Four Investment Themes for 2017

Posted On November 14, 2016 By Scott Stratton, CFP(R), CFA In Portfolio Management / 2 Comments

Each November and December, I undertake a complete review of our Premier Wealth Management Portfolio Models and make tactical adjustments for the year ahead. We have five risk levels: Conservative (roughly 35% equities / 65% fixed income), Balanced (50/50), Moderate (60/40), Growth (70/30), and Aggressive (85/15).

Our investment process is tactical and contrarian. Each year we look for those market opportunities which have attractive and low valuations, and increase our weighting to those segments, while decreasing those categories which appear more expensive. We include Core positions, which offer broad diversification and are the essential and permanent foundation of our portfolios. And we purchase Satellite positions which we feel offer a compelling current opportunity in a more narrow or niche investment category. Typically, there are 12-15 positions in total, consisting of Exchange Traded Funds (ETFs) and Mutual Funds.

While we are not afraid to make changes to our models, we believe that when it comes to trading, less is more. We want to minimize taxable sales and especially to avoid short-term capital gains. That’s why we only change the models once a year, although we also believe that more frequent trading would be likely to be detrimental rather than return enhancing.

For 2017, our portfolio changes will be based on three considerations:
1) Relative valuations (reducing expensive stocks and adding to the inexpensive segments).
2) Replacing our holdings in a few categories, where another fund appears to offers a better risk/return profile.
3) Our world view of the markets in 2017, which is more focused on identifying risk than trying to predict the top performing investments. No matter what, diversification remains more valuable than our opinions about investment opportunities.

Here then are our four investment themes for 2017:

1) Low for Longer
Although interest rates may have bottomed in 2016, it does not appear that there will be a V-shaped recovery. We think interest rates, inflation, Domestic and Global GDP will all remain quite low for 2017.

2) Full Valuations
US Equities are no longer cheap. Years of central banks holding interest rates near zero (or actually negative in some countries this year) has forced investors into risk assets. This has driven up PE multiples. And while I would not call this a bubble, you can’t say that the US market is cheap today. That means that equity growth going forward is likely to be tepid.

Low bond yields pushed investors into dividend stocks, specifically to consumer staples and utilities, which are perhaps the most “bond-like”. These categories seem to be especially bloated and could underperform.

Turning to bonds, the yield on the 10-Year Treasury has increased from 1.6% to 2% in the past three months. Time will tell, but could this summer have been the peak of the 30-year bull market in bonds? I don’t know, but when yields are this low, prices on long-term bonds can move dramatically. We invest in bonds for income and stability and to balance out the equity risk in our portfolios. We’re not interested in using bonds to speculate on the direction of interest rates.

While there may not be an equity level of risk in bonds, it is safe to say that the price of bonds globally is higher in 2016 than it has ever been before. Bonds are much less attractive than five years ago, although we find some pockets that interest us and may at least give us a chance of exceeding inflation and earning a positive real return on our money.

3) Leadership Rotation
I believe we are going to see a very gradual shift in three areas:

A) From Growth to Value. Since 2009, growth stocks have dominated value stocks. This tends to be cyclical, but over the long-term, value has outperformed. We see a widening valuation gap between popular growth stocks, some of which are trading at PEs of 100 or higher, and out of favor value companies. Value is showing signs of life in 2016, and we think that there will be mean reversion at some point that favors value.

B) From Domestic to Emerging. Over the past 5 years, US stocks have reigned. Boosted by a strong dollar and a global flight to quality, US stocks have outperformed others and become more expensive than international stocks. Emerging markets have languished and are now trading at a big discount to developed markets. But emerging economies have higher growth rates and overall, have less debt and more favorable demographics than developed markets. While volatility will be higher, Emerging markets could greatly outperform if you are looking out 10 or 20 years from now.

C) From Bonds to Commodities. In 2016 we have already seen a rebound in oil, gold, and other commodity prices. After years of commodity prices falling, have we put in a bottom? We don’t have commodities in our models currently, but when inflation and interest rates start to pick up, I expect to see commodities gain and bonds suffer. That’s why the bull market in bonds may well end at the same time as the bear market in commodities. 2017 may be a good year to start diversifying for long-term investors.

4) High Risk, Low Return
With full valuations in equities and very low interest rates in bonds, expected returns for a Balanced or Moderate allocation are likely to be noticeably lower than historical returns. While volatility has been actually very mild for the past several years, investors should not be lulled into thinking that their portfolios will continue to grind higher without the possibility of a 10% or 20% correction.

Unfortunately, in today’s global economy, it seems less likely that a traditional diversification, for example, adding small cap and international stocks, will provide any sort of defense in the next bear market. We are expanding our investment universe to look for alternative strategies which can offer a true low correlation to equities. When the market is booming or even just recovering (like 2009), equities are often the top performers. But in a high risk, low return environment, we want some positions that offer the potential for positive returns with lower, different, or uncorrelated risks. If you want to explore these in greater detail, see our new Defensive Managers Select portfolio model.

These four investment themes are important considerations for how we position for 2017. You can get investments anywhere and they are becoming a low-cost commodity. However, what you cannot get anywhere is insight, personal service, and a custom-tailored individual financial plan. Investments are interesting, but we view them as a means to an end. Investments should accomplish your financial goals with the absolute least amount of risk necessary. The more interesting angle is how we can use investments to fulfill your plan just for you.

