Thinking of Giving to Charity? Here are some options for giving!

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Jim Lorenzen, CFP®, AIF®

Giving to charity?  While most anything can be given to charity, these are the more common forms of donated property:

Cash: Cash gifts are the easiest to give to a charity, both in terms of substantiating the deduction and in determining the value of the gift.  But, cash may be your most expensive option.

Real Estate: Real estate that is owned outright and which has appreciated in value can be given to a charity. The donor can generally deduct the fair market value of the property, up to an adjusted gross income (AGI) percentage limitation. When a charity sells donated appreciated property, the capital gain then escapes taxation, up to AGI percentage limits.

Securities: The best securities to donate tend to be those that have increased substantially in value. As with real estate, the donor can generally deduct the fair market value of the security and the capital gain escapes taxation when the security is sold by the charity.

Charitable Gift Tax Implications:

  • Gifts of cash and ordinary income property are generally deductible up to 50% of the donor’s adjusted gross income (AGI).
  • The fair market value of gifts of long-term capital gains property (e.g., real estate, stock) is deductible up to 30% of AGI. There is, however, a special election through which a donor may deduct up to 50% of AGI if the donor values the property at the lesser of fair market value or adjusted cost basis.
  • Charitable contributions in excess of the percentage limitations can be carried over and deducted for up to five succeeding years.
  • The donor must itemize income tax deductions in order to claim a charitable deduction. A portion of itemized deductions is phased out for taxpayers with an AGI above certain limits.

Life Insurance: If a charitable organization is made the owner and beneficiary of an existing life insurance policy, the donor can deduct the value of the policy as of the date of the transfer of ownership. The donor may then deduct all future amounts given to the charity to pay the premiums. If a charity is named just the beneficiary of an insurance policy on the donor’s life, no current income tax deduction is available. At the donor’s death, however, the donor’s estate receives an estate tax charitable deduction for the full amount of the policy death benefit.

 

 

Disclosures

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Tax-Advantaged or Tax-Deferred? Do you know the difference?- copy

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Jim Lorenzen, CFP®, AIF®

Tax-deferred and tax-advantaged are two terms often used interchangeably and, as a result, often lead to a lot of confusion; but, the difference can be significant in planning how you will be drawing income from your nest-egg during your retirement years.  The key, of course, is to discover your options and do advance planning.

Tax-deferred investing is familiar to us.  Many employers match employee contributions up to a certain dollar amount to a company-sponsored retirement account, which usually offers tax-deferred growth.  Contributing to your account up to the employer match is a significant first step to retirement success.

However, many have found that their company-sponsored plan has proven inadequate due to contribution limits and other factors.  Most investors would likely be well served seeking out other sources of tax-advantaged retirement funds.  When used properly, tax-advantaged money is taxed up-front when earned, but not when withdrawn.  This approach may seem costly; but, that view may very well be short-sighted and far more costly.

Let’s take a look at a hypothetical example of tax-deferred and tax-advantaged money at work.  Our fictitious couple, Mitch and Laura, are starting retirement this year and will need $50,000 in addition to their Social Security benefits.  Assuming a 28% state and federal tax rate, they’ll actually need to draw $69,444 from their retirement account to meet their needs.*

Tax Deferred

Need = $50,000

Taxes = $19.444

Total Withdrawal required to meet spending need: $69,444

What if Mitch and Laura had balanced their portfolio with a tax-advantaged funding source?  What if they could pull the first $30,000 from the tax-advantaged source and the rest ($27,777) from the tax-deferred source?  What would that look like?

its-about-timeTax Deferred Combined with Tax Advantaged

Tax-Advantaged money = $30,000

Tax-Deferred money = $20,000

Taxes = $7,777

Total Withdrawal to meet needs and taxes = $57,777

Because Mitch and Laura balanced their portfolio, they saved $11,667 each year during retirement – almost 24% of their year’s living expenses each year!   Simple math reveals a savings of over $116,000 during ten years of retirement; and it they’re retired for 30 years, as many are, the savings is over $350,000, not counting what they could have made by leaving the money invested – which could be rather substantial:  At just 3.5% annualized, the total would come to over $600,000!

