Tom Shares Financial Planning Tips with Grief Group December 10th, 2013
Tom Alf recently spoke to a group of individuals who lost their spouses 18 months to two years ago and are in the next phase of moving forward. Tom was asked to speak about finances by a friend who had lost her husband. He provided the group with an overview of the following areas:
• How different types of financial services firms work with individuals.
• Fee-only advisors versus commissioned advisors.
• The comprehensive financial planning process (including retirement planning, cash flow, investments, taxes, insurance and estate planning).
• Pros and cons of annuities and reverse mortgages.
• Tax filing status of a surviving spouse.
While we tailor our planning approach for every new client, we consciously slow down the process for those who have recently suffered a significant loss. We first work on the areas of greatest concern, taking one area at a time and making sure that area is completed before moving on. Slowing down the process and taking one area at a time helps those grieving clients begin to move forward and feel more confident about their finances.
If you would like Tom to speak at a grief group in your area, or if you’re interested in learning more about Clerestory Advisors, give him a call at 651.209.2610.
Tom and Lauri Quoted in the Wall Street Journal October 9th, 2013
Clerestory Advisors principals Tom Alf and Lauri Salverda were both recently quoted in the Wall Street Journal by journalist Veronica Dagher in an article about How You Can Improve Your Company’s 401(k) Plan. Tom and Lauri offer advice surrounding Roth IRA accounts and 401(k) plans. For more information, you can read the article or contact us to learn more about how Clerestory Advisors can help walk you through retirement planning.
Odds and Ends September 25th, 2013
We want to thank all those clients and friends who were able to join us for our second annual summer celebration held this past July. Local Italian deli, Buon Giorno, supplied a variety of delicious sandwiches, cheeses, caprese and vegetables/fruits. Sommelier Jeff Kycek presented six affordable Italian wines: three reds and three whites. Tom’s wife Karen particularly enjoyed the Euganei Prosecco 2012, while Tom enjoyed several of the reds, including the Sant Antonio Veneto Corvina 2011. Despite a warm muggy evening, several folks wandered down to The Village green space to enjoy live music by treVeld, a fun blend of acoustic music with folk roots.
Tom and Lauri recently returned from a two and half day conference in Dallas for independent financial planning firms. A number of industry thought leaders spoke at the conference on a variety of topics from investment risk management to creating improved processes in order to better help clients. We were also able to mingle with other independent planning firm staff to share ideas and discuss trends.
On a lighter note, a conference presenter recommended an app for remembering wines you liked and checking out other user wine ratings. The app is Vivino Wine Scanner, which allows you to take a picture with your phone of the wine label for storage on the app. A really slick, visual way to remember those wines you enjoy.
Tom and Karen recently visited Tom’s aunt in Winterset, Iowa which is about 25 miles south west of Des Moines. This quaint, rural town happens to be the birthplace of John Wayne and the setting for the 1992 bestseller and movie, The Bridges of Madison County. Apparently these two claims to fame still attract folks from afar as we met a couple at our B&B who were from Sydney, Australia – go figure.
Our son David’s Los Angeles based architecture firm is designing an addition to the California Science Center. The Science Center will house the space shuttle Endeavour in launch position. The Endeavor is one of four shuttles on permanent display in museums around the country. Our son, who is on the design team, sent the following fun video link (yes, he is excited about this project) showing several minutes from onboard cameras during the first few minutes of post launch – http://io9.com/5893615/absolutely-mindblowing-video-shot-from-the-space-shuttle-during-launch.
Lauri’s family had an incredibly busy summer. At the beginning of the summer, they watched their oldest, daughter Ana, graduate from college. Their oldest son finished his first year at St. John’s with their team winning the first annual national small college rugby trophy. Their second oldest son’s team came in second in the national high school rugby tournament which his Dad coached. And their youngest son pitched his way into second place with his little league team. As the summer came to an end, their daughter started her first job working on a schooner on the Chesapeake Bay teaching school children about the ecosystem of the bay and became engaged to a young man the family all loves. Lauri submitted her first knitting design into the State Fair winning a fifth place ribbon.
Your Returns vs. the Market September 25th, 2013
One of the most misleading statistics in the financial world is the return data we are routinely given by the financial media, telling us how much investors made in the markets and in individual stocks or mutual funds over some time period. In fact, your returns are almost guaranteed to be different from whatever the markets and the funds you’ve invested in have gotten.
