Become A Wealth Builder

Posted On June 15, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /

Is this a terrible time to become a wealth builder? With market uncertainty from the Coronavirus, and the very real destruction of jobs and income, it’s easy to dispair. But you shouldn’t and here’s why.

There remains a unique opportunity in America to become financially independent. Building wealth is a slow process that requires patience, discipline, and smart decisions. But once that process has begun, it is simple. And by simple, I mean not complex. That’s not to say it is easy! Like running a marathon, it’s a long haul, but it is also just one step at a time.

You can begin those steps today. We offer two programs at Good Life Wealth Management. Our Premier Wealth Management program provides holistic financial planning and tactical asset management for investors with assets over $250,000. The Wealth Builder Program is designed for investors who are starting out and have less than $250,000 to invest. In fact, many of my clients in the program start with zero dollars to invest with me.

You can read more about the Wealth Builder Program here. Today, I want to share three reasons why now is a great time to start the process.

Long-term Expected Returns

Investing should be a 30+ year process, but people are so focused on the month to month volatility. Don’t! It’s noise that will distract from your goals. The Vanguard Capital Markets Model, projects the following expected annualized returns for the next 10 years (as of June 3, 2020):

US Large Cap 5.4% to 7.4%
US Small Cap 6.2% to 8.2%
International Equity 8.5% to 10.5%

That’s not bad. Will Vanguard be right? No one knows. But I do know that leaving your money in a bank account earning 0% won’t grow. If you have more than 10 years until retirement, history suggests you are likely to be wise to invest. And if the market does drop, that is often a great buying opportunity for investors in Index Funds. Stick with diversified funds, and Dollar Cost Average with monthly automatic contributions.

Consider Inflation

Right now, there is no inflation and the concern in the near months is deflation. However, globally, governments are expanding the supply of money and taking on new debt at an unbelievable pace. How will economies be able to repay all this debt?

There are a couple of possible scenarios. Some smaller countries will default and not repay their debt. Some will introduce austerity measures, slash spending, and raise taxes. This will be very unpopular. I think the preferred way for many developed economies will be to try to gradually inflate out of debt. That is to say, it is easier to repay a fixed dollar amount of debt as the GDP and taxes of a country grows. So, some inflation will be good and very welcome.

Inflation does not help consumers, as the cost of living increases. We also have very low interest rates today, which penalizes savers. But if the eventual scenario is modest inflation, it will benefit borrowers like the government. People who hold cash – nominal dollars – will see their purchasing power decline with inflation. Wealth Builders investing in stocks and real assets are more likely to see their net worth grow in times of inflation.

Positive Wealth Building Habits

Over the past 16 years as a Financial Advisor, I’ve met many people who are financially independent and observed their personal characteristics. Successful investors are not necessarily smarter than everyone else, but they usually are optimistically committed to good savings habits.

We’ve certainly had bad times in the past 20 years. It hasn’t been an easy road. We had the Tech bubble, followed by 9/11, and struggled with an unprecedented three down years in a row. The Death of Equities? No. We had the housing bubble and crash in 2008-2009. Was that the end of investing? No.

There are times when you have big drops and it’s ugly. Today, people may be thinking that the world is going to hell in a handbasket and that investing now would be pointless. But that is exactly what investors over the past 20 years faced, and it turned out fine. That’s why I think it’s important to educate yourself on history and think positive. Create wealth building habits now without worrying about what is going to happen in the rest of 2020.

Make automatic contributions to your accounts like a 401(k) or IRA. Dollar Cost Average and keep investing.
Diversify. Consider Index Funds as core holdings. Evidence shows that a majority of active funds underperform their benchmark over 5 or more years.
Don’t get greedy. Chasing performance can hurt returns. Avoid speculating on individual stocks, sectors, or countries.
You cannot control what the market does. Your goal should be to be a participant in the market, not to try to get in and out of the market.
Focus on what you can control: your mix of investments (asset allocation), and keeping taxes and expenses low. Rebalance.
Live beneath your means. Keep your housing and car expenses down and create the room in your budget to save. Increase your savings rate over the years, not your lifestyle expenses.

Conclusion

In spite of today’s uncertainty, there are reasons why young people need a plan to become a wealth builder. Long-term equity expected returns are still attractive, especially relative to cash and 10-year bonds. If you anticipate inflation picking up over the next several decades. you want to be invested for growth. Good savings and investing habits can create wealth over time. The more years you have, the earlier you start, the more chance to compound your returns. Eventually, your money will work for you.

In our Wealth Builder Program, we begin with a Balance Sheet to quantify all your assets and liabilities. For many young professionals, this often starts as a negative number. We will track your net worth and create a plan to save, invest, and grow your wealth. We will address risks to you and your family and develop a plan that’s unique to your situation.

Yes, you can always wait for tomorrow. A decade ago, we had just come out of a crash. As of May 31, 2020 the 10-year annualized return of an S&P 500 fund (SPY) is 13%. Were people wildly optimistic 10 years ago about the opportunity to invest? No. There’s never that degree of confidence and certainty. You just have to get started and commit to making it work. Ready to become a wealth builder? Email me for information.

Past performance is no guarantee of future results. Investing involves risk of loss of capital. Dollar cost averaging cannot guarantee against a loss.

Coronavirus Market Update

Posted On April 26, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /

As we enter the seventh week of shut-downs, we are going to share our Coronavirus Market Update. Let’s look at the numbers and talk about stocks, unemployment, interest rates, oil prices, and government assistance programs.

