident in their future. Together, we craft a financial plan that is more than just an investment strategy, but a comprehensive road map to accomplish your goals and avoid the hidden pitfalls which could derail your success. That begins with understanding you, and helping refine your goals from intangible ideas to specific, measurable outcomes.

2) Pricing Our Services
We provide objective advice for your best interests, and that’s why we adopted a fee model rather than a commission approach based on transactions. Other advisors have fee structures that are complicated and opaque. We offer two programs with prices that are simple, transparent, and fair:
– Wealth Builder Program (under $250,000 in assets) costs $200 a month.
– Premier Wealth Management (over $250,000) costs 1%, billed quarterly.

3) Value to You
We provide value to our clients’ finances in many tangible ways, such as reducing portfolio taxes, saving on investment expenses, and implementing tax strategies. We also help avoid pitfalls and unforeseen problems in many areas beyond the obvious portfolio risks, such as being uninsured or under-insured, having a poor estate plan, or not having an efficient college savings strategy.

You could tackle these issues yourself if you have the interest and inclination, but our clients value their free time and prefer to delegate to experts. They enjoy peace of mind knowing that are receiving objective advice that is based on experience, insight, and professional training. We can help couples achieve their financial goals with less friction and improved mutual understanding.

4) Our Practices
As we get to know you and your family and develop your custom plan, you will see how our services directly connect to your goals and concerns. Our clients feel secure with our consistent approach and time-tested methods that are based on evidence and academic rigor, and not sentiment, fad, or conjecture. We take our Fiduciary Oath very seriously, which is why our clients have placed such deep trust in our advice.

5) Why I’m an Advisor
None of my grandparents had any wealth, but they instilled in my parents the values of a strong work ethic and sense of personal responsibility. Through their education, hard work, frugality, and investing discipline, my parents became financially successful and independent. I became an Advisor because I believe all Americans have an opportunity to achieve the American Dream. My passion is educating others on how to make that dream a reality.

6) Community Involvement
Outside of financial planning, I have two long-standing interests. I’m a classically trained musician and perform as Principal Trombone of the Garland, Las Colinas, and Arlington orchestras. Additionally, I play frequently for area church services, and my brass quintet gives approximately 50 concerts a year at area nursing homes through Texas Winds.

My other interest is in animal welfare and ending the pet overpopulation problem here in America. I’ve been an active volunteer at Operation Kindness for 15 years. We frequently foster mom dogs and their puppies, which you can follow on The Foster Dog Chronicles facebook page. I also am proud to serve as a Board Member and Treasurer for Artists For Animals, a 501(c)3 non-profit group that raises money for humane rescue and education.

Good Life Wealth Management donates at least 10% of its pre-tax profits to charity annually. And there’s nothing I’d love more than to increase our giving each year!

7) Qualifications
My expertise sits right in the center of what you need in creating a family financial plan. I’ve developed similar plans for more than 100 clients at my previous firms, so it’s rare that an issue comes up that I haven’t already encountered. I hold two of the most comprehensive designations in finance: Certified Financial Planner (CFP), and Chartered Financial Analyst (CFA). But I didn’t get these just to put up on the wall – my whole life has been dedicated to the pursuit of educational excellence. I graduated first in my high school class of 330 and received my doctorate at the age of 25. My mantra is to never stop learning. The question I ask everyday is how can this information benefit my clients? That’s the prism through how I spend my time.

8) How I Built My Company
Simple – I look at how I’d want to be treated as a client. My family are the largest clients of Good Life Wealth Management, and I personally invest in our Growth Model (70/30). I share this because I know some advisors who recommend one thing to clients and then do something different with their own money, or who don’t have any investments at all. I aim to provide every client with the same care, detail, and diligence as if it were my own money. The Golden Rule isn’t new, but many businesses don’t think this way.

9) Our Business Objectives
Good Life Wealth Management is a small, family practice, where I know every client individually. Our capacity will be only 75 clients and once I reach that level, we will establish a waiting list for new clients. Why? Because we refuse to compromise our level of personal service to you for the sake of growth.