How is this possible? Start with cash flows. We are told that the S&P 500 has delivered a compounded return of about 7.8% from 1992 through 2011, which sounds pretty positive until you realize that this return would only be available to somebody who invested all his or her money at the beginning of 1992 and didn’t move that money around at all for the next twenty years. If you invested systematically, the same amount every month, as most of us do, then you would have earned a 3.2% compounded return. Why? A lot of your money would have been exposed to the 2008 downturn, and not much of it would have enjoyed the dramatic runup in stocks from 1992 to 2000.
In addition, there is the difference–only now getting attention from analysts–between investor returns and investment returns. Human nature drives investors to sell their stocks and move to the sidelines after their portfolios have been hammered–which is often the worst possible time to sell. And it drives people to start increasing their equity allocations toward the peak of bull markets when they perceive that everybody else is getting rich. That means less of their money tends to be exposed to stocks when the market turns from bearish to bullish, and more is exposed when markets switch from bullish to bearish.
This would be bad enough, but people also switch their mutual fund and stock holdings. When a great fund hits a rough patch, there’s a tendency to sell that dog and buy a fund whose recent returns have been scorching hot. Many times the underperforming fund will reverse course, while the hot fund will cool off. The Morningstar organization now calculates, for every fund it follows, the difference between the returns of the mutual fund and the average returns of the investors in that fund. The differences can be astonishing. Overall, according to Morningstar statistics and an annual report compiled by the Dalbar organization, investor returns have historically been about half of what the markets and funds are reporting.
And then there’s the tax bite. Some mutual funds invest more tax-efficiently than others, and generate less ordinary income. Beyond that, if a fund is sitting on significant losses when you invest, you get to ride out its gains without having the tax impact distributed to your 1040. If the fund is sitting on large gains when you buy in, you could find yourself paying taxes on gains even if the fund loses money.
By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends and information for leading practitioners in the financial planning profession.
Asset Location: Handle With Care September 25th, 2013
An old question has become new again. You have tax-deferred accounts like IRAs and tax sheltered accounts like Roth IRAs, and you have accounts that pay taxes every year on the income they receive. Where do you put different types of assets?
The answer is that you want to put the most tax-inefficient investments inside the tax-deferred accounts. The most notoriously tax-inefficient investments, historically, have been bond funds, commodities futures funds and real estate investment trusts (REITs), which all generate ordinary income that can be taxed at 39.6% plus the 3.8% Net Investment Income surtax for higher-income taxpayers. The Roth IRA, which shelters all future returns from taxes of any sort, can be a great place for mutual funds that invest in small cap or emerging market stocks, since they tend to have high turnover and historically have provided the highest gains.
In taxable accounts, you might put growth stocks which, if you hold them for more than a year, will have their price appreciation taxed at a maximum rate of 20% (or 23.8% with the Net Investment Income surtax). Of course, you can choose to hold individual securities for much longer periods, which gives you tax deferral on its own–and, if the stocks are held until death, the heirs get a step-up in basis, which basically means any rise in value is never taxed. Municipal bonds which qualify for an exemption from federal taxes are also good candidates for the taxable portion of your investment accounts.
What makes this debate new again? Higher ordinary income tax rates, and potentially higher capital gains tax rates (up from 15% to 23.8% for tax filers who have to pay the new Net Investment Income surtax) have introduced some gray areas, as have the historically low rates on bonds. When bonds were delivering upwards of 10% on the investment dollar, putting them in an IRA was a no-brainer. But what if you’re cautious about rising rates, and you’ve shortened maturities in a yield-starved market, so your return is closer to 1%? Suddenly, these funds are no longer a huge tax concern.At the same time, REITs offer tax benefits like depreciation, which becomes more valuable at higher ordinary income rates. And persons in retirement may see their tax rates fall from above 39% down to 15%, which decreases the benefits of astute asset location, and might raise the value of rebalancing each year across all accounts.
Another consideration for retirees is the mandatory withdrawals they have to take from their IRA account after they reach age 70 1/2. If the IRA is holding all the income-generating investments, then systematically liquidating those holdings means creating a higher exposure to stocks and a generally more volatile portfolio as you age–which may be the opposite of what is desired.
Saving taxes through asset location strategies is one of those rare opportunities to get additional dollars without taking additional risk–but a mindless focus on taxes without looking at the bigger picture can result in unintended consequences. The rules of thumb need to be informed by your tax bracket and other aspects of your individual circumstances–with an eye on the ever-changing tax and interest rates that Congress and the markets throw at us.
By Bob Veres, publisher of Inside Information - the premier publication of financial industry trends and information for leading practitioners in the financial planning profession.