Money is Time

Posted On November 7, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

Benjamin Franklin is credited with the phrase “time is money”, an exhortation to not delay for tomorrow what work you can do today. While this sense of urgency continues to be a universal part of modern life, I think investors can better understand their financial priorities with the reverse thought, Money is Time.

Time is not a limitless resource. We have to choose how we spend our hours. And whether you are a billionaire mogul, a retiree, or a parent working two jobs, we all have the same 24 hours in each day. To me, the goal of money is not the acquisition of material objects, but to afford the privilege of spending my time in the way that I enjoy most. Money can give us the freedom to do what we want, when we want.

Money can enable us to retire from a job, if we no longer enjoy it. Money can allow us to pursue our interests rather than working solely for the money. Work-life balance requires money. Having the courage to turn down work you don’t need or don’t enjoy is only possible when you do not have worries about running out of money.

Money allows us to experience new things, to see the world, and expand our horizons. Money gives us the ability to spend our time where we want, doing what we want. I enjoy variety, and money provides the flexibility to get out of a routine and try other things.

Money can free us from the mundane. Why spend four hours a week cleaning your home if you can afford to hire someone else to do it? Then we can use those hours for something we might enjoy, something more permanent, meaningful, or memorable.

What is the number one reason people don’t go to the gym and take better care of themselves? Not enough time. And unfortunately, poor health can shave years or decades off your life. Having enough money allows you to reset your priorities.

We should stop thinking of money in terms of what it can purchase, and instead recognize that financial independence can give us the one thing that no one can buy: more time. This doesn’t have to be for leisure or laziness. Time could be spent being with those you love, or feeling the satisfaction of volunteering to make your community a better place.

Someone who hoards their money, refusing to spend a penny, is ultimately squandering their time. To allow years to pass without doing what you love, is perhaps the greatest tragedy. You can never get those years back. Many people are mature enough to realize that material possessions won’t bring happiness. But if we think of money in terms of how it can impact your time, the idea of saving and investing may become more appealing and relevant. Could you retire at 62 instead of 65 and give yourself three additional years while you are still young and healthy?

My passion for helping families lead The Good Life, is ultimately about giving you as much time back as possible. That’s why saving early in your career is so important. It is an investment in your future freedom. Now, if you enjoy your work, congratulations, that is a tremendous blessing. But retirement planning is for everyone – just because you love your work, doesn’t mean you don’t need a plan.

I know that for many people, there is not a desire to become a millionaire or to be wealthy. But we all have dreams that require time. Think about how your nest egg could allow you to achieve the life of your dreams. That may give you the real reason to save and invest – not for guilt or fear or greed. Investing is to buy time, experiences, and living. Money is time.

The Price of Financial Advice

Posted On October 31, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

You are more likely to achieve your financial goals with my help than without it. Together, we can 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. I’ll be there along the way to keep us on course and respond to changing markets, regulations, and needs.

That’s my value proposition. Whether your goals are retirement, college, or making your money work for you, I’ve helped people achieve goals just like yours for more than a decade. Unfortunately, there is often some reluctance to hire a financial advisor, even one who is a Certified Financial Planner professional. Recently, the scandal at Wells Fargo reminded us that that some financial firms still allow short-term profits to take priority over ethical behavior or customer needs.

Years ago, I left the broker-dealer world that was paid by commission to become a fee-based financial planner. I am not a salesman, so why would I want to be paid on a transactional basis? It is a conflict of interests and investors know this. That’s why trust is so low for the financial industry and why many people are still reluctant to seek help even when they need it.

When a survey by Cerulli Associates asked about the most difficult part of working with financial advisors, the top concerns included:

Not sure if the advisors are recommending the best products
I am not sure if I can trust advisors
Costs are not transparent and I don’t know how much I pay advisors
I don’t feel like a top priority client for advisors

Boy, that is sad. Unfortunately, these thoughts are probably familiar and you may have had the exact same concerns. Luckily, you can address most of these issues by changing from a commissioned broker to a fee-based fiduciary. As a fiduciary, my legal obligation is to place client interests ahead of my own. In a 2014 survey by State Street Global Advisors, they found the top reasons why investors prefer fees versus commissions:

36%: I know what I am going to be paying upfront
27%: My advisor is invested in my success
20%: I trust that my advisor is not selecting costlier investment products just to drive up commissions
10%: An actively traded account could result in high commissions, costing more than fees
7%: I can deduct investment advisor fees on my taxes

Which would you prefer?
A) I’m not sure how my advisor gets paid or if I can trust him. Am I in the best products or the ones with the highest commissions?
Or B) I know exactly how and how much my advisor is paid. My advisor is paid by me for providing advice over time not a commission for a sale. My advisor has my best interests in mind.

At Good Life Wealth Management, our approach is simple and transparent. We offer two programs:

1) Premier Wealth Management. For investors seeking holistic financial planning and wealth management. Our fee is 1% of assets under management ($250,000 minimum). Most common needs include retirement income planning, portfolio management, college savings, tax and estate planning, and risk management.