1. Market rebound

From a low of 2237 on the S&P 500 Index on March 23, we are up 27% to 2836 as of Friday’s close. This is a remarkable bounce. Now the market is down only 12% year to date. I have a couple of thoughts on this:

The rebalancing trades I placed in March consisted of selling bonds and buying stocks. Overall, those trades have been profitable and beneficial for clients. At the time, it did not feel good to buy stocks in the midst of such carnage. Rebalancing is usually a contrarian action; we buy when markets are down and sell when markets are up.
If you thought the best move in March was to bail out and increase cash, it didn’t work. The market bottom will often be significantly ahead of an economic bottom. The market is a leading indicator. You won’t get an All-Clear to come back into the market.
Was that THE bottom? Will we retest lows? I don’t know and it is not predictable. We have up come very far, very fast and as I will discuss below, we are only seeing the tip of the iceberg of the economic fallout. The market has had a 26% move in a month and I am going to rebalance again. Because we made deliberate trades in March, some portfolios may now be overweighted in stocks after this quick rebound. Those trades will happen this week.

2. Unemployment

There have been 26 million unemployment claims since the start of the Coronavirus. Approximately one out of six workers have been laid off and this number excludes most independent contractors. A report from the Federal Reserve Bank of Boston projects that 18% of homeowners and 36% of renters in New England will be unable to make their housing payments.

These levels of unemployment have not been seen since the Great Depression, when unemployment reached 24% in 1933. This will have a ripple effect on consumer spending, defaults on loans, mortgages, and credit cards, the auto industry, real estate prices, and so on. For the economy, this will likely have an impact for at least 12-18 months.

Markets go up when there are more buyers than sellers. That’s it. So, the action over the past month tells you that there is money on the sidelines, in spite of rising unemployment. The wealthy are less wealthy, but they are rebalancing and looking for profits in a strong market. They are also bargain shopping for great companies which may have been trading at multi-year lows in the past month.

3. Oil prices

This week, massive options selling coupled with no buyers caused the May futures contracts for Crude Oil to sink into negative prices. With people not travelling, demand for oil has plummeted. A few countries have flooded the market with oil and current daily production exceeds demand by 20 million barrels a day. Luckily, Texas is more diversified today than just oil companies, but oil companies are taking a hit.

Oil Companies which have borrowed a lot of money for expansion or acquisition are in trouble and may fail. This is creating fear in the bond market, where the spreads on corporate bonds have widened significantly. At the beginning of the year, corporate bonds were trading at yields very close to Treasuries. Not so today, and that creates opportunity to buy bonds of companies with strong balance sheets.

4. Interest Rates

Treasury bill interest rates fell to zero last month, to match zero rates in Europe and Japan. Today, those levels have increased slightly, but remain around 0.13% to 0.20% for maturities of two years or less. Take aways:

You can’t fund your retirement with Treasury bonds today – the returns are too low. These rates are way below historical inflation, and even if we are in deflation for the next year, the returns just don’t work with most people’s required rate of return in their retirement projections.
You can move from Treasuries to CDs to Fixed Annuities to increase your yield while maintaining a guaranteed, safe return. Treasury rates are being manipulated by Central Banks. As governments take on trillions of new debt, they somehow become a safer credit and their interest rate falls to zero? This is not what a free-market looks like and it is penalizing the heck out of savers and retirees.
Individual investors will choose not to own Treasuries. The Fed wants to push investors out of risk-free assets and into risky assets like stocks or real estate.

5. Government Programs

Individuals have been receiving their $1200 stimulus checks. Many small businesses who applied for the Paycheck Protection Program have been shut out as demand for those loans greatly exceeded the $349 Billion allocated. I’ve heard that only companies who applied on the very first day received funds. Apparently, the Treasury favored community banks and therefore you were actually less likely to receive the loan if you applied through one of the large national banks. However, if you have an application pending, Congress is going to fund further loans. Thank you to everyone who reached out to me to discuss their PPP application.

The SBA also offered the Emergency Income Disaster Loans (EIDL). They announced a week ago that they were no longer accepting applications. I applied for this program about 18 days ago and still have not received a reply. They originally said applicants would receive the money in three days. I sent an email about my application and received back a form letter saying they were still processing applications in the order received. Hopefully, this will work! If you applied for any government assistance for your business, please shoot me an email and let me know where things stand for you.

Final Thoughts

The market has had a great rebound in April and it is a big relief. Losses have been cut by 2/3 and many investors have been buying. From my perspective, investors seem less panicked this year than they were in 2000 or 2008. As a result, most have understood that they need to ride things out and that this will pass.

We rebalanced in March and that worked well. It is part of our discipline and we will look at rebalancing again now that we have recovered 26%. This will be done on a portfolio by portfolio basis and will include a careful examination of the tax implications of any trades. Most of the March trades harvested losses, so we can now realize short-term gains up to those levels.

The economy clearly isn’t out of the woods. Unemployment will probably increase in May. These numbers will grow and many families are going to have to tighten their belts. There is a tremendous amount of government support being directed at impacted industries and small businesses. Hopefully, those funds will start to reach companies soon. Investors need to be patient and have a disciplined plan. We will continue to focus on your long-term success and look at ways to reduce unnecessary risk.

Stimulus Payments to Business Owners

Posted On April 5, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /

As part of the $2 Trillion CARES Act, there are three programs to provide Stimulus payments to business owners. Unlike the 2008 crisis, this time the government is not bailing out the big banks and Wall Street. Instead, Washington is sending cash to self-employed people and small business owners. They are shoveling money out the door to help you pay your bills, keep your workers paid, and still have a business when we eventually emerge from the Coronavirus shutdown. The scale of this is unprecedented and you should make sure to get your share.

We are going to look at three specific programs and give you links to find more information and apply. The three stimulus payments to business owners include: the Paycheck Protection Program, Employee Retention Tax Credit, and the SBA Disaster Grant. You may be eligible for some or all of these programs.

What if you are self-employed or an Independent Contractor, but not a corporation, LLC, or other entity? You are still a business even if you are the only employee. If you file a Schedule C, you have a business. If you have questions, here’s my contact info.

Paycheck Protection Program

The Paycheck Protection Program is providing $349 Billion in loans to small businesses. These loans are designed to keep employees on the payroll and off unemployment. The loans are forgivable. The government doesn’t want you to pay them back, as long as you spend the money to pay employee salaries and benefits in the next eight weeks.

