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.

Forget 2017, Think Longer

Posted On December 26, 2016 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

A few weeks ago, I brought my car to the dealership for some routine maintenance and they gave me a brand new 2017 model as a loaner for the day. As part of the car’s “infotainment system”, you could enter stock tickers and get price quotes right there on the screen of the car.

Aside from the obvious danger of distracted driving, does the outcome of my retirement plan actually hinge on having this information available 24-7? Will I be wealthier if make trades from my phone while stuck in rush-hour traffic?

Unfortunately, increasing our access to information does not guarantee we can use that information profitably. In fact, I believe that the more we focus on short-term issues, the more we endanger the long-term outcomes. Be careful of missing the forest for the trees.

The field of behavioral finance has identified many seemingly innate, but irrational, behaviors which can be hazardous to our wealth. The more information we have, the more frequently we are compelled to “do something” in terms of our investment allocation. Unfortunately, the more investors trade, the worse they do, on average, because of these behavioral tendencies.

Here are four behavioral patterns which can become a problem for all investors:

1) Overconfidence
The more information we have, the more strongly we believe that we can predict the outcome. Closely related is confirmation bias, which is where we place more weight on information which supports our existing point of view, and tend to ignore evidence which is contrary.

2) Disposition Effect
Many investors are willing to sell their winning trades but are very reluctant to sell their losing positions. “The loss isn’t real until you sell – it has to come back eventually!” What we should do is to ignore what we paid for a position and look objectively at how we expect it to perform going forward. If there are better opportunities elsewhere, we should not hold on to losers.

3) Home Bias
Investors prefer to invest in domestic companies, when left to their own devices. They miss the benefits of investing globally. See How a Benchmark Can Reduce Home Bias.

4) Naive Diversification
If a 401(k) plan offers five choices, many investors will simply put 20% into each of the five funds, regardless of category or their own risk tolerance. I’ve also seen portfolios that have multiple holdings in the same category, most often US Large Cap. When the market drops, having seven large cap funds will not offer any more defense than having one fund.

I mention these behavioral faults because you are inevitably going to see many articles over the next two weeks predicting what is likely to occur in the year ahead. Reading these is a waste of your time. The reality is that no one has a crystal ball and can predict the future.

Forecasters’ abilities to predict the stock market has been so poor and inconsistent, that if you actually look at a large number of past predictions, you will immediately recognize that their investment value is non-existent. There is often a great deal of group think and a Bullish bias from firms who get paid to manage investments. Others seem to be permanently Bearish, but still get press coverage in spite of being wrong for years at a time.

The good news is that you don’t have to know what 2017 has in store to accomplish your long-term goals. We need to think bigger than just one year at a time, so here’s a reminder of what we do:

Create a financial plan to lay out the steps to achieve your long-term goals.
Invest in a disciplined, diversified asset allocation based on your needs, risk tolerance, and risk capacity.
Pay attention to risks, taxes, and our returns.
Monitor, adjust, and rebalance to stay on course.

The more we allow short-term noise to dictate our long-term investment strategy, the greater risk we are to our own success. If your car offers stock quotes, may I suggest you instead set it to weather or sports? Your portfolio will thank you for it.

The Boomer’s Guide to Surviving a Lay-Off

Posted On December 19, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning, Retirement Planning /

Most people in their fifties and sixties have a very specific vision of their retirement. But if you find yourself unexpectedly getting laid off at age 55, or 63, you are probably feeling extremely stressed about your plans being thrown off course. The reality is that many people retire earlier than they had originally intended due to being laid off, or because of health or family reasons.