2) Wealth Builder Program. For newer investors seeking to build a personally-tailored financial foundation. The fee is $200/month (under $250,000). Most common needs are IRAs, employee benefits, net worth analysis, student loan advice, savings strategies and term life insurance.

The fee conversation often takes center stage for the decision about choosing a financial advisor. But it shouldn’t. We ought to be focusing on what we can do for you and about how working together will put you in a position to be more likely to achieve your goals. Investors work with me because they want peace of mind knowing that I have their back. My clients are very intelligent and could undoubtedly “do it themselves”. But that is not what most successful investors do. Why not?

They have better uses of their time. They would rather spend their time on work, family, or collecting cat figurines (or insert your actual hobby).
They recognize that they “don’t know what they don’t know”. Most people don’t have the interest in studying finance in their spare time, but even if they did, there remains the risk of missing information and not keeping up with new developments.
Leaders delegate to experts. You can’t be an expert at everything. You should have a good CPA, Attorney, and Financial Planner who know you so well that they can anticipate your needs.
It’s tough to be objective about money. For couples, conversations about money are often, how shall we say, counterproductive? An advisor brings an outside perspective, expertise, and insight to create a plan that works for both of you.

I remember the first day of ECON 101 at Oberlin – Professor Zinser started the class by writing this on the board: TINSTAAFL. There is no such thing as a free lunch. If you’re looking for financial help, it’s fair to ask what it will cost. That’s because if someone is offering you a free lunch, you know that it may ultimately be a very, very expensive lunch. Know what you are paying your financial advisor. Ask.

If you’re looking for comprehensive planning, or just help with a couple of questions, give me a call. Yes, there is a price for financial advice. I aim to make that cost completely transparent, so you can have the confidence to move forward and get to more important questions about how we can achieve your financial goals together.

23 Ways to Save Money

Posted On October 24, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning / 1 Comment

A penny saved is a penny earned. I write often about how much you might need to invest for retirement, college, and other financial goals. While I can help with the financial planning strategies and investment advice, it’s up to each client to save the cash required to meet these goals. And this crucial first step is often easier said than done!

There is some amount that each family is comfortable saving. Unfortunately, for many of us, the amount we need to save is often much larger than the amount we’d like to save. Here are 23 ways to save money, hopefully with little or no sacrifice on your behalf.

1. If you pay off your credit card monthly, use a cash back rewards card rather than a debit card, cash, or check. I put everything I can on the credit card – and have gotten back $907 so far this year.

2. Drop your landline and use your cell phone as your one and only phone. You still have a landline?

3. Drop cable or satellite for Netflix or another streaming service. We probably watch too much TV as a society, myself included. Read a book instead.

4. Buy used items online, from Craigslist, or at local sales.

5. Sell your unneeded items on Craigslist. Cash is better than a tax deduction of the same amount.

6. Wait to buy items on sale. Never pay full price. There are a number of apps that scan barcodes and will show you reviews and prices of that item.

7. Get a programmable thermostat. For every degree you adjust the thermostat, you may see a 3% change in your utility bill.

8. Replace light bulbs with LEDs. Prices have come down quite a bit in the last three years. They use a fraction of the electricity and will last for years. I’m a fan of the Cree floodlights.

9. DIY Home Energy Audit. US Department of Energy instructions here.

10. Compare your Texas electric rates at PowertoChoose.org. These tend to creep up after your initial guarantee period is over.

11. Shop your home and auto insurance every three years.

12. Save money on pets: 5 Ways to Save Money When Adopting a Pet.

13. Volunteer. Looking for something fun and interesting where you can make the world a better place? Find an organization doing great work and volunteer! You don’t have to spend a lot of money to have an interesting and satisfying weekend.

14. Prepare meals at home or eat at home. If you are going to eat at a restaurant, lunch is usually much less expensive than dinner.

15. Shop at Target? Get the Red Card for 5% off and free shipping. Sign up for the Cartwheel app for additional discounts.

16. Shop at Walmart? Download the Savings Catcher app. You scan your Walmart receipt and if they find a lower price elsewhere, they refund the difference to you.

17. The car advice I always give, the short version: Keep your current car for as long as you can. When you must buy your next vehicle, buy used and pay cash.

18. You don’t save much by doing your own oil changes. But if you are mechanically inclined, you can save a lot of money by doing your own brake jobs and other routine maintenance and repairs. Check YouTube for video instructions.

19. If your car is out of warranty, find a reputable independent mechanic rather than having all work done at the dealership. Develop a relationship with one mechanic.

20. Cheapest local gas prices: gasbuddy,com.

21. Do you need two cars? How often? Could you get by with one car plus using a Taxi or Uber a few days a month?

22. Don’t want to spend hours tracking a monthly budget? Read my tips about Reverse Budgeting and putting your savings on autopilot.

23. For inspiration, I subscribe to a number of frugality blogs which share ideas, frugal fails, and a chance to read about others’ journey. Media bombards us with a message of consumption, but not everyone buys into the materialism they’re selling. We all need a reminder from time to time that “more stuff” or the “latest and greatest” is neither the source of happiness nor financial independence! Make your goals the top priority for your cash flow.

