How to Talk to Your Parents About the Future (Part 1)

The holidays are upon us, and many people will be spending time with their elderly parents. Those who live far away and don’t get to see their parents very often may notice issues that need to be addressed. Perhaps Mom or Dad is becoming increasingly forgetful or may be having trouble taking care of day-to-day needs on their own. It can be difficult to talk to parents about the inevitabilities of aging and what to do about those changes, so we’d like to offer some tips for approaching such subjects. Below we’ve included signs that a parent might need help and suggestions on how to approach tough conversations. Next month we’ll cover specific concerns, such as driving, in-home and long-term care, and end-of-life issues.

Signs Your Aging Parent Needs Help

It’s hard for seniors to admit that they need help, as they are understandably afraid of losing their independence. Consequently, it’s typically up to their adult children to recognize the signs that assistance may be needed. This doesn’t necessarily mean that a parent will need to go to an assisted living or nursing home, but they may need some support in their home.

Here are 15 signs to look out for when visiting aging loved ones during the holidays (or any time of the year):

  • A cluttered, dirty or disorganized house or yard
  • Poor personal hygiene or disheveled clothing
  • Spoiled or expired groceries that don’t get thrown away
  • Changes in mood or extreme mood swings
  • Missed important appointments
  • Late-payment notices, bounced checks and calls from collections
  • Forgetfulness
  • Uncertainty or confusion when performing once-familiar tasks
  • Poor diet or weight loss
  • Unexplained bruises
  • Trouble getting up from a seated position
  • Loss of interest in hobbies and activities
  • Forgetfulness about taking medications
  • Broken appliances
  • Unexplained dents or scratches on a car

If you notice any of the above situations or if your parent’s health or happiness seems compromised, it may be time to have a conversation with them and find the right care options for their circumstances. Don’t wait until there’s a crisis to have a talk. It’s important to get concerns on the table as soon as possible and start a dialogue.

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Approach a Sensitive Topic with Care

Tread delicately when you approach tough conversations, and test the waters to get a sense of whether your parent is open to the discussion. You can ask open-ended questions such as the following in a normal, conversational tone:

  • How is it around the house?
  • How is driving going?
  • How is your health? What’s the doctor saying these days?

Short questions like these may be enough to get Mom or Dad talking, but here are additional techniques you can use to get the conversation moving:

  • Refer to a friend’s or a family member’s experience: Explain how their situation made you realize that the family needs to make some plans so you don’t end up in the same boat.
  • Take a cue from current events: A local medical-ethics controversy can serve as an opening to talk about what would be best to do if such a thing were to happen in your family.
  • Use story lines from books, movies and television: Popular culture is full of narratives about aging and illness that could create an opening for conversation.
  • Come up with your own plan and share it: One example would be doing your own advance-care planning and asking your parent to do the same.

Try to maintain a nonthreatening approach, and remain calm and respectful in your communication. Elderly loved ones usually appreciate an honest conversation. Let them know that you are concerned about their well-being and want to learn about their wishes so that the best decisions can be made for everyone involved.

Finally, make sure everyone in the family is on board by discussing the situation with your siblings. Not only will the discussion allow the family as a whole to make informed decisions, but the talk can include each sibling’s role in helping Mom or Dad. For instance, the sibling who is known for their nurturing ways might take on caretaking responsibilities, while the one who is known for their organization skills could pay the bills. Address how you all will share the responsibilities so no one feels unduly burdened.

Fun Facts Newsletter | December 2016

In the spirit of the holiday season, here is a list of early New Year’s resolutions and fun things to do in 2017!

  1. Remember, cash flow (income versus expenses) is the key to long-term financial success. If you are gainfully employed, you should save 15% to 25% of your income. If you are retired or not fully employed and are drawing on your investment portfolio, your total annual withdrawals should be 3% to 5% of your portfolio value or less. If your savings rate is low or withdrawal rate is high, review steps to increase your employment income or reduce your expenses.
  1. Insurance is the foundation of sound financial planning. Home and auto insurance, umbrella liability coverage, health insurance, life insurance, disability and long-term-care insurance all require regular review and updating. Funding a health savings account (HSA) warrants consideration. If you own or are considering long-term-care insurance, pay particular attention to and understand the inflation protection options.
  1. Are you maximizing your internet safety and protection by using different passwords, using long and complicated passwords and changing your passwords at least once a year? We highly recommend that you use a password manager program such as Dashlane, LastPass or RoboForm so you can have many different and complicated passwords but you only have to remember one password for your password manager program.
  1. Do your children or grandchildren have employment income that could be used for a Roth IRA contribution? If applicable, have you funded 529 college savings plans for the calendar year for children or grandchildren?
  1. Does a trusted person know where you keep your website usernames, passwords and answers to security questions? Do your family members know where to locate important personal financial papers and how to contact your professional advisors in case of an emergency?

Have a safe and happy holiday season. Take good care of yourself.

As always, please contact us with any questions, news or comments.

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Looking for a New Year’s Resolution? Here Are a Few Ideas for 2017

In the spirit of the holiday season, here is a list of early New Year’s resolutions and fun things to do in 2017!

  1. Remember, cash flow (income versus expenses) is the key to long-term financial success. If you are gainfully employed, you should save 15% to 25% of your income. If you are retired or not fully employed and are drawing on your investment portfolio, your total annual withdrawals should be 3% to 5% of your portfolio value or less. If your savings rate is low or withdrawal rate is high, review steps to increase your employment income or reduce your expenses.
  1. Insurance is the foundation of sound financial planning. Home and auto insurance, umbrella liability coverage, health insurance, life insurance, disability and long-term-care insurance all require regular review and updating. Funding a health savings account (HSA) warrants consideration. If you own or are considering long-term-care insurance, pay particular attention to and understand the inflation protection options.
  1. Are you maximizing your internet safety and protection by using different passwords, using long and complicated passwords and changing your passwords at least once a year? We highly recommend that you use a password manager program such as Dashlane, LastPass or RoboForm so you can have many different and complicated passwords but you only have to remember one password for your password manager program.
  1. Do your children or grandchildren have employment income that could be used for a Roth IRA contribution? If applicable, have you funded 529 college savings plans for the calendar year for children or grandchildren?
  1. Does a trusted person know where you keep your website usernames, passwords and answers to security questions? Do your family members know where to locate important personal financial papers and how to contact your professional advisors in case of an emergency?