My goal is to be a trusted advisor with each client for life. Our clients share our patient philosophy and appreciate our disciplined approach.

Are we the right fit for you? I don’t know, but I do believe that no one else will care more about your financial life than we will. I am blessed by the trust my clients have placed in me to serve them and love the challenge of working on each unique plan. If you’ve read this far, thank you. I’d love to have you take the next step and begin a conversation about how we can accomplish your goals together. Just send me a message, or call me at 214-478-3398 to get started.

Why We’re Adding Alternatives for 2017

Posted On January 1, 2017 By Scott Stratton, CFP(R), CFA In Portfolio Management /

For 2017, we are adding a 10% allocation to Alternatives to our Premier Wealth Management model portfolios (those over $250,000). The 10% allocation will be taken pro rata from both equity and fixed income categories. A 60/40 portfolio, for example, will have 6% taken from equities and 4% from fixed income, for a new allocation that is 54% Equities, 36% Fixed, and 10% Alternatives. We made some trades in December during our year-end tax reviews, and will make the rest of the trades in the next week.

Why Alternatives? The goal of Alternatives is to provide a positive return without being tied to the stock market or interest rates. Our aim is to diversify your portfolio further with a source of uncorrelated returns. Ideally, this can provide a smoother ride and dampen our portfolio volatility. (See Morningstar on Alternatives: When, Why, and Which Ones?)

That’s the goal, but investing in Alternatives poses its own set of unique challenges. Unlike stocks and bonds, there are many types of “Alternative” investment strategies. Alternatives is a catch-all category that encompasses everything from Real Estate, Gold, Commodities, Futures, Long/Short Equity, Arbitrage, to any other Hedge Fund process. And then there are multi-strategy funds which may combine four, five, or more unrelated strategies or managers.

Even within one category, some funds may do quite well and other funds poorly in the same year. That is a much smaller risk in equities, where, for example, most large cap funds are going to have a positive return when the S&P 500 Index is up and a negative return when the Index is down. In Alternatives, there is a wide dispersion of returns even within a single category.

Our view of Alternatives, then, is that it is a satellite holding that we want to employ tactically, rather than a core strategy that we hold at all times. We think the environment of 2017 could be just such a time to want to include Alternatives.

We enter the year with equities at or near their all-time highs and valuations somewhat above their historical averages. 2016 gave us a very nice return in US stocks: 9.5% in the S&P 500 and 19.4% in the small cap Russell 2000. The maxim that “the market climbs a wall of worry” definitely was the case in 2016. While the market confounds expectations frequently, valuations, not sentiment, are our guide to how we weight segments in our allocation. Valuations today, both relative and absolute, suggest diversifying from US stocks.

In fixed income, we saw a remarkable summer low in interest rates, with the 10-Year Treasury trading at a 1.6% yield. The second half of the year was painful for bondholders, with interest rates rising a full 1% on the 10-Year. It was such a dramatic move that we think it would be a mistake to think that interest rates can continue to increase at a linear projection of the past six months. Still, we may have just seen the end of the 30 year Bull market in bonds and that suggests expected returns going forward will be both lower and more volatile than historic returns.

Our goal within each portfolio is not only to grow your wealth, but to protect and preserve what you already have. Our modelling of adding the 10% allocation to Alternatives suggests that we can potentially reduce portfolio volatility and improve the risk/reward characteristics of our models. While that is no guarantee that returns will be positive in 2017, I want you to know that we are constantly monitoring, studying, and looking for quantifiable ways to better manage your money.

When would you not want Alternatives? If you went back to the lows of March 2009, the start of the current Bull Market, adding Alternatives would have held back your performance. They aren’t aiming to generate double digit returns, which you can sometimes get in equities on a snap-back like 2009. But that’s not where we are in January 2017. Today, with US stocks and bonds looking a bit expensive, we are looking to strengthen our defensive. (ICYMI, our Four Investment Themes for 2017)

As always, I’m happy to chat about your goals, the state of the market, or what we do in our investment management process. Give me a call or drop me a note. One of the reasons why we write about investing in the blog, is to communicate to everyone at the same time and then when we do have our next meeting or call, we can focus 100% on you and not the market.