We build detailed retirement analysis packages looking at when you can retire, how much you can spend, and how long your money will last. As much science and math goes into those calculations, we should recognize that things don’t always go as planned and that we may have to adjust our plans. If you find yourself unexpectedly out of a job, I want you to know that things will be okay and we can help give you a more informed dissection of what to do next. Here are five steps to get started:

1) Address immediate needs

Figure out your health insurance. COBRA may be very expensive, so take the time to compare COBRA to an individual plan. A lay-off is a qualifying event, so you may be eligible to join your spouse’s health plan without waiting until the next open enrollment period. Avoid gaps in your coverage. Researching your health insurance will likely take more hours than you want to spend, but it’s important to get it right.
Please note that if you are over 65 and did not sign up for Medicare because you had employer group coverage, that post-employment, you have an 8-month Special Enrollment Period to sign up for Medicare without incurring the lifetime surcharge. COBRA is not considered group coverage and will not delay the start of this 8-month window.
File for unemployment benefits so you can receive benefits as soon as you are eligible. You should never quit a job in advance of a layoff; doing so could jeopardize your eligibility for unemployment.

2) Create your household budget

Are you burning cash? How much money will you have left in 6, 12, or 24 months? Making a budget is how you will know. Uncertainty creates fear; planning creates clarity.
Can you live off one spouse’s income? Can you cut expenses? This is often not that difficult to do, but we resent it, because it was unplanned and forced upon us against our wishes. But we cannot stick our heads in the sand and ignore a new financial reality. If you are going to make changes, make them without delay.

3) Start your job search immediately

You have to document weekly job search activity to receive unemployment benefits, so you might as well get started!
It may take you much longer than expected to get your next job. Some of this may unfortunately be due to age discrimination, so I would not discount that consideration. However, many veteran employees have a skill set that was unique to one employer. You may need other skills for what the marketplace requires today. Lay-offs typically occur in jobs where there is a reduction in demand. Your next job may need to be very different.
Be careful of anchoring to your past income. If you are holding out that your next job will be the same work at the same pay as your old job, that may not be a realistic expectation.
Polish your resume and application; consider getting professional help with these materials. Most applications are done online today, so your words represent you. Practice your interview skills and be prepared to answer any question. Network with colleagues and meet with someone every week to chat about your next steps.

4) Consider retiring early

Maybe you are 63 and were planning to retire at 65. The layoff could be a blessing in disguise and will allow you to retire now. Make your budget and let’s take a look at your retirement plan. If you can afford it, why not go for it?
You may realize that you don’t enjoy your work as much as you used to and have other interests now. If you used to make $100,000, you might not be willing to work 50 hours a week for $65,000. Or you may decide that starting a new career isn’t going to be very fulfilling, if all you are doing is marking time for 2-3 years. Consider all your options.

5) Delay spending your nest egg

Can you hold off on withdrawals for a few years and get by on a spouse’s income or from existing cash and unemployment benefits? Postponing withdrawals by even two or three years can have a significant impact on the longevity of your portfolio.
Try to avoid dipping into your IRA and 401(k) at age 60, if you were not planning to touch those monies until age 66. The best withdrawal strategy remains to wait until age 70 1/2 and then take only your Required Minimum Distributions.
Lay-offs are one of the most common reasons people start Social Security benefits early. If you have longevity concerns – and most people should – you want to delay those benefits for as long as you can, even to age 70. You get an 8% increase in benefits by delaying for each year past full retirement age. Patience pays.
Take a part-time or seasonal job if it means you can avoid tapping your retirement accounts. Unemployment benefits are based on weekly income, so you would be better off working 40 hours in one week and zero the following week, versus working 20 hours both weeks.

Bonus: 6) Take care of your emotional needs

It’s easy to focus on the financial aspects of a lay-off, but the emotional impacts are even greater. If you are not yet financially ready for retirement, a very real concern is running out of money in your seventies or later. We need to address those fears with a revised financial plan.
It’s natural to feel resentment and even betrayal when you were planning on giving a company the rest of your working years, and they decide instead to kick you to the curb. It’s important to not take this personally. A lay-off does not have anything to do with your value as a human being, a parent, or even as an employee. If you still feel enthusiasm, optimism, and joy in your work, then your positive attitude will be as valuable to your next employer as your experience!
We need to have a sense of identity, self-worth, and purpose that is not tied to our job. We are more than just an accountant, teacher, or engineer. Many people who are laid off go through the same work withdrawal they would have experienced at retirement. They don’t have their old routine, colleagues, or sense of belonging. Can you fulfill those needs in another way, such as through part-time work, free-lancing, or volunteering? What exactly is it that you miss?