Have a safe and happy holiday season. Take good care of yourself.

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Have a Plan in Your Charitable Giving

As we move into the holiday season, Americans are being called upon to donate to a variety of philanthropic causes and nonprofit organizations. While charitable giving is a year-round consideration for many, holiday charity appeals and the desire to receive year-end tax deductions make it top of mind at this time of year. According to the Blackbaud Index, which tracks $20 billion in U.S.-based charitable giving, 34% of all donations are made in the last three months of the year and roughly 18% are given in December alone. What's more, a large percentage of charities depend upon a generous holiday season for a significant portion of their annual fundraising. Although you may have traditionally done the bulk of your charity giving at the end of the year, we'd like to encourage you to do things differently. Much as with open enrollment season, it's advisable to plan ahead with your charitable giving instead of leaving it as an afterthought for the year's end. This article outlines why allocating your resources throughout the year is a better way to go, as well as gives tips for selecting the beneficiaries of your charity dollars.

Charities Need Donations All Year Long

While many givers only think to donate to philanthropic causes around the holidays, charities need resources to facilitate their operations all 12 months of the year. They often find it difficult to plan for their yearly needs and allocate proper funds for outreach when the bulk of their donations comes in at the end of the year. In addition, when charities are inundated with donations during the short holiday time window, they may have to contend with resource allocation issues. For example, a food bank may receive so many boxes and cans of food that it doesn't have space to store them all, which can result in waste and missed opportunities to feed those in need.

To help mitigate donors' tendency to give mostly or solely during the holidays, some nonprofit organizations have shifted their fiscal year-ends from December to an earlier month, such as September. This change enables them to better budget their holiday donations throughout the year to cover key services. Donors can also benefit from changing the way they manage their charitable donations. Contributing year-round instead of only at holiday time can help you better budget your finances and prevent you from falling short at the end of the year.

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How to Choose the Charities to Give to

Even if you're resolute in your desire to donate to charity—at holiday time or throughout the year—you may wonder how to decide which charities should receive your donations. Here are some suggestions to help make the selection process easier for you:

Consider your passions: Take a few minutes to think about the causes you're passionate about. Do you want to help children, senior citizens, animals, the environment or a religious organization? Or would you like to contribute toward the research and treatment of a disease that has affected your life or the lives of your loved ones? Think about the causes you'd like to champion this year. You can always shift your focus next year or beyond.

Narrow the field and think outside the box: Within your top one or two areas of interest, select a small number of charities to support. It's better to give to three or four charities generously than to 10 organizations nominally. It's also a good idea to support less popular charities, perhaps those that are community-oriented, as such groups generally have a harder time meeting their donation goals. While a national cancer charity may have no problem raising money, for example, a local hospital may be struggling to raise funds for its new cancer wing and would really appreciate your contribution.

If you would like guidance on selecting reputable charities, here are a few websites that can help:

  • The Greater Cincinnati Foundation: If you want to focus your charitable giving locally, the GCF Community Funds are an excellent place to start. These funds are organized around seven of the Cincinnati area's greatest needs, including cultural vibrancy, economic opportunity and educational success.
  • Charity Navigator: This is the country's largest and most utilized evaluator of charities. Charity Navigator's rating system examines the financial health, accountability and transparency of each evaluated organization. You can search charities by name or browse 11 key interest categories.
  • CharityWatch: The groups included on CharityWatch's top-rated list generally spend 75% or more of their budgets on programs and have met key governance benchmarks. Top-ranked organizations are listed within 35-plus interest classifications, and each group is given a letter grade.

Once you're clear on the charities you're going to contribute to, it's a lot easier to turn down any additional donation requests you receive. You can simply state, “I'm sorry, but that's not one of the causes I'm supporting this year.”

Decide how much and how to give: The average American gives about 3.1 percent of his or her pre-tax income to charity, and the average household donates $1,620 each year. Of course, how much to give is a very individual consideration and can vary over time and based upon life circumstances. Charity Navigator offers a simple calculator that uses your federal income tax bracket to help you decide the best charitable giving amount for you.

In terms of the logistics of making charitable contributions, many organizations are now set up to accept monthly donations. You can sign up to have your desired donation amount processed each month via an automatic checking account deduction or credit card payment. This helps with your monthly budgeting while assisting charities in planning for their revenue. With automated donations, charities know how much will come in from donors each month, so they won't be caught short in funding their operations and outreach.

We hope we've convinced you of the value of creating a plan for your charitable giving. As 2016 draws to a close and you're writing out your holiday donation checks, we encourage you to take some time to think about what your plan is going to be for 2017. Allocating a short period of time now for these considerations will enable you to begin next year powerfully and help make your charitable giving more focused and impactful.

Fun Facts Newsletter | November 2016

I have the challenge of writing this one week from election day. Some of our clients have expressed concern about the impact of the election on the stock market. The attached chart confirms our perspective that we have had good and bad economies and stock markets under both political parties and that patient, long-term investors are rewarded. Regardless of the election, we will continue to manage your investments soundly.

The words “Financial Management” in our company name were not chosen by default. In personal financial management, we emphasize managing what is within our control.

We cannot manage the world economy or U.S. politics or legislative or judicial decisions beyond our control.

We can manage individual decisions and actions to plan for the future and be good stewards of our financial resources, whatever they may be.

We can manage to get a good education to enable productive employment.

We can manage to live within our means or beyond our means.

We can manage to be adequately insured for auto and property risk, liability, disability, health, life and long-term-care risks or choose to accept those risks without insurance.

We can manage our income and investments to minimize income taxes.

We can manage a strategically designed, broadly diversified, low-cost, tax-efficient investment portfolio, or we can assume unnecessary risks and taxes.

We can implement an estate plan to prepare for the potential inability to act or make decisions during our lifetime and to distribute our assets at our death to the people we want and when and how we want, or we can let the laws and courts decide.