The PPP is available to businesses from 1 to 500 employees. The Small Business Administration (SBA) guarantees the loans, which will be provided through 1700 Banks and Credit Unions. Your bank is probably already an SBA lender. Technically, the PPP is a 2-year loan at 0.50% interest. Payments are not required for six months. If you spend the loan on allowable expenses within 8 weeks, then the loan will be forgiven. You also have to keep the same number of employees and not reduce payroll during this period. The loan forgiveness will be non-taxable. Steps:

Apply for the loan at your bank using Model Application (link below).
Spend the loan in the following eight weeks on payroll, benefits, and rent.
Apply for loan forgiveness and document that the funds were spent as intended.

You must state on the application that your business was impacted by the Coronavirus and you need this money to meet payroll and expenses. This is easy. Most businesses are “non-essential” and were required to close in your area due to the shelter in place rules. Even if you stayed open, you may have had supply disruptions, or other negative impacts to you business.

Loan Amount and Application

The application provides instructions to calculate your loan amount. You are eligible to borrow two and one-half months of payroll, up to $10 million. Payroll includes gross pay plus taxes. Salary eligible for loan forgiveness is capped to $100,000 per person annually.

Then over the next eight weeks, you can spend the loan on payroll, payroll taxes, employee benefits, including health insurance premiums, retirement plan contributions, and sick leave or vacation. You can also spend the money on rent or mortgage interest for your business property (if you have a store or office, for example). Non-payroll expenses cannot exceed 25% of the total.

Eligible businesses includes corporations and LLCs, but also includes non-profit organizations, sole proprietors, and those who are self-employed or independent contractors. Many businesses can apply for the loan starting on April 3, 2020, and Independent Contractors can apply starting April 10. The program will close once the $349 Billion is gone. Don’t delay!

Here is the required application for the Paycheck Protection Program. Your bank should accept this paperwork for the loan. The SBA is paying all the application or service fees for the loan, so it costs you nothing. If you have a business account at Chase, apply here to get in their queue.

Employee Retention Credit

If you own a business with multiple employees, such you should also know about the Employee Retention Tax Credit. It’s another part of the CARES Act. To qualify, you must have either been temporarily closed down due to local regulations or have your gross receipts fall by 50% this quarter versus last year. For business owners with lower income or part time workers, it may be better to use the Employee Retention Credit rather than the PPP. You have to choose one or the other: if you take the PPP you are ineligible for the Employee Retention Credit.

The Employee Retention Credit is for 50% of income per employee up to $10,000 a year. So the maximum tax credit is $5,000 per employee for 2020. Now if your employees will make less than $5,000 in 2.5 months but more than $10,000 for the rest of the year, you would be better off with the ERC versus the PPP. The ERC is not available to self-employed individuals and will apply to income from March 12, 2020 to the end of the year. Full details and eligiblity here on the IRS Website.

In general, I think the PPP is the better option for most businesses, but it would not hurt to run the numbers. Calculate if the Employee Retention Credit would provide you with more funds. Of course, you won’t get the tax credit until you file your 2020 taxes next year. If you need the funds to meet payroll now, then you need the PPP. The ERC is not available to self-employed or sole proprietors.

SBA $10,000 Disaster Grant

The third of the stimulus payments to business owners from the CARES Act is the SBA Disaster Loan program. The full name is the COVID-19 Economic Injury Disaster Loan Application. They have expanded the eligibility to all businesses. You are technically applying for a loan. As part of the loan application, they will advance your business $10,000 of the loan. This is not called a “grant” on the SBA application, even though the CARES Act calls it a grant, so it can be confusing. They will direct deposit the funds into your business account within a week. The $10,000 Grant does not have to be repaid, but if you borrow more than the $10,000, the rest would have to be repaid. You’re not going to believe this, but even if the SBA does not approve your loan, you still get to keep the $10,000.

You can apply online at the SBA website here; it should take less than 20 minutes. On page one, they ask questions about your business eligibility for the Economic Injury Disaster Loan Program. Most will check the first line: “Applicant is a business with not more then 500 employees.” That qualifies you for the grant, even if you are the only employee.

Next, you will certify that you are not in a disqualifying business (i.e. porn). Third, you will give information about your business, including EIN, gross revenues and cost of goods sold for the 12 months to January 31, 2020. Fourth, information about the owner and the bank information for the deposit. Towards the end of the application, there is a box to check if you want to be considered for a $10,000 advance on the loan. CHECK THIS BOX. This advance is the $10,000 grant under the CARES Act. After you submit, it will give you an application number. Print this page or write it down. You do not receive an email confirmation, but you will be notified of the decision by email.

Which to Choose?

Technically, you can apply for both the SBA disaster grant and the PPP. However, they will subtract the disaster grant from your PPP forgiveness amount. The primary reason to do the disaster grant instead of the PPP is if your PPP would be under $10,000. If you need additional loans beyond the PPP’s two months of funding, do both applications. Also, you can apply for the Disaster Grant right now online whereas most banks are struggling to get ready for the PPP application.

Don’t delay in applying for stimulus payments for business owners. There are limited funds in place and some of these programs are first come, first served. I’ve spoken with some clients who are reluctant to take a bailout of their business and are prepared to tough it out. With everyone going to shelter in place, the economy is grinding to a halt. And when you have a service economy, that’s a catastrophic problem. So, please take the money and use it. Pay your employees. Keep buying stuff. Keep funding your retirement accounts. And of course, replenish your emergency fund or increase it. If you don’t need the money, make a donation to your favorite local charity, because they are also hurting from the shutdown.