A Plan that Self-Completes

Most savings plans, including employer-sponsored retirement plans, are dependent upon someone actually continuing to work and actively contributing to the plan.   If work and contributions stop, the plan does not complete itself.    

It’s been my experience that relatively few individual investors have self-completing retirement plans, while a rather large percentage of high net-worth investors do.

What financial tool can accomplish the goal of being self-completing?  Not stocks, bonds, mutual funds, or even government-backed securities of any type.   There’s only ONE I know of – and, it’s tax-advantaged, too.   Believe it or not, it’s a “Swiss Army Knife” financial tool called life insurance.    It’s not your father’s life insurance; it’s specially designed

It can ‘self-complete’ a retirement plan – and it doesn’t matter if the individual dies early or lives a long life.  Few people realize they can win either way.    As I said, stocks, bonds, real estate, commodities, and company retirement accounts simply can’t match it; but, the design must be customized.

If you’d like to learn more about this and other smart retirement strategies, feel free to contact me.

————–

 

*This has always been a source of misunderstanding for many individual investors:  The fact is not all the money in Mitch and Laura’s retirement account belongs to them.  Their retirement account might show a $500,000 balance, for example, leading them to believe they have $500,000.  The truth is less comforting.  The truth is, given a 28% tax-bracket, that $140,000 of that money belongs to the government, not Mitch and Laura.  They’ll likely never see it.  Their real balance – the one the statement doesn’t show them – is $360,000; and, as we’ve seen, they’ll need to draw-down $69,444 each year to meet their needs.  How long do you think that money will last?

 

 

Disclosures

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Should You Graduate From Mutual Funds?

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Jim Lorenzen, CFP®, AIF®

It’s probably a safe assumption that most individual investors began their investment programs with mutual funds and have built their 401(k)s, IRAs, and/or taxable accounts with mutual funds ever since.

While those mutual funds may have been appropriate for them in those early days, are they appropriate today?

If you’re one of those who’s built your retirement portfolio with mutual funds over the years and now have more than $500,000 invested in your long-term nest-egg, you may want to consider how much you may be losing to factors that have little to do with “the market”.   It begins with the Four Pillars of Investment Success.

 

For this post, we’ll talk about the bottom-left pillar, particularly as it relates to cost.

By now, most people are aware of the difference between ‘load’ and ‘no-load’ mutual funds.  Loads are basically sales charges that pay compensation to the selling registered representative of a broker -dealer.   They’re not necessarily bad.  A small investor can seldom be economically serviced by a fee-based registered investment advisor and this economic model provides that investor access to help that otherwise may not be available.   Either way, those charges aren’t hidden; they’re disclosed.   Here are some additional charges worth discussing:

Annual expense ratio

This is also disclosed in a mutual fund’s prospectus.  For example, assume a growth mutual fund has an expense ratio of 1.40%.   You’ll find it disclosed; but here’s what that 1.4% doesn’t include:

Turnover.  Turnover is an important factor in determining a fund’s true costs.  You see, turnover impacts other costs, as you’ll soon see.

Transaction/trading costs:  When a fund manager makes a trade on an exchange, that trade incurs a commission – just like your own trade would – and the fund manager receives a `confirm’ reflecting the net proceeds of the trade AFTER commissions have been taken… the same kind of ‘confirm’ you would receive.   They report the NET proceeds after the cost of the trade.

Look on your most recent mutual fund statement – any fund.  Do you see trading costs or any other fees or expenses disclosed on the statement… anywhere?  You might think it’s all in the annual expense ratio; but think again.  Transaction costs are NOT included in the fund’s annual expense ratio!

In the book, Bogle on Mutual Funds, the former Vanguard Fund chairman estimated trading costs generally average 0.6%  I don’t know the real number, so for illustration, I’ll use his.    If hypothetically a fund’s turnover is 120% – check the prospectus for your fund’s turnover – here’s what it means in calculating expenses:Trading Costs (use a low-end figure) x Turnover = Total trading costs.  So, 0.6% x 2.2  = 1.32%.