We can identify short-term and long-term financial goals that are consistent with our lifestyle and values and priorities, or we can drift along an uncharted course.

We can manage what’s within our control, or not. Which way do you vote?

Remember, your financial peace of mind is always our primary goal.

page12

Source: Dimensional Fund Advisors.

As always, please contact us with any questions, news or comments.

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Elections Come and Go—Sound Financial Management Remains

I have the challenge of writing this one week from election day. Some of our clients have expressed concern about the impact of the election on the stock market. The attached chart confirms our perspective that we have had good and bad economies and stock markets under both political parties and that patient, long-term investors are rewarded. Regardless of the election, we will continue to manage your investments soundly. [Tweet "We can manage what’s within our control, or not. Which way do you vote?"]

The words “Financial Management” in our company name were not chosen by default. In personal financial management, we emphasize managing what is within our control.

We cannot manage the world economy or U.S. politics or legislative or judicial decisions beyond our control.

We can manage individual decisions and actions to plan for the future and be good stewards of our financial resources, whatever they may be.

We can manage to get a good education to enable productive employment.

We can manage to live within our means or beyond our means.

We can manage to be adequately insured for auto and property risk, liability, disability, health, life and long-term-care risks or choose to accept those risks without insurance.

We can manage our income and investments to minimize income taxes.

We can manage a strategically designed, broadly diversified, low-cost, tax-efficient investment portfolio, or we can assume unnecessary risks and taxes.

We can implement an estate plan to prepare for the potential inability to act or make decisions during our lifetime and to distribute our assets at our death to the people we want and when and how we want, or we can let the laws and courts decide.

We can identify short-term and long-term financial goals that are consistent with our lifestyle and values and priorities, or we can drift along an uncharted course.

We can manage what’s within our control, or not. Which way do you vote?

Remember, your financial peace of mind is always our primary goal.

page12

Source: Dimensional Fund Advisors.

As always, please contact us with any questions, news or comments.

This Open Enrollment Season, Don’t Have a Closed Mind

The months of October and November are when open enrollment takes place for most corporate employer benefit plans as part of large corporations’ planning for the coming year. While it may be tempting to simply select the same options as you had in place for the previous year, it’s important to take the time to consider all of your available possibilities in relation to your complete financial picture. A recent Aflac report showed that 46% of people spend a half hour or less reviewing their health plan offerings. Don’t wait until the last minute to study your options or you may find yourself rushing through the process and making hasty decisions that could put your financial health at risk. The primary facets to think about are health insurance, life insurance, disability insurance, health savings accounts (HSAs) and flexible spending accounts (FSAs). Below are some key considerations to keep in mind for each.

Health Insurance

Most employers typically offer several health insurance options for their employees. To determine which one is best for you and your family, think about how often you tend to visit a doctor, whether you take regular prescription medications, any anticipated changes to your health care needs (e.g., a new baby) and how much money you’ve been paying out of pocket. According to a 2015 Kaiser Family Foundation study, the amount that workers contribute to their health insurance premiums has skyrocketed by 83% over the past 10 years. In addition to your monthly premiums, you also need to factor in deductibles, copays, out-of-pocket limits and out-of-network coverage.

It’s a good idea to weigh your employer’s offerings against those that are available on the health care exchanges, as you might find a cheaper or better plan there. In either case, before locking down your health insurance plan for the coming year, double-check that your primary care physician, specialists and preferred hospitals are covered. You should investigate this information even if you’re staying on your current plan, as networks may change their preferred providers from year to year. Also check to see if your health insurance plan offers dental and vision benefits or if standalone plans for those services are available through your employer.

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Life and Disability Insurance

For both life insurance and disability insurance, being on your employer’s plan may not be the most prudent choice for everyone and an individual plan may be the better option. If you change jobs frequently or anticipate that you may be moving on to a new position within the coming year, it may be better to purchase your own private individual life or disability insurance plan to ensure that you always have good coverage in place. Likewise, if you’re getting older but are still in good health, it’s often more cost-effective to pursue individual coverage, as employer plans generally have no medical qualifications. If you can qualify for preferred life insurance underwriting status, you’ll likely be able to get a cheaper plan with better coverage.

Most employers have a maximum amount that they offer for life insurance benefits, which is generally one to two times an employee’s salary. Would your family be able to live on that amount of money if something happens to you? If not, you should have individual coverage in place to supplement the coverage provided to you by your employer. For disability coverage, most employer plans have a monthly limit of $5,000 to $10,000. If you earn in excess of $150,000 per year, this payout may not be adequate to meet your family’s needs should you experience an illness or accident that renders you unable to work for a period of time.

Health Savings Accounts

To offset some of your out-of-pocket medical costs in a tax-advantaged way, you may want to open an HSA or FSA. A health savings account is a triple tax-exempt account (tax-free contributions, investment accumulation and withdrawals) that allows you to save money for qualified medical expenses. This is an especially good option for high-income earners who have high-deductible health plans (HDHPs). For 2017, the maximum annual HSA contribution limit for individuals will be $3,400, while a family may contribute up to $6,750. For those age 55 or older, a catch-up contribution for $1,000 per year is available.

If you’re eligible for an HSA, we recommend that you contribute the maximum amount and use it to build up an extra nest egg for your retirement health expenses. Although many investors feel they should prioritize maximizing their 401(k) investments, we believe you should still fully fund your HSA even if you have to reduce your 401(k) contributions in order to do so. For more information about the benefits of HSAs, please see our April 2016 article on that topic.

Flexible Spending Accounts

An FSA is a special tax-free account that is used to save money for certain out-of-pocket health care costs. An important difference between this type of account and an HSA is that FSA funds must be used within a given calendar year and may not be carried over into the following year. While the FSA limits for 2017 have not yet been announced, an additional $50 may be added to the 2016 limit of $2,550 in order to compensate for inflation.