5 Questions to Ask Your Advisor Before a Recession

Posted On October 17, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

It’s a matter of when, and not if, the economy will sink into recession. I’m not saying that because of some dire economic forecast – it is simply the reality of the economic cycle. We have not had a significant market correction since 08-09, and 7 1/2 years is a pretty long stretch historically. Even as a card-carrying optimist, I have to admit that there is always the possibility that our tepid GDP growth could turn negative in 2017 or in the near future. But market volatility could occur for any number of reasons, recession or not.

It’s vitally important that investors communicate with their advisors during the good times to understand what to expect when the market is down. The longer the current bull market runs, the more we forget how painful volatility can be. Make sure you understand the game plan before there’s a downturn. If you haven’t discussed these five questions with your advisor, it’s time for a meeting.

1) “When there is a downturn, will we change our investment allocation?”
We explain to clients that we do not time the market and that we are long-term, buy and hold investors. They nod in agreement, but then when the market goes down by 10%, I sometimes get calls asking if we should go to cash to avoid further losses. The answer is no, we don’t time the market. In fact, we will rebalance in downturns, buying stocks when everyone else is selling. It’s a discipline that works.

We have ample evidence why we think this approach is best one for investors. When we do have a downturn, emotions tend to take over our decision making process, often leading to sub-optimal results. The best time to have the fire drill is before the fire. Plan what you will do in advance. Make sure you do not turn a temporary decline into a permanent loss of capital by having a knee-jerk reaction when the market dips.

2) “How much risk is in my portfolio? How would it have performed in 2008-2009?”
While there’s no guarantee what will happen in the future, clients should at least understand how they are currently positioned. The best time to reallocate is when the market is up. If your current allocation is more aggressive than your risk tolerance, you should be making changes today to a more conservative strategy.

3) “How can we capitalize on the next downturn?”
You make your money in bear markets; you just don’t know it until later. Ask not only about defense but how we can profit from the inevitable cycles in the economy and markets. What would we like to be able to buy on sale? If we view a market downturn as an opportunity rather than a catastrophe, it will change how we respond. In hindsight, 2008-2009 was a remarkable chance to make the buys of a lifetime. The willingness to buy when everyone else wants to sell takes planning and commitment.

4) “Are there any changes that should be made to my portfolio if there could be a recession in 2017?”
If you are in a 70/30 portfolio, what would happen if you went to a 60/40 portfolio today? Many investors get stuck in thinking that investing should be all-in or all-out. Most of the time, fine tuning and making minor adjustments is a better approach. It’s a good time to revisit your 401(k) and other accounts, as well as to rebalance any equity positions which have run up in recent years.

5) “How could investment performance impact our financial goals?”
If you are close to retirement, the impact could be more significant than for someone in their thirties. Would a recession require that you push back your retirement or other goals? Hopefully your advisor is already considering these factors, but anytime you have a shorter time horizon, it pays to be having these conversations regularly.

I hope this doesn’t sound a pessimistic tone. To be clear, I am not predicting a recession. Pullbacks in the market are completely normal and part of the economic cycle. What no one knows is if we are still in the mid-cycle growth phase of this cycle or at the end-cycle plateau. Economists can only determine this in hindsight. We have a plan in place for each client and want to be sure we talk about volatility before it occurs.

Avoiding Another 2008 for Pre-Retirees

Posted On October 10, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 2 Comments

In 2008, the S&P 500 Index was down a whopping 37%. Other stock indices and many mutual funds did even worse. Perhaps the worst part of the 2008 crash was that diversification didn’t work. Correlations went to 1. You couldn’t hide out in international stocks, or small cap, or high yield bonds. They all went down. With today’s global economy, if the US catches a cold, the rest of the world becomes very sick. This is bad news for investors who thought they were safe by diversifying globally.

Since 2009, the market has been up. Just like Autumn turns to Winter, there will undoubtedly be another recession and bear market for investors in the future. On average, bear markets occur every 5-6 years, so many argue that we are already overdue. While we don’t know when this will ultimately occur, it’s not a matter of “predicting” a bear market, but being prepared.

If you’re a long-term investor, you can recover from years like 2008. In fact, it’s an opportunity to buy more shares while they are on sale. All that matters to you is that the returns are strong over the next decade or longer. However, if you were planning to retire in 2009, a year like 2008 can potentially derail your plans. Whether your retirement strategy involves a 4% withdrawal rate, buying an annuity, or investing for income, taking a 37% hit to your principal will certainly impact the amount of retirement income you can generate from your portfolio.

Even worse off were the people who retired in 2007, because they didn’t have the option of delaying retirement. If you retired with $1 million on January 1, 2007, and took withdrawals of 4% ($40,000 a year), you would have ended 2008 with less than $600,000 if you had invested in an S&P 500 Index fund.

There is a crucial window from 5 years before retirement to 5 years into retirement, when a large drop could have a major impact on your retirement success. Even if the market later rebounds, as it always has historically, retirees have the risk that their withdrawals could deplete their shares and they are still unable to recover. Financial planners call this sequence of returns risk.