CARES Act RMD Relief for 2020

Posted On March 30, 2020 By Scott Stratton, CFP(R), CFA In College Savings, Financial Planning, Tax Strategies /

The Coronavirus Aid, Relief, and Economic Security CARES Act approved this weekend eliminates Required Minimum Distributions from retirement accounts for 2020. If you have an inherited IRA, also known as a Stretch or Beneficiary IRA, there is also no RMD for this year. We are going dive into ideas from the CARES Act RMD changes and also look at its impact on charitable giving rules.

Of course, you can still take any distribution that you want from your retirement account and pay the usual taxes. Additionally, people who take a premature distribution from their IRA this year will not have to pay a 10% penalty. And they will be able to spread that income over three years.

RMDs for 2020

Many of my clients have already begun taking their RMDs for 2020. (No one would have anticipated the RMD requirement would be waived!) Can you reverse a distribution that already occurred? Not always. However, using the 60-day rollover rule, you can put back any IRA distribution within 60 days.

If you had taxes withheld, we cannot get those back from the IRS until next year. However, you can put back the full amount of your original distribution using your cash and undo the taxable distribution. You can only do one 60-day rollover per year.

For distributions in February and March, we still have time to put those distributions back if you don’t need them. Be sure to also cancel any upcoming automatic distributions if you do not need them for 2020.

If you are in a low tax bracket this year, it may still make sense to take the distribution. Especially if you think you might be in a higher tax bracket in future years. An intriguing option this year is to do a Roth Conversion instead of the RMD. With no RMD, and stocks down in value, it seems like a ideal year to consider a Conversion. Once in the Roth, the money will grow tax-free, reducing your future RMDs from what is left in your Traditional IRA. We always prefer tax-free to tax-deferred.

Charitable Giving under the CARES Act

Congress also thought about how to help charities this year. Although RMDs are waived for 2020, you can still do Qualified Charitable Distributions (QCDs) from your IRA. And for everyone who does not itemize in 2020: You can take up to $300 as an above-the-line deduction for a charitable contribution.

Also part of the CARES Act: the 50% limit on cash contributions is suspended for 2020. This means you could donate up to 100% of your income for the year. This is a great opportunity to establish a Donor Advised Fund, if significant charitable giving is a goal.

Above the $300 amount, most people don’t have enough itemized deductions to get a tax benefit from their donations. Do a QCD. The QCD lets you make donations with pre-tax money. Of course, you could do zero charitable donations in 2020 and then resume in 2021 when the QCD will count towards your next RMD. But I’m sure your charities have great needs for 2020 and are hoping you don’t skip this year.

The Government was willing to forgo RMDs this year to help investors who are suffering large drops in their accounts. To have to sell now and take a distribution is painful. However, if you already took a distribution, you are not required to spend it. You can invest that money right back into a taxable account. In a taxable account, the future growth could receive long-term capital gains status versus ordinary income in an IRA. I’ll be reaching out to my clients this week to explain the 2020 CARES Act RMD rules. Feel free to email me if you’d like our help.

SECURE Act Abolishes Stretch IRA

Posted On January 20, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning, Retirement Planning /

The SECURE Act passed in December and will take effect for 2020. I’m glad the government is helping Americans better face the challenge of retirement readiness. As a nation, we are falling behind and need to plan better for our retirement income.

It’s highly likely that the SECURE Act will directly impact you and your family. Six of the changes are positive, but there’s one big problem: the elimination of the Stretch IRA. We’re going to briefly share the six beneficial new rules, then consider the impact of eliminating the Stretch IRA.

Changes to RMDs and IRAs

1. RMDs pushed to age 72. Currently, you have to begin Required Minimum Distributions from your IRA or 401(k) in the year in which you turn 70 1/2. Starting in 2020, RMDs will begin at 72. This is going to be helpful for people who have other sources of income or don’t need to take money from their retirement accounts. People are living longer and working for longer, so this is a welcome change.

2. You can contribute to a Traditional IRA after age 70 1/2. Previously, you could no longer make a Traditional IRA contribution once you turned 70 1/2. Now there are no age limits to IRAs. Good news for people who continue to work into their seventies!

3. Stipends, fellowships, and home healthcare payments will be considered eligible income for an IRA. This will allow more people to fund their retirement accounts, even if they don’t have a traditional job.

529 and 401(k) Enhancements

4. 529 College Savings Plans. You can now take $10,000 in qualified distributions to pay student loans or for registered apprenticeship programs.

5. 401(k) plans will cover more employees. Small companies can join together to form multi-employer plans and part-time employees can be included

6. 401(k) plans can offer Income Annuities. Retiring participants can create a guaranteed monthly payout from their 401(k).

No More Stretch IRAs

7. The elimination of the Stretch IRA. This is a problem for a lot of families who have done a good job building their retirement accounts. As a spouse, you will still be allowed to roll over an inherited IRA into your own account. However, a non-spousal beneficiary (daughter, son, etc.) will be required to pay taxes on the entire IRA within 10 years.

Existing Beneficiary IRAs (also known as Inherited IRAs or Stretch IRAs) will be grandfathered under the old rules. For anyone who passes away in 2020 going forward, their IRA beneficiaries will not be eligible for a Stretch.

If you have a $1 million IRA, your beneficiaries will have to withdraw the full amount within 10 years. And those IRA distributions will be taxed as ordinary income. If you do inherit a large IRA, try to spread out the distributions over many years to stay in a lower income tax bracket.

For current IRA owners, there are a number of strategies to reduce this future tax liability on your heirs.
Read more: 7 Strategies If The Stretch IRA Is Eliminated

If you established a trust as the beneficiary of your IRA, the SECURE Act might negate the value and efficacy of your plan. See your attorney and financial planner immediately.

IRA Owners Need to Plan Ahead

The elimination of the Stretch IRA is how Congress is going to pay for the other benefits of the SECURE Act. I understand there is not a lot of sympathy for people who inherit a $1 million IRA. Still, this is a big tax increase for upper-middle class families. It won’t impact Billionaires at all. For the average millionaire next door, their retirement account is often their largest asset, and it’s a huge change.