Something to keep in mind with flexible spending accounts is that if you don’t end up needing as much money as in the past, you may be tempted to make unnecessary qualifying purchases (e.g., a new pair of glasses) just to spend the money rather than lose it. Consequently, we advise that FSA accounts only be used to cover predictable expenses such as child care coverage, expensive prescriptions for which the cost is known and nonurgent dental work that your dentist has recommended be done in the near future.

Additional Considerations

Before you submit your open enrollment paperwork, it’s a good idea to check that all of your designated beneficiaries are up-to-date. This is especially important if you’ve recently been through a life event, such as getting married or divorced or having a new baby, as you want to make sure that your insurance payouts or retirement money will go to the preferred individuals.

As financial planners, part of our job is to bring up issues that people don’t want to think about or address, and open enrollment falls into this category. Open enrollment considerations may not be fun, but if you’re willing to take a little extra time each year to select the proper insurance coverage for your unique personal and financial circumstances, you can save some money and ensure that you and your family will be well-served over the long term.

Fun Facts Newsletter | October 2016

“Don’t chase past performance” is one investment mantra that makes sense but is hard to live by. It applies to both asset allocation decisions (let’s double up on large cap growth stocks since they have been up the most over the last three years) and individual mutual fund selections (let’s buy XYZ Fund—it’s up 50%!). If you need a well-researched reason not to chase past fund performance and another good reason that supports our investment strategy, we have the Fun Facts for you! Standard & Poor’s publishes “The Persistence Scorecard,” which tracks how top-performing funds in one time period continue to perform in future time periods. Bottom line, relatively few funds consistently stay at the top. Specifically, out of 641 U.S. stock funds that were in the top 25% as of March 2014, only 7.3% managed to stay in the top 25% by the end of March 2016. The longer the time period, the lower the persistence: Only 0.78% of large cap funds and no mid cap or small cap funds stayed in the top 25% after five years.

Fortunately, for our clients, we manage and reduce this risk by using asset class or index funds. These funds have a much higher probability of matching their underlying asset class performance due to their broad diversification and low cost. Hopefully, this helps you sleep better at night and increases your financial peace of mind!

Shifting to seasonal highlights, October is National Cyber Security Awareness Month. So appropriate for Halloween! While we are not technology experts, we do recommend that you use long and complicated passwords for financial accounts and websites with personal confidential information, and different passwords for different websites, which may include simpler passwords for websites like general news or sports subscriptions.

Last month I said I had one and only one comment on the presidential election, but here is one more to consider: The stock market reacts strongly to unexpected news. This presidential election and its candidates are more controversial than we have seen in several elections, but all public news is already reflected in the stock market. We know that one candidate will get elected. The stock market isn’t spiraling down in fear that one candidate or the other will get elected. You shouldn’t live in fear either.

Happy October and happy Halloween! As always, please contact us with any questions, news or comments.

View/Print the Fun Facts Newsletter

Why Not Chase Past Performance? The Persistence Scorecard Lays It Out

“Don’t chase past performance” is one investment mantra that makes sense but is hard to live by. It applies to both asset allocation decisions (let’s double up on large cap growth stocks since they have been up the most over the last three years) and individual mutual fund selections (let’s buy XYZ Fund—it’s up 50%!). If you need a well-researched reason not to chase past fund performance and another good reason that supports our investment strategy, we have the Fun Facts for you! Standard & Poor’s publishes “The Persistence Scorecard,” which tracks how top-performing funds in one time period continue to perform in future time periods. Bottom line, relatively few funds consistently stay at the top. Specifically, out of 641 U.S. stock funds that were in the top 25% as of March 2014, only 7.3% managed to stay in the top 25% by the end of March 2016. The longer the time period, the lower the persistence: Only 0.78% of large cap funds and no mid cap or small cap funds stayed in the top 25% after five years.

[Tweet ""Don’t chase past performance" is one investment mantra that makes sense but is hard to live by."]

Fortunately, for our clients, we manage and reduce this risk by using asset class or index funds. These funds have a much higher probability of matching their underlying asset class performance due to their broad diversification and low cost. Hopefully, this helps you sleep better at night and increases your financial peace of mind!

Shifting to seasonal highlights, October is National Cyber Security Awareness Month. So appropriate for Halloween! While we are not technology experts, we do recommend that you use long and complicated passwords for financial accounts and websites with personal confidential information, and different passwords for different websites, which may include simpler passwords for websites like general news or sports subscriptions.

Last month I said I had one and only one comment on the presidential election, but here is one more to consider: The stock market reacts strongly to unexpected news. This presidential election and its candidates are more controversial than we have seen in several elections, but all public news is already reflected in the stock market. We know that one candidate will get elected. The stock market isn’t spiraling down in fear that one candidate or the other will get elected. You shouldn’t live in fear either.

Happy October and happy Halloween! As always, please contact us with any questions, news or comments.

Invest in Stocks as a Steady Income Source in Retirement

If you’re close to retirement, you’re probably considering a more conservative portfolio of investments—one designed to produce income rather than capital appreciation. Dividend-paying stocks can play an important part of that portfolio since they may offer lower risk and more stability while generating a steady and generally growing stream of income. In today’s low-interest-rate environment, stock dividend yields and bond interest rates are quite comparable, but stock cash dividends have the advantage of potentially growing over time. Increases in stock dividends also provide protection against inflation.

 Lower Risk, More Stability

Companies that provide dividends are generally mature companies (think Johnson & Johnson or Coca-Cola). The companies tend to be stable and are generating enough profit that they are able to pay out dividends.

This stability helps make dividends a source of income especially appropriate for retirees. Dividend stocks are generally less volatile than stocks that don’t pay dividends. With dividend-paying stocks, you receive spendable cash (usually quarterly) without having to touch the principal. You could even reinvest the dividends to buy more shares, thus increasing your income in the future.

What’s more, because the companies offering dividends are, by and large, established companies with a solid foundation of profits, they tend to increase dividend payouts over time. Say, for example, you purchased shares of Coca-Cola in 2000. In September of that year, the dividend was $0.17 per share. Coca-Cola has since paid out quarterly dividends, now amounting to $0.35 per share. That’s money you would have enjoyed quarterly without having to do anything but collect it. And although—as the Coca-Cola example shows—initial dividend yields may not be high, over time the yield on your original investment could become 10–15% or more.