Why use the 2.2 factor for a 120% turnover?  Simple:  You have to establish a position in a security before you can turn it over; and, that’s true for each security in the portfolio.  The entire portfolio is established, then 120% is `turned over’ in a year.   If you used 1.2, you’d be computing only a 20% turnover, far from what’s really happening.  So, trading cost  times turnover gives us 1.32% in trading costs, to add to the fund’s annual expense ratio to get combined annual expenses plus trading costs.

According to Morningstar, the typical equity fund has annual expenses of 1.4% annually.   If we use that figure for illustration – remember to look at your own funds’ prospectuses to see what applies to you – 1.32% + 1.40% = 2.72% in annual costs.

Market impact costs:   When you or I sell 100 shares of a security, it doesn’t really impact the price.  But, when an institution buys or sells huge blocks of a security, the price can be affected.  How much?   Market impact costs can range between 0.15-0.25%.   And, of course, you would apply that figure to turnover, too.   We’ll use the lower number for our hypothetical illustration.0.15% x 2.2 = 0.33%.  So our hypothetical fund with a 1.4% annual expense ratio that experiences a 120% annual turnover could actually be costing the shareholder 3.03% annually.

Annual Expense Ratio                            1.40%
Turnover 2.2 x 0.6%                              1.32%
Market Impact Costs 2.2 x 0.15%          0.33%
Total                                                   3.05%

This means, according to this calculation of our fictitious fund – the one we assumed had an annual expense ratio of 1.40% –  the total real annual expenses to the shareholder are actually 3.05%, more than twice the annual expense ratio reflected in the prospectus; and those additional costs are nowhere to be found on the statement.

Okay, you now know what to look for.  Pull out your statements and prospectuses and do your own math.  You may have to make a guess for market impact and trading costs, or you can use Mr. Bogle’s – you probably won’t be far off.

Here’s another point worth remembering.   Using our hypothetical fund example, if you’re paying 3% all-in for a $100,000 investment, you’re paying about $3,000 per year; but, the percentages don’t drop as your assets increase!  If you have a $1 million dollar portfolio, you’re now paying $30,000 per year – and, that’s just for the fund!

As I said at the outset, if your portfolio is over $500,000, there’s probably a better way to get responsible management, a good investment allocation, and even professional guidance – all for less than you may be paying simply to be in mutual funds now.

You may want to check into it.   Naturally, I’d be happy to help.

Jim

 

If you have $500,000 or more and are looking for an independent fiduciary advisor, you can get started here.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Your Cash Value Life Insurance Has Value!

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Jim Lorenzen, CFP®, AIF®

People often purchase cash value permanent insurance, throw the policy in a drawer or filing cabinet, and forget about it.   This could be a big mistake.

Most all permanent insurance has a cash value and that cash value has real value you shouldn’t ignore!  First a quick word about  what permanent insurance is.

Term vs Permanent

The terms themselves should tell you something.   Term insurance is simple:  You’re renting death benefit protection from an insurance company.  It’s like a lease, in a way.  You’re premiums stay level until the end of the lease.  You can renew your lease, but the rent will be higher.  How high depends on the length of the initial lease.   If you’re 40 years of age, and in good health, the purchase of a 20-year term policy means the ‘lease’ will be up when you’re age 60.  If you no longer need the death benefit, you simply let the policy expire.  If you do, you’ll either have to renew at what will likely be a much higher rate or buy a new policy, which means re-qualifying health-wise.  You might be able to convert to a permanent policy with the same company if your term policy offers that feature, but you’d still be paying the higher premiums.

Permanent insurance isn’t a rental.  This is a purchase on a sort-of installment plan.   Examples are whole life, universal life, and many other iterations that are now available.   In most policies, premiums do not increase and your protection doesn’t go away unless you fail to maintain the policy.  These policies have cash value and that brings us back to our topic.

Cash Value has Value!

Someone will end-up with the policy holder’s cash value:

A)The policy holder

B)The policy holder’s beneficiaries

C)The insurance company

If the policy holder dies before accessing cash value, the answer is C!  The insurance company pays out the death benefit but will keep the cash value.