If you want to reduce this future tax liability on your beneficiaries, it will require a gradual, multi-year strategy. It may be possible to save your family hundreds of thousands of dollars in income taxes. To create an efficient pre and post-inheritance distribution plan, you need to start now.

Otherwise, Uncle Sam will be happy to take 37% of your IRA (plus possible state income taxes, too!). Also, that top tax rate is set to go back to 39.6% after 2025. That’s why the elimination of the Stretch IRA is so significant. Many middle class beneficiaries will be taxed at the top rate with the elimination of the Stretch IRA.

From a behavioral perspective, most Stretch IRA beneficiaries limit their withdrawals to just their RMD. As a result, their inheritance can last them for decades. I’m afraid that by forcing beneficiaries to withdraw the funds quickly, many will squander the money. There will be a lot of consequences from the SECURE Act. We are here to help you unpack these changes and move forward with an informed plan.

Your Home Is Like A Bond

Posted On January 15, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /

You’re doing well. You’ve got your emergency fund, you’re maxing out your 401(k), and you don’t have any credit card debt. At this point, a common question is: Should I send extra payments to my mortgage? And with markets near their highs, maybe you’re even wondering, Should I pay off my mortgage?

There are a lot of emotional reasons to pay off your mortgage. You could own your house free and clear and never have to worry about a mortgage again. You could reduce your bills in retirement. Investments carry uncertainty, whereas paying down a debt is a sure thing. Those are typical thoughts, but that’s not necessarily a rational answer.

Maximize Your Net Worth

In financial planning, our goal is to determine the solution which maximizes utility. Will I have a higher net worth if I pay off my mortgage or invest the money?

The answer, then, is it depends. It depends on the rate of return on your investments compared to the rate you are paying on your mortgage. If your mortgage is 3% but your cash is earning 0.5%, you would be better off paying down the mortgage. (Assuming you still kept sufficient liquidity for emergencies). On the other hand, what if your mortgage is 3% and you could be making 7%? Then, you would maximize your net worth by staying invested and not pre-paying your mortgage.

Most people would prefer to be debt free. However, if you can invest at a higher return than you borrow, you will grow your net worth faster. I don’t think of a home as being a great investment. Houses generally keep up with inflation, but have returns similar to bonds, or slightly less.

Home Versus Bonds

Looking at the Case-Shiller 20 City Home Price Index (which includes Dallas), the overall rate of return since 2000 was 4.02%. Let’s look at an actual bond fund, not just hypothetical indexes. An investor could have earned 5.15% a year in the Vanguard Intermediate Term Bond Index fund, since fund inception in 2001.

The money you put into your house, will likely behave like a bond, although possibly with more volatility. Over a long period, it should keep up with inflation, or if you’re lucky, a little better than inflation. (See below for my concerns about home prices, or thinking of a home as an investment.)

I do believe it is realistic, based both on historical returns and projected returns, to anticipate a return of 5-8% from a diversified portfolio containing 60% or more in stocks. That’s not guaranteed, but if your time horizon is twenty or thirty years (i.e. same as a mortgage), it’s a reasonable assumption. And the longer the time period we consider, the greater likelihood of a positive outcome from stocks.

While it is important to consider the overall levels of risk and return of your portfolio, a portfolio is made up of specific segments. Today, the yields on high quality bonds are very low. With the 10-year treasury yielding only 1.25%, there’s not much return to be had in bonds.

Using Cash or Bonds to Pay Down Mortgage

Let’s consider an example, using round numbers for simplicity. Let’s say you have a $1 million portfolio in a 60/40 portfolio: $600,000 in stocks and $400,000 in bonds. You also have a $200,000 mortgage at 3.5%. The expected returns (hypothetical) for stocks is 7% and for bonds 2.5% today. That would give the overall portfolio an expected return of 5.2%, which is higher than your mortgage rate.

On the bonds, though, the expected return of 2.5% is less than your mortgage cost of 3.5%. If you believe that today’s low yield environment is likely to persist for a long time, it might make sense to take $200,000 from your bonds to pay off the mortgage. That would leave you with a portfolio containing $600,000 of equities and $200,000 in bonds, a 75/25 portfolio.

The new portfolio would be more volatile than the original 60/40 portfolio, but the dollar value of your stock holdings would remain the same. And your net worth will grow faster, since we paid off debt at 3.5% with bonds that would have yielded only 2.5%.

Provided you are comfortable with having a more volatile portfolio, you might maximize your net worth by withdrawing from bonds but not from your equities. This means increasing your equity percentage allocation. However, I wouldn’t sell stocks to pay down a long dated mortgage. Consider the math on that decision carefully.

Additional Considerations

There’s a lot to evaluate here, so it is important we discuss your individual situation and not try to simplify this to some type of universal advice or rule of thumb.

If your choices are to send in extra mortgage payments or do nothing, then yes, send in extra payments. That’s better than spending it!
Are you choosing between extra payments versus another investment? Then, consider the long-term expected rate of return of the investment versus the interest rate of the mortgage.
While bond yields are low today, it is possible they could rise in the future. If you have short-term bonds you might gradually reset your yields to higher levels. A fixed mortgage, however, will stay at the same rate for the full term of 15 to 30 years. Now is a great time to borrow very cheaply. If we have higher inflation in the future, it will benefit borrowers and penalize savers.
You can invest outside of a retirement account. In fact, if your goal is to retire early, become a millionaire, or create a family trust, you need to do more than just a 401(k). Some people stop after funding a 401(k) and think they don’t need to make any additional investments. Paying down a mortgage is not your only option; consider a taxable account.
A mortgage is a form of forced savings. If you have a monthly mortgage of $1,500, maybe $500 of that is interest and the remaining $1,000 is building equity in your home. If you pay off your mortgage from investments, you will save $1,500 a month. You will feel wealthier because you improved your cash flow. But if you don’t invest that $1,500 a month going forward, you will likely just increase your discretionary spending. Be careful to not miss that opportunity to increase your saving.