While you can do all these steps on your own, what may give you the most confidence to move forward is to meet with me and prepare a new financial plan. I’ve met a lot of folks in the same situation and can help. We will put together a detailed analysis reflecting your new situation, evaluate all your options, and chart a new course.

Sometimes we choose change and sometimes it is thrust upon us. Change isn’t always easy or what we would have preferred, but ultimately, it’s our attitude that determines how successfully we can adapt.

Will The Real Fiduciary Please Step Forward?

Posted On December 11, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

We’ve got some great news – the Department of Labor is finally requiring all financial advisors to adhere to the same level of transparency and fairness that we have with you. In April of 2017, the new DOL Fiduciary Rule is going into effect.

You may wonder what it means for your IRAs and 401(k) accounts. Here is what you need to do: nothing. At least that’s true for the accounts we service for you. If you have retirement accounts elsewhere, it might be a good time to discuss potential impact with us.

The new rule requires some financial services professionals to change their compensation structure to align with client interests. We already adhere to this high standard. You may hear advisors talking about a “new higher standard for retirement accounts.” These firms may be new to the idea of putting you first.

We’ve always put you first and we always will. That’s #1 in our 13 Guiding Beliefs. If you have any questions about the your retirement accounts don’t hesitate to contact us. We’ll be happy to talk about your situation as always.

While the Fiduciary Rule has the objective of protecting consumers and improving practices of the financial industry, I fear the legislation will create additional confusion for investors. Here’s what you might not know about the DOL Fiduciary Rule:

1) It only applies to retirement accounts. The DOL does not have jurisdiction over taxable accounts. That falls to the SEC, FINRA, state securities regulators, state insurance regulators, and banking regulators like the FDIC. There is no one regulator that watches over all investing, finance, and insurance activities. Broker/Dealers will not be required to act as Fiduciaries for your taxable brokerage accounts under the rule. If you have multiple accounts, the rule may apply to some of your accounts and not others.

2) In my opinion, being a Fiduciary means that I should find the best possible solution for my clients, with an objective, independent eye. Under the new rule, a captive insurance agent (one who represents a single company), is also required and presumed to be a Fiduciary. But will that agent recommend another company if it offers a superior product? Will an agent recommend a product with a lower commission, if it might be a better solution? It seems like the potential for a conflict of interest has not changed, in spite of the new label of “Fiduciary”.

3) Merrill Lynch announced this week that their advisors must refer at least two clients a year to other units of Bank of America or have their pay cut by 1%. (Read the Marketwatch article here.) This is not illegal under the Fiduciary Rule, because it is disclosed. What if other banks offer better mortgages, CDs, or other products? That doesn’t sound like putting clients’ needs first to me. Wells Fargo Advisors have a similar program, as I’m sure many big firms do. We do not accept compensation for referrals and never have.

4) As a result of the cost of implementing the new Fiduciary Rule, many firms are dropping small clients and implementing higher account minimums. According to the Investment Company Institute, the DOL Rule is already depriving investors of financial advice.

5) The DOL does not directly enforce this legislation. While the SEC and states have thousands of auditors and field agents who visit, inspect, and enforce securities law, the DOL does not have a team tasked with ensuring Fiduciary compliance. Rather, the Rule will rely on investors to file class action lawsuits. If an advisor violates the Fiduciary Rule, forget getting assistance or relief from the DOL – you need to hire an attorney.

This process seems to me to be a poor way to protect consumers, and very expensive, as attorneys will take a significant portion of any award in court. For firms, we face the potential for frivolous lawsuits, an expense which will have to be passed on to consumers.

I am all in favor of consumer protection. But the new Fiduciary Rule will make it harder for investors to really tell who is truly acting in their best interest.