What can you do to make sure you make the most of your cash value?  Here are some simple strategies you might consider:

  1. Use your cash value to make premium payments

    Why not use your cash value for premium payments to keep ‘paid-up’? You’ll not only save money each year, but maintains your death benefit protection.
  2. Increase your death benefitUse your cash value to purchase a larger death benefit! Life insurance death benefits generally go to beneficiaries income tax-free!   If you have a $500,000 insurance policy with $250,000 in cash value, you might want to take your cash value to zero and increase your heirs death benefit  to $750,000.   Better that than your heirs getting $500,000 and the insurance company taking $250,000 (which means they had only $250,000 ‘at risk’).
  3. Take a loanYou can borrow against your policy’s cash value at rates lower than your typical bank loan. In some cases, the net loan interest rate might be close to zero (the cost of the loan could be close or equal to the policy’s interest crediting rate).   Here’s the good part:  You’re not obligated to pay back the loan since, in effect, you’re borrowing your own money (you should know that any amount you borrow, plus interest, will be deducted from the death benefit when you die).   Here’s a smart strategy many people use:   They borrow money from policy cash values to pay cash for their new car, the make ‘car payments’ back to the policy.  The money they borrow is tax free.  And, in many policies, the money they took out to buy the car is still ‘on the books’ in their policy for interest crediting.  Every five years or so, they buy a new car almost interest free.
  4. Withdraw the moneyYou can withdraw your cash value—which could reduce or eliminate your death benefit. Don’t do this without checking with your agent.  Calculations may not be dollar-for-dollar.
  5. Surrender the policyNo more death protection, however.
  6. Supplement retirement incomeThis is a 10-15 year strategy that can provide excellent benefits and protections. Talk to your advisor—preferably someone who is independent of the companies and a CFP® professional.  Now, if we only knew where we could find one…..

 

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

How to Turn a $350,000 IRA into $600,000 for Your Heirs!

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Jim Lorenzen, CFP®, AIF®

IRS mandated withdrawals from retirement accounts – required minimum distributions (RMDs) – must begin by April following the year people turn 70-1/2.   

But, if you wait until the year following that birthday, you will be required to take a double-distribution that year – two RMDs (be sure to talk to your tax-advisor).  Here’s an RMD strategy you might like!

Many people, however don’t need their RMDs and don’t want them – they have to pay taxes on the distributions.  They simply plan to pass the money on to their kids or grand kids.

Fred and Wilma have been retired in Bedrock for some time now.  He’s 69 years old and has $350,000 in an IRA he plans to leave to his children, Pebbles and Bam-Bam.

The problem, of course – as usual, is Uncle Sam.   Uncle Sam will force Fred to begin taking money from his IRA in the form of Required Minimum Distributions (RMDs).

Because they both have pensions and other sources of income, this is money they never intended to spend or use.  What’s more, because the IRS uses a ‘withdrawal factor’ that changes as they age,  the RMDs are calculated to deplete his IRA, thus guaranteeing the government they’ll get their cut, by the end of his life expectancy.

To summarize:  Fred gets older, the IRA money is distributed by force, and the longer he lives, the greater the chances there will be little, if any, IRA left for the kids or grand kids.

The government is going to get their money – I guess we can all let that go – the only question is when, but that’s another story.  The fact is, if Fred’s in the 28% tax bracket, only 72% of the money he sees on his statement is actually his.  Uncle Sam is a 28% partner for the rest, unless he decides to change his percentage.

Fred could invest the after-tax withdrawal money and the kids could take advantage of the “stretch” option for the IRA, which requires non-spouse beneficiaries to take distributions over the course of the person’s life expectancy, keeping the money for the kids working for a longer period of time.   Of course, as noted, there may not be much left if he’s in good health and lives a long life.

The RMD

The IRS withdrawal factor for Fred at his age is 27.4 (you can find yours on the IRS website).

This means his first year RMD will be $12,773 and, of course, he’ll have to pay income taxes.  At his 28% tax bracket, that would leave him with $9,196 after taxes on his first RMD.