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Dividends as Income

Dividends can play an important role in a retiree’s portfolio—and it’s a role that has become more central in this era of low interest rates. As a retiree, you probably expect to withdraw around 4% from your retirement accounts each year. With a well-executed strategy, a good portion of that could come from stock dividends—say, 2–3%—thus leaving much of your principal intact.

Like any investment, dividend-paying stocks carry risk. The company could suffer severe financial straits, or the markets could hit an extreme point that affects the balance sheets of even stable companies, as in the housing crash and recession of 2007–08. There are always risks in investing, and it’s important to remember that past performance is no guarantee of future results. That said, it is rare that dividend companies have to reduce dividends. You will receive a steady, often increasing source of income that can act as a hedge against inflation and a buffer against volatile markets. That makes dividend stocks, and mutual funds that invest in them, a good investment for almost anyone.

If you’d like to see how dividend-stock mutual funds can play a role in your portfolio, please contact us.

 

Fun Facts Newsletter | September 2016

Happy 40th birthday, Vanguard 500 Index Fund! The Vanguard Group First Index Investment Trust (now the Vanguard 500 Index Fund) launched on August 31, 1976, with only $11.3 million in assets, far short of the goal of $150 million. According to The Wall Street Journal, critics called the fund “un-American” and a sure path to mediocrity.

Going back further in history, in 1963 legendary financial analyst Benjamin Graham had advocated for the creation of an index fund. In 1971, a division of Wells Fargo launched a $6 million indexed portfolio of New York Stock Exchange stocks for the pension fund of luggage manufacturer Samsonite. In June 1975, American National Bank in Chicago was running about $300 million in several index funds, and one of the investment officers was Rex Sinquefield, who went on to be one of two co-founders of Dimensional Fund Advisors (DFA Funds).

Today the Vanguard 500 Index Fund holds more than $252 billion (with a “b”) in assets, and index mutual funds and exchange-traded funds tout nearly $5 trillion in assets.

Did you know that September is Life Insurance Awareness Month? Insurance—in the form of auto/home/liability, health, disability, life and long-term care—is the foundation of a financial plan and a pillar of financial security. Let’s face it: Most people don’t like insurance companies and insurance agents. (News flash, right?) Nonetheless, life insurance is important, and a well-defined, well-thought-out strategy is essential. Feel free to contact us to review your life insurance plan.

Speaking of insurance, fall is also open enrollment season for many employer benefit plans and Medicare. Again, take the time to evaluate your needs and goals and the options available. Make sure employer life insurance beneficiary designations are accurate and include a primary and secondary or contingent beneficiary. We are not experts in Medicare Supplements but can make referrals if you need assistance.

Finally, one and only one comment on the presidential election: We have had good and bad economies and stock markets with both Democratic and Republican presidents over the years. The president is only one person and doesn’t control the economy or stock market. Don’t put too much emphasis on what may happen with a new president.

Enjoy these final summer and early fall days! As always, please contact us with any questions, news or comments.

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September a Month for Birthdays and Awareness

Happy 40th birthday, Vanguard 500 Index Fund! The Vanguard Group First Index Investment Trust (now the Vanguard 500 Index Fund) launched on August 31, 1976, with only $11.3 million in assets, far short of the goal of $150 million. According to The Wall Street Journal, critics called the fund “un-American” and a sure path to mediocrity.

Going back further in history, in 1963 legendary financial analyst Benjamin Graham had advocated for the creation of an index fund. In 1971, a division of Wells Fargo launched a $6 million indexed portfolio of New York Stock Exchange stocks for the pension fund of luggage manufacturer Samsonite. In June 1975, American National Bank in Chicago was running about $300 million in several index funds, and one of the investment officers was Rex Sinquefield, who went on to be one of two co-founders of Dimensional Fund Advisors (DFA Funds).

Today the Vanguard 500 Index Fund holds more than $252 billion (with a “b”) in assets, and index mutual funds and exchange-traded funds tout nearly $5 trillion in assets.

Did you know that September is Life Insurance Awareness Month? Insurance—in the form of auto/home/liability, health, disability, life and long-term care—is the foundation of a financial plan and a pillar of financial security. Let’s face it: Most people don’t like insurance companies and insurance agents. (News flash, right?) Nonetheless, life insurance is important, and a well-defined, well-thought-out strategy is essential. Feel free to contact us to review your life insurance plan.

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Speaking of insurance, fall is also open enrollment season for many employer benefit plans and Medicare. Again, take the time to evaluate your needs and goals and the options available. Make sure employer life insurance beneficiary designations are accurate and include a primary and secondary or contingent beneficiary. We are not experts in Medicare Supplements but can make referrals if you need assistance.

Finally, one and only one comment on the presidential election: We have had good and bad economies and stock markets with both Democratic and Republican presidents over the years. The president is only one person and doesn’t control the economy or stock market. Don’t put too much emphasis on what may happen with a new president.

Enjoy these final summer and early fall days! As always, please contact us with any questions, news or comments.

How Do You Give? Ways to Help Your Favorite Charities

If you’re like many Americans, you want to give to the causes and charities you believe in. Generosity is a tradition in America, after all—and one that’s getting stronger. Charitable donations last year reached an all-time high of $373.25 billion, according to Giving USA 2016: The Annual Report on Philanthropy for the Year 2015. But how do you give? Do you write a check to a charity you like? Do you set up a donor-advised fund? Or do you do something else altogether?

Your answer depends on the amount of involvement you want. Obviously, donating a one-time gift to the Red Cross is less complicated than creating a family foundation that you envision your great-grandchildren running. In addition, you want to consider the kinds of assets you’re giving and the tax advantages you’ll receive. Developing a charitable giving strategy can help you refine your goals and priorities, making it easier to decide on the how of your philanthropy.

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Following is a list of opportunities for giving, ranging from the least complex to the most:

Outright gifts: You can use cash, write a check or pay with your credit card—the result is the same. You support a cause you like as little or often as you like, and you don’t have to be involved in any other way. Assuming the organization has 501(c)(3) tax-exempt status, you get a tax deduction up to 50% of your adjusted gross income (AGI).