If you have an IRA in a commission-based account, you can expect your advisor to be moving your account to a fee-based account this year. Instead of having one account which is under a Fiduciary standard, I’d suggest you consider working with a holistic financial planner who will look at your entire financial picture when making recommendations in your best interest.

Will Trump Lower Your Taxes?

Posted On November 27, 2016 By Scott Stratton, CFP(R), CFA In Tax Strategies /

Since the surprise victory of Donald Trump, the markets have rallied and the dollar has strengthened. This is in expectation of increased infrastructure spending, looser regulation of finance, healthcare, and other industries, and lower tax rates. What does this mean for your personal tax situation?

You can read Trump’s tax platform on his website here. He proposes to simplify individual taxes from seven brackets today to three: 12%, 25%, and 33%. For higher income taxpayers, this would be a reduction from 35% and 39.6%. He also proposes to eliminate the 3.8% Medicare Surtax on Investment Income (for taxpayers above $200,000 single and $250,000, married). And he wants to lower the corporate income tax rate from 35% to 15% to prevent companies from leaving the US and to encourage US corporations to repatriate profits from overseas subsidiaries.

Before we consider what planning strategies this suggests, I’d like to make two points.

1) What candidates propose during the campaign and what they can actually achieve are often very different. There’s no guarantee these plans will become law. In Trump’s favor, however, he has a Republican controlled House and Senate which should work with him. Under budget reconciliation rules, the Senate can pass tax changes with a simple majority, and need not have 60 votes.

2) Under Trump’s economic plan, the deficit will soar and the national debt will grow at an unprecedented rate. Not only is he kicking the can down the road by not addressing the deficit, he will massively increase our debt load. Eventually, the cost of our debt service will crowd out other spending and has the potential to become a significant problem for our children and grandchildren.

For individual taxpayers, Trump wants to increase the standard deduction to $15,000 single and $30,000 joint, but to cap itemized deductions to $100,000 single and $200,000 joint. While he would reduce taxes for many taxpayers, the largest savings will go to those in the top tax brackets who would pay 33% on income over $225,000 (joint), under the Trump plan.

If you are in the top tax bracket and believe that Trump’s plan will become a reality in 2017, you would see your marginal rate decrease from 43.4% (39.6% plus 3.8% Medicare) to 33% next year. In that scenario, you would want to defer receipt of income, as possible, from 2016 to 2017. And you would want to accelerate any tax deductions, business expenses, and short-term capital loss harvesting to take those reductions in 2016. For example, in December, you could pay your property taxes, make charitable gifts planned for 2017, and make purchases of office supplies or other business goods which can be expensed and not capitalized.

If you own a business, under Trump’s plan, it may become appealing to convert to a C-Corporation to take advantage of the 15% corporate tax rate, instead of remaining a sole proprietor or other pass-through tax structure. While a dollar of income would be taxed at the corporate level and again when passed through to the owner, the owner of a C-corporation has the opportunity to take a modest salary and receive the rest of the profits as a dividend, which would be taxed at 15-20%, and not require any payroll tax.

For current owners of a C-Corporation, you would want to reduce your 2016 income as much as possible if you anticipate a 20% tax reduction in 2017. This means deferring income until January (which involves different strategies depending whether you use the cash or accrual accounting method), and maximizing your 2016 deductions.

Last December, Congress made the Section 179 deduction permanent. As a business owner, you should know about Section 179, which allows you to immediately deduct qualifying business equipment purchases, rather than capitalizing the costs over the life of the equipment and taking an annual depreciation amount. The limit on Section 179 is $500,000 per year, and is phased out for businesses who have purchased more than $2 million in qualifying property.

Qualifying property eligible for the Section 179 deduction includes equipment/machines, computers, software, furniture, and business vehicles over 6,000 pounds GVWR (Gross Vehicle Weight Rating). The vehicle deduction is very popular with business owners, and may be applied for new or used vehicles. Please note that vehicles under 6,000 pounds GVWR do not qualify, and that for certain vehicles, the deduction may be capped to $25,000.