We are starting a new portfolio model specifically to address sequence of returns risk by investing in a portfolio with significantly lower volatility. Our new Defensive Managers Select portfolio uses institutional funds with a disciplined quantitative or fundamental process to invest with less risk. Our aim is to approximate the return of a 60/40 portfolio, but with with much lower price fluctuation, as measured by standard deviation. We use funds which have a demonstrated track record of delivering low volatility, smaller magnitude of losses, and consistent positive returns.

The portfolio can include active managers, low volatility ETFs, alternative strategies, and cash. Portfolios will typically own 4-8 different funds, which gives us diversification of manager and style, in addition to stock and bond diversification. How did these funds do in 2008? While the S&P 500 Index was down 37%, three of our allocation funds were down 9.8%, 4.6%, and 0.5%. Although past performance is no guarantee of future results, we believe that having a disciplined risk strategy is better than not having any strategy and simply taking market results.

Defensive Managers Select takes a different approach than our traditional Premier Wealth Management portfolios. The Premier Wealth Management portfolios remain our recommended solution for accumulation and for investors who do not require withdrawals within five years. These portfolios use passive strategies, which are very low cost, tax efficient, and I believe will deliver superior long-term results for investors. Implicit in being invested in a passive strategy is that you have the time and resources to remain invested if the market ever takes another 37% plunge.

The Defensive Managers Select portfolio is not designed to beat the market. Most managers do not beat the market over time, and track records have no predictive accuracy as to which funds will beat the market going forward. What is more consistent is volatility. We are buying those funds with a style, process, and track record of low volatility. Pre-retirees don’t need to hit home runs, they just need to make sure that they aren’t going to be wiped out in the next bear market.

No one wants to think about another downturn, but there’s old saying that “the best time to fix the roof is when the sun is shining”. If you are within 5 years of retirement, don’t wait until there is a big drop to decide to shift your portfolio strategy to a more conservative posture. If you wait, you are just locking in your losses and diminishing your chances of recovery. The market is up this year, and the sun is shining. Now is the right time to adopt a defensive strategy.

Let’s schedule a call to talk about your income requirements and retirement goals. I don’t see a lot of other firms offering truly defensive retirement strategies, or making any distinction between accumulation and retirement objectives. This is a unique approach and one which I am happy to compare to what you are doing today. If the possibility of a bear market, or God forbid, another 2008, would hurt your retirement, let’s address that risk before it occurs.

Please note that the objective of this investment strategy is growth and not preservation of capital. While our goal is low volatility, that is no guarantee that losses will not occur.

Helping HENRY

Posted On October 5, 2016 By Scott Stratton, CFP(R), CFA In Financial Planning /

On Thursday, the CFP Board published the results of a consumer survey they undertook this spring. Based on interviews of 1000 adults over age 25, they identified four groups: Concerned Strivers, Stretched Worriers, Confident Savers, and Tentative Savers. At 27% of the respondents, Concerned Strivers could benefit tremendously from financial planning, but many investment firms are not equipped to help them because they may have little or even zero in investment assets today outside of their 401(k).

“The Concerned Striver has many day-to-day challenges that make it hard for them to save with any regularity,” said CFP Board Consumer Advocate Eleanor Blayney, CFP®. “Concerned Strivers feel like they can deal with the immediate needs of their families, but may neglect saving for their own future. They have good intentions, adequate resources and employer-sponsored retirement plans, yet they feel they are unable to capitalize on these financial strengths.”

We have an acronym for Concerned Strivers: HENRY, High Earners Not Rich Yet. There are so many families and professionals here in Dallas who are in their twenties, thirties, and forties and have incomes of $100,000 to $500,000 and yet have little or no investment assets. Between mortgages, car loans, credit cards, and student debt, they may have a negative net worth with no relief in sight.

While some HENRYs are “not rich yet”, many will be not rich ever, based on their current trajectory. You can change this. If you are are a Concerned Striver, you need the guidance of a Fiduciary – an expert whose legal and sole obligation is to put your needs first – and not someone who gets paid a commission to sell you investments and then give you a “free” plan.

Many people assume that they don’t have enough assets to be a client of Good Life Wealth Management. I am a former educator and it’s in my blood to want to help people get started. I want to make a difference in people’s lives. That’s why we offer two distinct programs.

Our Premier Wealth Management program is for investors with over $250,000 and focuses on holistic financial planning, retirement preparation, and investment management. For our clients with under $250,000 – even $0 – we created our Wealth Builder Program to build a strong financial foundation and put you on the path to your first million.

With our Wealth Builder Program, we will help you accomplish your goals and priorities:

Get out of debt: managing loan repayments and cash flow priorities.
Invest monthly – however much or little you can afford – to build your wealth.
Track your net worth annually to measure your assets and liabilities. Awareness creates behavior to increase assets and reduce liabilities. It’s like knowing you have to step on the bathroom scale Monday morning.
Select employee benefits and advise on 401(k) decisions.
Term Life Insurance, if you have a spouse or children. (The only life insurance a Concerned Striver needs).
College planning for your children that considers all your other financial goals.
Bring a “neutral” coach to improve communication about money with your spouse. A financial planner is still cheaper than a divorce!

The Wealth Builder Program is $200 a month, and is cancelable at any time if you are unsatisfied. That’s probably less than your cell phone bill or how much you spend on coffee. Make an investment in your future. Find out more here.