If he invested that $9,196 every year and earned 5%, he’d have $217,554 for his children and grandchildren if he passed away at age 85.  If he passed away at age 90, he’d leave $328,474 to his heirs, plus whatever pretax dollars might be left in the IRA – a balance that will likely be declining each year because the IRS withdrawal factor is based on life expectancy and computed on the balance of all IRAs a the end of the previous year.

There might be a better option[1].

Fred’s in good health.  Since he doesn’t need the money, he decides to pursue a little more sophisticated strategy.

He decides to leave the IRA where it is and use the required minimum distributions to purchase a permanent life insurance policy (since Fred can’t predict his date of death, his outliving a term policy would mean all the premiums he had paid would be lost forever with nothing to show for them).

For our example, we’ll use a no-lapse guaranteed individual universal life policy.  We’ll also assume the same numbers cited above and a 28% tax bracket.

Since Fred’s a non-smoker and in good health,  his $12,773 RMD, after his 28% income tax payment, means he might leverage his  $9,196 after-tax withdrawal into an immediate $334,936 death benefit, which generally would pass tax-free to his heirs.[2]  

The IRA money will still have embedded taxes, of course, and the amount of death benefit this annual premium might buy will vary by company, policy, and design.  For illustration, though, this is close enough to make the point.

As you can see from our table[3], when added to the remaining after-tax IRA assets, the net total to the beneficiaries can be substantial, regardless of when it happens.  I’ve highlighted two ages (85 and 95) to show what that $350.000 IRA could really mean if the RMDs are used for this strategy and Fred’s death should occur at those ages.

End of   Tax-Free End of Year Less Tax on Net IRA Value Total Value
Year Age Life Ins. Benefit IRA Value4 Beneficiaries (30%) to Beneficiaries To Beneficiaries
5 74 $334,936 $387,852 $116,356 $271,496 $606,432
10 79 $334,936 $392,978 $117,893 $275,085 $610,021
16 85 $334,936 $369,468 $110,840 $258,628 $593,564
21 90 $334,936 $318,786 $95,636 $223,150 $558,086
26 95 $334,936 $241,227 $72,368 $168,859 $503,795

 

All of this, of course, depends on Fred’s qualifying for a permanent policy.  Since Fred isn’t dealing with any ‘high risk’ conditions, he should have no issues getting approved.

Not a bad strategy for the use of $9,196 he otherwise didn’t need during a time he’d be drawing down on his $350,000 IRA.

This was a generic hypothetical.  In reality, RMDs do not remain constant; so, having a strategy properly designed can make a significant difference in outcomes.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Interested in Charitable Giving? You May Want a Wealth Replacement Trust!

Jim Lorenzen, CFP®, AIF®

Charitable giving is a way you can truly leave a legacy beyond our own family; However, believe it or not, few among what many would call the ‘mass affluent’ ever give much thought to charitable giving.  Often, they simply feel they don’t have enough money; however, many of these same people are often sitting on highly appreciated assets such as real estate.

What many fail to realize is there can be significant tax advantages in charitable giving.  When money is tied up in real estate and securities, having a tax-advantaged exit strategy can be helpful.

If you were to sell an appreciated asset, the gain would be subject to capital gains tax. By donating the appreciated asset to a charity, however, you can receive an income tax deduction equal to the fair market value of the asset and pay no capital gains tax on the increased value.

Example:   Alfred purchased $25,000 of publicly-traded stock several years ago. That stock is now worth $100,000. If he sells the stock, he must pay capital gains tax on the $75,000 gain.   But, Alfred can donate the stock to a qualified charity and, in turn, receive a $100,000 charitable income tax deduction.  When the charity then sells the stock, no capital gains tax is due on the appreciation.  How good is that?

But what happens to Alfred’s family who will be deprived of those assets that they might otherwise have received.

A popular solution:  Life Insurance.  Why is this popular?  How do you do it?  Read on…

In order to replace the value of the assets transferred to a charity, the donor establishes a second trust – an irrevocable life insurance trust (ILIT) – and the trustee acquires life insurance on the donor’s life in an amount equal to the value of the charitable gift.