If you are expecting your corporate tax rate to fall in 2017, I’d look to maximize your Section 179 purchases in 2016 and make those purchases before the year’s end.

I’d prefer you keep your hard-earned money rather than give it to the government to spend, and I will suggest every legal opportunity to reduce the amount my clients pay to the IRS. Having said that, it seems unfair to ask future generations to pay for our profligate spending. Hopefully, our politicians will eventually think further out than just winning the next election, but I’m not going to hold my breath for that one.

Trump’s economic plan also means that inflation should start to pick up. We’ve already seen interest rates move up since the election, perhaps more than they should have, in expectation of Trump’s spending plans. Mortgage rates have started to rise, and I believe that real estate price increases will slow. Property reflation may be in the 8th or 9th inning in many parts of the country. Affordability is an issue in many cities, and higher mortgage rates will not support home prices continuing to increase by 5-7% or more per year.

No one knows what will unfold over the next four years under Trump but if tax rates decline, we will certainly welcome the savings. We will continue to look for ways to reduce taxes from your investment portfolio and be as tax efficient as possible.

Bonds at a Discount: CEFs on Sale

Posted On November 21, 2016 By Scott Stratton, CFP(R), CFA In Portfolio Management /

Since the election, bond yields have risen and prices have fallen in anticipation of increased government spending and an uptick in inflation. The yield on the 10-year Treasury was 2.33% on Friday, almost a full percent higher than the all-time low, set only a few months ago in July. When bond prices fall, many investors will sell their funds at the end of the year to harvest losses and redeploy their capital into other bond funds.

The annual tax-loss harvesting creates a unique opportunity for investors to look at Closed End Funds. Closed End Funds (CEFs) are an alternative to bond mutual funds. They are similar to mutual funds in that they are diversified, professionally managed baskets of stocks or bonds. In a regular mutual fund, you buy and sell shares directly from the fund company, whereas with a CEF, you buy or sell shares on a stock exchange with other buyers or sellers. There are a fixed number of shares, so a CEF manager can focus on managing their portfolio without the impact of money flowing in or out of the fund.

This works very well for bond strategies, and indeed many CEFs have an income focus and pay dividends monthly or quarterly. Today, there are many CEFs that pay 4-6% tax-free, or 5-10% taxable. They range from high investment grade credit ratings to junk bonds. Some have been around for decades.

Here is a comparison of Closed End Funds with Mutual Funds:

Closed End Funds	Mutual Funds “open end”
Professionally managed basket of stocks, bonds, etc.	Professionally managed basket of stocks, bonds, etc.
Fixed number of shares	Unlimited number of shares
Buy/sell on an exchange	Buy/sell from the fund company
Price may be at a premium or discount to NAV	Price equals net asset value (NAV)
Manager does not need to buy or sell securities; fixed pool of money	Manager must buy or sell to meet inflow or outflow of cash
May use leverage	Typically not leveraged

Many people have not heard of CEFs because they generally don’t advertise. The managers cannot raise new money, and their management fee is fixed, usually around 1% of assets. The fund manager has no incentive to advertise, so CEFs remain a secret of the investment community. When these CEFs trade at a discount to the underlying value of the assets, you may be able to buy the equivalent of $1,000 of bonds for $950 or $900 dollars. And that is what is happening right now – tax-loss harvesting is widening the discounts of many bond CEFs.

We generally don’t use CEFs in our portfolio models because they tend to have more price fluctuation than mutual funds. Besides the change in NAV, the discount or premium can change by as much as 10% or more in any year. But when that discount widens to 10% plus, that is often a good entry point for investors who are willing to hold the funds for long-term and who don’t mind a bit of additional volatility.

However, not all CEFs are created equal! There are many different strategies, and they have many more moving parts than mutual funds. We have an in depth process for choosing our CEFs and have been investing in these for more than a decade. If you are looking to increase your portfolio income, let’s talk about if Closed End Funds might be a good fit for you.