I know that every fifty-year old millionaire was once a thirty-year old facing these very issues and concerns. Some of those thirty-year old professionals will become financially independent if they make smart decisions. There’s no need to reinvent the wheel, I can show you what works. But it’s not one-sided. You have to be coachable: eager to participate actively and willing to make changes. If that describes you, we could go a long ways together as a team. What are you waiting for, Henry?

How to Invest if Income Taxes Increase

Posted On September 26, 2016 By Scott Stratton, CFP(R), CFA In Portfolio Management /

Is there really any doubt that income taxes will be going up at some point in the future? Deficits are growing ($590 Billion for 2016 alone) and there is no interest in Washington in reducing expenditures. Given the magnitude of Federal spending, even if a balanced budget were possible, the reduction in cash flow would crush the economy and send unemployment through the roof. We’re addicted to our spending.

Politicians have realized that even the faintest hint of “raising taxes” would be career suicide. This means that increasing marginal tax rates (except on those making over $250,000) is impossible. But raising tax revenue by “closing loopholes for the rich” is considered a heroic undertaking. There are a lot of proposals out there right now to increase tax revenue, and you don’t have to be Bill Gates or Warren Buffet to be impacted.

Many of these “loopholes for the rich” benefit middle class professionals. Chances are that if you are reading this, you’re going to be paying higher taxes in the years ahead. Even if your marginal tax bracket remains the same, your effective tax rate – the total amount of taxes you pay – could rise with these proposals:

Eliminate the Stretch IRA for beneficiaries who inherit an IRA.
Close the Roth conversion process which allows the “back-door Roth IRA”.
Create Required Minimum Distributions for Roth IRAs.
Cut the estate tax exemption from $5.45 million to $3.5 million and increase the rate from 40% to a range of 45% to 65%.
Eliminate the step-up in cost basis on inherited assets.
Add a 4% surtax on income over $5 million.
Cap itemized deductions to 28% of your income.
Create a capital gains schedule that requires an asset be held for 6 years to qualify for the lowest long-term capital gains rate of 20%. Increase capital gains taxes on assets held less than 6 years.
Increase the Social Security payroll tax from 12.4% to 15.2%.
Increase the payroll tax ceiling from $118,500 (2016) to $250,000. Or eliminate the cap altogether.
Apply the payroll tax to passive income, so business owners are taxed the same on distributions and dividends as they would be on salary.
A proposal in July from Ohio congressman James Renacci would lower the corporate income tax and add a consumption tax, or European-style VAT.
Limit the mortgage interest deduction, which disproportionately benefits wealthier home owners because it requires itemized deductions. One proposal is to replace the deduction with a smaller tax credit.
Place a cap on tax-deferred accounts. For example a 62-year old with $3.2 million in tax-deferred accounts would be ineligible to make further contributions. Other proposals suggest caps as low as $500,000.

Although this is an election year, I do not view this as a political issue. Whoever is elected to the Presidency and to Congress will have to deal with reducing deficits. While some candidates propose to cut taxes, this would dramatically increase the debt, which already stands at $19 Trillion. When interest rates eventually rise, a significant portion of our annual tax revenue could be needed solely for paying interest on our debt. So, I view tax cuts as not only unrealistic, but dangerously inflating a problem our children will ultimately have to bear.

If effective tax rates are going higher, what can you do to keep more of your investment return?

1) Tax efficiency will be more valuable. Using low-turnover ETFs, asset location, and tax loss harvesting can lower your tax liability. Reduce tax drag and keep gross income under $250,000, if possible. See: 6 Steps to Save on Investment Taxes.
2) Tax-free may be more preferable than tax-deferred. If you think your tax rate in retirement will be the same or higher than today, there is less benefit to investing in a Traditional 401(k) or IRA. Preference goes to the Roth 401(k) or Roth IRA. See: To Roth or Not to Roth.
3) Tax-free municipal bonds will be even more attractive when compared to taxable bonds.
4) Rather than allowing capital gains to accumulate for years and become an enormous tax bill in the future, it may be wise to harvest gains in years when you are in a lower tax bracket, up to the threshold of your current tax rate.
5) Don’t negate reduced tax rates for qualified dividends and long-term capital gains by placing those investments into an IRA or Annuity where the distributions will be taxed as ordinary income.

Charitable Giving Rules and Strategies

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

Is Charitable Giving part of your financial plan? It is part of ours. At Good Life Wealth Management, we donate a minimum of 10% of pre-tax profits annually. We believe that charitable giving is the ultimate expression of financial freedom. Having the ability to help others and make the world a better place, without fear of running out of resources for ourselves, is perhaps the best definition of financial independence. So many people have helped us get to where we are today, it is only right that we look to make a difference through our work, our time, and our financial support.

The IRS rules behind deducting your donations are not well understood by most taxpayers. There are strategies which can make your giving dollars go farther. Even if you have been making charitable gifts for many decades, chances are that you will learn something new in this article.

1) Qualified Charities. If you are wondering whether your donation to a particular organization is tax-deductible, check the IRS database: Exempt Organization Select Check. There are some organizations, such as political parties or candidates, fraternal organizations, chambers of commerce, or lobbying groups, which are not eligible for tax-deductible donations. Donations to individuals are not tax deductible, either.