On Home Values

Your home value will increase the same whether you have a mortgage or own it free and clear.
There are significant expenses in being a home owner which make it a poor investment, including property taxes, insurance, utilities, and repairs or improvements. These costs are not included in a home price index. Read more: Inflation and Real Estate
Selling costs can also be significant, such as a 6% realtor commission. I bought a house for $375,000 in 2006 and sold it in 2017. After paying closing expenses, I received $376,000. That’s not a good return, and those amounts don’t include the improvements I made to the house.
If your primary goal is to grow your net worth, consider your home an expense and not an investment. If you aren’t going to stay for at least five years, rent.
After the Tax Cuts and Jobs Act, most people cannot deduct their property taxes and mortgage interest. This is especially true for married couples. So, forget about having a home as a great tax deduction; most taxpayers will take the standard deduction.

At best, you might consider home equity to be a substitute for a bond investment. Given today’s very low yields, you could reduce bond holdings to pay off a mortgage. Your home is significant part of your net worth statement. It’s often one of your biggest assets, liabilities, and expenses. Think carefully about how you manage those costs. Genuinely analyze how different decisions could impact your net worth over ten or more years. That’s the approach we want to use when asking, Should I pay off my mortgage?

Giving Strategies, Now and Later

Posted On November 10, 2019 By Scott Stratton, CFP(R), CFA In Financial Planning /

If you have a significant estate and are thinking about how to give money to charity or individual beneficiaries, you might want to consider if it would be possible to make some of those gifts during your lifetime. Today, we are going to look at the tax benefits or implications of different large gift strategies.

A gift to charity from your estate will reduce your your taxable estate. However, with the estate tax threshold presently at $11.4 million per person, most people will never pay any estate taxes. This was not the case 15 years ago when the estate tax threshold was just $1.5 million. For married couples, the threshold is doubled to $22.8 million. So if your past estate plan was based on estate tax avoidance, it may be time to update your plans and revisit your charitable strategies.

Charitable donations remain eligible as an itemized deduction, although many tax payers will not have enough deductions to exceed the 2019 $12,200 standard deduction ($24,400 married). However, if you are contemplating a large charitable donation, you can deduct up to 60% of your Adjusted Gross Income (AGI) when making a cash donation to a public charity. (This was increased from 50% under the 2017 Tax Cuts and Jobs Act.) If making a donation of non-cash property, such as appreciated shares of stock, the limit is 30% of AGI. In both cases, you can carry forward any excess donation for five years.

Here are seven principles for giving to charities and to individuals, such as your children or grandchildren:

1. If you have stocks or funds with a large gain, you can give those shares to charity, get the full tax deduction and avoid capital gains tax. The charity will not pay any taxes on the shares they receive and sell.

2. If you leave an IRA to a charity, that is name a charity as a beneficiary of your IRA rather than a person, they will pay no tax on receiving your IRA.

3. For individual beneficiaries of your estate, they will have to pay income tax on inheriting your IRA. Presently, there is a Bill which has passed the House which will eliminate the Stretch IRA. However, beneficiaries will receive a step-up in cost basis on inherited taxable accounts. The most tax efficient split is to leave your Traditional IRA to charity and your taxable assets and Roth IRAs, to your heirs. Then neither will pay income taxes on the assets they receive.

4. If you are over age 70 1/2, you can make up to $100,000 a year in gifts from your IRA as Qualified Charitable Distributions, which count towards your RMD. You do not have to itemize to use the QCD.

5. You can give $15,000 a year to any individual; this is called the annual gift tax exclusion. A couple could give $30,000 to an individual. This includes your adult children. Additionally, you can directly pay medical or educational expenses for any individual without this limit.

Where many people are confused: exceeding the gift tax exclusion does not automatically require you to pay a gift tax. It simply requires filing a gift tax return, which will reduce your lifetime Gift/Estate tax limit, which again is $11.4 million per person (2019). For example, if you give someone $17,000 this year, the $2,000 over the $15,000 limit will be subtracted from your $11.4 million estate tax exemption when you die.

6. If you want to create college funds for your grandchildren or other relatives, you can fund up to five years upfront into a 529 Plan without exceeding the gift tax exemption. That is $75,000 per beneficiary, or up to $150,000 if coming from both Grandma and Grandpa. You can retain control of the funds, even change the beneficiary if desired, and the money grows tax-free for qualified higher education expenses.

7. You can make a large donation to a Donor Advised Fund to receive an upfront tax deduction and then make small donations in the years ahead. For example, it would be more tax efficient to make a $100,000 donation into a DAF and make $10,000 a year in charitable distributions for 10 years from the DAF, than to make regular $10,000 donations each year for 10 years.

Even if you know all of this information, I think many potential donors are still looking for more flexibility in their giving plans. What if you need money later? How much should you keep for your own expenses and needs? Creating a comprehensive retirement analysis is an essential first step, and then we can help you consider other more advanced giving strategies.

There are many ways of structuring charitable trusts which can split assets and income between the creator of the trust, a charity, and/or beneficiaries. Generally, the donor is able to receive an upfront tax deduction for the present value of a gift, based on their expected lifetime or duration of the trust. The present value is calculated using your age and a specific discount rate, known as the Section 7520 rate, which is published monthly by the IRS. It is based on intermediate treasury bonds and is currently 2.2% for trusts created in September 2019. This rate is down from 3.4% from last August.

With a very low interest rate being used for the discount rate today, it is quite unappealing to establish a Charitable Remainder Trust (CRT). The low rate means that the tax deduction is very small compared to trusts that were established when the rate was higher. That’s unfortunate, because a CRT is an ideal structure: the creator receives income from the trust for life (or a set period of years) and then the remainder is donated to the charity when you pass away (or at the end of the term).