You don’t have to limit your gifts to cash. You can also give appreciated stock and other long-term capital gain property. By donating the stock directly rather than selling it and donating the proceeds, you can give a big boost to your charity. That’s because by donating the asset, the capital gains that selling it would trigger no longer apply. Meanwhile, you can get a tax deduction up to 30% of your AGI.

Donor-advised funds: DAFs are becoming an increasingly popular way to give, especially for people who don’t want the regulatory and administrative hassles of a private foundation. DAFs, such as from the Greater Cincinnati Foundation, are flexible. You can donate everything from cash to long-term capital gain property to life insurance policies—and in some cases, even bitcoin—and you will receive an income tax deduction for your donations. Any gifts that cannot be deducted in the current year can be carried over and deducted for up to five years following. And you can give now but decide later who receives your money. DAFs are particularly convenient for making a gift of appreciated stock or mutual fund shares and then granting gifts to several charities. So one gift of $25,000 can be split multiple ways with less paperwork. You can also manage the timing of gifts to make a large gift now for immediate tax benefits but spread the disbursements out several years in the future.

DAFs are popular because they are flexible; however, if you want absolute control over the charities that receive your donations, you might want to reconsider. DAFs are called “donor-advised funds” because your role is to advise. You advise the organization holding your account about the charities you want to give to. The organization ultimately decides. However, it’ll generally follow your wishes for qualified charities.

Private foundations: Setting up a private foundation allows you a long-term—even multigenerational—way to build a legacy. It allows you to involve your family members, thus passing on your values to the next generation. A foundation is similar to a DAF in that it allows you to fund it immediately and choose recipients later. However, private foundations are more expensive to operate and have more legal restrictions than DAFs, and the income tax deductions you can take are generally less. Where the administrative and legal requirements of a DAF are handled by the charity managing it, with a private foundation the responsibility is yours. However, unlike a DAF, you retain control over the distributions, making this setup especially attractive for ultra-affluent individuals and families who want to make philanthropy a cornerstone of their life.

When it comes to generosity, there is a universe of options you can consider. In addition to the above possibilities, you can employ charitable lead or remainder trusts, IRA rollovers and bequests in your will. When deciding what avenue works best for you, consider your personal and financial goals, the level of complexity and control you want, and the amount of time you can invest. Regardless of your decision, you get the pleasure of knowing you helped someone who needed a helping hand. And that makes your time, effort and expense worth it.

 

Fun Facts Newsletter | August 2016

There is an old stock market saying, “Sell in May and go away,” based on historical cycles that the stock market slumps during the summer (not to mention “going away” to the beach or vacation is more fun!). As with many stock market clichés, this adage is not always consistent given that the summer of 2016 has been strong in both June and July. I know summer isn’t over until after August, but with schools starting earlier every year, summer seems to keep getting shorter! Remember, “the stock market” is not the Standard & Poor’s 500 Index but rather the MSCI ACWI (All Country World Index). The MSCI ACWI rose 4.42% in July and is up 5.7% year-to-date. International stocks as measured by the MSCI World ex USA index were up 5.05% for July but a more modest 2.65% year-to-date.

Our broadly diversified strategy was supported in a recent Wall Street Journal article by personal finance columnist Jason Zweig. In his July 29 article “Your 401(k) Is Not Safe at Home,” he emphasized the risk of having too much of one’s 401(k) plan in employer stock. While the risk of loss is obvious, he pointed out (as we frequently do) that it is what you don’t own that may hold down your returns. He states: “In 2013, when the Wilshire 5000 stock index gained a spectacular 34%, one-fifth of all stocks lost money. … In 2014, although the total U.S. stock market gained 12%, more than four out of every 10 stocks went down anyway. In 2015, only five companies—Amazon, Alphabet (Google), Microsoft, Facebook and General Electric—accounted for well over 100% of the return of the U.S. stock market.” His advice: “Invest in all companies at once, through a total stock-market index fund, and you eliminate your risk of missing out on every other winner out there.”

Two nice personal notes from our office: Donna’s son, Cameron, just graduated from Army National Guard training with honors and will be enrolled at Wright State University this fall. Kathy’s son, Andrew, passed his state boards and is now a licensed physical therapist. Congratulations, Cameron and Andrew!

Enjoy these summer days! As always, please contact us with any questions, news or comments.

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Stock Market Cliché Falls Short This Summer

There is an old stock market saying, “Sell in May and go away,” based on historical cycles that the stock market slumps during the summer (not to mention “going away” to the beach or vacation is more fun!). As with many stock market clichés, this adage is not always consistent given that the summer of 2016 has been strong in both June and July. I know summer isn’t over until after August, but with schools starting earlier every year, summer seems to keep getting shorter! Remember, “the stock market” is not the Standard & Poor’s 500 Index but rather the MSCI ACWI (All Country World Index). The MSCI ACWI rose 4.42% in July and is up 5.7% year-to-date. International stocks as measured by the MSCI World ex USA index were up 5.05% for July but a more modest 2.65% year-to-date.

Our broadly diversified strategy was supported in a recent Wall Street Journal article by personal finance columnist Jason Zweig. In his July 29 article “Your 401(k) Is Not Safe at Home,” he emphasized the risk of having too much of one’s 401(k) plan in employer stock. While the risk of loss is obvious, he pointed out (as we frequently do) that it is what you don’t own that may hold down your returns. He states: “In 2013, when the Wilshire 5000 stock index gained a spectacular 34%, one-fifth of all stocks lost money. … In 2014, although the total U.S. stock market gained 12%, more than four out of every 10 stocks went down anyway. In 2015, only five companies—Amazon, Alphabet (Google), Microsoft, Facebook and General Electric—accounted for well over 100% of the return of the U.S. stock market.” His advice: “Invest in all companies at once, through a total stock-market index fund, and you eliminate your risk of missing out on every other winner out there.”

[Tweet "Our broadly diversified strategy was supported in a recent Wall Street Journal article."]