Premium payments can come from the charitable deduction income tax savings and any annual cash flow from a charitable trust or charitable gift annuity.  Alfred simply makes gifts to the irrevocable life insurance trust that are then used to pay the life insurance policy premiums.   At Alfred’s death, the life insurance proceeds generally pass to the donor’s heirs free of income tax and estate tax, replacing the value of the assets that were given to the charity.

Not a bad deal!

Life Insurance has a number of uses; but, before shopping, it pays to know what you’re actually shopping for!  To help understand life insurance design, you need to understand your priorities.  You might find this simple tool helpful.

What’s Your Focus Life Insurance Priorities Tool

If you would like help, of course, we can always visit by phone.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

How Will Rising Interest Rates Affect Stocks?

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Jim Lorenzen, CFP®, AIF®

… and what do rising interest rates (and inflation) mean to your long-term success?

Maybe less than you think… or is it maybe more than you think.

We don’t really know, do we?   Planning isn’t about what we know; if it were, we’d all just go with our guts and get rich!  Planning is about what we don’t know.

But we do have indicators.   Past performance is no guarantee the future will repeat – we know that; but, maybe – just maybe – it can provide a little idea of how markets have reacted to rising interest rates in the past.  Here’s a chart from Bloomberg; I apologize for the fuzziness.

As you can see (I hope) since March of 1971, there have been 21 periods of rising interest rates.  Of those 21 periods, the S&P declined only 5 times and the largest decline was around 5.5%.   Comforting?  Well, good reading  anyway.

The problem, of course, is we’re dealing with real money and real people’s lives.

It pays to have a ‘back-up’ in your financial plan that can help ensure there’s a ‘late life income’ even if everything else falls victim to the incompetency of elected officials who’ve become self-anointed economic experts.

For that reason, I thought you might enjoy a report I’ve put together about how to create a ‘late life income’ by adding another component to your investment diversification strategy.

I think you might enjoy it -it’s based on an actual case study.  You can access your Late Life Income report here.

Enjoy!

If you would like help, of course, we can always visit by phone.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Why Do Individual Investors Seem to Always Lag Behind Market Returns?

Jim Lorenzen, CFP®, AIF®

A recent study by Morningstar, a leading mutual fund research firm, compared mutual fund returns with the gains individual investors actually received. The study found that investor returns typically lagged fund returns.  The reason: Investors tended to move cash in and out as markets would rise and fall, often buying high and selling low.[1]

The study covered 10 years through the end of 2012, and found that funds posted an average annualized return of 7.05%, compared with a 6.1% average return realized by investors. (The returns factor in all stock and bond funds that Morningstar tracks. Investor returns are weighted based on asset owes into and out of all share classes of open-end mutual funds tracked by Morningstar.  [To learn more on why many individual investors have trouble reaching goals, see your report, Why Most Financial Planning Will Probably Fail.

Although a gap of a single percentage point may not seem like a big difference, it can make a significant impact over the long term, thanks to compounding. In fact, a hypothetical $10,000 investment returning an average of 7.05% annually would produce a total of $19,856 over 10 years compared with $18,078 for an average annual return of 6.1% over the same period. Over 30 years, the gap becomes even wider: $78,286 for the 7.05% return vs. $59,082 for the 6.1% return.[2]

The findings in the Morningstar study are apparently no fluke.  Similar findings were discovered in a study by Dalbar back in 2010 (see graph).

What’s the reason for this?  While I have admittedly not conducted a back-tested analysis on this, I do have what could be considered an informed opinion.   It’s investor behavior – to be sure not a ground-breaking epiphany.

When investors buy in good markets and sell in bad ones, they generally lose – no news there.  What is worth consideration is something Warren Buffett said years ago:  If you think investing is fun, you’re doing something wrong.  Real investing is boring; what you see on tv is financial porn.   However, if you’re investing properly, you will virtually always be buying low and selling high.

Why?  It’s as simple as having a properly constructed portfolio, designed to implement your formal financial plan, and adhering to a disciplined rebalancing process.  Not all financial plans are sound, however.  See our report.