2) Deduction limits. Charitable donations are part of itemized deductions. If you take the standard deduction, you are not getting any tax benefit from your charitable giving. If this is the case, try alternating years of itemized and standard deductions. Aim to “stuff” all your itemized deductions into one year. For example, you can pay your property taxes in January and then again in December, which puts two years of deductions into one year for tax purposes. Do the same with your charitable giving

There are limits to how much you can deduct, based on on your Adjusted Gross Income (AGI). If your donations are more than 20% of your AGI, you need to know these rules:

For most charities, you can deduct donations up to 50% of AGI.
If you donate Capital Gain Property, the limit is 30%.
For certain charities, including private foundations, veterans’ organizations, and non-profit cemeteries, the limit is 30%.
Capital Gain Property donated to 30% organizations is limited to 20% of AGI.
If you exceed these limits, the good news is that the excess will carry forward for the next five years.

Lastly, your itemized deductions – including charitable donations – may be reduced under the Pease limitations for high income earners.

3) Cash Donations. Cash donations under $250 may be substantiated with a cancelled check or credit card statement. Donations over $250 require an acknowledgement from the organization. Please note that if you receive anything in return for your donation (event tickets, T-shirt, etc.), the value of the goods or services received must be subtracted from the value of the donation. Most tickets to charity events, raffles, or contests are non-deductible.

4) Non-Cash Donations. Non-Cash Donations are an area of scrutiny for the IRS, and the record keeping requirements are more strict. You are limited to the fair market value of goods donated, and generally, not your cost basis in the items donated.

Under $250. A receipt from the organization, including a “reasonably detailed description” of the property. You may determine the value, but need to document how you calculated the value.
$250-$500. You must have a receipt from the organization, including the value of the items donated.
$501-$5,000. In addition to the requirements above, you must document how you acquired the property, when, and your cost basis. If you are donating an item to a charity auction, the receipt from the organization should indicate the amount that the item sold for, which could differ significantly from your opinion of value.
Over $5,000. You must also obtain a written appraisal from a qualified, independent appraiser.

5) Appreciated Securities. If you are planning on making larger donations, it may be worthwhile to donate appreciate securities (shares of stock, mutual funds, etc.) rather than making a cash donation. You still get the full value of your donation (and the charity gets the full amount), but you also will avoid paying capital gains tax on those securities. Since the charity is a tax exempt organization, they pay no capital gains when they sell your securities.

For example, consider a donation of $10,000. You could donate cash, or a $10,000 of a fund. Yous cost basis in the fund is $4000, so you would have a gain of $6000. At a 15% capital gains rate, you would avoid $900 in capital gains. If you are in the top bracket, you pay 23.8% for long-term capital gains, so you would save $1,428 in this example.

If you want, you can put the $10,000 cash you were planning to donate into your brokerage account and immediately repurchase your shares. There’s no waiting period or wash sale on donating gains! Now you have made your donation as planned, avoided some capital gains, and still have the same number of shares, but have reset your cost basis higher. Win-win-win.

6) IRA RMD. Last year, Congress made permanent the rules on Qualified Charitable Distributions from your Individual Retirement Account. If you are over age 70 1/2, you can make a distribution directly from your IRA to the charity of your choice, in fulfillment of your Required Minimum Distribution. I wrote in detail about who should use this benefit here: Qualified Charitable Distributions From Your IRA.

7) Donor Advised Fund (DAF). Also called a Charitable Gift Fund, a DAF is a charitable fund that allows you to make a tax deductible donation today, invest those funds, and distribute money to charities of your choice in the future. The DAF is itself a public charity, so your creating and funding an account is tax-deductible. It is also permanent and irrevocable, so plan carefully! Once funded, you can purchase various investments, such as cash, mutual funds, or other securities.

A DAF is great if you have significant windfall in one year – for example, through the sale of a business or real estate – and want to plan ahead for future giving. For example, you could put $100,000 into the fund, and receive a $100,000 deduction this year. You can subsequently make donations for the next 20 or 25 years, if you wanted to. A DAF is often a better solution than setting up a private foundation for family giving. If you have a significant financial event, you may be pushed into the top tax bracket of 43.4%. If that happens, every $1000 you put into a DAF will save you $434 in taxes. If you were ultimately planning to give that money to charity in the future, it would be crazy to not look at keeping more of your money out of the hands of the IRS today.

While the gift to the DAF is irrevocable, you still control the disbursements from the account, so you can decide when, to whom, and how much you give. You may love a charity today, but 10 years from now may find another that you feel is more deserving. This may be preferable to donating a significant amount to one charity in a single year. A DAF is also a great way to involve your children or grandchildren in your family’s philanthropy.

Certainly the purpose of Charitable Giving is not to get a tax-deduction. But if the government is going to give us financial incentives to encourage our donations, we should take advantage of those opportunities. Significant tax savings today means that you will have more money left over to donate in the future. Why pay 15% to 43.4% (or 50%+ in California, New York, and other states) tax on each dollar you donate?

Many people prefer to leave gifts to charity through their will. While this has the advantage of making sure you do not run out of money while you’re alive, you lose the benefit of reducing your income taxes today. If you have more than enough money, it may be preferable to give while you are alive, to enjoy seeing the good your money can do. That will give you better tax benefits, and also avoids problems with your will.