Two nice personal notes from our office: Donna’s son, Cameron, just graduated from Army National Guard training with honors and will be enrolled at Wright State University this fall. Kathy’s son, Andrew, passed his state boards and is now a licensed physical therapist. Congratulations, Cameron and Andrew!

Enjoy these summer days! As always, please contact us with any questions, news or comments.

Roth IRAs and Children: Never Too Early to Save

You want your child or grandchild to be financially secure—not just now but throughout life. A great way to get a kid started on that path is through a Roth IRA. What is a Roth IRA? Contributions to a Roth Individual Retirement Account (IRA) do not qualify for an immediate income tax deduction; but a child is in a low tax bracket, so a tax deduction is not meaningful. Most important, qualified withdrawals from Roth IRAs are income-tax-free, and there is not a required minimum distribution at age 70 ½ like a traditional IRA, so a Roth IRA can grow tax-free for many years.

Yes, children can contribute to a Roth IRA, or you may do it on their behalf. Either way, by laying the groundwork of saving now, you can help them achieve a secure retirement. In the process they’ll get an early education in personal finance. With many adult Americans woefully illiterate about finance, your kid will be ahead of the pack before they even graduate from college.

How It Works

You can set up a Roth IRA as soon as your child or grandchild starts earning income. That money can be W-2 wages, or it can be self-employment income, like babysitting. An allowance does not count as earned income, but if you own a business, you can employ the child. The job must be age-appropriate, and the wages must be at the market rate.

A bonus to the Roth IRA is that the IRS doesn’t care who contributes to the account. It can be a child, a parent or a grandparent. So, for example, if you want to set up an agreement that for every dollar the child earns, you’ll put a dollar in their Roth IRA, that’s perfectly fine. The only requirement is that the total amount contributed to the account cannot exceed the amount the child earned.

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A couple of other points:

  • You can contribute as much as $5,500 to a Roth IRA annually. This amount is set by the IRS and will likely change over the years.
  • You can contribute as much as $400 in self-employment income without having to worry about paying Social Security or Medicare taxes. Make more than $400 and a tax return will need to be filed.
  • If a child does not receive a W-2 for the work they do, they need to keep records—which can be a great lesson in organization and responsibility. The records should include the type of work they did, when and who they did it for, and how much money they made.
  • You’ll likely be the custodian for the account until your child or grandchild reaches adulthood—age 18 or 21 depending on the state. After that, they’ll take control of the account.

Using the Roth IRA for Life’s Milestones

Roth IRAs offer flexibility that other retirement accounts don’t. Because they’re funded with after-tax dollars, the contributions can be withdrawn before retirement without penalty or taxes. Not so for the earnings—a nonqualified withdrawal before age 59 1/2 will incur taxes and a 10% penalty.

When it comes to buying a first-time home, the Roth can prove especially helpful since the purchase counts as a qualified withdrawal. So, in addition to contributions, a first-time homebuyer can tap into earnings of up to $10,000 as long as the account is at least five years old and the money is used for the down payment, closing costs and related expenses.

Flexibility like this makes Roth IRAs very attractive. Of course, if your child or grandchild can buy their first home without dipping into their account, all the better since it will leave more for retirement.

One final point: By getting a child saving early, the Roth IRA becomes an effective vehicle for transferring wealth from one generation to the next. Ultimately, your heirs may have a sizeable retirement savings before they even start their career.

As always, consult with a qualified tax advisor about your personal financial situation.

Fun Facts Newsletter | July 2016

As I communicated in my interim monthly communication via email and blog, the Brexit event was not the “market plunge” that the media made it out to be.  For the month of June, the MSCI ACWI (remember that is All Country World Index, our primary benchmark) was down 0.72% and is up 1.36% for the year. The MSCI World Ex USA  international stock index was down 3.19% in June, again hardly a “plunge”. The biggest and shortest term effect has been in foreign currency exchange rates. The British pound and Euro have declined in value versus the U.S. dollar. A stronger dollar increases the costs to foreign buyers of U.S. exports and decreases the costs to U.S. buyers of foreign goods. This exacerbates the recent trend of a strong U.S. dollar reducing foreign investment returns. But a trip to Britain is now cheaper!

The longer term impact is potentially negative since it reflects a trend towards nationalism and less global free trade. Exactly how this will unfold remains to be seen.

T. Rowe Price recently published interesting research on the historic returns between U.S. stocks and international stocks. Since 1973, returns have cycled back and forth with the median time for either U.S. or international stocks to outperform each other ranging about 3 to 4 years and the longest period of outperformance of either asset class being 6.25 years. We have now past the longest time period for U.S. stocks to outperform international stocks. The pendulum will swing back for patient investors.

Should we make more changes more often in your portfolio? I have cited Warren Buffett in recent writings. His 2005 Annual Report to Shareholders referenced Isaac Newton’s three laws of motion and cited them as works of genius. To this Buffett added a Fourth Law of Motion: “For investors as a whole, returns decrease as motion increases.” The more changes one makes, the more one risks being wrong. Investing is contrarian!

We welcome Joanne Skinner to our staff as a part-time Client Service Assistant. We have grown over the years and are increasing our staff to continue to provide the best client service that we can. Joanne will be working 20 hours a week and we look forward to having her as part of our team.

Enjoy these summer days! As always, please contact us with any questions, news or comments.

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Media Hoopla Aside, Markets Did Not "Plunge" After Brexit

As I wrote last week, the Brexit event was not the “market plunge” that the media made it out to be. For June, the MSCI ACWI (remember, that is All Country World Index, our primary benchmark) was down 0.72% and is up 1.36% for the year. The MSCI World Ex USA international stock index was down 3.19% in June—again, hardly a “plunge.” The biggest and shortest-term effect of Brexit has been in foreign currency exchange rates. The British pound and the euro have declined in value versus the U.S. dollar. A stronger dollar increases the costs to foreign buyers of U.S. exports and decreases the costs to U.S. buyers of foreign goods. This exacerbates the recent trend of a strong U.S. dollar reducing foreign investment returns. But a trip to Britain is now cheaper!