Rebalancing is key.  Regardless of your rebalancing schedule,[3] it helps ensure you will be selling high and buying low.  Important:  Rebalancing does not guarantee gains nor does it guarantee against loss; but, it sure beats trying to ‘call’ markets.

Let’s use a simple hypothetical example using a simple stock and bond portfolio.   If your financial plan indicates the best balance for you is 60% bond and 40% stocks and your investment portfolio is valued at $500,000, you’d be allocating $300,000 to bonds and $200,000 to stocks.

Using easy to grasp numbers, let’s assume that when it’s time to rebalance, based on a schedule you and your advisor have chosen, your bonds have lost 10% in value, due to rising interest rates while your stocks have gained 20%.

Your bonds are now valued at $270,000 (down by $30,000) and your stocks are now valued at $240,000 (up by $40,000).  Your total portfolio is now valued at $510,000.  Not bad, but our schedule says it’s time to rebalance and we do believe in investment discipline.

40% of $510,000 would indicate a stock allocation of $204,000; but the current value of that portfolio is $240,000 due to the run-up.  That means trimming our stock exposure by $36,000 – we’re automatically “selling high”.

Our bond portfolio, now valued at $270,000 is down $30,000 due to rising interest rates.  At a 60% allocation, we should have $306,000 (60% of $510,000) in bonds.  Obviously, that’s where the $36,000 from our stock sales will go.  We’re “buying low” into a rising interest rate market.

In the real world, portfolios aren’t quite so elementary.  There are investment styles within each asset class and there are sectors within each style.  It can get rather sophisticated, but technology helps.

You may have heard it a thousand times; it still bears repeating:  It begins with a plan.  If you don’t have one, you’re lost – and if you think you have your plan in your head, your heirs will be helpless, even if you aren’t already.

[1] Russel Kinnel, “Mind the Gap: Why Investors Lag Funds,” Morningstar, February 4, 2013.

[2] Results are for illustrative purposes only and in no way represent the actual results of a specific investment.

[3] Transaction costs and tax implications should not be ignored.

As I noted earlier, many plans will likely fail.  See our report.  Hope you find this helpful.

If you would like help, of course, we can always visit by phone.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Should You Buy TERM Insurance and INVEST the Difference?

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Jim Lorenzen, CFP®, AIF®

BUY TERM INSURANCE!  INVEST THE DIFFERENCE!   That’s the mantra that’s been preached (mostly by tv gurus selling their DVDs) since the 1970 (they were selling tape cassettes back then) and even before.

It seems logical:  You buy term insurance and get pure protection with insurance dollars while you invest remaining dollars for retirement or other needs.

It even sounds catchy:  Buy term insurance and invest the difference.  That’s what your dad did, and grandpa before him.   Of course, they may not have majored in economics or finance.

Does the old “buy term” maxim they’ve been preaching really hold up under real number-crunching analysis?

Well, here’s an analysis using numbers you might find interesting.  While not exhaustive, it certainly will shed some worthwhile light worthy of discussion.   You can access it here.

Hope you find this helpful.

If you would like help, of course, we can always visit by phone.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Thinking of Buying An Annuity? Do Your Homework.

Jim Lorenzen, CFP®, AIF®

 

If you’re thinking of purchasing an annuity, here’s a report you might find helpful.

I seldom use annuities for client portfolios; but, that doesn’t mean they’re bad.  Any financial instrument will have it’s good and bad points; the question is really whether the instrument in question is appropriate for a particular client, and given that I take fiduciary status for my clients, it MUST be in a client’s best interest.

Television commercials abound – some advisors telling you they have annuity strategies no one else has (uh huh) and others telling you they’d rather die before they’d ever sell one (neglecting to either differentiate what annuities they’re talking about – variable and fixed annuities are two entirely different animals with virtually nothing in common – or to tell the viewer they’re not licensed to sell annuities to begin with).   The truth is both types of commercials are misleading and tend to target those who don’t know what questions to ask – convenient.

If you’re considering purchasing an annuity, and I’m not recommending that you should,  you might find this report about the things you should consider helpful.  You can access it here.

Hope you find this helpful.

If you would like help, of course, we can always visit by phone.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.