A more effective structure for a low interest rate environment is a Charitable Lead Trust (CLT). In this type of trust, a charity receives income for a period of years (say 10 years) and then any remaining principal is distributed to your beneficiaries, free from gift or estate taxes. This might hold some appeal for tax payers who would be subject to the estate tax and who do not need or want income from some portion of their assets. But it doesn’t offer much appeal to donors who want income or flexibility from their trusts.

If you are thinking about charitable giving or where your money might eventually go, let’s talk about which strategies might make the most sense for you.

Your Goals for 2019

Posted On January 13, 2019 By Scott Stratton, CFP(R), CFA In Financial Planning /

Welcome to 2019! A new year brings a fresh chance to accomplish your goals. Maybe you’re dreaming that this will be the year you buy your first home. Maybe you’ve realized that your kids are one year closer to college and it’s time you start preparing. Maybe this is the year you want to exit from your current job so you can spend more time doing the things you love.

Even if your goals are further out than 2019, by December 31 of this year, you can either be several steps closer to achieving those goals, or you can sit right where you are today and risk that they will remain forever out of reach. Time stands still for no one. This is the only chance to do 2019 before it is gone forever.

Many of your goals have a financial component. Whether it is becoming a home owner, paying off your student loans, getting married, saving for a college education, planning for your retirement, or supporting your favorite charity, we can help you achieve your goals. The objective of our financial planning is not to own a bunch of stocks and bonds or get a nice tax break, it is about finding an effective, efficient, and logical way to help you accomplish your life’s goals.

We love when someone has a concrete, specific objective. When you truly embrace an important goal, there is ample reason to find the discipline for whatever steps are needed to achieve your objectives. I can tell you all about the benefits of a Roth IRA or a 529 College Savings Plan, but if that doesn’t fit into your needs, all my words are worthless. The “why” has to be there first, before we can get excited about “how” we are going to do it.

If you have goals that you want to accomplish in 2019 – or 2020 or 2029 – I’d like to invite you to join us and become a client of Good Life Wealth Management today. We serve smart investors who value personalized advice centered on their goals.

I’d welcome the opportunity to share our approach and allow you to consider whether it would be a good fit for you and your family.

Our process focuses on planning first – we want to fully understand your goals and needs before we make any kind of recommendation. You would think this would be universal, but believe me, most of the financial industry has a product that they want to sell you before they have even met you. (Read our 13 Guiding Beliefs.)
We have no investment minimums. Younger professionals have financial goals and complex, competing objectives (hello, student loans!) even if they haven’t started investing or only have a small balance in a 401(k). We think helping young professionals build a strong financial foundation is important work. This is our Wealth Builder Program.
I’ve been a financial planner for 15 years and hold the Certified Financial Planner and Chartered Financial Analyst designations. Professional expertise and deep investment experience should be a given if you’re seeking financial advice. (More about Scott.)
Having your own plan means that you have taken an objective measure of where you are today, that we have created specific goals and objectives, and that we identify and implement steps to achieve those goals. While this is often savings and investment based, we’re going to evaluate your whole financial picture, from taxes and employee benefits to estate planning and life insurance. Bringing in a professional delivers accountability to a plan and protects you from what you don’t know you don’t know. (Financial Planning Services)
We are a Fiduciary, legally required to place client interests ahead of our own. Our fees are easy to understand and transparent. We aim to eliminate conflicts of interest wherever possible and if not possible, reduce and disclose. I invest in our Growth 70/30 model right along with our clients; if I thought there was a better way to invest, we would do that instead. (Skin in the Game)

Successful people – in any field – seek out the help and expertise of others. They surround themselves with knowledgeable professionals, not to abdicate responsibility, but to improve their understanding through asking the right questions. I became a financial planner to help others achieve their goals, and I love my job. For me, it is endlessly interesting and personally rewarding.

You could make a New Year’s resolution about your finances, but I genuinely believe you are more like to have a good outcome if you hire the right advisor who can help guide your journey. If you want 2019 to be the year when you turned your dreams into goals and a plan, then let’s talk about how we can work together.

Extend Your Car Warranty for Free

Posted On January 3, 2019 By Scott Stratton, CFP(R), CFA In Financial Planning /

When it comes to saving money, there are two expenses which will make or break your budget: your home and your cars. If you keep those expenses below your means, you will have a surplus to save and invest. That’s how you generate wealth.

Unexpected car repairs are the worst. You can spend thousands and it feels like you are just flushing your money away. That’s why we love car warranties: they help extinguish our fear of repair bills. For a lot of people, when their car warranty runs out, they want to get a new car because they can’t stand the thought of a catastrophic repair bill.

But buying a new car every three or four years exposes you to the steepest part of the depreciation curve. Most cars will lose 50 to 60 percent of their value within five years. Owning new cars is trading the mere possibility of car repair bills, which might not happen, for the certainty of significant depreciation, which is inevitable.

Of course, car dealers would love to sell you an extended warranty. It’s one of their most profitable areas. That alone makes me think they are not worth it. You are spending $2,000 to buy a $1,000 warranty. And the insurer probably only pays out 50 to 80 cents in claims for every dollar in premiums it receives. It seems like you would be betting against yourself.

I don’t usually endorse products or services here in my newsletter, but I came across a benefit which I think many of my readers might enjoy. It’s a way to provide protection against unexpected car repairs. This might allow you to keep your vehicles for longer and then direct more savings into your investment portfolios. (Selfishly, I will make more if my clients have larger investment portfolios, but hopefully that’s a goal we can both agree on!)

There is a company called BG Products which makes fluids for cars and trucks. They make motor oil (including synthetic), transmission fluid, brake fluid, anti-freeze/coolant, steering fluid, etc. BG offers a Lifetime Protection Plan that when you use their product regularly, if that component breaks down, they will reimburse you for the cost of the repair, up to a specific limit.

Best of all, they will cover your car, even if you don’t start using their fluids until 50,000 or 100,000 miles. That means that if you have a car with 80,000 miles, past the manufacturer’s warranty, you can actually add protection to your vehicle today. They offer double the protection if you start before 50,000 miles, so you might want to start sooner if you can.