The longer-term impact is potentially negative since it reflects a trend toward nationalism and less global free trade. Exactly how this will unfold remains to be seen.

T. Rowe Price recently published interesting research on the historic returns between U.S. stocks and international stocks. Since 1973, returns have cycled back and forth, with the median time for either U.S. or international stocks to outperform each other ranging about three to four years and the longest period of outperformance of either asset class being 6.25 years. We have now passed the longest time period for U.S. stocks to outperform international stocks. The pendulum will swing back for patient investors.

[Tweet "The more changes one makes, the more one risks being wrong."]

Should we make more changes more often in your portfolio? I have cited Warren Buffett in recent writings. His 2005 Annual Report to Shareholders referenced Isaac Newton’s three laws of motion and cited them as works of genius. To this, Buffett added a Fourth Law of Motion: “For investors as a whole, returns decrease as motion increases.” The more changes one makes, the more one risks being wrong. Investing is contrarian!

We welcome Joanne Skinner to our staff as a part-time Client Service Assistant. We have grown over the years and are increasing our staff to continue to provide the best client service that we can. Joanne will be working 20 hours a week, and we look forward to having her as part of our team.

Enjoy these summer days!

As always, please contact us with any questions, news or comments.

Saving for Retirement: Breaking Out of the One-Size-Fits-All Approach

You may have heard that investing has rules of thumb when it comes to saving money for retirement: Start at a certain age, set aside a certain amount of each paycheck and voila! When you retire, you're good to go. Those rules of thumb may work for some people, but life presents too many variables—the age at which you started saving, the income you made and when you made it—to make any strategy one-size-fits-all. Yet it's in our nature to want rules, to have structure, so we can feel that we are on the right path. A retirement saving rate that changes with your income could provide a viable framework, especially for professionals whose income climbs steeply over time.

Rules of Thumb

Say you're starting out in your career and you want to begin setting aside money for retirement. You know that you need to save enough to replace your income in retirement (called the replacement rate). How much do you save?

The short answer is: It depends. It depends on the age at which you are starting to save (the earlier the better), and it depends on the probability of success you want to achieve with your replacement rate. Let's use a table in a Dimensional Fund Advisors study that shows the saving rates a professional would need in order to achieve a 40% replacement rate. If that professional wanted 95% success at achieving that replacement rate, they would need to start setting aside 16.8% of their income at age 25. If they waited till age 30 to start saving, they'd have to put 19.5% away. And if they didn't get started until age 35, their lifetime saving rate would be a whopping 23.8%!

The High-Wage Earner

Professionals whose income climbs steeply toward the latter part of their careers have difficulties of their own using a one-size-fits-all approach. They don't get to put their money in early and allow compounding to increase their savings.

What's more, the DFA study broke down saving rates by preretirement income, using the same 40% replacement rate as the goal. It found that professionals in the $98,355–$129,945 range at the end of their careers would need a 20.5% saving rate. In contrast, someone making $21,716–$29,307 would need an 8.8% saving rate.

Obviously, people who are going to end their career with higher incomes will need a higher saving rate, but as the study pointed out, no one knows what their final income is going to be. What's more, we have different priorities at different ages. For example, when we're younger, we spend more and save less. We're getting established and putting our earnings toward that end. As we get older—and especially as our income climbs—we spend less and save more, putting aside more of our salary for retirement.

An income-based approach to retirement savings takes those priorities into account and allows flexibility for professionals whose income climbs over time. Using a saving rate that increases as income increases, DFA found the following rates for a professional seeking a 95% chance of success for a 40% replacement rate:

Income Range Saving Rate
≤ 25,000 2.8%
25,001–40,000 5.7%
40,001–50,000 8.5%
50,001–60,000 11.3%
60,001–70,000 14.2%
70,001–85,000 17.0%
85,001–100,000 19.8%
100,001–130,000 22.6%
130,001–180,000 30.6%
> 180,000 34.0%

The same study also considered probability rates of 90% and 50%, but we'll just keep it simple here to make our point: that an income-based saving rate allows for the demands of age and income variability. As shown in the table, the reduced saving rates for lower income levels would be consistent for someone starting out in life. The higher rates would peak when salary peaks, and seem to fall in naturally with a family that is in saving mode.

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It's important to go over your numbers with your financial advisor, who can help you decide whether the amount you have put aside will be sufficient for your retirement. And regardless of the scenario you choose—a saving rate that climbs and falls with your income, or a simpler rule of thumb—two takeaways from this article should be apparent: Start saving early—the earlier the better—and be consistent about saving. Those are your two most important factors for success.

Sources

Massi Di Santis and Marlena I. Lee, Income Based Saving Rates, DFA, June 2013.

Fun Facts Newsletter | June 2016

Since summer is beginning, I’ll keep “Fun Facts…” short and let you get started on your summer reading list, which I’m sure will be more enjoyable, but not as “Fun…”. Don’t leave home without the Four Core Principles of Our Investment Philosophy….

  1. Total Portfolio ApproachWe manage your total portfolio considering all accounts whether they be single, joint or trust taxable accounts or retirement account like IRA’s, Roth IRA’s or 401k’s. We consider “asset allocation” for the total portfolio as well as different types of accounts (for example, a Roth IRA may be more aggressively invested for growth and future inheritance).  We also consider “asset location” wherein tax-inefficient investments like REIT’s may be limited to retirement accounts.
  1. Broadly Diversified PortfolioInvestment management is a contrarian process where “buy low and sell high” is easier said than done. Diversification helps smooth the peaks and valleys although it is challenging not to load up on the most recent best investment and avoid the most recent dog. Discipline helps achieve long term goals and avoid strike-outs. (a great summer analogy, wouldn’t  you say?)
  1. Risk and Return are Related (The 3 R’s)Nothing demonstrates this better than the seemingly perpetual period of low interest rates that we have been experiencing. Low risk yields low return and higher returns require accepting more risk and potential volatility.
  1. Minimize Fund Fees, Expenses and Income Taxes.Simply said, net returns are what count! Low fund fees are a good predictor of future relative performance.

Enjoy these early summer days!

As always, please contact us with any questions, news or comments.

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