I know of a deceased individual (not a client) who planned to leave several million to charity and “only” $1 million to each child. The children are contesting the will and besides tying up the money for years, attorney’s fees will end up reducing the proceeds by at least $1 million. This tragic situation of a contested will is all too common, but could be avoided with better planning and communication. That’s where professional advice can help.

How can we help you with your charitable planning?

6 Steps at Age 60

Posted On September 12, 2016 By Scott Stratton, CFP(R), CFA In Retirement Planning / 1 Comment

The sixties are a decade of financial change. Are you prepared? Here’s my checklist to confirm if your finances are in good order at age 60.

1) 12.5X annual income. At this point, you should have saved at least 12.5 times your annual income in your investment and retirement accounts. Why 12.5 times? When you retire, we will recommend an initial 4% withdrawal rate. To replace one-half your income from investments, you would need 12.5X. For example, if your income is $100,000, we’d want at least $1,250,000 in investments to provide $50,000 a year in distributions.

Why replace only half your income? Won’t that be a significant drop in your standard of living? As an employee today, you are subject to payroll taxes (7.65%) which will not apply to your retirement income. Since you are saving today for retirement, that “expense” will go away in retirement. Plus the 50% is only withdrawals – when we include Social Security, and possibly pension income, your income replacement rate may be 70% or higher.

You may disagree with this, because at age 60, you have no immediate plans to retire. Therefore, you think this does not apply to you. Wrong. The 2016 Retirement Confidence Survey from the Employee Benefits Research Institute finds “a considerable gap exists between workers’ expectations and retirees’ experience about leaving the workforce.” Although 37% of workers expect to work past age 65, only 15% of retirees actually retired at this age. Most reported retiring for reasons beyond their control, such as layoffs, health issues, or family reasons. So, just because you plan to keep working does not guarantee that you will actually be able to do so.

Even if you do not retire for another five years, the market might not be higher over this short time frame. Certainly that was the experience for people who retired in January of 2009. If you already have 12.5X your income by age 60, then you aren’t dependent strong market performance in your last years of work to get you to the finish line.

2) Estate plan. If your will and documents are more than five years old, it’s time to revisit your estate plan for an update. This should include:

Checking the beneficiaries on your retirement plans, IRAs, life insurance, and annuities.
Updating your Will.
Establishing Directives and Powers of Attorney if you should become incapacitated.
Considering if you have the potential for an Estate Tax liability; considering whether trusts are needed for asset protection, tax planning, or special needs.

3) Health Care. Modern healthcare is extending the human lifespan. Even more significant than the added years is the high quality active lifestyle that people are leading in their seventies and even eighties today. Many of the miracles of modern medicine are in the early detection, treatment, and cure of common diseases such as cancer and heart disease. If you want to enjoy these life-saving advances, you have to participate and have regular screenings and testing as recommended by your physician. Don’t ignore minor symptoms, bring them to your doctor’s attention as soon as possible.

I think many of us are reluctant to go see a doctor when we feel well or can find an excuse to not go. Without your health, you are not going to be able to enjoy the fruits of your decades of work. Make a small, but essential, investment in your future by taking care of your self.

4) Long-Term Care Plan. Note, this says plan, it does not say insurance. Not everyone needs to have Long-Term Care Insurance, some people can afford to self-insure. No one wants to think of themselves as being in a nursing home. However, as people are living longer, more of us will need assistance. Today, many LTC insurance policies include coverage for home health care and aides, meaning that the policy may actually be the reason why you can stay at home and not have to go to a nursing home.

At age 50, people aren’t interested in buying LTC when it is 30+ years away. At age 70, a policy will be prohibitively expensive, and you won’t want to buy one even if you could afford it. Age 60 is the sweet spot for buying LTC insurance. Here’s what you should do: determine if you can afford long-term care in the future without the insurance. If not, contact me for more information. If leaving money to heirs or charity is a top priority for you, you should actually consider the insurance as it will reduce the possibility of depleting your assets if you should need care.

5) Social Security Statement. Create your account on ssa.gov and download your statement.

These estimates assume you continue to work until the age of retirement. Know your Full Retirement Age, and learn about how benefits are reduced for early retirement and increased for delaying up to age 70.
The spouse with the higher benefit will provide a benefit for both lives, under the survivorship benefit. Therefore, you should try to maximize the benefit of the higher earning spouse by delaying, if possible, to age 70.
Statements do not list spousal benefits, and all amounts are in today’s dollars. Benefits will accrue Cost of Living Adjustments to keep pace with inflation.

6) Health Insurance. Keeping your benefits is essential until age 65, when you become eligible for Medicare. When you do receive Medicare, you will still have to pay premiums for Part B, as well as any Supplement, Advantage, or drug plans. Don’t neglect to include these costs in your retirement budget!

Back in 2008, I realized that many of my clients had similar questions once they were within five years of retirement. This is a crucial final period of preparation for your decades ahead. To help educate pre-retirees about these issues, I wrote Your Last 5 Years: Making the Transition From Work to Retirement as your guidebook. Email me for a copy or order one from Amazon!