There is no limit on miles. As long as you continue to change the fluids within the specified number of miles, your car will be covered. You could keep your car for 300,000 miles and it would still be protected.

Here are the service intervals required for the Lifetime Protection Plan. If your manufacturer suggests more frequent changes, I would follow those instructions. To stay under this protection plan, you need to replace fluids before reaching these limits.

Engine Oil: 10,000 miles

Coolant: 30,000 miles

Transmission Fluid: 30,000 miles

Power Steering: 30,000 miles

Brake Fluid: 30,000 miles

The BG plan will reimburse repairs if these components break, but not for normal wear and tear. You would have to get the repairs done and then submit your receipts for reimbursement, which are subject to the following limits:

Plan 1, started before 50,000 miles: $4,000 coverage

Plan 2: started between 50,001 and 100,000 miles: $2,000 coverage

Full details of covered components HERE.

BG Products are not available in stores, you have to find a shop which uses them. Here in Dallas, I have used M2 Auto Repair, near Love Field. I’ve had a great experience there and can recommend them. If you talk to Eddie, the owner, please tell him I sent you.

If you’re not in the Dallas area, you can find a BG Dealer here. I have not filed a claim with BG, so I cannot vouch for that process, but obviously it is going to be very important to be able to document that you did have the services performed within the mileage limits and that the repairs required were on the specific parts covered by the protection plan.

It doesn’t cover electronics, which is an increasingly large component in modern cars, but can give you some peace of mind over mechanical failures. If you’ve used BG and had a claim, please send me an email and tell me about your experience.

I am aware that other fluid makers offer warranties, including Mobil 1, Castrol, and Valvoline. In reviewing their warranty pages, they may offer similar benefits, but I think it may be more difficult to document proof of eligibility, and they don’t cover all of the systems that BG Products covers.

I’d also love to hear from you if you have ever filed a claim with another oil company and what result you received. Regular maintenance is an important part of keeping your car healthy, and it’s great to see a company stand behind its products. I’m no expert on cars, but I have spent a lot of time looking at spending behavior. Any techniques which can help us spend less over the life of our vehicles will help you achieve your other financial goals. So, even if you don’t end up using the Lifetime Protection Plan, just knowing you were covered may provide you with the extra confidence to keep you car for 150,000 or 200,000 miles.

You CAN Invest in a Taxable Account

Posted On September 29, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

I spend a lot of time talking about retirement accounts, and for many Americans, the only stocks they will ever own are in their 401(k) and IRAs. I don’t know why, but many have never even considered investing outside of a retirement account, and a few have even thought it was not possible.

It is a GREAT idea to invest outside of your retirement accounts. Why? Because the contribution limits are so low for IRAs ($5,500) and 401(k) accounts ($18,500). There are a lot of people who put in that amount and then think they can’t do any more investing or that they don’t need to. There’s nothing magical about these amounts. No one is promised that if you save $5,500 a year into an IRA that you will have enough to retire (especially if you are getting a late start). And if you have ambitions to be wealthy, it may take you 30 or 40 years of 401(k) contributions to break the $1 million mark.

While we often talk about the tax benefits of retirement contributions, let’s actually run through the math of an IRA investment and making the same investment in a taxable account. The results may surprise you.

Let’s say you put in $5,000 to a Traditional IRA this year and also deposit $5,000 into a taxable account. In each account, you buy the same investment, such as a S&P 500 ETF, and hold it for 20 years until retirement. Assuming you get an 8% annualized return for those 20 years, in both accounts, your position would have grown to $23,304.79.

At the 20 year mark you withdraw both accounts. What taxes are due?

From the Traditional IRA, the entire withdrawal is treated as ordinary income. You may be in the 24% tax bracket, in which case you would owe $5,593.15 in taxes. That’s pretty painful and the reason why so many retirees hate taking money out of their IRAs and limit their withdrawals to their Required Minimum Distributions.

What about for the taxable account? You started with a $5,000 cost basis, so your taxable gain is $18,304.79. It is a long-term capital gain (more than one year), and will be taxed at the capital gains rate of 15%. Your tax due is $2,745.72. That’s less than half of the tax you’d pay on the withdrawal from the retirement account that you did for the “tax benefit”. Is that IRA a scam?

No, because you also got an upfront tax deduction for the IRA contribution. If you were in the 24% bracket, you would have saved $1,200 in taxes for making that $5,000 contribution. If you subtract the $1,200 in tax savings from $5,593, you still see that your net taxes paid was quite high: $4,393.

However, that is ignoring the time value of money and getting to save that $1,200 now. If you actually invest the $1,200 you saved that year, and have it grow at 8% for 20 years, guess what it grows to? $5593.15. (If you invested this in a retirement account, you will owe 24% in taxes on this gain, or another $1342.)

The key to coming out ahead with doing an IRA versus a taxable account is that you need to actually invest the tax savings you receive in year one. If you just consume that tax savings, instead of saving it, you actually might have been better off instead doing the taxable account where you could receive the lower capital gains rate.

The best solution is to maximize your retirement accounts AND save in a taxable account. If you want to become a millionaire in 10 years, save $5,466 a month. People have ambitious finish lines, but don’t set savings goals that are in line and realistic with their goals. The short-term activity has to match the long-term objectives. Once you are in retirement, it is a great benefit to have different types of accounts – IRAs, Roth, and taxable – to manage your tax liability.

My point is: Don’t be afraid of a taxable account. Retirement accounts are good, but mainly if you are going to save the upfront tax benefit you receive! Today’s ETFs are very tax efficient. While you will likely have dividend distributions of about two percent a year in a US equity ETF, when you reinvest those dividends, you are also increasing your cost basis. If you’re looking to invest in both a retirement and taxable account, let’s talk about how you can do this in the most effective way possible.